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PURSUANT TO RULE NO. 424(b)(3)
REGISTRATION NO. 333-42197
PROSPECTUS SUPPLEMENT
FIRST LINCOLN BANCSHARES INC.
FIRST FEDERAL LINCOLN BANK
PARTICIPATION INTERESTS
FIRST FEDERAL LINCOLN BANK
SAVINGS PLAN
This Prospectus Supplement relates to the offer and sale to participants
(the "Participants") in the First Federal Lincoln Bank Savings Plan (the
"Plan") of participation interests and shares of common stock, par value $.01
per share, (the "Common Stock") of First Lincoln Bancshares Inc. (the "Holding
Company"), as set forth herein.
In connection with the proposed conversion of First Federal Lincoln Bank
(the "Bank") from a federally chartered mutual savings bank to a federally
chartered capital stock savings bank (the "Conversion"), the Plan has been
amended to permit the investment of Plan assets in the Common Stock. The
amended Plan permits Participants to direct the trustee of the Plan (the
"Trustee") to invest in Common Stock with amounts in the Plan attributable to
such Participants. Such investments in Common Stock would be made by means of
the First Lincoln Bancshares Inc. Stock Fund (the "Employer Stock Fund").
Based upon the value of the Plan assets at September 30, 1997, 752,469 shares
of Common Stock could be purchased with Plan assets (assuming a purchase price
of $20.00 per share). This Prospectus Supplement relates to the initial
election of Participants to direct that all or a portion of their accounts be
invested in the Employer Stock Fund in connection with the Conversion and also
to elections by Participants to direct that all or a portion of their accounts
be invested in the Employer Stock Fund after the Conversion.
The prospectus dated March 13, 1998 of the Holding Company (the
"Prospectus"), which is attached to this Prospectus Supplement, includes
detailed information with respect to the Conversion, the Common Stock and the
financial condition, results of operations and business of the Bank. This
Prospectus Supplement, which provides detailed information with respect to the
Plan, should be read only in conjunction with the Prospectus and should be
retained for future reference.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PARTICIPANT, SEE "RISK FACTORS" IN THE ATTACHED PROSPECTUS.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS MARCH 13, 1998.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION OR ANY OTHER FEDERAL
AGENCY OR ANY STATE SECURITIES COMMISSION, NOR HAS SUCH COMMISSION, OFFICE OR
OTHER AGENCY OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT FEDERALLY INSURED OR GUARANTEED, NOR ARE THE SHARES OF
COMMON STOCK GUARANTEED BY THE COMPANY OR THE BANK. THE ENTIRE AMOUNT OF A
PURCHASER'S PRINCIPAL IS SUBJECT TO LOSS.
No person has been authorized to give any information or to make any
representations other than those contained in the Prospectus or this
Prospectus Supplement, and, if given or made, such information or
representations must not be relied upon as having been authorized by the Bank
or the Plan. This Prospectus Supplement does not constitute an offer to sell
or solicitation of an offer to buy any securities in any jurisdiction to any
person to whom it is unlawful to make such offer or solicitation in such
jurisdiction. Neither the delivery of this Prospectus Supplement and the
Prospectus nor any sale made hereunder shall under any circumstances create
any implication that there has been no change in the affairs of the Bank or
the Plan since the date hereof, or that the information contained or
incorporated by reference herein is correct as of any time subsequent to the
date hereof.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
THE OFFERING........................................................... 1
Securities Offered................................................... 1
Election to Purchase Common Stock in the Conversion.................. 1
Value of Participation Interests..................................... 1
Method of Directing Transfer......................................... 1
Time for Directing Transfer.......................................... 1
Irrevocability of Transfer Direction................................. 2
Direction to Purchase Common Stock After the Conversion.............. 2
Purchase Price of Common Stock....................................... 2
Nature of a Participant's Interest in the Common Stock............... 2
Voting and Tender Rights of Common Stock............................. 2
DESCRIPTION OF THE PLAN................................................ 3
Introduction......................................................... 3
Eligibility and Participation........................................ 3
Contributions Under the Plan......................................... 3
Limitations on Contributions......................................... 4
Investment of Contributions.......................................... 5
Benefits Under the Plan.............................................. 7
Withdrawals and Distributions From the Plan.......................... 7
Administration of the Plan........................................... 8
Reports to Plan Participants......................................... 8
Plan Administrator................................................... 9
Amendment and Termination............................................ 9
Merger, Consolidation or Transfer.................................... 9
Federal Income Tax Consequences...................................... 9
ERISA and Other Qualification........................................ 11
Restrictions on Resale............................................... 11
SEC Reporting and Short-Swing Profit Liability....................... 11
EXPERTS................................................................ 12
LEGAL OPINIONS......................................................... 12
FINANCIAL STATEMENTS................................................... A1 to A9
INVESTMENT FORM........................................................ 13
</TABLE>
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THE OFFERING
I. SECURITIES OFFERED
The securities offered hereby are participation interests in the Plan. Up to
752,469 shares (assuming the actual purchase price is $20.00 per share) of
Common Stock may be acquired by the Plan to be held in the Employer Stock
Fund. The Holding Company is the issuer of the Common Stock. All eligible
employees of the Bank (hereinafter referred to as the "Employer"), except
those who are paid solely on a retainer or fee basis, or have not completed
1,000 hours of service with the Employer, may participate in the Plan. The
Common Stock to be issued hereby is conditioned on the consummation of the
Conversion. A Participant's investment in the Employer Stock Fund in the
Conversion is subject to the priority set forth in the Plan of Conversion.
Information with regard to the Plan is contained in this Prospectus
Supplement and information with regard to the Conversion and the financial
condition, results of operations and business of the Bank is contained in the
attached Prospectus. The address of the principal executive office of the Bank
is 13th & "N" Streets, Lincoln, Nebraska, 68508. The Bank's telephone number
is (402) 475-0521.
II. ELECTION TO PURCHASE COMMON STOCK IN THE CONVERSION
In connection with the Bank's Conversion, the Plan has been amended to
permit each Participant to direct that all or part of the funds which
represent his or her beneficial interest in the assets of the Plan (i.e.
Required Contributions made before January 1, 1987, Elective Deferral
Contributions, Matching Contributions, and Rollover Contributions) may be
transferred to an investment fund that will invest in Common Stock and, to the
extent shares are available, to use such funds to purchase Common Stock issued
in connection with the Conversion, and to purchase Common Stock in the open
market. If there is not enough Common Stock in the Conversion to fill all
subscriptions, the Common Stock would be apportioned and the Plan may not be
able to purchase all of the Common Stock requested by the Participants. In
such case, the Trustee will purchase shares in the open market after the
Conversion to fulfill Participants' requests. Such purchases may be at prices
higher than the purchase price in the Conversion. Funds not transferred to the
Employer Stock Fund will remain in the other investment funds of the Plan as
directed by the Participant on the attached Enrollment and Investment
Application. THE ABILITY OF EACH PARTICIPANT TO INVEST IN THE EMPLOYER STOCK
FUND IN THE CONVERSION PURSUANT TO DIRECTIONS TO TRANSFER ALL OR A PORTION OF
THEIR BENEFICIAL ASSETS IN THE PLAN WILL BE BASED ON SUCH PARTICIPANT'S STATUS
AS AN ELIGIBLE ACCOUNT HOLDER OR SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDER PURSUANT
TO THE PLAN OF CONVERSION, THE SUBSCRIPTION PRIORITIES SET FORTH IN THE PLAN
OF CONVERSION AND THE AVAILABILITY OF COMMON STOCK. For general information as
to the ability of Participants to direct the Trustee to purchase shares in the
Conversion, see "The Conversion--Subscription Offering and Subscription
Rights" in the attached Prospectus.
III. VALUE OF PARTICIPATION INTERESTS
The market value of the assets of the Plan, as of September 30, 1997, was
$15,049,386. Each Participant was informed of the value of his or her
beneficial interest in the Plan. This value represented the past contributions
to the Plan by the Employer and the Participants and any earnings or losses
thereon, less previous withdrawals.
IV. METHOD OF DIRECTING TRANSFER
The last page of this Prospectus Supplement is a form to direct a transfer
to the Employer Stock Fund (the "Investment Form"). If a Participant wishes to
transfer all or part of his or her beneficial interest in the assets of the
Plan to the Employer Stock Fund being established in connection with the
Conversion, he or she should indicate that decision in the Investment Form. If
a Participant does not wish to make such an election, he or she does not need
to take any action.
V. TIME FOR DIRECTING TRANSFER
The deadline for submitting a direction to transfer amounts to the Employer
Stock Fund which will purchase Common Stock issued in connection with the
Conversion is March 27, 1998. The Investment Form should be returned to the
Bank's Human Resources Department by 12:00 noon, Central Time on such date.
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VI. IRREVOCABILITY OF TRANSFER DIRECTION
A Participant's direction to transfer amounts credited to such Participant's
account in the Plan to the Employer Stock Fund in connection with the
Conversion shall be irrevocable. Participants, however, will be able to direct
the investment of their accounts ("Accounts") after the Conversion under the
Plan as explained below.
VII. DIRECTION TO PURCHASE COMMON STOCK AFTER THE CONVERSION
After the Conversion, a Participant shall be able to direct that a
percentage of the net value of such Participant's interests in the trust fund
established for the Plan (the "Trust Fund") be transferred to the Employer
Stock Fund and invested in Common Stock, or to the other investment funds
available under the Plan. Alternatively, a Participant may direct that a
certain percentage of such Participant's interest in the Employer Stock Fund
be transferred to the Trust Fund to be invested in accordance with the terms
of the Plan. Participants will be permitted to direct that future
contributions made to the Plan by or on their behalf will be invested in
Common Stock. Following the initial election, the allocation of a
Participant's interest in the Employer Stock Fund may be changed by filing a
written notice with the plan Administrator or utilizing the Plan's "Teletouch"
system. Special restrictions apply to transfers directed by those Participants
who are officers, directors and principal shareholders of the Bank who are
subject to the provisions of Section 16(b) of the Securities Exchange Act of
1934, as amended (the "1934 Act").
VIII. PURCHASE PRICE OF COMMON STOCK
The funds transferred to the Employer Stock Fund for the purchase of Common
Stock in connection with the Conversion will be used by the Trustee to
purchase shares of Common Stock. The price to be paid by the Trust Fund for
such shares of Common Stock will be the same price as is paid by all persons
who purchase shares of Common Stock in the Conversion.
Common Stock purchased by the Trustee after the Conversion will be acquired
in open market transactions. The prices paid by the Trustee for shares of
Common Stock will not exceed "adequate consideration" as defined in Section
3(18) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"). Transaction fees associated with purchase, sale or transfer of the
Common Stock after the Conversion will be paid through the cash portion of
each Participant's Account.
IX. NATURE OF A PARTICIPANT'S INTEREST IN THE COMMON STOCK
The Common Stock will be held in the name of the Trustee for the Plan, as
trustee. Each Participant will have actual shares of Common Stock credited to
their Account. All Employer Stock Fund transactions to purchase or sell Common
Stock after the Conversion will take place on the open market.
X. VOTING AND TENDER RIGHTS OF COMMON STOCK
Each Participant with an investment in the Employer Stock Fund shall be
entitled to direct the Trustee as to the exercise of all voting powers over
shares of Common Stock credited to his or her Account. Specifically, each
Participant with an investment in the Employer Stock Fund shall have the right
to participate in voting with respect to the approval or disapproval of any
corporate merger or consolidation, recapitalization, reclassification,
liquidation, dissolution, sale of substantially all assets of a trade or
business, or such similar transaction as may be prescribed in the Treasury
Regulations.
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DESCRIPTION OF THE PLAN
I. INTRODUCTION
The Plan was established effective August 1, 1978, as the First Federal
Lincoln Bank Savings Plan, and was amended in connection with the Conversion
to provide for the investment in Common Stock. The Plan is a cash or deferred
arrangement established in accordance with the requirements under Section
401(a) and Section 401(k) of the Internal Revenue Code of 1986, as amended
(the "Code"). The Plan will be submitted to the Internal Revenue Service (the
"Service") in a timely manner for a determination that the Plan, as amended,
is qualified under Section 401(a) of the Code, and that its related trust(s)
are qualified under Section 501(a) of the Code.
The Bank intends that the Plan, in operation, will comply with the
requirements under Section 401(a) and Section 401(k) of the Code. The Bank
will adopt any amendments to the Plan that may be necessary to ensure the
qualified status of the Plan under the Code and applicable Treasury
Regulations.
Employee Retirement Income Security Act. The Plan is an "individual account
plan" other than a "money purchase pension plan" within the meaning of ERISA.
As such, the Plan is subject to all of the provisions of Title I (Protection
of Employee Benefit Rights) and Title II (Amendments to the Internal Revenue
Code Relating to Retirement Plans) of ERISA, except the funding requirements
contained in Part 3 of Title I of ERISA which by their terms do not apply to
an individual account plan (other than a money purchase pension plan). The
Plan is not subject to Title IV (Plan Termination Insurance) of ERISA. Neither
the funding requirements contained in Part 3 of Title I of ERISA nor the plan
termination insurance provisions contained in Title IV of ERISA will be
extended to Participants (as defined below) or beneficiaries under the Plan.
APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL RESTRICTIONS
ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW AMOUNTS HELD FOR HIS BENEFIT
UNDER THE PLAN PRIOR TO THE PARTICIPANT'S TERMINATION OF EMPLOYMENT WITH THE
BANK. A SUBSTANTIAL FEDERAL TAX PENALTY MAY ALSO BE IMPOSED ON WITHDRAWALS
MADE PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE 59 1/2, REGARDLESS OF
WHETHER SUCH A WITHDRAWAL OCCURS DURING HIS EMPLOYMENT WITH THE BANK OR AFTER
TERMINATION OF EMPLOYMENT.
Reference to Full Text of Plan. The following statements are summaries of
certain provisions of the Plan. They are not complete and are qualified in
their entirety by the full text of the Plan. Copies of the Plan are available
to all employees by filing a request with the Plan Administrator, First
Federal Lincoln Bank, 13th & "N" Streets, Lincoln, Nebraska 68508. The Plan
Administrator's telephone number is (402) 475-0521. Each employee is urged to
read carefully the full text of the Plan.
II. ELIGIBILITY AND PARTICIPATION
Any employee of the Employer, who completes 1,000 hours of service (except
those who are paid solely on a retainer or fee basis), is eligible to
participate in the Plan as soon as the employee completes one year of service
with the Employer. An eligible employee becomes an active participant in the
Plan on the 1st day of the month following the month he or she has met the
Plan eligibility requirements. In order to commence participation, an employee
must submit an elective deferral agreement ("Elective Deferral Agreement")
before the pay period in which the eligible employee desires to enter the
Plan.
As of September 30, 1997, there were approximately 288 employees eligible to
participate in the Plan, and 272 employees had account balances under the
Plan.
III. CONTRIBUTIONS UNDER THE PLAN
401(k) Plan Contributions. Subject to certain limitations on contributions,
each Participant in the Plan is permitted to elect to reduce such
Participant's Compensation (as defined below) pursuant to an Elective Deferral
Agreement by an amount not less than 1% and not more than 15% and have that
amount contributed to the Plan
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on such Participant's behalf. Such amounts are credited to the Participant's
Account. See "Section IV Limitations on Contributions" below. For purposes of
the Plan, "Compensation" means base salary minus bonuses, commissions,
overtime pay, and any other special compensation over $6,000. "Compensation"
does not include expense repayments or other allowances, fringe benefits,
moving expenses, deferred compensation and welfare benefits. As of January 1,
1998, the annual compensation of each Participant taken into account under the
Plan is limited to $160,000 (adjusted for increases in the cost of living as
permitted by the Code). Generally, a Participant may elect to modify the
amount contributed to the Plan under such participant's Elective Deferral
Agreement by providing written notice to the Plan Administrator before
commencement of the first day of the payroll period for which the modification
is to become effective. Elective Deferral Contributions are transferred by the
Employer to the Trustee of the Plan.
Employer Contributions. The Employer makes a matching contribution to the
Plan in an amount determined quarterly, up to 100% of each Participant's
Elective Deferral Contribution to his or her Account up to 6% of the
Participant's Compensation. Currently (the first quarter of 1998) the Employer
is matching 75% of each Participant's elective deferral contribution up to 6%
of the Participant Compensation. After the Conversion, at the discretion of
the Bank, the Employer matching contributions may be credited to the
Participant's Account in First Federal Lincoln Bank Employee Stock Ownership
Plan.
IV. LIMITATIONS ON CONTRIBUTIONS
Limitations on Annual Additions and Benefits. Pursuant to the requirements
of the Code, the Plan provides that the amount of contributions allocated to
each Participant's Account during any Plan Year may not exceed the lesser of
25% of the Participant's Section 415 Compensation for the Plan Year or $30,000
(adjusted for increases in the cost of living as permitted by the Code). A
Participant's Section 415 Compensation is generally a Participant's
Compensation received from the Employer. In addition, annual additions shall
be limited to the extent necessary to prevent the limitations set forth in the
Code for all of the qualified defined benefit plans and defined contribution
plans maintained by the Bank from being exceeded. To the extent that these
limitations would be exceeded by reason of excess annual additions with
respect to a Participant, such excess will be disposed of as follows:
(i) Any excess amount in the Participant's Account attributable to
elective deferrals will be returned to the Participant;
(ii) If after the return of Elective Deferral Contributions an excess
amount still exists, and the Participant is an Active Participant at the
end of the Plan Year, the excess amount in the Participant's Account will
be used to reduce the Employer's contributions for such Participant in the
next Plan Year; and
(iii) If, after the return of Elective Deferral Contributions, an excess
amount still exists, and the Participant is not covered by the Plan at the
end of the Plan Year, the excess amount will be held unallocated in a
suspense account which will then be applied to reduce future Employer
contributions for all remaining Participants in the next Plan Year.
Limitation on 401(k) Plan Contributions. The annual amount of deferred
Compensation under an Elective Deferral Agreement of a Participant (when
aggregated with any elective deferrals of the Participant under a simplified
employee pension plan or a tax-deferred annuity) may not exceed $7,000
adjusted for increases in the cost of living as permitted by the Code (the
limitation for 1998 is $10,000). Contributions in excess of this limitation
("excess deferrals") will be subject to federal income tax when distributed by
the Plan to the Participant, unless the excess deferral (together with any
income allocable thereto) is distributed to the Participant not later than the
first April 15th following the close of the taxable year in which the excess
deferral is made. Any income on the excess deferral that is distributed not
later than such date shall be treated, for federal income tax purposes, as
earned and received by the Participant in the taxable year in which the excess
deferral is made.
Limitation on Plan Contributions for Highly Compensated Employees. Sections
401(k) and 401(m) of the Code limit the amount of deferred compensation that
may be made to the Plan in any Plan Year on behalf of Highly Compensated
Employees (defined below) in relation to the amount of deferred compensation
made by or
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on behalf of all other employees eligible to participate in the Plan.
Specifically, the actual deferral percentage (i.e., the average of the ratios,
calculated separately for each eligible employee in each group, by dividing
the amount of deferred compensation credited to the Elective Deferral Account
of such eligible employee by such eligible employee's compensation for the
Plan Year) of the Highly Compensated Employees may not exceed the greater of
(i) 125% of the actual deferral percentage of all other eligible employees, or
(ii) the lesser of (x) 200% of the actual deferral percentage of all other
eligible employees, or (y) the actual deferral percentage of all other
eligible employees plus two percentage points. In addition, the actual
contribution percentage for such Plan Years (i.e., the average of the ratios
calculated separately for each eligible employee in each group, by dividing
the amount of employer matching contributions credited to the Account of such
eligible employee by such eligible employee's compensation for the Plan Year)
of the Highly Compensated Employees may not exceed the greater of (i) 125% of
the actual contribution percentage of all other eligible employees, or (ii)
the lesser of (x) 200% of the actual contribution percentage of all other
eligible employees, or (y) the actual contribution percentage of all other
eligible employees plus two percentage points.
In general, a Highly Compensated Employee includes any employee who, (1) was
a five percent owner of the Employer at any time during the year or preceding
year; or (2) had compensation for the preceding year in excess of $80,000 and,
if the Employer so elects, was in the top 20% of employees by compensation for
such year. The dollar amounts in the foregoing sentence are for 1998. Such
amounts are adjusted annually to reflect increases in the cost of living.
In order to prevent the disqualification of the Plan, any amount contributed
by Highly Compensated Employees that exceed the average deferral limitation or
average contribution limitation in any Plan Year ("excess contributions"),
together with any income allocable thereto, must be distributed to such Highly
Compensated Employees before the close of the following Plan Year. However,
the Employer will be subject to a 10% excise tax on any excess contributions
unless such excess contributions, together with any income allocable thereto,
are distributed before the close of the first 2 1/2 months following the Plan
Year to which such excess contributions relate.
Top-Heavy Plan Requirements. If for any Plan Year the Plan is a Top-Heavy
Plan (as defined below), then (i) the Bank may be required to make certain
minimum contributions to the Plan on behalf of non-key employees (as defined
below), and (ii) certain additional restrictions would apply with respect to
the combination of annual additions to the Plan and projected annual benefits
under any defined benefit plan maintained by the Bank.
In general, the Plan will be regarded as a "Top-Heavy Plan" for any Plan
Year if, as of the last day of the preceding Plan Year, the aggregate balance
of the Accounts of Participants who are Key Employees (as defined below)
exceeds 60% of the aggregate balance of the Accounts of all Participants. Key
Employees generally include any employee who, at any time during the Plan Year
or any of the four preceding Plan Years, is (1) an officer of the Bank having
annual compensation in excess of $65,000 who is in an administrative or
policy-making capacity, (2) one of the ten employees having annual
compensation in excess of $30,000 and owning, directly or indirectly, the
largest interests in the Bank, (3) a 5% owner of the Bank, (i.e., owns
directly or indirectly more than 5% of the stock of the Bank, or stock
possessing more than 5% of the total combined voting power of all stock of the
Bank) or (4) a 1% owner of the Bank having annual compensation in excess of
$150,000. The dollar amounts in the foregoing sentence are for 1998.
V. INVESTMENT OF CONTRIBUTIONS
All amounts credited to Participants' Accounts under the Plan are held in
the Plan Trust (the "Trust") which is administered by a trustee appointed by
the Bank's Board of Directors.
Prior to March 13, 1998, Participant Account balances have been invested in
the following accounts at the direction of the Participants:
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a. 5-Year Guaranteed Interest Account;
b. 2-Year Guaranteed Interest Account;
c. Bond & Mortgage Account;
d. Bond Emphasis Balanced Account;
e. Stock Emphasis Balance Account;
f. Stock Index 500 Account;
g. U.S. Stock Account;
h. Real Estate Account;
i. International Stock Account; and
j. Money Market Account
The Plan, as amended now provides that in addition to the Funds specified
above, a Participant who is employed by the Bank may direct the Trustee to
invest all or a portion of his Account in the Employer Stock Fund.
Participants in the Plan may direct the Trustee to invest all or a portion
of his or her Account in the Employer Stock Fund.
A Participant may elect to have both past and future contributions and
additions to the Participant's Account invested either in the Employer Stock
Fund or among such other Funds. After the Conversion, at the discretion of the
Bank, the "Matching Contribution" portion of Participants' Accounts may be
invested in Employer Stock under the proposed terms of the First Federal
Lincoln Bank Employee Stock Ownership Plan being implemented by the Bank.
These elections will be effective on the effective date of the Participant's
written notice to the plan administrator, provided such notice is filed with
the administrator in a timely fashion. After the Conversion, elections may be
made through the Plan's "Teletouch" system. Any amounts credited to a
Participant's Account for which investment directions are not given will be
invested in the 2-Year Guaranteed Interest Account in accordance with the
terms of the Plan.
The value of a Participant's Employer Stock Fund portion of his or her
Account will be the value of the shares of Common Stock held in the
Participant's Account, as determined by the price established by the American
Stock Exchange. Any dividends payable on the Common Stock held in a
Participant's Account will be reinvested in additional shares of Common Stock.
A. Plan Investments.
The annual percentage return on the Plan's investments for the prior three
years was:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
a. 5-Year Guaranteed Interest Account...................... 6.03% 6.30% 6.92%
b. 2-Year Guaranteed Interest Account...................... 5.10 5.65 4.01
c. Bond & Mortgage Account................................. 3.94 18.41 (2.05)
d. Bond Emphasis Balanced Account.......................... 10.02 19.82 (1.76)
e. Stock Emphasis Balanced Account......................... 16.34 22.3 (0.24)
f. Stock Index 500 Account................................. 22.5 37.07 1.05
g. U.S. Stock Account...................................... 24.13 33.1 0.29
h. Real Estate Account..................................... 9.63 7.82 5.14
i. International Stock Account............................. 24.32 14.41 (2.3)
j. Money Market Account.................................... 4.90 6.77 5.15
</TABLE>
B. The Employer Stock Fund.
The Employer Stock Fund will consist of cash and investments in Common Stock
made on and after the effective date of the Conversion. The cash portion of
the Employer Stock Fund is used to hold excess cash left over when processing
transactions. The Plan Trustee will purchase shares of Common Stock for
Participants' Accounts. The value of the shares credited to a Participant's
Account will be the fair market value of the Common Stock on the date of
purchase. The value of a Participant's Account is updated on a daily basis.
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On the occasion of the payment of a cash dividend, the Trustee may use the
dividend to purchase additional shares of Common Stock. The Board of Directors
of the Holding Company may consider a policy of paying cash dividends on the
Common Stock in the future; however, no decision as to the amount or timing of
cash dividends, if any, has been made. The Trustee will, to the extent
practicable, use all amounts held by it in the Employer Stock Fund to purchase
shares of Common Stock of the Bank. It is expected that all purchases will be
made at prevailing market prices. Under certain circumstances, the Trustee may
be required to limit the daily volume of shares purchased. Pending investment
in Common Stock, assets held in the Employer Stock Fund will be placed in
short-term investments.
Any brokerage commissions, transfer fees and other expenses incurred in the
sale and purchase of Common Stock for the Employer Stock Fund will be paid out
of the cash portion of each Participant's Account on a pro rata basis.
As of the date of this Prospectus Supplement, none of the shares of Common
Stock have been issued or are outstanding and there is no established market
for the Common Stock. Accordingly, there is no record of the historical
performance of the Employer Stock Fund. Performance will be dependent upon a
number of factors, including the financial condition and profitability of the
Holding Company and the Bank and market conditions for the Common Stock
generally. See "Market for the Common Stock" in the Prospectus.
INVESTMENTS IN THE EMPLOYER STOCK FUND MAY INVOLVE CERTAIN SPECIAL RISKS IN
INVESTMENTS IN COMMON STOCK OF THE COMPANY. FOR A DISCUSSION OF THESE RISK
FACTORS, SEE "RISK FACTORS" IN THE ATTACHED PROSPECTUS.
VI. BENEFITS UNDER THE PLAN
Vesting. A Participant, at all times, has a fully vested, nonforfeitable
interest in his or her Elective Deferral Account and the earnings thereon
under the Plan. A Participant vests in his or her Matching Contributions under
the Plan according to the following schedule:
<TABLE>
<CAPTION>
PERIOD OF SERVICE VESTED PERCENTAGE
----------------- -----------------
<S> <C>
less than 5 years.......... 0%
5 years or more............ 100%
</TABLE>
VII. WITHDRAWALS AND DISTRIBUTIONS FROM THE PLAN
APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL RESTRICTIONS
ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW AMOUNTS HELD FOR HIS BENEFIT
UNDER THE PLAN PRIOR TO THE PARTICIPANT'S TERMINATION OF EMPLOYMENT WITH THE
BANK. A SUBSTANTIAL FEDERAL TAX PENALTY MAY ALSO BE IMPOSED ON WITHDRAWALS
MADE PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE 59 1/2, REGARDLESS OF
WHETHER SUCH A WITHDRAWAL OCCURS DURING HIS EMPLOYMENT WITH THE BANK OR AFTER
TERMINATION OF EMPLOYMENT.
Withdrawals Prior to Termination of Employment. A Participant may withdraw
from his account, from amounts attributable to Required contributions, at
anytime. Subject to the hardship distribution rules under the Plan, a
Participant may withdraw all or a portion of his or her (i) Elective Deferral
Contributions and (ii) the vested interest in his or her Matching
Contributions and (iii) Rollover Contributions. The hardship distribution
requirements ensure that Participants have an immediate and heavy financial
need of which the hardship distribution is necessary to satisfy the financial
need.
Distribution Upon Retirement, Disability or Termination of
Employment. Payment of benefits to a Participant who retires, incurs a
disability, or otherwise terminates employment generally shall be made in a
lump sum cash payment as soon as administratively feasible after such
termination of employment if the vested value of the Participant's Account is
$5,000 or less. If the vested portion of the Participant's Account balance is
greater
7
<PAGE>
than $5,000, the Participant may request a distribution (subject to the
minimum distribution rules) in either a lump sum payment, installments, or an
annuity: (a) as soon as administratively possible after termination or (b) as
of the date the Participant attains normal retirement age. In lieu of a cash
distribution, a Participant may request that any portion of the Participant's
vested Account held in Common Stock be distributed in kind. Fractional shares
valued as of the most recent Valuation Date will be paid in cash. The
distribution will include any dividends (cash or stock) on such whole shares
or any additional shares of Common Stock received as a result of a stock split
or any other adjustment to such whole shares of Common Stock since the
Valuation Date preceding the date of distribution. Benefit payments ordinarily
will be made not later than 60 days following the end of the Plan Year in
which occurs the latest of the Participant's: (i) termination of employment;
(ii) the attainment of age 65 or (iii) 10th anniversary of commencement of
participation in the Plan; but in no event later than the later of April 1
following the calendar year in which the Participant attains age 70 1/2 or
retires. However, if the vested portion of the Participant's Account balances
exceeds or has ever exceeded $5,000, no distribution shall be made from the
Plan prior to the Participant's attaining age 65 unless the Participant elects
to receive an earlier distribution.
Distribution upon Death. A Participant who dies prior to the benefit
commencement date for retirement, disability or termination of employment, and
who has a surviving spouse shall have his benefits paid to the surviving
spouse in a lump sum, installment payments or annuity payments as soon as
administratively possible following the date of his death, unless the
Participant elected prior to his death, or the beneficiary so elects within 90
days of the Participant's death, to receive such distribution in a lump sum
payment, installment payments, or annuity payments as of any Valuation Date
which occurs within one year of the Participant's death. With respect to an
unmarried Participant, and in the case of a married Participant with spousal
consent to the designation of another beneficiary, payment of benefits to the
beneficiary of a deceased Participant shall be made in the form of a lump-sum
payment in cash or in Common Stock or annuity payments in the same manner
described above as to a Participant with a surviving spouse.
Nonalienation of Benefits. Except with respect to federal income tax
withholding, and provided with respect to a qualified domestic relations
orders (as defined in the Code), benefits payable under the Plan shall not be
subject in any manner to anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance, charge, garnishment, execution, or levy of any kind,
either voluntary or involuntary, and any attempt to anticipate, alienate,
sell, transfer, assign, pledge, encumber, charge or otherwise dispose of any
rights to benefits payable under the Plan shall be void.
VIII. ADMINISTRATION OF THE PLAN
The Trustee with respect to the Plan is the named fiduciary of the Plan for
purposes of Section 402 of ERISA.
Trustees. The Trustee(s) is appointed by the Board of Directors of the Bank
to serve at its pleasure. The current Trustees of the Plan are L.F.
Roschewski, Gil Lundstrom, Patricia Young, Roland Maaske, Larry Pfeil, Eugene
Witkowicz, Paula Luther and Roger Ludemann (referred collectively herein as
the "Trustee"). The Trustee of the Employer Stock Fund is the Delaware Charter
Guarantee & Trust Company. The Trustee with respect to the investment funds
other than the Employee Stock Fund is the Principal Financial Group.
Pursuant to the terms of the Plan, the Trustee receives, holds and invests
the contributions to the Plan in trust and distributes them to Participants
and beneficiaries in accordance with the terms of the Plan and the directions
of the Plan Administrator. The Trustee is responsible for investment of the
assets of the Trust.
IX. REPORTS TO PLAN PARTICIPANTS
The Plan Administrator will furnish to each Participant a statement showing
(i) the balance in the Participant's Account as of the end of that period,
(ii) the amount of contributions credited to such participant's Account for
that period, and (iii) for investments in the Employer Stock Fund, the number
of shares held in the Account.
8
<PAGE>
X. PLAN ADMINISTRATOR
Pursuant to the terms of the Plan, the Plan is administered by one or more
persons who are appointed by and who serve at the pleasure of the Bank (the
"Plan Administrator"). Currently, the Plan Administrator is First Federal
Lincoln Bank. The address and telephone number of the Plan Administrator is
First Federal Lincoln Bank, 13th & "N" Streets, Lincoln, Nebraska 68508. The
Plan Administrator is responsible for the administration of the Plan,
interpretation of the provisions of the Plan, prescribing procedures for
filing applications for benefits, preparation and distribution of information
explaining the Plan, maintenance of Plan records, books of account and all
other data necessary for the proper administration of the Plan, and
preparation and filing of all returns and reports relating to the Plan which
are required to be filed with the U.S. Department of Labor and the Service,
and for all disclosures required to be made to Participants, Beneficiaries and
others under Sections 104 and 105 of ERISA.
XI. AMENDMENT AND TERMINATION
It is the intention of the Bank to continue the Plan indefinitely.
Nevertheless, the Bank may terminate the Plan at any time. If the Plan is
terminated in whole or in part, then regardless of other provisions in the
Plan, each employee affected by such termination shall have a fully vested
interest in his Accounts. The Bank reserves the right to make, from time to
time, any amendment or amendments to the Plan which do not cause any part of
the Trust to be used for, or diverted to, any purpose other than the exclusive
benefit of Participants or their beneficiaries; provided, however, that the
Bank may make any amendment it determines necessary or desirable, with or
without retroactive effect, to comply with ERISA or the Code.
XII. MERGER, CONSOLIDATION OR TRANSFER
In the event of the merger or consolidation of the Plan with another plan,
or the transfer of the Trust assets to another plan, the Plan requires that
each Participant would (if either the Plan or the other plan then terminated)
receive a benefit immediately after the merger, consolidation or transfer
which is equal to or greater than the benefit he would have been entitled to
receive immediately before the merger, consolidation or transfer (if the Plan
had then terminated).
XIII. FEDERAL INCOME TAX CONSEQUENCES
The following is only a brief summary of certain federal income tax aspects
of the Plan which are of general application under the Code and is not
intended to be a complete or definitive description of the federal income tax
consequences of participating in or receiving distributions from the Plan. The
summary is necessarily general in nature and does not purport to be complete.
Moreover, statutory provisions are subject to change, as are their
interpretations, and their application may vary in individual circumstances.
Finally, the consequences under applicable state and local income tax laws may
not be the same as under the federal income tax laws. PARTICIPANTS ARE URGED
TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO ANY DISTRIBUTION FROM THE PLAN
AND TRANSACTIONS INVOLVING THE PLAN.
The Plan will be submitted to the Service in a timely manner for a
determination that it is qualified under Section 401(a) of the Code, and that
the related Trust is exempt from tax under Section 501(a) of the Code. A plan
that is "qualified" under the Code is afforded special tax treatment which
include the following: (1) the sponsoring employer is allowed an immediate tax
deduction for the amount contributed to the Plan each year; (2) participants
pay no current income tax on amounts contributed by the employer on their
behalf; and (3) earnings of the plan are tax-deferred thereby permitting the
tax-free accumulation of income and gains on investments. The Plan will be
administered to comply in operation with the requirements of the Code as of
the applicable effective date of any change in the law. The Bank expects to
timely adopt any amendments to the Plan that may be necessary to maintain the
qualified status of the Plan under the Code. Following such an amendment, the
Bank will submit the Plan to the Service for a determination that the Plan, as
amended, continues to qualify under Sections 401(a) and 501(a) of the Code and
that it continues to satisfy the requirements for a qualified cash or deferred
arrangement under Section 401(k) of the Code. Should the Plan receive from the
Service an adverse determination letter regarding its tax exempt status, all
participants would generally recognize income equal to their vested interest
in the Plan, the participants would not be permitted to transfer amounts
distributed from the Plan to an IRA or to another qualified retirement plan,
and the Bank may be denied certain deductions taken with respect to the Plan.
9
<PAGE>
Lump Sum Distribution. A distribution from the Plan to a Participant or the
beneficiary of a Participant will qualify as a Lump Sum Distribution if it is
made: (i) within one taxable year of the Participant or beneficiary; (ii) on
account of the Participant's death, disability or separation from service, or
after the Participant attains age 59 1/2; and (iii) consists of the balance to
the credit of the Participant under this Plan and all other profit sharing
plans, if any, maintained by the Bank. The portion of any Lump Sum
Distribution that is required to be included in the Participant's or
beneficiary's taxable income for federal income tax purposes (the "total
taxable amount") consists of the entire amount of such Lump Sum Distribution
less the amount of after-tax contributions, if any, made by the Participant to
any other profit sharing plans maintained by the Bank which is included in
such distribution.
Averaging Rules. The portion of the total taxable amount of a Lump Sum
Distribution that is attributable to participation after 1973 in this Plan or
in any other profit-sharing plan maintained by the Bank (the "ordinary income
portion") will be taxable generally as ordinary income for federal income tax
purposes. However, a Participant who has completed at least five years of
participation in this Plan before the taxable year in which the distribution
is made, or a beneficiary who receives a Lump Sum Distribution on account of
the Participant's death (regardless of the period of the Participant's
participation in this Plan or any other profit-sharing plan maintained by the
Employers), may elect to have the ordinary income portion of such Lump Sum
Distribution taxed according to a special averaging rule ("five-year
averaging"). The election of the special averaging rules may apply only to one
Lump Sum Distribution received by the Participant or beneficiary, provided
such amount is received on or after the Participant turns 59 1/2 and the
recipient elects to have any other Lump Sum Distribution from a qualified plan
received in the same taxable year taxed under the special averaging rule.
Under a special grandfather rule, individuals who turned 50 by 1986 may elect
to have their Lump Sum Distribution taxed under either the five-year averaging
rule or under the prior law ten-year averaging rule. Such individuals also may
elect to have that portion of the Lump Sum Distribution attributable to the
participant's pre-1974 participation in the Plan taxed at a flat 20% rate as
gain from the sale of a capital asset.
Common Stock Included in Lump Sum Distribution. If a Lump Sum Distribution
includes Common Stock, the distribution generally will be taxed in the manner
described above, except that the total taxable amount will be reduced by the
amount of any net unrealized appreciation with respect to such Common Stock,
i.e., the excess of the value of such Common Stock at the time of the
distribution over its cost or other basis of the securities to the Trust. The
tax basis of such Common Stock to the Participant or beneficiary for purposes
of computing gain or loss on its subsequent sale will be the value of the
Common Stock at the time of distribution less the amount of net unrealized
appreciation. Any gain on a subsequent sale or other taxable disposition of
such Common Stock, to the extent of the amount of net unrealized appreciation
at the time of distribution, will be considered long-term capital gain
regardless of the holding period of such Common Stock. Any gain on a
subsequent sale or other taxable disposition of the Common Stock in excess of
the amount of net unrealized appreciation at the time of distribution will be
considered either short-term, mid-term or long-term capital gain depending
upon the length of the holding period of the Common Stock. The recipient of a
distribution may elect to include the amount of any net unrealized
appreciation in the total taxable amount of such distribution to the extent
allowed by the regulations to be issued by the Treasury Department.
Distributions: Rollovers and Direct Transfers to Another Qualified Plan or
to an IRA. Pursuant to a change in the law, effective January 1, 1993,
virtually all distributions from the Plan may be rolled over to another
qualified Plan or to an individual retirement account ("IRA") without regard
to whether the distribution is a Lump Sum Distribution or a Partial
Distribution. Effective January 1, 1993, Participants have the right to elect
to have the Trustee transfer all or any portion of an "eligible rollover
distribution" directly to another plan qualified under Section 401(a) of the
Code or to an IRA. If the Participant does not elect to have an "eligible
rollover distribution" transferred directly to another qualified plan or to an
IRA, the distribution will be subject to an mandatory federal withholding tax
equal to 20% of the taxable distribution. An "eligible rollover distribution"
means any amount distributed from the Plan except: (1) a distribution that is
(a) one of a series of substantially equal periodic payments (not less
frequently than annually) made for the life (or life expectancy) of the
Participant or the joint lives of the Participant and his or her designated
beneficiary, or (b) for a specified period of ten years or more; (2) any
amount that is required to be distributed under the minimum distribution
rules; and (3) any other distributions excepted under applicable federal law.
The tax law change described above
10
<PAGE>
did not modify the special tax treatment of Lump Sum Distributions, that are
not rolled over or transferred i.e., forward averaging, capital gains tax
treatment and the nonrecognition of net unrealized appreciation, discussed
earlier.
THE FOREGOING IS ONLY A BRIEF SUMMARY OF CERTAIN FEDERAL INCOME TAX ASPECTS
OF THE PLAN WHICH ARE OF GENERAL APPLICATION UNDER THE CODE AND IS NOT
INTENDED TO BE A COMPLETE OR DEFINITIVE DESCRIPTION OF THE FEDERAL INCOME TAX
CONSEQUENCES OF PARTICIPATING IN OR RECEIVING DISTRIBUTIONS FROM THE PLAN.
ACCORDINGLY, EACH PARTICIPANT IS URGED TO CONSULT A TAX ADVISOR CONCERNING THE
FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF PARTICIPATING IN AND RECEIVING
DISTRIBUTIONS FROM THE PLAN.
XIV. ERISA AND OTHER QUALIFICATION
As noted above, the Plan is subject to certain provisions of ERISA and will
be submitted to the Service for a determination that it is qualified under
Section 401(a) of the Code.
XV. RESTRICTIONS ON RESALE
Any person receiving a distribution of shares of Common Stock under the Plan
who is an "affiliate" of the Bank as the term "affiliate" is used in Rules 144
and 405 under the Securities Act of 1933, as amended (the "Securities Act")
(e.g., directors, officers and substantial shareholders of the Bank) may
reoffer or resell such shares only pursuant to a registration statement filed
under the Securities Act assuming the availability thereof, pursuant to Rule
144 or some other exemption of the registration requirements of the Securities
Act. Any person who may be an "affiliate" of the Bank may wish to consult with
counsel before transferring any Common Stock owned by him. In addition,
Participants are advised to consult with counsel as to the applicability of
Section 16 of the 1934 Act which may restrict the sale of Common Stock where
acquired under the Plan, or other sales of Common Stock.
Persons who are not deemed to be "affiliates" of the Bank at the time of
resale will be free to resell any shares of Common Stock to them under the
Plan, either publicly or privately, without regard to the Registration and
Prospectus delivery requirements of the Securities Act or compliance with the
restrictions and conditions contained in the exemptive rules thereunder. An
"affiliate" of the Bank is someone who directly or indirectly, through one or
more intermediaries, controls, is controlled by, or is under common control,
with the Bank. Normally, a director, principal officer or major shareholder of
a corporation may be deemed to be an "affiliate" of that corporation. A person
who may be deemed an "affiliate" of the Bank at the time of a proposed resale
will be permitted to make public resales of the Bank's Common Stock only
pursuant to a "reoffer" Prospectus or in accordance with the restrictions and
conditions contained in Rule 144 under the Securities Act or some other
exemption from registration, and will not be permitted to use this Prospectus
in connection with any such resale. In general, the amount of the Bank's
Common Stock which any such affiliate may publicly resell pursuant to Rule 144
in any three-month period may not exceed the greater of one percent of the
Bank's Common Stock then outstanding or the average weekly trading volume
reported on the American Stock Exchange during the four calendar weeks prior
to the sale. Such sales may be made only through brokers without solicitation
and only at a time when the Bank is current in filing the reports required of
it under the 1934 Act.
XVI. SEC REPORTING AND SHORT-SWING PROFIT LIABILITY
Section 16 of the 1934 Act imposes reporting and liability requirements on
officers, directors and persons beneficially owning more than ten percent of
public companies such as the Holding Company. Section 16(a) of the 1934 Act
requires the filing of reports of beneficial ownership. Within ten days of
becoming a person subject to the reporting requirements of Section 16(a), a
Form 3 reporting initial beneficial ownership must be filed with the
Securities and Exchange Commission. Certain changes in beneficial ownership,
such as purchases, sales, gifts and participation in savings and retirement
plans must be reported periodically, either on a Form 4 within ten days after
the end of the month in which a change occurs, or annually on a Form 5 within
45 days after the close of the Bank's fiscal year. Participation in the
Employer Stock Fund of the Plan by officers, directors and persons
beneficially owning more than ten percent of Common Stock of the Holding
Company must be reported to the SEC annually on a Form 5 by such individuals.
At September 30, 1997, 11.98% of the Plan assets were allocated to executive
officers.
11
<PAGE>
In addition to the reporting requirements described above, Section 16(b) of
the 1934 Act provides for the recovery by the Holding Company of profits
realized by any officer, director or any person beneficially owning more than
ten percent of the Holding Company's Common Stock ("Section 16(b) Persons")
resulting from the purchase and sale or sale and purchase of the Holding
Company's Common Stock within any six-month period.
The SEC has adopted rules that provide exemption from the profit recovery
provisions of Section 16(b) for participant-directed employer security
transactions within an employee benefit plan, such as the Plan, provided
certain requirements are met. These requirements generally involve
restrictions upon the timing of elections to acquire or dispose of employer
securities for the accounts of Section 16(b) Persons.
Except for distributions of Common Stock due to death, disability,
retirement, termination of employment or under a qualified domestic relations
order, Section 16(b) Persons are required to hold shares of Common Stock
distributed from the Plan for six months following such distribution.
EXPERTS
The financial statements and schedule of the First Federal Lincoln Bank
Savings Plan as of December 31, 1996 and 1995 and for the years then ended
have been included herein in reliance upon the report of KPMG Peat Marwick
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.
LEGAL OPINIONS
The validity of the issuance of the Common Stock will be passed upon by
Muldoon, Murphy & Faucette, Washington, D.C., which firm acted as special
counsel for the Bank in connection with the Bank's Conversion from a mutual
savings bank to a stock based organization.
12
<PAGE>
FIRST FEDERAL LINCOLN BANK SAVINGS PLAN
TABLE OF CONTENTS
DECEMBER 31, 1996 AND 1995
<TABLE>
<S> <C>
Independent
Auditors'
Report....... A-2
Statements of
Net Assets
Available for
Plan
Benefits..... A-3
Statements of
Changes in
Net Assets
Available for
Pension
Benefits..... A-4
Notes to
Financial
Statements... A-5 to A-7
Item 27a--
Schedule of
Assets Held
for
Investment
Purposes..... A-8
Item 27d--
Schedule of
Reportable
Transactions.. A-9
</TABLE>
A-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Employee Benefit Committee
First Federal Lincoln Bank
Lincoln, Nebraska:
We were engaged to audit the financial statements and schedules of First
Federal Lincoln Bank Savings Plan as of December 31, 1996 and 1995, and for the
years then ended. These financial statements and schedules are the
responsibility of the Plan's management.
As permitted by 29 CFR 2520.103-8 of the Department of Labor's Rules and
Regulations for Reporting and Disclosure under the Employee Retirement Income
Security Act of 1974, the plan administrator instructed us not to perform, and
we did not perform, any auditing procedures with respect to the information
summarized in note 6, which was certified by the Principal Financial Group, Des
Moines, Iowa, the Insurer of the Plan, except for comparing the information
with related information included in the financial statements. We have been
informed by the plan administrator that the Insurer holds the Plan's investment
assets and executes investment transactions. A certification has been obtained
by the plan administrator from the Insurer as of and for the years ended
December 31, 1996 and 1995, that the information provided to the plan
administrator by the Insurer is complete and accurate.
Because of the significance of the information that we did not audit, we are
unable to, and do not, express an opinion on the accompanying financial
statements and schedules taken as a whole. The form and content of the
information included in the financial statements and schedules, other than that
derived from the information certified by the Insurer, have been audited by us
in accordance with generally accepted auditing standards and, in our opinion,
are presented in compliance with the Department of Labor's Rules and
Regulations for Reporting and Disclosure under the Employee Retirement Income
Security Act of 1974.
/s/ KPMG PEAT MARWICK LLP
June 13, 1997
Lincoln, Nebraska
A-2
<PAGE>
FIRST FEDERAL LINCOLN BANK SAVINGS PLAN
STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Pooled funds on deposit with the Insurer (notes 3, 4
and 6):
Guaranteed interest account.......................... $ 3,593,187 3,785,944
U.S. stock account................................... 4,723,942 3,588,100
International stock account.......................... 1,246,399 862,310
Stock index 500 account.............................. 737,961 423,780
Money market account................................. 774,330 727,006
Real estate account.................................. 323,960 278,339
Bond and mortgage account............................ 1,546,539 1,438,417
Bond emphasis balanced account....................... 246,737 205,354
Stock emphasis balanced account...................... 238,231 178,887
----------- ----------
Net assets available for plan benefits............. $13,431,286 11,488,137
=========== ==========
</TABLE>
See accompanying notes to financial statements.
A-3
<PAGE>
FIRST FEDERAL LINCOLN BANK SAVINGS PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS WITH FUND
INFORMATION
YEAR ENDED DECEMBER 31, 1996 WITH COMPARATIVE TOTALS FOR 1995
<TABLE>
<CAPTION>
1996
----------------------------------------------------------------------------------------------------------
BOND STOCK
GUARANTEED U.S. INTERNATIONAL STOCK MONEY REAL BOND AND EMPHASIS EMPHASIS
INTEREST STOCK STOCK INDEX 500 MARKET ESTATE MORTGAGE BALANCED BALANCED
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT TOTAL
---------- --------- ------------- --------- ------- ------- --------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income
(note 6)......... $ 217,389 915,688 235,291 123,745 36,341 28,218 58,086 22,051 33,114 1,669,923
Contributions:
Employer........ 48,258 74,955 31,741 19,995 14,487 9,720 27,915 4,880 7,494 239,445
Employee........ 137,488 143,643 66,381 44,079 29,346 19,140 55,168 11,186 14,983 521,414
---------- --------- --------- -------- ------- ------- --------- ------- ------- ----------
Total
contributions... 185,746 218,598 98,122 64,074 43,833 28,860 83,083 16,066 22,477 760,859
---------- --------- --------- -------- ------- ------- --------- ------- ------- ----------
Total
additions....... 403,135 1,134,286 333,413 187,819 80,174 57,078 141,169 38,117 55,591 2,430,782
---------- --------- --------- -------- ------- ------- --------- ------- ------- ----------
Benefits to
participants..... 198,054 82,528 112,601 11,034 33,777 15,532 21,929 976 1,395 477,826
Transfers and
adjustments...... 397,272 (84,478) (163,366) (137,436) (997) (4,082) 11,013 (4,271) (5,169) 8,486
Other............ 566 394 89 40 70 7 105 29 21 1,321
---------- --------- --------- -------- ------- ------- --------- ------- ------- ----------
Total
deductions...... 595,892 (1,556) (50,676) (126,362) 32,850 11,457 33,047 (3,266) (3,753) 487,633
Net increase
(decrease)...... (192,757) 1,135,842 384,089 314,181 47,324 45,621 108,122 41,383 59,344 1,943,149
Beginning of
year............. 3,785,944 3,588,100 862,310 423,780 727,006 278,339 1,438,417 205,354 178,887 11,488,137
---------- --------- --------- -------- ------- ------- --------- ------- ------- ----------
End of year...... $3,593,187 4,723,942 1,246,399 737,961 774,330 323,960 1,546,539 246,737 238,231 13,431,286
========== ========= ========= ======== ======= ======= ========= ======= ======= ==========
<CAPTION>
1995
----------
<S> <C>
Investment income
(note 6)......... 1,701,405
Contributions:
Employer........ 209,230
Employee........ 537,628
----------
Total
contributions... 746,858
----------
Total
additions....... 2,448,263
----------
Benefits to
participants..... 630,467
Transfers and
adjustments...... 21,502
Other............ 1,056
----------
Total
deductions...... 653,025
Net increase
(decrease)...... 1,795,238
Beginning of
year............. 9,692,899
----------
End of year...... 11,488,137
==========
</TABLE>
See accompanying notes to financial statements.
A-4
<PAGE>
FIRST FEDERAL LINCOLN BANK SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements of the First Federal Lincoln Bank
Savings Plan (Plan) have been prepared on an accrual basis and present the net
assets available for plan benefits and the changes in those net assets. The
Plan is sponsored by First Federal Lincoln Bank (Bank).
Administration
The Plan, established August 1, 1978 and restated as of January 1, 1989, is
a defined contribution 401(k) profit sharing plan and is administered by the
Employee Benefit Committee. The Bank has entered into an Immediate
Participation Guarantee Contract with the Principal Financial Group (Insurer).
The Bank directs the Insurer to make investments under the group contract in
accordance with elections made by the participants. The Bank has no
reversionary interest in the Plan.
Costs of administering the Plan are paid by the Bank.
Investments and Valuations
The Plan's investments are stated at fair value except for its guaranteed
interest account which is valued at contract value (note 3). The Plan's other
investment accounts are unit investments in pooled separate accounts of the
Insurer. Each pooled separate account is valued at fair value by the Insurer
at the close of each business day.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the plan administrator to make
estimates and assumptions that affect the reported amounts of net assets
available for plan benefits and the reported changes in those net assets
during the reporting period. Actual results could differ from those estimates.
(2) DESCRIPTION OF PLAN
The following description of the Plan provides only general information.
Participants should refer to the Plan agreement for a more complete
description of the Plan's provisions.
Eligibility
The Plan requires that employees complete one year of service to be eligible
for participation in the Plan. A year of service is defined as any period of
12 consecutive months beginning on the date of employment or any January 1,
thereafter, during which the employee has at least 1,000 hours of service. The
employee must make an election to participate in the Plan and agree to make
contributions to the Plan by payroll deductions.
Contributions
Employees can contribute from 1 percent to 15 percent of their salary to the
Plan. All participant contributions are fully vested and nonforfeitable at all
times. The Bank will contribute, through June 30, 1996, 50 percent of the
employee's contribution up to a maximum of 6 percent of the employee's salary.
Beginning July 1, 1996, the Bank will contribute 66 2/3 percent of the
employee's contribution up to a maximum of 6 percent of the employee's salary
(including bonus, commission, overtime or other special compensation up to
$6,000), provided accumulated net income, earnings or profits allow. The Bank
funds its liability bi-weekly as the participants' contributions are made. The
Bank may make additional contributions to the Plan not to exceed the maximum
amount deductible from the Bank's income under the Internal Revenue Code.
A-5
<PAGE>
FIRST FEDERAL LINCOLN BANK SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(2) DESCRIPTION OF PLAN--(CONTINUED)
Benefits
Plan participants become 100 percent vested in the Bank's matching
contributions after five years of service. Participant accounts are credited
with the participant's contribution, an allocation of the Bank's contribution
and Plan earnings. Benefits to which a participant is entitled are provided
from the participant's account.
Benefits upon retirement are payable as a single lump-sum or as a fixed-
period annuity upon participant election. Participants may also elect to
receive a taxable distribution of any part of their vested account balance
prior to retirement if Plan hardship requirements are met. Payment of benefits
are recorded when paid.
Plan Termination
Although the Bank has not expressed any intention to do so, it has the right
under the Plan to discontinue its contributions at anytime and to terminate
the Plan subject to the provisions of Employee Retirement Income Security Act
of 1974 (ERISA). In the event of Plan termination, the entire value of each
participant's account will be fully vested and nonforfeitable.
Nonassignability
The account of any participant shall not be subject to seizure for the
payment of debts or judgments of the participant. However, a court of law, by
an appropriate qualified domestic relations order, can assign part of a
participant's benefit to an alternate payee.
Amendments
The Plan can be amended at any time by the Bank's Board of Directors, but
such amendment may not deprive any participant of his or her vested interest.
(3) GUARANTEED INTEREST ACCOUNT WITH INSURER
The Plan entered into a guaranteed interest account with the Insurer who
maintains the contributions in a pooled account. The guaranteed interest
account is credited with earnings on the underlying investments and charged
for plan withdrawals and administrative expenses charged by the Insurer. The
guaranteed interest account is included in the financial statements at
contract value, (which represents contributions made under the contract, plus
earnings, less withdrawals and administrative expenses), because it is fully
benefit responsive. For example, participants may ordinarily direct the
withdrawal or transfer of all or a portion of their investment at contract
value. There are no reserves against contract value for credit risk of the
contract issuer or otherwise. The fair value of the guaranteed interest
account at December 31, 1996 and 1995 was $3,584,318 and $3,785,944,
respectively. The average yield and crediting interest rates were
approximately 6 percent for 1996 and 1995. The crediting interest rate is
based on an agreed-upon formula with the issuer, but cannot be less than zero
percent.
(4) INVESTMENTS
The following table presents the investments that represent five percent or
more of the Plan's net assets available for benefits at December 31, 1996.
<TABLE>
<S> <C>
Pooled funds on deposit with the Insurer:
Guaranteed interest account.................................... $3,593,187
U.S. stock account............................................. 4,723,942
International stock account.................................... 1,246,399
Stock index 500 account........................................ 737,961
Money market account........................................... 774,330
Bond and mortgage account...................................... 1,546,539
==========
</TABLE>
A-6
<PAGE>
FIRST FEDERAL LINCOLN BANK SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(5) FEDERAL INCOME TAXES
Management of the Bank believes the Plan is operating in accordance with its
qualified status under the provisions of sections 401(a) and 401(k) of the
Internal Revenue Code and is, therefore, exempt from Federal income tax under
section 501(a) of the Code. The Plan received a favorable determination letter
dated March 6, 1995 from the Internal Revenue Service.
(6) INSURER TRANSACTIONS
The Plan administrator has received the following information from the
Insurer and a statement certifying such information is accurate and complete.
Information included in the accompanying financial statements and information
in the supplemental schedules is presented in reliance solely upon their
certification.
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Investments at contract value......................... $13,431,286 11,488,137
=========== ==========
Investment income..................................... $ 1,669,923 1,701,405
=========== ==========
</TABLE>
A-7
<PAGE>
SCHEDULE 1
FIRST FEDERAL LINCOLN BANK SAVINGS PLAN
ITEM 27A--SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES
DECEMBER 31, 1996, AS REPORTED BY THE INSURER
<TABLE>
<CAPTION>
CURRENT OR
CONTRACT
COST VALUE
---------- ----------
<S> <C> <C>
Pooled funds on deposit with the Insurer:
Guaranteed interest account............................. $3,593,187 3,593,187
U.S. stock account...................................... 845,130 4,723,942
International stock account............................. 862,594 1,246,399
Stock index 500 account................................. 494,764 737,961
Money market account.................................... 669,462 774,330
Real estate account..................................... 265,387 323,960
Bond and mortgage account............................... 1,182,918 1,546,539
Bond emphasis balanced account.......................... 195,425 246,737
Stock emphasis balanced account......................... 185,032 238,231
---------- ----------
$8,293,899 13,431,286
========== ==========
</TABLE>
See accompanying independent auditors' report.
A-8
<PAGE>
SCHEDULE 2
FIRST FEDERAL LINCOLN BANK SAVINGS PLAN
ITEM 27D--SCHEDULE OF REPORTABLE TRANSACTIONS
DECEMBER 31, 1996, AS REPORTED BY THE INSURER
Series of transactions, when aggregated, involving an amount in excess of 5
percent of current value of plan assets:
<TABLE>
<CAPTION>
CURRENT
VALUE OF
ASSET ON NET
DESCRIPTION SERIES OF PURCHASE SELLING COST OF TRANSACTION GAIN
OF ASSETS TRANSACTIONS PRICE PRICE ASSET DATE OR LOSS
----------- ------------ -------- --------- --------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Purchase of guaranteed
interest account....... 38 $708,799 -- -- 708,799 --
=== ======== ========= ========= ======= ===
Sale of guaranteed in-
terest account......... 34 $ -- 1,118,921 1,118,921 -- --
=== ======== ========= ========= ======= ===
</TABLE>
See accompanying independent auditors' report.
A-9
<PAGE>
This Form Requests the Transfer of Money Already
Contributed From One Investment to Another
Investment. Use an Investment Direction Change
form to change the investment of future
contributions.
Plan Name: FIRST FEDERAL LINCOLN BANK SAVINGS
PLAN Contract Number: (3)56534
A.Select Contribution Type(s):
[_] EMPLOYER MATCH/ROLLOVER
[_] ELECTIVE DEFERRAL
[_] NON-DEDUCTIBLE EMPLOYEE THRIFT
[_] EMPLOYER THRIFT MATCH
Select Transfer Type: [_] Percent or [_] Dollar
<TABLE>
<CAPTION>
FROM: TO:
<S> <C> <C>
Guaranteed Interest Account 2 year
Guaranteed Interest Account 5 year
U.S. Stock Account
Money Market Account
Real Estate Account
Bond and Mortgage Account
International Stock Account
Stock Index Account
Bond Emphasis Balanced Account
Stock Emphasis Balanced Account
First Lincoln Bancshares Inc.
Stock Fund
</TABLE>
B.Select Contribution Type(s):
[_] EMPLOYER MATCH/ROLLOVER
[_] ELECTIVE DEFERRAL
[_] NON-DEDUCTIBLE EMPLOYEE THRIFT
[_] EMPLOYER THRIFT MATCH
Select Transfer Type: [_] Percent or [_] Dollar
<TABLE>
<CAPTION>
FROM: TO:
<S> <C> <C>
Guaranteed Interest Account 2 year
Guaranteed Interest Account 5 year
U.S. Stock Account
Money Market Account
Real Estate Account
Bond and Mortgage Account
International Stock Account
Stock Index Account
Bond Emphasis Balanced Account
Stock Emphasis Balanced Account
First Lincoln Bancshares Inc.
Stock Fund
</TABLE>
INSTRUCTIONS (SEE EXAMPLES ON BACK OF THIS FORM)
A. Select Contribution Type
. Mark an "x" by contribution type(s) you want to transfer
Select Transfer Type
. Check the box to show percentage or dollar amount
Indicate Your Transfers
. Unless you inform us otherwise, Guaranteed Interest Account Transfers come
from current account first, then from each preceding account with the
oldest account transferred last.
. There will be a penalty when money is transferred from a Guaranteed
Interest Account if the current interest rate for new deposits exceeds the
rate in your Guaranteed Interest Account.
B. Complete this section only if you are making different transfers for
different contribution types. For more than two different transfers,
complete an additional form.
C. Complete the Information Block
. The transfer is effective when this completed form is received at
Principal Mutual Life Insurance Company.
. If you want the transfer to be effective on a later date, write the date
after Future Effective Date.
C.Member Name: _________________________________________________________________
- -
Social Security Number: ______________________________________________________
Member Signature: X __________________________________________________________
/ /
Date Signed: _________________________________________________________________
/ /
Future Effective Date (optional) _____________________________________________
/ /
Date Received at The Principal*: _____________________________________________
13
<PAGE>
USE THE INSTRUCTIONS AND EXAMPLES TO COMPLETE
THE FRONT OF THE FORM. YOUR PLAN MAY OFFER
DIFFERENT INVESTMENTS OR CONTRIBUTION TYPES THAN
THOSE SHOWN BELOW.
INSTRUCTIONS
<TABLE>
<CAPTION>
STEP ACTION
- -------------------------------------------------------------------------------
<C> <S>
1 Select Contribution Type(s). Check the box(es) by the contribution
type(s) you want to transfer.
- -------------------------------------------------------------------------------
2 Select Transfer Type. Check the box to show if your transfer type is
percentage or dollar.
- -------------------------------------------------------------------------------
3 From: Write the percentage or dollar amount in front of each investment
from which you want to transfer money.
- -------------------------------------------------------------------------------
4 To: Write the percentage or dollar amount after each investment to which
you want to transfer money. Total percentage must equal 100%--Total
dollar amount must equal total dollar amount in the "From:" column.
</TABLE>
EXAMPLES
To transfer 100% of
all contributions
(Employer, Elective
Deferral, and Employee
Non-deductible) from
the Money Market
Account equally to the
Guaranteed Interest
Account 5 Year and the
Bond & Mortgage
Account:
To transfer the total
value of your Elective
Deferral contributions
to a different
percentage split (50%
Guaranteed Interest
Account 5 Year, 30%
Money Market Account,
and 20% Bond &
Mortgage Account):
SELECT CONTRIBUTION TYPE(S):
SELECT CONTRIBUTION TYPE(S):
[X] Employer [_] Employer
[X] Elective Deferral [X] Elective Deferral
[X] Employee Non-deductible
[_] Employee Non-deductible
Select Transfer Type: [X] Percent Or [_] Dollar
Select Transfer Type: [X] Percent Or [_] Dollar
<TABLE>
<CAPTION>
FROM: TO:
<S> <C> <C>
Guaranteed Interest Account 2 Year
Guaranteed Interest Account 5 Year 50
100 Money Market Account
Bond & Mortgage Account 50
</TABLE>
<TABLE>
<CAPTION>
FROM: TO:
<S> <C> <C>
100 Guaranteed Interest Account 2 Year
Guaranteed Interest Account 5 Year 50
100 Money Market Account 30
100 Bond & Mortgage Account 20
</TABLE>
To transfer $300 of
Employer contributions
from the Guaranteed
Interest Account to
the Money Market
Account:
To transfer $300 of
Employer contributions
and $300 of Elective
Deferral Contributions
(total $600) from the
Guaranteed Interest
Account to the Money
Market Account:
SELECT CONTRIBUTION TYPE(S):
SELECT CONTRIBUTION TYPE(S):
[X] Employer [X] Employer
[_] Elective Deferral [X] Elective Deferral
[_] Employee Non-deductible
[_] Employee Non-deductible
Select Transfer Type: [_] Percent Or [X] Dollar
Select Transfer Type: [_] Percent Or [X] Dollar
<TABLE>
<CAPTION>
FROM: TO:
<S> <C> <C>
300.00 Guaranteed Interest Account 2 Year
Guaranteed Interest Account 5 Year
Money Market Account 300.00
Bond & Mortgage Account
</TABLE>
<TABLE>
<CAPTION>
FROM: TO:
<S> <C> <C>
300.00 Guaranteed Interest Account 2 Year
Guaranteed Interest Account 5 Year
Money Market Account 300.00
Bond & Mortgage Account
</TABLE>
14
<PAGE>
PROSPECTUS
[LOGO OF FIRST FEDERAL LINCOLN BANCSHARES INC. APPEARS HERE]
(PROPOSED HOLDING COMPANY FOR FIRST FEDERAL LINCOLN BANK)
8,021,250 SHARES OF COMMON STOCK
First Lincoln Bancshares Inc. (the "Company"), a Delaware corporation, is
offering up to 8,021,250 shares of its common stock, par value $.01 per share
(the "Common Stock"), in connection with the conversion of First Federal
Lincoln Bank (the "Bank" or "Lincoln") from a federally chartered mutual
savings bank to a federally chartered capital stock savings bank pursuant to
the Bank's plan of conversion (the "Plan" or "Plan of Conversion"). The
simultaneous conversion of the Bank to stock form, the issuance of the Bank's
stock to the Company and the offer and sale of the Common Stock by the Company
are herein referred to as the "Conversion." In certain circumstances, the
Company may increase the amount of Common Stock offered hereby to 9,224,438
shares. See Footnote 4 to the table below.
(continued on following page)
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PROSPECTIVE INVESTOR, SEE "RISK FACTORS" BEGINNING ON PAGE 16.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, OR ANY OTHER FEDERAL
AGENCY OR ANY STATE SECURITIES COMMISSION, NOR HAS SUCH COMMISSION, OFFICE OR
OTHER AGENCY OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION ("FDIC"), THE BANK INSURANCE FUND ("BIF"), THE SAVINGS ASSOCIATION
INSURANCE FUND ("SAIF") OR ANY OTHER GOVERNMENT AGENCY NOR ARE THEY INSURED OR
GUARANTEED BY THE BANK OR THE COMPANY. THE COMMON STOCK IS SUBJECT TO
INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL INVESTED.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
ESTIMATED UNDERWRITING
COMMISSIONS
AND OTHER FEES ESTIMATED
SUBSCRIPTION PRICE(1) AND EXPENSES(2) NET PROCEEDS(3)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum Per Share...... $20.00 $0.51 $19.49
- -------------------------------------------------------------------------------------
Midpoint Per Share..... $20.00 $0.48 $19.52
- -------------------------------------------------------------------------------------
Maximum Per Share...... $20.00 $0.45 $19.55
- -------------------------------------------------------------------------------------
Total Minimum(1)....... $118,575,000 $3,050,504 $115,524,496
- -------------------------------------------------------------------------------------
Total Midpoint(1)...... $139,500,000 $3,313,795 $136,186,205
- -------------------------------------------------------------------------------------
Total Maximum(1)....... $160,425,000 $3,577,177 $156,847,823
- -------------------------------------------------------------------------------------
Total Maximum, as
adjusted(4)............ $184,488,800 $3,879,669 $180,609,131
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
</TABLE>
(1) Determined in accordance with an independent appraisal prepared by Keller
& Company, Inc. ("Keller") dated November 12, 1997, which states that the
aggregate estimated pro forma market value of the Common Stock being
offered for sale ranged from $118,575,000 to $160,425,000, with a midpoint
of $139,500,000 (the "Valuation Range") and which takes into account
shares to be issued to the First Federal Lincoln Foundation (the
"Foundation"). Based on the Valuation Range, the Board of Directors of the
Company (the "Board of Directors") established the estimated price range
of $118.6 million to $160.4 million (the "Estimated Price Range"), or
between 5,928,750 and 8,021,250 shares of Common Stock at the $20.00 price
per share (the "Purchase Price") to be paid for each share of Common Stock
subscribed for or purchased in the Offerings (as described herein). The
independent appraisal of Keller is based upon estimates and projections
that are subject to change and the valuation must not be construed as a
recommendation as to the advisability of purchasing such shares nor an
assurance that a purchaser will thereafter be able to sell such shares at
prices in the range of the foregoing valuation. See "The Conversion--Stock
Pricing" and "--Number of Shares to be Issued."
(2) Consists of the estimated costs to the Bank and the Company arising from
the Conversion, including estimated fixed expenses of $1.6 million and
marketing fees to be paid to Sandler O'Neill & Partners, L.P. ("Sandler
O'Neill"), estimated to be $1,450,504 and $1,977,177 at the minimum and
the maximum of the Estimated Price Range, respectively. See "The
Conversion--Marketing and Underwriting Arrangements." See "Pro Forma Data"
for the assumptions used to arrive at these estimates. The actual fees and
expenses may vary from the estimates.
(3) Actual net proceeds may vary substantially from estimated amounts
depending on the number of shares sold in each of the Offerings and other
factors. Includes the purchase of shares of Common Stock by the First
Federal Lincoln Bank Employee Stock Ownership Plan and related trust (the
"ESOP") and funded by a loan to the ESOP, by the Company or a third party,
which will be deducted from the Company's stockholders' equity. See "Use
of Proceeds" and "Pro Forma Data."
(4) As adjusted to reflect the sale of up to an additional 15% of the Common
Stock which may be offered at the Purchase Price, without resolicitation
of subscribers or any right of cancellation, due to regulatory
considerations, changes in market conditions or general financial and
economic conditions. See "Pro Forma Data" and "The Conversion--Stock
Pricing." For a discussion of the distribution and allocation of the
additional shares, if any, see "The Conversion--Subscription Offering and
Subscription Rights," "--Community Offering" and "--Limitations on Common
Stock Purchases."
---------------
Sandler O'Neill & Partners, l.p.
---------------
The date of this Prospectus is March 13, 1998.
<PAGE>
NON-TRANSFERABLE RIGHTS TO SUBSCRIBE FOR THE COMMON STOCK IN A SUBSCRIPTION
OFFERING (THE "SUBSCRIPTION OFFERING") HAVE BEEN GRANTED IN THE FOLLOWING
ORDER OF PRIORITY: (1) HOLDERS OF DEPOSIT ACCOUNTS (AS MORE PARTICULARLY
DESCRIBED HEREIN) OF THE BANK TOTALLING $50 OR MORE ON JUNE 30, 1996
("ELIGIBLE ACCOUNT HOLDERS"); (2) THE EMPLOYEE PLANS, INCLUDING THE ESOP WHICH
INTENDS TO SUBSCRIBE FOR UP TO 8% OF THE COMMON STOCK ISSUED IN CONNECTION
WITH THE CONVERSION (INCLUDING SHARES ISSUED TO THE FOUNDATION); (3)
DEPOSITORS WHOSE ACCOUNTS IN THE BANK TOTALLED $50 OR MORE ON DECEMBER 31,
1997 ("SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS"); AND (4) MEMBERS OF THE BANK
CONSISTING OF DEPOSITORS OF THE BANK AS OF MARCH 4, 1998 (THE "VOTING RECORD
DATE"), FOR THE SPECIAL MEETING (AS DEFINED HEREIN), AND BORROWERS WITH LOANS
OUTSTANDING AS OF JUNE 1, 1995, WHICH CONTINUE TO BE OUTSTANDING AS OF THE
VOTING RECORD DATE, OTHER THAN THOSE MEMBERS WHO OTHERWISE QUALIFY AS ELIGIBLE
ACCOUNT HOLDERS OR SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS ("OTHER MEMBERS").
SUBSCRIPTION RIGHTS ARE NON-TRANSFERABLE. PERSONS FOUND TO BE TRANSFERRING
SUBSCRIPTION RIGHTS WILL BE SUBJECT TO THE FORFEITURE OF SUCH RIGHTS AND
POSSIBLE FURTHER SANCTIONS AND PENALTIES IMPOSED BY THE OFFICE OF THRIFT
SUPERVISION ("OTS"). Upon completion of the Subscription Offering, and subject
to the prior rights of holders of subscription rights, the Company will offer
the shares of Common Stock not subscribed for in the Subscription Offering for
sale in a community offering to certain members of the general public (the
"Community Offering") with preference given first to depositors in First
Federal Lincoln Bank-Iowa (the "Iowa Bank") whose accounts in the Iowa Bank
totaled $50 or more on June 30, 1996, and second, to natural persons residing
in the counties of Adams, Boone, Box Butte, Buffalo, Cheyenne, Cuming, Custer,
Dawson, Dodge, Douglas, Gage, Hall, Howard, Jefferson, Johnson, Knox,
Lancaster, Lincoln, Madison, Nemaha, Otoe, Platte, Red Willow, Richardson,
Saline, Saunders, Scotts Bluff, Thayer and Valley, Nebraska, the counties of
Marshall and Rooks, Kansas and the counties of Cass, Harrison, Mills,
Montgomery, Page and Pottawattamie, Iowa (the Bank's "Local Community") (such
natural persons are referred to as "Preferred Subscribers"). Shares not
subscribed for in the Subscription and Community Offerings will be offered to
certain members of the general public in a syndicated community offering (the
"Syndicated Community Offering") (the Subscription and Community Offerings and
the Syndicated Community Offering are referred to collectively as the
"Offerings").
Except for the ESOP, which intends to subscribe for up to 8% of the Common
Stock issued in connection with the Conversion, including shares issued to the
Foundation, no Eligible Account Holder or Supplemental Eligible Account Holder
or Other Member may, in their respective capacities as such, purchase in the
Subscription Offering more than $500,000 of Common Stock; no person, together
with associates of and persons acting in concert with such person, may
purchase in the Community Offering and Syndicated Community Offering more than
$500,000 of Common Stock; and no person, together with associates of and
persons acting in concert with such person, may purchase in the aggregate more
than the overall maximum purchase limitation of 1% of the total number of
shares of Common Stock offered in the Conversion; provided, however, that the
overall maximum purchase limitations may be increased and the amount that may
be subscribed for may be increased or decreased at the sole discretion of the
Bank or the Company without further approval of the Bank's members. See "The
Conversion--Subscription Offering and Subscription Rights," "--Community
Offering" and "--Limitations on Common Stock Purchases." The minimum purchase
is 25 shares.
Pursuant to the Plan, the Company intends to establish a charitable
foundation in connection with the Conversion. The Plan provides that the Bank
and the Company will create the Foundation, which will be incorporated under
Delaware law as a non-stock corporation, and will be funded with shares of
Common Stock contributed by the Company in an amount equal to 6% of the number
of shares of Common Stock sold in the Conversion. The Foundation will be
dedicated to charitable purposes within the communities in which the Bank
operates. The establishment of the Foundation is subject to the approval of
the Bank's members at the special meeting being held to consider the Plan of
Conversion. For a discussion of the Foundation and the effects on the
Conversion, including if the members do not approve the establishment of the
Foundation, see "Risk Factors--Establishment of the Charitable Foundation,"
"Pro Forma Data," and "The Conversion--Establishment of the Charitable
Foundation."
THE SUBSCRIPTION OFFERING WILL TERMINATE AT 12:00 NOON, CENTRAL TIME, ON
APRIL 8, 1998 (THE "EXPIRATION DATE"), UNLESS EXTENDED BY THE BANK AND THE
COMPANY, WITH THE APPROVAL OF THE OTS, IF NECESSARY. The Community Offering
and/or any Syndicated Community Offering must be completed
2
<PAGE>
within 45 days after the close of the Subscription Offering, unless extended
by the Bank and the Company with the approval of the OTS, if necessary. Orders
submitted are irrevocable until the completion of the Conversion; provided,
that, if the Conversion is not completed within 45 days after the close of the
Subscription Offering, unless such period has been extended with the consent
of the OTS, if necessary, all subscribers will have their funds returned
promptly with interest, and all withdrawal authorizations will be canceled.
Such extensions may not go beyond April 17, 2000. See "The Conversion--
Subscription Offering and Subscription Rights" and "--Procedure for Purchasing
Shares in Subscription Offering."
The Company has received conditional approval to have its Common Stock
listed on the American Stock Exchange ("AMEX") under the symbol "FLF" upon
completion of the Conversion. Prior to this offering there has not been a
public market for the Common Stock, and there can be no assurance that an
active and liquid trading market for the Common Stock will develop or that the
Common Stock will trade at or above the Purchase Price. The absence or
discontinuance of a market may have an adverse impact on both the price and
liquidity of the Common Stock. See "Risk Factors--Absence of Market for Common
Stock."
3
<PAGE>
LOGO
4
<PAGE>
SUMMARY OF THE CONVERSION AND THE OFFERINGS
The following summary of the Conversion and the Offerings is qualified in its
entirety by the more detailed information appearing elsewhere in this
Prospectus.
Risk Factors................ A purchase of the Common Stock involves a
substantial degree of risk. Eligible Account
Holders, Supplemental Eligible Account Holders,
Other Members and other prospective investors
should carefully consider the matters set forth
under "Risk Factors." THE SHARES OF COMMON STOCK
OFFERED HEREBY ARE NOT INSURED OR GUARANTEED BY
THE FDIC, BIF OR SAIF OR ANY OTHER GOVERNMENT
AGENCY AND ARE NOT GUARANTEED BY THE COMPANY OR
THE BANK.
First Lincoln Bancshares First Lincoln Bancshares Inc. is a Delaware
Inc......................... corporation organized at the direction of the
Bank to become a savings and loan holding company
and own all of the Bank's capital stock to be
issued upon its conversion from mutual form to
stock form. To date, the Company has not engaged
in any business. Its executive office is located
at 13th & "N" Streets, Lincoln, Nebraska 68508
and its telephone number is (402) 475-0521.
First Federal Lincoln The Bank is a federally chartered mutual savings
Bank........................ bank. At September 30, 1997, the Bank had total
assets of $1.03 billion, total deposits of $923.7
million and total retained earnings of $80.6
million. The Bank is located at 13th & "N"
Streets, Lincoln, Nebraska 68508, and its
telephone number is (402) 475-0521. At September
30, 1997, the Bank operated 58 offices in
Nebraska, southwest Iowa and northern Kansas. The
Iowa offices are operated as the Iowa Bank, which
is a wholly-owned subsidiary of the Bank. Except
where the context requires otherwise, references
to the Bank herein include the Iowa Bank. The
Bank has historically operated as a community-
oriented savings institution providing single-
family residential mortgage loans and a variety
of retail deposit products to consumers
throughout the Bank's market area. Following
adoption of a new long-term strategic plan in
1994, the Bank has implemented a strategy to
operate as a consumer-oriented community bank
concentrating on the origination and purchase of
adjustable-rate residential loans and short-term
consumer loans, the origination for sale of
longer-term fixed-rate mortgage loans and
increased investment in other short-term and
variable-rate loans and investments.
The Conversion and Reasons
for Conversion............. The Board of Directors of the Bank has adopted
the Plan of Conversion pursuant to which the Bank
intends to convert to a federally-chartered
capital stock savings bank and issue all of its
stock to the Company. The Company is offering
shares of its Common Stock in the Offerings in
connection with the Conversion. Management
believes the Conversion offers a number of
advantages, including: (i) providing a larger
capital base with which to operate; (ii)
providing enhanced future access to capital
markets; (iii) providing enhanced ability to
diversify into other financial services-related
activities; and (iv) providing enhanced ability
to increase its presence in the communities it
serves through the
5
<PAGE>
acquisition or establishment of branch offices or
the acquisition of other financial institutions.
The Conversion and the Offerings are subject to
approval by the OTS, and approval of members of
the Bank eligible to vote at a special meeting to
be held on April 17, 1998 (the "Special
Meeting"). The OTS issued an approval letter on
February 12, 1998. See "The Conversion--General."
The First Federal Lincoln The Plan of Conversion provides for the
Foundation................. establishment of a charitable foundation in
connection with the Conversion. The Foundation,
which will be incorporated under Delaware law as
a non-stock corporation, will be funded with a
contribution by the Company equal to 6% of the
Common Stock sold in the Conversion. The
authority for the affairs of the Foundation will
be vested in the Board of Directors of the
Foundation, all of whom are existing Directors of
the Company or the Bank or officers of the
Company or the Bank. See "The Conversion--
Establishment of the Charitable Foundation."
Terms of the Offering....... The shares of Common Stock to be sold in
connection with the Conversion are being offered
at a fixed price of $20.00 per share in the
Subscription Offering pursuant to subscription
rights in the following order of priority to: (i)
Eligible Account Holders; (ii) the employee
plans, including the ESOP; (iii) Supplemental
Eligible Account Holders; and (iv) Other Members.
Upon completion of the Subscription Offering, and
subject to the prior rights of holders of
subscription rights, any shares of Common Stock
not subscribed for in the Subscription Offering
will be offered in the Community Offering at
$20.00 per share to certain members of the
general public with a preference given to
Preferred Subscribers. Subscription rights will
expire if not exercised by 12:00 noon, Central
Time, on April 8, 1998, unless extended by the
Bank and the Company, with the approval of the
OTS, if necessary. Deposit accounts which will
provide subscription rights consist of any
"savings account," as defined by the Plan
consistent with OTS regulations. Pursuant to the
Plan, deposit accounts do not include any demand
accounts maintained at the Bank. See "The
Conversion--Subscription Offering and
Subscription Rights" and "--Community Offering."
Procedure for Ordering
Shares and Prospectus Forms to order Common Stock offered in the
Delivery................... Subscription Offering and the Community Offering
will be preceded or accompanied by a Prospectus.
Any person receiving a stock order and
certification forms who desires to subscribe for
shares must do so prior to the Expiration Date by
delivering to the Bank a properly executed stock
order and certification forms together with full
payment. ONCE TENDERED, SUBSCRIPTION ORDERS
CANNOT BE REVOKED OR MODIFIED WITHOUT THE CONSENT
OF THE BANK. To ensure that each purchaser
receives a prospectus at least 48 hours prior to
the Expiration Date in accordance with Rule 15c2-
8 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), no prospectus will
be mailed any later than five days prior to the
Expiration Date or hand delivered any later than
two days prior to such date. The Bank is not
obligated to accept subscriptions not submitted
on an original
6
<PAGE>
stock order form. See "The Conversion--Procedure
for Purchasing Shares in Subscription Offering."
Form of Payment for Payment for subscriptions may be made: (i) in
Shares..................... cash (if delivered in person); (ii) by check,
bank draft or money order; or (iii) by
authorization of withdrawal from deposit accounts
maintained at the Bank. Orders for Common Stock
submitted by subscribers in the Subscription
Offering which aggregate to $50,000 or more must
be paid by official bank or certified check, a
check issued by a broker-dealer registered with
the National Association of Securities Dealers
("NASD") or by withdrawal authorization from a
deposit account of the Bank. No wire transfers
will be accepted. See "Conversion--Procedure for
Purchasing Shares in Subscription Offering."
Nontransferability of
Subscription Rights........ The subscription rights of Eligible Account
Holders, Supplemental Eligible Account Holders,
Other Members and the employee plans, including
the ESOP, are nontransferable. See "The
Conversion--Restrictions on Transfer of
Subscription Rights and Shares."
Purchase Limitations........ No Eligible Account Holder, Supplemental Eligible
Account Holder or Other Member may purchase in
the Subscription Offering more than $500,000 of
Common Stock. No person, together with associates
or persons acting in concert with such person,
may purchase in the Community Offering and the
Syndicated Community Offering more than $500,000
of Common Stock. No person, together with
associates or persons acting in concert with such
person, may purchase in the aggregate more than
1% of the Common Stock offered. However, the
employee plans, including the ESOP, may purchase
up to 10% of the Common Stock issued, including
shares issued to the Foundation. Pursuant to the
Plan of Conversion, it is the intent of the ESOP
to purchase 8% of the Common Stock issued,
including shares issued to the Foundation. The
minimum purchase is 25 shares of Common Stock. At
any time during the Conversion and without
approval of the Bank's depositors or a
resolicitation of subscribers, the Bank and the
Company may, in their sole discretion, decrease
the maximum purchase limitation below $500,000 of
Common Stock; however, such amount may not be
reduced to less than 0.10% of the Common Stock
offered. Additionally, at any time during the
Conversion, the Bank and the Company may, in
their sole discretion, increase the maximum
purchase limitation in the Subscription and
Community Offerings to an amount in excess of
$500,000 up to a maximum of 5% of the shares to
be issued in the Conversion. Similarly, the 1%
overall maximum purchase limitation may be
increased up to 5% of the total shares of Common
Stock offered in the Conversion.
Securities Offered and The Company is offering between 5,928,750 and
Purchase Price............. 8,021,250 shares of Common Stock at a Purchase
Price of $20.00 per share. The maximum of the
Estimated Price Range may be increased by up to
15% and the maximum number of shares of Common
Stock to be issued may be increased up to
9,224,438 shares due to regulatory considerations
and changes in market or general financial or
7
<PAGE>
economic conditions. See "The Conversion--Stock
Pricing" and "--Number of Shares to be Issued."
Appraisal................... The Purchase Price per share has been fixed at
$20.00. The total number of shares to be issued
in the Conversion is based upon an independent
appraisal prepared by Keller, dated as of
November 12, 1997, and updated as of January 23,
1998, which states that the estimated pro forma
market value of the Common Stock ranged from
$118,575,000 to $160,425,000. The final aggregate
value will be determined at the time of closing
of the Offerings and is subject to change due to
changing market conditions and other factors. See
"The Conversion--Stock Pricing."
Use of Proceeds............. The Company will use 50% of the net proceeds of
the Offerings to purchase all of the outstanding
common stock of the Bank to be issued in the
Conversion. The remaining net proceeds will be
retained by the Company. Funds retained by the
Company will be used for general business
activities, including a loan by the Company to
the ESOP to enable the ESOP to purchase up to 8%
of the stock issued in connection with the
Conversion, including shares issued to the
Foundation. The Company intends to initially
invest the remaining net proceeds in securities,
primarily federal funds and short-term mortgage-
backed and mortgage-related securities. The Bank
intends to utilize net proceeds for general
business purposes. Neither the Company nor the
Bank will take any action to further the payment
of a return of capital dividend for one year
following the Conversion without prior approval
by the OTS. See "Use of Proceeds."
Dividend Policy............. Upon Conversion, the Board of Directors of the
Company will have the authority to declare
dividends on the Common Stock, subject to
statutory and regulatory requirements. In the
future, the Board of Directors of the Company may
consider a policy of paying cash dividends on the
Common Stock. However, no decision has been made
with respect to such dividends, if any.
Additionally, in connection with the Conversion,
the Company and the Bank have committed to the
OTS that during the one-year period following the
consummation of the Conversion, the Company will
not take any action to further the payment of a
return of capital dividend without prior approval
by the OTS. See "Dividend Policy."
Benefits of the Conversion
to Management.............. Among the benefits to the Bank and the Company
anticipated from the Conversion is the ability to
attract and retain personnel through the use of
stock options and other stock related benefit
programs. Subsequent to the Conversion, the
Company intends to adopt one or more stock-based
benefit plans to provide stock options,
restricted stock awards and certain related
rights to directors, officers and employees
(hereinafter individually or collectively
referred to as the "Stock-Based Incentive Plan").
If the Stock-Based Incentive Plan is adopted
within one year after the Conversion, it will be
subject to stockholders' approval at a meeting of
stockholders which may not be held earlier than
six months after the Conversion. The Company
8
<PAGE>
intends to adopt a plan which would provide for
the granting of Common Stock to officers,
directors and employees of the Bank and Company
in an amount equal to 4% of the Common Stock
issued in the Conversion, including shares issued
to the Foundation which would have a value of
$5.0 million or $6.8 million at the minimum and
the maximum, respectively, of the Estimated Price
Range. Any Common Stock awarded under such plan
will be awarded at no cost to the recipients. The
Company also intends the plan to provide the
Company with the ability to grant options to
officers, directors and employees of the Bank and
Company to purchase Common Stock equal to 10% of
the number of shares of Common Stock issued in
the Conversion, including shares issued to the
Foundation.
Additionally, certain officers of the Company and
the Bank will be provided with employment
agreements or change in control agreements which
provide such officers with employment rights
and/or payments upon their termination of service
following a change in control. For a further
description of the Stock-Based Incentive Plan,
see "Risk Factors--Stock-Based Benefits to
Management and Directors, Employment Contracts
and Change in Control Payments" and "Management
of the Bank--Benefits." See "Management of the
Bank--Subscriptions by Executive Officers and
Directors," "Restrictions on Acquisition of the
Company and the Bank--Restrictions in the
Company's Certificate of Incorporation and
Bylaws," and "The Conversion--Establishment of
the Charitable Foundation."
Voting Control of Officers
and Directors.............. Directors and executive officers of the Bank and
the Company expect to purchase approximately 2.5%
or 1.9% of shares of Common Stock outstanding,
based upon the minimum and the maximum of the
Estimated Price Range, including shares issued to
the Foundation, respectively. Additionally,
assuming the implementation of the ESOP and the
Stock-Based Incentive Plan, directors, executive
officers and employees have the potential to
control the voting of approximately 22.4% or
21.8% of the Common Stock at the minimum and the
maximum of the Estimated Price Range, including
shares issued to the Foundation, respectively.
See "Management of the Bank--Subscriptions by
Executive Officers and Directors," and
"Restrictions on Acquisition of the Company and
the Bank--Restrictions in the Company's
Certificate of Incorporation and Bylaws."
Goodwill Litigation......... The Bank has filed a lawsuit (the "Goodwill
Litigation") in the United States Court of
Federal Claims against the United States
Government ("Government"), contending that the
Government breached its contracts with the Bank
in connection with three separate 1982
supervisory merger transactions and that the
Government deprived the Bank of its property
rights without due process. The complaint seeks
restitution of $22.5 million, plus interest on
that amount, plus additional amounts to be proved
by the Bank. The Goodwill Litigation was stayed
pending the resolution on
9
<PAGE>
appeal of United States v. Winstar Corporation,
No. 95-865, and other consolidated cases (the
"Winstar Cases"). The United States Supreme Court
affirmed a decision granting summary judgment to
the plaintiffs in the Winstar Cases on the issue
of the Government's liability and remanded the
proceedings for a determination of the amount of
damages. The United States Court of Federal
Claims issued a case management order governing
the procedure for all cases similar to the
Winstar Cases, including the Bank's. Based on the
current status of proceedings, the Bank does not
expect to litigate its case for at least two
years. There can be no assurance as to the amount
of any damages that may be awarded, if any, with
respect to the Goodwill Litigation or when such
damages, if any, may be awarded or received by
the Bank. The independent appraisal by Keller,
upon which the number of shares to be issued in
the Conversion is based, assigned no value to any
possible recovery by the Bank with regard to the
Goodwill Litigation. See "Management's Discussion
and Analysis of Financial Condition and Results
of Operations--Impact of Goodwill Litigation."
Expiration Date for the
Subscription Offering...... The Expiration Date for the Subscription Offering
is 12:00 noon, Central Time on April 8, 1998,
unless extended by the Bank and the Company, with
approval of the OTS, if necessary. See "The
Conversion--Subscription Offering and
Subscription Rights."
Market for Stock............
As a mutual institution, the Bank has never
issued capital stock and, consequently, there is
no existing market for the Common Stock. The
Company has applied to have its Common Stock
listed on the AMEX under the symbol "FLF" subject
to the completion of the Conversion and
compliance with certain conditions. See "Market
for the Common Stock."
No Board Recommendations.... The Bank's Board of Directors and the Company's
Board of Directors are not making any
recommendations to depositors or other potential
investors regarding whether such persons should
purchase the Common Stock. An investment in the
Common Stock must be made pursuant to each
investor's evaluation of his or her best
interests.
Conversion Center........... If you have any questions regarding the
Conversion, call the Conversion Center at (888)
876-4871.
10
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE BANK
The selected consolidated financial and other data of the Bank set forth
below are derived in part from, and should be read in conjunction with, the
Consolidated Financial Statements of the Bank and Notes thereto presented
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT JUNE 30,
--------------------- --------------------------------------------------
1997(1) 1996(1) 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- -------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED CONSOLIDATED
FINANCIAL DATA:
Total assets............ $1,033,578 $1,024,812 $1,042,335 $1,037,855 $982,818 $984,620 $1,082,836
Loans receivable,
net(2)................. 818,460 748,655 814,881 713,512 646,223 625,182 603,456
Investment securities
held-to-maturity(3).... 58,660 119,508 94,248 130,643 168,834 202,280 50,069
Investment securities
available-for-sale(3).. -- -- -- -- 994 979 200,484
Federal funds sold...... 33,700 17,200 3,600 52,500 30,600 45,200 154,000
FHLB stock.............. 7,060 6,417 6,933 6,313 5,639 8,416 8,416
Mortgage-backed
securities held-to-
maturity............... 80,413 93,237 85,372 97,030 91,297 68,247 298
Mortgage-backed
securities available-
for-sale(3)............ 747 821 750 843 1,955 2,090 11,266
Deposits................ 923,669 912,229 920,120 929,314 864,064 896,761 935,880
FHLB advances........... 10,565 14,582 21,569 13,598 23,632 3,665 38,000
Retained earnings....... 80,562 72,856 78,912 74,560 69,172 65,147 85,395
Allowance for possible
loan losses............ 7,022 5,971 6,330 5,918 5,642 5,966 7,581
Non-performing loans.... 1,112 729 1,814 2,796 3,852 865 3,805
Non-performing assets... 2,283 2,045 3,276 4,187 7,058 9,090 9,263
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
SEPTEMBER 30, FOR THE YEAR ENDED JUNE 30,
--------------- -----------------------------------------
1997(1) 1996(1) 1997 1996 1995 1994 1993
------- ------- ------- ------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income......... $20,113 $19,528 $78,346 $74,949 $69,364 $ 67,883 $82,678
Interest expense........ 11,986 11,841 47,198 48,206 44,605 43,652 51,374
------- ------- ------- ------- ------- -------- -------
Net interest income.... 8,127 7,687 31,148 26,743 24,759 24,231 31,304
Provision for loan
losses................. 713 96 450 598 243 (480) 815
------- ------- ------- ------- ------- -------- -------
Net interest income
after provision for
loan losses........... 7,414 7,591 30,698 26,145 24,516 24,711 30,489
Total noninterest
income................. 891 921 3,586 3,901 3,039 169 4,085
Total noninterest
expense(12)............ 5,707 11,123 27,249 22,136 20,852 47,262 25,196
------- ------- ------- ------- ------- -------- -------
Income (loss) before
provision for income
taxes and cumulative
effect of change in
accounting principle
and extraordinary
item................... 2,598 (2,611) 7,035 7,910 6,703 (22,382) 9,378
Income tax expense
(benefit).............. 955 (905) 2,695 2,535 2,644 180 1,571
------- ------- ------- ------- ------- -------- -------
Income (loss) before
cumulative effect of
change in accounting
principle and
extraordinary item.... 1,643 (1,706) 4,340 5,375 4,059 (22,562) 7,807
Cumulative effect of
change in accounting
for income taxes....... -- -- -- -- -- 2,314 --
Extraordinary item,
utilization of net
operating loss
carryforward........... -- -- -- -- -- -- 1,200
------- ------- ------- ------- ------- -------- -------
Net income (loss)....... $ 1,643 $(1,706) $ 4,340 $ 5,375 $ 4,059 $(20,248) $ 9,007
======= ======= ======= ======= ======= ======== =======
</TABLE>
(See footnotes on next page)
11
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS
ENDED
SEPTEMBER 30, AT OR FOR THE FISCAL YEAR ENDED AT JUNE 30,
---------------- -------------------------------------------------
1997(1) 1996(1) 1997 1996 1995 1994 1993
------- ------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL
RATIOS AND OTHER
DATA(4):
Performance Ratios:
Return on average
assets................ 0.63% (0.66)% 0.42% 0.53% 0.42% (1.96)% 0.81%
Return on average
retained earnings..... 8.23 (9.15) 5.74 7.52 6.05 (23.70) 11.03
Average retained
earnings to average
assets................ 7.67 7.23 7.26 7.05 6.88 8.26 7.36
Retained earnings to
total assets at end of
period................ 7.79 7.11 7.57 7.18 7.04 6.62 7.89
Net interest rate
spread(5)............. 2.86 2.74 2.74 2.36 2.33 2.25 2.78
Net interest
margin(6)............. 3.24 3.09 3.10 2.73 2.63 2.48 3.00
Average interest-
earning assets to
average interest-
bearing liabilities... 107.96 107.45 107.77 107.56 106.46 105.23 104.57
Total noninterest
expense to average
assets................ 2.19 4.31 2.62 2.18 2.14 4.57 2.27
Efficiency ratio(7).... 63.28 129.22 78.45 72.24 75.01 193.70 71.20
Net interest income to
operating expenses.... 142.40 69.11 114.31 120.81 118.74 51.27 124.24
Regulatory Capital
Ratios(8):
Leveraged capital...... 7.77 7.09 7.55 7.16 7.04 6.58 6.52
Total risk-based
capital............... 14.32 14.52 14.17 15.20 15.52 14.77 14.81
Asset Quality Ratios:
Total non-performing
loans(9).............. $1,112 $ 729 $ 1,814 $ 2,796 $ 3,852 $ 865 $ 3,805
Real estate owned,
net................... 1,171 1,316 1,462 1,391 3,206 8,225 5,458
Total non-performing
assets(10)............ 2,283 2,045 3,276 4,187 7,058 9,090 9,263
Non-performing loans as
a percent of
loans(9)(11).......... 0.13% 0.10% 0.22% 0.39% 0.59% 0.14% 0.62%
Non-performing assets
as a percent of total
assets(10)............ 0.21 0.20 0.31 0.40 0.72 0.92 0.86
Allowance for possible
loan losses as a
percent of
loans(2)(11).......... 0.85 0.79 0.77 0.82 0.87 0.95 1.24
Allowance for possible
loan losses as a
percent of total
non-performing loans.. 631.47 819.07 348.95 211.66 146.47 689.71 199.24
Other Data:
Number of full service
customer facilities... 58 57 58 56 55 55 58
</TABLE>
- --------
(1) The data presented for the three months ended September 30, 1997 and 1996
were derived from unaudited consolidated financial statements and reflect,
in the opinion of management, all adjustments (consisting only of normal
recurring adjustments) which are necessary to present fairly the results
for such interim periods. Interim results at and for the three months
ended September 30, 1997, are not necessarily indicative of the results
that may be expected for the fiscal year ending June 30, 1998.
(2) The allowance for loan losses at September 30, 1997 and 1996, and June 30,
1997, 1996, 1995, 1994 and 1993, was $7.02 million, $5.97 million, $6.33
million, $5.92 million, $5.64 million, $5.97 million and $7.58 million,
respectively.
(3) The Bank adopted Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities"
("SFAS No. 115") as of July 1, 1994. Prior to that date, investments in
mortgage-backed securities available-for-sale were recorded at the lower
of amortized cost or fair value.
(4) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of end of period ratios, all ratios are based
on average monthly balances during the indicated periods and are
annualized where appropriate.
(5) The net interest rate spread represents the difference between the
weighted average yield on average interest-earning assets and the weighted
average cost of average interest-bearing liabilities.
(6) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(7) The efficiency ratio represents the ratio of non-interest expense divided
by the sum of net interest income and non-interest income. This ratio was
affected by the write-off of goodwill during the year ended June 30, 1994,
and the payment of the special SAIF assessment during the three months
ended September 30, 1996.
(8) For definitions and further information relating to the Bank's regulatory
capital requirements, see "Regulation--Federal Savings Institution
Regulation--Capital Requirements." See "Regulatory Capital Compliance" for
the Bank's pro forma capital levels as a result of the Offerings.
(9) Non-performing loans consist of all loans 90 days or more past due. It is
the Bank's policy to cease accruing interest on all loans 90 days or more
past due. See "Business of the Bank--Delinquent Loans, Classified Assets
and Real Estate Owned."
(10) Non-performing assets consist of non-performing loans and real estate
owned, net ("REO").
(11) Loans include loans held for investment, net, excluding the allowance for
possible loan losses.
(12) In the year ended June 30, 1994, management determined that the intangible
asset, goodwill, had no continuing value to the Bank and, therefore, wrote
off the remaining amount of approximately $22.3 million.
12
<PAGE>
RECENT DEVELOPMENTS
The selected financial and other data presented below at December 31, 1997
and September 30, 1997, and for the six-month periods ended December 31, 1997
and 1996 are derived from unaudited financial data, but, in the opinion of
management, reflect all adjustments (consisting only of normal recurring
adjustments) which are necessary to present fairly the results for such interim
periods. The results of operations for the six months ended December 31, 1997
are not necessarily indicative of the results of operations that may be
expected for the fiscal year ending June 30, 1998.
<TABLE>
<CAPTION>
AT AT
DECEMBER 31, SEPTEMBER 30,
1997(1) 1997
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
SELECTED CONSOLIDATED FINANCIAL DATA:
Total assets........................................ $1,062,114 $1,033,578
Loans receivable, net(2)............................ 826,110 818,460
Investment securities held-to-maturity(3)........... 51,687 58,660
Investment securities available-for-sale(3)......... -- --
Federal funds sold.................................. 60,000 33,700
FHLB stock.......................................... 7,205 7,060
Mortgage-backed securities held-to-maturity......... 77,647 80,413
Mortgage-backed securities available-for-sale(3).... -- 747
Deposits............................................ 945,256 923,669
FHLB advances....................................... 10,549 10,565
Retained earnings................................... 82,844 80,562
Allowance for possible loan losses.................. 7,159 7,022
Non-performing loans................................ 1,084 1,112
Non-performing assets............................... 1,756 2,283
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED DECEMBER 31,
-------------------
1997(1) 1996(1)
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
SELECTED OPERATING DATA:
Interest income............................................ $ 40,144 $ 38,703
Interest expense........................................... 24,115 23,666
--------- ---------
Net interest income....................................... 16,029 15,037
Provision for loan losses.................................. 958 286
--------- ---------
Net interest income after provision for loan losses....... 15,071 14,751
Total noninterest income................................... 2,364 2,261
Total noninterest expense.................................. 11,148 16,699
--------- ---------
Income before provision for income taxes and cumulative
effect of change in accounting principle and extraordinary
item...................................................... 6,287 313
Income tax expense......................................... 2,364 216
--------- ---------
Net income................................................ $ 3,923 $ 97
========= =========
</TABLE>
(see footnotes on next page)
13
<PAGE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
DECEMBER 31,
---------------------------
1997(1) 1996(1)
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA(4):
Performance Ratios:
Return on average assets.......................... 0.75% 0.02%
Return on average retained earnings............... 9.71 0.26
Average retained earnings to average assets....... 7.70 7.20
Retained earnings to total assets at end of
period........................................... 7.80 7.21
Net interest rate spread(5)....................... 2.78 2.65
Net interest margin(6)............................ 3.17 3.02
Average interest-earning assets to average
interest-bearing liabilities..................... 108.10 107.55
Total noninterest expense to average assets....... 2.12 3.23
Efficiency ratio(7)............................... 60.61 96.54
Net interest income to operating expenses......... 143.78 90.05
Regulatory Capital Ratios(8):
Tangible capital.................................. 7.78 7.18
Leveraged capital................................. 7.78 7.18
Total risk-based capital.......................... 13.96 14.26
Asset Quality Ratios:
Total non-performing loans(9)..................... $ 1,084 $ 1,629
Real estate owned, net............................ 672 1,203
Total non-performing assets(10)................... 1,756 2,832
Non-performing loans as a percent of
loans(9)(11)..................................... 0.13% 0.21%
Non-performing assets as a percent of total
assets(10)....................................... 0.17 0.27
Allowance for possible loan losses as a percent of
loans(2)(11)..................................... 0.86 0.78
Allowance for possible loan losses as a percent of
total non-performing loans....................... 660.42 374.83
Other Data:
Number of full service customer facilities........ 58 58
</TABLE>
- --------
(1) The data presented for the six months ended December 31, 1997 and 1996
were derived from unaudited consolidated financial statements and reflect,
in the opinion of management, all adjustments (consisting only of normal
recurring adjustments) which are necessary to present fairly the results
for such interim periods. Interim results at and for the six months ended
December 31, 1997, are not necessarily indicative of the results that may
be expected for the fiscal year ending June 30, 1998.
(2) The allowance for loan losses at December 31, 1997 and 1996, and June 30,
1997, 1996, 1995, 1994 and 1993, was $7.16 million, $6.11 million, $6.33
million, $5.92 million, $5.64 million, $5.97 million and $7.58 million,
respectively.
(3) The Bank adopted SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," as of July 1, 1994. Prior to that date,
investments in mortgage-backed securities available-for-sale were recorded
at the lower of amortized cost or fair value.
(4) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of end of period ratios, all ratios are based
on average monthly balances during the indicated periods and are
annualized where appropriate.
(5) The net interest rate spread represents the difference between the
weighted average yield on average interest-earning assets and the weighted
average cost of average interest-bearing liabilities.
(6) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(7) The efficiency ratio represents the ratio of non-interest expense divided
by the sum of net interest income and non-interest income. This ratio was
affected by the payment of the special SAIF assessment during the six
months ended December 31, 1996.
(8) For definitions and further information relating to the Bank's regulatory
capital requirements, see "Regulation--Federal Savings Institution
Regulation--Capital Requirements." See "Regulatory Capital Compliance" for
the Bank's pro forma capital levels as a result of the Offerings.
(9) Non-performing loans consist of all loans 90 days or more past due. It is
the Bank's policy to cease accruing interest on all loans 90 days or more
past due. See "Business of the Bank--Delinquent Loans, Classified Assets
and Real Estate Owned."
(10) Non-performing assets consist of non-performing loans and REO.
(11) Loans include loans held for investment, net, excluding the allowance for
possible loan losses.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT DEVELOPMENTS
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND SEPTEMBER 30, 1997
Total assets at December 31, 1997, were $1.06 billion, an increase of $28.5
million, or 2.8%, compared to $1.03 billion at September 30, 1997. During the
quarter the Bank's holdings of federal funds increased by $26.3 million to $60
million at December 31, 1997, compared to $33.7 million at September 30, 1997.
This increase was primarily the result of the $21.6 million increase in
deposits during the quarter. Deposits increased to $945.3 million at December
31, 1997, compared to a balance of $923.7 million at September 30, 1997. Loans
receivable, net, increased by $7.6 million to $826.1 million at December 31,
1997, compared to $818.5 million at September 30, 1997. This loan growth was
primarily due to the $12.7 million increase in consumer loans offset by
declines in mortgage loans. Investment securities and mortgage-backed
securities declined $10.5 million, or 7.5%, from $139.8 million at September
30, 1997, to $129.3 million at December 31, 1997. Proceeds from their
maturities and amortizations were used to fund the increases in federal funds
and loans receivable, net. Retained earnings at December 31, 1997, were $82.8
million, an increase of $2.3 million, compared to $80.6 million at September
30, 1997.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND
DECEMBER 31, 1996
General. Net income increased $3.8 million to $3.9 million for the six months
ended December 31, 1997, from $0.1 million for the six months ended December
31, 1996. The $0.1 million income for the six months ended December 31, 1996,
was the result of a one-time special assessment charge of $5.7 million to fully
capitalize the SAIF. Excluding the net of tax impact of the one-time special
assessment, net income was $3.9 million for both six months ended December 31,
1997 and December 31, 1996. Net interest margin increased $1.0 million to $16.0
million for the six months ended December 31, 1997, from $15.0 million for the
six months ended December 31, 1996. This increase in net interest margin was
offset by a higher provision for loan losses and a small increase in
noninterest expenses after excluding the one-time special assessment.
Interest Income. Interest income for the six months ended December 31, 1997,
was $40.1 million, compared to $38.7 million for the six months ended December
31, 1996, an increase of $1.4 million or 3.6%. The increase in interest income
was the result of a shift in the asset composition from lower-yielding
investment securities to higher-yielding loans.
Interest Expense. Interest expense for the six months ended December 31,
1997, was $24.1 million, compared to $23.7 million for the six months ended
December 31, 1996, an increase of $449,000 or 1.9%. The increase in interest
expense was the result of an increase in the average balance of deposits
partially offset by the decrease in the average cost of Federal Home Loan Bank
("FHLB") advances.
Provision for Loan Losses. During the six months ended December 31, 1997, the
Bank's provision for loan losses was $958,000 compared to $286,000 for the six
months ended December 31, 1996, an increase of $672,000. The increase in the
provision was due primarily as a result of an increase in consumer loans of
$42.4 million to $103.3 million at December 31, 1997, from $60.9 million at
December 31, 1996.
Non-Interest Income. Non-interest income increased by $103,000 to $2.4
million for the six months ended December 31, 1997, from $2.3 million for the
six months ended December 31, 1996.
Non-Interest Expense. Non-interest expense decreased by $5.6 million to $11.1
million for the six months ended December 31, 1997, from $16.7 million for the
six months ended December 31, 1996. The decrease was attributable to a
significant reduction of premium assessments on savings deposits by the FDIC
and the one-time special assessment charged in September 1996. Excluding
federal insurance premiums, aggregate non-interest expense items increased
$843,000 or 8.4%, to $10.8 million for the six months ended December 31, 1997,
from $10.0 million for the six months ended December 31, 1996. The increase was
attributable to higher compensation and employee benefits, due to annual salary
increases and increased employee staff, along with an increase in advertising
expenses, related to deposit generation and marketing of mortgage loans.
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RISK FACTORS
The following risk factors, in addition to those discussed elsewhere in this
Prospectus, should be considered by investors in deciding whether to purchase
the Common Stock offered hereby.
SENSITIVITY TO INCREASES IN INTEREST RATES
The Bank's profitability, like that of most financial institutions, is
dependent to a large extent upon its net interest income, which is the
difference between its interest income on interest-earning assets, such as
loans and investments, and its interest expense on interest-bearing
liabilities, such as deposits and borrowings. Accordingly, the Bank's results
of operations and financial condition are largely dependent on movements in
market interest rates and its ability to manage its assets in response to such
movements.
At September 30, 1997, the Bank's total interest-bearing liabilities
maturing or repricing within one year exceeded its total interest-earning
assets maturing or repricing in the same time period by $7.0 million,
representing a cumulative one-year interest sensitivity gap as a percentage of
total assets of negative 0.68%. Accordingly, in a rapidly rising interest rate
environment, the cost of the Bank's interest-bearing liabilities will
generally increase at a rate faster than the yield on its interest-earning
assets thereby adversely affecting the Bank's net interest income. Increases
in interest rates also could adversely affect the type (fixed-rate or
adjustable-rate) and amount of loans originated by the Bank and the average
life of loans and securities which, in turn, could adversely impact the yields
earned on the Bank's loan and securities portfolios as well as the amount of
secondary market activity in which the Bank engages. The Bank attempts to
manage its interest rate risk by selling most longer-term, fixed-rate single-
family loans, emphasizing the origination of and retaining adjustable-rate and
shorter-term fixed-rate loans, purchasing adjustable-rate loans and investing
in securities with shorter stated or estimated maturities. One method of
analyzing an institution's exposure to interest rate risk is by measuring the
change in the institution's Net Portfolio Value ("NPV") under various interest
rate scenarios. NPV is the present value of expected cash flows from assets,
liabilities and off-balance sheet contracts. An NPV Ratio, in any interest
rate scenario, is defined as the NPV in that scenario divided by the market
value of assets in the same scenario. The sensitivity measure is the decline
in the NPV Ratio, in basis points, caused by a 2% increase or decrease in
rates, whichever produces the larger decline. The higher an institution's
sensitivity measure is, the greater its exposure to interest rate risk is
considered to be. As of September 30, 1997, the most recent date for which
information is available, the Bank's sensitivity measure, as measured by the
OTS, indicated that a 2% increase in interest rates would cause a 180 basis
point decline in the Bank's NPV Ratio. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Management of
Market Risk."
Increases in market interest rates would result in an increase in the
interest rates on the Bank's adjustable-rate loans, thereby causing higher
loan payment amounts by the borrowers which, in turn, may result in elevated
delinquencies on such loans. Increases in the level of interest rates may also
adversely affect the value of the Bank's investment and mortgage-backed
securities and other interest-earning assets and, in turn, its results of
operations or retained earnings. At September 30, 1997, the Bank's investment
securities, including mortgage-backed securities, held-to-maturity had an
estimated fair value of $139.4 million, which was $343,000 greater than their
amortized cost. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Management of Market Risk," "Business of
Bank--Lending Activities--Single-Family Mortgage Lending" and "--Investment
Activities."
POTENTIAL LOW RETURN ON EQUITY FOLLOWING THE CONVERSION
At September 30, 1997, the Bank's ratio of retained earnings to total assets
was 7.79%. The Company's equity position will be significantly increased as a
result of the Conversion. On a pro forma basis as of September 30, 1997,
assuming the sale of Common Stock at the midpoint of the Estimated Price
Range, the Company's ratio of equity to assets would be approximately 17.49%.
The Company's ability to deploy this new capital through investments in
interest-earning assets, such as loans and securities, which bear rates of
return comparable to its current investments, will be significantly affected
by industry competition for such investments. The Company currently
anticipates that it will take time to prudently deploy such capital. As a
result, the Company's
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return on equity initially is expected to be below its historical return on
equity and may be below peer group institutions after the Conversion.
Additionally, due to the implementation of stock-based benefit plans such as
the ESOP and the Stock-Based Incentive Plan, the Company's future compensation
expense will be increased, thereby adversely affecting its net income and
return on equity.
INCREASED LENDING RISKS ASSOCIATED WITH MULTI-FAMILY, COMMERCIAL REAL ESTATE
AND COMMERCIAL LOANS
At September 30, 1997, the Bank's multi-family, commercial real estate and
commercial loan portfolios totaled $182.0 million, or 21.5% of total loans
receivable. Of this amount, $39.2 million, or 21.5%, consisted of multi-family
loans, $140.8 million, or 77.4%, consisted of commercial real estate loans,
and $2.0 million, or 1.1%, consisted of commercial loans. Multi-family,
commercial real estate and commercial loans are generally viewed as exposing
the lender to greater credit risk than single-family residential loans and
typically involve higher loan principal amounts. Repayment of multi-family and
commercial real estate loans generally is dependent, in large part, on
sufficient income from the property to cover operating expenses and debt
service. The Bank attempts to offset the risks associated with multi-family
and commercial real estate lending primarily by originating such loans on a
selective basis, by lending to individuals who will be actively involved in
the management of the property and who have proven management experience, and
by making such loans with lower loan-to-value ratios than single-family loans.
Additionally, the Bank generally requires personal guarantees from the
borrowers of its multi-family and commercial real estate loans. Economic
events and government regulations, which are outside the control of the
borrower or lender, could impact the value of the property securing the loan
or the future cash flow of the affected properties. See "Business of the
Bank--Lending Activities."
INCREASED LENDING RISKS ASSOCIATED WITH CONSTRUCTION AND DEVELOPMENT LOANS
At September 30, 1997, the Bank had total outstanding construction and
development loans of $50.5 million, or 6.0% of total loans receivable.
Construction and development financing is generally considered to involve a
higher degree of credit risk than long-term financing on improved, owner-
occupied real estate because the risk of loss on such loans is dependent
largely upon the accuracy of the initial estimate of the property's value at
completion of construction or development compared to the estimated cost
(including interest) of construction. If the estimate of value proves to be
inaccurate, the property securing the loan, when completed, may have a value
which is insufficient to assure full repayment of the loan. See "Business of
the Bank--Lending Activities."
ESTABLISHMENT OF THE CHARITABLE FOUNDATION
Pursuant to the Plan, the Company intends to establish a charitable
foundation in connection with the Conversion. The Plan provides that the Bank
and the Company will establish the Foundation, which will be incorporated
under Delaware law as a non-stock corporation and will be funded with shares
of Common Stock contributed by the Company. Establishment of the Foundation is
subject to the approval of the Bank's members at the Special Meeting. If
approved by members, the establishment of the Foundation will be dilutive to
the voting and ownership interests of stockholders and will have an adverse
impact on the operating results of the Company in fiscal 1998, possibly
resulting in an operating loss in fiscal 1998, the fiscal year in which the
Foundation is established.
Dilution of Stockholders' Interests. The Company proposes to establish the
Foundation with Common Stock in an amount equal to 6% of the Common Stock sold
in the Conversion. At the minimum, midpoint and maximum of the Estimated Price
Range, the contribution to the Foundation would be 355,725, 418,500, and
481,275 shares, with a value of $7.1 million, $8.4 million and $9.6 million,
respectively, based on the Purchase Price of $20.00 per share. Upon completion
of the Conversion and establishment of the Foundation, the Company will have
8,502,525 shares issued and outstanding at the maximum of the Estimated Price
Range, of which the Foundation will own 481,275 shares, or 5.7%. AS A RESULT,
PERSONS PURCHASING SHARES IN THE CONVERSION WILL HAVE THEIR OWNERSHIP AND
VOTING INTERESTS IN THE COMPANY DILUTED BY 5.7%. SEE "PRO FORMA DATA."
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<PAGE>
Negative Impact on Earnings. Assuming receipt of approval of the Bank's
members, establishment of the Foundation will have an adverse impact on the
Company's and the Bank's earnings in the year in which the contribution is
made. The Company will recognize an expense in the amount of the contribution
to the Foundation in the quarter in which it occurs, which is expected to be
the fourth quarter of fiscal 1998. Such expense will reduce earnings and have
a material adverse impact on the Company's earnings for the year. The amount
of the contribution will range from $7.1 million to $9.6 million, depending on
the amount of Common Stock sold in the Conversion. The contribution expense
will be partially offset by the tax deductibility of the expense in an amount
equal to the fair market value of the stock at the time of the contribution
less the nominal par value that the Foundation is required to pay to the
Company for the stock. The Company and Bank have been advised by their
independent accountants that the contribution to the Foundation will be tax
deductible, subject to a limitation based on 10% of the Company's annual
taxable income. Assuming a contribution of $9.6 million in Common Stock, based
on the maximum of the Estimated Price Range, the Company estimates a net tax
effected expense of $6.2 million. If the Foundation had been established at
June 30, 1997, the Bank would have reported a net loss of $1.9 million for
fiscal 1997 rather than reporting net income of $4.3 million. In addition to
the contribution to the Foundation, the Bank expects in the future to continue
to make some charitable contributions within its community.
Possible Nondeductibility of the Contribution. The Company and the Bank have
been advised by their independent accountants that the Foundation will qualify
as a Section 501(c)(3) exempt organization under the Internal Revenue Code of
1986, as amended (the "Code"), and will be classified as a private foundation.
In this regard, the Foundation will submit a request to the Internal Revenue
Service ("IRS") to be recognized as a tax-exempt organization. The independent
accountants' opinion, however, does not consider the impact of the regulatory
condition on the gift imposed by the OTS which requires the shares of Common
Stock held by the Foundation to be voted in the same ratio as all other shares
of the Common Stock on all proposals considered by stockholders of the
Company. See "The Conversion--Establishment of the Charitable Foundation--
Regulatory Conditions Imposed on the Foundation." In the event that the
Company or the Foundation receives an opinion of their tax counsel
satisfactory to the OTS that compliance with the voting restriction would have
the effect of causing the Foundation to lose its tax exempt status, otherwise
have material adverse tax consequences on the Foundation or subject the
Foundation to an excise tax under Section 4941 of the Code, the OTS will waive
such voting restriction upon submission of such opinion(s) by the Company or
the Foundation. The independent accountants' opinion further provides that the
Company's contribution of its own stock to the Foundation should not
constitute an act of self-dealing, and that the Company will be entitled to a
deduction in the amount of the fair market value of the stock at the time of
the contribution less the nominal par value that the Foundation is required to
pay to the Company for such stock, subject to an annual limitation based on
10% of the Company's annual taxable income. The Company, however, would be
able to carry forward any unused portion of the deduction for five years
following the contribution for federal tax purposes. Thus, while the Company
expects to receive a charitable contribution deduction of approximately $1.7
million in calendar year 1998, based on the maximum of the Estimated Price
Range, the Company is permitted under the Code to carry over the excess
contribution over a five-year period following the year in which the
contribution is initially made for federal tax purposes, subject to the 10%
annual limitation. For state income tax purposes, the Company does not
anticipate receiving a full tax benefit for the charitable contribution in
Nebraska, and will receive no tax benefit in Iowa and Kansas. Assuming the
sale of Common Stock at the midpoint of the Estimated Price Range, the Company
estimates that all of the deduction should be deductible for federal tax
purposes over the combined six-year period. However, no assurances can be made
that the Company will have sufficient pre-tax income over the five-year period
following the year in which the contribution is initially made to utilize
fully the carryover related to the excess contribution. Although the Company
and the Bank have received an opinion of their independent accountants that
the Company will be entitled to the deduction for the charitable contribution,
there can be no assurances that the IRS will recognize the Foundation as a
Section 501(c)(3) exempt organization or that the deduction will be permitted.
In such event, there would be no tax benefit related to the Foundation.
Comparison of Valuation and Other Factors Assuming the Foundation is Not
Established as Part of the Conversion. The establishment of the Foundation was
taken into account by Keller in determining the estimated pro forma market
value of the Company. The aggregate price of the shares of Common Stock being
offered in the Subscription and Community Offerings is based upon the
independent appraisal conducted by Keller of the
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estimated pro forma market value of the Company. The pro forma aggregate price
of the shares being offered for sale in the Conversion is currently estimated
to be between $118.6 million and $160.4 million, with a midpoint of $139.5
million. Based on the appraisal, the pro forma market capitalization of the
Bank at the midpoint, including shares contributed to the Foundation, is
$147.9 million. At September 30, 1997, the pro forma price to book ratio and
the pro forma price to earnings ratio are 73.20% and 14.80x, respectively, at
the midpoint of the Estimated Price Range. In the event that the Conversion
did not include the Foundation, Keller has estimated that the estimated pro
forma market capitalization of the Bank would be approximately $158.4 million
at the midpoint based on a pro forma price to book ratio and the pro forma
price to earnings ratio that are approximately the same as the independent
appraisal at 73.20% and 15.05x, respectively. If the Foundation was not part
of the Conversion, the pro forma market value of the shares being offered is
estimated to be between $134.6 million and $182.2 million. See "Comparison of
Valuation and Pro Forma Information with No Foundation." This estimate by
Keller was prepared at the request of the OTS and is solely for purposes of
providing depositors with sufficient information with which to make an
informed decision on the Foundation. There is no assurance that if the
Foundation is not approved the appraisal prepared at that time would conclude
that the pro forma market value of the Company would be the same as the amount
estimated herein. Any appraisal prepared at that time would be based on the
facts and circumstances existing at that time, including, among other things,
market and economic conditions.
The Bank believes that the establishment of the Foundation is in the best
interests of the Bank, its depositors, its prospective stockholders and the
communities in which it operates. The Foundation is integrally tied to the
Bank's business of operating a community banking institution and the Bank
believes that the Foundation will have a positive impact on the Bank's long-
term franchise value. The amount of Common Stock being offered in the
Conversion at the midpoint of the Estimated Price Range is approximately $18.9
million less than the estimated amount of Common Stock that would be offered
in the Conversion without the Foundation based on the estimate provided by
Keller. Accordingly, certain depositors of the Bank who subscribe to purchase
Common Stock in the Subscription Offering may receive fewer shares depending
on the appraisal valuation at that time, the number of shares sold based on
that appraisal, the size of a depositor's stock order, the amount of his or
her qualifying deposits in the Bank and the overall level of subscriptions.
The decrease in the amount of Common Stock being offered will not have a
significant effect on the Company or the Bank's capital position. The Bank's
regulatory capital is significantly in excess of its regulatory capital
requirements and will further exceed such requirements following the
Conversion. The Bank's tangible, leverage and risk-based capital ratios at
September 30, 1997, were 7.77%, 7.77% and 14.32%, respectively. Assuming the
sale of shares at the midpoint of the Estimated Price Range, the Bank's pro
forma tangible, leverage and risk-based capital ratios at September 30, 1997
would be 12.06%, 12.06% and 21.73%, respectively. On a consolidated basis, the
Company's pro forma stockholders' equity would be $202.0 million or
approximately 17.49% of pro forma consolidated assets, assuming the sale of
shares at the midpoint of the Estimated Price Range. Pro forma stockholders'
equity per share and pro forma net earnings per share would be $27.32 and
$0.34, respectively. If the Foundation was not being established in the
Conversion, based on the Keller estimate, the Company's pro forma
stockholders' equity would be approximately $216.4 million or approximately
18.50% of pro forma consolidated assets at the midpoint of the estimate and
pro forma stockholders' equity per share and pro forma net earnings per share
would be approximately the same with the Foundation as without the
establishment of the Foundation. See "Comparison of Valuation and Pro Forma
Information with No Foundation."
Potential Anti-Takeover Effect. If approved by the Bank's members, upon
completion of the Conversion, the Foundation will own 5.7% of the total shares
of the Common Stock outstanding. Such shares will be owned solely by the
Foundation; however, pursuant to the terms of the contribution as mandated by
the OTS, the shares of Common Stock held by the Foundation must be voted in
the same ratio as all other shares of the Common Stock on all proposals
considered by the stockholders of the Company. See "The Conversion--
Establishment of the Charitable Foundation--Regulatory Conditions Imposed on
the Foundation." The Company and the Foundation will take the necessary steps
to provide such requirement in the Foundation's corporate governance
documents. As such, the Company does not believe the Foundation will have an
anti-takeover effect on the Company. In the event that the OTS were to waive
this voting restriction, the Foundation's Board of Directors would exercise
sole voting power over such shares and would no longer be subject to the
restriction. However, the OTS could impose additional conditions at that time
on the composition of the Board of Directors of the
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Foundation or which otherwise relate to control of the Common Stock held by
the Foundation. See "The Conversion--Establishment of the Charitable
Foundation--Regulatory Conditions Imposed on the Foundation." If a waiver of
the voting restriction were granted by the OTS and no further conditions were
imposed on the Foundation at that time, management of the Company and the Bank
may benefit to the extent that the Board of Directors of the Foundation
determines to vote the shares of Common Stock held by the Foundation in favor
of proposals supported by the Company and the Bank. Furthermore, in the event
of such a waiver, when the Foundation's shares are combined with shares
purchased directly by officers and directors of the Company, shares held by
proposed stock benefit plans, if approved by stockholders, and shares held in
the Bank's ESOP, the aggregate of such shares could exceed 20% of the
Company's outstanding Common Stock, which could enable management to defeat
stockholder proposals requiring 80% approval. Consequently, this potential
voting control might preclude takeover attempts that certain stockholders deem
to be in their best interest, and might tend to perpetuate management. Since
the ESOP shares are allocated to all eligible employees of the Bank, and any
unallocated shares will be voted by an independent trustee, and because awards
under the proposed stock benefit plans may be granted to employees other than
executive officers and directors, management of the Company does not expect to
have voting control of all shares held or allocated by the ESOP or other stock
benefit plans. See "--Certain Anti-Takeover Provisions Which May Discourage
Takeover Attempts--Voting Control of Officers and Directors."
Further, there will be no agreements or understandings, written or tacit,
with respect to the exercise of either direct or indirect control over the
management or policies of the Company by the Foundation which may discourage
takeover attempts, including agreements related to voting, acquisition or
disposition of the Common Stock. Finally, as the Foundation sells its shares
of Common Stock over time, its ownership interest and voting power in the
Company are expected to decrease.
Potential Challenges. The establishment and funding of a charitable
foundation as part of a conversion is innovative and has been done in a
limited number of instances in connection with a conversion. As such, the
Foundation may be subject to potential challenges notwithstanding that the
Boards of Directors of the Company and the Bank have carefully considered the
various factors involved in the establishment of the Foundation in reaching
its determination to establish the Foundation as part of the Conversion. See
"The Conversion--Establishment of the Charitable Foundation--Purpose of the
Foundation." In conjunction with its approval of the Conversion, the Bank
determined to submit the establishment of the Foundation for a vote of members
so that members have a right to vote on whether the Foundation should be
established as part of the Conversion. If certain parties were to institute an
action seeking to require the Bank to eliminate establishment of the
Foundation in connection with the Conversion, no assurances can be made that
the resolution of such action would not result in a delay in the consummation
of the Conversion or that any objecting persons would not be ultimately
successful in obtaining such removal or other equitable relief or monetary
damages against the Company or the Bank. Additionally, if the Company and the
Bank are forced to eliminate the Foundation, the Company may be required to
resolicit subscribers in the Offerings.
Approval of Members. Establishment of the Foundation is subject to the
approval of a majority of the total outstanding votes of the Bank's members
eligible to be cast at the Special Meeting. The Foundation will be considered
as a separate matter from approval of the Plan of Conversion. If the Bank's
members approve the Plan of Conversion, but not the establishment of the
Foundation, the Bank intends to complete the Conversion without the
establishment of the Foundation. Failure to approve the Foundation may
materially increase the pro forma market value of the Common Stock being
offered for sale in the Offerings since the Valuation Range, as set forth
herein, takes into account the dilutive impact of the issuance of shares to
the Foundation. If the pro forma market value of the Common Stock without the
Foundation is either greater than $182.2 million or less than $134.6 million,
the Bank will establish a new Estimated Price Range and commence a
resolicitation of subscribers (i.e., subscribers will be permitted to continue
their orders, in which case they will need to reconfirm affirmatively their
subscriptions prior to the expiration of the resolicitation offering or their
subscriptions funds will be promptly refunded with interest at the Bank's
passbook rate of interest, or be permitted to increase, decrease, or cancel
their subscriptions). Any change in the Estimated Price Range must be approved
by the OTS. See "The Conversion--Stock Pricing." A resolicitation, if any,
following the conclusion of the Subscription
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Offering would not exceed 45 days unless further extended by the OTS for
periods of up to 90 days not to extend beyond April 17, 2000.
HIGHLY COMPETITIVE INDUSTRY AND GEOGRAPHIC AREA
The Bank faces significant competition in its market area both in attracting
deposits and in originating loans. The Bank's primary market area, Nebraska,
southwest Iowa and northern Kansas, is a highly competitive market. The
population of the market area is relatively small and population growth is
moderate. The Bank faces direct competition from a significant number of
financial service providers operating in its market area, many with a state-
wide or regional presence, and, in some cases, a national presence. This
competition arises from commercial banks, savings banks, mortgage brokers,
mortgage banking companies, credit unions, and other providers of financial
services, many of which are significantly larger than the Bank and, therefore,
have greater financial and marketing resources than those of the Bank. As a
result of its highly competitive market, the Bank generally has paid and
continues to pay a relatively high rate of interest on its deposit accounts.
Payment of a high rate of interest on deposit accounts may adversely affect
net interest income, which is the difference between interest income on
interest-earning assets and interest expense on interest-bearing liabilities.
Competition for loans, particularly for more interest sensitive loans, within
the Bank's market area, has caused the Bank to rely more heavily on purchased
loans both inside and outside of its market area. See "Business of the Bank--
Market Area and Competition" and "--Lending Activities."
PURCHASED LOANS OUTSIDE THE BANK'S MARKET AREA AND CONCENTRATION IN CERTAIN
GEOGRAPHIC AREAS
The Bank's purchase of loans outside its market area may involve greater
risk because the Bank may not have the same depth of experience or knowledge
of the areas in which the property securing the loans is located. Some of the
properties may be located in states which are experiencing adverse economic
conditions, including a general softening in real estate markets and the local
economies, which may result in increased loan delinquencies and loan losses.
Additionally, regulations and practices regarding the liquidation of
properties (e.g., foreclosure) and the rights of mortgagors in default vary
greatly from state to state, and these restrictions may limit the Bank's
ability to foreclose on a property or seek other recovery. Because purchased
loans have been somewhat concentrated in the states of California, Arizona and
Colorado, the Bank may be subject to loan delinquencies and loan losses
resulting from adverse conditions affecting that region of the country. See
"Business of the Bank--Market Area and Competition" and "--Lending
Activities."
FINANCIAL INSTITUTION REGULATION AND POSSIBLE LEGISLATION
The Bank is subject to extensive regulation and supervision as a federal
savings association. In addition, the Company, as a savings and loan holding
company, is subject to extensive regulation and supervision. Such regulations,
which affect the Bank on a daily basis, may be changed at any time, and the
interpretation of the relevant law and regulations is also subject to change
by the authorities who examine the Bank and interpret those laws and
regulations. Any change in the regulatory structure or the applicable statutes
or regulations, whether by the OTS, the FDIC or the Congress, could have a
material impact on the Company, the Bank, its operations or the Conversion.
See "Regulation."
Recently enacted legislation provides that the BIF (the deposit insurance
fund that covers most commercial bank deposits) and the SAIF will merge on
January 1, 1999 if there are no more savings associations as of that date.
Several bills have been introduced in the current Congress that would
eliminate the federal thrift charter and the OTS. A bill recently reported by
the House Banking Committee would require federal thrifts to become national
banks or state banks or savings banks within two years after enactment or they
would, by operation of law, become national banks. Under the proposed
legislation, a national bank resulting from a converted federal thrift could
continue to engage in activities, including holding any assets, in which it
was lawfully engaged on the day before the date of enactment. Branches
operated on the day before enactment could be retained regardless of their
permissibility for national banks. Subject to a grandfathering provision, all
savings and loan holding companies would become subject to the same regulation
and activities restrictions as bank holding companies. The grandfathering
could be lost under certain circumstances, such as a change in control of the
holding company. The legislative proposal would also abolish the OTS and
transfer its functions to the federal bank
21
<PAGE>
regulators with respect to the institutions and to the Board of Governors of
the Federal Reserve Board with respect to the regulation of holding companies.
The Bank is unable to predict whether the legislation will be enacted or,
given such uncertainty, determine the extent to which the legislation, if
enacted, would affect its business. The Bank is also unable to predict whether
the SAIF and BIF will eventually be merged.
Legislation regarding bad debt recapture was signed into law in August 1996
effective for tax years beginning on or after January 1, 1996. The legislation
requires recapture of reserves accumulated after 1987. The recapture tax on
post-1987 reserves must be paid over a six-year period starting in 1996. The
payment of the tax can be deferred in each of 1996 and 1997 if an institution
originates at least the same average annual principal amount of mortgage loans
that it originated in the six years prior to 1996. See "Federal and State
Taxation--Federal Taxation--Bad Debt Reserve."
STOCK-BASED BENEFITS TO MANAGEMENT AND DIRECTORS, EMPLOYMENT CONTRACTS AND
CHANGE IN CONTROL PAYMENTS
Stock-Based Incentive Plan. The Company intends to adopt the Stock-Based
Incentive Plan which would provide for the granting of options, restricted
stock and certain related rights to eligible officers, employees and directors
of the Company and Bank. The Stock-Based Incentive Plan may consist of one or
more separate plans. While the Company currently anticipates granting stock
options and restricted stock awards under a single plan, it may establish
separate plans for directors and employees (including officers). The Company
plans to seek stockholder approval of such plan(s) at a meeting of
stockholders following the Conversion which, under current OTS regulations,
may be held no earlier than six months after completion of the Conversion.
Assuming the receipt of stockholder approval, the Company expects to acquire
or issue an amount equal to 10% of the shares of Common Stock issued in the
Conversion, including shares issued to the Foundation, or 628,447 shares and
850,252 shares at the minimum and maximum of the Estimated Price Range,
respectively, for stock options. In addition, the Company expects to acquire
or issue an amount equal to 4% of the shares of Common Stock issued in the
Conversion, including shares issued to the Foundation, or 251,379 shares and
340,101 shares at the minimum and maximum of the Estimated Price Range,
respectively, for stock awards. These shares will be acquired either through
open market purchases or from authorized but unissued Common Stock. See "--
Possible Dilutive Effect of Stock-Based Incentive Plan."
Under the Stock-Based Incentive Plan (or any separate plans for directors
and employees), stock awards would be granted in the form of non-transferable,
non-assignable shares of Common Stock. The Board of Directors intends to
appoint an independent trustee who will vote unallocated stock awards in the
same proportion as it receives instructions from recipients with respect to
allocated shares which have not been earned and distributed. The trustee will
not vote allocated shares which have not been distributed if it does not
receive instructions from the recipient.
The Stock-Based Incentive Plan (or any separate plan for employees) also
intends to provide for the grant of options to purchase Common Stock. The
exercise price of options will be equal to the fair market value of the
underlying Common Stock on the date of grant. Such options will permit such
officers and directors to benefit from any increase in the market value of the
shares in excess of the exercise price at the time of exercise. Officers and
directors receiving such options will not be required to pay for the shares
until the date of exercise. The award of restricted stock and exercise of non-
statutory stock options (and disqualifying dispositions of stock acquired
through the exercise of Incentive Stock Options) will result in additional
compensation expense to the Company and, accordingly, may result in an
increase in the overall compensation expense in future periods. See
"Management of the Bank--Benefits--Stock-Based Incentive Plan."
Although no specific award or option determinations have been made, the
Company anticipates that it will provide awards and/or options to the
directors, officers and employees to the extent permitted by applicable
regulations. Current OTS regulations provide that, with respect to any such
benefit plan which is implemented within one year after consummation of the
Conversion, no individual may receive more than 25% of the shares of any such
plan and non-employee directors may not receive more than 5% individually, or
30% in the aggregate, of the shares awarded under any such plan.
22
<PAGE>
The Board of Directors, in determining specific allocations and grants of
stock awards and stock options, will consider various factors, including but
not limited to, the financial condition of the Company, current and past
performance of plan participants and tax and securities law and regulation
requirements.
Employee Stock Ownership Plan. In connection with the Conversion, certain
officers and employees of the Bank and the Company will obtain the benefit of
stock ownership through the establishment of the ESOP, which is a tax-
qualified plan for the benefit of all eligible employees, including executive
officers, of the Bank. The ESOP intends to purchase in the Subscription
Offering up to 8% of the Common Stock issued in the Conversion, including the
issuance of shares to the Foundation, or 502,758 shares and 680,202 shares at
the minimum and maximum of the Estimated Price Range. The ESOP will be funded
over time by the Bank, and the Bank will allocate shares of Common Stock to
employees of the Bank who are Participants in the ESOP at no cost to the ESOP
beneficiaries. See "Management of the Bank--Benefits--Employee Stock Ownership
Plan."
Employment Contracts and Change in Control Provisions. Employment and change
in control agreements with certain officers and the employee severance
compensation plan provide for benefits and cash payments in the event of a
change in control of the Company or the Bank. The provisions in such
agreements and plan would provide the recipient with a change in control
payment in the event of the recipient's involuntary or, in certain
circumstances, voluntary termination of employment subsequent to a change in
control of the Company or the Bank. These provisions may have the effect of
increasing the cost of acquiring the Company, thereby discouraging future
attempts to take over the Company or the Bank. Based on current salaries, cash
payments to be paid in the event of a change in control pursuant to the terms
of the employment agreements, change in control agreements and an employee
severance compensation plan (assuming all eligible employees qualified for the
full benefit) would be approximately $10.6 million. However, the actual amount
to be paid in the event of a change in control of the Company or Bank cannot
be estimated at this time because the actual amount is based on the average
salary of the employee and other factors existing at the time of the change in
control. See "Management of the Bank--Employment Agreements," "--Change in
Control Agreements," "--Employee Severance Compensation Plan," "--Benefits--
Stock-Based Incentive Plan" and "Restrictions on Acquisition of the Company
and the Bank--Restrictions in the Company's Certificate of Incorporation and
Bylaws."
POSSIBLE DILUTIVE EFFECT OF STOCK-BASED INCENTIVE PLAN
Following the Conversion, the Stock-Based Incentive Plan will acquire an
amount of shares equal to 4% of the shares of Common Stock issued in the
Conversion, including shares issued to the Foundation, either through open
market purchases or the issuance of authorized but unissued shares of Common
Stock from the Company. If the Stock-Based Incentive Plan is funded by the
issuance of authorized but unissued shares, the voting interests of existing
stockholders at that time will be diluted by 3.8%. Also following the
Conversion, directors, officers and employees will be granted options under
the Stock-Based Incentive Plan. Although no specific determinations have been
made, the Company expects that executive officers and directors will be
granted options to purchase authorized but unissued shares in an amount equal
to 10% of the Common Stock issued in the Conversion. Under certain
circumstances, such options may be exercised and sold on the same day, thereby
eliminating any risk to officers and directors in exercising options in the
event that the market price exceeds the exercise price. If all of the options
were to be exercised using authorized but unissued Common Stock and the Stock-
Based Incentive Plan were funded with authorized but unissued shares, the
voting interests of existing stockholders at that time would be diluted by
9.1%.
CERTAIN ANTI-TAKEOVER PROVISIONS WHICH MAY DISCOURAGE TAKEOVER ATTEMPTS
Provisions in the Company's and the Bank's Governing Instruments. Certain
provisions of the Company's Certificate of Incorporation and Bylaws,
particularly a provision limiting voting rights, and the Bank's Stock Charter
and Bylaws, as well as certain federal regulations, assist the Company in
maintaining its status as an independent publicly owned corporation. These
provisions provide for, among other things, supermajority voting on certain
matters, staggered boards of directors, non-cumulative voting for directors,
limits on the calling of special meetings, limits on voting shares in excess
of 10% of outstanding shares, and certain uniform price
23
<PAGE>
provisions for certain business combinations. The Bank's Stock Charter also
prohibits, for five years, the acquisition or offer to acquire, directly or
indirectly, the beneficial ownership of more than 10% of the Bank's equity
securities. Any person violating this restriction may not vote the Bank's
securities in excess of 10%. These provisions in the Bank's and the Company's
governing instruments may discourage potential proxy contests and other
potential takeover attempts, particularly those which have not been negotiated
with the Board of Directors, and thus, generally may serve to perpetuate
existing management. For a more detailed discussion of these provisions, see
"Restrictions on Acquisition of the Company and the Bank."
Voting Control of Officers and Directors. Directors and executive officers
of the Bank and the Company expect to purchase approximately 2.7% or 2.0% of
the shares of Common Stock to be issued in the Conversion, based upon the
minimum and the maximum of the Estimated Price Range, respectively, exclusive
of shares that may be attributable to directors and officers through the
Stock-Based Incentive Plan and the ESOP, which plans may give directors,
executive officers and employees the potential to control the voting of an
additional 22.4% of the Common Stock based upon the minimum of the Estimated
Price Range, assuming all such plans were funded with authorized but unissued
shares. In addition, the Foundation will be funded with a contribution by the
Company equal to 6% of the Common Stock sold in the Conversion, which if a
waiver of the voting restriction imposed on such Common Stock is obtained from
the OTS, may be voted as determined by the directors of the Foundation who
also will be directors or officers of the Company and Bank. Management's
potential voting control could, together with additional stockholder support,
defeat stockholder proposals requiring 80% approval of stockholders. As a
result, this potential voting control may preclude takeover attempts that
certain stockholders deem to be in their best interest and may tend to
perpetuate existing management. See "Restrictions on Acquisition of the
Company and the Bank--Restrictions in the Company's Certificate of
Incorporation and Bylaws."
ABSENCE OF MARKET FOR COMMON STOCK
The Company and the Bank have never issued capital stock. The Company has
received conditional approval to have its Common Stock quoted on the AMEX
under the symbol "FLF" upon completion of the Conversion. However, there can
be no assurance that an active and liquid trading market for the Common Stock
will develop or, once developed, will continue, nor can there be any
assurances that purchasers of the Common Stock will be able to sell their
shares at or above the Purchase Price. The absence or discontinuance of a
market for the Common Stock would have an adverse impact on both the price and
liquidity of the Common Stock. See "Market for the Common Stock."
POSSIBLE INCREASE IN ESTIMATED PRICE RANGE AND NUMBER OF SHARES ISSUED
The number of shares to be issued in the Conversion, including shares issued
to the Foundation may be increased as a result of an increase in the Estimated
Price Range of up to 15% to reflect changes in market and financial conditions
following the commencement of the Subscription and Community Offerings. In the
event that the Estimated Price Range is so increased, it is expected that the
Company will issue up to 9,224,438 shares of Common Stock at the Purchase
Price for an aggregate purchase price of up to $184.5 million. An increase in
the number of shares issued will decrease a subscriber's pro forma net
earnings per share and stockholders' equity per share and will increase the
Company's pro forma consolidated stockholders' equity and net earnings. Such
an increase will also increase the Purchase Price as a percentage of pro forma
stockholders' equity per share and net earnings per share.
POSSIBLE ADVERSE INCOME TAX CONSEQUENCES OF THE DISTRIBUTION OF SUBSCRIPTION
RIGHTS
The Bank has received an opinion of Keller that pursuant to Keller's
valuation, subscription rights granted to Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members, have no value.
However, such valuation is not binding on the IRS. If the subscription rights
granted to Eligible Account Holders, Supplemental Eligible Account Holders and
Other Members are deemed to have an ascertainable value, receipt of such
rights could result in taxable gain to those Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members who receive and/or
exercise the subscription rights in an amount equal to such value.
Additionally, the Bank could recognize a gain for tax purposes on such
distribution. Whether subscription rights are considered to have ascertainable
value is an inherently factual determination. See "The Conversion--Effects of
Conversion" and "--Tax Aspects."
24
<PAGE>
YEAR 2000 COMPLIANCE
As the year 2000 approaches, an important business issue has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. Many existing application software products,
including the Bank's, were designed to accommodate a two-digit year. For
example, "96" is stored on the system and represents 1996. The Bank primarily
utilizes a third-party vendor for processing the primary banking applications.
In addition, the Bank also uses third-party vendor application software for
all ancillary computer applications. The third-party vendor for the Bank's
banking applications is in the process of modifying, upgrading or replacing
its computer applications to insure Year 2000 compliance. In addition, the
Bank has instituted a Year 2000 compliance program whereby the Bank is
reviewing the Year 2000 compliance issues that may be faced by its other
third-party vendors. Under such program, the Bank will examine the need for
modifications or replacement of all non-Year 2000 compliant pieces of
software. The Bank does not currently expect that the cost of its Year 2000
compliance program will be material to its financial condition and believes
that it will satisfy such compliance program by the end of 1998 without
material disruption of its operations. In the event that the Bank's
significant suppliers do not successfully and timely achieve Year 2000
compliance, the Bank's business or operations could be adversely affected.
FIRST LINCOLN BANCSHARES INC.
The Company was organized in November 1997 at the direction of the Board of
Directors of the Bank for the purpose of acquiring all of the capital stock to
be issued by the Bank in the Conversion. The Company has received approval
from the OTS to become a savings and loan holding company and, as such, will
be subject to regulation by the OTS. See "The Conversion--General." Upon
consummation of the Conversion, the Company will conduct business initially as
a multiple savings and loan holding company controlling both the Bank and the
Iowa Bank. As a multiple savings and loan holding company, the Company will be
subject to certain restrictions on activities in which it may engage in
addition to controlling the Bank and the Iowa Bank. See "Regulation--Holding
Company Regulation." After completion of the Conversion, the Company's assets
will consist of all of the outstanding shares of the Bank's capital stock
issued to the Company in the Conversion, that portion of the net proceeds of
the Offerings retained by the Company and all of the outstanding shares of
capital stock of the Iowa Bank. The Company intends to use part of the net
proceeds it retains to loan funds to the ESOP to enable the ESOP to purchase
8% of the Common Stock issued in the Conversion, including shares issued to
the Foundation. The Company intends to initially deposit the remaining
proceeds with the Bank. See "Use of Proceeds." The Company and Bank may,
however, alternatively choose to fund the ESOP through a loan to the ESOP
trust by a third-party financial institution. Immediately after the
Conversion, the Company will have no significant liabilities. The management
of the Company is set forth under "Management of the Company." Initially, the
Company will neither own nor lease any property, but will instead use the
premises, equipment and furniture of the Bank. At the present time, the
Company does not intend to employ any persons other than officers of the
Company who are also officers of the Bank, but will utilize the support staff
of the Bank from time to time. Additional employees will be hired as
appropriate to the extent the Company expands its business in the future.
Management believes that the holding company structure will provide the
Company with additional flexibility to diversify, should it decide to do so,
its business activities through existing or newly-formed subsidiaries, or
through acquisitions of other financial institutions and financial services
related companies. In addition, management believes that the Company will be
in a position after the Conversion, subject to regulatory limitations and the
Company's financial position, to take advantage of any acquisition and
expansion opportunities that may arise. There are no current arrangements,
understandings or agreements, written or oral, regarding any such
opportunities or transactions. The initial activities of the Company are
anticipated to be funded by the net proceeds retained by the Company and
earnings thereon or, alternatively, through dividends from the Bank.
The Company's executive offices are located at 13th and "N" Streets,
Lincoln, Nebraska 68508, and its telephone number is (402) 475-0521.
25
<PAGE>
FIRST FEDERAL LINCOLN BANK
The Bank was organized as a savings and loan association in 1907 and
received its federal charter and insurance of its accounts in June 1935. The
Bank operates as a community bank and its corporate philosophy has
traditionally been focused on providing a competitive array of financial
products and services to consumers within its market area. The Bank's business
primarily consists of accepting deposits from customers and investing those
funds primarily in mortgage loans secured by single-family residences. At
September 30, 1997, the Bank had invested $521.7 million, or 50.5% of total
assets, in single-family mortgage loans. At that date, the Bank's investment
in non-residential mortgage loans totaled $180.0 million, or 17.4% of total
assets, its investment in cash deposits and investment securities, consisting
primarily of U.S. Government and agency obligations, totaled $104.5 million,
or 10.1% of total assets, and mortgage-backed securities, primarily consisting
of those guaranteed by government agencies such as Freddie Mac ("FHLMC") and
Ginnie Mae ("GNMA"), totaled $81.2 million, or 7.9% of total assets. Remaining
assets were primarily multi-family mortgages, commercial real estate loans,
consumer loans, construction loans, commercial loans and corporate office
buildings and land. At September 30, 1997, the Bank's deposit accounts totaled
$923.7 million, or 96.9% of total liabilities. The Bank also uses advances
from the FHLB of Topeka as a source of funds. At September 30, 1997, such
advances totaled $10.6 million, or 1.1% of total liabilities.
The Bank operates its Iowa offices as the Iowa Bank, which is a separately
chartered federal savings bank. The Iowa Bank is wholly-owned by the Bank
through two wholly-owned subsidiary corporations and initially resulted from
the 1988 supervisory conversion and merger of two federal savings and loan
associations acquired by the Bank with financial assistance from the Federal
Savings and Loan Insurance Corporation ("FSLIC"). Following the Conversion,
the Bank plans to engage in a merger or other form of combination transaction
with the Iowa Bank. See "Regulation--Holding Company Regulation."
The Bank is subject to extensive regulation, supervision and examination by
the OTS, its primary regulator, and the FDIC, which insures its deposits. As
of September 30, 1997, the Bank exceeded all regulatory capital requirements
with tangible, core and risk-based capital of $80.3 million, $80.3 million and
$86.8 million, respectively. Additionally, the Bank's regulatory capital was
in excess of the amount necessary for the Bank to be deemed "well capitalized"
under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"). See "Regulatory Capital Compliance" and "Regulation." The Bank is
a member of the FHLB which is one of the twelve regional banks which comprise
the FHLB system.
The Bank's executive offices are located at 13th and "N" Streets, Lincoln,
Nebraska 68508, and its telephone number is (402) 475-0521.
26
<PAGE>
REGULATORY CAPITAL COMPLIANCE
At September 30, 1997, the Bank exceeded all regulatory capital
requirements. See "Regulation--Federal Savings Institution Regulation--Capital
Requirements." Set forth below is a summary of the Bank's compliance with the
regulatory capital standards as of September 30, 1997, on a historical and pro
forma basis assuming that the indicated number of shares were sold as of such
date and receipt by the Bank of 50% of the net proceeds. For purposes of the
table below, the amount expected to be borrowed by the ESOP and the cost of
the shares expected to be acquired by the Stock-Based Incentive Plan are
deducted from pro forma regulatory capital.
<TABLE>
<CAPTION>
FIRST FEDERAL LINCOLN BANK
PRO FORMA AT SEPTEMBER 30, 1997 BASED UPON THE SALE AT $20.00 PER SHARE
--------------------------------------------------------------------------------------
9,224,438 SHARES
5,928,750 SHARES 8,021,250 SHARES (15% ABOVE
(MINIMUM OF 6,975,000 SHARES (MAXIMUM OF MAXIMUM OF
HISTORICAL AT ESTIMATED (MIDPOINT OF ESTIMATED ESTIMATED ESTIMATED
SEPTEMBER 30, 1997 PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(1)
------------------ ------------------- -------------------------- ------------------- -------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2)
------- ---------- -------- ---------- ------------ ------------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP Capital..... $80,562 7.79% $123,241 11.45% $ 130,911 12.08% $138,580 12.70% $147,399 13.39%
======= ===== ======== ===== ============ ========= ======== ===== ======== =====
Tangible Capital:
Capital Level... $80,345 7.77% $123,024 11.43% $ 130,694 12.06% $138,363 12.68% $147,182 13.38%
Requirement..... 15,513 1.50 16,141 1.50 16,256 1.50 16,371 1.50 16,503 1.50
------- ----- -------- ----- ------------ --------- -------- ----- -------- -----
Excess.......... $64,832 6.27% $106,883 9.93% $ 114,438 10.56% $121,992 11.18% $130,679 11.88%
======= ===== ======== ===== ============ ========= ======== ===== ======== =====
Core Capital:
Capital Level... $80,345 7.77% $123,024 11.43% $ 130,694 12.06% $138,363 12.68% $147,182 13.38%
Requirement(3).. 41,369 4.00 43,050 4.00 43,348 4.00 43,655 4.00 44,008 4.00
------- ----- -------- ----- ------------ --------- -------- ----- -------- -----
Excess.......... $38,976 3.77% $ 79,974 7.43% $ 87,346 8.06% $ 94,708 8.68% $103,174 9.38%
======= ===== ======== ===== ============ ========= ======== ===== ======== =====
Risk-Based
Capital:
Capital
Level(4)(5)..... $86,765 14.32% $129,444 20.64% $ 137,114 21.73% $144,783 22.80% $153,602 24.02%
Requirement..... 48,475 8.00 50,182 8.00 50,489 8.00 50,795 8.00 51,148 8.00
------- ----- -------- ----- ------------ --------- -------- ----- -------- -----
Excess.......... $38,290 6.32% $ 79,262 12.64% $ 86,625 13.73% $ 93,988 14.80% $102,454 16.02%
======= ===== ======== ===== ============ ========= ======== ===== ======== =====
</TABLE>
- ----
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15%
as a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription Offering.
(2) Tangible capital levels are shown as a percentage of tangible assets. Core
capital levels are shown as a percentage of total adjusted assets. Risk-
based capital levels are shown as a percentage of risk-weighed assets.
(3) The current OTS core capital requirement for savings associations is 3% of
total adjusted assets. The OTS has proposed core capital requirements
which would require a core capital ratio of 3% of total adjusted assets
for thrifts that receive the highest supervisory rating for safety and
soundness and a 4% to 5% core capital ratio requirement for all other
thrifts. See "Regulation--Federal Savings Institution Regulation--Capital
Requirements."
(4) Assumes net proceeds are invested in assets that carry a 50% risk-
weighting.
(5) The difference between equity under generally accepted accounting
principles ("GAAP") and regulatory risk-based capital is attributable to
the addition of the general valuation allowance of $7,022,000 and other
assets that are required to be deducted of $602,000 at September 30, 1997.
27
<PAGE>
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Common Stock cannot be
determined until the Conversion is completed, it is presently anticipated that
the net proceeds from the sale of the Common Stock will be between $115.5
million and $156.8 million (or $180.6 million if the Estimated Price Range is
increased by 15%). See "Pro Forma Data" and "The Conversion--Stock Pricing" as
to the assumptions used to arrive at such amounts. The Company will be unable
to utilize any of the net proceeds of the Offerings until the consummation of
the Conversion.
The Company will purchase all of the outstanding capital stock of the Bank
to be issued upon Conversion in exchange for 50% of the net proceeds, with the
remaining net proceeds to be retained by the Company. Based on net proceeds of
$156.8 million, the Company expects to utilize $78.4 million of net proceeds
to purchase the common stock of the Bank. Such portion of net proceeds will be
added to the Bank's general funds which the Bank currently intends to utilize
for general corporate purposes, including the origination and purchase of
adjustable-rate residential loans, as well as non-residential mortgage and
consumer loans, and to fund stock-based benefit plans. The Bank may also use
such funds for the expansion of its facilities, and to expand operations
through acquisitions of other financial institutions, branch offices or other
financial services companies. The Bank has not yet determined the approximate
amount of net proceeds to be used for any of the purposes mentioned above.
The Company intends to use a portion of the net proceeds to make a loan
directly to the ESOP to enable the ESOP to purchase 8% of the Common Stock
issued in the Conversion, including shares issued to the Foundation. The
Company and the Bank may alternatively choose to fund the ESOP's stock
purchases through a loan by a third-party financial institution. The remaining
net proceeds retained by the Company will initially be invested in a deposit
account at the Bank. Based upon the sale of 5,928,750 shares or 8,021,250
shares at the minimum and maximum of the Estimated Price Range, and the
issuance of shares to the Foundation, the amount of the loan to the ESOP would
be $10.1 million or $13.6 million, respectively (or $15.6 million if the
Estimated Price Range is increased by 15%) to be repaid over a twelve-year
period at the prevailing prime rate of interest, which currently is 8.5%. See
"Management of the Bank--Benefits--Employee Stock Ownership Plan."
The net proceeds retained by the Company may also be used to support the
future expansion of operations through branch acquisitions, the establishment
of branch offices and the acquisition of smaller financial institutions or
their assets, including those located within the Bank's market area or
diversification into other banking related businesses. The Company has no
current arrangements, understandings or agreements regarding any such
opportunities or transactions. The Company, upon the Conversion, will be a
multiple savings and loan holding company, which under existing laws would be
restricted as to the types of business activities in which it may engage. See
"Regulation--Holding Company Regulation" for a description of certain
regulations applicable to the Company.
Upon completion of the Conversion, the Board of Directors of the Company
will have the authority to adopt stock repurchase plans, subject to statutory
and regulatory requirements. Unless approved by the OTS, the Company, pursuant
to OTS regulations, will be prohibited from repurchasing any shares of the
Common Stock for three years except (i) for an offer to all stockholders on a
pro rata basis, or (ii) for the repurchase of qualifying shares of a director.
Notwithstanding the foregoing and except as provided below, beginning one year
following completion of the Conversion, the OTS regulations permit the Company
to repurchase its Common Stock so long as: (i) the repurchases within the
following two years are part of an open-market program not involving greater
than 5% of its outstanding capital stock during a 12-month period; (ii) the
repurchases do not cause the Bank to become "undercapitalized" within the
meaning of the OTS prompt corrective action regulation; and (iii) the Company
provides to the Regional Director of the OTS no later than 10 days prior to
the commencement of a repurchase program written notice containing a full
description of the program to be undertaken and such program is not
disapproved by the Regional Director. See "Regulation--Prompt Corrective
Regulatory Action." In addition, under current OTS policies, repurchases may
be allowed in the first year following Conversion and in amounts greater than
5% in the second and third years following Conversion provided there are valid
and compelling business reasons for such repurchases and the OTS does not
object to such repurchases.
28
<PAGE>
Based upon facts and circumstances following Conversion and subject to
applicable regulatory requirements, the Board of Directors may determine to
repurchase stock in the future. Such facts and circumstances may include but
are not limited to: (i) market and economic factors such as the price at which
the stock is trading in the market, the volume of trading, the attractiveness
of other investment alternatives in terms of the rate of return and risk
involved in the investment, the ability to increase the book value and/or
earnings per share of the remaining outstanding shares, and the opportunity to
improve the Company's return on equity; (ii) the avoidance of dilution to
stockholders by not having to issue additional shares to cover the exercise of
stock options or to fund employee stock benefit plans; and (iii) any other
circumstances in which repurchases would be in the best interests of the
Company and its stockholders. In the event the Company determines to
repurchase stock, such repurchases may be made at market prices which may be
in excess of the Purchase Price in the Conversion.
Any stock repurchases will be subject to the determination of the Board of
Directors that both the Company and the Bank will be capitalized in excess of
all applicable regulatory requirements after any such repurchases and that
such capital will be adequate, taking into account, among other things, the
level of non-performing and other risk assets, the Company's and the Bank's
current and projected results of operations and asset/liability structure, the
economic environment, tax and other considerations. See "The Conversion--
Certain Restrictions on Purchase or Transfer of Shares after Conversion."
Both the Company and the Bank have committed to the OTS that during the one-
year period following the consummation of the Conversion, the Company will not
take any action to further the payment of a return of capital dividend without
prior approval by the OTS.
DIVIDEND POLICY
Upon Conversion, the Board of Directors of the Company will have the
authority to declare dividends on the Common Stock, subject to statutory and
regulatory requirements. In the future, the Board of Directors intends to
consider a policy of paying cash or stock dividends on the Common Stock.
However, no decision has been made with respect to the payment of dividends.
Declarations of dividends by the Board of Directors, if any, will depend upon
a number of factors, including the amount of net proceeds retained by the
Company in the Conversion, investment opportunities available to the Company
or the Bank, capital requirements, regulatory limitations, the Company's and
the Bank's financial condition and results of operations, tax considerations
and general economic conditions. No assurances can be given, however, that any
dividends will be paid or, if commenced, will continue to be paid.
The Bank will not be permitted to pay dividends to the Company on its
capital stock if its stockholders' equity would be reduced below the amount
required for the liquidation account. See "The Conversion--Liquidation
Rights." For information concerning federal regulations which apply to the
Bank in determining the amount of proceeds which may be retained by the
Company and regarding a savings institution's ability to make capital
distributions, including payment of dividends to its holding company, see
"Federal and State Taxation--Federal Taxation--Distributions" and
"Regulation--Federal Savings Institution Regulation--Limitation on Capital
Distributions."
Unlike the Bank, the Company is not subject to OTS regulatory restrictions
on the payment of dividends to its stockholders, although the source of such
dividends will be dependent on the net proceeds retained by the Company and
earnings thereon and may be dependent, in part, upon dividends from the Bank.
The Company is subject, however, to the requirements of Delaware law, which
generally limit dividends to an amount equal to the excess of the net assets
of the Company (the amount by which total assets exceed total liabilities)
over its statutory capital (generally defined as the aggregate par value of
the outstanding shares of the Company's capital stock having a par value plus
the amount of the consideration paid for shares of the Company's capital stock
without par value) or, if there is no such excess, to its net profits for the
current and/or immediately preceding fiscal year.
Additionally, in connection with the Conversion, the Company and the Bank
have committed to the OTS that during the one-year period following the
consummation of the Conversion, the Company will not take any action to
further the payment of a return of capital dividend without prior approval by
the OTS.
29
<PAGE>
MARKET FOR THE COMMON STOCK
The Company and Bank have not previously issued capital stock and,
consequently, there is no established market for the Common Stock. The Company
has received conditional approval to have its Common Stock listed on the AMEX
under the symbol "FLF" upon completion of the Conversion. Such approval is
subject to various conditions, including completion of the Conversion and the
satisfaction of applicable listing criteria. There can be no assurance that
the Common Stock will be able to meet the applicable listing criteria in order
to maintain its listing on the AMEX or that an active and liquid trading
market will develop or, if developed, will be maintained. A public market
having the desirable characteristics of depth, liquidity and orderliness,
however, depends upon the presence in the marketplace of both willing buyers
and sellers of Common Stock at any given time, which is not within the control
of the Company. No assurance can be given that an investor will be able to
resell the Common Stock at or above the Purchase Price of the Common Stock
after the Conversion.
30
<PAGE>
CAPITALIZATION
The following table presents the unaudited historical consolidated
capitalization of the Bank at September 30, 1997, and the pro forma
consolidated capitalization of the Company after giving effect to the
Conversion, including the issuance of shares to the Foundation, based upon the
sale of the number of shares indicated in the table and the other assumptions
set forth under "Pro Forma Data."
<TABLE>
<CAPTION>
COMPANY PRO FORMA BASED UPON SALE AT $20.00 PER SHARE
----------------------------------------------------------------
9,224,438
SHARES
5,928,750 6,975,000 8,021,250 (15% ABOVE
SHARES SHARES SHARES MAXIMUM OF
(MINIMUM OF (MIDPOINT OF (MAXIMUM ESTIMATED
BANK ESTIMATED ESTIMATED OF ESTIMATED PRICE
HISTORICAL PRICE RANGE) PRICE RANGE) PRICE RANGE) RANGE)(1)
---------- ------------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Deposit accounts(2)..... $923,669 $ 923,669 $ 923,669 $ 923,669 $ 923,669
FHLB advances........... 10,565 10,565 10,565 10,565 10,565
-------- ------------- ------------- ------------- -------------
Total deposit accounts
and FHLB advances...... $934,234 $ 934,234 $ 934,234 $ 934,234 $ 934,234
======== ============= ============= ============= =============
Stockholders' equity:
Preferred Stock, $.01
par value, 10,000,000
shares authorized;
none to be issued..... $ -- $ -- $ -- $ -- $ --
Common Stock, $.01 par
value, 60,000,000
shares authorized;
shares to be issued as
reflected............. -- 63 74 85 98
Additional paid-in
capital(3)............ -- 115,461 136,112 156,763 180,511
Retained earnings(4)... 80,562 80,562 80,562 80,562 80,562
Expense of contribution
to Foundation.......... -- 7,115 8,370 9,626 11,069
Tax-effected
contribution to the
Foundation(5).......... -- (4,554) (5,357) (6,161) (7,084)
Less:
Common Stock acquired
by the ESOP(6)......... -- (10,055) (11,829) (13,604) (15,645)
Common Stock acquired
by the Stock-Based
Incentive Plan(7)..... -- (5,027) (5,915) (6,802) (7,822)
-------- ------------- ------------- ------------- -------------
Total stockholders'
equity................. $ 80,562 $ 183,565 $ 202,017 $ 220,469 $ 241,689
======== ============= ============= ============= =============
</TABLE>
- --------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15%
as a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription Offering.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
Common Stock in the Conversion. Such withdrawals would reduce pro forma
deposits by the amount of such withdrawals.
(3) No effect has been given to the issuance of additional shares of Common
Stock to the Foundation at a value of $20.00 per share or to the issuance
of additional shares pursuant to the Stock-Based Incentive Plan intended
to be adopted by the Company and presented for approval of stockholders at
a meeting of stockholders to take place no sooner than six months
following the Conversion. If approved by the stockholders of the Company,
an amount equal to 10% of the shares of Common Stock issued in the
Conversion, including shares issued to the Foundation, will be reserved
for issuance upon the exercise of options to be granted under the Stock-
Based Incentive Plan. See "Risk Factors--Possible Dilutive Effect of
Stock-Based Incentive Plan," Footnote 3 to the tables under "Pro Forma
Data" and "Management of the Bank--Benefits--Stock-Based Incentive Plan."
(4) The retained earnings of the Bank will be substantially restricted after
the Conversion. See "The Conversion--Liquidation Rights" and "Regulation--
Federal Savings Institution Regulation--Limitation on Capital
Distributions."
(5) Represents the value of the contribution of Common Stock to the Foundation
at $20.00 per share reduced by the associated tax benefit of $2.6 million,
$3.0 million, $3.5 million and $4.0 million at the minimum, midpoint,
maximum and 15% above the maximum of the range, respectively. The
realization of the federal tax benefit is limited annually to 10% of the
Company's annual taxable income, subject to the ability of the Company to
carry forward any unused portion of the deduction for five years following
the year in which the contribution is made. For state income tax purposes,
the Company does not anticipate receiving a full tax benefit for the
charitable contribution in Nebraska, and will receive no tax benefit in
Iowa and Kansas.
(6) Assumes that 8% of the shares issued in connection with the Conversion,
including shares issued to the Foundation, will be purchased by the ESOP
and that the funds used to acquire such shares will be borrowed from the
Company. The Common Stock acquired by the ESOP is reflected as a reduction
of stockholders' equity. See "Management of the Bank--Benefits--Employee
Stock Ownership Plan."
(7) Assumes that no sooner than six months following the Conversion, an amount
equal to 4% of the shares of Common Stock sold in the Conversion and
issued to the Foundation, is purchased by the Stock-Based Incentive Plan
through open market purchases at the offering price of $20.00 per share.
The Common Stock purchased by the Stock-Based Incentive Plan is reflected
as a reduction of stockholders' equity. Implementation of the Stock-Based
Incentive Plan is subject to the approval of the Company's stockholders at
a meeting following the Conversion. See "Risk Factors--Possible Dilutive
Effect of Stock-Based Incentive Plan," Footnote 3 to the tables under "Pro
Forma Data" and "Management of the Bank--Benefits--Stock-Based Incentive
Plan."
31
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the Common Stock cannot be
determined until the Conversion is completed. However, net proceeds are
currently estimated to be between $115.5 million and $156.8 million (or $180.6
million in the event the Estimated Price Range is increased by 15%) based upon
the following assumptions: (i) 100% of the shares of Common Stock will be sold
in the Subscription Offering to Eligible Account Holders, the ESOP and
Supplemental Eligible Account Holders; (ii) directors, officers and employees
of the Bank and members of their immediate families (collectively, "Insiders")
will purchase an aggregate of $3.2 million of Common Stock and the ESOP will
purchase 8% of the Common Stock issued in connection with the Conversion,
including shares issued to the Foundation; (iii) Sandler O'Neill will receive
a fee equal to 1.375% of the aggregate Purchase Price of shares sold in the
Subscription and Community Offerings, excluding shares purchased by directors,
officers, employees and any immediate family member thereof and the ESOP for
which Sandler O'Neill will not receive a fee; and (iv) Conversion expenses,
excluding the marketing fees paid to Sandler O'Neill, will be approximately
$1.6 million. Actual Conversion expenses may vary from those estimated.
Pro forma consolidated net income of the Company for the three months ended
September 30, 1997, and for the year ended June 30, 1997, have been calculated
as if the Common Stock had been sold at the beginning of the respective
periods and the net proceeds had been invested at 5.31% (the one year U.S.
Treasury bill rate as of June 30, 1997). The one-year U.S. Treasury bill rate,
rather than an arithmetic average of the average yield on interest-earning
assets and average rate paid on deposits, has been used to estimate income on
net proceeds because it is believed that the one-year U.S. Treasury bill rate
is a more accurate estimate of the rate that would be obtained on an
investment of net proceeds from the Offering. The tables below do not reflect
the effect of withdrawals from deposit accounts for the purchase of Common
Stock or the effect of any possible use of the net Conversion proceeds. The
pro forma after-tax yields for the Company and the Bank are assumed to be
3.40% for the three months ended September 30, 1997, based on an effective tax
rate of 36.0%, and 3.40% for the year ended June 30, 1997, based on an
effective tax rate of 36.0%. Historical and pro forma net earnings per share
amounts have been calculated by dividing historical and pro forma amounts by
the indicated number of shares of Common Stock issued, as adjusted to give
effect to the purchase of shares by the ESOP and the issuance of shares to the
Foundation. Historical and pro forma stockholders' equity per share amounts
have been calculated by dividing historical and pro forma amounts by the
indicated number of shares of Common Stock issued.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma consolidated stockholders' equity represents
the difference between the stated amount of assets and liabilities of the
Company. The pro forma stockholders' equity is not intended to represent the
fair market value of the Common Stock and may be stated in an amount greater
than amounts that would be available for distribution to stockholders in the
event of liquidation.
The following tables summarize historical data of the Bank and pro forma
data of the Company on a consolidated basis at or for the three months ended
September 30, 1997, and at or for the year ended June 30, 1997, based on the
assumptions set forth above and in the table and should not be used as a basis
for projections of market value of the Common Stock following the Conversion.
The tables below give effect to the Stock-Based Incentive Plan, which is
expected to be adopted by the Company following the Conversion and presented
to stockholders for approval at a meeting of stockholders. See Footnote 3 to
the tables and "Management of the Bank--Benefits--Stock-Based Incentive Plan."
No effect has been given in the tables to the possible issuance of additional
shares reserved for future issuance of stock options pursuant to the Stock-
Based Incentive Plan to be adopted by the Board of Directors of the Company
and presented to stockholders for approval at a meeting of stockholders, nor
does book value give any effect to the liquidation account to be established
for the benefit of Eligible Account Holders and Supplemental Eligible Account
Holders or, in the event of liquidation of the Bank, to the tax effect of the
bad debt reserve and other factors. See Footnote 4 to the tables below, "The
Conversion--Liquidation Rights" and "Management of the Bank--Benefits--Stock-
Based Incentive Plan." THE FOLLOWING TABLE ASSUMES THAT THE FOUNDATION IS
APPROVED AS PART OF THE CONVERSION AND THEREFORE GIVES EFFECT TO THE ISSUANCE
OF AUTHORIZED BUT UNISSUED SHARES OF THE COMPANY'S COMMON STOCK TO THE
FOUNDATION CONCURRENTLY WITH THE COMPLETION OF THE CONVERSION. THE VALUATION
RANGE, AS SET FORTH HEREIN AND IN THE TABLE BELOW, TAKES INTO ACCOUNT THE
DILUTIVE IMPACT OF THE ISSUANCE OF SHARES TO THE FOUNDATION.
32
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
------------------------------------------------------
9,224,438
5,928,750 6,975,000 8,021,250 SHARES SOLD
SHARES SOLD SHARES SOLD SHARES SOLD AT $20.00
AT $20.00 AT $20.00 AT $20.00 PER SHARE
PER SHARE PER SHARE PER SHARE (15% ABOVE
(MINIMUM (MIDPOINT (MAXIMUM MAXIMUM
OF ESTIMATED OF ESTIMATED OF ESTIMATED OF ESTIMATED
PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(6)
------------ ------------ ------------ ---------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds.......... $118,575 $139,500 $160,425 $184,489
Plus: Shares acquired by
the Foundation
(equal to 6.00% of
stock sold in
conversion)....... 7,115 8,370 9,626 11,069
-------- -------- -------- --------
Pro Forma Market
Capitalization......... $125,690 $147,870 $170,051 $195,558
======== ======== ======== ========
Gross proceeds.......... $118,575 $139,500 $160,425 $184,489
Less: Offering expenses
and commissions... (3,051) (3,314) (3,577) (3,880)
-------- -------- -------- --------
Estimated net proceeds
from Conversion........ 115,524 136,186 156,848 180,609
Less: Shares purchased
by ESOP in open
market at $20.00.. (10,055) (11,829) (13,604) (15,645)
Less: Shares purchased
by Stock-Based
Incentive Plan.... (5,027) (5,915) (6,802) (7,822)
-------- -------- -------- --------
Total estimated net
proceeds, as
adjusted.............. $100,442 $118,442 $136,442 $157,142
======== ======== ======== ========
Net income(1):
Historical............. $ 1,643 $ 1,643 $ 1,643 $ 1,643
Pro forma income on net
proceeds, as adjusted
to eliminate proceeds
from Foundation
stock................. 853 1,006 1,159 1,335
Pro forma ESOP
adjustment(2)......... (134) (158) (181) (209)
Pro forma Stock-Based
Incentive Plan
adjustment(3)......... (161) (189) (218) (250)
-------- -------- -------- --------
Pro forma net income... $ 2,201 $ 2,302 $ 2,403 $ 2,519
======== ======== ======== ========
Per share net income(1):
Historical............. $ 0.28 $ 0.24 $ 0.21 $ 0.18
Pro forma income on net
proceeds, as adjusted
to eliminate proceeds
from Foundation
stock................. $ 0.15 $ 0.15 $ 0.15 $ 0.15
Pro forma ESOP
adjustment(2)......... (0.02) (0.02) (0.02) (0.02)
Pro forma Stock-Based
Incentive Plan
adjustment(3)......... (0.03) (0.03) (0.03) (0.03)
-------- -------- -------- --------
Pro forma net income
per share............. $ 0.38 $ 0.34 $ 0.31 $ 0.28
======== ======== ======== ========
Stockholders' equity:
Historical............. $ 80,562 $ 80,562 $ 80,562 $ 80,562
Estimated net proceeds
from Conversion....... 115,524 136,186 156,848 180,609
Plus:Tax Benefit of
Foundation............ 2,561 3,013 3,465 3,985
Less: Common Stock
acquired by
ESOP(2).......... (10,055) (11,829) (13,604) (15,645)
Less: Common Stock
acquired by
Stock-Based
Incentive
Plan(3).......... (5,027) (5,915) (6,802) (7,822)
-------- -------- -------- --------
Pro forma stockholders'
equity(3)(4)(5)....... $183,565 $202,017 $220,469 $241,689
======== ======== ======== ========
Stockholders' equity per
share:
Historical............. $ 12.82 $ 10.89 $ 9.47 $ 8.24
Estimated net proceeds
from Conversion....... 18.38 18.42 18.45 18.47
Plus: Tax Benefit of
Foundation....... 0.41 0.41 0.41 0.41
Less: Common Stock
acquired by
ESOP(2).......... (1.60) (1.60) (1.60) (1.60)
Less: Common Stock
acquired by
Stock-Based
Incentive
Plan(3).......... (0.80) (0.80) (0.80) (0.80)
-------- -------- -------- --------
Pro forma stockholders'
equity per
share(3)(4)(5)........ $ 29.21 $ 27.32 $ 25.93 $ 24.72
======== ======== ======== ========
Offering price as a
percent of pro forma
stockholders' equity
per share.............. 68.47% 73.20% 77.13% 80.91%
Offering price to pro
forma net income per
share.................. 13.16 14.80 16.30 17.89
</TABLE>
(see footnotes on next page)
33
<PAGE>
- --------
(1) Does not give effect to the non-recurring expense that will be recognized
in the fourth quarter of fiscal 1998 if the establishment of the
Foundation is approved. In that event, the Company will recognize an
after-tax expense for the amount of the contribution to the Foundation
which is expected to be $4.5 million, $5.4 million, $6.2 million, and $7.1
million at the minimum, midpoint, maximum, and maximum as adjusted, of the
Estimated Price Range, respectively.
(2) It is assumed that 8% of the shares of Common Stock issued in the
Conversion, including shares issued to the Foundation, will be purchased
by the ESOP. For purposes of this table, the funds used to acquire such
shares are assumed to have been borrowed by the ESOP from the Company. The
amount to be borrowed is reflected as a reduction of stockholders' equity.
The Bank intends to make annual contributions to the ESOP in an amount at
least equal to the principal and interest requirement of the debt. The
Bank's total annual payment of the ESOP debt is based upon 12 equal annual
installments of principal, with an assumed interest rate at 8.5%. The pro
forma net earnings assume: (i) that the Bank's contribution to the ESOP is
equivalent to the debt service requirement for the three months ended
September 30, 1997, and was made at the end of the period; (ii) that
41,897, 49,290, 56,684 and 65,186 shares at the minimum, midpoint, maximum
and 15% above the maximum of the range, respectively, were committed to be
released during the three months ended September 30, 1997, at an average
fair value of $20.00 per share in accordance with Statement of Position
("SOP") 93-6; and (iii) only the ESOP shares committed to be released were
considered outstanding for purposes of the net earnings per share
calculations. See "Management of the Bank--Benefits--Employee Stock
Ownership Plan."
(3) Gives effect to the Stock-Based Incentive Plan expected to be adopted by
the Company following the Conversion and presented for approval at a
meeting of stockholders. The Stock-Based Incentive Plan intends to acquire
an amount of Common Stock equal to 4% of the shares of Common Stock sold
in the Conversion and issued to the Foundation, or 251,379, 295,740,
340,101 and 391,116 shares of Common Stock at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Price Range,
respectively, either through open market purchases, if permissible, or
from authorized but unissued shares of Common Stock or treasury stock of
the Company, if any. Funds used by the Stock-Based Incentive Plan to
purchase the shares will be contributed to the Stock-Based Incentive Plan
by the Bank. In calculating the pro forma effect of the Stock-Based
Incentive Plan, it is assumed that the shares were acquired by the Stock-
Based Incentive Plan at the beginning of the period presented in open
market purchases at the Purchase Price and that 5% of the amount
contributed was an amortized expense during such period. The issuance of
authorized but unissued shares of the Common Stock to the Stock-Based
Incentive Plan instead of open market purchases would dilute the voting
interests of existing stockholders by approximately 3.8% and pro forma net
earnings per share would be $0.37, $0.33, $0.30, and $0.28, at the
minimum, midpoint, maximum and 15% above the maximum of the range,
respectively, and pro forma shareholders' equity per share would be
$28.86, $27.04, $25.70 and $24.54 at the minimum, midpoint, maximum, and
15% above the maximum of the range, respectively. There can be no
assurance that stockholder approval of the Stock-Based Incentive Plan will
be obtained, or that the actual purchase price of the shares will be equal
to the Purchase Price. See "Management of the Bank--Benefits--Stock-Based
Incentive Plan."
(4) No effect has been given to the issuance of additional shares of Common
Stock for stock option awards pursuant to the Stock-Based Incentive Plan
expected to be adopted by the Company following the Conversion. The
Company expects to present the Stock-Based Incentive Plan for approval at
a meeting of stockholders. An amount equal to 10% of the Common Stock
issued in the Conversion, including shares issued to the Foundation, or
628,447, 739,350, 850,252 and 977,790 shares at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Price Range,
respectively, will be reserved for future issuance upon the exercise of
options to be granted under the Stock-Based Incentive Plan. The issuance
of Common Stock pursuant to the exercise of options under the Stock-Based
Incentive Plan will result in the dilution of existing stockholders'
interests. Assuming all options were exercised at the end of the period at
an exercise price of $20.00 per share, the pro forma net earnings per
share would be $0.36, $0.32, $0.30, and $0.27, respectively, and the pro
forma stockholders' equity per share would be $28.37, $26.66, $25.39, and
$24.29, respectively. See "Management of the Bank--Benefits--Stock-Based
Incentive Plan."
(5) The retained earnings of the Bank will continue to be substantially
restricted after the Conversion. See "Dividend Policy," "The Conversion--
Liquidation Rights" and "Regulation--Federal Savings Institution
Regulation--Limitation on Capital Distributions."
(6) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15%
as a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription Offering.
34
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
------------------------------------------------------
9,224,438
5,928,750 6,975,000 8,021,250 SHARES SOLD
SHARES SOLD SHARES SOLD SHARES SOLD AT $20.00
AT $20.00 AT $20.00 AT $20.00 PER SHARE
PER SHARE PER SHARE PER SHARE (15% ABOVE
(MINIMUM (MIDPOINT (MAXIMUM MAXIMUM
OF ESTIMATED OF ESTIMATED OF ESTIMATED OF ESTIMATED
PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(6)
------------ ------------ ------------ ---------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds.......... $118,575 $139,500 $160,425 $184,489
Plus: Shares acquired by
the Foundation
(equal to 6.00% of
stock sold in
conversion)....... 7,115 8,370 9,626 11,069
-------- -------- -------- --------
Pro Forma Market
Capitalization......... $125,690 $147,870 $170,051 $195,558
======== ======== ======== ========
Gross proceeds.......... $118,575 $139,500 $160,425 $184,489
Less:Offering expenses
and commissions........ (3,051) (3,314) (3,577) (3,880)
-------- -------- -------- --------
Estimated net proceeds
from Conversion........ 115,524 136,186 156,848 180,609
Less: Shares purchased
by ESOP in open
market at $20.00.. (10,055) (11,829) (13,604) (15,645)
Less: Shares purchased
by Stock-Based
Incentive Plan.... (5,027) (5,915) (6,802) (7,822)
-------- -------- -------- --------
Total estimated net
proceeds, as
adjusted.............. $100,442 $118,442 $136,442 $157,142
======== ======== ======== ========
Net income(1):
Historical............. $ 4,340 $ 4,340 $ 4,340 $ 4,340
Pro forma income on net
proceeds, as adjusted
to eliminate proceeds
from Foundation
stock................. 3,413 4,025 4,637 5,340
Pro forma ESOP
adjustment(2)......... (536) (631) (725) (834)
Pro forma Stock-Based
Incentive Plan
adjustment(3)......... (643) (757) (871) (1,001)
-------- -------- -------- --------
Pro forma net income.. $ 6,574 $ 6,977 $ 7,381 $ 7,845
======== ======== ======== ========
Per share net income(1):
Historical............. $ 0.74 $ 0.63 $ 0.55 $ 0.48
Pro forma income on net
proceeds, as adjusted
to eliminate proceeds
from Foundation
stock................. $ 0.59 $ 0.59 $ 0.59 $ 0.59
Pro forma ESOP
adjustment(2)......... (0.09) (0.09) (0.09) (0.09)
Pro forma Stock-Based
Incentive Plan
adjustment(3)......... (0.11) (0.11) (0.11) (0.11)
-------- -------- -------- --------
Pro forma net income
per share............ $ 1.13 $ 1.02 $ 0.94 $ 0.87
======== ======== ======== ========
Stockholders' equity:
Historical............. $ 78,912 $ 78,912 $ 78,912 $ 78,912
Estimated net proceeds
from Conversion....... 115,524 136,186 156,848 180,609
Plus:Tax Benefit of
Foundation............ 2,561 3,013 3,465 3,985
Less:Common Stock
acquired by ESOP(2)... (10,055) (11,829) (13,604) (15,645)
Less: Common Stock
acquired by
Stock-Based
Incentive
Plan(3).......... (5,027) (5,915) (6,802) (7,822)
-------- -------- -------- --------
Pro forma
stockholders'
equity(3)(4)(5)...... $181,915 $200,367 $218,819 $240,039
======== ======== ======== ========
Stockholders' equity per
share:
Historical............. $ 12.56 $ 10.67 $ 9.28 $ 8.07
Estimated net proceeds
from Conversion....... 18.38 18.42 18.45 18.47
Plus:Tax Benefit of
Foundation............ 0.41 0.41 0.41 0.41
Less: Common Stock
acquired by
ESOP(2).......... (1.60) (1.60) (1.60) (1.60)
Less: Common Stock
acquired by
Stock-Based
Incentive
Plan(3).......... (0.80) (0.80) (0.80) (0.80)
-------- -------- -------- --------
Pro forma
stockholders' equity
per share(3)(4)(5)... $ 28.95 $ 27.10 $ 25.74 $ 24.55
======== ======== ======== ========
Offering price as a
percent of pro forma
stockholders' equity
per share.............. 69.09% 73.80% 77.71% 81.47%
Offering price to pro
forma net income per
share.................. 17.72 19.64 21.35 23.10
</TABLE>
(see footnotes on next page)
35
<PAGE>
- --------
(1) Does not give effect to the non-recurring expense that will be recognized
in the fourth quarter of fiscal 1998 if the establishment of the
Foundation is approved. In that event, the Company will recognize an
after-tax expense for the amount of the contribution to the Foundation
which is expected to be $4.5 million, $5.4 million, $6.2 million, and $7.1
million at the minimum, midpoint, maximum, and maximum as adjusted, of the
Estimated Price Range, respectively.
(2) It is assumed that 8% of the shares of Common Stock issued in the
Conversion, including shares issued to the Foundation, will be purchased
by the ESOP. For purposes of this table, the funds used to acquire such
shares are assumed to have been borrowed by the ESOP from the Company. The
amount to be borrowed is reflected as a reduction of stockholders' equity.
The Bank intends to make annual contributions to the ESOP in an amount at
least equal to the principal and interest requirement of the debt. The
Bank's total annual payment of the ESOP debt is based upon 12 equal annual
installments of principal, with an assumed interest rate at 8.5%. The pro
forma net earnings assume: (i) that the Bank's contribution to the ESOP is
equivalent to the debt service requirement for the year ended June 30,
1997, and was made at the end of the period; (ii) that 41,897, 49,290,
56,684 and 65,186 shares at the minimum, midpoint, maximum and 15% above
the maximum of the range, respectively, were committed to be released
during the year ended June 30, 1997, at an average fair value of $20.00
per share in accordance with SOP 93-6; and (iii) only the ESOP shares
committed to be released were considered outstanding for purposes of the
net earnings per share calculations. See "Management of the Bank--
Benefits--Employee Stock Ownership Plan."
(3) Gives effect to the Stock-Based Incentive Plan expected to be adopted by
the Company following the Conversion and presented for approval at a
meeting of stockholders. The Stock-Based Incentive Plan intends to acquire
an amount of Common Stock equal to 4% of the shares of Common Stock sold
in the Conversion and issued to the Foundation, or 251,379, 295,740,
340,101 and 391,116 shares of Common Stock at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Price Range,
respectively, either through open market purchases, if permissible, or
from authorized but unissued shares of Common Stock or treasury stock of
the Company, if any. Funds used by the Stock-Based Incentive Plan to
purchase the shares will be contributed to the Stock-Based Incentive Plan
by the Bank. In calculating the pro forma effect of the Stock-Based
Incentive Plan, it is assumed that the shares were acquired by the Stock-
Based Incentive Plan at the beginning of the period presented in open
market purchases at the Purchase Price and that 5% of the amount
contributed was an amortized expense during such period. The issuance of
authorized but unissued shares of the Common Stock to the Stock-Based
Incentive Plan instead of open market purchases would dilute the voting
interests of existing stockholders by approximately 3.8% and pro forma net
earnings per share would be $1.11, $1.00, $0.93, and $0.86 at the minimum,
midpoint, maximum, and 15% above the maximum of the range, respectively,
and pro forma stockholders' equity per share would be $28.60, $26.83,
$25.52 and $24.37 at the minimum, midpoint, maximum, and 15% above the
maximum of the range, respectively. There can be no assurance that
stockholder approval of the Stock-Based Incentive Plan will be obtained,
or that the actual purchase price of the shares will be equal to the
Purchase Price. See "Management of the Bank--Benefits--Stock-Based
Incentive Plan."
(4) No effect has been given to the issuance of additional shares of Common
Stock for stock option awards pursuant to the Stock-Based Incentive Plan
expected to be adopted by the Company following the Conversion. The
Company expects to present the Stock-Based Incentive Plan for approval at
a meeting of stockholders. An amount equal to 10% of the Common Stock
issued in the Conversion, including shares issued to the Foundation, or
628,447, 739,350, 850,252 and 977,790 shares at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Price Range,
respectively, will be reserved for future issuance upon the exercise of
options to be granted under the Stock-Based Incentive Plan. The issuance
of Common Stock pursuant to the exercise of options under the Stock-Based
Incentive Plan will result in the dilution of existing stockholders'
interests. Assuming all options were exercised at the end of the period at
an exercise price of $20.00 per share, the pro forma net earnings per
share would be $1.08, $0.99, $0.92, and $0.85, respectively, and the pro
forma stockholders' equity per share would be $28.13, $26.46, $25.21, and
$24.14, respectively. See "Management of the Bank--Benefits--Stock-Based
Incentive Plan."
(5) The retained earnings of the Bank will continue to be substantially
restricted after the Conversion. See "Dividend Policy," "The Conversion--
Liquidation Rights" and "Regulation--Federal Savings Institution
Regulation--Limitation on Capital Distributions."
(6) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15%
as a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription Offering.
36
<PAGE>
COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH NO FOUNDATION
In the event that the Foundation was not established as part of the
Conversion, Keller has estimated that the pro forma market capitalization of
the Bank would be approximately $158.4 million, at the midpoint, which is
approximately $10.5 million greater than the pro forma market capitalization
of the Bank if the Foundation is approved by members of the Bank and would
result in approximately an $18.9 million increase, or 13.5%, in the amount of
Common Stock offered for sale in the Conversion. The pro forma price to book
ratio and pro forma price to earnings ratio would be approximately the same
under both the current appraisal and the estimate of the value of the Company
without the Foundation. Further, assuming the midpoint of the Estimated Price
Range, pro forma stockholders' equity per share and pro forma earnings per
share would be substantially the same with the Foundation as without the
Foundation. In this regard, pro forma stockholders' equity per share and pro
forma net income per share would be $27.32 and $0.33, respectively, at the
midpoint of the estimate, assuming no Foundation, and $27.32 and $0.34,
respectively, with the Foundation. The pro forma price to book ratio and the
pro forma price to earnings ratio are 73.20% and 15.05x, respectively, at the
midpoint of the estimate, assuming no Foundation and are 73.20% and 14.80x,
respectively, with the Foundation. This estimate by Keller was prepared at the
request of the OTS and is solely for purposes of providing members with
sufficient information with which to make an informed decision on the
Foundation. There is no assurance that in the event the Foundation is not
approved at the Special Meeting the appraisal prepared at that time would
conclude that the pro forma market value of the Company would be the same as
that estimated herein. Any appraisal prepared at that time would be based on
the facts and circumstances existing at that time, including, among other
things, market and economic conditions.
For comparative purposes only, set forth below are certain pricing ratios
and financial data and ratios, at the minimum, midpoint, maximum and maximum,
as adjusted, of the Estimated Price Range, assuming the Conversion was
completed at September 30, 1997.
<TABLE>
<CAPTION>
AT THE MAXIMUM,
AT THE MINIMUM AT THE MIDPOINT AT THE MAXIMUM AS ADJUSTED
---------------------- ---------------------- ---------------------- ----------------------
WITH NO WITH NO WITH NO WITH NO
FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Estimated offering
amount.................. $ 118,575 $ 134,640 $ 139,500 $ 158,400 $ 160,525 $ 182,160 $ 184,489 $ 209,484
Pro forma market
capitalization.......... 125,690 134,640 147,870 158,400 170,051 182,160 195,558 209,484
Total assets............ 1,136,581 1,148,800 1,155,033 1,169,408 1,173,485 1,190,016 1,194,705 1,213,716
Total liabilities....... 953,016 953,016 953,016 953,016 953,016 953,016 953,016 953,016
Pro forma stockholders'
equity.................. 183,565 195,784 202,017 216,392 220,469 237,000 241,689 260,700
Pro forma consolidated
net earnings............ 2,201 2,306 2,302 2,425 2,403 2,545 2,519 2,682
Pro forma stockholders'
equity per share........ 29.21 29.08 27.32 27.32 25.93 26.02 24.72 24.89
Pro forma consolidated
net earnings per share.. 0.38 0.37 0.34 0.33 0.31 0.30 0.28 0.28
Pro Forma Pricing
Ratios:
Offering Price as a
percentage of pro
forma stockholders'
equity per share...... 68.47% 68.77% 73.20% 73.20% 77.13% 76.86% 80.91% 80.35%
Offering price to pro
forma net earnings per
share................. 13.16x 13.45x 14.80x 15.05x 16.30x 16.49x 17.89x 18.00x
Offering price to
assets................ 11.06% 11.72% 12.80% 13.55% 14.49% 15.31% 16.37% 17.26%
Pro Forma Financial
Ratios:
Return on Assets...... 0.77% 0.80% 0.80% 0.83% 0.82% 0.86% 0.84% 0.88%
Return on
stockholders' equity.. 4.80% 4.71% 4.56% 4.48% 4.36% 4.29% 4.17% 4.11%
Stockholders' equity
to assets............. 16.15% 17.04% 17.49% 18.50% 18.79% 19.92% 20.23% 21.48%
</TABLE>
37
<PAGE>
FIRST FEDERAL LINCOLN BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
The following Consolidated Statements of Income of the Bank and subsidiaries
for each of the years in the three fiscal years ended June 30, 1997, have been
audited by KPMG Peat Marwick LLP, independent certified public accountants,
whose reports thereon are included elsewhere in this Prospectus. With respect
to the information for the three months ended September 30, 1997 and 1996,
which is unaudited, in the opinion of management, all adjustments necessary
for a fair presentation of such interim periods have been included and are of
a normal recurring nature. Results for the three months ended September 30,
1997, are not necessarily indicative of the results that may be expected for
the fiscal year ending June 30, 1998. These Consolidated Statements of Income
should be read in conjunction with the Consolidated Financial Statements and
notes thereto and Management's Discussion and Analysis of Financial Condition
and Results of Operations included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED FOR THE YEAR
SEPTEMBER 30, ENDED JUNE 30,
--------------- -----------------------
1997 1996 1997 1996 1995
------- ------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income:
Loans............................... $17,159 $15,448 $63,942 $56,585 $51,964
Investment securities............... 1,162 1,861 6,899 8,220 10,606
Mortgage-backed securities.......... 1,382 1,570 5,982 5,967 5,784
Other interest-earning assets....... 410 649 1,523 4,177 1,010
------- ------- ------- ------- -------
Total interest income............. 20,113 19,528 78,346 74,949 69,364
------- ------- ------- ------- -------
Interest expense:
Deposit accounts.................... 11,791 11,606 46,546 47,165 43,709
FHLB advances....................... 195 235 652 1,041 896
------- ------- ------- ------- -------
Total interest expense............ 11,986 11,841 47,198 48,206 44,605
------- ------- ------- ------- -------
Net interest income before provision
for loan losses...................... 8,127 7,687 31,148 26,743 24,759
Provision for loan losses............. 713 96 450 598 243
------- ------- ------- ------- -------
Net interest income after provision
for loan losses...................... 7,414 7,591 30,698 26,145 24,516
------- ------- ------- ------- -------
Noninterest income:
Fees and service charges............ 405 525 1,690 1,535 1,181
Income from real estate operations,
net................................ 121 136 547 612 706
Other income........................ 210 185 952 358 710
Net gain on sales of:
Trading securities.................. -- -- -- 5 2
Investment and mortgage-backed
securities, available for sale..... -- 1 1 5 --
Loans receivable held for sale...... 144 74 389 359 92
Loans receivable held in portfolio.. -- -- -- 101 --
Real estate owned and held for
investment......................... 11 -- 7 926 348
------- ------- ------- ------- -------
Total noninterest income.......... 891 921 3,586 3,901 3,039
------- ------- ------- ------- -------
Noninterest expense:
Salaries and employee benefits...... 3,121 2,758 11,463 11,106 9,878
Net occupancy expense............... 1,058 985 4,018 4,073 4,443
Federal insurance premiums.......... 149 6,269 6,989 2,187 2,174
Data processing..................... 303 292 1,154 1,032 1,549
Advertising......................... 151 98 700 732 561
Other expense....................... 925 721 2,925 3,006 2,247
------- ------- ------- ------- -------
Total noninterest expense......... 5,707 11,123 27,249 22,136 20,852
------- ------- ------- ------- -------
Income (loss) before income taxes..... 2,598 (2,611) 7,035 7,910 6,703
Income tax expense (benefit).......... 955 (905) 2,695 2,535 2,644
------- ------- ------- ------- -------
Net income (loss)..................... $ 1,643 $(1,706) $ 4,340 $ 5,375 $ 4,059
======= ======= ======= ======= =======
</TABLE>
See accompanying notes to Consolidated Financial Statements.
38
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company has only recently been formed and, accordingly, has no results
of operations. The Bank's results of operations are dependent primarily on net
interest income, which is the difference between the income earned on its loan
and investment portfolios and its cost of funds, consisting of the interest
paid on deposits and borrowings. Results of operation are also affected by the
Bank's provision for loan losses, loan sale activities and loan servicing. The
Bank's noninterest expense principally consists of compensation and employee
benefits, office occupancy and equipment expense, federal deposit insurance
premiums, data processing, advertising and business promotion and other
expenses. Results of operations are also significantly affected by general
economic and competitive conditions, particularly changes in interest rates,
government policies and actions of regulatory authorities. Future changes in
applicable law, regulations or government policies may materially impact the
Bank.
MANAGEMENT STRATEGY
The Bank has historically operated as a traditional savings institution
providing single-family residential mortgage loans and a variety of retail
deposit products and services to consumers throughout the Bank's market area.
Since its organization in 1907, and particularly in recent decades, the Bank
has enjoyed a relatively steady pattern of asset growth. Through a series of
acquisitions of savings associations and the establishment of additional
branch offices between 1971 and 1995, the Bank expanded its operations from
the Lincoln and Omaha area to a large region encompassing Nebraska, southwest
Iowa and northern Kansas. Three of those acquisitions received financial
assistance from the FSLIC and three of the acquisitions resulted in the
creation of supervisory goodwill as an asset of the Bank. Supervisory goodwill
("Supervisory Goodwill") was an intangible asset that resulted from the
application of the purchase method of accounting to acquisitions of failing
thrift institutions that were acquired with the encouragement of the Federal
Home Loan Bank Board. Supervisory Goodwill is the subject of litigation by the
Bank against the United States government in the United States Court of
Federal Claims. See "--Impact of Goodwill Litigation." The Bank is one of the
most well-recognized financial institutions in its market area. Its extensive
retail office network throughout its region offers customers the convenience
of visiting an office near where they live or work. The Bank's strategy
includes continuing to develop its reputation for service, competitive
products, innovations and a small "hometown" perception that has earned the
loyalty of its customers throughout the region. The Bank will also seek to
enhance its leadership position and involvement in the communities it serves
through the establishment of a charitable foundation. See "The Conversion--
Establishment of the Charitable Foundation."
As a result of the enactment of the Financial Institutions Reform, Recovery
and Enforcement Act of 1989 ("FIRREA"), new capital requirements were imposed
on the thrift industry that mandated certain levels of "tangible capital,"
"core capital," and "risk-based capital," and defined those terms so as to
exclude, following a five-year transition period, intangible assets, such as
goodwill, from the calculation of the various capital requirements. The Bank
continued to exceed all capital requirements following FIRREA but in response
to the more stringent capital requirements adopted by the OTS as a result of
FIRREA and the mandatory phase-out of Supervisory Goodwill as an asset for
purposes of calculating capital, the Bank adopted a strategic policy to reduce
deposits, consolidate offices, centralize operations, and reduce noninterest
expenses. As a result of these policies, the Bank's ratios of tangible capital
to tangible assets, core capital to tangible assets and risk-based capital to
risk-weighted assets increased from 2.9% to 7.18%, 4.4% to 7.18%, and 8.06% to
14.26%, respectively, from December 31, 1990 to December 31, 1996. On January
1, 1994, the Bank hired a new president and began the development of a new
long-term strategic plan, which was adopted in 1994 and began to be
implemented in 1995. Pursuant to that plan, the Bank began to rely more
heavily on investments in loans and particularly adjustable-rate mortgage
("ARM") loans, consumer loans and commercial real estate loans instead of
investment securities. The Bank also stabilized assets in 1995 and employed a
modest asset growth strategy in 1996 as a means to continue to build capital.
The Bank supported its growth with a greater emphasis on retail deposits in
place of borrowings. The Bank's objectives include originating and purchasing
ARMs on
39
<PAGE>
single-family residential properties; selling longer-term fixed-rate mortgage
loans; aggressive marketing and retention of short-term consumer loans,
primarily home equity loans and home improvement loans; and generally
concentrating investment in shorter-term and variable-rate products. The Bank
has also established as goals increasing interest margins and improving
operational efficiency.
Because of limited demand for ARM loans in the Bank's market area and the
competition among financial service providers for such loans, and in order to
support its growth in short-term consumer loans and other more interest-
sensitive products, the Bank has increasingly relied upon purchased loans from
brokers. See "Business of the Bank."
Management believes the Bank's financial position provides the opportunity
to expand in existing markets or grow through strategic acquisitions.
Acquisitions may improve operational efficiencies through economies of scale
and strengthen the Bank's geographic diversification. The Company and the Bank
may use a portion of the Conversion proceeds to establish new branch offices
or acquire other financial institutions. However, neither the Company nor the
Bank have any pending agreements or understandings regarding acquisitions of
any specific financial institutions or branch offices. See "Use of Proceeds."
Management also believes profitable market share growth in selected product
areas can be achieved through a more aggressive marketing and pricing
approach.
MANAGEMENT OF MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises primarily from interest rate risk
inherent in its lending and deposit taking activities. To that end, management
actively monitors and manages its interest rate risk exposure.
The principal objective of the Bank's interest rate risk management function
is to evaluate the interest rate risk included in certain balance sheet
accounts, determine the level of risk appropriate given the Bank's business
strategy, operating environment, capital and liquidity requirements and
performance objectives, and manage the risk consistent with Board of
Directors' approved guidelines. Through such management, the Bank seeks to
reduce the vulnerability of its operations to changes in interest rates. The
Bank monitors its interest rate risk as such risk relates to its operating
strategies. The Bank's Board of Directors has established an Asset/Liability
Committee, responsible for reviewing its asset/liability policies and interest
rate risk position, which meets on a monthly basis and reports trends and
interest rate risk position to the Board of Directors on a quarterly basis.
The extent of the movement of interest rates is an uncertainty that could have
a negative impact on the earnings of the Bank. See "Risk Factors--Sensitivity
to Increases in Interest Rates."
In recent years, the Bank has primarily utilized the following strategies to
manage interest rate risk: (1) emphasizing the origination and purchase for
portfolio retention of adjustable-rate and shorter-term fixed-rate, single-
family mortgage loans; (2) originating and selling in the secondary market
longer-term, fixed-rate mortgage loans; and (3) investing primarily in short-
term U.S. Government securities or mortgage-backed securities with adjustable
interest rates.
Gap Analysis. The matching of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities are "interest rate
sensitive" and by monitoring a bank's interest rate sensitivity "gap." An
asset and liability is said to be interest rate sensitive within a specific
time period if it will mature or reprice within that time period. The interest
rate sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period
and the amount of interest-bearing liabilities maturing or repricing within
that same time period. At September 30, 1997, the Bank's cumulative interest
rate gap (which is the difference between the amount of interest-earning
assets maturing or repricing within one year and interest-bearing liabilities
maturing or repricing within one year) as a percentage of total assets, was a
negative 0.7%. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. During a
period of rising interest rates, a negative gap would tend to affect adversely
net interest income while a positive gap would tend to result in an increase
in net interest income. Conversely, during a period of falling interest rates,
a negative gap would
40
<PAGE>
tend to result in an increase in net interest income while a positive gap
would tend to affect adversely net interest income.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at September 30, 1997, which are
anticipated by the Bank, based upon certain assumptions, to reprice or mature
in each of the future time periods shown (the "GAP Table"). Except as stated
below, the amount of assets and liabilities shown which reprice or mature
during a particular period were determined in accordance with the earlier of
term to repricing or the contractual maturity of the asset or liability. The
table sets forth an approximation of the projected repricing of assets and
liabilities at September 30, 1997, on the basis of contractual maturities,
anticipated prepayments, and scheduled rate adjustments within a three-month
period and subsequent selected time intervals. The loan amounts in the table
reflect principal balances expected to be redeployed and/or repriced as a
result of contractual amortization and anticipated prepayments of adjustable-
rate loans and fixed-rate loans, and as a result of contractual rate
adjustments on adjustable-rate loans. Annual prepayment rates for adjustable-
rate and fixed-rate single-family and multi-family mortgage loans are assumed
to range from 14.0% to 17.0% and 6.0% to 52.0%, respectively. The annual
prepayment rate for mortgage-backed securities is assumed to be 13.0%. Money
market deposit accounts, savings accounts and negotiable order of withdrawal
("NOW") accounts are assumed to have annual decay rates of 7.0%, 34.0% and
17.0%, respectively. See "Business of the Bank--Lending Activities," "--
Investment Activities" and "--Sources of Funds."
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
----------------------------------------------------------------------------
MORE THAN MORE THAN MORE THAN MORE THAN MORE
3 MONTHS 3 MONTHS 6 MONTHS 1 YEAR 3 YEARS THAN TOTAL
OR LESS TO 6 MONTHS TO 1 YEAR TO 3 YEARS TO 5 YEARS 5 YEARS AMOUNT
-------- ----------- --------- ---------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning
assets(1):
Investment
securities(2)......... $ 38,701 $ 6,984 $ 29,502 $ 8,017 $ 7,986 $ 1,170 $ 92,360
Loans receivable(3).... 129,773 73,055 95,797 232,734 186,215 127,826 845,400
Mortgage-backed
securities............ 14,809 2,680 18,769 16,146 15,291 13,465 81,160
FHLB stock............. 7,060 -- -- -- -- -- 7,060
-------- -------- -------- -------- -------- -------- ----------
Total interest-earning
assets................ 190,343 82,719 144,068 256,897 209,492 142,461 1,025,980
======== ======== ======== ======== ======== ======== ==========
Interest-bearing
liabilities:
Money market accounts.. 5,042 5,042 10,084 40,336 40,336 191,862 292,702
Savings accounts....... 1,032 1,032 2,064 7,897 -- -- 12,025
NOW accounts........... 3,250 3,250 6,500 26,000 26,000 9,618 74,618
Certificate accounts... 74,929 105,508 201,338 117,455 36,736 1,120 537,086
FHLB advances.......... 5,016 17 17 66 5,067 382 10,565
-------- -------- -------- -------- -------- -------- ----------
Total interest-bearing
liabilities........... 89,269 114,849 220,003 191,754 108,139 202,982 926,996
-------- -------- -------- -------- -------- -------- ----------
Interest-earning assets
less interest-bearing
liabilities............ $101,074 $(32,130) $(75,935) $ 65,143 $101,353 $(60,521) $ 98,984
======== ======== ======== ======== ======== ======== ==========
Cumulative interest-rate
sensitivity gap(4)..... $101,074 $ 68,944 $ (6,991) $ 58,152 $159,505 $ 98,984
======== ======== ======== ======== ======== ========
Cumulative interest-rate
gap as a percentage of
total assets at
September 30, 1997..... 9.78% 6.67% (0.68)% 5.63% 15.43% 9.58%
Cumulative interest-
earning assets as a
percentage of
cumulative interest-
bearing liabilities at
September 30, 1997..... 213.22% 133.78% 98.35% 109.44% 122.03% 110.68%
</TABLE>
- --------
(1) Interest earnings assets are included in the period in which the balances
are expected to be redeployed and/or repriced as a result of anticipated
prepayments, scheduled rate adjustments and contractual maturities.
(2) Includes Federal funds sold.
(3) For purposes of the gap analysis, loans receivable includes non-performing
loans gross of the allowance for loan losses, undisbursed loan funds,
unamortized discounts and deferred loan fees.
(4) Interest sensitivity gap represents the difference between net interest-
bearing assets and interest-bearing liabilities.
41
<PAGE>
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react to 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. Additionally, certain assets, such as adjustable-rate
loans, have features which restrict changes in interest rates both on a short-
term basis and over the life of the asset. Further, in the event of change in
interest rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in calculating the table. Finally, the
ability of many borrowers to service their adjustable-rate loans may decrease
in the event of an interest rate increase.
Net Portfolio Value. The Bank's interest rate sensitivity is monitored by
management through the use of a model which internally generates estimates of
the change in the Bank's NPV over a range of interest rate scenarios. NPV is
the present value of expected cash flows from assets, liabilities, and off-
balance sheet contracts. The NPV ratio, under any interest rate scenario, is
defined as the NPV in that scenario divided by the market value of assets in
the same scenario. The OTS also produces a similar analysis using its own
model, based upon data submitted on the Bank's quarterly Thrift Financial
Reports, the results of which may vary from the Bank's internal model
primarily due to differences in assumptions utilized, including estimated loan
prepayment rates, reinvestment rates and deposit decay rates. See
"Regulation--Federal Savings Institution Regulation." The following table sets
forth the Bank's NPV as of September 30, 1997, as calculated by the OTS.
<TABLE>
<CAPTION>
CHANGE IN NPV AS % OF PORTFOLIO
INTEREST RATES NET PORTFOLIO VALUE VALUE OF ASSETS
IN BASIS POINTS --------------------------- -------------------------
(RATE SHOCK) AMOUNT $ CHANGE % CHANGE NPV RATIO CHANGE(1)
--------------- -------- -------- -------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
400 $ 62,140 $(50,908) (45.0)% 6.25% (438)bp
300 76,765 (36,284) (32.1) 7.57 (305)
200 91,104 (21,945) (19.4) 8.82 (180)
100 103,709 (9,340) (8.3) 9.88 (75)
Static 113,049 -- -- 10.62 --
(100) 118,803 5,754 5.1 11.05 43
(200) 120,767 7,718 6.8 11.16 54
(300) 124,233 11,184 9.9 11.39 76
(400) 129,731 16,682 14.8 11.77 115
</TABLE>
- --------
(1) Expressed in basis points.
The Bank's change in its NPV at September 30, 1997, based on a rise in
interest rates of 200 basis points was a 19.4% decrease, representing a dollar
decrease in equity value of $21.9 million. In contrast, based on a decline in
interest rates of 200 basis points, the Bank's NPV was estimated to increase
6.8% or $7.8 million at September 30, 1997. The Bank's exposure increases to a
45.0% decrease under a 400 basis point rise in rates, and the NPV is estimated
to increase 14.8% based on a 400 basis point decrease in rates.
The Bank is aware of its interest rate risk exposure under rapidly rising
rates and more modest exposure under falling rates. Due to the Bank's
recognition of the need to control its interest rate exposure, the Bank has
focused on being active in the origination and purchase of ARMs, construction
loans and adjustable-rate multi-family and commercial real estate loans and
plans to continue this lending strategy with an increased emphasis on short-
term consumer loans.
As is the case with the GAP Table, certain shortcomings are inherent in the
methodology used in the above interest rate risk measurements. Modeling
changes in NPV require the making of certain assumptions which may or may not
reflect the manner in which actual yields and costs respond to changes in
market interest rates. In this regard, the NPV model presented assumes that
the composition of the Bank's interest sensitive assets and liabilities
existing at the beginning of a period remains constant over the period being
measured and also assumes that a particular change in interest rates is
reflected uniformly across the yield curve regardless of the duration to
maturity or repricing of specific assets and liabilities. Accordingly,
although the NPV measurements and net
42
<PAGE>
interest income models provide an indication of the Bank's interest rate risk
exposure at a particular point in time, such measurements are not intended to
and do not provide a precise forecast of the effect of changes in market
interest rates on the Bank's net interest income and will differ from actual
results.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A derivative financial instrument includes futures, forwards, interest rate
swaps, option contracts, and other financial instruments with similar
characteristics. The Bank currently does not enter into futures, forwards,
swaps, or options. However, the Bank is 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 include commitments to
extend credit. These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated statements of financial condition. Commitments to extend credit
are agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates and may require collateral from the borrower if deemed
necessary by the Bank. Commitments to extend credit are not recorded as an
asset or liability by the Bank until the instrument is exercised.
Interest rate risk is the potential for economic losses due to future
interest rate changes. These economic losses can be reflected as a loss of
future net interest income and/or a loss of current fair market values. The
objective is to measure the effect on net interest income and to adjust the
balance sheet to minimize the inherent risk while at the same time maximize
income. Management realizes certain risks are inherent and that the goal is to
identify and minimize the risks. Tools used by management include the standard
GAP report and interest rate shock simulation reports. The Bank has no market
risk sensitive instruments held for trading purposes. Management believes that
the Bank's market risk is reasonable at this time.
43
<PAGE>
Table of Market Risk Sensitive Instruments. The following table shows the
Bank's financial instruments that are sensitive to changes in interest rates,
categorized by expected maturity, and the instruments' fair values at
September 30, 1997. Market risk sensitive instruments are generally defined as
on-and off-balance sheet derivatives and other financial instruments.
<TABLE>
<CAPTION>
EXPECTED MATURITY/PRINCIPAL REPAYMENT SEPTEMBER 30,
AVERAGE ----------------------------------------------------------------------------
INTEREST FAIR
RATE 1998 1999 2000 2001 2002 THEREAFTER TOTAL(1) VALUE(1)
-------- -------- -------- -------- -------- ------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Sensitive
Assets:
Federal funds sold..... 5.57% $ 33,700 $ -- $ -- $ -- $ -- $ -- $ 33,700 $ 33,700
Investment securities.. 5.96 41,487 3,007 5,010 7,986 -- 1,170 58,660 58,613
Loans receivable....... 8.26 298,625 111,006 121,728 116,099 70,116 127,826 845,400 833,419
Mortgage-backed
securities............ 6.71 36,258 8,502 7,645 7,645 7,645 13,465 81,160 81,550
FHLB stock............. 7.25 7,060 -- -- -- -- -- 7,060 7,060
-------- -------- -------- -------- ------- -------- ---------- ----------
Total.................. $417,130 $122,515 $134,383 $131,730 $77,761 $142,461 $1,025,980 $1,014,342
======== ======== ======== ======== ======= ======== ========== ==========
Interest Sensitive
Liabilities:
Money market accounts.. 4.68% $ 20,168 $ 20,168 $ 20,168 $ 20,168 $20,168 $191,862 $ 292,702 $ 292,702
Savings accounts....... 1.99 4,128 4,128 3,769 -- -- -- 12,025 12,025
NOW accounts........... 2.76 13,000 13,000 13,000 13,000 13,000 9,618 74,618 74,618
Certificate accounts... 5.76 394,055 90,983 14,192 15,790 20,946 1,120 537,086 543,304
FHLB advances.......... 5.97 5,050 33 33 5,033 34 382 10,565 10,543
-------- -------- -------- -------- ------- -------- ---------- ----------
Total.................. $436,401 $128,312 $ 51,162 $ 53,991 $54,148 $202,982 $ 926,996 $ 933,192
======== ======== ======== ======== ======= ======== ========== ==========
Interest-Sensitive Off-
Balance Sheet Items:(2)
Loans serviced for
others................ 9.30% 19,835 19,835
Commitments to extend
credit................ 7.92 23,009 23,009
Unused consumer lines
of credit............. 8.90 15,978 15,978
Commitments to purchase
loans................. 6.36 12,138 12,138
Commitments to sell
loans................. 7.47 14,085 14,085
========== ==========
</TABLE>
- --------
(1) Loans are reduced for nonaccrual loans but are not reduced for the
allowance for loan losses.
(2) Total balance equals the notional amount of off-balance sheet items and
interest rates are the weighted average interest rates of the underlying
loans.
Expected maturities are contractual maturities adjusted for prepayment of
principal. The Bank uses certain assumptions to estimate fair values and
expected maturities. For assets, expected maturities are based upon
contractual maturity, projected repayments and prepayments of principal. The
prepayment experience reflected herein is based on the Bank's historical
experience. The Bank's average prepayment rate on its total fixed-rate
portfolio of one- to four-family and multi-family mortgage loans ranges from
14.0% to 17.0% and 6.0% to 52.0% on its adjustable-rate portfolio for
interest-earning assets. For deposit liabilities, in accordance with standard
industry practice and the Bank's own historical experience, "decay factors,"
used to estimate deposit runoff were 7.0%, 34.0% and 7.0% for money market
deposit accounts, savings accounts and NOW accounts, respectively. The actual
maturities of these instruments could vary substantially if future prepayments
differ from the Bank's historical experience.
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on interest-
earning assets and expense on interest-bearing liabilities. Net interest
income also depends upon the relative amounts of interest-earning assets and
interest-bearing liabilities and the interest rate earned or paid on them.
44
<PAGE>
Average Balance Sheet. The following table sets forth certain information
relating to the Bank at and for the three months ended September 30, 1997 and
1996, and for the years ended June 30, 1997, 1996 and 1995. The average yields
and costs are derived by dividing income or expense by the average balance of
interest-earning assets or interest-bearing liabilities, respectively, for the
periods shown except where noted otherwise and reflect annualized yields and
costs. Average balances are derived from average month-end balances.
Management does not believe that the use of average monthly balances instead
of average daily balances has caused any material differences in the
information presented. The yields and costs include fees which are considered
adjustments to yields.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
AT SEPTEMBER 30, --------------------------------------------------------
1997 1997 1996
----------------- ---------------------------- ---------------------------
AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE COST BALANCE INTEREST COST BALANCE INTEREST COST
---------- ------ ---------- -------- -------- ---------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Federal funds sold..... $ 33,700 5.57% $ 26,750 $ 410 6.13% $ 42,100 $ 649 6.17%
Investment
securities(2)......... 65,720 5.96 75,769 1,162 6.13 129,093 1,861 5.77
Mortgage-backed
securities(5)......... 81,160 6.71 83,732 1,382 6.60 96,009 1,570 6.54
Loans receivable,
net(1)................ 818,460 8.26 818,564 17,159 8.38 728,470 15,448 8.48
---------- ---------- ------- ---------- -------
Total interest-earning
assets................ 999,040 7.89 1,004,815 20,113 8.01 995,672 19,528 7.85
------ ------- ------ ------- ------
Noninterest-earning
assets................. 34,538 36,150 36,344
---------- ---------- ----------
Total assets........... $1,033,578 $1,040,965 $1,032,016
========== ========== ==========
LIABILITIES AND RETAINED
EARNINGS:
Interest-bearing
liabilities:
NOW accounts........... $ 74,618 2.76% $ 75,729 $ 525 2.77% $ 78,665 $ 528 2.68%
Regular savings
accounts.............. 12,025 1.99 12,118 61 2.01 14,439 72 1.99
Money market accounts.. 292,702 4.68 292,138 3,448 4.72 255,681 2,953 4.62
Certificate accounts... 537,086 5.76 537,404 7,757 5.77 563,992 8,053 5.71
---------- ---------- ------- ---------- -------
Total interest-bearing
deposits.............. 916,431 5.12 917,389 11,791 5.14 912,777 11,606 5.09
FHLB advances.......... 10,565 5.97 13,316 195 5.86 13,844 235 6.79
---------- ---------- ------- ---------- -------
Total interest-bearing
liabilities........... 926,996 5.13 930,705 11,986 5.15 926,621 11,841 5.11
------ ------- ------ ------- ------
Non-interest-bearing
accounts............... 7,238 6,841 6,683
Other liabilities....... 18,782 23,568 24,121
---------- ---------- ----------
Total liabilities...... 953,016 961,114 957,425
Retained earnings....... 80,562 79,851 74,591
---------- ---------- ----------
Total liabilities and
retained earnings..... $1,033,578 $1,040,965 $1,032,016
========== ========== ==========
Net interest income/Net
interest rate
spread(3).............. 2.76% $ 8,127 2.86% $ 7,687 2.74%
====== ======= ====== ======= ======
Net interest margin(4).. 3.13% 3.24% 3.09%
====== ====== ======
Ratio of interest-
earning assets to
interest- bearing
liabilities............ 107.77% 107.96% 107.45%
====== ====== ======
</TABLE>
- --------
(1) Amount is net of deferred loan origination costs, undisbursed proceeds of
construction loans in process, allowance for loan losses and includes non-
performing loans.
(2) Includes investment securities available-for-sale and held-to-maturity and
stock in the FHLB.
(3) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(4) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
(5) Includes mortgage-backed securities available-for-sale and held-to-
maturity.
45
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- ---------------------------- --------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
---------- -------- ------- ---------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Federal funds sold..... $ 24,400 $ 1,523 6.24% $ 70,331 $ 4,177 5.94% $ 17,771 $ 1,010 5.68%
Investment
securities(2)......... 120,170 6,899 5.74 145,685 8,220 5.64 201,928 10,606 5.25
Mortgage-backed
securities(5)......... 91,794 5,982 6.52 91,739 5,967 6.50 90,876 5,784 6.36
Loans receivable,
net(1)................ 767,973 63,942 8.33 672,321 56,585 8.42 629,488 51,964 8.25
---------- ------- ---------- ------- -------- -------
Total interest-earning
assets................ 1,004,337 78,346 7.80 980,076 74,949 7.65 940,063 69,364 7.38
------- ------ ------- ------ ------- ------
Noninterest-earning
assets................. 36,370 34,404 35,612
---------- ---------- --------
Total assets........... $1,040,707 $1,014,480 $975,675
========== ========== ========
LIABILITIES AND
RETAINED EARNINGS:
Interest-bearing
liabilities:
NOW accounts........... $ 77,400 $ 2,086 2.70% $ 64,032 $ 1,664 2.60% $ 57,469 $ 1,276 2.22%
Regular savings
accounts.............. 13,593 270 1.99 15,466 307 1.98 18,498 395 2.14
Money market accounts.. 271,686 12,599 4.64 228,799 10,448 4.57 206,520 8,815 4.27
Certificate accounts... 556,974 31,591 5.67 586,991 34,746 5.92 585,721 33,223 5.67
---------- ------- ---------- ------- -------- -------
Total interest-bearing
deposits.............. 919,653 46,546 5.06 895,288 47,165 5.27 868,208 43,709 5.03
FHLB advances.......... 12,265 652 5.32 15,921 1,041 6.54 14,801 896 6.05
---------- ------- ---------- ------- -------- -------
Total interest-bearing
liabilities........... 931,918 47,198 5.06 911,209 48,206 5.29 883,009 44,605 5.05
------- ------ ------- ------ ------- ------
Non-interest-bearing
accounts............... 6,747 5,396 3,134
Other liabilities....... 26,436 26,400 22,429
---------- ---------- --------
Total liabilities...... 965,101 943,005 908,572
Retained earnings....... 75,606 71,475 67,103
---------- ---------- --------
Total liabilities and
retained earnings..... $1,040,707 $1,014,480 $975,675
========== ========== ========
Net interest income/Net
interest rate
spread(3).............. $31,148 2.74% $26,743 2.36% $24,759 2.33%
======= ====== ======= ====== ======= ======
Net interest margin(4).. 3.10% 2.73% 2.63%
====== ====== ======
Ratio of interest-
earning assets to
interest-bearing
liabilities............ 107.77% 107.56% 106.46%
====== ====== ======
</TABLE>
- --------
(1) Amount is net of deferred loan origination costs, undisbursed proceeds of
construction loans in process, allowance for loan losses and includes non-
performing loans.
(2) Includes investment securities available-for-sale and held-to-maturity and
stock in the FHLB.
(3) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(4) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
(5) Includes mortgage-backed securities available-for-sale and held-to-
maturity.
46
<PAGE>
Rate/Volume Analysis. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected the Bank's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to: (i) changes attributable to changes in volume
(changes in volume multiplied by prior rate); (ii) changes attributable to
changes in rate (changes in rate multiplied by prior volume); and (iii) the
net change. The changes attributable to the combined impact of volume and rate
have been allocated on a proportional basis between changes in rate and
volume.
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1997 JUNE 30, 1997 JUNE 30, 1996
COMPARED TO COMPARED TO COMPARED TO
THREE MONTHS ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1996 JUNE 30, 1996 JUNE 30, 1995
--------------------- ------------------------ ---------------------
INCREASE INCREASE INCREASE
(DECREASE) (DECREASE) (DECREASE)
DUE TO DUE TO DUE TO
-------------- --------------- -------------
VOLUME RATE NET VOLUME RATE NET VOLUME RATE NET
------ ------ ----- ------- ------ ------- ------ ----- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold..... $ (235) $ (4) $(239) $(2,855) $ 201 $(2,654) $3,119 $ 48 $3,167
Investment securities.. (1,415) 716 (699) (1,464) 143 (1,321) (3,127) 741 (2,386)
Mortgage-backed
securities............ (284) 96 (188) 3 12 15 55 128 183
Loans receivable, net.. 2,891 (1,180) 1,711 6,843 514 7,357 3,547 1,074 4,621
------ ------ ----- ------- ------ ------- ------ ----- ------
Total interest-earning
assets................ 957 (372) 585 2,527 870 3,397 3,594 1,991 5,585
------ ------ ----- ------- ------ ------- ------ ----- ------
Interest-bearing
liabilities:
NOW accounts........... (76) 73 (3) 356 66 422 156 232 388
Savings accounts....... (16) 5 (11) (39) 2 (37) (60) (28) (88)
Money market accounts.. 430 65 495 1,989 162 2,151 989 644 1,633
Certificate accounts... (795) 499 (296) (1,728) (1,427) (3,155) 71 1,452 1,523
------ ------ ----- ------- ------ ------- ------ ----- ------
Total deposits......... (457) 642 185 578 (1,197) (619) 1,156 2,300 3,456
FHLB advances.......... (9) (31) (40) (215) (174) (389) 70 75 145
------ ------ ----- ------- ------ ------- ------ ----- ------
Total interest-bearing
liabilities........... (466) 611 145 363 (1,371) (1,008) 1,226 2,375 3,601
------ ------ ----- ------- ------ ------- ------ ----- ------
Net change in net
interest income........ $1,423 $ (983) $ 440 $ 2,164 $2,241 $ 4,405 $2,368 $(384) $1,984
====== ====== ===== ======= ====== ======= ====== ===== ======
</TABLE>
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1997, AND JUNE 30, 1997.
Total assets at September 30, 1997, were $1.03 billion, a decrease of $8.8
million, or 0.8%, compared to $1.04 billion at June 30, 1997. The decrease was
primarily due to the Bank's use of maturity and prepayment proceeds from
investment securities, federal funds and mortgage-backed securities to paydown
FHLB advances. As a result, aggregate holdings in investment securities,
federal funds and mortgage-backed securities decreased by $10.5 million to
$173.5 million at September 30, 1997, compared to $184.0 million at June 30,
1997. FHLB advances decreased by $11.0 million to $10.6 million at September
30, 1997, compared to $21.6 million at June 30, 1997.
Loans receivable, net, increased by $3.5 million to $818.4 million at
September 30, 1997, compared to $814.9 million at June 30, 1997. The growth in
loans receivable, net, was primarily due to a $11.2 million increase in
purchased consumer loans which was offset in part by a decline of $7.8 million
in mortgage loans.
Total deposits at September 30, 1997, were $923.7 million, an increase of
$3.6 million, compared to $920.1 million at June 30, 1997. Retained earnings
at September 30, 1997, were $80.6 million, an increase of $1.7 million,
compared to $78.9 million at June 30, 1997
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1997, AND JUNE 30, 1996.
Total assets increased by $4.5 million, or 0.4% from $1.038 billion at June
30, 1996, to $1.042 billion at June 30, 1997.
During that period, the Bank also experienced a shift in the composition of
its asset portfolio. Loans receivable, net, increased by $101.4 million, or
14.2%, from $713.5 million at June 30, 1996, to $814.9 million
47
<PAGE>
at June 30, 1997. This growth was primarily due to increased purchases and
originations of ARM products and consumer loans. The growth in consumer loans
resulted from the addition of an equity line of credit product and expanded
home equity loan offerings. ARM loans increased by $76.3 million, or 22.0%,
from $346.9 million at June 30, 1996, to $423.2 million at June 30, 1997,
while consumer loans increased $44.8 million, or 127.1%, from $35.2 million at
June 30, 1996, to $80.0 million at June 30, 1997.
The funding for the increased net loans receivable was realized from the
maturities and prepayments of investment securities and mortgage-backed
securities and a reduction in federal funds. Investment securities and
mortgage-backed securities declined $48.1 million, or 21.1%, from $228.5
million at June 30, 1996, to $180.4 million at June 30, 1997, while federal
funds declined $48.9 million, or 93.1%, from $52.5 million at June 30, 1996,
to $3.6 million at June 30, 1997. Total deposits at June 30, 1997, were $920.1
million, a decrease of $9.2 million, or 1.0%, compared to $929.3 million at
June 30, 1996. The decrease was primarily due to a decrease of $37.5 million,
or 6.5%, in certificate accounts to $536.2 million at June 30, 1997, from
$573.7 million at June 30, 1996, offset, by an increase of $29.3 million, or
8.4%, in net increases in money market, savings and NOW accounts.
As a result of an increase in net income of $4.3 million for the year ended
June 30, 1997, retained earnings at June 30, 1997, were $78.9 million,
compared to $74.6 million at June 30, 1996.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997,
AND SEPTEMBER 30, 1996.
General. Net income increased $3.3 million to $1.6 million for the three
months ended September 30, 1997, from a $1.7 million loss for the three months
ended September 30, 1996. The loss for the three months ending September 30,
1996, was the result of a one-time special assessment charge of $5.7 million
to fully capitalize the SAIF. Excluding the net of tax impact of the one-time
special assessment, net income decreased from $2.1 million for the three
months ended September 30, 1996, to $1.6 million for the three months ended
September 30, 1997. The decrease was due in part to higher non-interest
expenses and a higher provision for loan losses, partially offset by an
increase in interest income.
Interest Income. Interest income for the three months ended September 30,
1997, was $20.1 million, compared to $19.5 million for the three months ended
September 30, 1996, an increase of $585,000, or 3.0%. The increase in interest
income was the result of a shift in the asset composition from lower-yielding
investment securities to higher-yielding loans.
Interest Expense. Interest expense for the three months ended September 30,
1997, was $12.0 million, compared to $11.8 million for the three months ended
September 30, 1996, an increase of $145,000, or 1.2%. The increase in interest
expense was the result of an increase in the average cost of deposits
partially offset by the decrease in both the average balance and average cost
of FHLB advances.
Provision for Loan Losses. During the three months ended September 30, 1997,
the Bank's provision for loan losses was $713,000 compared to $96,000 for the
three months ended September 30, 1996, an increase of $617,000. The increase
in the provision was due primarily to an increase in consumer loans of $11.3
million to $91.2 million at September 30, 1997, from $79.9 million at June 30,
1997, resulting in an increase of $524,000 in the allowance for loan losses
for consumer loans. In addition, 13 construction loans totaling approximately
$1 million were classified special mention by the Bank at September 30, 1997,
resulting in an increase of $100,000 in the allowance for loan losses for
these construction loans.
To the extent the Bank increases its investment in commercial real estate,
commercial and construction loans which entail higher risk than single-family
loans, the Bank may deem it appropriate to increase its allowance for loan
losses through additional loan loss provisions which may adversely affect net
income.
Management of the Bank is responsible for the determination of the level of
the allowance for loan losses. The allowance for loan losses is maintained at
a level sufficient to provide for estimated losses based on evaluating known
and inherent risks in the loan portfolio and upon management's continuing
analysis of the
48
<PAGE>
factors underlying the qualify of the loan portfolio. These factors include
changes in the size and composition of the loan portfolio, actual loan loss
experience, current and anticipated economic conditions, detailed analysis of
individual loans for which full collectibility may not be assured, and
determination of the existence and realizable value of the collateral
guarantees securing the loan. Additions to this allowance are charged to
earnings. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the Bank to provide additions to the
allowance based upon judgments different from management. Although management
uses the best information available, future adjustments to the allowance may
be necessary due to economic, operating, regulatory and other conditions
beyond the Bank's control.
Non-Interest Income. Non-interest income decreased by $30,000 to $891,000
for the three months ended September 30, 1997, from $921,000 for the three
months ended September 30, 1996. The decrease was primarily due to a decline
in loan commitment fees.
Non-Interest Expense. Non-interest expense decreased by $5.4 million to $5.7
million for the three months ended September 30, 1997, from $11.1 million for
the three months ended September 30, 1996. The decrease was attributable to a
significant reduction of premium assessments on savings deposits by the FDIC
(from 23 basis points to 6.48 basis points) and the one-time special
assessment charged in September 1996. Excluding federal insurance premiums,
aggregate non-interest expense items increased $704,000 or 14.4%, to $5.6
million for the three months ended September 30, 1997, from $4.9 million for
the three months ended September 30, 1996. The increase was attributable to
higher compensation and employee benefits, due to annual salary increases and
increased employee staff, along with increased sales promotion and advertising
expenses. These increases were primarily the result of a greater focus on
deposit generation in addition to mortgage volume.
Provision for Income Taxes. Income tax expense increased $1.9 million for
the three months ended September 30, 1997. The increase in the provision for
income taxes was the result of the $5.2 million increase in earnings before
income taxes for the three months ended September 30, 1997, as compared to the
three months ended September 30, 1996.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1997 AND JUNE 30,
1996.
General. Net income decreased $1.1 million, or 23.8%, to $4.3 million for
the year ended June 30, 1997, from $5.4 million for the year ended June 30,
1996. The decrease was the result of a one-time special assessment charge of
$5.7 million in September 1996, to fully capitalize the SAIF. Excluding the
net of tax impact of the one-time special assessment, net income increased
from $5.4 million for the year ended June 30, 1996, to $8.0 million for the
year ended June 30, 1997. The increase was due primarily to an increase in net
interest income, which is the principal source of income for the Bank and
represents the difference between total interest and fees earned on loans,
mortgage-backed securities and other investments and total interest paid on
deposits and borrowings. The increase in net interest income resulted from an
increase in the interest spread to 2.74% for the year ended June 30, 1997,
from 2.36% for the year ended June 30, 1996. The increase in balances and
rates of interest-earning assets was greater than the increase in the balances
and a lowering of rates on interest-bearing liabilities as the Bank focused on
higher yielding assets and increasing loan volume. The loan-to-deposit ratio
increased to 88.6% at June 30, 1997, from 76.8% at June 30, 1996. Excluding
the $5.7 million special assessment, for the year ended June 30, 1997, non-
interest income decreased by $315,000 for the year ended June 30, 1997, which
was offset by a $587,000 decrease in non-interest expense.
Interest Income. Interest income for the year ended June 30, 1997, was $78.3
million, compared to $74.9 million for the year ended June 30, 1996, an
increase of $3.4 million or 4.5%. Interest income from loans accounted for all
of the increase, with decreases in interest income on investment securities
and other interest-earning assets offsetting some of the increase. The
increase in interest income on loans of $7.3 million to $63.9 million for the
year ended June 30, 1997, from $56.6 million for the year ended June 30, 1996,
was a result of growth in the average balance of loans outstanding, partially
offset by a decline in the average yield. The average balance of loans
receivable increased $95.7 million, while the yield on these loans declined to
8.33% for 1997, from 8.42% for 1996. The growth in loans was attributable to
an increase in the origination and purchase of residential ARM loans and an
increase in originated and purchased construction and consumer loans. During
the
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year ended June 30, 1997, the Bank increased the amount of equity line of
credit loans in the portfolio to $20.0 million, from $7.3 million for the year
ended June 30, 1996, an increase of $12.7 million or 174.0%.
Interest income on investment securities, federal funds and other interest-
earning assets decreased $4.0 million to $8.4 million for the year ended June
30, 1997, compared to $12.4 million for the year ended June 30, 1996. The
average balance decreased $71.4 million to $144.6 million for the year ended
June 30, 1997, from $216.0 million for the year ended June 30, 1996. The
average yield on investment securities and other interest-earning assets
increased to 5.82% for the year ended June 30, 1997, from 5.74% for the year
ended June 30, 1996. The decreased balances of these maturing investments were
primarily used to fund the increase in loan balances.
Interest Expense. Interest expense for the year ended June 30, 1997, was
$47.2 million, compared to $48.2 million for the year ended June 30, 1996, a
decrease of $1.0 million, or 2.1%. The decrease in interest expense was
primarily the result of a decrease in the average cost of interest-bearing
deposits to 5.06% for the year ended June 30, 1997, from 5.27% for the year
ended June 30, 1996, even though the average balance increased to $919.7
million for 1997, compared to $895.2 million for 1996, an increase of $24.5
million.
Provisions for Loan Losses. The Bank's provision for loan losses was
$450,000 for the year ended June 30, 1997, compared to $598,000 for the year
ended June 30, 1996. The $450,000 provision was used to increase the Bank's
allowance for loan losses as the loan portfolio increased by $101.0 million to
$842.0 million at June 30, 1997, from $740.0 million at June 30, 1996. The
decrease in the provision was due to the decrease in the Bank's non-performing
loans. The Bank's non-performing loans as a percentage of total loans improved
from 0.39% at June 30, 1996, to 0.22% at June 30, 1997. At June 30, 1997, the
Bank's allowance for loan losses as a percentage of total non-performing loans
was 348.95%, compared to 211.66% at June 30, 1996. At June 30, 1997, the
Bank's allowance for loan losses as a percentage of loans receivable, net, was
0.77%, compared to 0.82% at June 30, 1996.
Non-Interest Income. Other non-interest income decreased to $3.6 million for
the year ended June 30, 1997, from $3.9 million for the year ended June 30,
1996. This decrease was primarily due to the decrease in gains on the sale of
REO of $819,000 to $7,000 for the year ended June 30, 1997, from $826,000 for
the year ended June 30, 1996. This decrease was offset by fees and service
charges, which consist of deposit product fees, loan servicing fees and other
loan fees, which increased by $155,000 in 1997, as compared to 1996. Other
increases of $65,000 came from net commissions received on the sale of
annuities and mutual funds in 1997 as compared to 1996. Included in the year
ended June 30, 1996, were net losses on the disposal of computer software,
equipment and the lease termination fee paid on the mainframe computer (the
Bank outsourced its computer processing to a third party in June 1995) in the
amount of $271,000.
Non-Interest Expense. Non-interest expense increased by $5.1 million or
23.1%, from $22.1 million for the year ended June 30, 1996, to $27.2 million
for the year ended June 30, 1997, primarily due to the one-time special SAIF
assessment of $5.7 million. Regular SAIF assessments decreased by $925,000 to
$1.3 million for the year ended June 30, 1997, from $2.2 million for the year
ended June 30, 1996 due to the decreased assessment rate from 23 basis points
to 6.48 basis points. Salaries and employee benefit costs increased by
$356,000 to $11.5 million for the year ended June 30, 1997, or 3.1%, from
$11.1 million for the year ended June 30, 1996. The increase was attributable
to annual salary increases. Excluding the one-time SAIF special assessment,
non-interest expense actually decreased by $587,000 for the year ended June
30, 1997.
Provision for Income Taxes. Total income tax expense was $2.7 million for
the year ended June 30, 1997, compared to $2.6 million for the year ended June
30, 1996. The effective tax rate for 1997 was 38.3%, an increase of 6.2% over
the 32.1% effective tax rate for 1996. The lower effective tax rate for the
year ended June 30, 1996, was primarily the result of prior year state tax
refunds of $451,000 and the reversal of estimated deferred tax liability.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1996, AND JUNE
30, 1995.
General. Net income increased $1.3 million, or 32.4%, to $5.4 million for
the year ended June 30, 1996, from $4.1 million for the year ended June 30,
1995. The increase was due primarily to an increase in net interest
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income. The increase in balances and rates of interest-earning assets was
greater than the increase in balances and rates of interest-bearing
liabilities as the Bank focused on higher yielding assets and increasing
lending volume. The Bank's loans-to-deposits ratio increased to 76.8% at June
30, 1996, from 74.8% at June 30, 1995. Additionally, the Bank sold its credit
card operation for $101,000 and recorded net gains on the sale of REO and real
estate held for investment of $926,000 for the year ended June 30, 1996. This
was offset by an increase in non-interest expense of $1.3 million. The
increase was due to increased compensation and benefit expenses of $1.2
million for overtime, vacation and severance payments incurred for the
conversion process of outsourcing the Bank's data processing system to a
third-party provider and increases in staff.
Interest Income. Interest income for the year ended June 30, 1996, was $74.9
million, compared to $69.4 million for the year ended June 30, 1995, an
increase of $5.5 million, or 7.9%. Increased interest income on loans
accounted for substantially all of the increase. The increase in interest
income on loans was a result of growth in the average balance of loans
outstanding combined with an increase in the average yield. The average
balance of loans receivable increased $42.8 million, while the yield on such
loans increased to 8.42% for the year ended June 30, 1996, from 8.25% for the
year ended June 30, 1995.
The growth in lending was attributable to increased origination and
purchases of residential ARM loans and a more focused attention to the
generation of residential construction and consumer loans. During 1996 the
Bank also entered the equity line of credit market and by year end had
generated $7.3 million of these loans for its loan portfolio. The increase in
average yield for 1996 over 1995 was a direct result of generating higher-
yielding construction and equity line of credit loans, and also, the upward
rate adjustments on the Bank's "teaser" ARM loans which were offered initially
at low rates to attract borrowers.
Interest income on mortgage-backed securities increased $183,000 for the
year ended June 30, 1996, compared to the year ended June 30, 1995. The
average balance of mortgage-backed securities increased by $863,000 for the
year ended June 30, 1996, compared to the year ended June 30, 1995. The yield
on this portfolio increased to 6.50% from 6.36%, primarily due to the
repricing of adjustable-rate securities. Interest income on investment
securities decreased $2.4 million for the year ended June 30, 1996, compared
to the year ended June 30, 1995. The average balance of investment securities
declined by $56.2 million for the year ended June 30, 1996, compared to the
year ended June 30, 1995, primarily due to the funding of loans with proceeds
from maturing investment securities.
Interest Expense. Interest expense for the year ended June 30, 1996, was
$48.2 million, compared to $44.6 million for the year ended June 30, 1995, an
increase of $3.6 million, or 8.1%. The increase in interest expense was the
result of a $27.1 million increase in the average balance of interest-bearing
deposits and an increase in the average cost of deposits to 5.27% for the year
ended June 30, 1996, from 5.03% for the year ended June 30, 1995. The increase
in average cost was due to a higher rate environment.
Provision for Loan Losses. During the year ended June 30, 1996, the Bank's
provision for loan losses was $598,000 compared to $243,000 for the year ended
June 30, 1995, an increase of $355,000. The increase was mainly due to the
increase in loans which grew $75.0 million to $740.0 million at June 30, 1996,
from $665.0 million at June 30, 1995. With the provision for loan losses in
1996 of $598,000, the total allowance for loan losses increased by $276,000 to
$5.9 million at June 30, 1996, from $5.6 million at June 30, 1995.
Non-Interest Income. Non-interest income increased by $863,000 to $3.9
million for the year ended June 30, 1996, from $3.0 million for the year ended
June 30, 1995. The increase was primarily due to increases of $478,000 in
gains on the sale of REO and $354,000 in fees and service charges collected
from loan and deposit customers. Additionally, the Bank also realized a gain
of $101,000 on the sale of its credit card portfolio and an increase of
$266,000 on the sale of loans held-for-sale. These increases during 1996 were
offset by a loss of $271,000 on the disposal of computer software and the
lease termination fees paid on the mainframe computer when the Bank outsourced
its data processing system to a third party.
Non-Interest Expense. Non-interest expense increased to $22.1 million for
the year ended June 30, 1996, from $20.9 million for the year ended June 30,
1995, an increase of $1.3 million. Salary and benefit expenses increased $1.2
million to $11.1 million for the year ended June 30, 1996, from $9.9 million
for the year ended
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June 30, 1995. Attributable to this increase were annual salary adjustments of
$433,000, or 4.5%; $500,000 for increased employee staff associated with the
Bank's expanded lending areas, and $295,000 for severance and overtime
payments made to staff personnel involved in the conversion process of
outsourcing the data processing system. Occupancy, data processing and other
expense items decreased by $127,000 to $8.1 million for the year ended June
30, 1996, from $8.2 million for the year ended June 30, 1995. This decrease
was primarily attributed to the data processing conversion. Advertising
expenses increased $171,000 to $732,000 for the year ended June 30, 1996, from
$561,000 for the year ended June 30, 1995. The increase was primarily the
result of a greater focus on deposit generation in addition to mortgage
volume.
Provision for Income Taxes. Income tax expense was $2.5 million for the year
ended June 30, 1996, compared to $2.6 million for the year ended June 30,
1995. The effective tax rate for 1996 was 32.1%, a decrease of 7.3% over the
39.4% effective tax rate for 1995. The decrease in the effective tax rate for
June 30, 1996, was primarily the result of prior year state tax refunds of
$451,000, and the reversal of estimated deferred tax liability.
OTHER NONINTEREST EXPENSE
Other noninterest expense consists primarily of telephone expenses, postage
expenses, external bank service charges, and ATM operating charges. None of
the expenses exceed 15% of the total other noninterest expense amount. The
changes in total other noninterest expense as well as the change in the
primary components of this other noninterest expense have remained consistent
over the period from June 30, 1995 to September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are deposits, principal and interest
payments on loans, mortgage-backed and investment securities and FHLB
advances. While maturities and scheduled amortization of loans are predictable
sources of funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and competition. The
Bank has continued to maintain the required levels of liquid assets as defined
by OTS regulations. This requirement of the OTS, which may be varied at the
direction of the OTS depending upon economic conditions and deposit flows, is
based upon a percentage of deposits and short-term borrowings. The Bank's
currently required liquidity ratio is 5.0%. At September 30, 1997 and 1996,
the Bank's liquidity ratios were 11.9% and 14.9%, respectively, and at June
30, 1997, 1996, 1995, 1994, and 1993, the Bank's liquidity ratios were 12.4%,
19.1%, 23.0%, 27.8% and 22.8%, respectively.
At September 30, 1997, the Bank exceeded all of its regulatory capital
requirements with a tangible capital level of $80.3 million, or 7.8%, of total
adjusted assets, which is above the required level of $15.5 million, or 1.5%;
core capital of $80.3 million, or 7.8%, of total adjusted assets, which is
above the required level of $41.4 million, or 4.0%; and risk-based capital of
$86.8 million, or 14.3%, of risk-weighted assets, which is above the required
level of $48.5 million, or 8.0%. See "Regulatory Capital Compliance."
The Bank's most liquid assets are cash and cash equivalents and investment
securities. The levels of these assets are dependent on the Bank's operating,
financing, lending and investing activities during any given period.
Generally, the Bank's investment policy is more restrictive than the OTS
regulations allow and, accordingly, the Bank has invested primarily in U.S.
Government and agency securities, which qualify as liquid assets under the OTS
regulations. The Bank may also invest in commercial paper and investment-grade
corporate debt securities that return a higher rate. The Bank is cognizant of
the greater risks in these investments and only invests in commercial paper
rated in the two highest categories of the nationally recognized rating
services and invests in corporate debt securities rated only in one of the
four highest rating categories by a nationally recognized investment rating
service. At September 30, 1997, cash and cash equivalents and investment
securities totaled $104.3 million, or 10.1% of total assets.
The Bank has other sources of liquidity if a need for additional funds
arises, including FHLB advances. At September 30, 1997, the Bank had $10.6
million in advances outstanding from the FHLB, and at September 30, 1997, had
an additional overall borrowing capacity from the FHLB of $403.0 million.
Depending on market conditions, the pricing of deposit products and FHLB
advances, the Bank may continue to rely on FHLB borrowing to fund asset
growth.
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At September 30, 1997, the Bank had commitments to originate and purchase
loans and unused outstanding lines of credit and undisbursed proceeds of
construction mortgages totaling $68.8 million. The Bank anticipates that it
will have sufficient funds available to meet its current loan origination
commitments. Certificate accounts, including individual retirement account
("IRA") and KEOGH accounts, which are scheduled to mature in less than one
year from September 30, 1997, totalled $394.1 million. The Bank expects that
substantially all of the maturing certificate accounts will be retained by the
Bank at maturity.
YEAR 2000 COMPLIANCE
As the year 2000 approaches, an important business issue has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. Many existing application software products,
including the Bank's, were designed to accommodate a two-digit year. For
example, "96" is stored on the system and represents 1996. The Bank primarily
utilizes a third-party vendor for processing the primary banking applications.
In addition, the Bank also uses third-party vendor application software for
all ancillary computer applications. The third-party vendor for the Bank's
banking applications is in the process of modifying, upgrading or replacing
its computer applications to insure Year 2000 compliance. In addition, the
Bank has instituted a Year 2000 compliance program whereby the Bank is
reviewing the Year 2000 compliance issues that may be faced by its other
third-party vendors. Under such program, the Bank will examine the need for
modifications or replacement of all non-Year 2000 compliant pieces of
software. The Bank does not currently expect that the cost of its Year 2000
compliance program will be material to its financial condition and believes
that it will satisfy such compliance program by the end of 1998 without
material disruption of its operations. In the event that the Bank's
significant suppliers do not successfully and timely achieve Year 2000
compliance, the Bank's business or operations could be adversely affected.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with GAAP, which require the measurement of
financial position and operating results generally in terms of historical
dollar amounts without considering the changes in the relative purchasing
power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of the Bank's operations. Unlike industrial
companies, nearly all of the assets and liabilities of the Bank are monetary
in nature. As a result, interest rates have a greater impact on the Bank's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the
prices of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
Accounting for Stock-Based Compensation. In November 1995, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS No. 123").
This statement establishes financial accounting standards for stock-based
employee compensation plans. SFAS No. 123 permits the Bank to choose either a
new fair value based method or the current Accounting Principles Board ("APB")
Opinion 25 intrinsic value based method of accounting for its stock-based
compensation arrangements. SFAS No. 123 requires pro forma disclosures of net
earnings and earnings per share computed as if the fair value based method had
been applied in financial statements of companies that continue to follow
current practice in accounting for such arrangements under APB Opinion 25.
SFAS No. 123 applies to all stock-based employee compensation plans in which
an employer grants shares of its stock or other equity instruments to
employees except for employee stock ownership plans. SFAS No. 123 also applies
to plans in which the employer incurs liabilities to employees in amounts
based on the price of the employer's stock, (e.g., Stock-Based Incentive Plan,
stock purchase plans, restricted stock plans, and stock appreciation rights).
The statement also specifies the accounting for transactions in which a
company issues stock options or other equity instruments for services provided
by nonemployees or to acquire goods or services from outside suppliers or
vendors. The recognition provisions of SFAS No. 123 for companies choosing to
adopt the new fair value based method of accounting for stock-based
compensation arrangements may be adopted immediately and will apply to all
transactions entered into in fiscal years that begin after December 15, 1995,
however, disclosure of the pro forma net earnings and earnings per share, as
if the fair value method of accounting for stock-based compensation had been
elected, is required for all awards granted in fiscal years
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beginning after December 31, 1994. Any effect that this statement will have on
the Bank will be applicable upon the consummation of the Conversion. The Bank
has elected to continue to follow the APB Opinion 25 method upon adoption, but
will provide pro forma disclosure as if the fair value method had been
applied.
Reporting Comprehensive Income. In June 1997, the FASB issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). This statement establishes standards for the reporting and
displaying of comprehensive income and its components in a full set of
financial statements. Comprehensive income is the total of reported net income
and all other revenues, expenses, gains and losses that under generally
accepted accounting principles bypass reported net income. SFAS No. 130
requires that comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements with the
aggregate amount of comprehensive income reported in that same financial
statement. SFAS No. 130 permits the statement of changes in stockholders'
equity be used to meet this requirement. Companies are encouraged, but not
required, to display the components of other comprehensive income below the
total for net income in the statement of operations or in a separate statement
of comprehensive income. Companies are also required to display the cumulative
total of other comprehensive income for the period as a separate component of
equity in the statement of financial position. This statement is effective for
fiscal years beginning after December 15, 1997, or July 1, 1998 for the Bank.
Disclosures About Segments of an Enterprise and Related Information. In June
1997, the FASB issued Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS
No. 131"). This statement requires disclosure for each segment that are
similar to those required under current standards with the addition of
quarterly disclosure requirements and a finer partitioning of geographic
disclosures. It requires limited segment data on a quarterly basis. It also
requires geographic data by county, as opposed to broader geographic regions
as permitted under current standards. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997, or July 1, 1998 for the Bank.
IMPACT OF GOODWILL LITIGATION
On August 7, 1995, the Bank initiated the Goodwill Litigation against the
Government in the United States Court of Federal Claims. The suit contends
that the Government breached its contracts with the Bank in connection with
three separate 1982 supervisory merger transactions. The breach occurred
through the enactment of FIRREA in 1989, which mandated the imposition of new
capital requirements on the thrift industry, required certain levels of
"tangible capital," and "risk-based capital," and defined those terms to
exclude, following a five-year transition period, intangible assets such as
goodwill from the calculation of the various capital requirements. (First
Federal Lincoln Bank v. The United States, No. 95-518-C). The complaint also
raises claims against the Government for unconstitutional taking and
deprivation of property rights without due process. The contracts arose in
connection with the Bank's acquisition by merger of three federal savings and
loan associations in 1982, pursuant to which the Bank alleges the Government
agreed that the Bank would have the right to use the purchase method of
accounting in each of the three mergers and include the approximately $41
million in resulting Supervisory Goodwill as a capital asset amortizing over a
25-year period for purposes of meeting applicable regulatory net worth
requirements. The Bank's complaint seeks restitution in the amount of not less
than $22.5 million, which amount represents the unamortized portion of the
Supervisory Goodwill, plus interest thereon, plus additional damages in an
amount to be proved by the Bank. The Goodwill Litigation was stayed pending
the resolution on appeal of the Winstar Cases which present issues similar to
those presented by the Bank in the Goodwill Litigation.
On July 1, 1996, the United States Supreme Court issued its opinion in
United States v. Winstar Corporation, No. 95-865, which affirmed the decisions
of the United States Court of Appeals for the Fourth Federal Circuit and the
United States Court of Federal Claims in various consolidated cases in
granting summary judgment to the plaintiff thrift institutions on the
liability portion of their breach of contract claims against the Government.
The Supreme Court held that the Government breached certain express contracts
when Congress enacted FIRREA, and the Supreme Court remanded the proceedings
for a determination of the appropriate measure and amount of damages which, as
of the date of this prospectus, have not been finally litigated.
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The United States Court of Federal Claims issued a Case Management Order
("CMO") in all of the cases similar to the Winstar Cases ("Winstar-related
Cases"), including the Bank's. The CMO sets forth procedures for all of the
plaintiffs and the Government to follow relating to the exchange of documents
and other discovery, filing of partial summary judgment motions with respect
to liability only, discovery on damages issues and the timing of all of the
Winstar-related Cases being set for liability and/or damage trials. Pursuant
to the CMO, the Bank filed a motion for partial summary judgment as to the
Government's liability to the Bank for breach of contract in each of the three
subject matter transactions. Pursuant to the CMO, the Government filed its
response to the Bank's motion and the Bank filed its reply to the Government's
response. Based upon the current status of the proceedings in the Winstar-
related Cases and the CMO and subsequent procedural orders, the Goodwill
Litigation is not expected to be set for trial for at least two years. The
amount of damages the Bank has suffered as a result of the Government's breach
of contract has not yet been determined. In addition, although the decision of
the Supreme Court in the Winstar Cases as to liability has been rendered,
there can be no assurance that the court will not reach a different conclusion
in the Goodwill Litigation or any other Winstar-related case. There can also
be no assurance as to the amount of any damages that may be awarded with
respect to the Goodwill Litigation or when such damages may be awarded or
received by the Bank.
BUSINESS OF THE BANK
GENERAL
The Bank's principal business has been and continues to be attracting retail
deposits from the general public in the areas surrounding its 57 offices and
investing those deposits, together with funds generated from operations and
borrowings, primarily in adjustable-rate and shorter-term fixed-rate single-
family residential mortgage loans. The Bank originates loans for investment
and loans for sale in the secondary market, generally retaining adjustable
rate loans and selling longer-term fixed rate loans. To a lesser extent, the
Bank invests in multi-family, commercial real estate, construction and land,
consumer and commercial loans. In addition to loans it originates in areas
surrounding its branches, the Bank purchases loans from loan brokers secured
by properties located in other western states. Loan sales are made from loans
designated as being held for sale or originated for sale during the period.
The Bank's revenues are derived principally from interest on its mortgage
loans, and to a lesser extent, interest and dividends on its investment and
mortgage-backed securities and loan servicing income. The Bank's primary
sources of funds are deposits, principal and interest payments on loans and
mortgage-backed securities, FHLB advances and proceeds from the sale of loans.
MARKET AREA AND COMPETITION
The Bank is a community-oriented savings institution offering a variety of
financial products and services to meet the needs of the communities it
serves. The Bank's deposit gathering is concentrated in the communities
surrounding its 57 offices located in Nebraska, Marshall and Rooks Counties in
northern Kansas and six counties in southwest Iowa. The Bank invests primarily
in loans secured by first or second mortgages on properties located in areas
surrounding its offices. It also invests to a lesser extent in loans on
properties outside of its Nebraska, Kansas, and Iowa market areas, primarily
in other Western and Midwestern states.
The Bank's home office is located in Lincoln, Nebraska, which is the state
capital and home of the University of Nebraska at Lincoln. The region in which
the Bank's offices are located was once dominated by agriculture, but now
consists of a blend of industries, major urban centers, and significant
corporate investment. The region's population is nearly 1.8 million persons
and more than 90% of the individuals in the Bank's primary market area live in
Nebraska. The region continues to experience a migration from rural
communities to the Omaha and Lincoln metropolitan areas, as well as other mid-
sized regional growth centers scattered throughout the Bank's primary market
area. After a moderate decline between 1984 and 1986, median household income
in Nebraska has steadily increased. According to the 1990 census, the majority
of Nebraska households had incomes between $15,000 and $49,999 with nearly
16.3% of all households with incomes above $50,000.
The Bank faces significant competition both in generating loans and in
attracting deposits. The Bank's primary market area is highly competitive and
the Bank faces direct competition from a significant number of financial
service providers, many with a state-wide or regional presence and, in some
cases, a national presence.
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Many of these financial service providers are significantly larger and have
greater financial resources than the Bank. The Bank's competition for loans
comes principally from commercial banks, savings banks, credit unions,
mortgage brokers, mortgage banking companies and insurance companies. Due to
the Bank's increasing emphasis on the acquisition of ARM loans for retention
in its portfolio, and because the demand for such loans is limited in the
Bank's market area in the recent interest rate environment, competition for
such loans and for other shorter-term interest-sensitive loans has caused the
Bank to increase its reliance upon purchases of loans from selected brokers,
particularly in California, Arizona and Colorado. The Bank's most direct
competition for deposits has historically come from savings banks and
associations and commercial banks and credit unions. In addition, the Bank
faces increasing competition for deposits from non-bank institutions such as
brokerage firms and insurance companies in such instruments as short-term
money market funds, corporate and government securities funds, mutual funds
and annuities. Competition may also increase as a result of the lifting of
restrictions on the interstate operations of financial institutions. See "Risk
Factors--Highly Competitive Industry and Geographic Area."
LENDING ACTIVITIES
Loan Portfolio Composition. A significant amount of the Bank's loan
portfolio consists of first mortgage loans secured by single-family
residences. At September 30, 1997, loans receivable, net totaled $818.5
million, of which $521.7 million were single-family, residential mortgage
loans, or 61.7% of the Bank's total loans receivable. At such date, the
remainder of the loan portfolio consisted of: $39.2 million of multi-family
residential loans, or 4.6% of total loans receivable; $140.8 million of
commercial real estate loans, or 16.7% of total loans receivable; $50.5
million of construction and land loans, or 6.0% of total loans receivable; and
$91.2 million of consumer loans, or 10.8% of total loans receivable,
consisting of $21.8 million of equity lines of credit, $25.6 million of home
equity loans, $27.3 million of home improvement loans, $10.3 million of auto
loans and $6.2 million of other consumer loans. The Bank had $1.5 million of
mortgage loans held for sale at September 30, 1997, consisting of single-
family, fixed-rate mortgage loans. At that same date, 49.5% of the Bank's
residential mortgage loans and construction and land loans, excluding mortgage
loans held for sale, had adjustable interest rates, most of which are indexed
to the one-year U.S. Treasury Constant Maturity Yield ("CMT Index").
The types of loans that the Bank may purchase and originate are subject to
federal and state laws and regulations. Interest rates charged by the Bank on
loans are affected by the demand for such loans and the supply of money
available for lending purposes and the rates offered by competitors. These
factors are, in turn, affected by, among other things, economic conditions,
monetary policies of the federal government, including the Federal Reserve
Board, and legislative tax policies.
56
<PAGE>
The following table sets forth the composition of the Bank's loan portfolio
in dollar amounts and as a percentage of the portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
AT SEPTEMBER 30, ---------------------------------------------------------------------------
1997 1997 1996 1995 1994
------------------ ------------------ ------------------ ------------------ ------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential:
Single-family.... $521,679 61.71% $531,110 63.08% $487,744 65.87% $455,715 68.49% $448,782 70.19%
Multi-family..... 39,208 4.64 39,167 4.65 27,966 3.78 24,391 3.67 27,183 4.25
Commercial real
estate........... 140,825 16.65 144,139 17.12 146,207 19.74 132,070 19.85 132,373 20.71
Construction and
land............. 50,531 5.98 45,617 5.42 41,112 5.55 25,623 3.85 5,886 0.92
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total mortgage
loans........... 752,243 88.98 760,033 90.27 703,029 94.94 637,799 95.86 614,224 96.07
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Commercial and
equipment......... 1,954 0.23 1,990 0.24 2,246 0.30 1,330 0.20 92 0.01
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Consumer loans:
Home equity...... 25,661 3.04 22,407 2.66 12,486 1.69 11,383 1.71 11,408 1.78
Equity line of
credit........... 21,784 2.58 19,992 2.37 7,341 0.99 -- -- -- --
Home
improvement...... 27,311 3.23 21,772 2.58 4,270 0.58 4,173 0.63 3,882 0.61
Auto loans....... 10,263 1.21 9,224 1.10 4,817 0.65 2,921 0.44 2,991 0.47
Other............ 6,184 0.73 6,560 0.78 6,290 0.85 7,757 1.16 6,801 1.06
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total consumer
loans........... 91,203 10.79 79,955 9.49 35,204 4.76 26,234 3.94 25,082 3.92
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans
receivable........ 845,400 100.00% 841,978 100.00% 740,479 100.00% 665,363 100.00% 639,398 100.00%
====== ====== ====== ====== ======
Allowance for
loan losses...... (7,022) (6,330) (5,918) (5,642) (5,966)
Undisbursed
proceeds on
construction loans
in process........ (16,908) (17,699) (17,270) (9,656) (3,922)
Deferred loan
origination fees,
net............... (3,010) (3,068) (3,779) (3,842) (4,328)
-------- -------- -------- -------- --------
Loans
receivable,
net............. $818,460 $814,881 $713,512 $646,223 $625,182
======== ======== ======== ======== ========
<CAPTION>
1993
------------------
PERCENT
AMOUNT OF TOTAL
--------- --------
<S> <C> <C>
Mortgage loans:
Residential:
Single-family.... $406,449 65.80%
Multi-family..... 33,314 5.39
Commercial real
estate........... 145,112 23.49
Construction and
land............. 2,304 0.37
--------- --------
Total mortgage
loans........... 587,179 95.05
--------- --------
Commercial and
equipment......... 155 0.03
--------- --------
Consumer loans:
Home equity...... 14,964 2.42
Equity line of
credit........... -- --
Home
improvement...... 4,713 0.76
Auto loans....... 5,771 0.94
Other............ 4,921 0.80
--------- --------
Total consumer
loans........... 30,369 4.92
--------- --------
Total loans
receivable........ 617,703 100.00%
========
Allowance for
loan losses...... (7,581)
Undisbursed
proceeds on
construction loans
in process........ (1,206)
Deferred loan
origination fees,
net............... (5,460)
---------
Loans
receivable,
net............. $603,456
=========
</TABLE>
57
<PAGE>
Loan Maturity. The following table shows the remaining contractual maturity
of the Bank's loans at September 30, 1997. The table does not include the
effect of future principal prepayments.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
----------------------------------------------------------------------
SINGLE- MULTI- COMMERCIAL CONSTRUCTION TOTAL
FAMILY FAMILY REAL ESTATE AND LAND COMMERCIAL CONSUMER LOANS
-------- ------- ----------- ------------ ---------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
One year or less....... $ 13,730 $ 7 $ 4,556 $45,101 $ 37 $ 4,404 $ 67,835
-------- ------- -------- ------- ------ ------- --------
After one year:
More than one year to
three years.......... 2,468 3,807 16,663 5,146 1,159 9,892 39,135
More than three years
to five years........ 10,500 2,817 3,046 152 758 62,547 79,820
More than five years
to 10 years.......... 44,053 31,324 114,943 132 -- 14,296 204,748
More than 10 years to
20 years............. 174,306 1,253 1,617 -- -- 64 177,240
More than 20 years.... 276,622 -- -- -- -- -- 276,622
-------- ------- -------- ------- ------ ------- --------
Total due after
September 30, 1998... 507,949 39,201 136,269 5,430 1,917 86,799 777,565
-------- ------- -------- ------- ------ ------- --------
Total amount due...... $521,679 $39,208 $140,825 $50,531 $1,954 $91,203 845,400
======== ======= ======== ======= ====== =======
</TABLE>
<TABLE>
<S> <C>
Less:
Allowance for loan losses........................................... (7,022)
Undisbursed loan funds.............................................. (16,908)
Deferred loan fees.................................................. (2,155)
Unamortized discounts, net.......................................... (855)
--------
Loans receivable, net................................................. $818,460
========
</TABLE>
The following table sets forth, at September 30, 1997, the dollar amount of
loans, excluding mortgage loans held for sale, contractually due after
September 30, 1998, and whether such loans have fixed interest rates or
adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER SEPTEMBER 30, 1998
----------------------------
FIXED ADJUSTABLE TOTAL
-------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loans:
Single-family.................................... $261,989 $245,960 $507,949
Multi-family..................................... 5,930 33,271 39,201
Commercial real estate........................... 15,737 120,532 136,269
Construction and land............................ 816 4,614 5,430
-------- -------- --------
Total mortgage loans........................... 284,472 404,377 688,849
Commercial loans................................... 1,917 -- 1,917
Consumer loans..................................... 72,452 14,347 86,799
-------- -------- --------
Total loans receivable......................... $358,841 $418,724 $777,565
======== ======== ========
</TABLE>
Origination, Sale and Servicing of Loans. The Bank's mortgage lending
activities are conducted primarily through its branch offices and through a
network of approximately 5 active loan correspondents and wholesale loan
brokers approved by the Bank. All loans originated by the Bank, either through
internal sources or through loan correspondents, are underwritten pursuant to
the Bank's policies and procedures. For fiscal 1997, and the three months
ended September 30, 1997, the Bank's loan correspondents originated $71.7
million and $3.2 million in loans, respectively. The Bank originates both
adjustable-rate and fixed-rate loans. The Bank's ability to originate and
purchase fixed- or adjustable-rate loans is dependent upon the relative
customer demand for such loans, which is affected by the current and expected
future level of interest rates. The recent interest rate environment has
caused the Bank to increase its reliance on purchasing ARM loans for retention
in its portfolio.
Generally, all adjustable-rate mortgage loans originated by the Bank are
originated for investment. While the Bank has in the past, from time to time,
retained fixed-rate single-family loans, it is currently the general policy of
the Bank to sell most of the 30-year single-family fixed-rate mortgage loans
and retain for portfolio adjustable-rate loans and shorter term fixed-rate
loans with maturities of 15 years or less.
58
<PAGE>
At September 30, 1997, the Bank was servicing its portfolio of $658.9
million of loans receivable, net and mortgage loans held for sale and $19.8
million of loans for others, primarily consisting of conforming fixed-rate
loans sold by the Bank. Loan servicing includes collecting and remitting loan
payments, accounting for principal and interest, contacting delinquent
mortgagors, supervising foreclosures and property dispositions in the event of
unremedied defaults, making certain insurance and tax payments on behalf of
the borrowers and generally administering the loans. In the past, the Bank has
recognized gains from excess servicing, which is the present value of any
difference between the interest rate charged to the borrower and the interest
rate paid to the purchaser after deducting a normal servicing fee, and is
recognizable as an adjustment to the cash gain or loss. The excess servicing
gain or loss is dependent on prepayment estimates and discount rate
assumptions. The gross servicing fee income from loans originated and
purchased is generally 0.25% to 0.50% of the total balance of the loan
serviced. In the past, the Bank recognized the present value of the income
attributable to excess servicing rights upon the sale of loans.
During the fiscal years ended June 30, 1997, and June 30, 1996, the Bank
originated $97.7 million and $96.1 million of fixed-rate and adjustable-rate
single-family loans, respectively, of which $49.7 million and $45.5 million,
respectively, were retained by the Bank. The Bank's current policy is
generally to retain only those fixed-rate loans originated with a term of 15
years or less. The Bank recognizes, at the time of sale, the gain or loss on
the sale of the loans based on the difference between the net proceeds
received and the carrying value of the loans sold.
The following table sets forth the Bank's loan originations, purchases,
sales and principal repayments for the periods indicated:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED SEPTEMBER 30, FOR THE YEAR ENDED JUNE 30,
--------------------- ---------------------------
1997 1996 1997 1996 1995
---------- ---------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
TOTAL LOANS:
Beginning balance............ $ 814,881 $ 713,512 $ 713,512 $646,223 $625,182
---------- ---------- --------- -------- --------
Loans originated:
Single-family............ 38,395 23,638 97,688 96,065 40,869
Multi-family............. 4,065 1,510 19,476 7,137 6,011
Commercial real estate... 4,554 6,247 19,798 36,807 21,871
Construction and land.... 16,332 13,452 52,064 48,825 15,931
Commercial............... 308 543 1,954 1,513 1,347
Consumer:................ 16,602 10,999 50,215 28,566 16,914
---------- ---------- --------- -------- --------
Total loans
originated............ 80,256 56,389 241,195 218,913 102,943
---------- ---------- --------- -------- --------
LOANS PURCHASED:
Single-family............ 3,204 29,067 71,689 70,572 24,904
Residential
construction............ -- -- -- -- 15,593
Consumer loans........... 9,510 6,027 28,069 18 --
---------- ---------- --------- -------- --------
Total loans purchased.. 12,714 35,094 99,758 70,590 40,497
---------- ---------- --------- -------- --------
Total.................. 907,851 804,995 1,054,465 935,726 768,622
---------- ---------- --------- -------- --------
LESS:
Principal repayments....... 72,244 47,841 191,137 169,649 99,035
Sales of loans............. 16,971 8,374 48,084 50,557 22,547
Transfer to REO and loan
charge-offs............... 176 125 363 2,008 817
---------- ---------- --------- -------- --------
Loans receivable............. $ 818,460 $ 748,655 $ 814,881 $713,512 $646,223
========== ========== ========= ======== ========
</TABLE>
Single-Family Mortgage Lending. The Bank currently offers both fixed-rate
and ARM loans with maturities of up to 30 years secured by single-family
residences. Most of such loans are located in the Bank's primary market area.
Single-family mortgage loan originations are generally obtained from the
Bank's in-house loan representatives, from existing or past customers, from
mortgage brokers, and through referrals from members of the Bank's local
communities. At September 30, 1997, the Bank's single-family mortgage loans
totaled $521.7 million, or 61.7% of total loans. Of the single-family mortgage
loans outstanding at that date, 51.0% were fixed-rate mortgage loans and 49.0%
were ARM loans.
59
<PAGE>
The Bank currently offers fixed-rate mortgage loans with terms from 15 to 30
years. The Bank sells most of the 30-year fixed-rate residential loans that it
originates. The Bank generally retains for its portfolio shorter-term, fixed-
rate loans with maturities of 15 years or less and all adjustable-rate single-
family loans. From time to time, the Bank will purchase single-family mortgage
loans secured by real estate located primarily in the Midwest. Such loans are
purchased with servicing retained by the seller.
The Bank currently offers a number of ARM loans with terms of up to 30 years
and interest rates which initially adjust one, two, three or five years from
the outset of the loan and thereafter annually or biannually for the duration
of the loan. The interest rates for the Bank's ARM loans are indexed to either
the one-year or two-year CMT Index or the U.S. Treasury Bill. The Bank
originates ARM loans initially with "teaser rates." The Bank's ARM loans
generally provide for periodic (not more than 2%) caps on the increase or
decrease in the interest rate at any adjustment date. Currently, the Bank has
a rate ceiling for the life of the loan of 11.875%.
The origination of adjustable-rate residential mortgage loans, as opposed to
fixed-rate residential mortgage loans, helps reduce the Bank's exposure to
increases in interest rates. However, adjustable-rate loans generally pose
credit risks not inherent in fixed-rate loans, primarily because as interest
rates rise, the underlying payments of the borrower rise, thereby increasing
the potential for default. Periodic and lifetime caps on interest rate
increases help to reduce the risks associated with adjustable-rate loans but
also limit the interest rate sensitivity of such loans.
Most single-family mortgage loans are underwritten according to Fannie Mae
("FNMA") and FHLMC guidelines. Generally, the Bank originates single-family
residential mortgage loans in amounts up to 80% of the lower of the appraised
value or the selling price of the property securing the loan and up to 95% of
the appraised value or selling price if private mortgage insurance ("PMI") is
obtained. Mortgage loans originated by the Bank generally include due-on-sale
clauses which provide the Bank with the contractual right to deem the loan
immediately due and payable in the event the borrower transfers ownership of
the property without the Bank's consent. Due-on-sale clauses are an important
means of adjusting the yields on the Bank's fixed-rate mortgage loan portfolio
and the Bank has generally exercised its rights under these clauses. The Bank
requires fire, casualty, title and, in certain cases, flood insurance on all
properties securing real estate loans made by the Bank.
Commercial Real Estate and Multi-Family Lending. The Bank invests in
commercial real estate loans that are secured by properties generally used for
business purposes such as office buildings, retail facilities, and multi-
family housing structures. Those loans are made on properties located
primarily in Lincoln and Omaha, Nebraska and in selected areas of the western
states. Commercial real estate loans are typically generated through loan
brokers in communities outside of Lincoln and Omaha. The Bank's underwriting
procedures provide generally that commercial real estate loans may be made in
amounts up to 75% of the value of the security property and any loan exceeding
that value ratio must be supported by documentation of the relevant factors
justifying the deviation which is reviewed by the Bank's Board of Directors on
a quarterly basis. Commercial property loans exceeding established loan to
value limits may not exceed 30% of the Bank's capital. All commercial loans
are underwritten at the Bank's centralized Loan Underwriting Department at the
Bank's home office. In underwriting these loans, the Bank considers all
aspects of the ability and willingness of each borrower to repay the debt. The
Bank considers the borrower's income, probable continuation of income and
credit history. The Bank currently invests in commercial real estate loans
with a loan amount up to $10.0 million and for terms of up to 15 years. Loans
in excess of $3.0 million must be presented to and approved by the Bank's
Board of Directors. The Bank has generally required that the properties
securing these real estate loans have debt service coverage ratios (the ratio
of earnings before debt service to debt service) of at least 125%. In
addition, the Bank requires that security instruments contain affirmative
language concerning the prospective borrower's responsibility for compliance
with laws and regulations (including environmental, health and safety) and for
protecting the environmental conditions of the security property. A phase one
environmental assessment report, prepared in conformance with the Bank's
environmental risk policy, is obtained if the loan is in excess of $750,000,
or if there is any known indication of contamination at the security property.
The Bank's multi-family real estate loan portfolio at September 30, 1997 was
$39.2 million, or 4.6% of total loans, and the Bank's commercial real estate
loan portfolio at such date was $140.8 million, or 16.7% of total loans. The
largest multi-family or commercial real estate loan at September 30, 1997 was
a $7.4 million loan serviced by the Bank and secured by property located in
Nebraska.
60
<PAGE>
Loans secured by multi-family and commercial real estate properties
generally involve larger principal amounts and a greater degree of risk than
single-family residential mortgage loans. Payments on loans secured by multi-
family and commercial real estate properties are often dependent on successful
operation or management of the properties. Repayment of such loans may be
subject to adverse conditions in the real estate market or the economy and a
concentration of loans in a geographic region may be subject to greater risk
because of the potential for adverse economic conditions affecting that
region. The Bank seeks to minimize these risks through its underwriting
standards. See "Risk Factors--Increased Lending Risks Associated with Multi-
Family, Commercial Real Estate and Commercial Loans."
Special Loan Program. The Bank makes loans to mortgage brokers to fund home
loans originated by the broker from the date of the closing of the home loan
until funding of the purchase of the home loan by an investor pursuant to a
previously executed agreement. The duration of such loans ordinarily does not
exceed 21 days and the loan is secured by a conditional assignment of the home
purchaser's loan. The amount of the loan is limited to the principal amount of
the note of the home purchaser. At September 30, 1997, the Bank's investment
in such loans totalled $11.7 million. In underwriting these loans, the Bank
considers the borrower's experience in the home loan lending market, asset
size, income level and credit history. To reduce risks associated with these
loans, a compensating depository account and maintenance of a minimal tangible
net worth are required.
Construction Lending. The Bank offers residential construction loans for
either presold or speculative homes both as temporary and as permanent
financing. The Bank generates such residential construction loans primarily
through direct contact with home builders, and most such loans involve
properties located in the Omaha and Lincoln metropolitan areas. Such loans
require that the Bank review plans, specifications and cost estimates and that
the contractor be known to the Bank to be reputable. The amount of
construction advances to be made, together with the sum of previous
disbursements, may not exceed the percentage of completion of the
construction. Maximum loan-to-value limits applicable to such loans generally
are as follows: 95% for loans up to the maximum amount established by FNMA and
FHLMC from time to time (currently $214,600); 80% for loans up to $250,000;
and 75% for loans up to $350,000. At September 30, 1997, the Bank's largest
residential construction loans were performing loans each with an outstanding
principal balance of $500,000, secured by single-family residences located in
Gretna and Omaha, Nebraska. At that date, residential construction loans
totaled $37.3 million, or 4.4% of the Bank's total outstanding loans.
Construction and development financing is generally considered to involve a
higher degree of credit risk than long-term financing on improved, owner-
occupied real estate. Risk of loss on a construction loan is dependent largely
upon the accuracy of the initial estimate of the property's value at
completion of construction or development compared to the estimated cost
(including interest) of construction and other assumptions, including the
estimated time to sell residential properties. If the estimate of value proves
to be inaccurate, the Bank may be confronted with a project, when completed,
having a value which is insufficient to assure full repayment. See "Risk
Factors--Increased Lending Risks Associated with Construction and Development
Loans."
Consumer and Other Lending. Consumer loans, including primarily home equity
loans and home improvement loans as well as other loans for consumer purposes,
at September 30, 1997, amounted to $91.2 million or 10.8% of the Bank's total
loans. These loans include home improvement, automobile, equity lines of
credit, home equity, recreational vehicle, personal, and student loans. Most
of these loans have maturities of less than 60 months. The Bank generally
offers home equity loans in amounts up to $100,000 with a term of 60 months or
less and a loan-to-value ratio up to 100% of value or with terms from 61
months to 120 months and a loan-to-value ratio up to 90% of value. The Bank
offers home improvement loans in amounts up to $75,000 with a term of 60
months or less and a loan-to-value ratio up to 100% of value or with terms of
61 months to 120 months and loan-to-value ratios of 90% of value. The Bank
offers automobile loans in amounts up to $50,000 with 60 month terms and loan-
to-value ratios of 85% for new cars and 75% for used cars. The Bank offers
loans on recreational vehicles in amounts up to $50,000 with terms up to 184
months and loan-to-value ratios of 75% of the retail price. Boat loans and
motorcycle loans are offered in amounts up to $25,000 and $5,000 respectively
61
<PAGE>
with loan-to-value ratios of 60% of the sales price. The Bank also offers 36
month personal, unsecured loans in amounts up to $10,000 and loans on deposit
accounts or stocks in amounts up to $50,000. Student loans are offered through
the Nebraska Higher Education Loan Program and insured by the Nebraska Student
Loan Program.
Loans secured by rapidly depreciable assets such as automobiles or that are
unsecured entail greater risks than single-family residential mortgage loans.
In such cases, repossessed collateral for a defaulted loan may not provide an
adequate source of repayment of the outstanding loan balance, since there is a
greater likelihood of damage, loss or depreciation of the underlying
collateral. Further, consumer loan collections on these loans are dependent on
the borrower's continuing financial stability and, therefore, are more likely
to be adversely affected by job loss, divorce, illness or personal bankruptcy.
Finally, 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 in the event of a default. At September 30, 1997, the
Bank's consumer loans 90 days or more delinquent totaled $44,000.
Commercial Lending. At September 30, 1997, the Bank had $2.0 million in
commercial loans which amounted to 0.2% of total loans receivable. The Bank
does not currently anticipate that commercial lending activity will
significantly increase in the immediate future.
Loan Approval Procedures and Authority. The Board of Directors of the Bank
establishes the lending policies and procedures of the Bank. All general
lending policies are set on an ongoing basis by the Asset/Liability Committee
("ALCO") composed of the following officers of the Bank: Chairman; President;
Executive Vice Presidents: Director of Lending, Director of Financial
Services, Director of Marketing and Employee Development, Director of Consumer
Services, Director of Finance; and a First Vice President-Controller. Pursuant
to established policies, the Chairman, President or Director of Lending may
approve consumer loans and residential loans up to the maximum amount
permitted for the Bank under applicable regulations.
Loans on commercial real estate and construction loans may be approved up to
$500,000 by a designated First Vice President and the Director of Lending with
ratification by the ALCO; in excess of $500,000 by any three of a designated
First Vice President, Director of Lending, President, and Chairman, with
ratification by the ALCO.
For loan amounts in excess of $3.0 million, approval of the Board of
Directors of the Bank is required.
DELINQUENT LOANS, CLASSIFIED ASSETS AND REAL ESTATE OWNED
Delinquencies and Classified Assets. Reports listing all delinquent accounts
are generated and reviewed by management on a monthly basis and the Board of
Directors performs a monthly review of all loans or lending relationships
delinquent 30 days or more and all REO. The procedures taken by the Bank with
respect to delinquencies vary depending on the nature of the loan, period and
cause of delinquency and whether the borrower is habitually delinquent. When a
borrower fails to make a required payment on a loan, the Bank takes a number
of steps to have the borrower cure the delinquency and restore the loan to
current status. The Bank generally sends the borrower a written notice of non-
payment after the loan is first past due. The Bank's guidelines provide that
telephone, written correspondence and/or face-to-face contact will be
attempted to ascertain the reasons for delinquency and the prospects of
repayment. When contact is made with the borrower at any time prior to
foreclosure, the Bank will attempt to obtain full payment, work out a
repayment schedule with the borrower to avoid foreclosure or, in some
instances, accept a deed in lieu of foreclosure. In the event payment is not
then received or the loan not otherwise satisfied, additional letters and
telephone calls generally are made. If the loan is still not brought current
or satisfied and it becomes necessary for the Bank to take legal action, which
typically occurs after a loan is 90 days or more delinquent, the Bank will
commence foreclosure proceedings against any real property that secures the
loan. If a foreclosure action is instituted and the loan is not brought
current, paid in full, or refinanced before the foreclosure sale, the property
securing the loan generally is sold at foreclosure and, if purchased by the
Bank, becomes REO.
62
<PAGE>
Federal regulations and the Bank's Asset Classification Policy require that
the Bank utilize an internal asset classification system as a means of
reporting problem and potential problem assets. The Bank has incorporated the
OTS internal asset classifications as a part of its credit monitoring system.
The Bank currently classifies problem and potential problem assets as
"Substandard," "Doubtful" or "Loss" assets. An asset is considered
"Substandard" if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "Doubtful" have all of the weaknesses
inherent in those classified "Substandard" with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis
of currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "Loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets which do not
currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are required to be designated "Special Mention."
When an insured institution classifies one or more assets, or portions
thereof, as "Substandard" or "Doubtful", it is required to establish a general
valuation allowance for loan losses in an amount deemed prudent by management.
General valuation allowances represent loss allowances which have been
established to recognize the inherent risk associated with lending activities,
but which, unlike specific allowances, have not been allocated to particular
problem assets. When an insured institution classifies one or more assets, or
portions thereof, as "Loss," it is required either to establish a specific
allowance for losses equal to 100% of the amount of the asset so classified or
to charge off such amount.
A savings institution's determination as to the classification of its assets
and the amount of its valuation allowances is subject to review by the OTS
which can order the establishment of additional general or specific loss
allowances. The OTS, in conjunction with the other federal banking agencies,
has adopted an interagency policy statement on the allowance for loan and
lease losses. The policy statement provides guidance for financial
institutions on both the responsibilities of management for the assessment and
establishment of adequate allowances and guidance for banking agency examiners
to use in determining the adequacy of general valuation guidelines. Generally,
the policy statement recommends that institutions have effective systems and
controls to identify, monitor and address asset quality problems; that
management has analyzed all significant factors that affect the collectibility
of the portfolio in a reasonable manner; and that management has established
acceptable allowance evaluation processes that meet the objectives set forth
in the policy statement. Although management believes that, based on
information currently available to it at this time, its allowance for loan
losses is adequate, actual losses are dependent upon future events and, as
such, further additions to the level of allowances for loan losses may become
necessary.
The ALCO reviews and classifies assets on a monthly basis and the Board of
Directors reviews the results of the reports on a quarterly basis. The Bank
classifies assets in accordance with the management guidelines described
above. At September 30, 1997, the Bank had $2.3 million of assets designated
as "Substandard" which consisted of REO and mortgage and consumer loans. At
that same date the Bank had no loans designated as "Doubtful" or "Loss". As of
September 30, 1997, the Bank had a total of 13 single-family loans, totaling
$1.0 million, designated as Special Mention. At September 30, 1997, the
largest loan designated as Special Mention was a residential construction loan
with a carrying balance of $180,000.
At September 30, 1997, the Bank had no loans with a balance of $500,000 or
more which had been adversely classified or identified as a problem loan.
63
<PAGE>
The following table sets forth the delinquencies in the Bank's loan portfolio
as of the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997 AT JUNE 30, 1997
------------------------------------- -------------------------------------
30-89 DAYS 90 DAYS OR MORE 30-89 DAYS 90 DAYS OR MORE
------------------ ------------------ ------------------ ------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
-------- --------- -------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Single-family......... 59 $2,485 28 $1,068 44 $1,620 17 $ 920
Multi-family.......... 2 751 -- -- 1 8 1 762
Commercial real
estate............... -- -- -- -- -- -- 1 110
Construction and
land................. 1 14 -- -- -- -- -- --
--- ------ --- ------ --- ------ --- ------
Total mortgage
loans.............. 62 3,250 28 1,068 45 1,628 19 1,792
Consumer loans.......... 48 495 10 44 42 292 3 22
--- ------ --- ------ --- ------ --- ------
Total loans............. 110 $3,745 38 $1,112 87 $1,920 22 $1,814
=== ====== === ====== === ====== === ======
Delinquent loans to
total loans............ 0.44% 0.13% 0.23% 0.22%
====== ====== ====== ======
<CAPTION>
AT JUNE 30, 1996 AT JUNE 30, 1995
------------------------------------- -------------------------------------
30-89 DAYS 90 DAYS OR MORE 30-89 DAYS 90 DAYS OR MORE
------------------ ------------------ ------------------ ------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
-------- --------- -------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Single-family......... 12 $ 250 13 $ 714 6 $ 270 10 $ 255
Multi-family.......... -- -- 1 1,302 -- -- 1 1,302
Commercial real
estate............... -- -- 1 759 -- -- 3 2,273
Construction and
land................. -- -- -- -- 1 165 -- --
--- ------ --- ------ --- ------ --- ------
Total mortgage
loans.............. 12 250 15 2,775 7 435 14 3,830
Consumer loans.......... 9 42 4 21 33 122 25 87
--- ------ --- ------ --- ------ --- ------
Total loans............. 21 $ 292 19 $2,796 40 $ 557 39 $3,917
=== ====== === ====== === ====== === ======
Delinquent loans to
total loans............ 0.04% 0.39% 0.08% 0.59%
====== ====== ====== ======
</TABLE>
64
<PAGE>
Non-Accrual Loans and REO. The following table sets forth information
regarding non-accrual loans and REO. At September 30, 1997, non-accrual loans
totaled $1.1 million, consisting of 38 loans, and REO totaled $1.2 million
consisting of one single-family property and two commercial real estate
properties. It is the policy of the Bank to cease accruing interest on loans
90 days or more past due and to charge off all accrued interest. For the three
months ended September 30, 1997, and the year ended June 30, 1997, the amount
of additional interest income that would have been recognized on non-accrual
loans if such loans had continued to perform in accordance with their
contractual terms was $48,000 and $115,000, respectively. On July 1, 1995, the
Bank adopted SFAS No. 114 "Accounting by Creditors for Impairment of a Loan,"
as amended by SFAS No. 118 "Accounting by Creditors for Impairment of a Loan--
Income Recognition and Disclosures." Total impaired loans, including non-
accrual and restructured loans, were $5.0 million and $4.3 million at June 30,
1997, and June 30, 1996, respectively. At September 30, 1997, such impaired
loans totalled $2.9 million.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT JUNE 30,
------------------ -------------------------------------------
1997 1996 1997 1996 1995 1994 1993
-------- -------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Non-accrual loans:
Mortgage loans:
Single-family......... $ 1,068 $ 699 $ 920 $ 714 $ 255 $ 820 $ 1,082
Multi-family.......... -- -- 762 1,302 1,302 -- 2,706
Commercial real es-
tate................. -- -- 110 759 2,273 -- --
Construction and
land................. -- 26 -- -- -- -- --
-------- -------- ------- ------- ------- ------- -------
Total mortgage
loans.............. 1,068 725 1,792 2,775 3,830 820 3,788
Consumer................ 44 4 22 21 22 45 17
-------- -------- ------- ------- ------- ------- -------
Total nonaccrual loans.. 1,112 729 1,814 2,796 3,852 865 3,805
Real estate owned,
net(1)................. 1,171 1,316 1,462 1,391 3,206 8,225 5,458
-------- -------- ------- ------- ------- ------- -------
Total non-performing
assets............. $ 2,283 $ 2,045 $ 3,276 $ 4,187 $ 7,058 $ 9,090 $ 9,263
======== ======== ======= ======= ======= ======= =======
Allowance for loan
losses as a percent of
total loans
receivable(2).......... 0.85% 0.79% 0.77% 0.82% 0.87% 0.95% 1.24%
Allowance for loans
losses as a percent of
non-performing
loans(3)............... 631.47% 819.07% 348.95% 211.66% 146.47% 689.71% 199.24%
Non-performing loans as
a percent of total
loans
receivable(2)(3)....... 0.13% 0.10% 0.22% 0.39% 0.59% 0.14% 0.62%
Non-performing assets as
a percent of total
assets(3).............. 0.21% 0.20% 0.31% 0.40% 0.72% 0.92% 0.86%
</TABLE>
- --------
(1)REO balances are shown net of related loss allowances.
(2)Total loans include loans receivable, less undisbursed loan funds, deferred
loan fees and unamortized premiums and discounts.
(3)Non-performing assets consist of non-performing loans and REO. Non-
performing loans consist of all loans 90 days or more past due.
65
<PAGE>
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in its loan portfolio and the general economy. The allowance
for loan losses is maintained at an amount management considers adequate to
cover estimated losses in loans receivable which are deemed probable and
estimable based on information currently known to management. The allowance is
based upon a number of factors, including current economic conditions, actual
loss experience and industry trends. In addition, various regulatory agencies,
as an integral part of their examination process, periodically review the
Bank's allowance for loan losses. Such agencies may require the Bank to make
additional provisions for estimated loan losses based upon judgments different
from those of management. As of September 30, 1997, the Bank's allowance for
loan losses was 0.85% of total loans receivable as compared to 0.77% as of
June 30, 1997. The Bank had non-accrual loans of $1.1 million and $1.8 million
at September 30, 1997, and June 30, 1997, respectively. The Bank will continue
to monitor and modify its allowances for loan losses as conditions dictate.
While management believes the Bank's allowance for loan losses is sufficient
to cover losses inherent in its loan portfolio at this time, no assurances can
be given that the Bank's level of allowance for loan losses will be sufficient
to cover future loan losses incurred by the Bank or that future adjustments to
the allowance for loan losses will not be necessary if economic and other
conditions differ substantially from the economic and other conditions used by
management to determine the current level of the allowance for loan losses.
The following table sets forth activity in the Bank's allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
AT OR FOR THE THREE
MONTHS ENDED
SEPTEMBER 30, AT OR FOR THE YEAR ENDED JUNE 30,
-------------------- --------------------------------------
1997 1996 1997 1996 1995 1994 1993
--------- --------- ------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of
period................. $ 6,330 $ 5,918 $5,918 $5,642 $5,966 $7,581 $7,685
Provision for loan loss-
es..................... 713 96 450 598 243 (902) 274
Charge-offs:
Mortgage loans:
Single-family......... 7 41 44 16 83 45 13
Multi-family.......... -- -- -- -- -- -- --
Commercial real es-
tate................. -- -- -- 75 374 672 382
Construction and
land................. -- -- -- -- -- -- --
Commercial loans...... -- -- -- -- -- -- --
Consumer loans:
Home Equity........... -- -- -- -- 1 3 7
Home improvement
loans................ -- -- -- -- -- -- --
Auto loans............ 2 -- -- -- -- -- --
Equity lines of cred-
it................... -- -- -- -- -- -- --
Credit cards.......... -- -- 10 250 113 -- --
Other................. 16 7 10 9 8 10 6
--------- --------- ------ ------ ------ ------ ------
Total charge-offs... 25 48 64 350 579 730 408
Recoveries.............. 4 5 26 28 12 17 30
--------- --------- ------ ------ ------ ------ ------
Balance at end of peri-
od..................... $ 7,022 $ 5,971 $6,330 $5,918 $5,642 $5,966 $7,581
========= ========= ====== ====== ====== ====== ======
Ratio of net charge-offs
during the period
to average loans
outstanding during the
period (1)............. 0.01% 0.03% 0.01% 0.05% 0.09% 0.12% 0.06%
========= ========= ====== ====== ====== ====== ======
</TABLE>
- --------
(1)Ratio is annualized for the three-month periods.
66
<PAGE>
The following tables set forth the Bank's percent of allowance for loan
losses to total allowance for loans losses and the percent of loans to total
loans in each of the categories listed at the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-----------------------------------------------------
1997 1996
-------------------------- --------------------------
PERCENT PERCENT
OF LOANS OF LOANS
PERCENT OF IN EACH PERCENT OF IN EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------ ---------- -------- ------ ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Single-family mortgage
loans.................. $ 964 13.73% 61.71% $ 921 15.42% 66.08%
Commercial real estate
and multi-family....... 1,902 27.09 21.29 1,975 33.08 22.11
Construction and land... 345 4.91 5.98 134 2.24 5.62
Commercial loans........ 10 0.14 0.23 13 0.22 0.33
Consumer loans.......... 1,268 18.06 10.79 415 6.95 5.86
Unallocated............. 2,533 36.07 -- 2,513 42.09 --
------ ------ ------ ------ ------ ------
Total allowance for
loan losses.......... $7,022 100.00% 100.00% $5,971 100.00% 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30,
--------------------------------------------------------------------------------
1997 1996 1995
-------------------------- -------------------------- --------------------------
PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS
PERCENT OF IN EACH PERCENT OF IN EACH PERCENT OF IN EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------ ---------- -------- ------ ---------- -------- ------ ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Single-family mortgage
loans.................. $ 986 15.58% 63.08% $ 918 15.52% 65.87% $ 955 16.93% 68.49%
Commercial real estate
and multi-family....... 1,945 30.73 21.77 2,101 35.50 23.52 2,074 36.76 23.52
Construction and land... 142 2.24 5.42 113 1.91 5.55 78 1.38 3.85
Commercial loans........ 10 0.16 0.24 12 0.20 0.30 7 0.12 0.20
Consumer loans.......... 744 11.75 9.49 315 5.32 4.76 219 3.88 3.94
Unallocated............. 2,503 39.54 -- 2,459 41.55 -- 2,309 40.93 --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance for
loan losses........... $6,330 100.00% 100.00% $5,918 100.00% 100.00% $5,642 100.00% 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30,
-----------------------------------------------------
1994 1993
-------------------------- --------------------------
PERCENT PERCENT
OF LOANS OF LOANS
PERCENT OF IN EACH PERCENT OF IN EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------ ---------- -------- ------ ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Single-family mortgage
loans.................. $ 979 16.41% 70.19% $ 962 12.69% 65.80%
Commercial real estate
and multi-family....... 2,201 36.89 24.96 3,691 48.69 28.88
Construction and land... 10 0.17 0.92 6 0.08 0.37
Commercial loans........ -- -- 0.01 1 0.01 0.03
Consumer loans.......... 201 3.37 3.92 170 2.24 4.92
Unallocated............. 2,575 43.16 -- 2,751 36.29 --
------ ------ ------ ------ ------ ------
Total allowance for
loan losses.......... $5,966 100.00% 100.00% $7,581 100.00% 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
67
<PAGE>
Real Estate Owned. At September 30, 1997, the Bank had $1.2 million of REO
consisting of one single-family property and two commercial properties. When
the Bank acquires property through foreclosure or deed in lieu of foreclosure,
it is initially recorded at the lower of the recorded investment in the
corresponding loan or the fair value of the related assets at the date of
foreclosure, less costs to sell. Thereafter, if there is a further
deterioration in value, the Bank provides for a specific valuation allowance
and charges operations for the diminution in value. It is the policy of the
Bank to have obtained an appraisal or broker's price opinion on all real
estate subject to foreclosure proceedings prior to the time of foreclosure. It
is the Bank's policy to require appraisals on a periodic basis on foreclosed
properties and conducts inspections on foreclosed properties.
INVESTMENT ACTIVITIES
Federally chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certificates of deposit of insured
banks and savings institutions, bankers' acceptances, repurchase agreements
and federal funds. Subject to various restrictions, federally chartered
savings institutions may also invest their assets in commercial paper,
investment-grade corporate debt securities and mutual funds whose assets
conform to the investments that a federally chartered savings institution is
otherwise authorized to make directly. Additionally, the Bank must maintain
minimum levels of investments that qualify as liquid assets under OTS
regulations. See "Regulation--Federal Savings Institution Regulation--
Liquidity." Historically, the Bank has maintained liquid assets above the
minimum OTS requirements and at a level considered to be adequate to meet its
normal daily activities.
The investment policy of the Bank, as approved by the Board of Directors,
requires management to maintain adequate liquidity, generate a favorable
return on investments without incurring undue interest rate and credit risk
and to complement the Bank's lending activities. The Bank primarily utilizes
investments in securities for liquidity management and as a method of
deploying excess funding not utilized for loan originations or sales.
Generally, the Bank's investment policy is more restrictive than the OTS
regulations allow and, accordingly, the Bank has invested primarily in U.S.
Government and agency securities, which qualify as liquid assets under the OTS
regulations, federal funds and U.S. Government sponsored agency issued
mortgage-backed securities. As required by SFAS No. 115, the Bank has
established an investment portfolio of securities that are categorized as held
to maturity, available for sale or held for trading. The Bank generally
invests in securities as a method of utilizing funds not utilized for loan
origination activity and as a method of maintaining liquidity at levels deemed
appropriate by management. The Bank does not currently maintain a portfolio of
securities categorized as held for trading. The substantial majority of the
Bank's investment and mortgage-backed securities are purchased for the held-
to-maturity portfolio which portfolio totaled $139.1 million, or 13.5% of
assets, at September 30, 1997. At September 30, 1997, the available-for-sale
securities portfolio totaled $747,000. As of September 30, 1997, $57.9
million, of the Bank's investment securities held-to-maturity consisted of
U.S. Government and agency obligations with a weighted average maturity of
nine months.
At September 30, 1997, the Bank had invested $81.2 million in mortgage-
backed securities, or 7.9% of total assets, which were insured by GNMA, FNMA
or FHLMC, of which 99.1% were classified as held to maturity. Of the $81.2
million, $29.5 million were adjustable-rate with maximum interest rate
adjustments of 2.0% annually or 6.0% over the life of the security.
Investments in mortgage-backed securities involve a risk that actual
prepayments will be greater than estimated prepayments over the life of the
security, which may require adjustments to the amortization of any premium or
accretion of any discount relating to such instruments thereby changing the
net yield on such securities. There is also reinvestment risk associated with
the cash flows from such securities or in the event such securities are
redeemed by the issuer. In addition, the market value of such securities may
be adversely affected by changes in interest rates.
68
<PAGE>
The following table sets forth certain information regarding the amortized
cost and fair value of the Bank's investment securities at the dates
indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
AT SEPTEMBER 30, -------------------------------------------------------
1997 1997 1996 1995
----------------- ----------------- ------------------ ------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE COST VALUE
--------- ------- --------- ------- --------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities:
Held-to-maturity:
U.S. Government and
agency operations..... $57,944 $57,894 $92,930 $92,654 $123,351 $122,285 $159,150 $157,140
Corporate obligations.. 500 503 1,002 1,004 6,367 6,367 8,721 8,720
Other.................. 216 216 316 316 925 924 963 959
------- ------- ------- ------- -------- -------- -------- --------
Total held-to-maturi-
ty................... 58,660 58,613 94,248 93,974 130,643 129,576 168,834 166,819
Available-for-sale(1).. -- -- -- -- -- -- 1,000 994
------- ------- ------- ------- -------- -------- -------- --------
Total investment secu-
rities............... $58,660 $58,613 $94,248 $93,974 $130,643 $129,576 $169,834 $167,813
======= ======= ======= ======= ======== ======== ======== ========
</TABLE>
- -------
(1)Consists of marketable equity securities.
The following table sets forth certain information regarding the amortized
cost and fair values of the Bank's mortgage-backed securities at the dates
indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
--------------------------------------------------------------------------------
AT SEPTEMBER 30, 1997 1997 1996 1995
-------------------------- -------------------------- -------------------------- --------------------------
PERCENT PERCENT PERCENT PERCENT
AMORTIZED OF FAIR AMORTIZED OF FAIR AMORTIZED OF FAIR AMORTIZED OF FAIR
COST TOTAL(1) VALUE COST TOTAL(1) VALUE COST TOTAL(1) VALUE COST TOTAL(1) VALUE
--------- -------- ------- --------- -------- ------- --------- -------- ------- --------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed securi-
ties:
Fixed rate:
FNMA............ $33,328 41.07% $32,986 $34,915 40.54% $34,233 $40,498 41.37% $39,057 $45,381 48.64% $44,140
FHLMC........... 12,223 15.06 12,334 12,835 14.90 12,827 14,689 15.00 14,380 15,828 16.97 15,579
CMOs............ 3,217 3.96 3,243 3,337 3.87 3,371 3,400 3.47 3,422 1,157 1.24 1,179
REMIC........... 2,035 2.51 2,039 2,482 2.88 2,479 3,741 3.82 3,728 -- -- --
Other........... 141 0.17 148 154 0.18 160 206 0.21 214 257 0.28 268
------- ------ ------- ------- ------ ------- ------- ------ ------- ------- ------ -------
Total fixed
rate........... 50,944 62.77 50,750 53,723 62.37 53,070 62,534 63.87 60,801 62,623 67.13 61,166
------- ------ ------- ------- ------ ------- ------- ------ ------- ------- ------ -------
Adjustable rate:
GNMA............ 23,568 29.04 24,063 24,797 28.79 25,233 27,849 28.45 27,905 19,717 21.13 19,997
FNMA............ 2,468 3.04 2,504 3,055 3.55 3,084 3,135 3.20 3,163 5,371 5.76 5,438
FHLMC........... 3,433 4.23 3,486 3,751 4.35 3,786 2,886 2.95 2,915 3,586 3.84 3,609
REMICs.......... -- -- -- 46 0.05 46 626 0.64 626 -- -- --
------- ------ ------- ------- ------ ------- ------- ------ ------- ------- ------ -------
Total adjustable
rate........... 29,469 36.31 30,053 31,649 36.74 32,149 34,496 35.24 34,609 28,674 30.73 29,044
------- ------ ------- ------- ------ ------- ------- ------ ------- ------- ------ -------
Total mortgage-
backed
securities
held-to-
maturity....... 80,413 99.08 80,803 85,372 99.11 85,219 97,030 99.11 95,410 91,297 97.86 90,210
------- ------ ------- ------- ------ ------- ------- ------ ------- ------- ------ -------
Available-for-
sale GNMA
fixed-rate..... 749 0.92 747 763 0.89 750 874 0.89 843 2,000 2.14 1,955
------- ------ ------- ------- ------ ------- ------- ------ ------- ------- ------ -------
Total mortgage-
backed
securities..... $81,162 100.00% $81,550 $86,135 100.00% $85,969 $97,904 100.00% $96,253 $93,297 100.00% $92,165
======= ====== ======= ======= ====== ======= ======= ====== ======= ======= ====== =======
</TABLE>
- -------
(1)Based on amortized cost.
69
<PAGE>
The following table sets forth the Bank's mortgage-backed securities
activities for the periods indicated.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED SEPTEMBER 30, FOR THE YEAR ENDED JUNE 30,
---------------------- -------------------------------
1997 1996 1997 1996 1995
---------- ---------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Beginning balance....... $ 86,122 $ 97,873 $ 97,873 $ 93,252 $ 70,337
Principal repayments... (4,901) (4,039) (15,066) (16,631) (7,494)
Purchases.............. -- 857 4,172 22,606 30,985
Sales.................. -- (565) (565) (1,014) --
Gains on sales......... -- 1 1 5 --
(Premium Amortiza-
tion)................. (61) (69) (293) (345) (576)
---------- ---------- --------- --------- --------
Ending balance.......... $ 81,160 $ 94,058 $ 86,122 $ 97,873 $ 93,252
========== ========== ========= ========= ========
</TABLE>
The table below sets forth certain information regarding the carrying value,
weighted average yields and contractual maturities of the Bank's investment
securities and mortgage-backed securities as of September 30, 1997.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
-----------------------------------------------------------------------------------------
MORE THAN ONE MORE THAN 5
ONE YEAR YEAR YEARS MORE THAN
OR LESS TO FIVE YEARS TO 10 YEARS 10 YEARS TOTAL
----------------- ----------------- ----------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities:
Held to maturity:
U.S. Government and
agency obligations.... $40,977 5.55% $15,967 6.39% $1,000 8.00% -- --% $57,944 5.82%
Corporate obligations.. 500 6.82 -- -- -- -- -- -- 500 6.82
Other.................. -- -- -- -- 216 8.25 -- -- 216 8.25
------- ------- ------ ------- -------
Total investment
securities held to
maturity.............. $41,477 5.57% $15,967 6.39% $1,216 8.04% $ -- --% $58,660 5.84%
======= ======= ====== ======= =======
Mortgage-backed securi-
ties:
Fixed-rate:
FNMA................... $ 103 8.50% $ 8,497 6.50% $ 710 8.00% $24,018 6.08% $33,328 6.24%
FHLMC.................. -- -- 1,650 7.09 -- -- 10,573 7.08 12,223 7.08
CMOs................... -- -- 1,161 7.68 2,056 7.03 -- -- 3,217 7.26
REMICs................. -- -- 1,540 6.75 495 6.50 -- -- 2,035 6.69
Other.................. -- -- 1 8.00 140 9.52 -- -- 141 9.51
------- ------- ------ ------- -------
Total fixed-rate
mortgage-backed
securities............ 103 8.50% 12,849 6.71% 3,401 7.26% 34,591 6.39% 50,944 6.53%
------- ------- ------ ------- -------
Total adjustable-rate
mortgage-backed
securities............ -- -- -- -- -- -- 29,469 7.05 29,469 7.05
Available-for-sale GNMA
mortgage-backed
securities............ -- -- -- -- 747 6.15% -- -- 747 6.15%
------- ------- ------ ------- -------
Total mortgage-backed
securities............. $ 103 8.50% $12,849 6.71% $4,148 7.06% $64,060 6.69% $81,160 6.71%
======= ======= ====== ======= =======
</TABLE>
70
<PAGE>
SOURCES OF FUNDS
General. Deposits, loan repayments and prepayments, proceeds from sales of
loans, cash flows generated from operations and FHLB advances are the primary
sources of the Bank's funds for use in lending, investing and for other
general purposes.
Deposits. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. The Bank's deposits consist of checking, money
market, savings, NOW, and certificate accounts and Individual Retirement
Accounts. More than 58.1% of the funds deposited in the Bank are in time
certificates. For the three months ended September 30, 1997, core deposits
represented 41.1% of total average deposits. The flow of deposits is
influenced significantly by general economic conditions, changes in money
market rates, prevailing interest rates and competition. The Bank's deposits
are obtained predominantly from the areas in which its branch offices are
located. The Bank has historically relied primarily on customer service and
long-standing relationships with customers to attract and retain these
deposits; however, market interest rates and rates offered by competing
financial institutions significantly affect the Bank's ability to attract and
retain deposits. The Bank uses traditional means of advertising its deposit
products, including radio and print media and generally does not solicit
deposits from outside its market area. The Bank does not actively solicit
certificate accounts in excess of $100,000 or use brokers to obtain deposits.
At September 30, 1997, the weighted average remaining maturity of the Bank's
certificate of deposit accounts was 12 months. Further increases in short-term
certificate of deposit accounts, which tend to be more sensitive to movements
in market interest rates than core deposits, may result in the Bank's deposit
base being less stable than if it had a large amount of core deposits which,
in turn, may result in further increases in the Bank's cost of deposits.
The following table presents the deposit activity of the Bank for the
periods indicated:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED SEPTEMBER 30, FOR THE YEAR ENDED JUNE 30,
--------------------- -----------------------------
1997 1996 1997 1996 1995
---------- ---------- --------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net deposits (withdraw-
als)................... $ (6,488) $ (25,942) $ (47,944) $ 30,846 $ (56,506)
Interest credited on de-
posit accounts......... 10,037 8,857 38,750 34,404 23,809
--------- ---------- --------- -------- ---------
Total increase (de-
crease) in deposit ac-
counts................. $ 3,549 $ (17,085) $ (9,194) $ 65,250 $ (32,697)
========= ========== ========= ======== =========
</TABLE>
At September 30, 1997, the Bank had $27.8 million in certificate accounts in
amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
MATURITY PERIOD AMOUNT RATE
--------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Three months or less.............................. $ 4,356 5.57%
Over 3 through 6 months........................... 5,109 5.66
Over 6 through 12 months.......................... 11,183 5.85
Over 12 months.................................... 7,131 5.92
------------
Total........................................... $27,779 5.79%
============
</TABLE>
71
<PAGE>
The following table sets forth the distribution of the Bank's average
deposit accounts for the periods indicated and the weighted average interest
rates on each category of deposits presented. Averages for the periods
presented utilize month-end balances.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
-----------------------------------------------------------------------------
FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 1997 1997 1996 1995
---------------------------- ---------------------------- ---------------------------- -------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
TOTAL WEIGHTED TOTAL WEIGHTED TOTAL WEIGHTED TOTAL
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE BALANCE DEPOSITS
-------- ---------- -------- -------- ---------- -------- -------- ---------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest-
bearing
accounts........ $ 6,841 0.74% --% $ 6,747 0.73% --% $ 5,396 0.60% --% $ 3,134 0.36%
Money market
accounts........ 292,138 31.61 4.68 271,686 29.33 4.62 228,799 25.40 4.53 206,520 23.70
Savings
accounts........ 12,118 1.31 2.00 13,593 1.47 2.00 15,466 1.72 2.00 18,498 2.12
NOW accounts..... 75,729 8.19 2.55 77,400 8.35 2.60 64,032 7.11 2.58 57,469 6.60
-------- ------ ---- -------- ------ ---- -------- ------ ---- -------- ------
Total........... 386,826 41.85 4.10 369,426 39.88 4.02 313,693 34.83 3.93 285,621 32.78
-------- ------ ---- -------- ------ ---- -------- ------ ---- -------- ------
Certificate
accounts(1):
Less than six
months......... 184,453 19.96 5.57 256,737 27.71 5.63 261,043 28.98 5.86 257,858 29.59
Over 6 through
12 months...... 274,338 29.68 5.83 224,373 24.22 5.78 224,303 24.90 6.04 133,277 15.30
Over 12 through
36 months...... 63,466 6.87 5.85 63,303 6.83 5.69 97,258 10.80 5.84 174,275 20.00
Over 36 months.. 15,147 1.64 6.04 12,561 1.36 5.88 4,387 0.49 5.87 20,311 2.33
-------- ------ ---- -------- ------ ---- -------- ------ ---- -------- ------
Total
certificate
accounts....... 537,404 58.15 5.75 556,974 60.12 5.70 586,991 65.17 5.93 585,721 67.22
-------- ------ ---- -------- ------ ---- -------- ------ ---- -------- ------
Total average
deposits....... $924,230 100.00% 5.06% $926,400 100.00% 5.03% $900,684 100.00% 5.19% $871,342 100.00%
======== ====== ==== ======== ====== ==== ======== ====== ==== ======== ======
<CAPTION>
WEIGHTED
AVERAGE
RATE
--------
<S> <C>
Non-interest-
bearing
accounts........ --%
Money market
accounts........ 4.27
Savings
accounts........ 2.00
NOW accounts..... 2.24
--------
Total........... 3.67
--------
Certificate
accounts(1):
Less than six
months......... 5.81
Over 6 through
12 months...... 6.22
Over 12 through
36 months...... 6.32
Over 36 months.. 5.58
--------
Total
certificate
accounts....... 6.05
--------
Total average
deposits....... 5.27%
========
</TABLE>
<TABLE>
<CAPTION>
PERIOD TO MATURITY FROM SEPTEMBER 30, 1997 AT JUNE 30,
-------------------------------------------------------- --------------------------
LESS ONE TWO THREE FOUR
THAN TO TO TO TO OVER
ONE TWO THREE FOUR FIVE FIVE
YEAR YEARS YEARS YEARS YEARS YEARS TOTAL 1997 1996 1995
-------- ------- ------- ------- ------- ------ -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CERTIFICATE ACCOUNTS:
0 to 3.99%............. $ 96 $ -- $ -- $ -- $ -- $ -- $ 96 $ 125 $ 435 $ 7,346
4.00 to 4.99%.......... 2,707 338 71 14 -- -- 3,130 3,696 14,662 49,261
5.00 to 5.99%.......... 271,029 19,598 6,722 12,746 5,265 585 315,945 324,209 408,134 174,558
6.00 to 6.99%.......... 119,740 70,548 6,914 2,747 15,631 525 216,105 206,242 98,944 279,733
7.00 to 7.99%.......... 131 401 49 283 49 -- 913 975 50,004 65,267
8.00 to 8.99%.......... 341 100 438 -- -- 5 884 979 1,541 9,330
Over 9.00%............. 13 -- -- -- -- -- 13 13 12 --
-------- ------- ------- ------- ------- ------ -------- -------- -------- --------
Total.................. $394,057 $90,985 $14,194 $15,790 $20,945 $1,115 $537,086 $536,239 $573,732 $585,495
======== ======= ======= ======= ======= ====== ======== ======== ======== ========
- -------
(1)Based on remaining maturity of certificates.
The following table presents by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at September 30, 1997.
</TABLE>
72
<PAGE>
Borrowings. The Bank utilizes advances from the FHLB as an alternative to
retail deposits to fund its operations as part of its operating strategy.
These FHLB advances are collateralized primarily by certain of the Bank's
mortgage loans and mortgage-backed securities and secondarily by the Bank's
investment in capital stock of the FHLB. FHLB advances are made pursuant to
several different credit programs, each of which has its own interest rate and
range of maturities. The maximum amount that the FHLB will advance to member
institutions, including the Bank, fluctuates from time to time in accordance
with the policies of the FHLB. See "Regulation--Federal Home Loan Bank
System." At September 30, 1997, the Bank had $10.6 million in outstanding FHLB
advances and had no other borrowings as compared to $21.6 million at June 30,
1997.
The following table sets forth certain information regarding the Bank's
borrowed funds at or for the periods ended on the dates indicated:
<TABLE>
<CAPTION>
AT OR FOR THE THREE
MONTHS ENDED AT OR FOR THE YEAR ENDED
SEPTEMBER 30, JUNE 30,
-------------------- ----------------------------
1997 1996 1997 1996 1995
--------- --------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FHLB advances:
Average balance outstand-
ing..................... $ 13,316 $ 13,844 $ 12,265 $ 15,921 $ 14,801
Maximum amount
outstanding at any
month-end during the
period.................. 10,565 14,582 21,569 23,632 23,632
Balance outstanding at
end of period........... 10,565 14,582 21,569 13,598 23,632
Weighted average interest
rate during the period.. 5.86% 6.79% 5.32% 6.54% 6.05%
Weighted average interest
rate at end of period... 5.97% 6.80% 5.78% 6.87% 6.34%
</TABLE>
SUBSIDIARY ACTIVITIES
The Bank is the parent corporation of five wholly-owned subsidiary
corporations. First Federal Lincoln Holding Corporation-Nebraska holds 100% of
the stock of FFL Holding Corporation-Iowa, which holds 100% of the stock of
the Iowa Bank. The Iowa Bank was established in conjunction with the merger
and acquisition of two insolvent Iowa savings and loan associations on August
12, 1988, with the assistance of the Federal Savings and Loan Insurance
Corporation. The Iowa Bank offers virtually the identical products and service
as the Bank with regional pricing on related products. The Chairman of the
Board of the Bank is the Chief Executive Officer of the Iowa Bank. Other
executive officers of the Iowa Bank hold similar positions with the Bank. TMS
Corporation of the Americas is a direct subsidiary of the Bank and holds all
of the stock of First Financial Investment & Insurance Corporation ("FFIIC").
FFIIC provides a selection of investment products made available to consumers
via licensed representatives in the Bank's retail office network. Fees
generated through annuity, mutual fund and insurance sales contributed
$664,000 in noninterest income during the year ended June 30, 1997.
73
<PAGE>
PROPERTIES
The Bank currently conducts its business through 57 full service banking
offices located in Nebraska, Kansas and Iowa. The following table sets forth
the Bank's offices as of September 30, 1997.
<TABLE>
<CAPTION>
NET BOOK VALUE OF
PROPERTY OR
LEASEHOLD
ORIGINAL YEAR IMPROVEMENTS
LEASED OR LEASED OR DATE OF LEASE AT SEPTEMBER 30,
LOCATION OWNED ACQUIRED EXPIRATION 1997
- -------- --------- ------------- ------------- ----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ADMINISTRATIVE/HOME OF-
FICE:
13 & "N" Street
Lincoln, Nebraska
68508.................. Owned 1996 -- $1,824
BRANCH OFFICES:
8820 Arbor Street
Omaha, Nebraska 68124-
2030................... Owned 1995 -- 424
2101 So. 42nd Street
Suite 100
Omaha, Nebraska 68105-
2900................... Leased 1996 2001 21
135 N. Cotner Street
Lincoln, Nebraska 68505-
0204................... Owned 1966 -- 453
3010 N. 90th Street
Omaha, Nebraska 68134-
4759................... Leased 1971 2001 14
6891 "A" Street
Lincoln, Nebraska 68510-
4199................... Leased 1970 2001 48
2120 1st Avenue
Kearney, Nebraska 68848-
0816................... Owned 1963 -- 147
513 "E" Street
Fairbury, Nebraska
68352-0022............. Leased 1973 1999 2
1612 "K" Street
Ord, Nebraska 68862-
1048................... Owned 1989 -- 127
1301 Main Avenue
Crete, Nebraska 68333-
0126................... Owned 1979 -- 138
423 West 3rd Street
Alliance, Nebraska
69301-3307............. Owned 1991 -- 54
1811 W. 2nd Street #108
Grand Island, Nebraska
68802-2320............. Owned 1977 -- 1,256
3939 Normal Boulevard
Lincoln, Nebraska 68506-
5217................... Leased 1989 1999 12
840 N. 70th Street
Lincoln, Nebraska 68505-
2189................... Leased 1982 1999 25
521 N. Dewey Street(1)
North Platte, Nebraska
69101-3912............. Leased 1997 1998 499
5540 South Street,
#100(2)
Lincoln, Nebraska 68506-
2135................... Leased 1990 2000 14
211 West "C" Street
McCook, Nebraska 69001-
0339................... Leased 1976 1998 1
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
NET BOOK VALUE OF
PROPERTY OR
LEASEHOLD
ORIGINAL YEAR IMPROVEMENTS
LEASED OR LEASED OR DATE OF LEASE AT SEPTEMBER 30,
LOCATION OWNED ACQUIRED EXPIRATION 1997
- -------- --------- ------------- ------------- ----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
14100 "S" Street
Omaha, Nebraska 68137-
2600................... Owned 1982 -- $ 349
1016 Central Avenue
Nebraska City, Nebraska
68410-2337............. Owned 1977 -- 6
9628 "M" Street
Omaha, Nebraska 68127-
2054................... Leased 1989 1998 10
2625 S. 140th Street
Omaha, Nebraska 68144-
2338................... Owned 1996 -- 1,586
5300 S. 56th Street
Lincoln, Nebraska 68516-
1833................... Owned 1989 -- 325
320 Lincoln Avenue
Hebron, Nebraska 68370-
0003................... Owned 1977 -- 8
647 W. 2nd Street
Hastings, Nebraska
68901-5131............. Leased 1978 1998 7
830 S. "E" Street.
Broken Bow, Nebraska
68822-0445............. Owned 1978 -- 6
609 Howard Avenue
St. Paul, Nebraska
68873-2022............. Owned 1994 -- 32
6424 Havelock Avenue
Lincoln, Nebraska 68507-
1331................... Owned 1989 -- 182
1028 Toledo Street
Sidney, Nebraska 69162-
0197................... Leased 1978 1998 --
2001 Broadway
Scottsbluff, Nebraska
69361-1973............. Owned 1980 -- 406
103 E. Main Street
Bloomfield, Nebraska
68718-0547............. Owned 1979 -- 1
3301 S. 13th Street
Lincoln, Nebraska 68502-
4576................... Owned 1988 -- 237
1000 E. Court Street
Beatrice, Nebraska
68310-0664............. Owned 1988 -- 167
114 W. 15th Street
Falls City, Nebraska
68355-0009............. Owned 1982 -- 95
1301 "J" Street
Auburn, Nebraska 68305-
1964................... Owned 1982 -- 198
173 S. 3rd Street
Tecumseh, Nebraska
68450-0536............. Owned 1982 -- 21
314 E. Square
Humboldt, Nebraska
68376-0167............. Owned 1978 -- 3
608 N. Linden
Wahoo, Nebraska 68066-
0092................... Owned 1982 -- 166
</TABLE>
75
<PAGE>
<TABLE>
<CAPTION>
NET BOOK VALUE OF
PROPERTY OR
LEASEHOLD
ORIGINAL YEAR IMPROVEMENTS
LEASED OR LEASED OR DATE OF LEASE AT SEPTEMBER 30,
LOCATION OWNED ACQUIRED EXPIRATION 1997
- -------- --------- ------------- ------------- ----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
400 Braasch Avenue
Norfolk, Nebraska 68701-
4020................... Owned 1982 -- $ 270
1616 N. Bell
Fremont, Nebraska 68025-
1357................... Leased 1988 1998 2
2457 33rd Avenue, Suite
F
Columbus, Nebraska
68601-1309............. Leased 1993 1998 5
127 S. 4th Street
Albion, Nebraska 68620-
0269................... Leased 1983 1998 2
203 N. Lincoln
West Point, Nebraska
68788-1409............. Leased 1991 1998 3
1850 10th Street
Gering, Nebraska 69341-
2414................... Owned 1988 -- 49
1004 Avenue D
Gothenburg, Nebraska
69138-1940............. Owned 1988 -- 65
29 S. Main
Council Bluffs, Iowa
51503-9034............. Leased 1990 2000 32
201 S. Locust
Glenwood, Iowa 51534-
1727................... Owned 1988 -- 107
3201 W. Broadway
Council Bluffs, Iowa
51501.................. Owned 1996 2025 309
700 W. Thomas Avenue
Shenandoah, Iowa 51601-
1746................... Owned 1988 -- 111
5533 S. 27th, Suite 101
Lincoln, Nebraska 68512-
1611................... Leased 1996 2006 160
509 Chestnut Street
Atlantic, Iowa 50022-
0520................... Leased 1988 1998 18
200 S. Jefferson
Plainvile, Kansas 67663-
0030................... Owned 1988 -- 27
201 S. Cedar
Stockton, Kansas 67669-
0274................... Owned 1988 -- 22
519 3rd Street
Red Oak, Iowa 51566-
0636................... Leased 1989 1998 6
301 E. Washington
Clarinda, Iowa 51632-
0200................... Owned 1988 -- 82
203 N. 18th Street
Marysville, Kansas
66508-0229............. Owned 1992 -- 79
411 N. 114th Street
Omaha, Nebraska 68154-
2518................... Leased 1989 1999 55
</TABLE>
76
<PAGE>
<TABLE>
<CAPTION>
NET BOOK VALUE OF
PROPERTY OR
LEASEHOLD
ORIGINAL YEAR IMPROVEMENTS
LEASED OR LEASED OR DATE OF LEASE AT SEPTEMBER 30,
LOCATION OWNED ACQUIRED EXPIRATION 1997
- -------- --------- ------------- ------------- ----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1722 Madison Avenue
Council Bluffs, Iowa
51503-5277............. Owned 1990 -- $ 271
205 East Erie
Missouri Valley, Iowa
51555-1500............. Owned 1995 -- 39
</TABLE>
- --------
(1) The Bank closed this branch office and relocated it as an owned facility
to 222 N. Dewey Street, effective on or about December 31, 1997.
(2) The Bank closed this branch office, effective January 31, 1998.
LEGAL PROCEEDINGS
Except for the Goodwill Litigation, the Bank is not involved in any pending
legal proceedings other than routine legal proceedings occurring in the
ordinary course of business. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Impact of Goodwill Litigation."
Such routine legal proceedings, in the aggregate, are believed by management
to be immaterial to the Company's financial condition or results of
operations.
PERSONNEL
As of September 30, 1997, the Bank had 337 authorized full-time employee
positions and 29 authorized part-time employee positions. The employees are
not represented by a collective bargaining unit and the Bank considers its
relationship with its employees to be good. See "Management of the Bank--
Benefits" for a description of certain compensation and benefit programs
offered to the Bank's employees.
77
<PAGE>
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
General. The Company and the Bank will report their income on a calendar
year basis using the accrual method of accounting and will be subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Bank's reserve for bad debts discussed
below. The following discussion of tax matters is intended only as a summary
and does not purport to be a comprehensive description of the tax rules
applicable to the Bank or the Company. The Bank was last audited by the IRS in
1993 and in 1996 by the Nebraska State Department of Revenue.
Bad Debt Reserve. Historically, savings institutions such as the Bank which
met certain definitional tests primarily related to their assets and the
nature of their business ("qualifying thrifts") were permitted to establish a
reserve for bad debts and to make annual additions thereto, which may have
been deducted in arriving at their taxable income. The Bank's deductions with
respect to "qualifying real property loans," which are generally loans secured
by certain interest in real property, were computed using an amount based on
the Bank's actual loss experience, or a percentage equal to 8% of the Bank's
taxable income, computed with certain modifications and reduced by the amount
of any permitted addition to the non-qualifying reserve. Due to the Bank's
loss experience, the Bank generally recognized a bad debt deduction equal to
8% of taxable income.
In August 1996, the provisions repealing the current thrift bad debt rules
were passed by Congress as part of "The Small Business Job Protection Act of
1996." The new rules eliminate the 8% of taxable income method for deducting
additions to the tax bad debt reserves for all thrifts for tax years beginning
after December 31, 1995. These rules also require that all thrift institutions
recapture all or a portion of their bad debt reserves added since the base
year (last taxable year beginning before January 1, 1988). The Bank has
previously recorded a deferred tax liability equal to the bad debt recapture
and, as such, the new rules will have no effect on net income or federal
income tax expense. For taxable years beginning after December 31, 1995, the
Bank's bad debt deduction will be equal to net charge-offs. The new rules
allow an institution to suspend the bad debt reserve recapture for the 1996
and 1997 tax years if the institution's lending activity for those years is
equal to or greater than the institutions average mortgage lending activity
for the six taxable years preceding 1996. For this purpose, only home purchase
and home improvement loans are included and the institution can elect to have
the tax years with the highest and lowest lending activity removed from the
average calculation. If an institution is permitted to postpone the reserve
recapture, it must begin its six year recapture no later than the 1998 tax
year. The unrecaptured base year reserves will not be subject to recapture as
long as the institution continues to carry on the business of banking. In
addition, the balance of the pre-1988 bad debt reserves continue to be subject
to provision of present law referred to below that require recapture in the
case of certain excess distributions to shareholders.
Distributions. To the extent that the Bank makes "non-dividend
distributions" to the Company that are considered as made (i) from the reserve
for losses on qualifying real property loans, or (ii) from the supplemental
reserve for losses on loans ("Excess Distributions"), then an amount based on
the amount distributed will be included in the Bank's taxable income. Non-
dividend distributions include distributions in excess of the Bank's current
and accumulated earnings and profits, distributions in redemption of stock,
and distributions in partial or complete liquidation. However, dividends paid
out of the Bank's current or accumulated earnings and profits, as calculated
for federal income tax purposes, will not be considered to result in a
distribution from the Bank's bad debt reserve. Thus, any dividends to the
Company that would reduce amounts appropriated to the Bank's bad debt reserve
and deducted for federal income tax purposes would create a tax liability for
the Bank. The amount of additional taxable income created from an Excess
Distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if, after the
Conversion, the Bank makes a "non-dividend distribution," then approximately
one and one-half times the amount so used would be includable in gross income
for federal income tax purposes, assuming a 34% corporate income tax rate
(exclusive of state and local taxes). See "Regulation" and "Dividend Policy"
for limits on the payment of dividends of the Bank. The Bank does not intend
to pay dividends that would result in a recapture of any portion of its bad
debt reserve.
78
<PAGE>
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI can be
offset by net operating loss carryovers of which the Bank currently has none.
AMTI is increased by an amount equal to 75% of the amount by which the Bank's
adjusted current earnings exceeds its AMTI. The Bank does not expect to be
subject to the alternative minimum tax.
Dividends Received Deduction and Other Matters. The Company may exclude from
its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction
is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Bank will not file a consolidated
tax return, except that if the Company or the Bank own more than 20% of the
stock of a corporation distributing a dividend then 80% of any dividends
received may be deducted.
STATE AND LOCAL TAXATION
Nebraska Taxation. Under Nebraska law, the Bank presently pays a franchise
tax in lieu of a corporate income tax. The franchise tax is the lesser of two
amounts computed based on the Bank's average deposits and net financial
income, respectively. Presently, the tax is $.47 per $1,000 of average
deposits but not to exceed an amount determined by applying 3.81% to the
Bank's net financial income. Net financial income is the income of the Bank as
reported to the OTS, including its subsidiaries, after ordinary and necessary
expenses but before income taxes.
In addition, the Company will be required to file a Nebraska income tax
return because it will be doing business in Nebraska. For Nebraska tax
purposes, regular corporations are presently taxed at a rate equal to 7.81% of
taxable income. For this purpose, "taxable income" generally means Federal
taxable income, subject to certain adjustments (including addition of interest
income on non-Nebraska municipal obligations and excluding interest income
from qualified U.S. governmental obligations).
Iowa and Kansas Taxation. For both Iowa and Kansas income tax purposes, the
Bank is taxed at a rate equal to 5% and 6 3/4%, respectively, of taxable
income. For this purpose, "taxable income" generally means Federal taxable
income, subject to certain adjustments (including addition of interest income
on state and municipal obligations).
Delaware Taxation. As a Delaware holding company not earning income in
Delaware, the Company is exempt from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
79
<PAGE>
REGULATION
GENERAL
The Bank is subject to extensive regulation, examination and supervision by
the OTS, as its chartering agency, and the FDIC, as the deposit insurer. The
Bank is a member of the FHLB System. The Bank's deposit accounts are insured
up to applicable limits by the SAIF managed by the FDIC. The Bank must file
reports with the OTS and the FDIC concerning its activities and financial
condition in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with, or acquisitions of, other financial
institutions. There are periodic examinations by the OTS and the FDIC to test
the Bank's compliance with various regulatory requirements. This regulation
and supervision establishes a comprehensive framework of activities in which
an institution can engage and is intended primarily for the protection of the
insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
policies, whether by the OTS, the FDIC or the Congress, could have a material
adverse impact on the Company, the Bank and their operations. The Company, as
a savings and loan holding company, will also be required to file certain
reports with, and otherwise comply with the rules and regulations of the OTS
and of the Securities and Exchange Commission (the "SEC") under the federal
securities laws.
Any change in the regulatory structure or the applicable statutes or
regulations, whether by the OTS, the FDIC or the Congress, could have a
material impact on the Company, the Bank, their operations or the Bank's
Conversion. Congress has been considering in 1997 the elimination of the
federal thrift charter and abolishment of the OTS. The results of such
consideration, including possible enactment of legislation, is uncertain.
Therefore, the Bank is unable to determine the extent to which the results of
consideration or possible legislation, if enacted, would affect its business.
See "Risk Factors--Financial Institution Regulation and Possible Legislation."
Certain of the regulatory requirements applicable to the Bank and to the
Company are referred to below or elsewhere herein. The description of
statutory provisions and regulations applicable to savings associations set
forth in this Prospectus do not purport to be complete descriptions of such
statutes and regulations and their effects on the Bank and the Company and is
qualified in its entirety by reference to such statutes and regulations.
FEDERAL SAVINGS INSTITUTION REGULATION
Business Activities. The activities of federal savings institutions are
governed by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act (the "FDI Act") and the
regulations issued by the agencies to implement these statutes. These laws and
regulations delineate the nature and extent of the activities in which federal
associations may engage. In particular, many types of lending authority for
federal associations, e.g., commercial, non-residential real property loans
and consumer loans, are limited to a specified percentage of the institution's
capital or assets.
Loans-to-One Borrower. Under the HOLA, savings institutions are generally
subject to the national bank limit on loans-to-one borrower. Generally, this
limit is 15% of the Bank's unimpaired capital and surplus, plus an additional
10% of unimpaired capital and surplus, if such loan is secured by readily-
marketable collateral, which is defined to include certain financial
instruments and bullion. At September 30, 1997, the Bank's combined limit on
loans-to-one borrower was $21.7 million. At September 30, 1997, the Bank's
largest aggregate amount of loans-to-one borrower consisted of a $7.4 million
commercial real estate loan located in Nebraska.
QTL Test. The HOLA requires savings institutions to meet a Qualified Thrift
Lender Test ("QTL Test"). Under the QTL Test, a savings association is
required to maintain at least 65% of its "portfolio assets" (total assets
less: (i) specified liquid assets up to 20% of total assets; (ii) intangibles,
including goodwill; and (iii) the value of property used to conduct business)
in certain "qualified thrift investments" (primarily residential mortgages and
related investments, including certain mortgage-backed and related securities)
in at least 9 months out of each 12-month period. A savings association that
fails the QTL Test must either convert to a bank charter or operate under
certain restrictions. As of September 30, 1997, the Bank maintained 84.3% of
its portfolio assets
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<PAGE>
in qualified thrift investments and, therefore, met the QTL Test. Recent
legislation has expanded the extent to which education loans, credit card
loans and small business loans may be considered as "qualified thrift
investments."
Limitation on Capital Distributions. OTS regulations impose limitations upon
all capital distributions by a savings institution, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to
shareholders of another institution in a cash-out merger and other
distributions charged against capital. The rule establishes three tiers of
institutions, which are based primarily on an institution's capital level and
supervisory condition. An institution, such as the Bank, that exceeds all
fully phased-in regulatory capital requirements before and after a proposed
capital distribution ("Tier 1 Bank") and has not been advised by the OTS that
it is in need of more than normal supervision, could, after prior notice to,
but without the approval of the OTS, make capital distributions during a
calendar year equal to the greater of: (i) 100% of its net earnings to date
during the calendar year plus the amount that would reduce by one-half its
"surplus capital ratio" (the excess capital over its fully phased-in capital
requirements) at the beginning of the calendar year; or (ii) 75% of its net
earnings for the previous four quarters. Any additional capital distributions
would require prior OTS approval. In the event the Bank's capital fell below
its capital requirements or the OTS notified it that it was in need of more
than normal supervision, the Bank's ability to make capital distributions
could be restricted. In addition, the OTS could prohibit a proposed capital
distribution by any institution, which would otherwise be permitted by the
regulation, if the OTS determines that such distribution would constitute an
unsafe or unsound practice.
Liquidity. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a
specified percentage (currently 4%) of its net withdrawable deposit accounts
plus short-term borrowings. Monetary penalties may be imposed for failure to
meet this liquidity requirement. The Bank's average liquidity ratio for the
three months ended September 30, 1997 was 12.0%, which exceeded the applicable
requirement. The Bank has never been subject to monetary penalties for failure
to meet its liquidity requirements. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
Assessments. Savings institutions are required by regulation to pay
assessments to the OTS to fund the agency's operations. The general
assessment, paid on a semi-annual basis, is based upon the savings
institution's total assets, including consolidated subsidiaries, as reported
in the Bank's latest quarterly Thrift Financial Report. The assessments paid
by the Bank for the year ended June 30, 1997, totaled $210,000.
Branching. OTS regulations permit federally-chartered savings associations
to branch nationwide under certain conditions. Generally, federal savings
associations may establish interstate networks and geographically diversify
their loan portfolios and lines of business. The OTS authority preempts any
state law purporting to regulate branching by federal savings associations.
The Bank currently operates branch offices in Nebraska and Kansas, and in Iowa
through the Iowa Bank. For a discussion of the impact of proposed legislation,
see "Risk Factors--Financial Institution Regulation and Possible Legislation."
Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and any non-savings institution subsidiaries that the Company may establish)
is limited by Sections 23A and 23B of the Federal Reserve Act (the "FRA").
Section 23A restricts the aggregate amount of covered transactions with any
individual affiliate to 10% of the capital and surplus of the savings
institution and also limits the aggregate amount of transactions with all
affiliates to 20% of the savings institution's capital and surplus. Certain
transactions with affiliates are required to be secured by collateral in an
amount and of a type described in Section 23A and the purchase of low quality
assets from affiliates is generally prohibited. Section 23B generally requires
that certain transactions with affiliates, including loans and asset
purchases, must be on terms and under circumstances, including credit
standards, that are substantially the same or at least as favorable to the
institution as those prevailing at the time for comparable transactions with
non-affiliated companies.
The Bank's authority to extend credit to executive officers, directors and
10% shareholders, as well as entities such persons control, is governed by
Sections 22(g) and 22(h) of the FRA, and Regulation O thereunder.
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<PAGE>
Among other things, these regulations require such loans to be made on terms
and conditions substantially the same as those offered to unaffiliated
individuals and not involve more than the normal risk of repayment. Recent
legislation created an exception for loans to insiders made pursuant to a
benefit or compensation program that are widely available to all employees of
the institution and do not give preference to insiders over other employees.
Regulation O also places individual and aggregate limits on the amounts of
loans the Bank may make to insiders based, in part, on the Bank's capital
position, and requires certain board approval procedures to be followed.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring action
against all "institution-affiliated parties," including stockholders, and any
attorneys, appraisers and accountants who knowingly or recklessly participate
in wrongful action likely to have an adverse effect on an insured institution.
Formal enforcement action may range from the issuance of a capital directive
or cease and desist order to removal of officers or directors, receivership,
conservatorship or termination of deposit insurance. Civil penalties cover a
wide range of violations and can amount to $25,000 per day, or $1 million per
day in especially egregious cases. Under the FDI Act, the FDIC has the
authority to recommend to the Director of the OTS that enforcement action be
taken with respect to a particular savings institution. If action is not taken
by the Director, the FDIC has authority to take such action under certain
circumstances. Federal and state law also establishes criminal penalties for
certain violations.
Standards for Safety and Soundness. The FDI Act requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, and compensation, fees and benefits and such other
operational and managerial standards as the agency deems appropriate. The
federal banking agencies have adopted final regulations and Interagency
Guidelines Establishing Standards for Safety and Soundness (the "Guidelines")
to implement these safety and soundness standards. The Guidelines set forth
the safety and soundness standards that the federal banking agencies use to
identify and address problems at insured depository institutions before
capital becomes impaired. The Guidelines address internal controls and
information systems; internal audit system; credit underwriting; loan
documentation; interest rate risk exposure; asset growth; asset quality;
earnings; and compensation, fees and benefits. If the appropriate federal
banking agency determines that an institution fails to meet any standard
prescribed by the Guidelines, the agency may require the institution to submit
to the agency an acceptable plan to achieve compliance with the standard, as
required by the FDI Act. The final regulations establish deadlines for the
submission and review of such safety and soundness compliance plans.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital
standard, a 3% leverage (core capital) ratio and an 8% risk based capital
standard. Core capital is defined as common stockholder's equity (including
retained earnings), certain non-cumulative perpetual preferred stock and
related surplus, minority interests in equity accounts of consolidated
subsidiaries less intangibles other than certain mortgage servicing rights
("MSRs") and credit card relationships. The OTS regulations require that, in
meeting the leverage ratio, tangible and risk-based capital standards
institutions generally must deduct investments in and loans to subsidiaries
engaged in activities not permissible for a national bank. In addition, the
OTS prompt corrective action regulation provides that a savings institution
that has a leverage capital ratio of less than 4% (3% for institutions
receiving the highest CAMEL examination rating) will be deemed to be
"undercapitalized" and may be subject to certain restrictions. See "--Prompt
Corrective Regulatory Action."
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and
supplementary capital) to risk-weighted assets of 8%. In determining the
amount of risk-weighted assets, all assets, including certain off-balance
sheet assets, are multiplied by a risk-weight of 0% to 100%, as assigned by
the OTS capital regulation based on the risks OTS believes are inherent in the
type of asset. The components of core capital are equivalent to those
discussed earlier under the 3% leverage standard. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock and, within specified limits, the allowance
for loan and lease losses. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.
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<PAGE>
The OTS has incorporated an interest rate risk component into its regulatory
capital rule. The final interest rate risk rule also adjusts the risk-
weighting for certain mortgage derivative securities. Under the rule, savings
associations with "above normal" interest rate risk exposure would be subject
to a deduction from total capital for purposes of calculating their risk-based
capital requirements. A savings association's interest rate risk is measured
by the decline in the net portfolio value of its assets (i.e., the difference
between incoming and outgoing discounted cash flows from assets, liabilities
and off-balance sheet contracts) that would result from a hypothetical 200-
basis point increase or decrease in market interest rates divided by the
estimated economic value of the association's assets, as calculated in
accordance with guidelines set forth by the OTS. A savings association whose
measured interest rate risk exposure exceeds 2% must deduct an interest rate
component in calculating its total capital under the risk-based capital rule.
The interest rate risk component is an amount equal to one-half of the
difference between the institution's measured interest rate risk and 2%,
multiplied by the estimated economic value of the association's assets. That
dollar amount is deducted from an association's total capital in calculating
compliance with its risk-based capital requirement. Under the rule, there is a
two quarter lag between the reporting date of an institution's financial data
and the effective date for the new capital requirement based on that data. A
savings association with assets of less than $300 million and risk-based
capital ratios in excess of 12% is not subject to the interest rate risk
component, unless the OTS determines otherwise. The rule also provides that
the Director of the OTS may waive or defer an association's interest rate risk
component on a case-by-case basis. The OTS has postponed indefinitely the date
that the component will first be deducted from an institution's total capital.
At September 30, 1997, the Bank met each of its capital requirements, in
each case on a fully phased-in basis. See "Regulatory Capital Compliance" for
a table which sets forth in terms of dollars and percentages the OTS tangible,
leverage and risk-based capital requirements, the Bank's historical amounts
and percentages at September 30, 1997, and pro forma amounts and percentages
based upon the issuance of the shares within the Estimated Price Range and
assuming that a portion of the net proceeds are retained by the Company.
THRIFT RECHARTERING
The Deposit Insurance Funds Act of 1996 (the "Funds Act"), which was enacted
in September 1996, provides that the BIF (the deposit insurance fund that
covers most commercial bank deposits) and the SAIF will merge on January 1,
1999, if there are no more savings associations as of that date. Several bills
have been introduced in the current Congress that would eliminate the federal
thrift charter and the OTS. A bill recently reported by the House Banking
Committee would require federal thrifts to become national banks or state
banks or savings banks within two years after enactment or they would, by
operation of law, become national banks. A national bank resulting from a
converted federal thrift could continue to engage in activities, including
holding any assets, in which it was lawfully engaged on the day before the
date of enactment. Branches operated on the day before enactment could be
retained regardless of their permissibility for national banks. Subject to a
grandfathering provision, all savings and loan holding companies would become
subject to the same regulation and activities restrictions as bank holding
companies. The grandfathering could be lost under certain circumstances, such
as a change in control of the holding company. The legislative proposal would
also abolish the OTS and transfer its functions to the federal bank regulators
with respect to the institutions and to the Board of Governors of the Federal
Reserve Board with respect to the regulation of holding companies. The Bank is
unable to predict whether the legislation will be enacted or, given such
uncertainty, determine the extent to which the legislation, if enacted, would
affect its business. The Bank is also unable to predict whether the SAIF and
BIF will eventually be merged and what effect, if any, such merger would have
on the Bank.
PROMPT CORRECTIVE REGULATORY ACTION
Under the OTS prompt corrective action regulations, the OTS is required to
take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has a total risk-based capital of less
than 8.0% or a leverage ratio or a Tier 1 capital ratio that is less than 4.0%
is considered to be undercapitalized. A savings institution that has a total
risk-based capital less than 6.0%, a Tier 1 risk-based capital ratio of less
than 3.0% or a leverage ratio that is less than 3.0% is considered to be
"significantly undercapitalized" and a savings institution that has a tangible
capital
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to assets ratio equal to or less than 2.0% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the banking regulator is
required to appoint a receiver or conservator for an institution that is
critically undercapitalized. The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date an
association receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." Compliance with the plan
must be guaranteed by any parent holding company. In addition, numerous
mandatory supervisory actions may become immediately applicable to the
institution depending upon its category, including, but not limited to,
increased monitoring by regulators, restrictions on growth, and capital
distributions and limitations on expansion. The OTS could also take any one of
a number of discretionary supervisory actions, including the issuance of a
capital directive and the replacement of senior executive officers and
directors.
INSURANCE OF DEPOSIT ACCOUNTS
The FDIC has adopted a risk-based insurance assessment system. The FDIC
assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period. The capital categories are (1) well
capitalized, (2) adequately capitalized or (3) undercapitalized. An
institution is also placed in one of three supervisory subcategories within
each capital group. The supervisory subgroup to which an institution is
assigned is based on a supervisory evaluation provided to the FDIC by the
institution's primary federal regulator and information that the FDIC
determines to be relevant to the institution's financial condition and the
risk posed to the deposit insurance funds. An institution's assessment rate
depends on the capital category and supervisory category to which it is
assigned with the most well capitalized, healthy institutions receiving the
lowest rates.
Deposits of the Bank are presently insured by the SAIF. Both the SAIF and
the BIF are statutorily required to achieve and maintain a ratio of insurance
reserves to total insured deposits equal to 1.25%. Until recently, members of
the SAIF and BIF were paying average deposit insurance assessments of between
24 and 25 basis points. The BIF met the required reserve level in 1995,
whereas the SAIF was not expected to meet or exceed the required level until
2002 at the earliest. This situation was primarily due to the statutory
requirement that SAIF members make payments on bonds issued in the late 1980s
by the Financing Corporation ("FICO") to recapitalize the predecessor to the
SAIF.
In view of the BIF's achieving the 1.25% ratio, the FDIC ultimately adopted
a new assessment rate schedule of from 0 to 27 basis points under which 92% of
BIF members paid an annual premium of only $2,000. With respect to SAIF member
institutions, the FDIC adopted a final rule retaining the previously existing
assessment rate schedule applicable to SAIF member institutions of 23 to 31
basis points. As long as the premium differential continued, it may have had
adverse consequences for SAIF members, including reduced earnings and an
impaired ability to raise funds in the capital markets. In addition, SAIF
members, such as the Bank, could have been placed at a substantial competitive
disadvantage to BIF members with respect to pricing of loans and deposits and
the ability to achieve lower operating costs.
On September 30, 1996, the President of the United States signed into law
the Funds Act which, among other things, imposed a special one-time assessment
on SAIF member institutions, including the Bank, to recapitalize the SAIF. As
required by the Funds Act, the FDIC imposed a special assessment of 65.7 basis
points on SAIF assessable deposits held as of March 31, 1995, payable November
27, 1996 (the "SAIF Special Assessment"). The SAIF Special Assessment was
recognized by the Bank as an expense in the quarter ended September 30, 1996
and is generally tax deductible. The SAIF Special Assessment recorded by the
Bank amounted to $5.7 million on a pre-tax basis and $3.7 million on an after-
tax basis.
The Funds Act also spread the obligations for payment of the FICO bonds
across all SAIF and BIF members. Beginning on January 1, 1997, BIF deposits
were assessed for a FICO payment of 1.3 basis points, while SAIF deposits pay
6.48 basis points. Full pro rata sharing of the FICO payments between BIF and
SAIF members will occur on the earlier of January 1, 2000, or the date the BIF
and SAIF are merged.
As a result of the Funds Act, the FDIC voted to effectively lower SAIF
assessments to 0 to 27 basis points as of January 1, 1997, a range comparable
to that of BIF members. SAIF members will also continue to make
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the FICO payments described above. The FDIC also lowered the SAIF assessment
schedule for the fourth quarter of 1996 to 18 to 27 basis points. Management
cannot predict the level of FDIC insurance assessments on an on-going basis,
whether the federal thrift charter will be eliminated or whether the BIF and
SAIF will eventually be merged.
The Bank's assessment rate for fiscal 1997 ranged from 6.48 to 23 basis
points, excluding the SAIF Special Assessment rate of 65.7 basis points, and
the regular premium paid for this period was $1.3 million.
The FDIC is authorized to raise the assessment rates in certain
circumstances. The FDIC has exercised this authority several times in the past
and may raise insurance premiums in the future. If such action is taken by the
FDIC, it could have an adverse effect on the earnings of the Bank.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is
in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or
the OTS. The management of the Bank does not know of any practice, condition
or violation that might lead to termination of deposit insurance.
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB, is required to acquire and
hold shares of capital stock in the FHLB in an amount at least equal to 1% of
the aggregate principal amount of its unpaid residential mortgage loans and
similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the FHLB, whichever is greater. The Bank was in compliance
with this requirement with an investment in FHLB stock at September 30, 1997
of $7.1 million. FHLB advances must be secured by specified types of
collateral and all long-term advances may only be obtained for the purpose of
providing funds for residential housing finance. At September 30, 1997, the
Bank had $10.6 million in FHLB advances.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest
on advances to their members. For the years ended June 30, 1997, 1996 and
1995, dividends from the FHLB to the Bank amounted to approximately $433,000,
$370,000 and $331,000, respectively. If dividends were reduced, the Bank's net
interest income would likely also be reduced. Further, there can be no
assurance that the impact of recent or future legislation on the FHLBs will
not also cause a decrease in the value of the FHLB stock held by the Bank.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts. The
Federal Reserve Board regulations generally require that reserves be
maintained against aggregate transaction accounts as follows: for accounts
aggregating $47.8 million or less (subject to adjustment by the Federal
Reserve Board) the reserve requirement is 3%; and for accounts greater than
$47.8 million, the reserve requirement is $1.4 million plus 10% (subject to
adjustment by the Federal Reserve Board between 8% and 14%) against that
portion of total transaction accounts in excess of $47.8 million. The first
$4.7 million of otherwise reservable balances (subject to adjustment by the
Federal Reserve Board) are exempted from the reserve requirements. The Bank is
in compliance with the foregoing requirements. Because required reserves must
be maintained in the form of either vault cash, a non-interest-bearing account
at a Federal Reserve Bank or a pass-through account as defined by the Federal
Reserve Board, the effect of this reserve requirement is to reduce the Bank's
interest-earning assets. FHLB System members are also authorized to borrow
from the Federal Reserve "discount window," but Federal Reserve Board
regulations require institutions to exhaust all FHLB sources before borrowing
from a Federal Reserve Bank.
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HOLDING COMPANY REGULATION
The Company will be a non-diversified multiple savings and loan holding
company within the meaning of the HOLA. It will be a multiple, rather than
unitary, savings and loan holding company because it will control both the
Bank and the Iowa Bank. As a savings and loan holding company, the Company
will be required to register with the OTS and will be subject to OTS
regulations, examinations, supervision and reporting requirements. In
addition, the OTS has enforcement authority over the Company and its non-
savings institution subsidiaries. Among other things, this authority permits
the OTS to restrict or prohibit activities that are determined to be a serious
risk to the subsidiary savings institutions. The Bank must notify the OTS 30
days before declaring any dividend to the Company.
As a multiple savings and loan holding company, the Company will be subject
to limitations on the types of business activities in which it may engage. The
HOLA limits the activities of a multiple savings and loan holding company and
its non-insured institution subsidiaries primarily to activities permissible
for bank holding companies under Section 4(c)(8) of the Bank Holding Company
Act, as amended (the "BHC Act"), subject to the prior approval of the OTS, and
to other activities authorized by OTS regulation. All of the Bank's current
activities are permissible for subsidiaries of a multiple savings and loan
holding company and the Bank has no current plans to engage in any activities
that would be subject to such limitations. Therefore, the limitations will
have no effect on the current or anticipated business operations of the
Company or the Bank. Following the Conversion, the Bank expects to acquire the
branches of the Iowa Bank, surrender or sell the charter of the Iowa Bank, and
operate under a single charter. As a result, the Company would become a
unitary savings and loan holding company. As a unitary savings and loan
holding company, the Company generally would not be restricted under existing
laws as to the types of business activities in which it may engage, provided
that the Bank after the combination continued to be a QTL. See "--Federal
Savings Institution Regulation--QTL Test" for a discussion of the QTL
requirements. Previously proposed legislation would have treated all savings
and loan holding companies as bank holding companies and limited the
activities of such companies to those permissible for bank holding companies.
See "Risk Factors--Financial Institution Regulation and Possible Legislation."
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5%
of the voting stock of another savings institution, or holding company
thereof, without prior written approval of the OTS; or from acquiring or
retaining, with certain exceptions, more than 5% of a non-subsidiary holding
company or savings association. The HOLA also prohibits a savings and loan
holding company from acquiring more than 5% of a company engaged in activities
other than those authorized for savings and loan holding companies by the
HOLA; or acquiring or retaining control of a depository institution that is
not insured by the FDIC. In evaluating applications by holding companies to
acquire savings institutions, the OTS must consider the financial and
managerial resources and future prospects of the company and institution
involved, the effect of the acquisition on the risk to the insurance funds,
the convenience and needs of the community and competitive factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, except: (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies, and (ii) the acquisition
of a savings institution in another state if the laws of the state of the
target savings institution specifically permit such acquisitions. The states
vary in the extent to which they permit interstate savings and loan holding
company acquisitions.
FEDERAL SECURITIES LAWS
The Company has filed with the SEC a registration statement (the
"Registration Statement") under the Securities Act of 1933 (the "Securities
Act") for the registration of the Common Stock to be issued pursuant to the
Conversion. Upon completion of the Conversion, the Common Stock will be
registered with the SEC under the Exchange Act. The Company will be subject to
the information, proxy solicitation, insider trading restrictions and other
requirements under the Exchange Act.
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The registration under the Securities Act of shares of the Common Stock to
be issued in the Conversion does not cover the resale of such shares. Shares
of the Common Stock purchased by persons who are not affiliates of the Company
may be resold without registration. Shares purchased by an affiliate of the
Company will be subject to the resale restrictions of Rule 144 under the
Securities Act. If the Company meets the current public information
requirements of Rule 144 under the Securities Act, each affiliate of the
Company who complies with the other conditions of Rule 144 (including those
that require the affiliate's sale to be aggregated with those of certain other
persons) would be able to sell in the public market, without registration, a
number of shares not to exceed, in any three-month period, the greater of (i)
1% of the outstanding shares of the Company or (ii) the average weekly volume
of trading in such shares during the preceding four calendar weeks. Provision
may be made in the future by the Company to permit affiliates to have their
shares registered for sale under the Securities Act under certain
circumstances.
MANAGEMENT OF THE COMPANY
The Board of Directors of the Company is divided into three classes, each of
which contains approximately one-third of the Board. The directors shall be
elected by the stockholders of the Company for staggered three-year terms, or
until their successors are elected and qualified. One class of directors,
consisting of Campbell McConnell, has a term of office expiring at the first
annual meeting of stockholders, a second class, consisting of Gilbert G.
Lundstrom and Joyce Person Pocras, has a term of office expiring at the second
annual meeting of stockholders, and a third class, consisting of LaVern F.
Roschewski and Ann Lindley Spence, has a term of office expiring at the third
annual meeting of stockholders. The names and biographical information of the
directors are set forth under "Management of the Bank--Biographical
Information."
The following individuals are the executive officers of the Company and hold
the offices set forth below opposite their names.
<TABLE>
<CAPTION>
NAME POSITION(S) HELD WITH COMPANY
---- -----------------------------
<S> <C>
LaVern F. Roschewski.... Chairman of the Board
Gilbert G. Lundstrom.... President and Chief Executive Officer
Eugene B. Witkowicz..... Executive Vice President, Treasurer and Chief Financial Officer
Patricia A. Young....... Corporate Secretary
Judith A. Klinkman...... Assistant Corporate Secretary
</TABLE>
The executive officers of the Company are elected annually and hold office
until their respective successors have been elected and qualified or until
death, resignation or removal at the discretion of the Board of Directors.
Since the formation of the Company, none of the executive officers,
directors or other personnel has received remuneration from the Company.
Information concerning the principal occupations, employment and other
information concerning the directors and officers of the Company during the
past five years is set forth under "Management of the Bank--Biographical
Information."
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MANAGEMENT OF THE BANK
DIRECTORS
The following table sets forth certain information regarding the Board of
Directors of the Bank.
<TABLE>
<CAPTION>
NAME AGE(1) POSITION(S) HELD WITH THE BANK DIRECTOR SINCE TERM EXPIRES
- ---- ------ ------------------------------ -------------- ------------
<S> <C> <C> <C> <C>
LaVern F. Roschewski.... 66 Chairman of the Board of the 1982 2000
Bank, Chairman of the Board and
Chief Executive Officer of the
Iowa Bank
Gilbert G. Lundstrom.... 56 Director, President and Chief 1994 1999
Executive Officer
Campbell McConnell...... 69 Director 1974 1998
Ann Lindley Spence...... 63 Director 1989 2000
Joyce Person Pocras..... 55 Director 1994 1999
</TABLE>
- --------
(1) As of September 30, 1997
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following table sets forth certain information regarding the executive
officers of the Bank who are not also directors.
<TABLE>
<CAPTION>
NAME AGE(1) POSITION(S) HELD WITH BANK
- ---- ------ --------------------------
<S> <C> <C>
Eugene B. Witkowicz..................... 49 Executive Vice President,
Treasurer, Chief Financial
Officer and Director of Finance
Roland P. Maaske........................ 64 Executive Vice President and
Director of Lending
Larry L. Pfeil.......................... 54 Executive Vice President and
Director of Financial Services
Patricia A. Young....................... 58 Executive Vice President,
Corporate Secretary and Director
of Marketing and Employment
Development
Roger R. Ludemann....................... 48 Executive Vice President and
Director of Consumer Services
</TABLE>
- --------
(1) As of September 30, 1997
Each of the executive officers of the Bank will retain his/her office in the
converted Bank until their re-election at the annual meeting of the Board of
Directors of the Bank, held immediately after the first annual meeting of
stockholders subsequent to the Conversion, and until their successors are
elected and qualified or until they resign, retire, or are removed or
replaced. Officers are subject to re-election by the Board of Directors
annually.
BIOGRAPHICAL INFORMATION
DIRECTORS
LaVern F. Roschewski currently serves as Chairman of the Board. Mr.
Roschewski was elected Chairman of the Board and Chief Executive Officer of
the Bank on January 1, 1994, after serving as President and Chief Operating
Officer since January 1984. Effective January 1, 1996, he retired from the
position of Chief Executive Officer. Mr. Roschewski joined the Bank in 1956
and has served as Internal Auditor, Treasurer, Senior Vice President,
Executive Vice President, Chief Executive Officer and Chairman.
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<PAGE>
Gilbert G. Lundstrom joined the Bank as President, Chief Operating Officer,
and Director on January 1, 1994. Mr. Lundstrom was an attorney and a managing
partner for the Lincoln, Nebraska law firm of Woods & Aitken, where he
practiced law for 25 years. The law firm served as the Bank's general counsel
for the previous seven years. He assumed the additional duties of Chief
Executive Officer on January 1, 1996, and currently serves as an elected
director of the FHLB. Mr. Lundstrom is also a founding director of the
National Council of Federal Home Loan Banks and serves on the Board of
Directors of several for-profit and not-for-profit corporations.
Campbell McConnell is a Professor Emeritus of the Economics Department of
the University of Nebraska-Lincoln. He retired from the University of
Nebraska-Lincoln in 1990.
Ann Lindley Spence is the retired President of Spence Title Services, Inc.,
a title insurance company located in Omaha, Nebraska.
Joyce Person Pocras was the Bank's Internal Auditor until her retirement in
1993.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Eugene B. Witkowicz currently serves as Executive Vice President, Treasurer,
Chief Financial Officer and Director of Finance of the Bank, and is
responsible for managing the corporation's financial administration,
investment portfolio, and budgeting. He began his career at the Bank in 1971
as an Internal Auditor. He has also served as Controller and Fiscal Department
Manager.
Roland P. Maaske is responsible for the Bank's lending operations. Mr.
Maaske began his career at the Bank in 1961 as a loan trainee and advanced to
become Senior Vice President and Director of Lending in 1981. Mr. Maaske was
promoted to Executive Vice President in 1984.
Larry L. Pfeil joined the Bank in 1971 as Branch Manager for the Fairbury
office and currently serves as Executive Vice President and Director of
Financial Services. Mr. Pfeil is responsible for the savings operation and
data processing support for the Bank. He has also served as the Director of
Lincoln Area Operations and Director of Central Area Operations.
Patricia A. Young joined the Bank in 1958 as a secretary in the
Insurance/Personnel Department. As Executive Vice President, Corporate
Secretary and Director of Marketing and Employment Development, Ms. Young is
responsible for the Bank's marketing, advertising, public relations, market
research, and employee training. Ms. Young has also served as Corporate
Secretary to the Board of Directors since 1971.
Roger R. Ludemann joined the Bank in 1995 as Senior Vice President, Director
of Consumer Services. He was promoted to Executive Vice President in September
1997. He is responsible for the overall development and coordination of retail
banking activities. Prior to joining the Bank, Mr. Ludemann served for two
years as President of Cross Financial Group, and has also served as Senior
Vice President of Retail Banking for American Charter.
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS OF THE BANK AND COMPANY
The Bank's Board of Directors meets once per month and may have additional
special meetings called in the manner specified in the Bylaws. During fiscal
year 1997, no current Director attended less than 75% of the aggregate of the
total number of Board meetings and the total number of committee meetings of
the Board of Directors on which they served.
The Board of Directors of the Bank has established the following committees:
The Audit Committee consists of Mr. McConnell, Mrs. Pocras and Mrs. Spence.
The purpose of this committee is to review the audit function and management
actions regarding the implementation of audit findings. The committee meets
four times a year.
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The Proxy Committee consists of Messrs. Roschewski, Lundstrom and McConnell,
Mrs. Pocras and Mrs. Spence. The primary function of this committee is to vote
the proxies of the members of the Bank at any annual or special meeting.
The Executive Committee consists of Messrs. Roschewski and McConnell, and
Mrs. Pocras. The purpose of this committee is to act in the absence of the
Board of Directors between meetings of the Board of Directors.
Additionally, the Bank has a number of other management committees including
the Management Committee, Asset/Liability Committee, Charitable Contributions
Committee, Community Investment Committee, Employee Benefit/Ethics Committee
and Safety Committee.
The Board of Directors of the Company has established the following
committees: the Compensation Committee, consisting of Messrs. Roschewski and
McConnell and Mrs. Pocras; the Pricing Committee, consisting of Messrs.
Lundstrom, Roschewski and McConnell; and the Audit and Compliance Committee
consisting of Mr. McConnell, Mrs. Pocras and Mrs. Spence.
DIRECTOR COMPENSATION
All directors of the Bank currently receive a fee of $2,200 for each
regularly scheduled monthly and special Board meeting, regardless of
attendance. In addition, Mr. Roschewski receives an additional $2,200 for each
regularly scheduled monthly and special board meeting for the Chairman of the
Board fee. For fiscal 1997, there were two special meetings of the Board of
Directors and no meetings of the Executive Committee. Members of the Audit
Committee receive a fee of one-half the regular Board meeting fee. Directors
also currently receive life and health insurance benefits through the Bank.
Directors of the Company are not expected to receive additional fees for such
service.
DIRECTOR EMERITUS
The Bank maintains a Board of Directors Emeritus which currently consists of
four former Directors of the Bank. Pursuant to the Bank's former bylaws,
Directors had to retire in the year they reached age 70. Any Director who
retired because of such age limitation and had either 10 years prior service
on the Board of Directors, or any Director of a merged institution who had
served on the Bank's Board, regardless of length of service, was named a
Director Emeritus upon retirement from the Board. Directors Emeritus are paid
a fee amounting to the full Board fee for the first year. Each year
thereafter, the fee is reduced by 20% of the then payable Board fee until five
years have passed. The four Directors Emeritus are in the last year of payment
under this policy.
Effective January 1, 1998, the Board eliminated the position of Director
Emeritus for directors who retire after that date. Effective as of that date,
the Bank's bylaws also no longer provide for mandatory retirement. In
connection with these changes, the Bank is implementing a plan under which any
retiring director with 10 or more years of service, including service as an
employee of the Bank, who agrees to provide consulting or advisory services to
the Board will be entitled to an annual benefit equal to the then payable
Board fee reduced by twenty percent for each additional year in which the
director provides consulting or advisory services to the Board.
DIRECTORS' DEFERRAL PROGRAM
The Bank maintains a deferred compensation program for directors. Under the
deferred compensation program, each director may defer, until retirement, any
portion of his or her annual remuneration for serving as a director. Each
director has the right, under the program, to direct the investment of his or
her deferred fees. A director may change his or her investment direction
quarterly. Payments commence under the program upon the earlier of death,
termination from service, disability, or a change in control of the Bank. Each
director may elect, at the time he or she makes the deferral election, to
receive benefits in the form of a single lump sum payment, a life annuity, a
joint and survivor annuity, or monthly installments (over a period from 2 to
240 months). The Bank intends to modify the program to allow funds in the
program to be invested in the Common Stock.
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<PAGE>
EXECUTIVE COMPENSATION
Cash Compensation. The following table sets forth the cash compensation paid
by the Bank for services rendered in all capacities during the fiscal year
ended June 30, 1997, to the Chief Executive Officer and the four highest paid
executive officers of the Bank who received cash compensation in excess of
$100,000.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
----------------------------- --------------------- -------
SECURITIES
OTHER RESTRICTED UNDERLYING ALL
ANNUAL STOCK OPTIONS/ LTIP OTHER
NAME AND PRINCIPAL FISCAL SALARY BONUS COMPENSATION AWARDS SARS PAYOUTS COMPENSATION
POSITIONS YEAR ($)(1) ($)(2) ($)(3) ($)(4) ($)(5) ($)(6) ($)(7)
------------------ ------ -------- ------- ------------ ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gilbert G. Lundstrom
President and Chief
Executive Officer...... 1997 $311,108 $86,231 -- -- -- -- $63,392
LaVern F. Roschewski
Chairman of the Board.. 1997 $155,816 $20,695 -- -- -- -- $ 4,169
Eugene B. Witkowicz
Executive Vice
President, Treasurer,
Chief Financial Officer
and Director of
Finance................ 1997 $104,607 $24,967 -- -- -- -- $ 4,424
Roland P. Maaske
Executive Vice
President and Director
of Lending............. 1997 $115,189 $31,293 -- -- -- -- $ 4,848
Larry L. Pfeil
Executive Vice
President and Director
of Financial Services
....................... 1997 $114,911 $25,916 -- -- -- -- $ 4,837
</TABLE>
- --------
(1) Includes directors' fees for the named President and Chief Executive
Officer and the Chairman of the Board.
(2) Represents payments under the Management Incentive Compensation Plan.
(3) For fiscal year 1997, there were no (a) perquisites over the lesser of
$50,000 or 10% of the individual's total salary and bonus for the year;
(b) payments of above-market preferential earnings on deferred
compensation; (c) payments of earnings with respect to long-term incentive
plans prior to settlement or maturation; (d) tax payment reimbursements;
or (e) preferential discounts on stock. For fiscal year 1997, the Bank had
no restricted stock or stock related plans in existence.
(4) Does not include awards pursuant to the Stock-Based Incentive Plan, which
may be granted in conjunction with a meeting of stockholders of the
Company, subject to OTS and stockholder approval, as such awards were not
earned, vested or granted in fiscal year 1997. For a discussion of the
terms of the Stock Program, see "--Benefits--Stock-Based Incentive Plan."
For fiscal year 1997, the Bank had no restricted stock plans in existence.
(5) Does not include options, which may be granted in conjunction with a
meeting of stockholders of the Company, subject to OTS and stockholder
approval, because such options were not earned or granted in fiscal year
1997. For a discussion of the terms of grants and vesting of options, see
"--Benefits--Stock-Based Incentive Plan."
(6) For the fiscal year ended June 30, 1997, there were no payouts or awards
under any long-term incentive plan.
(7) Includes contributions by the Bank of $7,487, $4,169, $4,424, $4,848 and
$4,837 to the accounts of Messrs. Lundstrom, Roschewski, Witkowicz, Maaske
and Pfeil, respectively, under the Bank's 401(k) Plan. Also includes life
insurance premiums of $55,905 for Mr. Lundstrom. Such life insurance
policies provide that Mr. Lundstrom may receive a benefit, if any, equal
to the difference between the cash surrender value of the policy and the
premiums paid by the Bank.
EMPLOYMENT AGREEMENTS
The Bank entered into an employment agreement (the "Bank Employment
Agreement") with Mr. Lundstrom effective January 1, 1994, which was amended
and restated as of February 23, 1995. The employment agreement provides for a
three-year term which is extended on an annual basis, unless either the Board
or Mr. Lundstrom gives written notice of non-renewal. Mr. Lundstrom's Bank
Employment Agreement provides for an annual base salary review by the Board of
Directors. Mr. Lundstrom's current base salary is $350,000. In addition to the
base salary, Mr. Lundstrom's Bank Employment Agreement provides for, among
other things, participation in retirement and executive benefit plans, and
other fringe benefits applicable to executive personnel. The Bank's Board of
Directors may terminate Mr. Lundstrom's Bank Employment Agreement at any time,
but any termination, other than termination for "Cause" (as defined in the
agreement) will not prejudice Mr. Lundstrom's right to compensation or other
benefits under his agreement. In the event of termination for Cause, Mr.
Lundstrom has no right to receive compensation or other benefits, for any
period after termination for Cause with the exception of vested benefits under
the Bank's benefit plans or policies and
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<PAGE>
incentive plans for the benefit of the executive. In the event the Bank
chooses to terminate Mr. Lundstrom's employment for reasons other than Cause,
or in the event Mr. Lundstrom resigns for "Good Reason" (as defined in the
agreement), Mr. Lundstrom or, in the event of his death, his beneficiary,
would be entitled to receive (i) an amount equal to the remaining base salary
payments and bonus due under the agreement in addition to all life, health and
disability benefits provided under the agreement for the remaining term of
employment; (ii) a lump sum cash payment equal to Mr. Lundstrom's "base
amount" of compensation, as defined under Section 280G(b)(3) of the Code,
times the number of years or fractional portion thereof remaining in the term
of the agreement as of the termination date; and (iii) ownership of any split
dollar life insurance policy in Mr. Lundstrom's name.
Upon consummation of the Conversion, the Bank also intends to enter into
employment agreements with Mr. Roschewski and Mr. Witkowicz. The Company also
intends to enter into employment agreements with Mr. Lundstrom, Mr. Roschewski
and Mr. Witkowicz. The proposed Bank and Company employment agreements (other
than Mr. Lundstrom's Bank Employment Agreement) are collectively referred to
herein as the "Employment Agreements." The Employment Agreements are subject
to the review and approval of the OTS and may be amended as a result of such
OTS review. Review of compensation arrangements by the OTS does not indicate,
and should not be construed to indicate, that the OTS has passed upon the
merits of such arrangements. The Employment Agreements are intended to ensure
that the Bank and the Company will be able to maintain a stable and competent
management base after the Conversion. The continued success of the Bank and
the Company depends to a significant degree on the skills and competence of
Mr. Lundstrom, Mr. Roschewski and Mr. Witkowicz.
The Employment Agreements provide for a three-year term for Mr. Lundstrom
and Mr. Roschewski, and a two-year term for Mr. Witkowicz. The Bank Employment
Agreements provide that the Board of Directors may annually extend the
agreement for an additional year so that the remaining term shall be three
years in the case of Mr. Lundstrom and Mr. Roschewski, and two years in the
case of Mr. Witkowicz, unless written notice of non-renewal is given by the
Board of Directors after conducting a performance evaluation of the executive.
The terms of the Company Employment Agreements renew on a daily basis, unless
written notice of non-renewal is given by the Board of Directors of the
Company. The Bank and Company Employment Agreements provide that the
Executive's base salary will be reviewed annually. The base salaries which
will be effective for such Employment Agreements for Messrs. Roschewski and
Witkowicz will be $110,000 and $125,000, respectively. In addition to the base
salary, the Employment Agreements provide for, among other things,
participation in stock benefits plans and other fringe benefits applicable to
similarly situated executive personnel. The Employment Agreements provide for
termination by the Bank or the Company for cause as defined in the agreements
at any time. In the event the Bank or the Company chooses to terminate the
Executive's employment for reasons other than for cause, or in the event of
the Executive's resignation from the Bank or the Company upon certain
conditions, the Executive or, in the event of death, his beneficiary would be
entitled to receive an amount equal to the remaining base salary payments due
to the Executive and the contributions that would have been made on the
Executive's behalf to any employee benefit plans of the Bank or the Company
during the remaining term of the Employment Agreement. The Bank and the
Company would also continue and pay for the Executive's life, health and
disability coverage for the remaining term of the Employment Agreement.
Under the Employment Agreements, if voluntary or involuntary termination
follows a change in control of the Bank or the Company, each of the
executives, or in the event of the executive's death, his beneficiary, would
be entitled to a severance payment equal to the greater of: (i) the payments
due for the remaining terms of the agreement; or (ii) three times the average
of the executive's five preceding taxable years' annual compensation. The Bank
and the Company would also continue the executive's life, health, and
disability coverage for thirty-six months. Notwithstanding that both
agreements provide for a severance payment in the event of a change in
control, the executive would only be entitled to receive a severance payment
under one agreement.
Payments to executives under the Bank employment agreement will be
guaranteed by the Company in the event that payments or benefits are not paid
by the Bank. Payment under the Company Employment Agreements would be made by
the Company. Payments under either the Company Employment Agreement or the
Bank Employment Agreement would be offset against payment obligations due
simultaneously under the other Agreement. Therefore, the executive could not
receive duplicate payments. All reasonable costs and legal fees
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paid or incurred by the Executive pursuant to any dispute or question of
interpretation relating to the Employment Agreements shall be paid by the Bank
or Company, respectively, if the Executive is successful on the merits
pursuant to a legal judgment, arbitration or settlement. The Employment
Agreements also provide that the Bank and Company shall indemnify the
Executive to the fullest extent allowable under federal and Delaware law,
respectively. In the event of a change in control of the Bank or Company, the
total amount of payments due under the Agreements, based solely on the base
salaries to be paid to Messrs. Lundstrom, Roschewski and Witkowicz effective
upon the consummation of the Conversion and excluding any benefits under any
employee benefit plan which may be payable, would be approximately $2.2
million.
CHANGE IN CONTROL AGREEMENTS
Upon Conversion, the Company and the Bank intend to enter into proposed
three-year Change in Control Agreements (the "CIC Agreements") with Larry
Pfeil, Patricia Young, Roger Ludemann and Gale Furnas, none of whom will be
covered by an Employment Agreement. The terms of the Company CIC Agreements
shall be renewed on a daily basis unless written notice of non-renewal is
given by the Board of Directors of the Company. The Bank CIC Agreements may be
renewed by the Board of Directors of the Bank for an additional year. The
Company CIC Agreements will provide that in the event of a change in control
of the Bank or the Company, the officer would be entitled to receive a
severance payment equal to three times the average of the officer's five
preceding taxable years' annual compensation. Under the Bank's CIC Agreement,
in the event voluntary or involuntary termination follows a change in control
of the Bank or the Company, the officer would be entitled to the same
severance payment provided under the Company CIC Agreement. The Company and
Bank would also continue and pay for the officer's life, health and disability
coverage for 24 months following termination. Payments to the officer under
the Bank's CIC Agreements will be guaranteed by the Company in the event that
payments or benefits are not paid by the Bank. Payments under either CIC
Agreement would be offset against payment obligations due simultaneously under
the other. Therefore, the officer could not receive duplicate payments. In the
event of a change in control of the Bank or Company, the total payments that
would be due under the CIC Agreement, based solely on the current annual
compensation paid to the officers covered by the CIC Agreement and excluding
any benefits under any employee benefit plan which may be payable, would be
approximately $1.2 million.
In the event payments and benefits under the CIC Agreements and Bank
employment agreements, which are contingent upon a change in control,
constitute an excess parachute payment under Section 280G of the Code, such
payments would be reduced to $1.00 less than the excess parachute payment
amount. Nevertheless, payments under the Company employment agreements and
payments and benefits under the CIC Agreements and Bank employment agreements
together with payments under other benefit plans may constitute an excess
parachute payment under Section 280G of the Code, resulting in the imposition
of an excise tax on the recipient and denial of the deduction for such excess
amounts to the Company and the Bank. If an excess parachute payment occurs as
a result of payments under the Company employment agreements, the Company will
reimburse the executive for the excise tax due with respect to such payment.
EMPLOYEE SEVERANCE COMPENSATION PLAN
Upon consummation of the Conversion, the Bank's Board of Directors intends
to establish the First Federal Lincoln Bank Employee Severance Compensation
Plan ("Severance Plan") which will provide eligible employees with severance
pay benefits in the event of a change in control of the Bank or the Company.
Management personnel with employment agreements or CIC Agreements are not
eligible to participate in the Severance Plan. Generally, employees are
eligible to participate in the Severance Plan if they have completed at least
one year of service with the Bank. The Severance Plan vests in each
participant a contractual right to the benefits such participant is entitled
to thereunder. Under the Severance Plan, in the event of a change in control
of the Bank or the Company, eligible employees who are terminated from or
terminate their employment within one year (for reasons specified under the
Severance Plan), will be entitled to receive a severance payment. If the
participant, whose employment has terminated, has completed at least one year
of service, the participant will be entitled to a cash severance payment equal
to one-twelfth of annual compensation for each year of service up to a maximum
of 100% of annual compensation. Such payments may tend to discourage takeover
attempts by increasing costs to be incurred by the Bank in the event of a
takeover. In the event the provisions of the
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Severance Plan were triggered, the total amount of payments that would be due
thereunder, based solely upon current salary levels, would be approximately
$7.8 million. However, it is management's belief that substantially all of the
Bank's employees would be retained in their current positions in the event of
a change in control, and that any amount payable under the Severance Plan
would be considerably less than the total amount that could possibly be paid
under the Severance Plan.
INSURANCE PLANS
All full-time employees of the Bank, upon completion of the applicable
introductory period, are covered as a group for comprehensive hospitalization,
including major medical and long-term disability insurance. Life insurance is
also provided to employees.
BENEFITS
Retirement Plan. The Bank maintains the First Federal Savings and Loan
Association of Lincoln Retirement Plan (the "Retirement Plan"), a defined
benefit plan intended to satisfy the tax-qualification requirements of Section
401(a) of the Code. Employees, other than employees paid solely on a retainer
or fee basis, become eligible to participate in the Retirement Plan upon the
attainment of age 21 and the completion of one year of eligibility service.
Following the Conversion, the Bank intends to freeze the future accrual of
benefits under the Retirement Plan in connection with the adoption or
amendment of other qualified employee benefit plans. For purposes of the
Retirement Plan, an employee earns one year of eligibility service when he
completes 1,000 hours of service within a one-year eligibility computation
period. An employee's first eligibility computation period is the one-year
period beginning on the employee's date of hire. Subsequent eligibility
computation periods begin on January 1 and end on December 31.
The Retirement Plan provides for a monthly benefit upon a participant's
retirement at the age of 65, or if later, the fifth anniversary of the
participant's initial participation in the Retirement Plan (i.e., the
participant's "normal retirement date").
The normal monthly retirement benefit for a participant under the Retirement
Plan equals (i) 2% of average monthly compensation multiplied by his number of
years and months of service before January 1, 1978, plus (ii) 1% of his
average monthly compensation multiplied by his number of years and months of
service after January 1, 1978, minus, (iii) the amount of monthly retirement
benefits on the participant's normal retirement date which could have been
provided by either (a) the value of his account as paid to him under the
Norfolk First Federal Savings and Loan Association Money Purchase Plan or (b)
that portion of the value of his account attributable to employer
contributions under the Tri-Federal Savings and Loan Association of Wahoo, NE
Profit Sharing Plan, whichever applies, multiplied by the participant's earned
benefit percentage. For purposes of the Retirement Plan, earned benefit
percentage generally equals the participant's months of service divided by the
number of months the participant will accrue at the later of age 65 or his
normal retirement date. A participant may also receive a benefit on his early
retirement date, which is the date on which he attains age 60 and completes
ten years of vesting service. Benefits received prior to a participant's
normal retirement date are reduced by certain factors set forth in the
Retirement Plan. Participants become fully vested in their benefits under the
Retirement Plan upon the completion of five years of vesting service.
Participants also become 100% vested in their benefits upon the attainment of
normal retirement age (age 65).
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The following table sets forth the estimated annual benefits payable upon
retirement at age 65 for the period ended September 30, 1997.
<TABLE>
<CAPTION>
YEARS OF BENEFIT SERVICE
---------------------------------------------------------------
FINAL AVERAGE
EARNINGS 15 20 25 30 35
- ------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
$ 50,000 $ 7,500 $10,125 $15,125 $20,125 $25,125
75,000 11,250 15,188 22,688 30,188 37,688
100,000 15,000 20,250 30,250 40,250 50,250
125,000 18,750 25,313 37,813 50,313 62,813
150,000 22,500 30,375 45,375 60,375 75,375
175,000(1) 24,000 32,400 48,400 64,400 80,400
200,000(1) 24,000 32,400 48,400 64,400 80,400
250,000(1) 24,000 32,400 48,400 64,400 80,400
300,000(1) 24,000 32,400 48,400 64,400 80,400
350,000(1) 24,000 32,400 48,400 64,400 80,400
400,000(1) 24,000 32,400 48,400 64,400 80,400
</TABLE>
- --------
(1)The maximum amount of annual compensation which the Retirement Plan can
consider in computing benefits is $160,000 for plan years beginning on or
after January 1, 1997 pursuant to Section 401(a)(17) of the Code.
The approximate years of credited service, as of September 30, 1997, for the
named executive officers are as follows:
<TABLE>
<CAPTION>
YEARS OF
SERVICE
--------
<S> <C>
Gilbert G. Lundstrom............................................. 2
LaVern F. Roschewski............................................. 32
Eugene B. Witkowicz.............................................. 19
Roland P. Maaske................................................. 32
Larry L. Pfeil................................................... 23
</TABLE>
Savings Plan. The Bank maintains the First Federal Savings and Loan
Association of Lincoln Savings Plan (the "401(k) Plan"), a tax-qualified plan
under Section 401(a) of the Code with a cash or deferred arrangement under
Section 401(k) of the Code. Employees, other than employees paid solely on a
retainer or fee basis, become eligible to participate in the 401(k) Plan upon
the completion of one year of entry service. For purposes of the 401(k) Plan,
an employee earns one year of entry service when he completes 1,000 hours of
service within a one-year service period. An employee's first service period
is the one-year period beginning on the employee's date of hire. Subsequent
service periods begin on January 1 and end on December 31.
Under the 401(k) Plan, participants may elect to have the Bank contribute up
to 15% of their compensation to the 401(k) Plan, subject to certain
limitations imposed by the Code. The Bank currently makes matching
contributions to the 401(k) Plan equal to 75% of the first 6% of compensation
deferred by a participant. The Board periodically reviews the level of
matching contributions under the 401(k) Plan and has the discretion to change
the amount of the match from time to time.
Currently, participants in the 401(k) Plan may direct the investment of
their accounts in several types of investment funds. In connection with the
Conversion, the Bank has amended the 401(k) Plan to permit plan participants
to invest their account balances in Common Stock through an Employer Stock
Fund. However, no participant may purchase more than $500,000 in aggregate
value of the Common Stock in the Conversion (subject to the overall purchase
limitations) through 401(k) Plan subscription rights. A participant's ability
to direct all or some of his vested account to purchase Common Stock in the
Offerings will be dependent upon such individual being an Eligible Account
Holder, Supplemental Eligible Account Holder or Other Member. A participant
may directly vote shares of Common Stock held in his or her 401(k) Plan
account.
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<PAGE>
Participants are always 100% vested in their elective deferrals and related
earnings under the 401(k) Plan. Participants become fully vested in matching
contributions and related earnings upon the completion of five years of
vesting service. Participants also become 100% vested in matching
contributions and related earnings upon the earlier of attainment of normal
retirement age (age 65), death, disability, or the satisfaction of the
requirements for early retirement (separation from service on or after the
attainment of age 55).
Participants may receive distributions from the 401(k) Plan in the form of a
lump sum payment or monthly installments, or annuity payments over a term not
less than 60 months but not in excess of the life expectancy of the
Participant and Beneficiary.
Management Incentive Compensation Plan. The Bank maintains the First Federal
Lincoln Bank Management Incentive Compensation Plan ("Incentive Compensation
Plan"). The Incentive Compensation Plan is designed to give officers and key
employees an incentive for effectively operating the Bank and to further its
earning power by providing cash payments, equal to a certain percentage of
their base salaries, based on individual and organization performance.
Eligibility in the Incentive Compensation Plan is limited to individuals the
Board believe have a significant opportunity to improve the profits and growth
of the Bank.
Supplemental Executive Retirement Plans. The Bank currently maintains a
supplemental executive retirement plan for Mr. Lundstrom. Under the plan, in
consideration for remaining in the employ of the Bank until his retirement
(upon or after attaining age 65), Mr. Lundstrom will receive a supplemental
benefit for a period of 15 years. Mr. Lundstrom's supplemental benefit equals
his average annual compensation (excluding bonuses and incentive compensation)
during the three years of employment affording the highest average
compensation, reduced by amounts paid under the Retirement Plan or any
disability benefits paid by the Bank, multiplied by 50%.
In the event of disability, the Bank may pay an annual supplemental benefit
for up to ten years or until (i) the discontinuance of such disability and
employment is fully restored, (ii) Mr. Lundstrom becomes eligible for benefits
provided at retirement under the plan, which benefits shall be exclusive of
and in addition to any disability payments, or (iii) death.
The supplemental executive retirement plan is an "unfunded" plan and
represents only a promise on the part of the Bank to pay the benefits provided
for in accordance with its terms.
The Bank intends to implement an additional supplemental executive
retirement plan to provide for supplemental benefits to certain employees
whose benefits under the Retirement Plan, ESOP and/or 401(k) Plan are reduced
by limitations imposed by the Code. From time to time, the Board will
designate which employees may participate in this additional supplemental
executive retirement plan. The Bank may establish a grantor trust in
connection with the plan to satisfy the obligations of the Bank under the
plan. The assets of the grantor trust would be subject to the claims of the
Bank's general creditors in the event of the Bank's insolvency. The grantor
trust would be permitted to invest in a wide-variety of investments, including
Company Common Stock.
Employee Stock Ownership Plan. The Bank intends to establish an ESOP in
connection with the Conversion. Employees, other than employees paid solely on
a retainer or fee basis, employed with the Bank at the time of the Conversion
and have completed 500 hours of service in the previous 12 months, and
employees of the Bank and its affiliates that adopt the ESOP, including the
Company, shall become participants in the ESOP immediately. Eligible employees
employed after the Conversion shall become participants in the ESOP upon the
attainment of age 21 and the completion of one year of service. For purposes
of the ESOP, an employee earns one year of service when he completes 1,000
hours of service within a one-year eligibility computation period. An
employee's first eligibility computation period will be the one-year period
beginning of the employee's date of hire. Subsequent eligibility computation
periods will begin on January 1 and end on December 31. Participants will
become fully vested in their benefits under the ESOP upon the completion of
five years of service (with credit for prior service). Participants will also
become 100% vested in their benefits upon the attainment of normal retirement
age (age 65), death, disability, or upon a change in control of the Bank or
Company. Benefits become payable in a lump sum upon death, retirement,
disability or separation from service.
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The ESOP intends to purchase 8% of the Common Stock issued in the
Conversion, including the issuance of shares to the Foundation. As part of the
Conversion and in order to fund the ESOP's purchase of the Common Stock issued
in the Conversion, the ESOP intends to borrow 100% of the aggregate purchase
price of the Common Stock either from the Company or a third party lender. In
either case, the loan will be repaid principally from the Bank's contributions
to the ESOP over a period of 12 years. Subject to receipt of any necessary
regulatory approvals or opinions, the Bank may make contributions to the ESOP
for repayment of the loan since the participants are all employees of the Bank
or reimburse the Company for contributions made by it. Contributions to the
ESOP will be discretionary; however, the Company or the Bank intend to make
annual contributions to the ESOP in an aggregate amount at least equal to the
principal and interest due on the debt. The interest rate for the loan is
expected to be the prime rate on or about the date of Conversion and may be
fixed or variable. The contributions to the ESOP are not fixed, so benefits
payable under the ESOP cannot be estimated.
Shares purchased by the ESOP will initially be pledged as collateral for the
loan and will be held in a suspense account until released for allocation
among participants as the loan is repaid. The pledged shares will be released
annually from the suspense account in an amount proportional to the repayment
of the ESOP loan for each plan year. The released shares will be allocated
among the accounts of participants on the basis of the participant's
compensation for the year of allocation relative to all participant's
compensation for the year of allocation.
A committee of the Board of Directors administers the ESOP (the "ESOP
Committee"). An unrelated corporate trustee for the ESOP will be appointed
prior to the Conversion. The ESOP Committee may instruct the trustee regarding
investment of funds contributed to the ESOP. The ESOP trustee, subject to its
fiduciary duty, must vote all allocated shares held in the ESOP in accordance
with the instructions of the participants. The trustee will vote the
unallocated shares (i.e., those held in the suspense account) and allocated
shares for which it receives no instructions in a manner calculated to most
accurately reflect the instructions it has received from participants
regarding the allocated stock; provided, however, that such vote is in
accordance with the provisions of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"). In the event no shares have been allocated at
the time such shares are to be voted, each participant shall be deemed to have
one share allocated to his account for voting purposes.
Management Supplemental Executive Retirement Plan. The Bank intends to
implement a non-qualified Management Supplemental Executive Retirement Plan
("MSERP") to provide certain employees (designated by the Board) of the Bank
and its affiliates, including the Company, with additional retirement
benefits. The MSERP benefit is intended to make up benefits lost under the
ESOP allocation procedures to participants who retire prior to the complete
repayment of the ESOP loan. At the retirement of a participant, the benefits
under the MSERP are determined by first: (i) projecting the number of shares
that would have been allocated to the participant under the ESOP if the
participant had remained employed throughout the period of the ESOP loan
(measured from the participant's first date of ESOP participation); and (ii)
reducing that number by the number of shares actually allocated to the
participant's account under the ESOP; and second, by multiplying the number of
shares that represent the difference between such figures by the average fair
market value of the Common Stock over the preceding five years. Benefits under
the MSERP vest in 20% annual increments over a five-year period commencing as
of the date of an individual's participation in the MSERP. The vested portion
of the participant's benefits are payable upon the participant's retirement.
The Bank may establish a grantor trust in connection with the MSERP to satisfy
the obligations of the Bank with respect to the MSERP. The assets of the
grantor trust are subject to the claims of the Bank's general creditors in the
event of the Bank's insolvency.
Deferred Compensation Programs. The Bank currently maintains deferred
compensation arrangements with approximately 25 individuals, including some
former employees who currently receive benefits pursuant to such arrangements.
The deferred compensation arrangements were established to reward employees
for their valuable services to the Bank. Among the individuals with whom the
Bank maintains deferred compensation arrangements are Messrs. Witkowicz,
Maaske, Pfeil, and Roschewski and Ms. Young.
The arrangements generally provide that the employees will receive a monthly
benefit, beginning at their retirement, for a fixed number of years. If an
employee leaves the employ of the Bank prior to his retirement, he
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forfeits any benefit he may have otherwise had under the terms of his
arrangement. The majority of arrangements provide a monthly benefit of
approximately of $100 to $600 for 120 months.
The deferred compensation arrangements are unfunded and represent only
promises on the part of the Bank to pay amounts in the future. The approximate
present value of the benefits payable pursuant to the deferred compensation
arrangements is $779,000.
Stock-Based Incentive Plan. Following the Conversion, the Board of Directors
of the Company intends to adopt one or more stock-based benefit plans to
provide stock options, awards of restricted stock and certain related rights
to eligible officers, employees, and directors of the Company and Bank. The
Company anticipates granting stock options and restricted stock awards under a
single plan. However, it is possible separate plans could be established for
directors and employees (including officers).
At a meeting of stockholders of the Company following the Conversion, which
under applicable OTS regulations may be held no earlier than six months after
the completion of the Conversion, the Board of Directors intends to present
the Stock-Based Incentive Plan or any separate plan(s) to stockholders for
approval. The Company has reserved an amount equal to 10% of the shares of
Common Stock issued in the Conversion, including shares issued to the
Foundation, or 850,252 shares (based upon the issuance of 8,502,525 shares),
for stock options, and 4% of the shares of Common Stock issued in the
Conversion, including shares issued to the Foundation, or 340,101 shares
(based upon the issuance of 8,502,525 shares), for restricted stock awards.
OTS regulations provide that no individual officer or employee of the Bank may
receive more than 25% of the stock options available under the Stock-Based
Incentive Plan (or any separate plan for officers and employees) and non-
employee directors may not receive more than 5% individually, or 30% in the
aggregate, of the stock options available under the Stock-Based Incentive Plan
(or any separate plan for directors). OTS regulations also provide that no
individual officer or employee of the Bank may receive more than 25% of the
restricted stock awards available under the Stock-Based Incentive Plan (or any
separate plan for officers and employees) and non-employee directors may not
receive more than 5% individually, or 30% in the aggregate, of the restricted
stock awards available under the Stock-Based Incentive Plan (or any separate
plan for directors). The Bank expects to contribute funds to a trust
established in connection with the Stock-Based Incentive Plan (or any separate
plan(s)) to enable the plan to acquire, in the aggregate, an amount equal to
4% of the shares of Common Stock issued in the Conversion, including shares
issued to the Foundation, or 340,101 shares (based upon the issuance of
8,502,525 shares). These shares would be acquired through open market
purchases, if permitted, or from authorized but unissued shares. The Board
intends to appoint an independent fiduciary to serve as trustee of a trust to
be established in connection with the Stock-Based Incentive Plan. In the event
that additional authorized but unissued shares are acquired by the Stock-Based
Incentive Plan after the Conversion, the interests of existing shareholders
would be diluted. See "Pro Forma Data."
The grants of stock options and restricted stock awards will be designed to
attract and retain qualified personnel in key positions, provide officers and
key employees with a propriety interest in the Company as an incentive to
contribute to the success of the Company and reward key employees for
outstanding performance. All employees of the Company and its subsidiaries,
including the Bank, will be eligible to participate in the Stock-Based
Incentive Plan (or any separate plan for employees). It is expected that the
committee administering the plan will determine which officers and employees
will be granted stock options, restricted stock awards and related rights,
including limited rights. The committee will also determine whether stock
options will be incentive or non-statutory stock options, the number of shares
subject to each stock option and restricted stock award, the exercise price of
each non-statutory stock option, whether stock options may be exercised by
delivering other shares of Common Stock, and when stock options become
exercisable or restricted stock awards vest. Only employees may receive grants
of Incentive Stock Options. Therefore, under the Stock-Based Incentive Plan
(or any separate plan for directors), directors may receive only grants of
Non-Statutory Stock Options (as defined below).
The Stock-Based Incentive Plan (or any separate plan for employees) will
provide for the grant of: (i) options to purchase the Common Stock intended to
qualify as incentive stock options under Section 422 of the Code ("Incentive
Stock Options"); (ii) options that do not so qualify ("Non-Statutory Stock
Options"); and (iii) limited option rights ("Limited Option Rights"). Limited
Option Rights are exercisable only upon a change
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in control of the Bank or the Company. Upon exercise of Limited Option Rights
in the event of a change in control, the employee or director will be entitled
to receive a lump sum cash payment equal to the difference between the
exercise price of any unexercised option, whether exercisable or unexercisable
at such time, and the fair market value of the shares of common stock subject
to the stock option on the date of exercise of the right in lieu of purchasing
the stock underlying the stock option. It is anticipated that all stock
options granted contemporaneously with stockholder approval of the Stock-Based
Incentive Plan will qualify as Incentive Stock Options to the extent permitted
under Section 422 of the Code. Unless sooner terminated, the Stock-Based
Incentive Plan will be in effect for a period of ten years from the earlier of
adoption by the Board of Directors or approval by the Company's Stockholders.
Subject to stockholder approval, the Company intends to grant stock options
with Limited Option Rights under the Plan at an exercise price equal to at
least the fair market value of the underlying Common Stock on the date of
grant.
An individual will not be deemed to have received taxable income upon the
grant or exercise of any Incentive Stock Option, provided that such shares
received through the exercise of such option are not disposed of by the
employee for at least one year after the date the stock is received in
connection with the stock option exercise and two years after the date of
grant of the stock option (a "disqualifying disposition"). No compensation
deduction will be available to the Company as a result of the grant or
exercise of Incentive Stock Options unless there has been a disqualifying
disposition. In the case of a Non-Statutory Stock Option and in the case of a
disqualifying disposition of an Incentive Stock Option, an individual will
realize ordinary income upon exercise of the stock option (or upon the
disqualifying disposition) in an amount equal to the amount by which the
exercise price exceeds the fair market value of the Common Stock purchased by
exercising the stock option on the date of exercise. The amount of any
ordinary income realized by an optionee upon the exercise of a Non-Statutory
Stock Option or due to a disqualifying disposition of an Incentive Stock
Option will be a deductible expense to the Company for tax purposes. In the
case of Limited Rights, the option holder will have to include the amount paid
to him or her upon exercise in his gross income for federal income tax
purposes in the year in which the payment is made and the Company will be
entitled to a deduction for federal income tax purposes of the amount paid.
Under the Stock-Based Incentive Plan (or any separate plans for directors
and employees), restricted stock awards and related Limited Stock Rights,
would be granted in the form of shares of Common Stock held by the plans.
Awards will be non-transferable and non-assignable. Allocations and grants of
restricted stock awards, and related Limited Stock Rights, to officers and
employees may be made in the form of base grants and/or performance grants
(the vesting of which would be contingent upon performance goals established
by the committee administering the plan). In establishing any performance
goals, the committee may utilize the annual financial results of the Bank,
actual performance of the Bank as compared to targeted goals such as the ratio
of the Bank's net worth to total assets, the Bank's return on average assets,
or such other performance standards as determined by the committee with the
approval of the Board of Directors.
Limited Stock Rights would be exercisable by participants upon a change in
control of the Company or Bank as described in the plan. Subject to OTS
regulations, upon the exercise of a Limited Stock Right, the recipient will be
entitled to receive a cash payment equal to the fair market value of all
unvested stock awards in exchange for any rights to such unvested stock
awards.
When a participant becomes vested with respect to restricted stock awards,
the participant will realize ordinary income equal to the fair market value of
the Common Stock at the time of vesting (unless the participant made an
election pursuant to Section 83(b) of the Code). The amount of income
recognized by the participants will be a deductible expense for tax purposes
for the Bank. When restricted stock awards become vested and shares of Common
Stock are actually distributed to participants, the participants would receive
amounts equal to any accrued dividends with respect thereto. Prior to vesting,
recipients of stock awards may direct the voting of the shares awarded to
them. Shares not subject to grants and shares allocated subject to the
achievement of performance goals will be voted by the trustee in proportion to
the directions provided with respect to shares subject to grants. Vested
shares will be distributed to recipients as soon as practicable following the
day on which they vest.
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If the Stock-Based Incentive Plan (or any separate plans for employees and
directors) is adopted in the form described above, stock awards would become
vested and stock options would become vested and exercisable in the manner
specified by the Company, subject to applicable OTS regulations, which require
that stock options and restricted stock awards begin vesting no earlier than
one year from the date of shareholder approval of the plan and thereafter vest
at a rate of no more than 20% per year. Stock options could be exercisable for
three months following the date on which the employee or director ceases to
perform services for the Bank or the Company, except that in the event of
death or disability, options accelerate and become fully vested and could be
exercisable for up to one year thereafter or such longer period as determined
by the Company. In the case of death or disability, stock options may be
exercised for a period of 12 months. However, any Incentive Stock Options
exercised more than three months following the date the employee ceases to
perform services as an employee would be treated as a Non-Statutory Stock
Option. In the event of retirement, if the optionee continues to perform
services as a director or consultant on behalf of the Bank, the Company or an
affiliate, unvested options would continue to vest in accordance with their
original vesting schedule until the optionee ceases to serve as a consultant
or director. In the event of death, disability or normal retirement, the
Company, if requested by the optionee, or the optionee's beneficiary, could
elect, in exchange for vested options, to pay the optionee, or the optionee's
beneficiary in the event of death, the amount by which the fair market value
of the Common Stock exceeds the exercise price of the options on the date of
the employee's termination of employment.
Applicable OTS regulations currently do not permit accelerated vesting in
the event of a change in control of stock options or stock awards granted
under a plan adopted within one year after conversion. Subject to any
applicable regulatory requirements, the Stock-Based Incentive Plan (or any
separate plans for employees and directors) may be amended, subsequent to the
expiration of the one-year period, to provide for accelerated vesting of
previously granted options in the event of a change in control of the Company
or the Bank. A change in control would generally be considered to occur when a
person or group of persons acting in concert acquires beneficial ownership of
20% or more of any class of equity security of the Company or the Bank or in
the event of a tender or exchange offer, merger or other form of business
combination, sale of all or substantially all of the assets of the Company or
the Bank or contested election of directors which resulted in the replacement
of a majority of the Board of Directors by persons not nominated by the
directors in office prior to the contested election.
TRANSACTIONS WITH CERTAIN RELATED PERSONS
Federal regulations require that all loans or extensions of credit to
executive officers and directors must be made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with the general public and must not involve more than
the normal risk of repayment or present other unfavorable features. In
addition, loans made to a director or executive officer in excess of the
greater of $25,000 or 5% of the Bank's capital and surplus (up to a maximum of
$500,000) must be approved in advance by a majority of the disinterested
members of the Board of Directors.
The Bank currently makes certain consumer loans to its executive officers,
directors and employees on the same terms and conditions offered to the
general public. The Bank's policy provides that all loans made by the Bank to
its executive officers and directors be made in the ordinary course of
business, on substantially the same terms, including collateral, as those
prevailing at the time for comparable transactions with other persons and may
not involve more than the normal risk of collectibility or present other
unfavorable features. As of September 30, 1997, four of the Bank's executive
officers or directors had loans with outstanding balances totaling
approximately $427,000 in the aggregate. All such loans were made by the Bank
in the ordinary course of business, with no favorable terms and such loans do
not involve more than the normal risk of collectibility or present unfavorable
features.
The Company intends that all transactions in the future between the Company
and its executive officers, directors, holders of 10% or more of the shares of
any class of its common stock and affiliates thereof, will contain terms no
less favorable to the Company than could have been obtained by it in arm's
length negotiations with unaffiliated persons and will be approved by a
majority of independent outside directors of the Company not having any
interest in the transaction.
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SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the number of shares of Common Stock the
Bank's executive officers and directors propose to purchase, assuming shares
of Common Stock are issued at the minimum and maximum of the Estimated Price
Range, giving effect to the shares issued to the Foundation, and that
sufficient shares will be available to satisfy their subscriptions. The table
also sets forth the total expected beneficial ownership of Common Stock as to
all directors and executive officers as a group.
<TABLE>
<CAPTION>
AT THE MINIMUM AT THE MAXIMUM
OF THE ESTIMATED OF THE ESTIMATED
PRICE RANGE(1) PRICE RANGE(1)
------------------ --------------------
AS A AS A
NUMBER PERCENT OF PERCENT OF
OF SHARES NUMBER OF SHARES
NAME AMOUNT SHARES ISSUED SHARES ISSUED
- ---- ---------- ------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
LaVern F. Roschewski....... $ 500,000 25,000 0.42% 25,000 0.31%
Gilbert G. Lundstrom....... 500,000 25,000 0.42 25,000 0.31
Campbell McConnell......... 400,000 20,000 0.34 20,000 0.25
Ann Lindley Spence......... 500,000 25,000 0.42 25,000 0.31
Joyce Person Pocras........ 530,000 26,500 0.45 26,500 0.33
Eugene B. Witkowicz........ 150,000 7,500 0.13 7,500 0.09
Roland P. Maaske........... 200,000 10,000 0.17 10,000 0.12
Larry L. Pfeil............. 200,000 10,000 0.17 10,000 0.12
Patricia A. Young.......... 100,000 5,000 0.08 5,000 0.06
Roger R. Ludemann.......... 100,000 5,000 0.08 5,000 0.06
All Directors and Executive
Officers as a Group (10
persons).................. $3,180,000 159,000 2.68% 159,000 1.98%
========== ======= ==== ======= ====
</TABLE>
- --------
(1) Includes proposed subscriptions, if any, by associates. Also includes
funds from the Bank's 401(k) Plan which may be used to purchase shares of
Common Stock under such plan's new employer stock fund investment option.
See "--Benefits--Savings Plan." Does not include subscription orders by
the ESOP. Intended purchases by the ESOP are expected to be 8% of the
shares issued in the Conversion, including shares issued to the
Foundation. Also does not include shares to be contributed to the
Foundation equal to 6% of the Common Stock sold, Common Stock which may be
awarded under the Stock-Based Incentive Plan to be adopted equal to 4% of
the Common Stock issued in the Conversion, including shares issued to the
Foundation, and Common Stock which may be purchased pursuant to options
which may be granted under the Stock-Based Incentive Plan equal to 10% of
the number of shares of Common Stock issued in the conversion, including
shares issued to the Foundation.
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THE CONVERSION
THE BOARD OF DIRECTORS OF THE BANK AND THE OTS HAVE APPROVED THE PLAN OF
CONVERSION, SUBJECT TO APPROVAL BY THE MEMBERS OF THE BANK ENTITLED TO VOTE ON
THE MATTER AND THE SATISFACTION OF CERTAIN OTHER CONDITIONS. SUCH OTS
APPROVAL, HOWEVER, DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE
PLAN BY SUCH AGENCY. THE OTS NEITHER APPROVED NOR DISAPPROVED THE
ESTABLISHMENT OF THE FOUNDATION.
GENERAL
On October 7, 1997, the Bank's Board of Directors unanimously adopted the
Plan pursuant to which the Bank will be converted from a federally chartered
mutual savings bank to a federally chartered capital stock savings bank. It is
currently intended that all of the outstanding capital stock of the Bank will
be held by the Company. The Plan was approved by the OTS, subject to, among
other things, approval of the Plan by the Bank's members. See "--Stock
Pricing." A special meeting of members has been called for this purpose to be
held on April 17, 1998.
The Company has applied for the approval of the OTS to become a savings and
loan holding company and to acquire all of the capital stock of the Bank to be
issued in the Conversion. The Company plans to purchase the shares of issued
and outstanding capital stock of the Bank in exchange for 50% of the net
proceeds and retain the remaining net proceeds. The Conversion will be
effected only upon completion of the sale of all of the shares of Common Stock
to be issued pursuant to the Plan.
The Plan provides that the Board of Directors of the Bank may, at any time
prior to the issuance of the Common Stock and for any reason, decide not to
use a holding company form. Such reasons may include possible delays resulting
from overlapping regulatory processing or policies which could adversely
affect the Bank's or the Company's ability to consummate the Conversion and
transact its business as contemplated herein and in accordance with the Bank's
operating policies. In the event such a decision is made, the Bank will
withdraw the Company's Registration Statement from the SEC and take steps
necessary to complete the Conversion without the Company, including filing any
necessary documents with the OTS. In such event, and provided there is no
regulatory action, directive or other consideration upon which basis the Bank
determines not to complete the Conversion, if permitted by the OTS, the Bank
will issue and sell the common stock of the Bank and subscribers will be
notified of the elimination of a holding company and resolicited (i.e., be
permitted to affirm their orders, in which case they will need to
affirmatively reconfirm their subscriptions prior to the expiration of the
resolicitation offering or their funds will be promptly refunded with interest
at the Bank's passbook rate of interest; or be permitted to modify or rescind
their subscriptions), and notified of the time period within which the
subscriber must affirmatively notify the Bank of his intention to affirm,
modify or rescind his subscription. The following description of the Plan
assumes that a holding company form of organization will be used in the
Conversion. In the event that a holding company form of organization is not
used, all other pertinent terms of the Plan as described below will apply to
the conversion of the Bank from the mutual to stock form of organization and
the sale of the Bank's common stock.
The Plan provides generally that (i) the Bank will convert from a mutual
savings bank to a capital stock savings bank and (ii) the Company will offer
shares of Common Stock for sale in the Subscription Offering to the Bank's
Eligible Account Holders, the ESOP, Supplemental Eligible Account Holders, and
Other Members. See "--Subscription Offering and Subscription Rights." Upon
completion of the Subscription Offering, and subject to the prior rights of
holders of subscription rights, shares will be offered in a Community Offering
with preference given first to certain accountholders of the Iowa Bank and to
natural persons residing in the Bank's Local Community. It is anticipated that
all shares not subscribed for in the Subscription and Community Offerings will
be offered for sale by the Company to the general public in a Syndicated
Community Offering. The Bank has the right to accept or reject, in whole or in
part, any orders to purchase shares of the Common Stock received in the
Community Offering or in the Syndicated Community Offering. See "--Community
Offering" and "--Syndicated Community Offering."
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The aggregate price of the shares of Common Stock to be issued in the
Conversion within the Estimated Price Range, currently estimated to be between
$118.6 million and $160.4 million, will be determined based upon an
independent appraisal, prepared by Keller of the estimated pro forma market
value of the Common Stock. All shares of Common Stock to be issued and sold in
the Conversion will be sold at the same price. The independent appraisal will
be affirmed or, if necessary, updated at the completion of the Subscription
Offering, if all shares are subscribed for, or at the completion of the
Community or Syndicated Community Offering. The appraisal has been performed
by Keller, a consulting firm experienced in the valuation and appraisal of
savings institutions. See "--Stock Pricing" for additional information as to
the determination of the estimated pro forma market value of the Common Stock.
The following is a brief summary of pertinent aspects of the Conversion. The
summary is qualified in its entirety by reference to the provisions of the
Plan. A copy of the Plan is available for inspection at each branch of the
Bank and at the Midwest Region and Washington, D.C. offices of the OTS.
ESTABLISHMENT OF THE CHARITABLE FOUNDATION
General. In furtherance of the Bank's long-standing commitment to its local
community, the Plan of Conversion provides for the establishment of a
charitable foundation in connection with the Conversion. The Plan provides
that the Bank and the Company will establish the Foundation, which will be
incorporated under Delaware law as a non-stock corporation, and will fund the
Foundation with Common Stock, as further described below. The Company and the
Bank believe that the funding of the Foundation with Common Stock is a means
of establishing a common bond between the Bank and the communities in which
the Bank operates and thereby enables such communities to share in the
potential growth and success of the Company and the Bank over the long term.
By further enhancing the Bank's visibility and reputation in the communities
in which it operates, the Bank believes that the Foundation will enhance the
long-term value of the Bank's community banking franchise.
The Foundation will be dedicated to the promotion of charitable purposes
within the communities in which the Bank operates, including, but not limited
to, providing grants or donations to support housing assistance, not-for-
profit medical facilities, community groups and other types of organizations
or projects. Establishment of the Foundation is subject to the approval of a
majority of the total outstanding votes of the Bank's members eligible to be
cast at the Special Meeting. The Foundation will be considered as a separate
matter from approval of the Plan of Conversion. If the Bank's members approve
the Plan of Conversion, but not the Foundation, the Bank intends to complete
the Conversion without the establishment of the Foundation. Failure to approve
the establishment of the Foundation may materially affect the pro forma market
value of the Common Stock. In such an event, the Bank may establish a new
Estimated Price Range and commence a resolicitation of subscribers. In the
event of a resolicitation, unless an affirmative response is received within a
specified period of time, all funds will be promptly returned to investors, as
described elsewhere herein. See "--Stock Pricing."
Purpose of the Foundation. The purpose of the Foundation is to provide
funding to support charitable purposes within the communities in which the
Bank operates. The Bank has long emphasized community lending and community
development activities and currently has a "satisfactory" Community
Reinvestment Act ("CRA") rating. The Foundation is being formed as a
complement to the Bank's existing community activities, not as a replacement
for such activities. Indeed, the Bank intends to continue to emphasize
community lending and community development activities following the
Conversion. However, such activities are not the Bank's sole corporate
purpose. The Foundation, conversely, will be completely dedicated to community
activities and the promotion of charitable causes, and may be able to support
such activities in ways that are not presently available to the Bank. The Bank
believes that the Foundation will enable the Company and the Bank to assist
their local community in areas beyond community development and lending. In
this regard, the Board of Directors believes the establishment of a charitable
foundation is consistent with the Bank's commitment to community service. The
Boards of Directors of the Bank and the Company also believe that the funding
of the Foundation with Common Stock of the Company is a means of enabling the
communities in which the Bank operates to share in the potential growth and
success of the Company long after completion of the Conversion. The Foundation
accomplishes that goal by providing for continued ties between the Foundation
and Bank, thereby forming a partnership with the Bank's community. The
establishment of the Foundation would also enable the Company and the Bank to
develop a unified charitable donation strategy and would centralize the
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responsibility for administration and allocation of corporate charitable
funds. The Bank, however, does not expect the contribution to the Foundation
to take the place of the Bank's traditional community lending and charitable
activities. The Bank expects in future periods to continue to make some
charitable contributions within its communities.
Structure of the Foundation. The Foundation will be incorporated under
Delaware law as a non-stock corporation. Pursuant to the Foundation's bylaws,
the Foundation's board of directors will initially be comprised of five
members, all of whom will be individuals selected from officers or directors
of the Bank or the Company. In the future, the Board of Directors intends to
add one or more outside directors from the local community with knowledge and
experience regarding charitable foundation matters. Directors of the
Foundation who also serve as directors of the Bank represent less than a
majority of the Bank's directors. The initial board of directors of the
Foundation will be comprised of Messrs. Roschewski, Lundstrom, Pfeil and
Ludemann, and Ms. Young, who intend to purchase 25,000, 25,000, 10,000, 5,000
and 5,000 shares of Common Stock in the Conversion, respectively. At the
supermaximum of the Estimated Price Range, such purchases equal 0.26%, 0.26%,
0.10%, 0.05% and 0.05%, respectively, or 0.72% in the aggregate, of the total
number of shares to be issued in the Conversion, including shares issued to
the Foundation. On an on-going basis, a Nominating Committee of the board of
directors of the Foundation will nominate individuals eligible for election to
the board of directors of the Foundation. The members of the Foundation, who
are comprised of its board members, will elect the directors at the annual
meeting of the Foundation from those nominated by the Nominating Committee.
Only persons serving as directors of the Foundation qualify as members of the
Foundation with voting authority. Directors will be divided into three classes
with each class appointed for three-year terms. The certificate of
incorporation of the Foundation provides that the corporation is organized
exclusively for charitable purposes as set forth in Section 501(c)(3) of the
Code. The Foundation's certificate of incorporation further provides that no
part of the net earnings of the Foundation will inure to the benefit of, or be
distributable to its directors, officers or members. In addition, any person
who is a director, officer or employee of the Bank, or has the power to direct
its management or policies, or otherwise owes a fiduciary duty to the Bank,
and will also serve as a director, officer or employee of the Foundation, is
subject to the requirements of the OTS Conflicts of Interest Regulations.
The authority for the affairs of the Foundation will be vested in the board
of directors of the Foundation. The directors of the Foundation will be
responsible for establishing the policies of the Foundation with respect to
grants or donations by the Foundation, consistent with the stated purposes for
which the Foundation was established. Although no formal policy governing
Foundation grants exists at this time, the Foundation's board of directors
will adopt such a policy upon establishment of the Foundation. The directors
will also be responsible for directing the assets of the Foundation. Pursuant
to the terms of the contribution as mandated by the OTS, all shares of Common
Stock held by the Foundation must be voted in the same ratio as all other
shares of the Common Stock on all proposals considered by stockholders of the
Company; provided, however, that the OTS will waive this voting restriction
under certain circumstances if compliance with the restriction would: (i)
cause a violation of the law of the State of Delaware and the OTS determines
that federal law would not preempt the application of the laws of the State of
Delaware to the Foundation; (ii) cause the Foundation to lose its tax-exempt
status or otherwise have a material and adverse tax consequence on the
Foundation; or (iii) cause the Foundation to be subject to an excise tax under
Section 4941 of the Code. In order for the OTS to waive such voting
restriction, the Company's or the Foundation's legal counsel must render an
opinion satisfactory to OTS that compliance with the voting restriction would
have the effect described in clauses (i), (ii) or (iii) above. Under those
circumstances, the OTS will grant a waiver of the voting restriction upon
submission of such legal opinion(s) by the Company or the Foundation. In the
event that the OTS waived the voting restriction, the directors would direct
the voting of the Common Stock held by the Foundation. However, a condition to
the OTS approval of the Conversion provides that in the event such voting
restriction is waived or becomes unenforceable, the Director of the OTS, or
his designees, at that time may impose conditions on the composition of the
board of directors of the Foundation or such other conditions or restrictions
relating to the control of the Common Stock held by the Foundation, any of
which could limit the ability of the board of directors of the Foundation to
control the voting of the Common Stock held by the Foundation. There will be
no agreements or understandings with directors of the Foundation regarding the
exercise of control, directly or indirectly, over the management or policies
of the Company or the Bank, including agreements related to voting,
acquisition or
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disposition of the Common Stock. As directors of a nonprofit corporation,
directors of the Foundation will at all times be bound by their fiduciary duty
to advance the Foundation's charitable goals, to protect the assets of the
Foundation and to act in a manner consistent with the charitable purpose for
which the Foundation is established.
The Company will provide office space and administrative support services to
the Foundation. Initially, the Foundation is expected to have no employees.
The board of directors of the Foundation will appoint such officers as may be
necessary to manage the operations of the Foundation. It is anticipated that
initially such officers will be selected from the board of directors of the
Foundation. Any transaction between the Bank and the Foundation will comply
with the affiliate transaction restrictions set forth in Sections 23A and 23B
of the FRA.
The Company proposes to capitalize the Foundation with Common Stock in an
amount equal to 6% of the total amount of Common Stock to be sold in
connection with the Conversion. At the minimum, midpoint and maximum of the
Estimated Price Range, the contribution to the Foundation would equal 355,725,
418,500 and 481,275 shares, which would have a market value of $7.1 million,
$8.4 million and $9.6 million, respectively, based on the Purchase Price of
$20.00 per share. Such contribution, once made, will not be recoverable by the
Company or the Bank. The Company and the Bank determined to fund the
Foundation with Common Stock rather than cash because it desired to form a
bond with its community in a manner that would allow the community to share in
the potential growth and success of the Company and the Bank over the long
term. The funding of the Foundation with stock also provides the Foundation
with a potentially larger endowment than if the Company contributed cash to
the Foundation since, as a stockholder, the Foundation will share in the
potential growth and success of the Company. As such, the contribution of
stock to the Foundation has the potential to provide a self-sustaining funding
mechanism which reduces the amount of cash that the Company, if it were not
making the stock contribution, would have to contribute to the Foundation in
future years in order to maintain a level amount of charitable grants and
donations.
The Foundation would receive working capital from any dividends that may be
paid on the Common Stock in the future, and subject to applicable federal and
state laws, loans collateralized by the Common Stock or from the proceeds of
the sale of any of the Common Stock in the open market from time to time as
may be permitted to provide the Foundation with additional liquidity. As a
private foundation under Section 501(c)(3) of the Code, the Foundation will be
required to distribute annually in grants or donations, a minimum of 5% of the
average fair market value of its net investment assets. One of the conditions
imposed on the gift of Common Stock by the Company is that the amount of
Common Stock that may be sold by the Foundation in any one year shall not
exceed 5% of the average market value of the assets held by the Foundation,
except where the board of directors of the Foundation, determines that the
failure to sell an amount of Common Stock greater than such amount would
result in a long-term reduction of the value of the Foundation's assets or
would otherwise jeopardize the Foundation's capacity to carry out its
charitable purposes. While there may be a greater risk associated with a one-
stock portfolio in comparison to a diversified portfolio, the Company believes
any such risk is mitigated by the ability of the Foundation's directors to
sell more than 5% of its stock in such circumstances. Upon completion of the
Conversion and the contribution of shares to the Foundation immediately
following the Conversion, the Company would have 6,284,475, 7,393,500 and
8,502,525 shares issued and outstanding at the minimum, midpoint and maximum
of the Estimated Price Range. Because the Company will have an increased
number of shares outstanding, the voting and ownership interests of
stockholders in the Company's common stock would be diluted by 5.7%, as
compared to their interests in the Company if the Foundation was not
established. For additional discussion of the dilutive effect, see "Comparison
of Valuation and Pro Forma Information With No Foundation" and "Pro Forma
Data."
Comparison of Valuation and Other Factors Assuming the Foundation is Not
Established as Part of the Conversion. The Company proposes to capitalize the
Foundation with Common Stock in an amount equal to 6% of the total amount of
Common Stock sold in connection with the Conversion. At the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Price Range, the
contribution to the Foundation would equal 355,725, 418,500, 481,275 and
553,466 shares, respectively, which would have a value of $7.1 million, $8.4
million, $9.6 million and $11.1 million, respectively, based on the Purchase
Price. Such contribution, once made, will not be recoverable by the Company or
the Bank. As a result of the establishment of the Foundation, the Estimated
Price Range, as estimated by Keller, has decreased and the amount of stock
available for sale in
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the Offerings has also correspondingly decreased. The amount of the decrease
is 803,250, 945,000, 1,081,750 and 1,249,750 shares at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Price Range, respectively,
which would have a value of $16.1 million, $18.9 million, $21.6 million and
$25.0 million, respectively, based on the Purchase Price. See "Pro Forma Data"
and "Comparison of Valuation and Pro Forma Information with No Foundation."
Tax Considerations. The Company and the Bank have been advised by their
independent accountants that an organization created for the above purposes
will qualify as a 501(c)(3) exempt organization under the Code, and will be
classified as a private foundation rather than a public charity. A private
foundation typically receives its support from one person or one corporation
whereas a public charity receives its support from the public. The Foundation
will submit a request to the IRS to be recognized as an exempt organization
after approval of the Foundation by the Bank's members at the Special Meeting
being held to consider the Conversion. As long as the Foundation files its
application for tax-exempt status within 15 months from the date of its
organization, and provided the IRS approves the application, the effective
date of the Foundation's status as a Section 501(c)(3) organization will be
the date of its organization. The Company's independent accountants, however,
have not rendered any advice on the condition of the gift which requires that
all shares of Common Stock held by the Foundation must be voted in the same
ratio as all other shares of the Common Stock, on all proposals considered by
stockholders of the Company. See "--Regulatory Conditions Imposed on the
Foundation."
A legal opinion of the OTS which addresses the establishment of charitable
foundations by savings associations opines that as a general rule funds
contributed to a charitable foundation should not exceed the deductible
limitations set forth in the Code, and if an association's contributions
exceed the deductible limit, such action must be justified by the board of
directors. In addition, under Delaware law, the Company is authorized by
statute to make charitable contributions and case law has recognized the
benefits of such contributions to a Delaware corporation. In this regard,
Delaware case law provides that a charitable gift must merely be within
reasonable limits as to amount and purpose to be valid. Under the Code, the
Company may deduct up to 10% of its taxable income in any one year and any
contributions made by the Company in excess of the deductible amount will be
deductible for federal tax purposes over each of the five succeeding taxable
years. The Company and the Bank believe that the Conversion presents a unique
opportunity to establish and fund a charitable foundation given the
substantial amount of additional capital being raised in the Conversion. In
making such a determination, the Company and the Bank considered the dilutive
impact of the Foundation on the amount of Common Stock available to be offered
for sale in the Conversion. See "Comparison of Valuation and Pro Forma
Information with No Foundation." Based on such consideration, the Company and
Bank believe that the contribution to the Foundation in excess of the 10%
annual limitation is justified given the Bank's capital position and its
earnings, the substantial additional capital being raised in the Conversion
and the potential benefits of the Foundation to the Bank's community. In this
regard, assuming the sale of the Common Stock at the midpoint of the Estimated
Price Range, the Company would have pro forma consolidated capital of $202.0
million, or 17.49% of consolidated assets and the Bank's pro forma tangible,
core and risk-based capital ratios would be 12.06%, 12.06% and 21.73%,
respectively. See "Regulatory Capital Compliance," "Capitalization," and
"Comparison of Valuation and Pro Forma Information with No Foundation." Thus,
the amount of the contribution will not adversely impact the financial
condition of the Company and the Bank and the Company and the Bank therefore
believe that the amount of the charitable contribution is reasonable given the
Company and the Bank's pro forma capital positions. As such, the Company and
the Bank believe that the contribution does not raise safety and soundness
concerns.
The Company and the Bank have received an opinion of their independent
accountants that the Company's contribution of its own stock to the Foundation
should not constitute an act of self-dealing, and that the Company will be
entitled to a deduction in the amount of the fair market value of the stock at
the time of the contribution less the nominal par value that the Foundation is
required to pay to the Company for such stock, subject to a limitation based
on 10% of the Company's annual taxable income. The Company, however, would be
able to carry forward any unused portion of the deduction for five years
following the year in which the contribution is made for federal tax purposes.
Thus, while the Company expects to receive a charitable contribution deduction
of approximately $1.7 million in calendar year 1998, based on the maximum of
the Estimated Price Range, the Company is permitted under the Code to
carryover the excess contribution over a five-year period for federal
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income tax purposes, subject to the 10% annual limitation. For state income
tax purposes, the Company does not anticipate receiving a full tax benefit for
the charitable contribution in Nebraska, and will receive no tax benefit in
Iowa and Kansas. Assuming the close of the Offerings at the midpoint of the
Estimated Price Range, the Company estimates that all of the deduction should
be deductible over the six-year period. However, no assurances can be made
that the Company will have sufficient pre-tax income over the five-year period
following the year in which the contribution was made to fully utilized the
carryover related to the excess contribution. Neither the Company nor the Bank
expect to make any further contributions to the Foundation within the first
five years following the initial contribution. After that time, the Company
and the Bank may consider future contributions to the Foundation. Any such
decisions would be based on an assessment of, among other factors, the
financial condition of the Company and the Bank at that time, the interests of
stockholders of the Company and depositors of the Bank, and the financial
condition and operations of the Foundation.
Although the Company and the Bank have received an opinion of their
independent accountants that the Company is entitled to a deduction for the
charitable contribution, there can be no assurances that the IRS will
recognize the Foundation as a Section 501(c)(3) exempt organization or that
the deduction will be permitted. In such event, the Company's contribution to
the Foundation would be expensed without tax benefit, resulting in a reduction
in earnings in the year in which the IRS makes such a determination. See "Risk
Factors--Establishment of the Charitable Foundation." In cases of willful,
flagrant or repeated acts or failures to act which result in violations of the
IRS rules governing private foundations, a private foundation's status as a
private foundation may be involuntarily terminated by the IRS. In such event,
the managers of a private foundation could be liable for excise taxes based on
such violations and the private foundation could be liable for a termination
tax under the Code. The Foundation's certificate of incorporation provides
that it shall have a perpetual existence. In the event, however, the
Foundation were subsequently dissolved as a result of a loss of its tax exempt
status, the Foundation would be required under the Code and its certificate of
incorporation to distribute any assets remaining in the Foundation at that
time for one or more exempt purposes within the meaning of Section 501(c)(3)
of the Code, or to distribute such assets to the federal government, or to a
state or local government, for a public purpose.
As a private foundation, earnings and gains, if any, from the sale of Common
Stock or other assets are exempt from federal and state corporate taxation.
However, investment income, such as interest, dividends and capital gains,
will be subject to a federal excise tax of 2.0%. The Foundation will be
required to make an annual filing with the IRS within four and one-half months
after the close of the Foundation's fiscal year to maintain its tax-exempt
status. The Foundation will be required to publish a notice that the annual
information return will be available for public inspection for a period of 180
days after the date of such public notice. The information return for a
private foundation must include, among other things, an itemized list of all
grants made or approved, showing the amount of each grant, the recipient, any
relationship between a grant recipient and the Foundation's managers and a
concise statement of the purpose of each grant.
Regulatory Conditions Imposed on the Foundation. Establishment of the
Foundation is subject to the following conditions imposed by the OTS: (i) the
Foundation will be subject to examination by the OTS, at the Foundation's own
expense; (ii) the Foundation must comply with supervisory directives imposed
by the OTS; (iii) the Foundation will provide annual reports to the OTS
describing grants made and grant recipients; (iv) the Foundation will operate
in accordance with written policies adopted by the board of directors,
including a conflict of interest policy; (v) the Foundation will not engage in
self-dealing and will comply with all laws necessary to maintain its tax-
exempt status; (vi) any purchases of Common Stock by the Foundation following
the Conversion will be subject to the OTS regulations on stock repurchases;
and (vii) any shares of Common Stock of the Company held by the Foundation
must be voted in the same ratio as all other shares of the Company's Common
Stock on all proposals considered by stockholders of the Company; provided,
however, that the OTS will waive this voting restriction under certain
circumstances if compliance with the voting restriction would: (a) cause a
violation of the law of the State of Delaware and the OTS determines the
federal law does not preempt the application of the laws of the State of
Delaware to the Foundation; (b) cause the Foundation to lose its tax-exempt
status or otherwise have a material and adverse tax consequence on the
Foundation; or (c) cause the Foundation to be subject to an excise tax under
Section 4941 of the Code. In order for the OTS to waive such voting
restriction, the Company's or the Foundation's legal counsel must render an
opinion satisfactory to OTS
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that compliance with the voting restriction would have the effect described in
clauses (a), (b) or (c) above. Under those circumstances, the OTS will grant a
waiver of the voting restriction upon submission of such opinion(s) by the
Company or the Foundation. There can be no assurances that either a legal or
tax opinion addressing these issues will be rendered, or if rendered, that the
OTS will grant an unconditional waiver of the voting restriction. In this
regard, a condition to the OTS approval of the Conversion provides that in the
event such voting restriction is waived or becomes unenforceable, the Director
of the OTS, or his designees, at that time may impose conditions on the
composition of the board of directors of the Foundation or such other
conditions or restrictions relating to the control of the Common Stock held by
the Foundation, any of which could limit the ability of the board of directors
of the Foundation to control the voting of Common Stock held by the
Foundation. In no event will the voting restriction survive the sale of shares
of the Common Stock held by the Foundation.
In addition, establishment of the Foundation is subject to the approval of a
majority of the total outstanding votes of the Bank's members eligible to be
cast at the special meeting being held to consider the Conversion. The
Foundation will be considered as a separate matter from approval of the Plan
of Conversion. If the Bank's members approve the Plan of Conversion, but not
the Foundation, the Bank intends to complete the Conversion without the
establishment of the Foundation. Failure to approve the Foundation may
materially increase the pro forma market value of the Common Stock being
offered for sale in the Offering since the Valuation Range, as set forth
herein, takes into account the dilutive impact of the issuance of shares to
the Foundation. See "Comparison of Valuation and Pro Forma Information With No
Foundation."
PURPOSES OF CONVERSION
The Bank, as a federally chartered mutual savings bank, does not have
stockholders and has no authority to issue capital stock. By converting to the
capital stock form of organization, the Bank will be structured in the form
used by commercial banks, other business entities and a growing number of
savings institutions. The Conversion will enhance the Bank's ability to access
capital markets, expand its current operations, acquire other financial
institutions or branch offices, provide affordable home financing
opportunities to the communities it serves or diversify into other financial
services to the extent allowable by applicable law and regulation. The
Conversion would also position the Bank for a conversion to a commercial bank
charter if the Board of the Bank chooses to do so in the future. In
determining whether to convert to a commercial bank charter, the Bank may
consider, among other things, the differences in the regulatory and
supervisory structure applicable to the Bank as a commercial lending
institution as opposed to a thrift lending institution. In particular, a
conversion to a commercial bank charter would provide the Bank with added
lending flexibility in that the Bank would not be restricted in the types or
amounts of commercial loans in which it may not currently be able to invest
due to regulations applicable to federal savings institutions. However, the
Bank does not expect to convert to a commercial bank charter at this time.
The holding company form of organization will provide additional flexibility
to diversify the Bank's business activities through existing or newly formed
subsidiaries, or through acquisitions of or mergers with both mutual and stock
institutions, as well as other companies. Although there are no current
arrangements, understandings or agreements regarding any such opportunities,
the Company will be in a position after the Conversion, subject to regulatory
limitations and the Company's financial position, to take advantage of any
such opportunities that may arise.
The potential impact of the Conversion upon the Bank's capital base is
significant. Due to the Bank's capital position, it has sought to limit its
asset growth to a level sustainable by its capital position. The Conversion
will significantly increase the Bank's capital position to a level whereby the
Bank will be better positioned to take advantage of business opportunities and
engage in activities which, prior to Conversion, would have been more
difficult for the Bank to engage in and still continue to meet its status as a
"well capitalized" institution. At September 30, 1997, the Bank had retained
earnings, determined in accordance with GAAP, of $80.6 million, or 7.8% of
total assets. An institution with a ratio of tangible capital to total assets
of greater than or equal to 5.0% is considered to be "well-capitalized"
pursuant to OTS regulations. Assuming that the Company uses 50% of the net
proceeds at the maximum of the Estimated Price Range, the Bank's GAAP capital
will increase to $138.6 million or a ratio of GAAP capital to adjusted assets,
on a pro forma basis, of 12.70% after the Conversion. The investment of the
net proceeds from the sale of the Common Stock is expected to provide the Bank
with
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additional income to increase further its capital position. The additional
capital may also assist the Bank in offering new programs and expanded
services to its customers. See "Use of Proceeds."
After completion of the Conversion, the authorized but unissued common and
preferred stock authorized by the Company's Certificate of Incorporation will
permit the Company, subject to market conditions and regulatory approval of an
offering, to raise additional equity capital through further sales of
securities, and to issue securities in connection with possible acquisitions.
At the present time, the Company has no plans with respect to additional
offerings of securities, other than the issuance of additional shares upon
exercise of stock options under the Stock-Based Incentive Plan or the possible
issuance of authorized but unissued shares to the Stock-Based Incentive Plan
under the Stock-Based Incentive Plan. Following the Conversion, the Company
will also be able to use stock-related incentive programs to attract and
retain executive and other personnel for itself and its subsidiaries. See
"Management of the Bank--Benefits."
EFFECTS OF CONVERSION
General. Each depositor in a mutual savings institution has both a deposit
account in the institution and a pro rata ownership interest in the net worth
of the institution based upon the balance in his or her account, which
interest may only be realized in the event of a liquidation of the institution
or in the event the institution declares a capital distribution to depositors,
subject to applicable regulations of the OTS. However, this ownership interest
is tied to the depositor's account and has no tangible market value separate
from such deposit account. Any depositor who opens a deposit account obtains a
pro rata ownership interest in the net worth of the institution without any
additional payment beyond the amount of the deposit. A depositor who reduces
or closes his account receives a portion or all of the balance in the account
but nothing for his ownership interest in the net worth of the institution,
which is lost to the extent that the balance in the account is reduced.
Consequently, mutual savings institution depositors normally have no way to
realize the value of their ownership interest, which has realizable value only
in the unlikely event that the mutual savings institution is liquidated or in
the event the institution declares a capital distribution to depositors,
subject to applicable regulations of the OTS. In such event, the depositors of
record at that time, as owners, would share pro rata in any residual surplus
and reserves after other claims, including claims of depositors to the amounts
of their deposits, are paid.
When a mutual savings institution converts to stock form, permanent
nonwithdrawable capital stock is created to represent the ownership of the
institution's net worth. THE COMMON STOCK IS SEPARATE AND APART FROM DEPOSIT
ACCOUNTS AND CANNOT BE AND IS NOT INSURED BY THE FDIC OR ANY OTHER
GOVERNMENTAL AGENCY. Certificates are issued to evidence ownership of the
capital stock. The stock certificates are transferable and, therefore, the
stock may be sold or traded if a purchaser is available with no effect on any
account the seller may hold in the institution.
Continuity. While the Conversion is being accomplished, the normal business
of the Bank of accepting deposits and making loans will continue without
interruption. The Bank will continue to be subject to regulation by the OTS
and the FDIC. After the Conversion, the Bank will continue to provide services
for depositors and borrowers under current policies by its present management
and staff.
The Directors serving the Bank at the time of Conversion will serve
initially as Directors of the Bank after the Conversion. The Directors of the
Company will consist initially of individuals currently serving on the Board
of Directors of the Bank. All officers of the Bank at the time of Conversion
will retain their positions immediately after Conversion.
Effect on Deposit Accounts. Under the Plan, each depositor in the Bank at
the time of Conversion will automatically continue as a depositor after the
Conversion, and each such deposit account will remain the same with respect to
deposit balance, interest rate and other terms. Each such account will be
insured by the FDIC to the same extent as before the Conversion (i.e., up to
$100,000 per depositor). Depositors will continue to hold their existing
certificates, passbooks and other evidences of their accounts.
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Effect on Loans. No loan outstanding from the Bank will be affected by the
Conversion, and the amount, interest rate, maturity and security for each loan
will remain as they were contractually fixed prior to the Conversion.
Effect on Voting Rights of Members. At present, all depositors and certain
borrowers of the Bank are members of, and have voting rights in, the Bank as
to all matters requiring membership action. Upon Conversion, depositors and
borrowers will cease to be members and will no longer be entitled to vote at
meetings of the Bank. Upon Conversion, all voting rights in the Bank will be
vested in the Company as the sole stockholder of the Bank. Exclusive voting
rights with respect to the Company will be vested in the holders of Common
Stock. Depositors and borrowers of the Bank will not have voting rights after
the Conversion except to the extent that they become stockholders of the
Company through the purchase of Common Stock.
Tax Effects. The Bank has received an opinion of counsel with regard to
federal income taxation and an opinion from KPMG Peat Marwick LLP with regard
to Nebraska, Kansas and Iowa taxation which provide that the adoption and
implementation of the Plan of Conversion set forth herein will not be taxable
for federal, Nebraska, Kansas or Iowa tax purposes to the Bank, its Eligible
Account Holders, or its Supplemental Eligible Account Holders or the Company,
except as discussed below. See "--Tax Aspects."
Effect on Liquidation Rights. If a mutual savings institution were to
liquidate, all claims of creditors (including those of depositors, to the
extent of deposit balances) would be paid first. Thereafter, if there were any
assets remaining, depositors would be entitled to such remaining assets, pro
rata, based upon the deposit balances in their deposit accounts immediately
prior to liquidation. In the unlikely event that the Bank were to liquidate
after Conversion, all claims of creditors (including those of depositors, to
the extent of their deposit balances) would also be paid first, followed by
distribution of the "liquidation account" to certain depositors (see "--
Liquidation Rights"), with any assets remaining thereafter distributed to the
Company as the holder of the Bank's capital stock. Pursuant to the rules and
regulations of the OTS, a post-Conversion merger, consolidation, sale of bulk
assets or similar combination or transaction with another insured savings
institution would not be considered a liquidation and, in such a transaction,
the liquidation account would be assumed by the surviving institution.
STOCK PRICING
The Plan of Conversion requires that the aggregate purchase price of the
Common Stock must be based on the appraised pro forma market value of the
Common Stock, as determined on the basis of an independent valuation. The Bank
and the Company have retained Keller to make such valuation. For its services
in making such appraisal and assisting the Company in the development of its
business plan, Keller will receive a fee not to exceed $33,000, including
expenses. The Bank and the Company have agreed to indemnify Keller and its
employees and affiliates against certain losses (including any losses in
connection with claims under the federal securities laws) arising out of its
services as appraiser, except where Keller's liability results from its
negligence, willful misconduct or bad faith.
An appraisal has been made by Keller in reliance upon the information
contained in this Prospectus, including the Consolidated Financial Statements.
Keller also considered the following factors, among others: the present and
projected operating results and financial condition of the Company and the
Bank and the economic and demographic conditions in the Bank's existing
marketing area; certain historical, financial and other information relating
to the Bank; a comparative evaluation of the operating and financial
statistics of the Bank with those of other similarly situated publicly-traded
savings banks and savings institutions located in the Bank's primary market
area and Midwestern United States; the aggregate size of the offering of the
Common Stock; the impact of Conversion on the Bank's net worth and earnings
potential; the proposed dividend policy of the Company and the Bank; and the
trading market for securities of comparable institutions and general
conditions in the market for such securities. In making the appraisal, Keller
did not assign a value to any possible recovery from the Government with
respect to the Goodwill Litigation. As a condition to its approval of the
Plan, the OTS required the submission of an analysis by an independent
appraiser that fully explains the effect, if any, of the Goodwill Litigation
on the appraised value of the Bank. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Impact of Goodwill
Litigation."
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On the basis of the foregoing, Keller has advised the Company and the Bank
that, in its opinion, dated as of November 12, 1997 and updated as of January
23, 1998, the estimated pro forma market value of the Common Stock ranged from
a minimum of $118.6 million to a maximum of $160.4 million with a midpoint of
$139.5 million. Based upon the Valuation Range and the Purchase Price of
$20.00 per share for the Common Stock established by the Board of Directors,
the Board of Directors has established the Estimated Price Range of $118.6
million to $160.4 million, with a midpoint of $139.5 million, and the Company
expects to issue between 5,928,750 and 8,021,250 shares of Common Stock. The
Board of Directors of the Company and the Bank have reviewed the appraisal of
Keller and in determining the reasonableness and adequacy of such appraisal
consistent with OTS regulations and policies, have reviewed the methodology
and reasonableness of the assumptions utilized by Keller in the preparation of
such appraisal. The Estimated Price Range may be amended with the approval of
the OTS (if required), if necessitated by subsequent developments in the
financial condition of the Company or the Bank or market conditions generally.
SUCH APPRAISAL, HOWEVER, IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS A
RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING COMMON STOCK
IN THE OFFERINGS. KELLER DID NOT INDEPENDENTLY VERIFY THE CONSOLIDATED
FINANCIAL STATEMENTS AND OTHER INFORMATION PROVIDED BY THE BANK, NOR DID
KELLER VALUE INDEPENDENTLY THE ASSETS OR LIABILITIES OF THE BANK. THE
APPRAISAL CONSIDERS THE BANK AS A GOING CONCERN AND SHOULD NOT BE CONSIDERED
AS AN INDICATION OF THE LIQUIDATION VALUE OF THE BANK. MOREOVER, BECAUSE SUCH
APPRAISAL IS NECESSARILY BASED UPON ESTIMATES AND PROJECTIONS OF A NUMBER OF
MATTERS, ALL OF WHICH ARE SUBJECT TO CHANGE FROM TIME TO TIME, NO ASSURANCE
CAN BE GIVEN THAT PERSONS PURCHASING COMMON STOCK IN THE CONVERSION WILL
THEREAFTER BE ABLE TO SELL COMMON STOCK AT PRICES AT OR ABOVE THE PURCHASE
PRICE OR IN THE RANGE OF THE FOREGOING VALUATION OF THE PRO FORMA MARKET VALUE
THEREOF. SEE "RISK FACTORS--ABSENCE OF MARKET FOR COMMON STOCK."
Following commencement of the Subscription and Community Offerings, the
maximum of the Estimated Price Range may be increased up to 15% and the number
of shares of Common Stock to be issued in the Conversion may be increased to
9,224,438 shares due to regulatory considerations, changes in the market and
general financial and economic conditions, without the resolicitation of
subscribers. See "--Limitations on Common Stock Purchases" as to the method of
distribution and allocation of additional shares that may be issued in the
event of an increase in the Estimated Price Range to fill unfilled orders in
the Subscription and Community Offerings. As a condition to its approval of
the Plan, the OTS required that an updated appraisal satisfactory to the OTS
be submitted within five days (unless extended by the OTS) of the close of the
subscription offering period.
If all shares of Common Stock are not sold through the Subscription and
Community Offerings, then the Bank and the Company expect to offer the
remaining shares in a Syndicated Community Offering which would occur as soon
as practicable following the close of the Community Offering but may commence
during the Community Offering subject to prior rights of subscribers. All
shares of Common Stock will be sold at the same price per share in the
Syndicated Community Offering as in the Subscription and Community Offerings.
See "--Syndicated Community Offering."
No sale of shares of Common Stock may be consummated unless, prior to such
consummation, Keller confirms to the Bank, the Company and the OTS that, to
the best of its knowledge, nothing of a material nature has occurred which,
taking into account all relevant factors, including those which would be
involved in a cancellation of the Syndicated Community Offering, would cause
Keller to conclude that the aggregate value of the Common Stock at the
Purchase Price is incompatible with its estimate of the pro forma market value
of the Common Stock of the Company at the time of the Syndicated Community
Offering. Any change which would result in an aggregate purchase price which
is below or more than 15% above the Estimated Price Range would be subject to
OTS approval. If such confirmation is not received, the Bank may extend the
Conversion, extend, reopen or commence a new Subscription Offering, Community
Offering or Syndicated Community Offering, establish a new Estimated Price
Range and commence a resolicitation of all subscribers with the approval of
the OTS or take such other actions as permitted by the OTS in order to
complete the Conversion, or terminate the Plan and cancel the Subscription
Offering, Community Offering and/or the Syndicated Community Offering. In the
event market or financial conditions change so as to cause the aggregate
purchase price of the shares to be below the minimum of the Estimated Price
Range or more than 15% above the maximum of such range, and the
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Company and the Bank determine to continue the Conversion, subscribers will be
resolicited (i.e., be permitted to continue their orders, in which case they
will need to affirmatively reconfirm their subscriptions prior to the
expiration of the resolicitation offering or their subscription funds will be
promptly refunded with interest at the Bank's passbook rate of interest, or be
permitted to decrease or cancel their subscriptions). Any change in the
Estimated Price Range must be approved by the OTS. As a condition to its
approval of the Plan, the OTS required that updated appraisals satisfactory to
the OTS be submitted to the OTS prior to any resolicitation and within five
days (unless extended by the OTS) of the close of the resolicitation period. A
resolicitation, if any, following the conclusion of the Subscription and
Community Offerings would not exceed 45 days, or if following the Syndicated
Community Offering, 90 days, unless further extended by the OTS for periods up
to 90 days not to extend beyond April 17, 2000. If such resolicitation is not
effected, the Bank will return all funds promptly with interest at the Bank's
passbook rate of interest on payments made by check, bank draft or money
order.
Copies of the appraisal report of Keller, including any amendments thereto,
and the detailed memorandum of the appraiser setting forth the method and
assumptions for such appraisal are available for inspection at the main office
of the Bank and the other locations specified under "Additional Information."
NUMBER OF SHARES TO BE ISSUED
Depending upon market or financial conditions following the commencement of
the Subscription and Community Offerings, the total number of shares to be
issued in the Conversion may be increased or decreased without a
resolicitation of subscribers, provided that the product of the total number
of shares times the price per share is not below the minimum of the Estimated
Price Range or more than 15% above the maximum of the Estimated Price Range.
Based on a fixed purchase price of $20.00 per share and Keller's estimate of
the pro forma market value of the Common Stock ranging from a minimum of
$118,575,000 to a maximum, as increased by 15%, of $184,488,800, the number of
shares of Common Stock expected to be sold in the Conversion is between a
minimum of 5,928,750 shares and a maximum, as adjusted by 15%, of 9,224,438
shares. The actual number of shares sold between this range will depend on a
number of factors and shall be determined by the Bank and Company subject to
OTS approval, if necessary.
In the event market or financial conditions change so as to cause the
aggregate purchase price of the shares to be below the minimum of the
Estimated Price Range or more than 15% above the maximum of the Estimated
Price Range, if the Plan is not terminated by the Company and the Bank after
consultation with the OTS, purchasers will be resolicited (i.e., permitted to
continue their orders, in which case they will need to affirmatively reconfirm
their subscriptions prior to the expiration of the resolicitation offering or
their subscription funds will be promptly refunded, or be permitted to modify
or rescind their subscriptions). Any change in the Estimated Price Range must
be approved by the OTS. If the number of shares issued in the Conversion is
increased due to an increase of up to 15% in the Estimated Price Range to
reflect changes in market or financial condition, persons who subscribed for
the maximum number of shares will not be given the opportunity to subscribe
for an adjusted maximum number of shares, except for the ESOP which will be
able to subscribe for such adjusted amount. See "--Limitations on Common Stock
Purchases."
In the event the members of the Bank approve the establishment of the
Foundation, the number of shares to be issued and outstanding following the
Conversion will be increased by a number of shares equal to 6% of the Common
Stock sold in the Conversion. Assuming the sale of shares in the Offerings at
the maximum of the Estimated Price Range, the Company will issue 481,275
shares of its Common Stock from authorized but unissued shares to the
Foundation immediately following the completion of the Conversion. In that
event, the Company will have total shares of Common Stock outstanding of
8,502,525 shares. Of that amount, the Foundation will own 5.7%. Funding the
Foundation with authorized but unissued shares will have the effect of
diluting the ownership and voting interests of persons purchasing shares in
the Conversion by 5.7% since a greater number of shares will be outstanding
upon completion of the Conversion than would be if the Foundation were not
established. See "Pro Forma Data."
An increase in the number of shares to be issued in the Conversion as a
result of an increase in the estimated pro forma market value would decrease
both a subscriber's ownership interest and the Company's pro forma net
earnings and stockholders' equity on a per share basis while increasing pro
forma net earnings and stockholders'
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equity on an aggregate basis. A decrease in the number of shares to be issued
in the Conversion would increase both a subscriber's ownership interest and
the Company's pro forma net earnings and stockholders' equity on a per share
basis while decreasing pro forma net earnings and stockholder's equity on an
aggregate basis. For a presentation of the effects of such changes, see "Pro
Forma Data."
SUBSCRIPTION OFFERING AND SUBSCRIPTION RIGHTS
In accordance with the Plan of Conversion, rights to subscribe for the
purchase of Common Stock have been granted under the Plan of Conversion to the
following persons in the following order of descending priority: (1) holders
of deposit accounts with a balance of $50 or more as of June 30, 1996
("Eligible Account Holders"); (2) the ESOP; (3) holders of deposit accounts
with a balance of $50 or more as of December 31, 1997 ("Supplemental Eligible
Account Holders"); and (4) members of the Bank, consisting of depositors of
the Bank as of March 4, 1998, the Voting Record Date, and borrowers with loans
outstanding as of June 1, 1995, which continue to be outstanding as of the
Voting Record Date other than Eligible Account Holders and Supplemental
Eligible Account Holders ("Other Members"). All subscriptions received will be
subject to the availability of Common Stock after satisfaction of all
subscriptions of all persons having prior rights in the Subscription Offering
and to the maximum and minimum purchase limitations set forth in the Plan of
Conversion and as described below under "--Limitations on Common Stock
Purchases."
Deposit accounts which will provide subscription rights to holders thereof
consist of any "savings accounts," as defined by the Plan consistent with OTS
regulations. Pursuant to the Plan, deposit accounts do not include demand
accounts maintained at the Bank.
Priority 1: Eligible Account Holders. Each Eligible Account Holder will
receive, without payment therefor, first priority, nontransferable
subscription rights to subscribe for in the Subscription Offering up to the
greater of the amount permitted to be purchased in the Community Offering,
currently $500,000 of Common Stock, one-tenth of one percent (.10%) of the
total offering of shares of Common Stock or fifteen times the product (rounded
down to the next whole number) obtained by multiplying the total number of
shares of Common Stock to be issued by a fraction of which the numerator is
the amount of the Eligible Account Holder's Qualifying Deposit (defined by the
Plan as any deposit account in the Bank with a balance of $50 or more as of
June 30, 1996) and the denominator is the total amount of Qualifying Deposits
of all Eligible Account Holders, in each case on the Eligibility Record Date,
subject to the overall purchase limitation and exclusive of an increase in the
shares issued pursuant to an increase in the Estimated Price Range of up to
15%. See "--Limitations on Common Stock Purchases."
In the event that Eligible Account Holders exercise subscription rights for
a number of shares of Common Stock in excess of the total number of such
shares eligible for subscription, the shares of Common Stock shall be
allocated among the subscribing Eligible Account Holders so as to permit each
subscribing Eligible Account Holder, to the extent possible, to purchase a
number of shares sufficient to make his or her total allocation of Common
Stock equal to the lesser of 100 shares or the number of shares subscribed for
by the Eligible Account Holder. Any shares remaining after that allocation
will be allocated among the subscribing Eligible Account Holders whose
subscriptions remain unsatisfied in the proportion that the amount of the
Qualifying Deposit of each Eligible Account Holder whose subscription remains
unsatisfied bears to the total amount of the Qualifying Deposits of all
Eligible Account Holders whose subscriptions remain unsatisfied. If the amount
so allocated exceeds the amount subscribed for by any one or more Eligible
Account Holders, the excess shall be reallocated (one or more times as
necessary) among those Eligible Account Holders whose subscriptions are still
not fully satisfied on the same principle until all available shares have been
allocated or all subscriptions satisfied.
To ensure proper allocation of stock, each Eligible Account Holder must list
on his subscription order form all accounts in which he has an ownership
interest. Failure to list an account could result in less shares being
allocated than if all accounts had been disclosed. The subscription rights of
Eligible Account Holders who are also Directors or Officers of the Bank or
their associates will be subordinated to the subscription rights of other
Eligible Account Holders to the extent attributable to increased deposits in
the 12 months preceding June 30, 1996.
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Priority 2: Employee Stock Ownership Plan. To the extent that there are
sufficient shares remaining after satisfaction of the subscriptions by
Eligible Account Holders, the ESOP will receive, without payment therefor,
second priority, nontransferable subscription rights to purchase, in the
aggregate, up to 10% of Common Stock issued in the Conversion, including
shares issued to the Foundation, and any increase in the number of shares of
Common Stock to be issued in the Conversion after the date hereof as a result
of an increase of up to 15% in the maximum of the Estimated Price Range. The
ESOP intends to purchase 8% of the shares to be issued in the Conversion,
including shares issued to the Foundation, or 502,758 shares and 680,202
shares, based on the issuance of 5,928,750 shares and 8,021,250 shares,
respectively. Subscriptions by the ESOP will not be aggregated with shares of
Common Stock purchased directly by or which are otherwise attributable to any
other participants in the Subscription and Community Offerings, including
subscriptions of any of the Bank's directors, officers, employees or
associates thereof. See "Management of the Bank--Benefits--Employee Stock
Ownership Plan."
Priority 3: Supplemental Eligible Account Holders. Each Supplemental
Eligible Account Holder will receive, without payment therefor, third
priority, nontransferable subscription rights to subscribe for in the
Subscription Offering up to the greater of the amount permitted to be
purchased in the Community Offering, currently $500,000 of Common Stock, one-
tenth of one percent (.10%) of the total offering of shares of Common Stock or
fifteen times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of Common Stock to be issued by a
fraction of which the numerator is the amount of the Supplemental Eligible
Account Holder's Qualifying Deposit and the denominator is the total amount of
Qualifying Deposits of all Supplemental Eligible Account Holders, in each case
on the Supplemental Eligibility Record Date, subject to the overall purchase
limitation and exclusive of an increase in the shares issued pursuant to an
increase in the Estimated Price Range of up to 15%. See "--Limitations on
Common Stock Purchases."
In the event that Supplemental Eligible Account Holders exercise
subscription rights for a number of shares of Common Stock in excess of the
total number of such shares eligible for subscription, the shares of Common
Stock shall be allocated among the subscribing Supplemental Eligible Account
Holders so as to permit each subscribing Supplemental Eligible Account Holder,
to the extent possible, to purchase a number of shares sufficient to make his
or her total allocation of Common Stock equal to the lesser of 100 shares or
the number of shares subscribed for by the Supplemental Eligible Account
Holder. Any shares remaining after that allocation will be allocated among the
subscribing Supplemental Eligible Account Holders whose subscriptions remain
unsatisfied in the proportion that the amount of the Qualifying Deposit of
each Supplemental Eligible Account Holder whose subscription remains
unsatisfied bears to the total amount of the Qualifying Deposits of all
Supplemental Eligible Account Holders whose subscriptions remain unsatisfied.
If the amount so allocated exceeds the amount subscribed for by any one or
more Supplemental Eligible Account Holders, the excess shall be reallocated
(one or more times as necessary) among those Supplemental Eligible Account
Holders whose subscriptions are still not fully satisfied on the same
principle until all available shares have been allocated or all subscriptions
satisfied.
To ensure proper allocation of stock, each Supplemental Eligible Account
Holder must list on his subscription order form all accounts in which he has
an ownership interest. Failure to list an account could result in less shares
being allocated than if all accounts had been disclosed. The subscription
rights received by Eligible Account Holders will be applied in partial
satisfaction to the subscription rights to be received as a Supplemental
Eligible Account Holder.
Priority 4: Other Members. To the extent that there are sufficient shares
remaining after satisfaction of subscriptions by the Eligible Account Holders,
the ESOP and the Supplemental Eligible Account Holders, each Other Member will
receive, without payment therefor, fourth priority nontransferable
subscription rights to subscribe for Common Stock in the Subscription Offering
up to the greater of the amount permitted to be purchased in the Community
Offering, currently $500,000 of Common Stock, or one-tenth of one percent
(.10%) of the total offering of shares of Common Stock, subject to the overall
purchase limitation and exclusive of an increase in shares issued pursuant to
an increase in the Estimated Price Range of up to 15%.
In the event that Other Members subscribe for a number of shares of Common
Stock which, when added to the shares of Common Stock subscribed for by the
Eligible Account Holders, the employee plans and the
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Supplemental Eligible Account Holders is in excess of the total number of
shares of Common Stock being issued, the subscriptions of such Other Members
will be allocated among the subscribing Other Members so as to permit each
subscribing Other Member, to the extent possible, to purchase a number of
shares sufficient to make his or her total allocation of Conversion Stock
equal to the lesser of 100 shares or the number of shares subscribed for by
the Other Member. Any shares remaining after that allocation will be allocated
among the subscribing Other Members whose subscriptions remain unsatisfied pro
rata in the same proportion that the number of votes of a subscribing Other
Member on the Voting Record Date bears to the total votes on the Voting Record
Date of all subscribing Other Members whose subscriptions remain unsatisfied.
If the amount so allocated exceeds the amount subscribed for by any one or
more remaining Other Members, the excess shall be reallocated (one or more
times as necessary) among those remaining Other Members whose subscriptions
are still not fully satisfied on the same principle until all available shares
have been allocated or all subscriptions satisfied.
Expiration Date for the Subscription Offering. The Subscription Offering
will expire on April 8, 1998, unless extended for up to 45 days by the Bank or
such additional periods with the approval of the OTS. Subscription rights
which have not been exercised prior to the Expiration Date will become void.
The Bank will not execute orders until all shares of Common Stock have been
subscribed for or otherwise sold. If all shares have not been subscribed for
or sold within 45 days after the Expiration Date, unless such period is
extended with the consent of the OTS, all funds delivered to the Bank pursuant
to the Subscription Offering will be returned promptly to the subscribers with
interest and all withdrawal authorizations will be canceled. If an extension
beyond the 45-day period following the Expiration Date is granted, the Bank
will notify subscribers of the extension of time and of any rights of
subscribers to modify or rescind their subscriptions and have their funds
returned promptly with interest, and of the time period within which
subscribers must affirmatively notify the Bank of their intention to confirm,
modify, or rescind their subscription. If an affirmative response to any
resolicitation is not received by the Company from a subscriber, such order
will be rescinded and all subscription funds will be promptly returned with
interest. Such extensions may not go beyond April 17, 2000.
COMMUNITY OFFERING
Upon completion of the Subscription Offering, to the extent that shares
remain available for purchase after satisfaction of all subscriptions of the
Eligible Account Holders, the ESOP, the Supplemental Eligible Account Holders
and Other Members, the Company and the Bank have determined to offer shares of
Common Stock pursuant to the Plan to certain members of the general public.
Any excess of shares available will be available for purchase by the general
public, with preference given to natural persons (such natural persons
referred to as "Preferred Subscribers") first who had deposits with a balance
of $50 or more in the Iowa Bank on the Eligibility Record Date, and second, to
natural persons residing in the counties of Adams, Boone, Box Butte, Buffalo,
Cheyenne, Cuming, Custer, Dawson, Dodge, Douglas, Gage, Hall, Howard,
Jefferson, Johnson, Knox, Lancaster, Lincoln, Madison, Nemaha, Otoe, Platte,
Red Willow, Richardson, Saline, Saunders, Scotts Bluff, Thayer and Valley,
Nebraska, the counties of Marshall and Rooks, Kansas and the counties of Cass,
Harrison, Mills, Montgomery, Page and Pottawattamie, Iowa. Such persons,
together with associates of and persons acting in concert with such persons,
may purchase up to $500,000 of Common Stock subject to the maximum purchase
limitation and exclusive of shares issued pursuant to an increase in the
Estimated Price Range by up to 15%. See "--Limitations on Common Stock
Purchases." This amount may be increased to up to a maximum of 5% or decreased
to less than $500,000 at the sole discretion of the Company and the Bank. THE
OPPORTUNITY TO SUBSCRIBE FOR SHARES OF COMMON STOCK IN THE COMMUNITY OFFERING
CATEGORY IS SUBJECT TO THE RIGHT OF THE BANK AND THE COMPANY, IN THEIR SOLE
DISCRETION, TO ACCEPT OR REJECT ANY SUCH ORDERS IN WHOLE OR IN PART EITHER AT
THE TIME OF RECEIPT OF AN ORDER OR AS SOON AS PRACTICABLE FOLLOWING THE
EXPIRATION DATE OF THE COMMUNITY OFFERING, PROVIDED THAT SUCH REJECTION IS NOT
IN CONTRAVENTION OF ANY LAW OR REGULATION.
Subject to the foregoing, if the amount of stock remaining is insufficient
to fill the orders of Preferred Subscribers after completion of the
Subscription Offering and the Community Offering, such stock will be allocated
first to each Preferred Subscriber whose order is accepted by the Bank, in an
amount equal to the lesser of 100 shares or the number of shares subscribed
for by each such Preferred Subscriber, if possible. Thereafter, unallocated
shares will be allocated among the Preferred Subscribers whose order remains
unsatisfied on a 100
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shares per order basis until all such orders have been filled or the remaining
shares have been allocated. If there are any shares remaining, shares will be
allocated to other persons of the general public who purchase in the Community
Offering applying the same allocation described above for Preferred
Subscribers.
PERSONS IN NONQUALIFIED STATES OR FOREIGN COUNTRIES
The Company and the Bank will make reasonable efforts to comply with the
securities laws of all states in the United States in which persons entitled
to subscribe for stock pursuant to the Plan reside. However, the Plan provides
that the Bank and the Company are not required to offer stock in the
Subscription Offering to any person who resides in a foreign country or
resides in a state of the United States with respect to which both of the
following apply: (i) a small number of persons otherwise eligible to subscribe
for shares of Common Stock reside in such state; and (ii) the Company or the
Bank determines that compliance with the securities laws of such state would
be impracticable for reasons of cost or otherwise, including but not limited
to a request that the Company and the Bank or their officers, directors or
trustees register as a broker, dealer, salesman or selling agent, under the
securities laws of such state, or a request to register or otherwise qualify
the subscription rights or Common Stock for sale or submit any filing with
respect thereto in such state. Where the number of persons eligible to
subscribe for shares in one state is small, the Bank and the Company will base
their decision as to whether or not to offer the Common Stock in such state on
a number of factors, including the size of accounts held by account holders in
the state, the cost of registering or qualifying the shares or the need to
register the Company, its officers, directors or employees as brokers, dealers
or salesmen.
MARKETING AND UNDERWRITING ARRANGEMENTS
The Bank and the Company have engaged Sandler O'Neill as a consultant and
financial advisor in connection with the offering of the Common Stock, and
Sandler O'Neill has agreed to use its best efforts to solicit subscriptions
and purchase orders for shares of Common Stock in the Offerings. Based upon
negotiations between the Bank and the Company concerning fee structure,
Sandler O'Neill will receive a fee equal to 1.375% of the aggregate Purchase
Price of the shares sold in the Subscription and Community Offerings,
excluding shares purchased by directors, officers, employees, and any
immediate family member thereof, and any employee benefit plan of the Company
or Bank, including the ESOP for which Sandler O'Neill will not receive a fee.
In the event that a selected dealers agreement is entered into in connection
with a Syndicated Community Offering, the Bank will pay a fee (to be
negotiated at such time under such agreement) to such selected dealers, any
sponsoring dealers fees, and a management fee to Sandler O'Neill of 1.375% for
shares sold by National Association of Securities Dealers, Inc. member firms
pursuant to a selected dealers agreement; provided, however, that any fees
payable to Sandler O'Neill for Common Stock sold by them pursuant to such a
selected dealers agreement shall not exceed 1.375% of the Purchase Price and
provided, further, however, that the aggregate fees payable to Sandler O'Neill
and the selected dealers will not exceed 7.0% of the aggregate purchase price
of the Common Stock sold by selected dealers. Fees to Sandler O'Neill and to
any other broker-dealer may be deemed to be underwriting fees, and Sandler
O'Neill and such broker-dealers may be deemed to be underwriters. The Company
and the Bank have agreed to indemnify Sandler O'Neill for reasonable costs and
expenses in connection with certain claims or liabilities, including certain
liabilities under the Securities Act. Sandler O'Neill has received advances
towards its fees totaling $25,000. Total marketing fees to Sandler O'Neill are
expected to be $1,450,504 and $1,977,177 at the minimum and the maximum of the
Estimated Price Range, respectively. See "Pro Forma Data" for the assumptions
used to arrive at these estimates.
Sandler O'Neill will perform proxy solicitation services, conversion agent
services and records management services for the Bank in the Conversion and
will receive a fee for these services of $50,000.
Directors and executive officers of the Company and Bank may participate in
the solicitation of offers to purchase Common Stock. Questions of prospective
purchasers will be directed to executive officers or registered
representatives. Other employees of the Bank may participate in the Offering
in ministerial capacities or providing clerical work in effecting a sales
transaction. Such other employees have been instructed not to solicit offers
to purchase Common Stock or provide advice regarding the purchase of Common
Stock. The Company
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will rely on Rule 3a4-1 under the Exchange Act, and sales of Common Stock will
be conducted within the requirements of Rule 3a4-1, so as to permit officers,
directors and employees to participate in the sale of Common Stock. No
officer, director or employee of the Company or the Bank will be compensated
in connection with his participation by the payment of commissions or other
remuneration based either directly or indirectly on the transactions in the
Common Stock. For a discussion on how the Offering will be conducted, see "--
General," "--Subscription Offering and Subscription Rights," "--Community
Offering," and "--Syndicated Community Offering."
PROCEDURE FOR PURCHASING SHARES IN SUBSCRIPTION OFFERING
To ensure that each purchaser receives a prospectus at least 48 hours before
the Expiration Date in accordance with Rule 15c2-8 of the Exchange Act, no
prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of the stock
order form and certification form will confirm receipt or delivery in
accordance with Rule 15c2-8. Stock order and certification forms will only be
distributed with a prospectus.
To purchase shares in the Offering, an executed stock order form and
certification form with the required payment for each share subscribed for, or
with appropriate authorization for withdrawal from the subscriber's deposit
account at the Bank (which may be given by completing the appropriate blanks
in the stock order form), must be received by the Bank at any of its offices
by 12:00 noon, Central Time, on the Expiration Date with respect to the
Subscription Offering, or by the date set for the termination of the Community
Offering, which date shall be within 45 days after the close of the
Subscription Offering, or May 23, 1998, unless extended by the Bank and the
Company with the approval of the OTS, if necessary. Stock order forms which
are not received by such time or are executed defectively or are received
without full payment (or appropriate withdrawal instructions) are not required
to be accepted. In addition, the Bank and Company are not obligated to accept
orders submitted on photocopied or facsimilied stock order forms and will not
accept stock order forms unaccompanied by an executed certification form.
Notwithstanding the foregoing, the Company shall have the right, in its sole
discretion, to permit institutional investors to submit irrevocable orders
together with a legally binding commitment for payment and to thereafter pay
for the shares of Common Stock for which they subscribe in the Community
Offering at any time prior to 48 hours before the completion of the
Conversion. The Company and the Bank have the right to waive or permit the
correction of incomplete or improperly executed forms, but do not represent
that they will do so. Once received, an executed stock order form may not be
modified, amended or rescinded without the consent of the Bank unless the
Conversion has not been completed within 45 days after the end of the
Subscription Offering, unless such period has been extended.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the Eligibility Record Date (June 30,
1996) and/or the Supplemental Eligibility Record Date (December 31, 1997)
and/or the Voting Record Date (March 4, 1998) must list all accounts on the
stock order form giving all names in each account and the account number.
Payment for subscriptions may be made (i) in cash (if delivered in person)
at any branch office of the Bank, (ii) by check, bank draft or money order, or
(iii) by authorization of withdrawal from deposit accounts maintained with the
Bank. Orders for Common Stock submitted by subscribers in the Subscription
Offering which aggregate to $50,000 or more must be paid by official bank or
certified check, a check issued by a broker-dealer registered with the NASD or
by withdrawal authorization from a deposit account of the Bank. No wire
transfers will be accepted. Interest will be paid on payments made by cash,
check, bank draft or money order at the Bank's passbook rate of interest from
the date payment is received until the completion or termination of the
Conversion. If payment is made by authorization of withdrawal from deposit
accounts, the funds authorized to be withdrawn from a deposit account will
continue to accrue interest at the contractual rates until completion or
termination of the Conversion, but a hold will be placed on such funds,
thereby making them unavailable to the depositor until completion or
termination of the Conversion.
If a subscriber authorizes the Bank to withdraw the amount of the purchase
price from his deposit account, the Bank will do so as of the effective date
of the Conversion. The Bank will waive any applicable penalties for
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early withdrawal from certificate accounts. If the remaining balance in a
certificate account is reduced below the applicable minimum balance
requirement at the time that the funds actually are transferred under the
authorization, the certificate will be canceled at the time of the withdrawal,
without penalty, and the remaining balance will earn interest at the Bank's
passbook rate.
If the ESOP subscribes for shares during the Subscription Offering, the ESOP
will not be required to pay for the shares subscribed for at the time it
subscribes, but rather, may pay for such shares of Common Stock subscribed for
at the Purchase Price upon consummation of the Subscription Offering, if all
shares are sold, or upon consummation of the Community Offering or the
Syndicated Community Offering if shares remain to be sold in such offering;
provided, that there is in force from the time of its subscription until such
time, a loan commitment from an unrelated financial institution or the Company
to lend to the ESOP, at such time, the aggregate Purchase Price of the shares
for which it subscribed.
Owners of self-directed IRAs and Qualified Plans may use the assets of such
IRAs and Qualified Plans to purchase shares of Common Stock in the
Subscription and Community Offerings, provided that such IRAs are not
maintained at the Bank. Persons with self-directed IRAs and Qualified Plans
maintained at the Bank must have their accounts transferred to an unaffiliated
institution or broker to purchase shares of Common Stock in the Offerings. In
addition, the provisions of ERISA and IRS regulations require that officers,
directors and ten percent shareholders who use self-directed IRA funds and
Qualified Plans to purchase shares of Common Stock in the Subscription and
Community Offerings, make such purchases for the exclusive benefit of the IRAs
and Qualified Plans.
Certificates representing shares of Common Stock purchased will be mailed to
purchasers at the address specified in properly completed stock order forms,
as soon as practicable following consummation of the sale of all shares of
Common Stock. Any certificates returned as undeliverable will be disposed of
in accordance with applicable law.
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
Prior to the completion of the Conversion, the OTS conversion regulations
prohibit any person with subscription rights, including the Eligible Account
Holders, the ESOP, the Supplemental Eligible Account Holders and Other
Members, from transferring or entering into any agreement or understanding to
transfer the legal or beneficial ownership of the subscription rights issued
under the Plan or the shares of Common Stock to be issued upon their exercise.
Such rights may be exercised only by the person to whom they are granted and
only for his account. Each person exercising such subscription rights will be
required to certify that he is purchasing shares solely for his own account
and that he has no agreement or understanding regarding the sale or transfer
of such shares. The regulations also prohibit any person from offering or
making an announcement of an offer or intent to make an offer to purchase such
subscription rights or shares of Common Stock prior to the completion of the
Conversion.
THE BANK AND THE COMPANY WILL PURSUE ANY AND ALL LEGAL AND EQUITABLE
REMEDIES (INCLUDING FORFEITURE) IN THE EVENT THEY BECOME AWARE OF THE TRANSFER
OF SUBSCRIPTION RIGHTS AND WILL NOT HONOR ORDERS KNOWN BY THEM TO INVOLVE THE
TRANSFER OF SUCH RIGHTS.
SYNDICATED COMMUNITY OFFERING
As a final step in the Conversion, the Plan provides that, if feasible, all
shares of Common Stock not purchased in the Subscription and Community
Offerings, if any, will be offered for sale to the general public in a
Syndicated Community Offering through a syndicate of registered broker-dealers
to be formed and managed by Sandler O'Neill acting as agent of the Company to
assist the Company and the Bank in the sale of the Common Stock. The Company
and the Bank have the right to reject orders in whole or in part in their sole
discretion in the Syndicated Community Offering. Neither Sandler O'Neill nor
any registered broker-dealer shall have any obligation to take or purchase any
shares of the Common Stock in the Syndicated Community Offering,
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however, Sandler O'Neill has agreed to use its best efforts in the sale of
shares in the Syndicated Community Offering.
The price at which Common Stock is sold in the Syndicated Community Offering
will be determined as described above under "--Stock Pricing." Subject to
overall purchase limitations, no person, together with any associate or group
of persons acting in concert, will be permitted to subscribe in the Syndicated
Community Offering for more than $500,000 of the Common Stock, exclusive of an
increase in shares issued pursuant to an increase in the Estimated Price Range
of up to 15%; provided, however, that shares of Common Stock purchased in the
Community Offering by any persons, together with associates of or persons
acting in concert with such persons, will be aggregated with purchases in the
Syndicated Community Offering and be subject to an overall maximum purchase
limitation of 1.0% of the shares offered, exclusive of an increase in shares
issued pursuant to an increase in the Estimated Price Range by up to 15%.
Payments made in the form of a check, bank draft, money order or in cash
will earn interest at the Bank's passbook rate of interest from the date such
payment is actually received by the Bank until completion or termination of
the Conversion.
In addition to the foregoing, if a syndicate of broker-dealers ("selected
dealers") is formed to assist in the Syndicated Community Offering, a
purchaser may pay for his shares with funds held by or deposited with a
selected dealer. If an order form is executed and forwarded to the selected
dealer or if the selected dealer is authorized to execute the order form on
behalf of a purchaser, the selected dealer is required to forward the order
form and funds to the Bank for deposit in a segregated account on or before
noon of the business day following receipt of the order form or execution of
the order form by the selected dealer. Alternatively, selected dealers may
solicit indications of interest from their customers to place orders for
shares. Such selected dealers shall subsequently contact their customers who
indicated an interest and seek their confirmation as to their intent to
purchase. Those indicating an intent to purchase shall execute order forms and
forward them to their selected dealer or authorize the selected dealer to
execute such forms. The selected dealer will acknowledge receipt of the order
to its customer in writing on the following business day and will debit such
customer's account on the third business day after the customer has confirmed
his intent to purchase (the "debit date") and on or before noon of the next
business day following the debit date will send order forms and funds to the
Bank for deposit in a segregated account. Although purchasers' funds are not
required to be in their accounts with selected dealers until the debit date in
the event that such alternative procedure is employed, once a confirmation of
an intent to purchase has been received by the selected dealer, the purchaser
has no right to rescind his order.
Certificates representing shares of Common Stock purchased, together with
any refund due, will be mailed to purchasers at the address specified in the
order form, as soon as practicable following consummation of the sale of the
Common Stock. Any certificates returned as undeliverable will be disposed of
in accordance with applicable law.
The Syndicated Community Offering will terminate no more than 45 days
following the Expiration Date, unless extended by the Company with the
approval of the OTS. Such extensions may not be beyond April 17, 2000. See "--
Stock Pricing" above for a discussion of rights of subscribers, if any, in the
event an extension is granted.
LIMITATIONS ON COMMON STOCK PURCHASES
The Plan includes the following limitations on the number of shares of
Common Stock which may be purchased during the Conversion:
(1) No less than 25 shares;
(2) Each Eligible Account Holder may subscribe for and purchase in the
Subscription Offering up to the greater of the amount permitted to be
purchased in the Community Offering, currently $500,000 of Common
Stock, one-tenth of one percent (.10%) of the total offering of shares
of Common Stock or fifteen times the product (rounded down to the next
whole number) obtained by multiplying the total number of shares of
Common Stock to be issued by a fraction of which the numerator is the
amount of
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the Qualifying Deposit of the Eligible Account Holder and the
denominator is the total amount of Qualifying Deposits of all Eligible
Account Holders in each case on the Eligibility Record Date subject to
the overall maximum purchase limitation in (8) below and exclusive of an
increase in the total number of shares issued due to an increase in the
Estimated Price Range of up to 15%;
(3) The ESOP is permitted to purchase in the aggregate up to 10% of the
shares of Common Stock issued in the Conversion, including shares
issued to the Foundation, including shares issued in the event of an
increase in the Estimated Price Range of 15% and intends to purchase 8%
of the shares of Common Stock issued in the Conversion, including
shares issued to the Foundation;
(4) Each Supplemental Eligible Account Holder may subscribe for and
purchase in the Subscription Offering up to the greater of the amount
permitted to be purchased in the Community Offering, currently $500,000
of Common Stock, one-tenth of one percent (.10%) of the total offering
of shares of Common Stock or fifteen times the product (rounded down to
the next whole number) obtained by multiplying the total number of
shares of Common Stock to be issued by a fraction of which the
numerator is the amount of the Qualifying Deposit of the Supplemental
Eligible Account Holder and the denominator is the total amount of
Qualifying Deposits of all Supplemental Eligible Account Holders in
such case on the Supplemental Eligibility Record Date subject to the
overall maximum purchase limitation in (8) below and exclusive of an
increase in the total number of shares issued due to an increase in the
Estimated Price Range of up to 15%;
(5) Each Other Member may subscribe for and purchase in the Subscription
Offering up to the greater of the amount permitted to be purchased in
the Community Offering, currently $500,000 of Common Stock, or one-
tenth of one percent (.10%) of the total offering of shares of Common
Stock subject to the overall maximum purchase limitation in (8) below
and exclusive of an increase in the total number of shares issued due
to an increase in the Estimated Price Range of up to 15%;
(6) Persons purchasing shares of Common Stock in the Community Offering,
together with associates of and groups of persons acting in concert
with such persons, may purchase in the Community Offering up to
$500,000 of Common Stock subject to the overall maximum purchase
limitation in (8) below and exclusive of an increase in the total
number of shares issued due to an increase in the Estimated Price Range
of up to 15%;
(7) Persons purchasing shares of Common Stock in the Syndicated Community
Offering, together with associates of and persons acting in concert
with such persons, may purchase in the Syndicated Offering up to
$500,000 of Common Stock subject to the overall maximum purchase
limitation in (8) below and exclusive of an increase in the total
number of shares issued due to an increase in the Estimated Price Range
of up to 15% and, provided further that shares of Common Stock
purchased in the Community Offering by any persons, together with
associates of and persons acting in concert with such persons, will be
aggregated with purchases in the Syndicated Community Offering in
applying the $500,000 purchase limitation;
(8) Eligible Account Holders, Supplemental Eligible Account Holders and
Other Members may purchase stock in the Community Offering and
Syndicated Community Offering subject to the purchase limitations
described in (6) and (7) above, provided that, except for the ESOP, the
overall maximum number of shares of Common Stock subscribed for or
purchased in all categories of the Conversion by any person, together
with associates of and groups of persons acting in concert with such
persons, shall not exceed 1.0% of the shares of Common Stock offered in
the Conversion and exclusive of an increase in the total number of
shares issued due to an increase in the Estimated Price Range of up to
15%; and
(9) No more than 25% of the total number of shares offered for sale in the
Conversion may be purchased by directors and officers of the Bank and
their associates in the aggregate, excluding purchases by the ESOP.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the members
of the Bank, both the individual amount permitted to be subscribed for and the
overall maximum purchase limitation may be increased to up to a maximum of 5%
at the sole discretion of the Company and the Bank. If such amount is
increased, subscribers for the maximum amount will be, and certain other large
subscribers in the sole discretion of the Bank may be, given the opportunity
to increase their
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subscriptions up to the then applicable limit. In addition, the Boards of
Directors of the Company and the Bank may, in their sole discretion, increase
the maximum purchase limitation referred to above up to 9.99%, provided that
orders for shares exceeding 5% of the shares being offered in the Subscription
and Community Offerings shall not exceed, in the aggregate, 10% of the shares
being offered in the Subscription and Community Offerings. Requests to
purchase additional shares of Common Stock under this provision will be
determined by the Boards of Directors and, if approved, allocated on a pro
rata basis giving priority in accordance with the priority rights set forth
herein.
The overall maximum purchase limitation may not be reduced to less than 1%
but the individual amount permitted to be subscribed for may be reduced by the
Bank to less than $500,000, subject to paragraphs (2), (4) and (5) above
without the further approval of members or resolicitation of subscribers. An
individual Eligible Account Holder, Supplemental Eligible Account Holder or
Other Member may not purchase individually in the Subscription Offering the
overall maximum purchase limit of 1.0% of the shares offered, but may make
such purchase, together with associates of and persons acting in concert with
such person, by also purchasing in other available categories of the
Conversion, subject to availability of shares and the overall maximum purchase
limit for purchases in the Conversion.
In the event of an increase in the total number of shares offered in the
Conversion due to an increase in the Estimated Price Range of up to 15% (the
"Adjusted Maximum"), the additional shares will be allocated in the following
order of priority in accordance with the Plan: (i) to fill the ESOP's
subscription of 8% of the amount of Common Stock issued in the Conversion,
including shares issued to the Foundation, at the Adjusted Maximum number of
shares; (ii) in the event that there is an oversubscription by Eligible
Account Holders, to fill unsatisfied subscriptions of Eligible Account
Holders, exclusive of the Adjusted Maximum; (iii) in the event that there is
an oversubscription by Supplemental Eligible Account Holders, to fill
unsatisfied subscriptions of Supplemental Eligible Account Holders, exclusive
of the Adjusted Maximum; (iv) in the event that there is an oversubscription
by Other Members, to fill unsatisfied subscriptions of Other Members exclusive
of the Adjusted Maximum; and (v) to fill unsatisfied subscriptions in the
Community Offering to the extent possible, exclusive of the Adjusted Maximum,
with preference to Preferred Subscribers.
The term "associate" of a person is defined to mean: (i) any corporation
(other than the Bank or a majority-owned subsidiary of the Bank) of which such
person is an officer, partner or 10% stockholder; (ii) any trust or other
estate in which such person has a substantial beneficial interest or serves as
a trustee or in a similar fiduciary capacity; provided, however, such term
shall not include any employee stock benefit plan of the Bank in which such
person has a substantial beneficial interest or serves as a trustee or in a
similar fiduciary capacity; and (iii) any relative or spouse of such person,
or any relative of such spouse, who either has the same home as such person or
who is a director or officer of the Bank. Directors are not treated as
associates of each other solely because of their Board membership. For a
further discussion of limitations on purchases of a converting institution's
stock at the time of Conversion and subsequent to Conversion, see "Management
of the Bank--Subscriptions by Executive Officers and Directors," "--Certain
Restrictions on Purchase or Transfer of Shares After Conversion" and
"Restrictions on Acquisition of the Company and the Bank."
LIQUIDATION RIGHTS
In the unlikely event of a complete liquidation of the Bank in its present
mutual form, each depositor would receive his pro rata share of any assets of
the Bank remaining after payment of claims of all creditors (including the
claims of all depositors to the withdrawal value of their accounts). Each
depositor's pro rata share of such remaining assets would be in the same
proportion as the value of his deposit account was to the total value of all
deposit accounts in the Bank at the time of liquidation. After the Conversion,
each depositor, in the event of a complete liquidation, would have a claim as
a creditor of the same general priority as the claims of all other general
creditors of the Bank. However, except as described below, his claim would be
solely in the amount of the balance in his deposit account plus accrued
interest. He would not have an interest in the value or assets of the Bank
above that amount.
The Plan provides for the establishment, upon the completion of the
Conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in an amount
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equal to the surplus and reserves of the Bank as of the date of its latest
balance sheet contained in the final Prospectus used in connection with the
Conversion. Each Eligible Account Holder and Supplemental Eligible Account
Holder, if he were to continue to maintain his deposit account at the Bank,
would be entitled, on a complete liquidation of the Bank after the Conversion,
to an interest in the liquidation account prior to any payment to the
stockholders of the Bank. Each Eligible Account Holder and Supplemental
Eligible Account Holder would have an initial interest in such liquidation
account for each deposit account, including regular accounts, transaction
accounts such as NOW accounts, money market deposit accounts, and certificates
of deposit, with a balance of $50 or more held in the Bank on June 30, 1996
and December 31, 1997, respectively. Each Eligible Account Holder and
Supplemental Eligible Account Holder will have a pro rata interest in the
total liquidation account based on the proportion that the balance of his
Qualifying Deposits on the Eligibility Record Date or Supplemental Eligibility
Record Date, respectively, bore to the total amount of all Qualifying Deposits
of all Eligible Account Holders and Supplemental Eligible Account Holders in
the Bank. For deposit accounts in existence at both dates separate subaccounts
shall be determined on the basis of the Qualifying Deposits in such deposit
accounts on such respective record dates.
If, however, on any annual closing date subsequent to the Eligibility Record
Date or Supplemental Eligibility Record Date, the amount of the Qualifying
Deposit of an Eligible Account Holder or Supplemental Eligible Account Holder
is less than the amount of the Qualifying Deposit of such Eligible Account
Holder or Supplemental Eligible Account Holder as of the Eligibility Record
Date or Supplemental Eligibility Record Date, respectively, or less than the
amount of the Qualifying Deposits as of the previous annual closing date, then
the interest in the liquidation account relating to such Qualifying Deposit
would be reduced from time to time by the proportion of any such reduction,
and such interest will cease to exist if such Qualifying Deposit accounts are
closed. In addition, no interest in the liquidation account would ever be
increased despite any subsequent increase in the related Qualifying Deposit.
Any assets remaining after the above liquidation rights of Eligible Account
Holders and Supplemental Eligible Account Holders are satisfied would be
distributed to the Company as the sole stockholder of the Bank.
TAX ASPECTS
Consummation of the Conversion is expressly conditioned upon the receipt by
the Bank of either a favorable ruling from the IRS or an opinion of counsel
with respect to federal income taxation, and an opinion of an independent
accountant with respect to Nebraska, Kansas and Iowa law, to the effect that
the Conversion will not be a taxable transaction to the Company, the Bank,
Eligible Account Holders, or Supplemental Eligible Account Holders except as
noted below.
No private ruling will be received from the IRS with respect to the proposed
Conversion. Instead, the Bank has received an opinion of its counsel, Muldoon,
Murphy & Faucette, to the effect that for federal income tax purposes, among
other matters: (i) the Bank's change in form from mutual to stock ownership
will constitute a reorganization under section 368(a)(1)(F) of the Code and
neither the Bank nor the Company will recognize any gain or loss as a result
of the Conversion; (ii) no gain or loss will be recognized to the Bank or the
Company upon the purchase of the Bank's capital stock by the Company or to the
Company upon the purchase of its Common Stock in the Conversion; (iii) no gain
or loss will be recognized by Eligible Account Holders or Supplemental
Eligible Account Holders upon the issuance to them of Deposit Accounts in the
Bank in its stock form plus their interests in the liquidation account in
exchange for their deposit accounts in the Bank; (iv) the tax basis of the
depositors' accounts in the Bank immediately after the Conversion will be the
same as the basis of their deposit accounts immediately prior to the
Conversion; (v) the tax basis of each Eligible Account Holder's and
Supplemental Eligible Account Holder's interest in the liquidation account
will be zero; (vi) no gain or loss will be recognized by Eligible Account
Holders or Supplemental Eligible Account Holders upon the distribution to them
of nontransferable subscription rights to purchase shares of the Common Stock,
provided that the amount to be paid for the Common Stock is equal to the fair
market value of such stock; and (vii) the tax basis to the holders of the
Common Stock purchased in the Conversion will be the amount paid therefor and
the holding period for the shares of Common Stock purchased by such persons
will begin on the date on which their subscription rights are exercised. KPMG
Peat Marwick LLP has opined that the Conversion will not be a taxable
transaction to the Company, the Bank, Eligible Account Holders or Supplemental
Eligible Account Holders for Nebraska, Kansas and Iowa income and/or franchise
tax purposes. Certain portions of both the federal and the
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state and local tax opinions are based upon the assumption that the
subscription rights issued in connection with the Conversion will have no
value.
Unlike private rulings, an opinion of counsel or an opinion of an
independent accountant is not binding on the IRS and the IRS could disagree
with conclusions reached therein. In the event of such disagreement, there can
be no assurance that the IRS would not prevail in a judicial or administrative
proceeding.
Keller has issued an opinion stating that, pursuant to its valuation, Keller
is of the opinion that the subscription rights do not have any value, based on
the fact that such rights are acquired by the recipients without cost, are
nontransferable and of short duration, and afford the recipients the right
only to purchase the Common Stock at a price equal to its estimated fair
market value, which will be the same price as the Purchase Price for the
shares of Common Stock sold in the Community Offering. Such valuation is not
binding on the IRS. If the subscription rights granted to Eligible Account
Holders or Supplemental Eligible Account Holders are deemed to have an
ascertainable value, receipt of such rights could be taxable to those Eligible
Account Holders or Supplemental Eligible Account Holders who receive and/or
exercise the subscription rights in an amount equal to such value and the Bank
could recognize gain on such distribution. Eligible Account Holders and
Supplemental Eligible Account Holders are encouraged to consult with their own
tax advisor as to the tax consequences in the event that such subscription
rights are deemed to have an ascertainable value.
INTERPRETATION AND AMENDMENT OF THE PLAN OF CONVERSION
To the extent permitted by law, all interpretations of the Plan by the Bank
will be final. The Plan provides that the Bank's Board of Directors shall have
the discretion to interpret and apply the provisions of the Plan to particular
circumstances and that such interpretation or application shall be final. This
includes any and all interpretations, applications and determinations made by
the Board of Directors on the basis of such information and assistance as was
then reasonably available for such purpose.
The Plan provides that, if deemed necessary or desirable by the Board of
Directors, the Plan may be substantively amended at any time prior to
solicitation of proxies from members to vote on the Plan by a two-thirds vote
of the Bank's Board of Directors. After submission of the proxy materials to
the members, the Plan may be amended by a two-thirds vote of the Board of
Directors at any time prior to the Special Meeting with the concurrence of the
OTS. The Plan may be amended at any time after the approval of members with
the approval of the OTS and no further approval of the members will be
necessary unless otherwise required by the OTS. By adoption of the Plan, the
Bank's members will be deemed to have authorized amendment of the Plan under
the circumstances described above.
The establishment of the Foundation will be considered as a separate matter
from approval of the Plan of Conversion. If the Bank's members approve the
Plan of Conversion, but not the creation of the Foundation, the Bank intends
to complete the Conversion without the Foundation. Failure to approve the
establishment of the Foundation may materially increase the pro forma market
value of the Common Stock since the Valuation Range, as set forth herein,
takes into account the dilutive impact of the issuance of shares to the
Foundation. In such an event, the Bank may establish a new Estimated Price
Range and commence a resolicitation of subscribers. In the event of a
resolicitation, unless an affirmative response is received within a specified
period of time, all funds will be promptly returned to investors, as described
elsewhere herein. See "--Stock Pricing."
The Company will file, if necessary, during any period in which offers or
sales are being made, a post-effective amendment to the 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; or (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.
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CERTAIN RESTRICTIONS ON PURCHASE OR TRANSFER OF SHARES AFTER CONVERSION
All shares of Common Stock purchased in connection with the Conversion by a
director or an executive officer of the Bank will be subject to a restriction
that the shares not be sold for a period of one year following the Conversion,
except in the event of the death of such director or executive officer. Each
certificate for restricted shares will bear a legend giving notice of this
restriction on transfer, and instructions will be issued to the effect that
any transfer within such time period of any certificate or record ownership of
such shares other than as provided above is a violation of the restriction.
Any shares of Common Stock issued at a later date as a stock dividend, stock
split, or otherwise, with respect to such restricted stock will be subject to
the same restrictions. The directors and executive officers of the Bank will
also be subject to the insider trading rules promulgated pursuant to the
Exchange Act and any other applicable requirements of the federal securities
laws.
Purchases of outstanding shares of Common Stock of the Company by directors,
executive officers (or any person who was an executive officer or director of
the Bank after adoption of the Plan of Conversion) and their associates during
the three-year period following Conversion may be made only through a broker
or dealer registered with the SEC, except with the prior written approval of
the OTS. This restriction does not apply, however, to negotiated transactions
involving more than 1.0% of the outstanding Common Stock or to the purchase of
stock pursuant to any Stock-Based Incentive Plan to be established after the
Conversion.
Unless approved by the OTS, the Company, pursuant to OTS regulations, will
be prohibited from repurchasing any shares of the Common Stock for three years
except: (i) for an offer to all stockholders on a pro rata basis; or (ii) for
the repurchase of qualifying shares of a director. Notwithstanding the
foregoing, beginning one year following completion of the Conversion the
Company may repurchase its Common Stock so long as: (i) the repurchases within
the following two years are part of an open-market program not involving
greater than 5% of its outstanding capital stock during a twelve-month period;
(ii) the repurchases do not cause the Company to become undercapitalized; and
(iii) the Company provides to the Regional Director of the OTS no later than
10 days prior to the commencement of a repurchase program written notice
containing a full description of the program to be undertaken and such program
is not disapproved by the Regional Director. In addition, under current OTS
policies, repurchases may be allowed in the first year following Conversion
and in amounts greater than 5% in the second and third years following
Conversion, provided there are valid and compelling business reasons for such
repurchases and the OTS does not object to such repurchases.
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RESTRICTIONS ON ACQUISITION OF THE COMPANY
AND THE BANK
GENERAL
The Plan of Conversion provides for the Conversion of the Bank from the
mutual to the stock form of organization and, in connection therewith, a new
Federal Stock Charter and Bylaws to be adopted by members of the Bank. The
Plan also provides for the concurrent formation of a holding company, which
form of organization may or may not be utilized at the option of the Board of
Directors of the Bank. See "The Conversion--General." As described below,
certain provisions in the Company's Certificate of Incorporation and Bylaws
and in its management remuneration entered into in connection with the
Conversion, together with provisions of Delaware corporate law, may have anti-
takeover effects. In the event that the holding company form of organization
is not utilized, the Bank's Stock Charter and Bylaws and management
remuneration entered into in connection with the Conversion may have anti-
takeover effects as described below. In addition, regulatory restrictions may
make it difficult for persons or companies to acquire control of either the
Company or the Bank.
RESTRICTIONS IN THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
A number of provisions of the Company's Certificate of Incorporation and
Bylaws deal with matters of corporate governance and certain rights of
stockholders. The following discussion is a general summary of certain
provisions of the Company's Certificate of Incorporation and Bylaws and
certain other statutory and regulatory provisions relating to stock ownership
and transfers, the Board of Directors and business combinations, which might
be deemed to have a potential "anti-takeover" effect. These provisions may
have the effect of discouraging a future takeover attempt which is not
approved by the Board of Directors but which individual Company stockholders
may deem to be in their best interests or in which stockholders may receive a
substantial premium for their shares over then current market prices. As a
result, stockholders who might desire to participate in such a transaction may
not have an opportunity to do so. Such provisions will also render the removal
of the current Board of Directors or management of the Company more difficult.
The following description of certain provisions of the Certificate of
Incorporation and Bylaws of the Company is necessarily general and reference
should be made in each case to such Certificate of Incorporation and Bylaws,
which are incorporated herein by reference. See "Additional Information" as to
how to obtain a copy of these documents.
Limitation on Voting Rights. The Certificate of Incorporation of the Company
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. Beneficial ownership is determined
pursuant to Rule 13d-3 of the General Rules and Regulations promulgated
pursuant to the Exchange Act, and includes shares beneficially owned by such
person or any of his affiliates (as defined in the Certificate of
Incorporation), shares which such person or his affiliates have the right to
acquire upon the exercise of conversion rights or options and shares as to
which such person and his affiliates have or share investment or voting power,
but shall not include shares beneficially owned by the ESOP or directors,
officers and employees of the Bank or Company or shares that are subject to a
revocable proxy and that are not otherwise beneficially owned, or deemed by
the Company to be beneficially owned, by such person and his affiliates. The
Certificate of Incorporation of the Company further provides that this
provision limiting voting rights may only be amended upon the vote of 80% of
the outstanding shares of voting stock (after giving effect to the limitation
on voting rights).
Board of Directors. The Board of Directors of the Company is divided into
three classes, each of which shall contain approximately one-third of the
whole number of members of the Board. Each class shall serve a staggered term,
with approximately one-third of the total number of directors being elected
each year. The Company's Certificate of Incorporation and Bylaws provide that
the size of the Board shall be determined by a majority of the directors. The
Certificate of Incorporation and the Bylaws provide that any vacancy occurring
in the Board, including a vacancy created by an increase in the number of
directors or resulting from death, resignation, retirement, disqualification,
removal from office or other cause, shall be filled for the remainder of the
unexpired term exclusively by a majority vote of the directors then in office.
The classified Board is intended
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to provide for continuity of the Board of Directors and to make it more
difficult and time consuming for a stockholder group to fully use its voting
power to gain control of the Board of Directors without the consent of the
incumbent Board of Directors of the Company. The Certificate of Incorporation
of the Company provides that a director may be removed from the Board of
Directors prior to the expiration of his term only for cause, upon the vote of
80% of the outstanding shares of voting stock.
In the absence of these provisions, the vote of the holders of a majority of
the shares could remove the entire Board, with or without cause, and replace
it with persons of such holders' choice.
Cumulative Voting, Special Meetings and Action by Written Consent. The
Certificate of Incorporation does not provide for cumulative voting for any
purpose. Moreover, special meetings of stockholders of the Company may be
called only by the Board of Directors of the Company. The Certificate of
Incorporation also provides that any action required or permitted to be taken
by the stockholders of the Company may be taken only at an annual or special
meeting and prohibits stockholder action by written consent in lieu of a
meeting.
Authorized Shares. The Certificate of Incorporation authorizes the issuance
of 60,000,000 shares of Common Stock and 10,000,000 shares of Preferred Stock.
The shares of Common Stock and Preferred Stock were authorized in an amount
greater than that to be issued in the Conversion to provide the Company's
Board of Directors with as much flexibility as possible to effect, among other
transactions, financings, acquisitions, stock dividends, stock splits and to
provide shares for employee benefit plans. However, these additional
authorized shares may also be used by the Board of Directors consistent with
its fiduciary duty to deter future attempts to gain control of the Company.
The Board of Directors also has sole authority to determine the terms of any
one or more series of Preferred Stock, including voting rights, conversion
rates, and liquidation preferences. As a result of the ability to fix voting
rights for a series of Preferred Stock, the Board has the power, to the extent
consistent with its fiduciary duty, to issue a series of Preferred Stock to
persons friendly to management in order to attempt to block a post-tender
offer merger or other transaction by which a third party seeks control, and
thereby assist management to retain its position. The Company's Board of
Directors currently has no plans for the issuance of additional shares, other
than the issuance of additional shares pursuant to the terms of the Stock-
Based Incentive Plan and upon exercise of stock options to be issued pursuant
to the terms of the Stock-Based Incentive Plan, all of which are to be
established and presented to stockholders at the first annual meeting after
the Conversion.
Stockholder Vote Required to Approve Business Combinations with Principal
Stockholders. The Certificate of Incorporation requires the approval of the
holders of at least 80% of the Company's outstanding shares of voting stock to
approve certain "Business Combinations," as defined therein, and related
transactions. Under Delaware law, absent this provision, Business
Combinations, including mergers, consolidations and sales of all or
substantially all of the assets of a corporation must, subject to certain
exceptions, be approved by the vote of the holders of two-thirds of the
outstanding shares of Common Stock of the Company and any other affected class
of stock. Under the Certificate of Incorporation, at least 80% approval of
shareholders is required in connection with any transaction involving an
Interested Stockholder (as defined below) except (i) in cases where the
proposed transaction has been approved in advance by a majority of those
members of the Company's Board of Directors who are unaffiliated with the
Interested Stockholder and were directors prior to the time when the
Interested Stockholder became an Interested Stockholder or (ii) if the
proposed transaction meets certain conditions set forth therein which are
designed to afford the stockholders a fair price in consideration for their
shares in which case, if a stockholder vote is required, approval of only a
majority of the outstanding shares of voting stock would be sufficient. The
term "Interested Stockholder" is defined to include any individual,
corporation, partnership or other entity (other than the Company or a
subsidiary thereof) which owns beneficially or controls, directly or
indirectly, 10% or more of the outstanding shares of voting stock of the
Company. This provision of the Certificate of Incorporation applies to any
"Business Combination," which is defined to include (i) any merger or
consolidation of the Company or any of its subsidiaries with or into any
Interested Stockholder or Affiliate (as defined in the Certificate of
Incorporation) of an Interested Stockholder; (ii) any sale, lease, exchange,
mortgage, pledge, transfer, or other disposition to or with any Interested
Stockholder or Affiliate of 25% or more of the assets of the Company or
combined assets of the Company and its subsidiaries; (iii) the issuance or
transfer to any Interested Stockholder or its Affiliate by the Company (or any
subsidiary) of any securities of the Company in exchange for any assets, cash
or securities the value of which equals or exceeds
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25% of the fair market value of the Common Stock of the Company; (iv) the
adoption of any plan for the liquidation or dissolution of the Company
proposed by or on behalf of any Interested Stockholder or Affiliate thereof;
and (v) any reclassification of securities, recapitalization, merger or
consolidation of the Company which has the effect of increasing the
proportionate share of Common Stock or any class of equity or convertible
securities of the Company owned directly or indirectly by an Interested
Stockholder or Affiliate thereof. The directors and executive officers of the
Bank are purchasing in the aggregate approximately 2.0% of the shares of the
Common Stock at the maximum of the Estimated Price Range. In addition, the
ESOP intends to purchase 8% of the Common Stock issued in connection with the
Conversion including shares issued to the Foundation. Additionally, if at a
meeting of stockholders following the Conversion stockholder approval of the
proposed Stock-Based Incentive Plan is received, the Company expects to
acquire 10% of the Common Stock issued in connection with the Conversion,
including shares issued to the Foundation, on behalf of the Stock-Based
Incentive Plan and expects to issue an amount equal to 10% of the Common Stock
issued in connection with the Conversion, including shares issued to the
Foundation, under the Stock-Based Incentive Plan to directors and executive
officers. As a result, assuming the Stock-Based Incentive Plan is approved by
Stockholders, directors, executive officers and employees have the potential
to control the voting of approximately 21.8% of the Common Stock, thereby
enabling them to prevent the approval of the transactions requiring the
approval of at least 80% of the Company's outstanding shares of voting stock
described hereinabove.
Evaluation of Offers. The Certificate of Incorporation of the Company
further provides that the Board of Directors of the Company, when evaluating
any offer of another "Person" (as defined therein) to (i) make a tender or
exchange offer for any equity security of the Company, (ii) merge or
consolidate the Company with another corporation or entity, or (iii) purchase
or otherwise acquire all or substantially all of the properties and assets of
the Company, may, in connection with the exercise of its judgment in
determining what is in the best interest of the Company, the Bank and the
stockholders of the Company, give due consideration to all relevant factors,
including, without limitation, the social and economic effects of acceptance
of such offer on the Company's customers and the Bank's present and future
account holders, borrowers and employees; on the communities in which the
Company and the Bank operate or are located; and on the ability of the Company
to fulfill its corporate objectives as a savings and loan holding company and
on the ability of the Bank to fulfill the objectives of a federally chartered
stock savings bank under applicable statutes and regulations. By having these
standards in the Certificate of Incorporation of the Company, the Board of
Directors may be in a stronger position to oppose such a transaction if the
Board concludes that the transaction would not be in the best interest of the
Company, even if the price offered is significantly greater than the then
market price of any equity security of the Company.
Amendment of Certificate of Incorporation and Bylaws. Amendments to the
Company's Certificate of Incorporation must be approved by a majority vote of
its Board of Directors and also by a majority of the outstanding shares of its
voting stock; provided, however, that an affirmative vote of at least 80% of
the outstanding voting stock entitled to vote (after giving effect to the
provision limiting voting rights) is required to amend or repeal certain
provisions of the Certificate of Incorporation, including the provision
limiting voting rights, the provisions relating to approval of certain
business combinations, calling special meetings, the number and classification
of directors, director and officer indemnification by the Company and
amendment of the Company's Bylaws and Certificate of Incorporation. The
Company's Bylaws may be amended by its Board of Directors, or by a vote of 80%
of the total votes eligible to be voted at a duly constituted meeting of
stockholders.
Certain Bylaw Provisions. The Bylaws of the Company also require a
stockholder who intends to nominate a candidate for election to the Board of
Directors, or to raise new business at a stockholder meeting to give at least
90 days advance notice to the Secretary of the Company. The notice provision
requires a stockholder who desires to raise new business to provide certain
information to the Company concerning the nature of the new business, the
stockholder and the stockholder's interest in the business matter. Similarly,
a stockholder wishing to nominate any person for election as a director must
provide the Company with certain information concerning the nominee and the
proposing stockholder.
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ANTI-TAKEOVER EFFECTS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
AND MANAGEMENT REMUNERATION ADOPTED IN CONVERSION
The provisions described above are intended to reduce the Company's
vulnerability to takeover attempts and certain other transactions which have
not been negotiated with and approved by members of its Board of Directors.
The provisions of the Employment Agreements, CIC Agreements, Severance Plan,
or the Stock-Based Incentive Plan to be established may also discourage
takeover attempts by increasing the costs to be incurred by the Bank and the
Company in the event of a takeover. See "Management of the Bank--Employment
Agreements" and "--Benefits--Stock-Based Incentive Plan."
The Company's Board of Directors believes that the provisions of the
Certificate of Incorporation, Bylaws and management remuneration plans to be
established are in the best interest of the Company and its stockholders. An
unsolicited, non-negotiated proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Accordingly, the Board
of Directors believes it is in the best interests of the Company and its
stockholders to encourage potential acquirors to negotiate directly with
management and that these provisions will encourage such negotiations and
discourage non-negotiated takeover attempts. It is also the Board of
Directors' view that these provisions should not discourage persons from
proposing a merger or other transaction at a price that reflects the true
value of the Company and that otherwise is in the best interest of all
stockholders.
DELAWARE CORPORATE LAW
The state of Delaware has a statute designed to provide Delaware
corporations with additional protection against hostile takeovers. The
takeover statute, which is codified in Section 203 of the Delaware General
Corporate Law ("Section 203"), is intended to discourage certain takeover
practices by impeding the ability of a hostile acquiror to engage in certain
transactions with the target company.
In general, Section 203 provides that a "Person" (as defined therein) who
owns 15% or more of the outstanding voting stock of a Delaware corporation (an
"Interested Stockholder") may not consummate a merger or other business
combination transaction with such corporation at any time during the three-
year period following the date such "Person" became an Interested Stockholder.
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.
The statute exempts the following transactions from the requirements of
Section 203: (i) any business combination if, prior to the date a person
became an Interested Stockholder, the Board of Directors approved either the
business combination or the transaction which resulted in the stockholder
becoming an Interested Stockholder; (ii) any business combination involving a
person who acquired at least 85% of the outstanding voting stock in the
transaction in which he became an Interested Stockholder, with the number of
shares outstanding calculated without regard to those shares owned by the
corporation's directors who are also officers and by certain employee stock
plans; (iii) any business combination with an Interested Stockholder that is
approved by the Board of Directors and by a two-thirds vote of the outstanding
voting stock not owned by the Interested Stockholder; and (iv) certain
business combinations that are proposed after the corporation had received
other acquisition proposals and which are approved or not opposed by a
majority of certain continuing members of the Board of Directors. A
corporation may exempt itself from the requirements of the statute by adopting
an amendment to its Certificate of Incorporation or Bylaws electing not to be
governed by Section 203. At the present time, the Board of Directors does not
intend to propose any such amendment.
RESTRICTIONS IN THE BANK'S NEW CHARTER AND BYLAWS
Although the Board of Directors of the Bank is not aware of any effort that
might be made to obtain control of the Bank after the Conversion, the Board of
Directors believes that it is appropriate to adopt certain provisions
permitted by federal regulations to protect the interests of the converted
Bank and its stockholders from any hostile takeover. Such provisions may,
indirectly, inhibit a change in control of the Company, as the Bank's sole
stockholder. See "Risk Factors--Certain Anti-Takeover Provisions Which May
Discourage Takeover Attempts."
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The Bank's Federal Stock Charter will contain a provision whereby the
acquisition of or offer to acquire beneficial ownership of more than 10% of
the issued and outstanding shares of any class of equity securities of the
Bank by any person (i.e., any individual, corporation, group acting in
concert, trust, partnership, joint stock company or similar organization),
either directly or through an affiliate thereof, will be prohibited for a
period of five years following the date of completion of the Conversion. Any
stock in excess of 10% acquired in violation of the Federal Stock Charter
provision will not be counted as outstanding for voting purposes. This
limitation shall not apply to any transaction in which the Bank forms a
holding company without a change in the respective beneficial ownership
interests of its stockholders other than pursuant to the exercise of any
dissenter or appraisal rights. In the event that holders of revocable proxies
for more than 10% of the shares of the Common Stock of the Company seek, among
other things, to elect one-third or more of the Company's Board of Directors,
to cause the Company's stockholders to approve the acquisition or corporate
reorganization of the Company or to exert a continuing influence on a material
aspect of the business operations of the Company, which actions could
indirectly result in a change in control of the Bank, the Board of Directors
of the Bank will be able to assert this provision of the Bank's Federal Stock
Charter against such holders. Although the Board of Directors of the Bank is
not currently able to determine when and if it would assert this provision of
the Bank's Federal Stock Charter, the Board of Directors, in exercising its
fiduciary duty, may assert this provision if it were deemed to be in the best
interests of the Bank, the Company and its stockholders. It is unclear,
however, whether this provision, if asserted, would be successful against such
persons in a proxy contest which could result in a change in control of the
Bank indirectly through a change in control of the Company. Finally, for five
years after the Conversion, stockholders will not be permitted to call a
special meeting of stockholders relating to a change of control of the Bank or
a charter amendment or to cumulate their votes in the election of directors.
Furthermore, the staggered terms of the Board of Directors could have an anti-
takeover effect by making it more difficult for a majority of shares to force
an immediate change in the Board of Directors since only one-third of the
Board is elected each year. The purpose of these provisions is to assure
stability and continuity of management of the Bank in the years immediately
following the Conversion.
Although the Bank has no arrangements, understandings or plans at the
present time, except as described in "Description of Capital Stock of the
Company--Preferred Stock," for the issuance or use of the shares of
undesignated Preferred Stock proposed to be authorized, the Board of Directors
believes that the availability of such shares will provide the Bank with
increased flexibility in structuring possible future financings and
acquisitions and in meeting other corporate needs which may arise. In the
event of a proposed merger, tender offer or other attempt to gain control of
the Bank of which management does not approve, it might be possible for the
Board of Directors to authorize the issuance of one or more series of
Preferred Stock with rights and preferences which could impede the completion
of such a transaction. An effect of the possible issuance of such Preferred
Stock, therefore, may be to deter a future takeover attempt. The Board of
Directors does not intend to issue any Preferred Stock except on terms which
the Board deems to be in the best interest of the Bank and its then existing
stockholders.
REGULATORY RESTRICTIONS
The Plan of Conversion prohibits any person, prior to the completion of the
Conversion, from transferring, or from entering into any agreement or
understanding to transfer, to the account of another, legal or beneficial
ownership of the subscription rights issued under the Plan or the Common Stock
to be issued upon their exercise. The Plan also prohibits any person, prior to
the completion of the Conversion, from offering, or making an announcement of
an offer or intent to make an offer, to purchase such subscription rights or
Common Stock.
For three years following the Conversion, OTS regulations prohibit any
person from acquiring or making an offer to acquire more than 10% of the stock
of any converted savings institution, except for: (i) offers that, if
consummated, would not result in the acquisition by such person during the
preceding 12-month period of more than 1% of such stock; (ii) offers for up to
25% in the aggregate by the ESOP or other tax qualified plans of the Bank or
the Company; or (iii) offers which are not opposed by the Board of Directors
of the Bank and which receive the prior approval of the OTS. Such prohibition
is also applicable to the acquisition of the stock of the Company. Such
acquisition may be disapproved by the OTS if it is found, among other things,
that the proposed acquisition (a) would frustrate the purposes of the
provisions of the regulations regarding conversions; (b) would be manipulative
or deceptive; (c) would subvert the fairness of the conversion; (d) would be
likely to result in
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injury to the savings institution; (e) would not be consistent with economical
home financing; (f) would otherwise violate any law or regulation; or (g)
would not contribute to the prudent deployment of the savings institution's
conversion proceeds. In the event that any person, directly or indirectly,
violates this regulation, the securities beneficially owned by such person in
excess of 10% shall not be counted as shares entitled to vote and shall not be
voted by any person or counted as voting shares in connection with any matters
submitted to a vote of stockholders. The definition of beneficial ownership
for this regulation extends to persons holding revocable or irrevocable
proxies for the Company's stock under circumstances that give rise to a
conclusive or rebuttable determination of control under the OTS regulations.
In addition, any proposal to acquire 10% of any class of equity security of
the Company generally would be subject to approval by the OTS under the Change
in Bank Control Act. The OTS requires all persons seeking control of a savings
institution and, therefore, indirectly its holding company, to obtain
regulatory approval prior to offering to obtain control. Federal law generally
provides that no "person," acting directly or indirectly or through or in
concert with one or more other persons, may acquire directly or indirectly
"control," as that term is defined in OTS regulations, of a federally-insured
savings institution without giving at least 60 days' written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition.
Such acquisitions of control may be disapproved if it is determined, among
other things, that (i) the acquisition would substantially lessen competition;
(ii) the financial condition of the acquiring person might jeopardize the
financial stability of the savings institution or prejudice the interests of
its depositors; or (iii) the competency, experience or integrity of the
acquiring person or the proposed management personnel indicates that it would
not be in the interest of the depositors or the public to permit the
acquisition of control by such person. Such change in control restrictions on
the acquisition of holding company stock are not limited to three years after
conversion but will apply for as long as the regulations are in effect.
Persons holding revocable or irrevocable proxies may be deemed to be
beneficial owners of such securities under OTS regulations and therefore
prohibited from voting all or the portion of such proxies in excess of the 10%
aggregate beneficial ownership limit. Such regulatory restrictions may prevent
or inhibit proxy contests for control of the Company or the Bank which have
not received prior regulatory approval.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
GENERAL
The Company is authorized to issue 60,000,000 shares of Common Stock having
a par value of $.01 per share and 10,000,000 shares of preferred stock having
a par value of $.01 per share (the "Preferred Stock"). Based on the sale of
Common Stock in connection with the Conversion and issuance to the Foundation
of authorized but unissued Common Stock in an amount equal to 6% of the Common
Stock sold in the Conversion, the Company currently expects to issue up to
8,502,525 shares of Common Stock (or 9,777,904 in the event of an increase of
15% in the Estimated Price Range) and no shares of Preferred Stock in the
Conversion. Except as discussed above in "Restrictions on Acquisition of the
Company and the Bank," each share of the Common Stock will have the same
relative rights as, and will be identical in all respects with, each other
share of Common Stock. Upon payment of the Purchase Price for the Common
Stock, in accordance with the Plan, all such stock will be duly authorized,
fully paid and non-assessable.
THE COMMON STOCK OF THE COMPANY WILL REPRESENT NON-WITHDRAWABLE CAPITAL,
WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE, AND WILL NOT BE INSURED BY THE
FDIC.
COMMON STOCK
Dividends. The Company can pay dividends out of statutory surplus or from
certain net profits if, as and when declared by its Board of Directors. The
payment of dividends by the Company is subject to limitations which are
imposed by law and applicable regulation. See "Dividend Policy" and
"Regulation." The holders of Common Stock will be entitled to receive and
share equally in such dividends as may be declared by the Board of Directors
of the Company out of funds legally available therefor. If the Company issues
Preferred Stock, the holders thereof may have a priority over the holders of
the Common Stock with respect to dividends.
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Voting Rights. Upon Conversion, the holders of Common Stock of the Company
will possess exclusive voting rights in the Company. They will elect the
Company's Board of Directors and act on such other matters as are required to
be presented to them under Delaware law or the Company's Certificate of
Incorporation or as are otherwise presented to them by the Board of Directors.
Except as discussed in "Restrictions on Acquisition of the Company and the
Bank," each holder of Common Stock will be entitled to one vote per share, and
will not have any right to cumulate votes in the election of directors. If the
Company issues Preferred Stock, holders of the Preferred Stock may also
possess voting rights. Certain matters require an 80% shareholder vote. See
"Restrictions on Acquisition of the Company and the Bank."
As a federal mutual savings bank, corporate powers and control of the Bank
are vested in its Board of Directors, who elect the officers of the Bank and
who fill any vacancies on the Board of Directors as it exists upon Conversion.
Subsequent to Conversion, voting rights will be vested exclusively in the
owners of the shares of capital stock of the Bank, which will be the Company,
and voted at the direction of the Company's Board of Directors. Consequently,
the holders of the Common Stock will not have direct control of the Bank.
Liquidation. In the event of any liquidation, dissolution or winding up of
the Bank, the Company, as holder of the Bank's capital stock, would be
entitled to receive, after payment or provision for payment of all debts and
liabilities of the Bank (including all deposit accounts and accrued interest
thereon) and after distribution of the balance in the special liquidation
account to Eligible Account Holders and Supplemental Eligible Account Holders
(see "The Conversion--Liquidation Rights"), all assets of the Bank available
for distribution. In the event of liquidation, dissolution or winding up of
the Company, the holders of its Common Stock would be entitled to receive,
after payment or provision for payment of all its debts and liabilities, all
of the assets of the Company available for distribution. If Preferred Stock is
issued, the holders thereof may have a priority over the holders of the Common
Stock in the event of liquidation or dissolution.
Preemptive Rights. Holders of the Common Stock of the Company will not be
entitled to preemptive rights with respect to any shares which may be issued.
The Common Stock is not subject to redemption.
PREFERRED STOCK
None of the shares of the Company's authorized Preferred Stock will be
issued in the Conversion. Such stock may be issued with such preferences and
designations as the Board of Directors may from time to time determine. The
Board of Directors can, without stockholder approval, issue preferred stock
with voting, dividend, liquidation and conversion rights which could dilute
the voting strength of the holders of the Common Stock and may assist
management in impeding an unfriendly takeover or attempted change in control.
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DESCRIPTION OF CAPITAL STOCK OF THE BANK
GENERAL
The Federal Stock Charter of the Bank, to be effective upon the Conversion,
authorizes the issuance of capital stock consisting of 45,000,000 shares of
common stock, par value $1.00 per share, and 5,000,000 shares of preferred
stock, par value $1.00 per share, which preferred stock may be issued in
series and classes having such rights, preferences, privileges and
restrictions as the Board of Directors may determine. Each share of common
stock of the Bank will have the same relative rights as, and will be identical
in all respects with, each other share of common stock. After the Conversion,
the Board of Directors will be authorized to approve the issuance of common
stock up to the amount authorized by the Federal Stock Charter without the
approval of the Bank's stockholders. Assuming that the holding company form of
organization is utilized, all of the issued and outstanding common stock of
the Bank will be held by the Company as the Bank's sole stockholder. The
capital stock of the Bank will represent non-withdrawable capital, will not be
an account of an insurable type, and will not be insured by the FDIC.
COMMON STOCK
Dividends. The holders of the Bank's common stock will be entitled to
receive and to share equally in such dividends as may be declared by the Board
of Directors of the Bank out of funds legally available therefor. See
"Dividend Policy" for certain restrictions on the payment of dividends and
"Federal and State Taxation--Federal Taxation" for a discussion of the
consequences of the payment of cash dividends from income appropriated to bad
debt reserves.
Voting Rights. Immediately after the Conversion, the holders of the Bank's
common stock will possess exclusive voting rights in the Bank. Each holder of
shares of common stock will be entitled to one vote for each share held,
subject to the right of shareholders to cumulate their votes for the election
of directors. During the five-year period after the effective date of the
Conversion, cumulation of votes will not be permitted. See "Restrictions on
Acquisition of the Company and the Bank--Anti-Takeover Effects of the
Company's Certificate of Incorporation and Bylaws and Management Remuneration
Adopted in Conversion."
Liquidation. In the event of any liquidation, dissolution, or winding up of
the Bank, the holders of common stock will be entitled to receive, after
payment of all debts and liabilities of the Bank (including all deposit
accounts and accrued interest thereon), and distribution of the balance in the
special liquidation account to Eligible Account Holders and Supplemental
Eligible Account Holders, all assets of the Bank available for distribution in
cash or in kind. If preferred stock is issued subsequent to the Conversion,
the holders thereof may also have priority over the holders of common stock in
the event of liquidation or dissolution.
Preemptive Rights; Redemption. Holders of the common stock of the Bank will
not be entitled to preemptive rights with respect to any shares of the Bank
which may be issued. The common stock will not be subject to redemption. Upon
receipt by the Bank of the full specified purchase price therefor, the common
stock will be fully paid and non-assessable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Securities
Transfer & Trust, Inc.
132
<PAGE>
EXPERTS
The consolidated financial statements of the Bank and its subsidiaries as of
June 30, 1997 and 1996, and for each of the years in the three-year period
ended June 30, 1997, have been included in this Prospectus, in reliance upon
the report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
Keller has consented to the publication herein of the summary of its report
to the Bank and Company setting forth its opinion as to the estimated pro
forma market value of the Common Stock upon Conversion and its valuation with
respect to subscription rights.
LEGAL AND TAX OPINIONS
The legality of the Common Stock and the federal income tax consequences of
the Conversion will be passed upon for the Bank and the Company by Muldoon,
Murphy & Faucette, Washington, D.C., special counsel to the Bank and the
Company. Muldoon, Murphy & Faucette will rely as to certain matters of
Delaware law on the opinion of Morris, Nichols, Arsht & Tunnell. The States of
Nebraska, Kansas and Iowa tax consequences of the Conversion and certain
matters related to the Foundation will be passed upon for the Bank and the
Company by KPMG Peat Marwick LLP. Certain legal matters will be passed upon
for Sandler O'Neill by Foley & Lardner.
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement under the
Securities Act with respect to the Common Stock offered hereby. As permitted
by the rules and regulations of the SEC, this Prospectus does not contain all
the information set forth in the Registration Statement. Such information can
be examined without charge at the public reference facilities of the SEC
located at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of such
material can be obtained from the SEC at prescribed rates. In addition, the
SEC maintains a web site (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC including the Company. This Prospectus contains a
description of the material terms and features of all material contracts,
reports or exhibits to the Registration Statement required to be described.
The statements contained in this Prospectus as to the contents of any contract
or other document filed as an exhibit to the Registration Statement are, of
necessity, brief descriptions thereof and are not necessarily complete; each
such statement is qualified by reference to such contract or document.
The Bank has filed an application for conversion with the OTS with respect
to the Conversion. Pursuant to the rules and regulations of the OTS, this
Prospectus omits certain information contained in that application. The
application may be examined at the principal office of the OTS, 1700 G Street,
N.W., Washington, D.C. 20552, and at the Office of the Regional Director of
the OTS located at 122 John Carpenter Freeway, Suite 600, Irving, Texas 75039.
In connection with the Conversion, the Company has registered its Common
Stock with the SEC under Section 12(b) of the Exchange Act and, upon such
registration, the Company and the holders of its stock will become subject to
the proxy solicitation rules, reporting requirements and restrictions on stock
purchases and sales by directors, officers and greater than 10% stockholders,
the annual and periodic reporting and certain other requirements of the
Exchange Act. Under the Plan, the Company has undertaken that it will not
terminate such registration for a period of at least three years following the
Conversion. In the event that the Bank amends the Plan to eliminate the
concurrent formation of the Company as part of the Conversion, the Bank will
register its stock with the OTS under Section 12(b) of the Exchange Act and,
upon such registration, the Bank and the holders of its stock will become
subject to the same obligations and restrictions.
A copy of the Certificate of Incorporation and the Bylaws of the Company and
the Federal Stock Charter and Bylaws of the Bank are available without charge
from the Bank.
133
<PAGE>
FIRST FEDERAL LINCOLN BANK AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) AND YEARS
ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Independent Auditors' Report...................................... F-2
Consolidated Statements of Financial Condition as of September 30,
1997 (unaudited) and June 30, 1997 and 1996...................... F-3
Consolidated Statements of Income for the Three-Month Periods
Ended September 30, 1997 and 1996 (unaudited) and Years Ended
June 30, 1997, 1996 and 1995..................................... 38
Consolidated Statements of Retained Earnings for the Three-Month
Period Ended September 30, 1997 (unaudited) and Years Ended June
30, 1997, 1996 and 1995.......................................... F-4
Consolidated Statements of Cash Flows for the Three-Month Periods
Ended September 30, 1997 and 1996 (unaudited) and Years Ended
June 30, 1997, 1996 and 1995..................................... F-5 to F-6
Notes to Consolidated Financial Statements........................ F-7 to F-27
</TABLE>
All schedules are omitted because they are not required or applicable or the
required information is shown in the financial statement or the notes thereto.
Financial statements of First Lincoln Bancshares Inc. have not been provided
because First Lincoln Bancshares Inc. has not conducted any operations to
date.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
First Federal Lincoln Bank:
We have audited the accompanying consolidated statements of financial
condition of First Federal Lincoln Bank and subsidiaries as of June 30, 1997
and 1996, and the related consolidated statements of income, retained earnings
and cash flows for each of the years in the three-year period ended June 30,
1997. These financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Federal Lincoln Bank and subsidiaries at June 30, 1997 and 1996 and the results
of their operations and their cash flows for each of the years in the three-
year period ended June 30, 1997, in conformity with generally accepted
accounting principles.
As described in Note 1 to the consolidated financial statements, the Bank
adopted the provisions of Statement of Financial Accounting Standards (FAS) No.
115, Accounting for Certain Investments in Debt and Equity Securities, on July
1, 1994.
LOGO
Lincoln, Nebraska
August 20, 1997
(October 7, 1997 as to note 21)
F-2
<PAGE>
FIRST FEDERAL LINCOLN BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 1997 (UNAUDITED) AND JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
JUNE 30,
SEPTEMBER 30, ----------------------------
1997 1997 1996
-------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and due from banks.......... $ 12,123,731 12,748,083 13,045,330
Federal funds sold............... 33,700,000 3,600,000 52,500,000
-------------- ------------- -------------
Total cash and cash
equivalents................. 45,823,731 16,348,083 65,545,330
Investment securities, held to
maturity, at amortized cost
(estimated market value of
$58,613,037 (unaudited),
$93,974,136 and $129,576,038 at
September 30, 1997 and June 30,
1997 and 1996, respectively).... 58,659,904 94,248,200 130,643,090
Mortgage-backed securities:
Held to maturity, at amortized
cost (estimated market value
of $80,803,782 (unaudited),
$85,218,664 and $95,410,083 at
September 30, 1997 and June
30, 1997 and 1996,
respectively)................. 80,413,202 85,371,877 97,030,479
Available for sale, at
estimated market value........ 746,466 749,960 843,076
Loans receivable, net............ 818,460,094 814,881,349 713,511,565
Accrued interest receivable...... 6,474,410 7,065,140 7,183,465
Investment in FHLB stock, at
cost............................ 7,059,900 6,933,300 6,313,300
Real estate held for investment,
net............................. 601,724 606,316 624,688
Real estate owned, net........... 1,170,044 1,461,606 1,391,062
Premises and equipment, net...... 13,044,536 12,823,082 12,904,464
Other assets..................... 1,124,445 1,846,363 1,864,286
-------------- ------------- -------------
Total assets................. $1,033,578,456 1,042,335,276 1,037,854,805
============== ============= =============
LIABILITIES AND RETAINED EARNINGS
Liabilities:
Deposits....................... $ 923,669,334 920,119,585 929,314,129
Overdrawn cash account in
bank.......................... 3,680,860 5,017,943 4,337,671
Advances from FHLB............. 10,565,250 21,568,700 13,598,500
Advances from borrowers for
taxes and insurance........... 211,068 1,305,150 962,991
Accrued interest payable....... 9,324,024 8,930,073 9,497,497
Accrued expenses and other
liabilities................... 5,565,861 6,481,972 5,583,711
-------------- ------------- -------------
Total liabilities............ 953,016,397 963,423,423 963,294,499
-------------- ------------- -------------
Retained earnings:
Retained earnings, subject to
certain restrictions.......... 80,563,705 78,920,703 74,580,578
Net unrealized losses on
securities available for
sale.......................... (1,646) (8,850) (20,272)
-------------- ------------- -------------
Total retained earnings...... 80,562,059 78,911,853 74,560,306
Commitments and contingencies....
Total liabilities and
retained earnings........... $1,033,578,456 1,042,335,276 1,037,854,805
============== ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
FIRST FEDERAL LINCOLN BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1997 (UNAUDITED)
AND YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
NET UNREALIZED
LOSSES ON
SECURITIES TOTAL
RETAINED AVAILABLE RETAINED
EARNINGS FOR SALE EARNINGS
----------- -------------- ----------
<S> <C> <C> <C>
Balance at June 30, 1994.. $65,147,000 -- 65,147,000
Net income................ 4,058,979 -- 4,058,979
Unrealized losses due to
adoption of FAS No. 115,
net of deferred income
taxes of ($94,665).......... -- (183,762) (183,762)
Change in unrealized
losses, net of income
taxes of $77,167......... -- 149,795 149,795
----------- -------- ----------
Balance at June 30, 1995.. 69,205,979 (33,967) 69,172,012
Net income................ 5,374,599 -- 5,374,599
Change in unrealized
losses, net of income
taxes of $7,055.......... -- 13,695 13,695
----------- -------- ----------
Balance at June 30, 1996.. 74,580,578 (20,272) 74,560,306
Net income................ 4,340,125 -- 4,340,125
Change in unrealized
losses, net of income
taxes of $5,884.......... -- 11,422 11,422
----------- -------- ----------
Balance at June 30, 1997.. 78,920,703 (8,850) 78,911,853
Net income (unaudited).... 1,643,002 -- 1,643,002
Change in unrealized
losses, net of income
taxes of $3,711
(unaudited).............. -- 7,204 7,204
----------- -------- ----------
Balance at September 30,
1997 (unaudited)......... $80,563,705 (1,646) 80,562,059
=========== ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
FIRST FEDERAL LINCOLN BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)AND YEARS
ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
------------------------- ---------------------------------------
1997 1996 1997 1996 1995
------------ ----------- ------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net cash provided by
operating activities... $ 2,083,577 1,950,255 6,668,048 6,509,984 11,544,675
------------ ----------- ------------ ------------ -----------
Cash flows from
investing activities:
Purchase of investment
securities:
Held to maturity....... -- (2,000,000) (12,008,364) (155,092,171) (32,194,735)
Available for sale..... -- -- -- (947,851) --
Proceeds from maturity
of investment
securities:
Held to maturity...... 35,595,000 13,290,000 48,890,000 193,735,586 65,768,002
Available for sale.... -- -- -- 1,000,000 --
Proceeds from sale of
investment securities,
available for sale.... -- -- -- 948,125 --
Purchase of mortgage-
backed securities:
Held to maturity....... -- (290,932) (3,608,460) (22,606,115) (30,985,039)
Available for sale..... -- (563,841) (563,841) -- --
Proceeds from sale of
mortgage-backed
securities, available
for sale.............. -- 565,251 565,251 1,014,135 --
Proceeds from principal
repayments of
investment and
mortgage-backed
securities............ 4,903,044 4,041,154 15,075,393 16,643,264 7,769,192
Increase in loans
receivable............ (4,138,020) (35,078,211) (101,689,876) (69,121,251) (20,638,423)
Proceeds from sale of
real estate owned and
held for investment... 217,621 -- 73,260 5,268,054 5,316,059
Additions to real
estate held for
investment............ -- -- -- (1,925) (23,124)
Additions to premises
and equipment......... (647,804) (545,646) (1,539,201) (4,580,909) (2,148,493)
Proceeds from sale of
premises and
equipment............. 10,013 3,934 10,028 687,867 15,526
Purchase of FHLB
stock................. -- -- (187,300) (391,600) (116,300)
Proceeds from
redemption of FHLB
stock................. -- -- -- -- 2,893,100
Premium paid for First
Bank deposits......... -- -- -- (652,257) --
------------ ----------- ------------ ------------ -----------
Net cash provided by
(used in) investing
activities.......... 35,939,854 (20,578,291) (54,983,110) (34,097,048) (4,344,235)
------------ ----------- ------------ ------------ -----------
Cash flows from
financing activities:
Net increase (decrease)
in deposits........... 3,549,749 (17,085,246) (9,194,544) 65,250,007 (32,697,003)
Net increase (decrease)
in advances from
borrowers for taxes
and insurance......... (1,094,082) (832,711) 342,159 (5,765,135) (556,715)
Proceeds from FHLB
advances.............. 5,000,000 1,000,000 37,000,000 -- 25,000,000
Repayment of FHLB
advances.............. (16,003,450) (16,625) (29,029,800) (10,033,250) (5,033,250)
------------ ----------- ------------ ------------ -----------
Net cash provided by
(used in) financing
activities.......... (8,547,783) (16,934,582) (882,185) 49,451,622 (13,286,968)
------------ ----------- ------------ ------------ -----------
Net increase
(decrease) in cash
and cash
equivalents......... 29,475,648 (35,562,618) (49,197,247) 21,864,558 (6,086,528)
Cash and cash
equivalents at
beginning of year...... 16,348,083 65,545,330 65,545,330 43,680,772 49,767,300
------------ ----------- ------------ ------------ -----------
Cash and cash
equivalents at end of
year................... $ 45,823,731 29,982,712 16,348,083 65,545,330 43,680,772
============ =========== ============ ============ ===========
</TABLE>
(Continued)
F-5
<PAGE>
FIRST FEDERAL LINCOLN BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)AND YEARS
ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
------------------------ -------------------------------------
1997 1996 1997 1996 1995
------------ ---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Reconciliation of net
income to cash provided
by
operating activities:
Net income (loss)...... $ 1,643,002 (1,706,082) 4,340,125 5,374,599 4,058,979
------------ ---------- ----------- ----------- -----------
Adjustments to
reconcile net income
(loss) to net cash
provided by operating
activities:
(Accretion)
amortization of
investment and
mortgage-backed
securities, net....... 63,337 (86,799) (184,657) (105,376) 106,360
Depreciation and
amortization.......... 386,227 373,934 1,579,243 1,493,802 1,409,341
Accretion on loans
receivable, net....... (68,635) (85,510) (249,820) (345,441) (523,885)
Deferred income tax
expense (benefit)..... (160,006) 428,604 700,588 (214,252) 163,681
Provision for loan
losses................ 713,412 95,708 450,240 598,414 243,133
Provision for fixed
asset valuation....... 32,000 -- -- -- --
Proceeds from sales of
loans held for sale... 16,971,100 8,373,600 48,472,966 50,915,405 22,638,842
Originations and
purchases of loans
held for sale......... (16,826,937) (8,300,233) (48,101,288) (50,556,941) (22,547,129)
Net (gain) loss on
sales of:
Trading securities.... -- -- -- (4,986) (2,326)
Investment and
mortgage-backed
securities available
for sale............. -- (1,410) (1,410) (5,165) --
Loans receivable held
for sale............. (144,163) (73,367) (389,070) (358,464) (91,713)
Loans receivable held
in portfolio......... -- -- -- (100,969) --
Real estate owned and
held for
investment........... (11,561) -- (6,739) (926,226) (347,989)
Premises and
equipment............ 2,702 46,486 49,684 103,749 121,498
FHLB stock dividend.... (126,600) (103,100) (432,700) (282,400) --
Purchase of trading
securities............ -- -- -- (2,947,514) (1,279,596)
Proceeds from sale of
trading securities.... -- -- -- 2,952,500 1,281,922
Changes in certain
assets and
liabilities:
Accrued interest
receivable........... 590,730 356,907 118,325 (61,643) (633,413)
Other assets.......... 721,918 (505,396) 17,923 576,859 (785,772)
Overdrawn cash
account in bank...... (1,337,083) (515,720) 680,272 (2,410,841) 6,748,512
Accrued interest
payable.............. 393,951 (175,491) (567,424) 466,091 1,320,583
Accrued expenses and
other liabilities.... (759,817) 3,828,124 191,790 2,348,783 (336,353)
------------ ---------- ----------- ----------- -----------
Total adjustments.... 440,575 3,656,337 2,327,923 1,135,385 7,485,696
------------ ---------- ----------- ----------- -----------
Net cash provided by
operating
activities.......... $ 2,083,577 1,950,255 6,668,048 6,509,984 11,544,675
------------ ---------- ----------- ----------- -----------
Supplemental disclosures
of cash flow
information:
Cash paid during the
year for:
Interest............... $ 11,592,327 12,016,156 47,765,285 47,739,979 43,284,240
============ ========== =========== =========== ===========
Income taxes, net of
refunds............... $ 1,173,020 1,107,710 2,074,489 1,268,193 1,888,221
============ ========== =========== =========== ===========
Supplemental schedules
of noncash investing
activities:
Transfers from loans to
real estate owned
through foreclosure... $ 151,509 76,471 299,175 1,657,789 238,043
============ ========== =========== =========== ===========
Stock dividend from
FHLB.................. $ 126,600 103,100 432,700 282,400 --
============ ========== =========== =========== ===========
</TABLE>
In July 1995, the Bank acquired certain assets and liabilities of Missouri
Valley and Clarinda, Iowa branches of First Bank for $871,469. In connection
with this acquisition, liabilities were assumed as follows:
<TABLE>
<S> <C>
Fair value of assets acquired................................... $22,144,692
Cash paid for assets............................................ (871,469)
Less cash and other assets assumed.............................. 219,212
-----------
Liabilities assumed............................................. $21,492,435
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
FIRST FEDERAL LINCOLN BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996 AND JUNE 30, 1997, 1996 AND 1995
(DATA AS OF AND FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts of the First
Federal Lincoln Bank (the Bank), a mutual savings bank, and the following
wholly-owned subsidiaries:
. TMS Corporation of the Americas--the holding company of First Financial
Investments and Insurance, a company which administers the sale of
insurance and securities products; and
. First Federal Lincoln Holding Corporation--the holding company of FFL
Holding Corporation, which is the holding company of First Federal
Lincoln Bank-Iowa, a stock savings bank (formerly First Federal Savings
and Loan Association of Lincoln-Iowa).
All significant intercompany balances and transactions have been eliminated
in consolidation.
Investment and Mortgage-Backed Securities
Statement of Financial Accounting Standards (FAS) No. 115, Accounting for
Certain Investments in Debt and Equity Securities, was adopted by the Bank and
its subsidiaries on July 1, 1994. The objective of this standard is to
classify the investment and mortgage-backed securities portfolios between
those securities the Bank intends to hold to maturity, those securities
available for sale and those securities held for trading purposes.
Securities classified as held to maturity are those securities which the
Bank has the ability and positive intent to hold to maturity regardless of
changes in market condition, liquidity needs or changes in general economic
conditions. These securities are stated at cost, adjusted for amortization of
premiums and accretion of discounts, over the period to maturity using the
interest method.
Securities classified as available for sale are those securities that the
Bank intends to hold for an indefinite period of time, but not necessarily to
maturity. Any decision to sell a security classified as available for sale
would be based on various factors, including significant movements in interest
rates, changes in the maturity mix of the Bank's assets and liabilities,
liquidity needs, regulatory capital considerations and other similar factors.
These securities are carried at fair value with unrealized gains or losses
reported as increases or decreases in retained earnings, net of the related
deferred tax effect. Realized gains or losses, determined on the basis of the
cost of specific securities sold, are included in earnings.
Trading securities are those securities which the Bank purchases and holds
principally for the purpose of selling them in the near term. These securities
are carried at fair value with unrealized gains or losses included in
earnings.
Loans Receivable
Loans receivable are stated at unpaid principal balances, less unearned
discounts and premiums and net deferred loan origination fees. Interest on
loans is credited to income as earned, except interest which is not accrued on
loans contractually delinquent three months or more. Premiums or discounts on
purchased loans, loans acquired through merger and property loans are
amortized into income over the period to maturity using the interest method.
Loan origination fees received in excess of certain direct origination costs
are deferred and amortized into income over the life of the loan using the
interest method or recognized when the loan is sold.
The Bank also originates mortgage loans for sale in the secondary market.
Mortgage loans held for sale are carried at the lower of cost or market value,
determined on an individual loan basis.
F-7
<PAGE>
FIRST FEDERAL LINCOLN BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DATA AS OF AND FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Provisions for Losses
Provisions for losses on loans, accrued interest and real estate are charged
to earnings when it is determined by management to be required. Management's
periodic evaluation of the adequacy of allowance accounts is based on the
Bank's past loss experience, known and inherent risks related to the assets,
adverse situations that may affect a borrower's ability to repay, estimated
value of the underlying collateral and current and prospective economic
conditions.
Management believes the allowances for losses on loans and real estate are
adequate. While management uses available information to recognize losses on
loans and real estate, future additions to the allowances may be necessary
based on changes in economic conditions. In addition, various regulatory
agencies, as an integral part of their examination process, periodically
review the Bank's allowances for losses on loans and real estate. Such
agencies may require the Bank to recognize additions to the allowances based
on their judgments of information available to them at the time of their
examination.
Additionally, accrual of interest and amortization of deferred loan fees on
potential problem loans are excluded from income when, in the opinion of
management, such suspension is warranted. Income is subsequently recognized
only to the extent cash payments are received until, in management's judgment,
the borrower's ability to make periodic interest and principal payments is
back to normal, in which case the loan is returned to accrual status.
Effective in 1996, the Bank adopted FAS No. 114, Accounting by Creditors for
Impairment of a Loan and FAS No. 118, Accounting by Creditors for Impairment
of a Loan--Income Recognition and Disclosures. Under the Bank's credit
policies and practices, all nonaccrual and restructured commercial,
agricultural, construction and commercial real estate loans meet the
definition of impaired loans under FAS No. 114 and No. 118. Impaired loans as
defined by FAS No. 114 and No. 118 exclude certain consumer loans and
residential real estate loans classified as nonaccrual. Loan impairment is
measured based on the present value of expected future cash flows discounted
at the loan's effective interest rate or, as a practical expedient, at the
observable market price of the loan or the fair value of the collateral if the
loan is collateral dependent. The adoption of FAS No. 114 and No. 118 did not
have a material effect on the Bank's financial position or results of
operations.
Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. The allowance for loan losses and
related provision as described above, present the significant area requiring
management judgment and estimate. Actual results could differ from those
estimates.
Real Estate Held for Investment
Real estate properties held for investment are carried at cost, including
cost of improvements, holding costs and amenities incurred subsequent to
acquisition. The portion of interest costs related to development of real
estate is capitalized. Depreciation is computed using the straight-line method
over the estimated useful lives of the related assets. The valuation allowance
was established to reduce the carrying value of the asset for estimated
holding costs and selling expenses.
Real Estate Owned
Real estate acquired through foreclosure is considered to be held for sale,
thus is initially recorded at estimated fair value (carrying value).
Subsequent to foreclosure, these assets are carried at the lower of carrying
F-8
<PAGE>
FIRST FEDERAL LINCOLN BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DATA AS OF AND FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
value or fair value, less selling costs. Change in the valuation allowances
for unrealized gains and losses and income and operating expenses are included
in noninterest income of the current period.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are computed using the straight-
line method over the estimated useful lives of the related assets. Estimated
lives are 10 to 50 years for buildings and improvements and 2 to 10 years for
furniture, fixtures and equipment.
Income Taxes
The Bank files a consolidated Federal income tax return on a calendar-year
basis. Deferred income taxes arise from the recognition of certain items of
revenue and expense for tax purposes in years different from those in which
they are recognized in the consolidated financial statements.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Intangible Assets
In July 1995, the Bank acquired certain assets of First Bank, N.A. in
consideration for the assumption of certain liabilities of approximately
$21,500,000 using the purchase method. Goodwill of $652,257 related to this
purchase, representing the cost of acquisition in excess of the fair value, is
being amortized on a straight-line basis over 5 years.
Overdrawn Cash Account in Bank
The Bank has an arrangement with a correspondent bank to write teller
checks, interest checks, and corporate checks on a corporate checking account.
The checks are funded by the Bank on a daily basis.
Reclassifications
Certain prior year amounts have been reclassified to conform with 1997
presentation.
(2) INVESTMENT SECURITIES
Investment securities at September 30, 1997 and June 30, 1997 and 1996 are
summarized below.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-------------------------------------
GROSS
UNREALIZED
AMORTIZED --------------
COST GAINS LOSSES FAIR VALUE
----------- ------ ------- ----------
<S> <C> <C> <C> <C>
Held to maturity:
U.S. Government
obligations............ $24,980,944 25,880 79,480 24,927,344
U.S. Government agency
obligations............ 32,963,267 49,233 45,312 32,967,188
Corporate commercial
paper.................. 500,000 2,812 -- 502,812
Municipal obligations... 215,693 -- -- 215,693
----------- ------ ------- ----------
$58,659,904 77,925 124,792 58,613,037
=========== ====== ======= ==========
</TABLE>
F-9
<PAGE>
FIRST FEDERAL LINCOLN BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DATA AS OF AND FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
IS UNAUDITED)
(2) INVESTMENT SECURITIES--(CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, 1997
----------------------------------------------
GROSS UNREALIZED
AMORTIZED ---------------------
COST GAINS LOSSES FAIR VALUE
------------ ---------- ---------- -----------
<S> <C> <C> <C> <C>
Held to maturity:
U.S. Government
obligations.............. $ 32,973,002 24,105 137,263 32,859,844
U.S. Government agency
obligations.............. 59,957,111 23,984 186,471 59,794,624
Corporate commercial
paper.................... 1,002,294 1,612 -- 1,003,906
Municipal obligations..... 220,793 -- -- 220,793
Other..................... 95,000 -- 31 94,969
------------ ---------- ---------- -----------
$ 94,248,200 49,701 323,765 93,974,136
============ ========== ========== ===========
<CAPTION>
JUNE 30, 1996
----------------------------------------------
GROSS UNREALIZED
AMORTIZED ---------------------
COST GAINS LOSSES FAIR VALUE
------------ ---------- ---------- -----------
<S> <C> <C> <C> <C>
Held to maturity:
U.S. Government
obligations.............. $ 46,462,031 12,351 411,922 46,062,460
U.S. Government agency
obligations.............. 76,889,419 26,715 693,985 76,222,149
Corporate commercial
paper.................... 6,366,654 2,335 1,520 6,367,469
Municipal obligations..... 734,986 -- -- 734,986
Other..................... 190,000 -- 1,026 188,974
------------ ---------- ---------- -----------
$130,643,090 41,401 1,108,453 129,576,038
============ ========== ========== ===========
The amortized cost and estimated fair value of debt securities held to
maturity at September 30, 1997 and June 30, 1997, by contractual maturity, are
shown below. Expected maturities will differ from the contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<CAPTION>
SEPTEMBER 30, 1997 JUNE 30, 1997
----------------------- ----------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
------------ ---------- ---------- -----------
<S> <C> <C> <C> <C>
Held to maturity:
Due in one year or less... $ 52,478,342 52,434,531 64,558,538 64,522,469
Due after one year through
five years............... 5,965,869 5,962,813 29,468,869 29,230,874
Due after five years
through ten years........ 215,693 215,693 220,793 220,793
------------ ---------- ---------- -----------
$ 58,659,904 58,613,037 94,248,200 93,974,136
============ ========== ========== ===========
</TABLE>
Proceeds from sales of investment securities available for sale were
$948,125 during the year ended June 30, 1996. Gross gains of $274 were
realized on those sales.
There were no sales of investment securities held to maturity during the
three-month periods ended September 30, 1997 and 1996 and the years ended June
30, 1997, 1996 or 1995 or available for sale investment securities during the
three-month periods ended September 30, 1997 and 1996 and the years ended June
30, 1997 and 1995.
F-10
<PAGE>
FIRST FEDERAL LINCOLN BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DATA AS OF AND FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
IS UNAUDITED)
(3) MORTGAGE-BACKED SECURITIES
Mortgage-backed securities at September 30, 1997 and June 30, 1997 and 1996,
consisting of pass-through certificates, are summarized on the below:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------------------
GROSS
UNREALIZED
AMORTIZED ---------------
COST GAINS LOSSES FAIR VALUE
----------- ------- ------- ----------
<S> <C> <C> <C> <C>
Held to maturity:
FNMA............................... $33,328,334 65,281 406,996 32,986,619
FHLMC.............................. 12,223,471 110,568 -- 12,334,039
GNMA--ARMs......................... 23,567,731 495,889 -- 24,063,620
FNMA--ARMs......................... 2,467,961 36,327 -- 2,504,288
FHLMC--ARMs........................ 3,432,575 53,513 -- 3,486,088
FHLMC--CMO......................... 3,216,649 26,339 252 3,242,736
FNMA--REMIC........................ 1,540,199 3,649 -- 1,543,848
FHLMC--REMIC....................... 494,837 -- -- 494,837
Other.............................. 141,445 6,262 -- 147,707
----------- ------- ------- ----------
$80,413,202 797,828 407,248 80,803,782
=========== ======= ======= ==========
Available for sale, GNMA............. $ 748,960 -- 2,494 746,466
=========== ======= ======= ==========
<CAPTION>
JUNE 30, 1997
--------------------------------------
GROSS
UNREALIZED
AMORTIZED ---------------
COST GAINS LOSSES FAIR VALUE
----------- ------- ------- ----------
<S> <C> <C> <C> <C>
Held to maturity:
FNMA............................... $34,914,849 47,946 730,112 34,232,683
FHLMC.............................. 12,835,382 31,486 40,145 12,826,723
GNMA--ARMs......................... 24,797,265 436,079 -- 25,233,344
FNMA--ARMs......................... 3,055,210 28,848 -- 3,084,058
FHLMC--ARMs........................ 3,751,291 34,752 -- 3,786,043
FHLMC--CMO......................... 3,337,217 34,159 -- 3,371,376
FNMA--REMIC........................ 1,889,644 -- 2,089 1,887,555
FHLMC--REMIC....................... 636,984 -- -- 636,984
Other.............................. 154,035 5,863 -- 159,898
----------- ------- ------- ----------
$85,371,877 619,133 772,346 85,218,664
=========== ======= ======= ==========
Available for sale, GNMA............. $ 763,369 -- 13,409 749,960
=========== ======= ======= ==========
</TABLE>
F-11
<PAGE>
FIRST FEDERAL LINCOLN BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DATA AS OF AND FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
IS UNAUDITED)
(3) MORTGAGE-BACKED SECURITIES--(CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, 1997
----------------------------------------
GROSS UNREALIZED
AMORTIZED -----------------
COST GAINS LOSSES FAIR VALUE
----------- ------- --------- ----------
<S> <C> <C> <C> <C>
Held to maturity:
FNMA............................. $40,498,146 47,111 1,487,881 39,057,376
FHLMC............................ 14,688,739 28,879 337,171 14,380,447
GNMA--ARMs....................... 27,849,250 177,924 121,919 27,905,255
FNMA--ARMs....................... 3,135,396 27,389 -- 3,162,785
FHLMC--ARMs...................... 2,885,716 28,846 -- 2,914,562
FNMA--CMO........................ 589,906 -- 369 589,537
FHLMC--CMO....................... 2,810,315 21,618 282 2,831,651
FNMA--REMIC...................... 2,740,955 453 11,633 2,729,775
FHLMC--REMIC..................... 1,626,003 -- 1,563 1,624,440
Other............................ 206,053 8,202 -- 214,255
----------- ------- --------- ----------
$97,030,479 340,422 1,960,818 95,410,083
=========== ======= ========= ==========
Available for sale, GNMA........... $ 873,791 -- 30,715 843,076
=========== ======= ========= ==========
</TABLE>
As mortgage-backed securities are not due at a single maturity, a maturity
schedule has not been estimated and is not included.
Proceeds from sales of mortgage-backed securities available for sale were
$565,251, $565,251 and $1,014,135 during the three-month period ended
September 30, 1996 and the years ended June 30, 1997 and 1996, respectively.
Gross gains of $1,410, $1,410 and $4,892 were realized on those sales during
the three-month period ended September 30, 1996 and the years ended June 30,
1997 and 1996, respectively.
There were no sales of held to maturity or available for sale mortgage-
backed securities during the three-month period ended September 30, 1997 or
the year ended June 30, 1995.
(4) LOANS RECEIVABLE
Loans receivable at September 30, 1997 and June 30, 1997 and 1996 are
summarized on the following page.
<TABLE>
<CAPTION>
JUNE 30,
SEPTEMBER 30, ------------------------
1997 1997 1996
------------- ----------- -----------
<S> <C> <C> <C>
Real estate:
One-to-four family.............. $521,678,914 531,110,247 487,742,820
Commercial real estate, multi-
family and land................ 183,520,134 187,813,261 176,819,061
Construction.................... 47,043,999 41,109,571 38,465,703
Consumer and property
improvement loans.............. 93,156,185 81,944,526 37,450,652
------------ ----------- -----------
845,399,232 841,977,605 740,478,236
Less:
Allowance for loan losses....... (7,022,510) (6,329,897) (5,917,846)
Deferred loan fees.............. (2,154,010) (2,151,012) (2,457,435)
Unearned premiums and
discounts...................... 90,181 96,611 (52,134)
Discounts on loans acquired
through merger................. (944,892) (1,013,300) (1,269,333)
Undisbursed portion of loans in
process........................ (16,907,907) (17,698,658) (17,269,923)
------------ ----------- -----------
$818,460,094 814,881,349 713,511,565
============ =========== ===========
</TABLE>
F-12
<PAGE>
FIRST FEDERAL LINCOLN BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DATA AS OF AND FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
IS UNAUDITED)
(4) LOANS RECEIVABLE--(CONTINUED)
In May 1996, the Bank sold the VISA credit card loan portfolio for
approximately $1,483,000 recording a gain of $100,969.
The one-to-four family real estate loans above include $1,502,000,
$1,271,150 and $828,200 of loans held for sale at September 30, 1997 and June
30, 1997 and 1996, respectively.
The activity in the allowance for loan losses is summarized below:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
--------------------- -------------------------------
1997 1996 1997 1996 1995
---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at beginning of
year................... $6,329,897 5,917,846 5,917,846 5,642,122 5,965,646
Provision for loan
losses................. 713,412 95,708 450,240 598,414 243,133
Losses charged off...... (24,872) (48,078) (63,881) (350,081) (578,740)
Recoveries.............. 4,073 5,323 25,692 27,391 12,083
---------- --------- --------- --------- ---------
Balance at end of year.. $7,022,510 5,970,799 6,329,897 5,917,846 5,642,122
========== ========= ========= ========= =========
</TABLE>
Certain executive officers and directors of the Bank have indebtedness, in
the form of loans, as customers. These loans were made on substantially the
same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with other customers and did not involve
more than the normal risk of collectibility. These loans amounted to
approximately $427,000, $722,000 and $750,000 at September 30, 1997 and June
30, 1997 and 1996, respectively. The change in loans to certain executive
officer and directors include only repayments as the Bank adopted the policy
to cease making loans to officers, directors and employees.
The Financial Accounting Standards Board has issued Statements No. 114 and
No. 118. The statements, which were effective for financial statements issued
for fiscal years beginning after December 15, 1994, require impaired loans be
measured at the present value of expected future cash flows by discounting
those cash flows generally at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or the fair value
of the collateral if the loan is collateral dependent. The statements also
require troubled debt restructurings involving a modification of terms be
remeasured on a discounted basis. The Bank adopted these statements on July 1,
1995.
Total impaired loans, including nonaccrual loans and restructured loans,
aggregated approximately $2,920,000, $5,047,000 and $4,313,000 at September
30, 1997 and June 30, 1997 and 1996, respectively. The average balances of
impaired loans for the three-month period ended September 30, 1997 and the
years ended June 30, 1997 and 1996 were approximately $4,559,000, $4,606,000,
and $5,522,000, respectively. Impaired loans were not subject to a related
specific allowance for loan losses at September 30, 1997 and June 30, 1997 and
1996, respectively, because of the net realizable value of loan collateral,
guarantees and other factors.
The effect of non-accrual and restructured loans on interest income is
summarized below:
<TABLE>
<CAPTION>
SEPTEMBER 30 JUNE 30
-------------- -----------------------
1997 1996 1997 1996 1995
------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
Interest income:
As originally contracted........... $48,000 34,000 115,000 301,000 396,000
As recognized...................... -- -- -- -- 23,000
------- ------ ------- ------- -------
Reduction of interest income......... $48,000 34,000 115,000 301,000 373,000
======= ====== ======= ======= =======
</TABLE>
F-13
<PAGE>
FIRST FEDERAL LINCOLN BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DATA AS OF AND FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
IS UNAUDITED)
(4) LOANS RECEIVABLE--(CONTINUED)
There were no material commitments to lend additional funds to customers
whose loans were classified as impaired at September 30, 1997 and June 30,
1997 and 1996.
The Bank serviced loans for others amounting to approximately $19,835,000,
$21,828,000, $19,903,000, $23,066,000 and $29,091,000 at September 30, 1997
and 1996 and June 30, 1997, 1996 and 1995, respectively. Loans serviced for
others are not included in the accompanying consolidated statements of
financial condition. Servicing loans for others consists of collecting
mortgage payments, maintaining escrow accounts, disbursing payments to
investors and foreclosure processing. In connection with these loans serviced
for others, the Bank held borrowers' escrow balances of approximately
$380,000, $386,000, $380,000, $371,000 and $421,000 at September 30, 1997 and
1996 and June 30, 1997, 1996 and 1995, respectively.
(5) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at September 30, 1997 and June 30, 1997 and 1996
is summarized below:
<TABLE>
<CAPTION>
JUNE 30,
SEPTEMBER 30, -------------------
1997 1997 1996
------------- --------- ---------
<S> <C> <C> <C>
Investment securities...................... $ 772,589 1,499,945 1,978,315
Mortgage-backed securities................. 500,562 526,726 589,234
Loans receivable........................... 5,201,259 5,038,469 4,615,916
---------- --------- ---------
$6,474,410 7,065,140 7,183,465
========== ========= =========
</TABLE>
(6) INVESTMENT IN FEDERAL HOME LOAN BANK STOCK
The investment in Federal Home Loan Bank (FHLB) stock is carried at cost and
the Bank was required to hold approximately $6,693,000, $6,496,000 and
$6,036,850 at September 30, 1997 and June 30, 1997 and 1996, respectively.
(7) REAL ESTATE HELD FOR INVESTMENT
Real estate held for investment at September 30, 1997 and June 30, 1997 and
1996 is summarized below:
<TABLE>
<CAPTION>
JUNE 30,
SEPTEMBER 30, ----------------
1997 1997 1996
------------- ------- -------
<S> <C> <C> <C>
Land......................................... $ 95,300 95,300 95,300
Buildings.................................... 643,015 643,015 643,015
-------- ------- -------
738,315 738,315 738,315
Less accumulated depreciation................ (65,591) (60,999) (42,627)
-------- ------- -------
672,724 677,316 695,688
Less valuation allowance..................... (71,000) (71,000) (71,000)
-------- ------- -------
$601,724 606,316 624,688
======== ======= =======
</TABLE>
F-14
<PAGE>
FIRST FEDERAL LINCOLN BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DATA AS OF AND FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
IS UNAUDITED)
(8) REAL ESTATE OWNED
Real estate owned at September 30, 1997 and June 30, 1997 and 1996 is
summarized below:
<TABLE>
<CAPTION>
JUNE 30,
SEPTEMBER 30, --------------------
1997 1997 1996
------------- --------- ---------
<S> <C> <C> <C>
Real estate owned........................ $1,639,846 1,823,408 1,467,302
Less valuation allowance................. (469,802) (361,802) (76,240)
---------- --------- ---------
$1,170,044 1,461,606 1,391,062
========== ========= =========
</TABLE>
The activity in the valuation allowance is summarized below:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
---------------- ----------------------------
1997 1996 1997 1996 1995
-------- ------- ------- -------- ----------
<S> <C> <C> <C> <C> <C>
Balance at beginning of
year....................... $361,802 76,240 76,240 787,500 2,229,710
Provision for real estate
losses..................... 108,000 93,062 285,562 76,240 (102,409)
Losses charged off.......... -- -- -- (787,500) (1,339,801)
-------- ------- ------- -------- ----------
Balance at end of year...... $469,802 169,302 361,802 76,240 787,500
======== ======= ======= ======== ==========
</TABLE>
(9) PREMISES AND EQUIPMENT
Premises and equipment at September 30, 1997 and June 30, 1997 and 1996 are
summarized below:
<TABLE>
<CAPTION>
JUNE 30,
SEPTEMBER 30, ------------------------
1997 1997 1996
------------- ----------- -----------
<S> <C> <C> <C>
Land............................... $ 3,259,405 3,167,447 3,162,841
Buildings.......................... 13,445,801 12,996,929 12,220,806
Leasehold improvements............. 1,906,217 1,905,581 1,859,519
Furniture, fixtures and equipment.. 5,972,929 5,978,677 5,767,568
Computer equipment................. 3,425,950 3,393,816 3,190,449
Vehicles........................... 236,436 236,436 207,916
----------- ----------- -----------
28,246,738 27,678,886 26,409,099
Less accumulated depreciation and
amortization...................... (15,202,202) (14,855,804) (13,504,635)
----------- ----------- -----------
$13,044,536 12,823,082 12,904,464
=========== =========== ===========
</TABLE>
F-15
<PAGE>
FIRST FEDERAL LINCOLN BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DATA AS OF AND FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
IS UNAUDITED)
(10) DEPOSITS
Deposits at September 30, 1997 and June 30, 1997 and 1996 are summarized on
the following page.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 JUNE 30, 1997 JUNE 30, 1996
--------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RATES AMOUNT RATES AMOUNT RATES AMOUNT
-------- ------------ -------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing
checking............... -- % $ 7,238,903 -- % $ 5,643,281 -- % $ 6,650,577
Passbook................ 2.00 12,025,865 2.00 12,201,010 2.00 14,704,722
Interest-bearing
checking............... 2.55 74,617,483 2.78 75,968,157 3.38 85,640,176
4.68 292,701,663 4.76 290,068,711 4.45 248,586,736
==== ------------ ==== ------------ ==== ------------
Money market............ 386,583,914 383,881,159 355,582,211
------------ ------------ ------------
41.85% 41.73% 38.26%
============ ============ ============
Certificate accounts:
1.00% to 2.99%......... 95,681 124,828 430,721
3.00 to 4.99........... 3,130,947 3,695,652 14,675,521
5.00 to 6.99........... 532,051,306 530,454,331 507,041,497
7.00 and over.......... 1,807,486 1,963,615 51,584,179
------------ ------------ ------------
5.75% 537,085,420 5.73% 536,238,426 5.74% 573,731,918
==== ------------ ==== ------------ ==== ------------
58.15% 58.27% 61.74%
============ ============ ============
5.06% $923,669,334 5.09% $920,119,585 5.08% $929,314,129
==== ============ ==== ============ ==== ============
100.0% 100.0% 100.0%
============ ============ ============
</TABLE>
At September 30, 1997 and June 30, 1997, scheduled maturities of certificate
accounts are shown below:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 JUNE 30, 1997
-------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT
------------ ------- ------------ -------
<S> <C> <C> <C> <C>
1998.............................. $394,055,005 73.37% $358,880,629 66.93%
1999.............................. 90,982,812 16.94 129,652,874 24.18
2000.............................. 14,192,400 2.64 12,077,139 2.25
2001.............................. 15,789,523 2.94 11,179,254 2.08
2002.............................. 20,945,653 3.90 22,902,146 4.27
Thereafter........................ 1,120,027 .21 1,546,384 .29
------------ ------ ------------ ------
$537,085,420 100.00% $536,238,426 100.00%
============ ====== ============ ======
</TABLE>
At September 30, 1997 and June 30, 1997 and 1996, time deposits over $100,000
approximated $27,779,000, $11,975,000 and $13,851,000, respectively. The
deposits of the Bank are insured up to $100,000 by the Savings Association
Insurance Fund, which is administered by the FDIC and is backed by the full
faith and credit of the U.S. Government.
F-16
<PAGE>
FIRST FEDERAL LINCOLN BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DATA AS OF AND FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
IS UNAUDITED)
(10) DEPOSITS--(CONTINUED)
Interest expense, by each category of deposits, for the three-month periods
ended September 30, 1997 and 1996 and for the years ended June 30, 1997, 1996
and 1995 is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
---------------------- --------------------------------
1997 1996 1997 1996 1995
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Passbook accounts....... $ 60,734 72,200 269,862 306,632 395,354
Interest-bearing
checking accounts...... 525,146 527,667 2,086,775 1,664,213 1,275,499
Money market accounts... 3,448,067 2,952,557 12,598,640 10,447,769 8,815,389
Certificate accounts.... 7,757,185 8,053,330 31,590,787 34,746,431 33,222,713
----------- ---------- ---------- ---------- ----------
$11,791,132 11,605,754 46,546,064 47,165,045 43,708,955
=========== ========== ========== ========== ==========
</TABLE>
(11) ADVANCES FROM FHLB
At September 30, 1997 and June 30, 1997 and 1996, the Bank was indebted to
the FHLB of Topeka on notes maturing as shown below:
<TABLE>
<CAPTION>
JUNE 30,
INTEREST SEPTEMBER 30, ----------------------
RATE RANGE 1997 1997 1996
---------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
1997........................ 6.71-7.14% $ -- -- 13,000,000
1998........................ 5.56 -- 11,000,000 --
1999........................ 5.66 5,000,000 5,000,000 --
2002........................ 6.27 5,000,000 5,000,000 --
2009........................ 6.83 565,250 568,700 598,500
----------- ---------- ----------
$10,565,250 21,568,700 13,598,500
=========== ========== ==========
Weighted-average interest rate......... 5.97% 5.78% 6.87%
=========== ========== ==========
</TABLE>
The Bank also has a line of credit of $125,000,000 with the FHLB at an
adjustable interest rate (6.65% and 6.40% at September 30, 1997 and June 30,
1997, respectively) which expires in 1998. There was no outstanding balance on
this line of credit at September 30, 1997 and June 30, 1997 and 1996.
Pursuant to blanket collateral agreements with the FHLB, the advances are
secured by the Bank's FHLB stock, qualifying first mortgage loans and other
investment and mortgage-backed securities totaling approximately $131,325,000
and $146,746,000 at September 30, 1997 and June 30, 1997, respectively, which
exceeds the amount of outstanding advances using the collateral valuation
schedule method.
(12) ADVANCES FROM BORROWERS FOR TAXES AND INSURANCE
The Bank has a custodial mortgage account with the FHLB of Topeka. At
September 30, 1997 and June 30, 1997 and 1996, the Bank maintained
approximately $6,800,000, $5,700,000 and $6,000,000, respectively, of its
advances from borrowers for taxes and insurance in this trust account. The
related asset and liability balances are not reported in the financial
statements. This account earns a rate equal to the federal funds sold rate
less 15 basis points (5.67% and 6.56% at September 30, 1997 and June 30, 1997,
respectively). The funds remain in this account until the Bank authorizes them
to be transferred for disbursement.
F-17
<PAGE>
FIRST FEDERAL LINCOLN BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DATA AS OF AND FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
IS UNAUDITED)
(13) INCOME TAXES
Income tax expense (benefit) for the three-month periods ended September 30,
1997 and 1996 and for the years ended June 30, 1997, 1996 and 1995 consists of
the following components:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
---------------------- ------------------------------
1997 1996 1997 1996 1995
---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Federal:
Current............ $1,005,106 (1,248,604) 1,699,612 2,867,352 2,282,021
Deferred........... (160,006) 428,604 700,588 (214,252) 163,681
---------- ---------- --------- --------- ---------
845,100 (820,000) 2,400,200 2,653,100 2,445,702
State................ 109,717 (85,328) 294,436 (117,902) 198,204
---------- ---------- --------- --------- ---------
$ 954,817 (905,328) 2,694,636 2,535,198 2,643,906
========== ========== ========= ========= =========
</TABLE>
The actual income tax expense (benefit) differs from the "expected" income
tax expense (computed by applying the statutory 34% Federal tax rate to income
before income tax expense (benefit)) as shown below:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
------------------ -------------------------------
1997 1996 1997 1996 1995
-------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
"Expected" income tax
expense (benefit)...... $883,258 (887,879) 2,391,819 2,689,331 2,278,977
Increase (decrease)
resulting from:
Net operating loss
carryforward......... -- -- -- -- (34,000)
State income tax
deduction............ 72,413 -- 194,327 224,505 (130,815)
Bad debt deduction.... -- -- -- 267,931 201,270
Gain on sale of real
estate owned......... -- 237 1,438 (194,502) 95,045
Change in valuation
allowance for
deferred tax assets.. -- -- -- 372,561 94,457
Tax exempt interest
income............... (1,545) (4,350) (4,866) (17,574) (14,210)
Refund of prior years
state taxes, net..... -- -- -- (302,320) --
Change in estimated
deferred
tax liabilities...... -- -- -- (539,164) 145,261
Other................. 691 (13,336) 111,918 34,430 7,921
-------- -------- --------- --------- ---------
Total income tax expense
(benefit).............. $954,817 (905,328) 2,694,636 2,535,198 2,643,906
======== ======== ========= ========= =========
Effective tax rate...... 36.8% (34.7%) 38.3% 32.1% 39.4%
======== ======== ========= ========= =========
</TABLE>
F-18
<PAGE>
FIRST FEDERAL LINCOLN BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DATA AS OF AND FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
IS UNAUDITED)
(13) INCOME TAXES--(CONTINUED)
The significant items comprising the Bank's net deferred income tax
liability as of September 30, 1997 and June 30, 1997 and 1996 are shown below:
<TABLE>
<CAPTION>
JUNE 30,
SEPTEMBER 30, ----------------------
1997 1997 1996
------------- ---------- ----------
<S> <C> <C> <C>
Deferred tax liabilities:
Deferred fees on loans............. $ 770,988 745,468 352,273
Basis in FHLB stock................ 1,709,529 1,666,485 1,519,367
Fixed asset depreciation........... 432,258 424,844 235,224
Other.............................. 291,733 276,121 259,853
----------- ---------- ----------
Deferred tax liabilities......... 3,204,508 3,112,918 2,366,717
----------- ---------- ----------
Deferred tax assets:
Net unrealized losses on
securities........................ 848 4,559 10,443
Loan fees.......................... 851,839 856,822 852,227
Deferred compensation.............. 966,012 921,067 758,835
Amortization of goodwill........... 172,761 217,099 394,453
Allowance for loan losses.......... 1,424,507 1,114,457 936,100
Discounts on purchased loans....... 296,783 318,941 399,068
Other.............................. 429,369 461,290 503,379
Valuation allowance on deferred tax
assets............................ (1,500,000) (1,500,000) (1,500,000)
----------- ---------- ----------
2,642,119 2,394,235 2,354,505
----------- ---------- ----------
Net deferred income tax
liability....................... $ 562,389 718,683 12,212
=========== ========== ==========
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will be realized. Management considers the scheduled reversals of
deferred tax liabilities, taxable income and tax planning strategies in making
this assessment in determining the amount of the valuation allowance.
Retained earnings at September 30, 1997 and June 30, 1997 includes
approximately $7,650,000, at each date, for which no Federal income tax
liability has been provided. Such amount represents the bad debt reserves for
tax purposes which were accumulated in tax years through the year ended
December 31, 1987 (the base year). These amounts represent allocations of
income to bad debt deductions for tax purposes only. The Small Business
Protection Act (Act) passed by Congress during 1996, requires that savings and
loan associations recapture into taxable income bad debt reserves, which were
accumulated in taxable years after December 31, 1987, and which exceeded
certain guidelines. The Bank's recorded deferred tax liability provides for
the approximately $1,100,000 of income tax expense associated with the
recapture of loan loss reserves. Reductions of the remaining allocated
retained earnings for purposes other than tax bad debt losses will create
taxable income, which will be subject to the then current corporate income tax
rate.
F-19
<PAGE>
FIRST FEDERAL LINCOLN BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DATA AS OF AND FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
IS UNAUDITED)
(14) EMPLOYEE BENEFIT PLANS
Retirement Plan
The Bank has a qualified, noncontributory defined benefit pension plan
covering substantially all full-time employees who are at least 21 years of
age and have completed one year of service (at least 1,000 hours). Generally,
the plan provides for benefits at normal retirement age of 65, or five years
after Plan entry date, if later, but may elect reduced benefits with early
retirement after completion of 10 years of service and reaching age 60. The
table below sets forth the plan's funded status at April 1, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Plan assets, at fair value........................ $12,779,562 11,929,854
----------- ----------
Projected benefit obligation:
Actuarial present value of accumulated
benefits....................................... 9,178,819 9,044,785
Effect of projected salary increases............ 1,649,665 1,748,789
----------- ----------
Projected benefit obligation...................... 10,828,484 10,793,574
----------- ----------
Excess of plan assets over projected benefit
obligation....................................... (1,951,078) (1,136,280)
Unrecognized transitional obligation.............. (18,158) (21,790)
Unrecognized net gain from past experience
different from assumptions....................... 2,863,513 1,936,061
----------- ----------
Accrued pension liability..................... $ 894,277 777,991
=========== ==========
</TABLE>
Plan assets are primarily listed stocks, corporate bonds and U.S. Government
securities. At April 1, 1997 and 1996, the expected long-term rate of return
on assets is 8.0%.
At April 1, 1997 and 1996, the projected benefit obligation was determined
using an assumed discount rate of 7.25% and 6.75%, respectively, and an annual
compensation increase of 5.73% at each date, over the remaining service lives
of employees covered under the plan.
The projected benefit obligation includes vested benefits of $9,031,632 and
$8,895,547 at April 1, 1997 and 1996, respectively. Net pension cost included
the following components for 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- --------
<S> <C> <C> <C>
Service cost.............................. $ 359,433 343,422 588,255
Interest cost............................. 716,191 683,092 777,350
Actual return on plan assets.............. (1,239,085) (1,668,773) (481,262)
Net amortization and deferral............. 279,747 832,298 (281,046)
----------- ---------- --------
Net period pension cost................... $ 116,286 190,039 603,297
=========== ========== ========
</TABLE>
Savings Plan
In addition, the Bank has a defined contribution 401(k) profit sharing plan.
Under the plan, each employee may contribute from 1% to 15% of their salary.
In 1997, 1996 and 1995, respectively, the Bank contributed 66 2/3%, 50% and
50% of the employee's contribution to a maximum of 6% of the employee's salary
(including bonus, commission, overtime or other special compensation up to
$6,000). The 401(k) plan expense, net of forfeitures, for the three-month
periods ended September 30, 1997 and 1996 and for the years ended June 30,
1997, 1996 and 1995 was $72,875, $65,361, $284,848, $199,645 and $188,279,
respectively.
F-20
<PAGE>
FIRST FEDERAL LINCOLN BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DATA AS OF AND FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
IS UNAUDITED)
(14) EMPLOYEE BENEFIT PLANS--(CONTINUED)
Deferred Compensation Plan
The Bank has deferred compensation agreements with certain officers and
directors of the Bank. The agreements permit certain officers and directors to
defer a portion of their salary until future years. The deferred compensation
is not available to the officers and directors until retirement and a minimum
numbers of years of service, death or disability.
The expense related to the agreements was approximately $116,000, $111,000,
$430,000, $244,000 and $268,000 in the three-month periods ended September 30,
1997 and 1996 and for the years ended June 30, 1997, 1996 and 1995,
respectively. The liability, included in accrued expenses and other
liabilities, was approximately $1,401,000, $1,312,000 and $1,052,000 at
September 30, 1997 and June 30, 1997 and 1996, respectively.
(15) REGULATORY CAPITAL REQUIREMENTS
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. The regulations require the Bank to meet specific
capital adequacy 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 classification is also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Under the Financial Institutions Reform, Recovery and Enforcement Act of
1989 (FIRREA), and in implementing Office of Thrift Supervision regulatory
capital regulations, the Bank must maintain minimum amounts and ratios of
tangible capital to total tangible assets, core (leverage) capital to adjusted
tangible assets, and total (risk-based) capital to risk-weighted assets.
Management believes, as of September 30, 1997, that the Bank meets all capital
adequacy requirements to which it is subject.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
established additional capital regulations which require prompt correction
action against depository institutions in one of the under-capitalized
categories as defined in implementing regulations. In addition to the prompt
corrective actions requirements, FDICIA included significant changes to the
legal and regulatory environment for insured depository institutions.
F-21
<PAGE>
FIRST FEDERAL LINCOLN BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DATA AS OF AND FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
IS UNAUDITED)
(15) REGULATORY CAPITAL REQUIREMENTS--(CONTINUED)
As of September 30, 1997, the most recent notification from the Office of
Thrift Supervision, categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain tangible capital, core (leverage) capital
and total (risk-based) capital ratios as set forth in the table shown below
(dollars in thousands):
<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
------------- -------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- -------- ----- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1997:
Total capital (to risk-
weighted assets)........... $86,765 14.3% *$48,475 *8.0% *$60,593 *10.0%
Core Capital (to adjusted
tangible assets)........... $80,345 7.8% *$41,369 *4.0% *$51,711 * 5.0%
Tangible Capital (to
tangible assets)........... $80,345 7.8% *$15,513 *1.5% N/A
Tier I Capital (to risk-
weighted assets)........... $80,345 13.3% N/A *$36,365 * 6.0%
As of June 30, 1997:
Total capital (to risk-
weighted assets)........... $84,406 14.2% *$47,640 *8.0% *$59,550 *10.0%
Core Capital (to adjusted
tangible assets)........... $78,682 7.5% *$41,691 *4.0% *$52,113 * 5.0%
Tangible Capital (to
tangible assets)........... $78,682 7.5% *$15,634 *1.5% N/A
Tier I Capital (to risk-
weighted assets)........... $78,682 13.2% N/A *$35,730 * 6.0%
As of June 30, 1996:
Total capital (to risk-
weighted assets)........... $79,473 15.2% *$41,823 *8.0% *$52,279 *10.0%
Core Capital (to adjusted
tangible assets)........... $74,262 7.2% *$41,511 *4.0% *$51,889 * 5.0%
Tangible Capital (to
tangible assets)........... $74,262 7.2% *$15,567 *1.5% N/A
Tier I Capital (to risk-
weighted assets)........... $74,262 14.2% N/A *$31,367 * 6.0%
</TABLE>
- --------
* Greater than or equal to.
The Bank's management believes that with respect to the current regulations,
the Bank will continue to meet its minimum capital requirements in the
foreseeable future. However, events beyond the control of the Bank, such as
increased interest rates or a downturn in the economy in areas where the Bank
has most of its loans, could adversely affect future earnings and,
consequently, the ability of the Bank to meets its future minimum capital
requirements.
The following table shows a reconciliation between GAAP capital included in
these consolidated financial statements and consolidated regulatory capital
amounts as presented in the previous table (dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------
TANGIBLE CORE TOTAL
CAPITAL CAPITAL CAPITAL
-------- ------- -------
<S> <C> <C> <C>
GAAP Capital...................................... $80,562 80,562 80,562
Plus:
Unrealized losses on securities available for
sale, net...................................... 2 2 2
General loan valuation allowance for loan
losses......................................... -- -- 7,022
Less:
Deposit premium, net of taxes................... 219 219 219
Real estate held for investment................. -- -- 602
------- ------ ------
Regulatory Capital................................ $80,345 80,345 86,765
======= ====== ======
</TABLE>
F-22
<PAGE>
FIRST FEDERAL LINCOLN BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DATA AS OF AND FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
IS UNAUDITED)
(15) REGULATORY CAPITAL REQUIREMENTS--(CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, 1997
------------------------
TANGIBLE CORE TOTAL
CAPITAL CAPITAL CAPITAL
-------- ------- -------
<S> <C> <C> <C>
GAAP Capital...................................... $78,912 78,912 78,912
Plus:
Unrealized losses on securities available for
sale, net...................................... 9 9 9
General loan valuation allowance for loan
losses......................................... -- -- 6,330
Less:
Deposit premium, net of taxes................... 239 239 239
Real estate held for investment................. -- -- 606
------- ------ ------
Regulatory Capital................................ $78,682 78,682 84,406
======= ====== ======
<CAPTION>
JUNE 30, 1996
------------------------
TANGIBLE CORE TOTAL
CAPITAL CAPITAL CAPITAL
-------- ------- -------
<S> <C> <C> <C>
GAAP Capital...................................... $74,560 74,560 74,560
Plus:
Unrealized losses on securities available for
sale, net...................................... 20 20 20
General loan valuation allowance for loan
losses......................................... -- -- 5,836
Less:
Deposit premium, net of taxes................... 318 318 318
Real estate held for investment................. -- -- 625
------- ------ ------
Regulatory Capital................................ $74,262 74,262 79,473
======= ====== ======
</TABLE>
(16) LEASE COMMITMENTS
At September 30, 1997 and 1996 and June 30, 1997, 1996 and 1995, the Bank
was obligated under noncancelable operating leases for office space and
equipment. Certain leases contain escalation clauses providing for increased
rentals based primarily on increases in real estate taxes or in the average
consumer price index. Net rent expense under operating leases, included in net
occupancy expense, was approximately $108,600, $106,600, $427,200, $710,100
and $1,141,300 for the three-month periods ended September 30, 1997 and 1996
and for the years ended June 30, 1997, 1996 and 1995, respectively.
The approximate future minimum rental payments projected under the terms of
the leases are as follows:
<TABLE>
<S> <C>
Years Ending June 30
1998............................................................ $ 380,000
1999............................................................ 324,000
2000............................................................ 177,000
2001............................................................ 136,000
2002............................................................ 74,000
----------
$1,091,000
==========
</TABLE>
F-23
<PAGE>
FIRST FEDERAL LINCOLN BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DATA AS OF AND FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
IS UNAUDITED)
(17) FEDERAL INSURANCE PREMIUMS
In order to fully capitalize the Savings Association Insurance Fund (SAIF),
a one-time assessment was charged to all institutions that had SAIF-insured
deposits. In November 1996, the Bank paid a one-time assessment of $5,726,833
to the SAIF.
(18) FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates, methods and assumptions are set forth below for the
Bank's financial instruments.
General Assumptions
The Bank assumes the book value of short-term financial instruments, defined
as any items that mature or reprice within six months or less, approximate
their fair value. Short-term financial instruments consist of cash and cash
equivalents, accrued interest receivable, overdrawn cash account in bank,
advances from borrowers for taxes and insurance and accrued interest payable.
Investment and Mortgage-Backed Securities
For investment and mortgage-backed securities, fair value equals quoted
market price, if available, or quotations received from securities dealers. If
a quoted market price is not available, fair value is estimated using quoted
market prices for similar securities, adjusted for differences between the
quoted securities and the securities being valued.
Investment in FHLB Stock and Advances from FHLB
The fair value of FHLB stock is equivalent to its carrying amount due to it
only being redeemable at par value with the FHLB. The fair value of advances
from FHLB is the estimated market value of similar advances with comparable
maturities at interest rates currently offered by the FHLB.
Loans Receivable
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type, such as commercial, mortgage
and real estate, consumer and other. Each loan category is further segmented
into fixed and adjustable rate interest terms and by performing and
nonperforming categories.
The fair value of performing loans is estimated by discounting the future
contractual cash flows using the current rates at which similar loans would be
made to borrowers with similar credit ratings and for the same remaining
maturities. The allowance for loan losses, as recorded in these consolidated
financial statements, is considered by management to include a reasonable
estimation of the credit and market risk associated with nonperforming loans.
Deposits
The fair value of commercial, passbook, interest-bearing checking and money
market accounts is the amount payable on demand. The fair value of fixed-
maturity certificate accounts is based on the discounted value of contractual
cash flows. The discount rate is estimated using the rates currently offered
for deposits of similar remaining maturities.
Commitments To Originate Loans
The fair value of commitments to originate loans is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present credit worthiness of the
counterparties. For fixed rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates.
F-24
<PAGE>
FIRST FEDERAL LINCOLN BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DATA AS OF AND FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
IS UNAUDITED)
(18) FAIR VALUE OF FINANCIAL INSTRUMENTS--(CONTINUED)
The estimated fair values of the Bank's financial instruments as of
September 30, 1997 and June 30, 1997 and 1996 are presented in the following
table. Since the fair value of commitments to originate loans approximate book
value, these disclosures are not included in the table.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 JUNE 30, 1997 JUNE 30, 1996
------------------ ---------------- ----------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE VALUE VALUE
------------------ -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Financial Assets:
Cash and due from
banks................ $ 12,124 12,124 12,748 12,748 13,045 13,045
Federal funds sold.... 33,700 33,700 3,600 3,600 52,500 52,500
Investment
securities........... 58,660 58,613 94,248 93,974 130,643 129,576
Mortgage-backed
securities........... 81,160 81,550 86,122 85,969 97,874 96,253
Loans receivable,
net.................. 818,460 833,419 814,881 826,821 713,512 718,039
Accrued interest
receivable........... 6,474 6,474 7,065 7,065 7,183 7,183
Investment in FHLB
stock................ 7,060 7,060 6,933 6,933 6,313 6,313
========= ======== ======= ======= ======= =======
Financial Liabilities:
Deposits.............. $ 923,669 922,649 920,120 918,622 929,314 927,819
Overdrawn cash account
in bank.............. 3,681 3,681 5,018 5,018 4,338 4,338
Advances from
borrowers for taxes
and insurance........ 211 211 1,305 1,305 963 963
Advances from FHLB.... 10,565 10,543 21,569 21,468 13,599 13,635
Accrued interest
payable.............. 9,324 9,324 8,930 8,930 9,497 9,497
========= ======== ======= ======= ======= =======
</TABLE>
Limitations
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates. In addition,
the tax ramifications related to the realization of the unrealized gains and
losses can have a significant effect on fair value estimates and have not been
considered in these estimates.
(19) COMMITMENTS, CONTINGENCIES AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE-
SHEET RISK
The consolidated financial statements do not reflect various commitments,
contingencies and financial instruments with off-balance-sheet risk which
arise in the normal course of business. These commitments, contingencies and
financial instruments, which represent credit risk, interest rate risk and
liquidity risk, consist of commitments to extend credit, unsecured lending and
litigation arising in the normal course of business.
At September 30, 1997 and June 30, 1997 and 1996, the Bank had commitments
to originate fixed rate loans of approximately $18,878,000, $21,140,000 and
$23,035,000, respectively, and adjustable rate loans of approximately
$4,131,000, $13,738,000 and $7,153,000, respectively. Commitments, which are
disbursed subject to certain limitations, extend over periods of time with the
majority of executed commitments disbursed within a twelve-month period. Fixed
rate commitments carried interest rates ranging from 7.25% to 8.375%, 7.25% to
8.625% and 7.25% to 9.25% at September 30, 1997 and June 30, 1997 and 1996,
respectively.
F-25
<PAGE>
FIRST FEDERAL LINCOLN BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DATA AS OF AND FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
IS UNAUDITED)
(19) COMMITMENTS, CONTINGENCIES AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE-
SHEET RISK--(CONTINUED)
Commitments to extend credit are agreements to lend to customers as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The same credit policies are used in
granting lines of credit as for on-balance-sheet instruments. At September 30,
1997 and June 30, 1997 and 1996, the Bank had commitments to lend to customers
unused consumer lines of credit of approximately $15,978,000, $14,714,000 and
$6,240,000, respectively.
At September 30, 1997 and June 30, 1997 and 1996, outstanding commitments to
purchase mortgage loans aggregated approximately $12,138,000, $2,132,000 and
$19,027,000, respectively, and commitments to sell mortgage loans aggregated
approximately $14,085,000, $8,033,000 and $8,796,000, respectively. These
commitments extend over varying periods of time with the majority being
settled within a sixty-day period. All loan commitments at September 30, 1997
and June 30, 1997 and 1996 were at fixed prices.
Included in cash and cash equivalents are Federal funds sold, which are
maintained with other financial institutions representing unsecured lending at
September 30, 1997 and June 30, 1997 and 1996.
The Bank is party to litigation and claims arising in the normal course of
business. Management, after consultation with legal counsel, believes that the
liabilities, if any, arising from such litigation and claims will not be
material to the consolidated financial statements.
(20) CONCENTRATION OF CREDIT RISK
The loan portfolio is diversified and approximately 75 percent of the Bank's
loan portfolio and current business activity is with customers located within
the states of Nebraska, Iowa, Kansas and Colorado. At September 30, 1997 and
June 30, 1997 and 1996, the Bank had commercial real estate loans, which are
considered by management to be of some greater risk of collectibility.
Commercial real estate loans approximated $140,825,000, $144,139,000 and
$146,207,000 at September 30, 1997 and June 30, 1997 and 1996, respectively.
Management believes any future losses related to these types of loans have
been adequately provided for in the allowance for loan losses.
(21) CONVERSION TO CAPITAL STOCK FORM OF OWNERSHIP
On October 7, 1997, the Board of Directors of the Bank adopted a Plan of
Conversion (Plan), as amended, to convert from a federally chartered mutual
savings and loan association to a federally chartered capital stock
association. The Plan, which is subject to approval by the OTS, includes
formation of a holding company and the filing of a registration statement with
the Securities and Exchange Commission. The conversion requires the approval
of the Bank's voting members and involves the sale of the holding company's
common stock. A subscription offering of shares of the holding company's
common stock will be offered in order of the following priorities to: eligible
account holders; employee benefit plans of the Bank; supplemental eligible
account holders and other members. Any remaining shares not subscribed for by
the foregoing will be offered to the public in a direct community offering.
Pursuant to the Plan, the holding company intends to establish a Charitable
Foundation in connection with the conversion. The Plan provides that the Bank
and the holding company will create the Foundation and donate an amount of the
holding company's common stock up to 8.0% of the common stock to be issued in
the conversion. The Foundation will be dedicated to charitable purposes within
Nebraska, Southwest Iowa and Northern Kansas communities where the Bank has
its offices and their neighboring communities and to complement the Bank's
existing community activities.
F-26
<PAGE>
FIRST FEDERAL LINCOLN BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DATA AS OF AND FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
IS UNAUDITED)
(21) CONVERSION TO CAPITAL STOCK FORM OF OWNERSHIP--(CONTINUED)
The Foundation will submit a request to the Internal Revenue Service to be
recognized as a tax-exempt organization and would likely be classified as a
private foundation. A contribution of common stock to the Foundation by the
holding company would be tax deductible, subject to a limitation based on 10%
of the holding company's annual taxable income. The holding company, however,
would be able to carry forward any unused portion of the deduction for five
years following the contribution. Upon funding the Foundation, the holding
company will recognize an expense in the full amount of the contribution,
offset in part by the corresponding tax deduction, during the quarter in which
the contribution is made.
At the time of the conversion, the Bank will establish a liquidation account
in an amount equal to its equity as reflected in the latest statement of
financial condition used in the final conversion prospectus. The liquidation
account will be maintained for the benefit of eligible account holders and
supplemental eligible account holders who continue to maintain their accounts
at the Bank after the conversion. The liquidation account will be reduced
annually to the extent that eligible account holders and supplemental eligible
account holders have reduced their qualifying deposits as of each anniversary
date. Subsequent increases will not restore an eligible account holder's or
supplemental eligible account holder's interest in the liquidation account. In
the event of a complete liquidation of the Bank, each eligible account holder
and supplemental eligible account holder will be entitled to receive a
distribution from the liquidation account in an amount proportionate to the
current adjusted qualifying balances for accounts then held.
Subsequent to the conversion, the Bank may not declare or pay cash dividends
on or repurchase any of its shares of common stock if the effect thereof would
cause equity to be reduced below applicable regulatory capital maintenance
requirements or if such declaration and payment would otherwise violate
regulatory requirements.
Conversion costs will be deferred and reduce the proceeds from the shares
sold in the conversion. If the conversion is not completed, all costs will be
charged as an expense. There were no deferred costs related to the conversion
at September 30, 1997 and June 30, 1997.
F-27
<PAGE>
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NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS PRO-
SPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY FIRST LINCOLN BANCSHARES INC., THE BANK OR SANDLER O'NEILL &
PARTNERS, L.P. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLIC-
ITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO,
OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN
SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUN-
DER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF FIRST LINCOLN BANCSHARES INC. OR THE BANK SINCE ANY OF
THE DATES AS OF WHICH INFORMATION IS FURNISHED HEREIN OR SINCE THE DATE HEREOF.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary of the Conversion and the Offerings.............................. 5
Selected Consolidated Financial and Other Data of the Bank............... 11
Recent Developments...................................................... 13
Risk Factors............................................................. 16
First Lincoln Bancshares Inc............................................. 25
First Federal Lincoln Bank............................................... 26
Regulatory Capital Compliance............................................ 27
Use of Proceeds.......................................................... 28
Dividend Policy.......................................................... 29
Market for the Common Stock.............................................. 30
Capitalization........................................................... 31
Pro Forma Data........................................................... 32
Comparison of Valuation and Pro Forma Information With No Foundation..... 37
First Federal Lincoln Bank and Subsidiaries Consolidated Statements of
Income.................................................................. 38
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 39
Business of the Bank..................................................... 55
Federal and State Taxation............................................... 78
Regulation............................................................... 80
Management of the Company................................................ 87
Management of the Bank................................................... 88
The Conversion........................................................... 102
Restrictions on Acquisition of the Company and the Bank.................. 125
Description of Capital Stock of the Company.............................. 130
Description of Capital Stock of the Bank................................. 132
Transfer Agent and Registrar............................................. 132
Experts.................................................................. 133
Legal and Tax Opinions................................................... 133
Additional Information................................................... 133
Index of Consolidated Financial Statements............................... F-1
</TABLE>
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UNTIL APRIL 8, 1998, OR 25 DAYS AFTER COMMENCEMENT OF THE COMMUNITY OFFERING
AND THE SYNDICATED COMMUNITY OFFERING, IF ANY, WHICHEVER IS LATER, ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPAT-
ING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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8,021,250 SHARES
[LOGO OF FIRST LINCOLN BANCSHARES INC.]
(PROPOSED HOLDING COMPANY FOR
FIRST FEDERAL LINCOLN BANK)
COMMON STOCK
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PROSPECTUS
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March 13, 1998
Sandler O'Neill & Partners, l.p.
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