<PAGE>
As filed with the Securities and Exchange Commission on December 18, 1998
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FIRST FEDERAL BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 6712 (To be applied for)
(State or other jurisdiction of (Primary standard (I.R.S. Employer
incorporation or organization) industrial classification) identification number)
329 Pierce Street
Sioux City, Iowa 51101
(712) 277-0200
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Barry E. Backhaus
President and Chief Executive Officer
329 Pierce Street
Sioux City, Iowa 51101
(712) 277-0200
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Robert I. Lipsher, Esq.
Luse Lehman Gorman Pomerenk & Schick
5335 Wisconsin Avenue, N.W.
Suite 400
Washington, D.C. 20015
</TABLE>
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 of the Securities Act of 1933,
check the following box: |X|
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. |_|
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- -------------------------------------- ---------------- ------------------- ---------------------- ----------------
Proposed Proposed maximum
Title of each class of Amount to be maximum offering aggregate Amount of
securities to be registered registered price per share offering price (1) registration fee
- -------------------------------------- ---------------- ------------------- ---------------------- ----------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value per share 7,489,496 shares $10.00 $74,894,960 $20,900
- -------------------------------------- ---------------- ------------------- ---------------------- ----------------
</TABLE>
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(1) Estimated solely for the purpose of calculating the registration fee.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration shall
thereafter become effective in accordance with Section 8(a) of the Securities
Act of 1933 or until the registration statement shall become effective on such
date as the Securities and Exchange Commission, acting pursuant to said Section
8(a), may determine.
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<PAGE>
Prospectus Supplement
FIRST FEDERAL BANKSHARES, INC.
FIRST FEDERAL BANK
EMPLOYEES' SAVINGS & PROFIT SHARING PLAN AND TRUST
This Prospectus Supplement is being provided to members (the "Members") in
First Federal Bank Employees' Savings & Profit Sharing Plan and Trust (the
"Plan"). First Federal Bankshares, M.H.C., the Mutual Holding Company of First
Federal Savings Bank of Siouxland (the "Bank") is converting from a federally
chartered mutual holding company to a Delaware stock corporation (the
"Conversion") and shares of common stock of First Federal Bankshares, Inc. (the
"Company") will be issued to certain depositors and the public (the "Offering").
As a Member, you may direct the trustee of the Plan to purchase Company common
stock ("Common Stock") in the Offering with amounts allocated to your account
under the Plan. The Plan would invest in Common Stock through the First Federal
Bankshares, Inc. Stock Fund ("Employer Stock Fund"). Since the Plan actually
purchases the Common Stock, you would acquire only a "membership interest" in
the shares and would not own the shares directly. This Prospectus Supplement
relates to your initial election to direct that all or a portion of your account
be invested in the Employer Stock Fund in the Offering. Your account will be
reinvested in the other funds available under the Plan in the event that the
Offering is oversubscribed and the total amount allocated to your account cannot
be used by the trustee to purchase Common Stock. You will be entitled to direct
the investment of your account in the Employer Stock Fund after the Offering is
completed.
The Prospectus of the Company dated February ___, 1999 (the "Prospectus")
which is attached to this Prospectus Supplement includes detailed information
with respect to the Conversion and related stock offering, and the financial
condition, results of operations and business of the Bank. This Prospectus
Supplement, which provides information with respect to the Plan, should be read
only in conjunction with the Prospectus. Defined terms have the same meaning as
is set forth in the Prospectus.
-----------------------
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
MEMBER AS TO AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS"
BEGINNING ON PAGE __ OF THE PROSPECTUS
-----------------------
THE INTERESTS IN THE PLAN AND THE OFFERING OF THE COMMON STOCK HAVE NOT
BEEN APPROVED OR DISAPPROVED BY THE OFFICE OF THRIFT SUPERVISION, THE SECURITIES
AND EXCHANGE COMMISSION OR ANY OTHER FEDERAL OR STATE AGENCY.
NO OFFICE, CORPORATION, COMMISSION, BUREAU OR OTHER AGENCY HAS PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THE MEMBERSHIP INTERESTS OFFERED HEREBY ARE NOT (1) SAVINGS ACCOUNTS OR
DEPOSITS, (2) FEDERALLY INSURED OR GUARANTEED, OR (3) GUARANTEED BY THE COMPANY
OR THE BANK. THE PLAN'S ENTIRE INVESTMENT IN COMMON STOCK IS SUBJECT TO LOSS.
The date of this Prospectus Supplement is February ___, 1998.
<PAGE>
NOTICE TO MEMBERS IN
FIRST FEDERAL BANK
EMPLOYEES' SAVINGS & PROFIT SHARING PLAN AND TRUST
Attached to this Notice is a copy of the Prospectus and Prospectus
Supplement relating to the offer and sale of membership interests and shares of
common stock, par value $.01 per share (the "Common Stock") of First Federal
Bankshares, Inc. (the "Company").
First Federal Savings Bank of Siouxland (the "Bank") withdrew from the
Financial Institutions Thrift Plan and adopted the First Federal Bank Employees'
Savings & Profit Sharing Plan and Trust (the "Plan") effective December 1, 1998,
in connection with the conversion of the Mutual Holding Company from a federally
chartered mutual holding company to a Delaware stock corporation, in order to
establish an Employer Stock Fund as an additional investment option under the
Plan. The Prospectus Supplement has been prepared and distributed to you so that
you can make an informed decision regarding your opportunity to invest all or a
portion of your account balance in the Plan in the Employer Stock Fund. Your
account will be reinvested in the other funds available under the Plan in the
event the offering is oversubscribed and the total amount allocated to your
account cannot be used by the trustee to purchase Common Stock. The other funds
selected by the trustee of the Plan in which you may invest include: A. S&P 500
Stock Fund, B. Stable Value Fund, C. S&P MidCap Stock Fund, D. Money Market
Fund, E. Government Bond Fund, F. Income Plus Fund, G. Growth & Income Fund, H.
Growth Fund and I. International Stock Fund.
The Plan's feature which allows members the opportunity to direct the
investment of their account balances is intended to satisfy the requirements of
Section 404(c) of the Employee Retirement Income Security Act of 1974 ("ERISA").
The effect of this is two-fold. First, you will not be deemed a 'fiduciary' by
virtue of your exercise of investment discretion. Second, no person who
otherwise is a fiduciary (for example, the employer, the Plan administrator, or
the Plan's trustee) is liable under the fiduciary responsibility provision of
ERISA for any loss which results from your exercise of control over the assets
in your Plan account.
Because you will be entitled to invest all or a portion of your account
balance in the Plan in the Employer Stock Fund which will be invested in Common
Stock, the regulations under Section 404(c) of ERISA require that the Plan
establish procedures that ensure the confidentiality of your decision to
purchase, hold, or sell employer securities, except to the extent that
disclosure of such information is necessary to comply with federal or state laws
not preempted by ERISA. These regulations also require that your exercise of
voting and similar rights with respect to the Employer Stock Fund be conducted
pursuant to procedures that ensure the confidentiality of your exercise of these
rights. Accordingly, the Plan committee designates Peggy Smith, Vice President
of the Bank, as the person to whom your investment instructions should be
returned. Ms. Smith will transfer your investment instructions directly to
Pentegra Group, the Plan's third-party administrator. In the case of an event
that involves a potential for undue employer influence, you will be instructed
to return your instructions directly to Pentegra Group.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
THE OFFERING..........................................................................................1
Securities Offered...............................................................................1
Election to Purchase Common Stock in the Offering; Priorities....................................1
Value of Membership Interests....................................................................2
Method of Director Transfer......................................................................2
Time for Directing Transfer......................................................................2
Irrevocability of Transfer Direction.............................................................2
Direction to Purchase Common Stock After the Offering............................................2
Purchase Price of Common Stock...................................................................3
Nature of a Member's Interest in Common Stock....................................................3
Voting Rights of Common Stock....................................................................3
DESCRIPTION OF THE PLAN...............................................................................3
Introduction.....................................................................................3
Eligibility and Membership.......................................................................4
Contributions Under the Plan.....................................................................5
Limitations on Contributions.....................................................................5
Investment of Contributions and Account Balances.................................................7
Benefits Under the Plan.........................................................................10
Withdrawals and Distributions From the Plan.....................................................10
Trustee.........................................................................................12
Plan Administrator..............................................................................12
Reports to Plan Members.........................................................................12
Amendment and Termination.......................................................................12
Merger, Consolidation or Transfer...............................................................13
Federal Income Tax Consequences.................................................................13
ERISA and Other Qualifications..................................................................16
SEC Reporting and Short-Swing Profit Liability..................................................16
Financial Information Regarding Plan Assets.....................................................17
LEGAL OPINION........................................................................................17
</TABLE>
<PAGE>
THE OFFERING
Securities Offered
The securities offered hereby are participation interests in the Plan. Up
to 46,000 shares (assuming a purchase price of $10.00 per share) of Common Stock
may be acquired by the Plan to be held in the Employer Stock Fund. The Company
is the issuer of the Common Stock. Only employees of the Bank may become Members
in the Plan. The Common Stock to be issued hereby is conditioned on the
consummation of the Conversion. A Member'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 operation and business of the Bank is contained in the
attached Prospectus. The address of the principal executive office of the Bank
is 329 Pierce Street, Sioux City, Iowa 51101. The Bank's telephone number is
(712) 277-0200.
Election to Purchase Common Stock in the Offering; Priorities
The Plan permits each Member to direct that all or part of the funds which
represent his or her beneficial interest in the assets of the Plan may be
transferred to the Employer Stock Fund, an investment fund in the Plan, that
will invest in Common Stock and will be used to purchase Common Stock issued in
connection with the Offering. The Trustee (as defined herein) of the Employer
Stock Fund will purchase Common Stock offered for sale in connection with the
Offering in accordance with each Member's directions. Members will be provided
the opportunity to elect alternative investments from among the nine other funds
offered. In the event the Offering is oversubscribed and the Trustee is unable
to use the full amount allocated by a Member to purchase Common Stock in the
Offering, the amount that cannot be invested in Common Stock shall be reinvested
in the other investment funds of the Plan in accordance with the Member's
current investment election. If a Member fails to direct the investment of his
or her account balance, the Member's account balance will be remain in the other
investment funds of the Plan as previously directed by the Member. If a Member
has never made an investment election, the Member's account balance will be
invested in the Money Market Fund.
The shares of Common Stock to be sold in the Offering are being offered in
accordance with the following priorities: (i) depositors of the Bank with
aggregate account balances (including demand deposits) of $50 or more as of
September 30, 1997 ("Eligible Account Holders"); (ii) the Bank's tax-qualified
employee benefit plans, including the ESOP; (iii) depositors of the Bank with
aggregate account balances (including demand deposits) of $50 or more as of
December 31, 1998 ("Supplemental Eligible Account Holders"); (iv) members of the
Mutual Holding Company as of ________________, 1999 (the "Voting Record Date")
who are not Eligible Account Holders ("Other Members"); (v) certain members of
the general public with preference given first to persons who hold shares of
common stock of the Bank (other than the Mutual Holding Company), then to
depositors of Mid-Iowa Savings Bank, FSB as of ________________________, 1998
and then to natural persons residing in the "Community", consisting of the State
of Iowa, the Nebraska counties
1
<PAGE>
of Dakota, Dixon, Thurston, Cedar and Wayne, and the South Dakota counties of
Union, Clay, Yankton, Lincoln and Turner. To the extent that Members fall into
one of these categories, they are being permitted to use funds in their Plan
account to subscribe or pay for the Common Stock being acquired. Common Stock so
purchased will be placed in the Member's Employer Stock Fund within his Plan
account.
Value of Membership Interests
The aggregate market value of the Members' accounts in the Financial
Institutions Thrift Plan as adopted by First Federal Savings Bank of Siouxland
("Financial Institutions Thrift Plan") were valued at approximately $408,343 as
of September 30, 1998. Each Member was informed of the value of his or her
beneficial interest in the Financial Institutions Thrift Plan as of September
30, 1998.
Method of Directing Transfer
Each Member shall receive a form which provides for a Member to direct that
all or a portion of his or her beneficial interest in the Plan be transferred to
the Employer Stock Fund (the "Investment Allocation Form") or to the other
investment options established under the Plan. If a Member wishes to invest all
or part of his or her beneficial interest in the assets of the Plan to the
purchase of Common Stock issued in connection with the Offering, he or she
should indicate that decision on the Investment Allocation Form.
Time for Directing Transfer
Directions to transfer amounts to the Employer Stock Fund in order to
purchase Common Stock issued in connection with the Offering must be returned to
Peggy Smith, Vice President, First Federal Savings Bank of Siouxland, 329 Pierce
Street, Sioux City, Iowa 51101 no later than _____ p.m. on February __, 1999.
Irrevocability of Transfer Direction
A Member's direction to transfer amounts credited to such Member's account
in the Plan to the Employer Stock Fund in order to purchase shares of Common
Stock in connection with the Offering is irrevocable. Members, however, will be
able to direct the investment of their accounts under the Plan as explained
below.
Direction to Purchase Common Stock After the Offering
After the Offering, a Member will continue to be able to direct that a
certain percentage of his or her interest in the Plan be transferred to the
Employer Stock Fund and invested in Common Stock, or to the other investment
funds available under the Plan. The allocation of a Member's interest in a Plan
Fund may be changed on a daily basis. Special restrictions may apply to
transfers
2
<PAGE>
directed to and from the Employer Stock Fund by those Members who are officers,
directors and principal shareholders of the Company who are subject to the
provisions of Section 16(b) of the Securities and Exchange Act of 1934 (the
"Exchange Act"), as amended.
Purchase Price of Common Stock
The funds transferred to the Employer Stock Fund for the purchase of Common
Stock in connection with the Offering will be used by the Trustee to purchase
shares of Common Stock, except in the event of an oversubscription, as discussed
above. The price paid for such shares of Common Stock will be the same price as
is paid by all other persons who purchase shares of Common Stock in the
Offering.
Subsequent to the Offering, Common Stock purchased by the Trustee 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").
Nature of a Member's Interest in the Common Stock
The Common Stock will be held in the name of the Trustee for the Plan, as
Trustee. Shares of Common Stock acquired at the direction of a Member will be
allocated to the Member's account under the Plan. Therefore, earnings with
respect to a Member's account should not be affected by the investment
designations (including investments in Common Stock) of other Members. The
Trustee as record holder will vote such allocated shares, if any, as directed by
Members.
Voting Rights of Common Stock
The Trustee generally will exercise voting rights attributable to all
Common Stock held by the Employer Stock Fund as directed by Members with
interests in the Employer Stock Fund. With respect to each matter as to which
holders of Common Stock have a right to vote, each Member will be allocated
voting instruction rights reflecting such Member's proportionate interest in the
Employer Stock Fund. The number of shares of Common Stock held in the Employer
Stock Fund that are voted in the affirmative and negative on each matter shall
be proportionate to the number of voting instruction rights exercised by Members
in the affirmative and negative respectively.
DESCRIPTION OF THE PLAN
Introduction
The Bank adopted a multiple-employer defined contribution plan (the
"Financial Institutions Thrift Plan") effective September 1, 1996. The Bank
withdrew from the Financial Institutions Thrift Plan and adopted a
single-employer plan effective December 1, 1998 in order to permit the
3
<PAGE>
investment of Plan assets in Common Stock. All Members of the Financial
Institutions Thrift Plan, other than Members who had terminated employment, were
given the opportunity to transfer their
accounts to the First Federal Bank Employees' Savings & Profit Sharing Plan and
Trust. The Plan is a tax-qualified plan with a cash or deferred compensation
feature established in accordance with the requirements under Section 401(a) and
Section 401(k) or the Internal Revenue Code of 1986, as amended (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 plan). The Plan is not
subject to Title IV (Plan Termination Insurance) of ERISA. The funding
requirements contained in Title IV of ERISA are not applicable to Members (as
defined below) or beneficiaries under the Plan.
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. Words capitalized but not defined in the
following discussion have the same meaning as set forth in the Plan. Copies of
the Plan are available to all employees by filing a request with the Plan
Administrator, c/o First Federal Bank, Attention: Barry E. Backhaus, President,
329 Pierce Street, Sioux City, Iowa 51101. Each employee is urged to read
carefully the full text of the Plan.
Eligibility and Membership
Any employee of the Bank is eligible to become a Member in the Plan on the
first day of the month following completion of one year of employment during
which an employee completes at least 1000 hours of service with the Bank. The
plan year is January 1 to December 31 (the "Plan Year").
As of September 30, 1998, there were approximately 158 employees eligible
to participate in the Plan, and 129 employees participating by making elective
deferral contributions.
4
<PAGE>
Contributions Under the Plan
401(k) Plan Contributions. Each Member of the Plan is permitted to elect to
defer such Member's Salary (as defined below) on a pre-tax basis up to 15% of
annual Salary (expressed in terms of whole percentages) and subject to certain
other restrictions imposed by the Code, and to have that amount contributed to
the Plan on such Member's behalf. For purposes of the Plan, "Salary" means a
Member's total compensation reported on Internal Revenue Service Form W-2,
exclusive of any compensation deferred from a prior year, plus pre-tax
contributions made to a Section 401(k) Plan or a Section 125 Cafeteria Plan. In
1998, the annual Salary of each Member taken into account under the Plan was and
is limited to $160,000. (Limits established by the IRS are subject to increase
pursuant to an annual cost of living adjustment, as permitted by the Code). A
Member may elect to modify the amount contributed to the Plan by filing a new
elective deferral agreement with the Plan Administrator which will be effective
the first day of any contribution reporting period.
Employer Contributions. The Bank makes matching contributions to the Plan
equal to 25% of the elective deferral contributions, up to a maximum of 4% of
the Member's Plan Salary. Such matching contributions are subject to revision by
the Bank at any time. The matching contributions are subject to the applicable
vesting schedule noted hereinafter.
Limitations on Contributions
Limitation on Employee Salary Deferrals. The annual amount of deferred
Salary of a Member (when aggregated with any elective deferrals of the Member
under a simplified employee pension plan or a tax-deferred annuity) may not
exceed the limitation contained in Section 402(g) of the Code, 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 included in the Member's gross income for federal income tax
purposes in the year they are made. In addition, any such excess deferral will
again be subject to federal income tax when distributed by the Plan to the
Member, unless the excess deferral (together with any income allocable thereto)
is distributed to the Member 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 Member
in the taxable year in which the distribution is made.
Limitations on Annual Additions and Benefits. Pursuant to the requirements
of the Code, the Plan provides that the amount of contributions and forfeitures
allocated to each Member's account during any Plan Year may not exceed the
lesser of $30,000 or 25% of the Member's Compensation (as defined) for the Plan
Year. In addition, annual additions are limited to the extent necessary to
prevent contributions on behalf of any employee from exceeding the employee's
combined plan limit, i.e., a limit that takes into account the contributions and
benefits made on behalf of an employee to all plans of the Bank. To the extent
that these limitations have been exceeded with respect to a Member, the Plan
Administrator shall:
5
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(i) return any elective deferral contributions, with earnings thereon, to
the extent that the return would reduce the excess amount in the Member's
accounts;
(ii) reduce Employer contributions made with respect to those returned
elective deferral contributions.
If, in addition to this Plan, the Member is covered under other defined
contribution plans maintained by the Bank and annual additions exceed the
maximum permissible amount, the amount contributed or allocated under the other
defined contribution plans will be reduced so that the annual additions under
all such plans equal the maximum permissible amount.
Limitation on Plan Contributions for Highly Compensated Employees. Sections
401(k) and 401(m) of the Code limits the amount of elective deferral
contributions and matching contributions 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 elective deferral contributions made by or on behalf of all
other employees eligible to participate in the Plan. Specifically, the "actual
deferral percentage" ("ADP") (i.e., the average of the actual deferral ratios,
expressed as a percentage, of each eligible employee's elective deferral
contribution if any, for the Plan Year over the employee's Salary), of the
Highly Compensated Employees must meet either of the following tests: (i) the
ADP of the eligible Highly Compensated Employees is not more than 125% of the
ADP of all other eligible employees, or (ii) the ADP of the eligible Highly
Compensated Employees is not more than 200% of the ADP of all other eligible
employees, and the excess of the ADP for the eligible Highly Compensated
Employees over the ADP of all other eligible employees is not more than two
percentage points. Similarly, the actual contribution percentage ("ACP") (i.e.,
the average of the actual contribution ratios, expressed as a percentage, of
each eligible employee's matching contributions, if any, for the Plan Year over
the employee's Salary) of the Highly Compensated Employees must meet either of
the following tests: (i) the ACP of the eligible Highly Compensated Employees is
not more than 125% of the ACP of all other eligible employees, or (ii) the ACP
of the eligible Highly Compensated Employees is not more than 200% of the ACP of
all other eligible employees, and the excess of the ACP for the eligible Highly
Compensated Employees over the ACP of all other employees is not more than two
percentage points. Effective January 1, 1997, the ADP and ACP tests are
performed by using the actual deferral percentage and the actual contribution
percentage of non-highly compensated employees for the Plan Year preceding the
Plan Year that is being tested.
In general, for Plan Years beginning in 1998, a Highly Compensated Employee
includes any employee who, (1) during the Plan Year or the preceding Plan Year,
was at any time a 5% owner (i.e., owns directly or indirectly more than 5% of
the stock of an employer, or stock possessing more than 5% of the total combined
voting power of all stock of an employer), or (2) for the preceding Plan Year,
received Salary from an employer in excess of $80,000 (in 1998), and (if the
employer elects for a Plan Year) was in the group consisting of the top 20% of
employees when ranked on the basis of Salary paid during the Plan Year. The
dollar amounts set forth above are adjusted annually to reflect increases in the
cost of living.
6
<PAGE>
In order to prevent the disqualification of the Plan, any amount
contributed by Highly Compensated Employees that exceed the ADP limitation in
any Plan Year ("excess contributions"), together with any income allocable
thereto, must be distributed first to Highly Compensated Employees with the
greatest dollar amount deferrals, and so on, until the Plan satisfies the ADP
test, before the close of the following Plan Year. Moreover, the Bank will be
subject to a 10% excise tax on any excess contributions unless such excess
contributions, together with any income allocable thereto, either are
re-characterized or are distributed before the close of the first 2-1/2 months
following the Plan Year to which such excess contributions relate. In addition,
in order to avoid disqualification of the Plan, any contributions by Highly
Compensated Employees that exceed the average contribution limitation in any
Plan Year ("excess aggregate 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 10% excise tax will be imposed on
the Bank with respect to any excess aggregate contributions, unless such
amounts, plus any income allocable thereto, are distributed within 2-1/2 months
following the close of the Plan Year in which they arose.
Investment of Contributions and Account Balances
All amounts credited to Members' accounts under the Plan are held in the
Plan Trust (the "Trust") which is administered by the Trustee appointed by the
Bank's Board of Directors.
Prior to the effective date of the Offering, Members have been provided the
opportunity to direct the investment of their accounts into one of the following
funds (the "Funds"):
A. S&P 500 Stock Fund
B. Stable Value Fund
C. S&P MidCap Stock Fund
D. Money Market Fund
E. Government Bond Fund
F. Income Plus Fund
G. Growth & Income Fund
H. Growth Fund
I. International Stock Fund
The Plan now provides that in addition to the Funds specified above, a
Member may direct the Trustee to invest all or a portion of his account in the
Employer Stock Fund.
A Member may elect to have both past contributions (and earnings), as well
as future contributions to the Member's account invested either in the Employer
Stock Fund or among the Funds listed above. Transfers of past contributions (and
the earnings thereon) do not affect the investment mix of future contributions.
Each Participant who makes an election to direct investment of assets under the
Employer Stock Fund may change such investment at a future date, in whole, or in
part, by filing a Change of Investment Allocation form with the Plan's
third-party administrator, Pentegra Group, or by using Pentegra's voice response
unit by calling (800)433-4422, in accordance
7
<PAGE>
with established procedures to dispose of such Plan investment and reinvest the
net proceeds in an alternative investment under the Plan. The proceeds of such
sale, net of expenses, will be allocated to the Member's account and reinvested
in accordance with the Plan. Until an effective direction is made by a Member, a
Member's account will be invested in the Money Market Fund.
A. Previous Funds.
Prior to the effective date of the Offering, contributions under the Plan
have been invested in the nine Funds specified above. The Income Plus, Growth &
Income, Growth and International Stock Funds were added July 2, 1997. The
following table provides performance data with respect to the investment funds
available under the Plan, based on information provided to the Company by The
Pentegra Group ("Pentegra"):
Net Investment Performance - Fund Returns Through September 30, 1998
<TABLE>
<CAPTION>
5 Calendar 10 Calendar
Year-to- Last 12 Years Years
Date Months Annualized Annualized
---- ------ ---------- ----------
<S> <C> <C> <C> <C>
A. S&P 500 Stock Fund 5.6% 8.5% 19.7% 17.4%
B. Stable Value Fund 4.4 6.0 6.8 7.9
C. S&P MidCap Stock Fund -7.4 -6.8 17.2 18.8
D. Money Market Fund 4.2 5.5 5.0 6.2
E. Government Bond Fund 15.1 23.2 9.8 10.7
F. Income Plus Fund 4.6 6.1 8.5 N/A
G. Growth & Income Fund 3.0 3.8 12.1 N/A
H. Growth Fund 2.7 3.1 16.3 N/A
I. International Stock Fund -0.6 -8.1 13.0 9.3
</TABLE>
The following is a description of each of the Plan's nine investment funds:
S&P 500 Stock Fund A fund designed to simulate the performance of the
Standard & Poor's Composite Index of 500 stocks. Preservation of the value of
the principal investment is not guaranteed.
Stable Value Fund An income portfolio with the objective of maximizing
income at minimum risk of capital with contributions invested in fixed income
instruments, including, but not limited to: (i) group annuity contracts
including fixed and variable rate contracts with insurance companies or other
financial institutions, (ii) bank time deposits or deposit agreements, (iii)
short term investment funds, (iv) U.S. Treasury Bills and (v) third party
agreements providing book value liquidity for
8
<PAGE>
investments in U. S. Government or Agency securities or collateralized mortgage
obligations backed by Agency collateral.
S&P MidCap Stock Fund A diversified equity portfolio with the objective of
simulation the performance of the Standard & Poor's MidCap Index of 400 stocks.
Preservation of the value of the principal investment is not guaranteed.
Money Market Fund A government instrument fund with the objective of
maximizing income at minimum risk of capital with underlying investments in
obligations issued or guaranteed by the United States government or agencies or
instrumentalities thereof.
Government Bond Fund A fund designed to maximize income at minimum risk
with underlying investments in U.S. Treasury bonds with a maturity of 20 years
or more.
Income Plus Fund A fund designed to invest in stable value securities to
reduce short-term risk and to offer some potential for growth. Preservation of
the value of the principal investment is not guaranteed.
Growth & Income Fund A fund that invests in U.S. and international stocks,
U. S. bonds and other stable value investments to pursue long-term appreciation
and short-term stability and has a small flexible component to take advantage of
market opportunities. Preservation of the value of the principal investment is
not guaranteed.
Growth Fund A fund that invests in a broad range of domestic and
international stocks with a large flexible component to take advantage of market
opportunities. Preservation of the value of the principal investment is not
guaranteed.
International Fund A fund that invests in over 1,000 foreign stocks in 21
countries and is designed to approximate the performance of the Morgan Stanley
Capital International EAFE (Europe, Australia, Far East) Index (with a 25%
investment limit in Japanese stocks). Preservation of the value of the principal
investment is not guaranteed.
B. The Employer Stock Fund.
The Employer Stock Fund will consist of investments in Common Stock made on
and after the effective date of the Offering. After the Offering, the Trustee
will, to the extent practicable, use all amounts held by it in the Employer
Stock Fund, including cash dividends paid on Common Stock held in the Employer
Stock Fund, to purchase shares of Common Stock of the Company. 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 a short-term interest fund. Any earnings that result
therefrom will remain in the Employer Stock Fund in the event of an
oversubscription and will not be reinvested among the other nine Funds.
9
<PAGE>
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 Company and
the Bank and market conditions for the Common Stock generally.
INVESTMENT IN THE EMPLOYER STOCK FUND MAY INVOLVE CERTAIN RISKS IN
INVESTMENT IN COMMON STOCK OF THE COMPANY. FOR A DISCUSSION OF THESE RISK
FACTORS, SEE THE PROSPECTUS.
Benefits Under the Plan
Vesting. A Member, at all times, has a fully vested, nonforfeitable
interest in his or her monthly salary contribution and the earnings thereon
under the Plan. A Member is vested in any employer contributions (matching and
supplemental) in accordance with the following schedule:
<TABLE>
<CAPTION>
Years of Service Vesting Percentage
---------------- ------------------
<S> <C> <C>
Less than 1 0%
1 25%
2 50%
3 75%
4 or more 100%
</TABLE>
A Member will also be 100% vested in employer contributions regardless of
his or her years of employment, upon attainment of normal retirement age under
the Plan, death or approved disability. Any non-vested contributions which are
forfeited shall be used at the option of the Bank to (i) reduce administrative
expenses, (ii) offset any contribution to be made for the Plan Year, or (iii) be
allocated to all eligible Members at the end of the Plan Year in the same ratio
as each Member's Salary bears to the total of the Salary of all Members.
Withdrawals and Distributions From the Plan
APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL RESTRICTIONS
ON THE RIGHT OF A PLAN MEMBER TO WITHDRAW AMOUNTS HELD FOR HIS OR HER BENEFIT
UNDER THE PLAN PRIOR TO THE MEMBER'S TERMINATION OF EMPLOYMENT WITH THE BANK. A
SUBSTANTIAL FEDERAL TAX PENALTY MAY ALSO BE IMPOSED ON WITHDRAWALS MADE PRIOR TO
THE MEMBER'S ATTAINMENT OF AGE 59-1/2, REGARDLESS OF WHETHER SUCH A WITHDRAWAL
OCCURS DURING HIS OR HER EMPLOYMENT WITH THE BANK OR AFTER TERMINATION OF
EMPLOYMENT.
10
<PAGE>
Withdrawals Prior to Termination of Employment or Age 59-1/2. A Member may
make a withdrawal from his or her 401(k) Account (comprised of employee
contributions) prior to termination of employment or age 59-1/2 only in the
event of financial hardship, subject to the hardship distribution rules under
the Plan. These requirements insure that Members have a true financial need
before a withdrawal may be made. A Member may make a withdrawal of employer
matching contributions credited to his Regular Account if the Member has
completed 60 months of participation in the Plan, the employer contributions
have been in the Plan for at least 24 months, or the Member has attained age
59-1/2. A Member may make a withdrawal from his or her Regular Account and
Rollover Account once per calendar year.
Members are entitled to borrow between $1,000 and $50,000 from the Plan,
subject to the limitation of no more than 50% of the combined vested balance of
their Regular Account , 401(K) Account and Rollover Account, but excluding any
amounts to the extent invested in the Employer Stock Fund.
Distribution Upon Termination of Employment or Disability. Payment of
benefits to a Member who retires, incurs a disability, or otherwise terminates
employment shall be made in a lump sum payment or in installments, over a period
of 2-10, 15 or 20 years, which period can not exceed the life expectancy of the
Member, or may be transferred to another qualified employee benefit plan or
individual retirement account ("IRA"). Benefit payments may be deferred until
April 1 following the calendar year in which the Member attains age 70-1/2 or,
alternatively, the Member may make one withdrawal per account each calendar
year.
Distribution Upon Death. A Member who dies prior to the benefit
commencement date for retirement, disability or termination of employment shall
have his or her benefits paid to the surviving spouse or beneficiary in a lump
sum, unless the payment would exceed $500, and the Member elected prior to death
that the payment be made in annual installments over a period not to exceed 5
years (10 years if the spouse is the beneficiary). If no election is in effect
at the time of the Member's death, the beneficiary may elect to receive the
benefit in the form of annual installments over a period not to exceed 5 years
(10 years if the spouse is the beneficiary) or make withdrawals as often as once
per year, except that any balance remaining must be withdrawn by the fifth
anniversary (tenth anniversary if the spouse is the beneficiary) of the Member's
death. If a Member dies after distribution of his or her interest has begun, the
remaining portion of such interests will continue to be distributed as rapidly
as under the method of distribution being used prior to the Member's death.
Nonalienation of Benefits. Except with respect to federal income tax
withholding and as provided with respect to a qualified domestic relations order
(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.
11
<PAGE>
Trustee
The Trustee with respect to the Plan is the named fiduciary of the Plan for
purposes of Section 402 of ERISA. The Trustee is appointed by the Board of
Directors of the Bank to serve at its pleasure. The Bank of New York has been
appointed as trustee of the Plan. Until the Offering is concluded, Barry E.
Backhaus, President and Chief Executive Officer of the Bank, will serve as
trustee of the Employer Stock Fund. The trustees are referred to collectively
herein as the Trustee.
The Trustee receives, holds and invests the contributions to the Plan in
trust and distributes them to Members 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.
Plan Administrator
Pursuant to the terms of the Plan, the Plan is administered by the plan
administrator (the "Plan Administrator"). The Bank is the Plan Administrator and
has designated the Compensation and Benefits Committee of the Board of
Directors, to supervise its responsibilities as such. The address of the Plan
Administrator is 329 Pierce Street, Sioux City, Iowa 51101, Telephone number
(712) 277-0200. 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 IRS, and for all
disclosures required to be made to Members, beneficiaries, and others under
Sections 104 and 105 of ERISA.
Reports to Plan Members
The Plan Administrator will furnish to each Member a statement quarterly
showing (i) the number of units in each of the Funds, (ii) the unit value of
each Fund as of the end of the quarter, and (iii) the amount of contributions
allocated to such Member's account for that period.
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 Member affected by such termination shall have a fully vested interest in
his or her 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
Members 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.
12
<PAGE>
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
Member 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 or she would have been entitled to receive
immediately before the merger, consolidation or transfer (if the Plan had then
terminated).
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. Members are urged to
consult their tax advisors with respect to any distribution from the Plan and
transactions involving the Plan.
The Plan is qualified under Section 401(a) and 401(k) of the Code and the
related Trust is exempt from tax under Section 501(a) of the Code. A plan that
is qualified under these sections of the Code is afforded special tax treatment
which include the following: (1) the 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-exempt 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.
Assuming that the Plan is administered in accordance with the requirements
of the Code, membership in the Plan under existing federal income tax laws will
have the following effects:
(a) Amounts contributed to a Member's account and the investment earnings
on the account are not includable in a Member's federal taxable income until
such contributions or earnings are actually distributed or withdrawn from the
Plan. Special tax treatment may apply to the taxable portion of any distribution
that includes Common Stock or qualifies as a Lump Sum Distribution (as described
below).
(b) Income earned on assets held by the Trust will not be taxable to the
Trust.
13
<PAGE>
Lump Sum Distribution. A distribution from the Plan to a Member or the
beneficiary of a Member will qualify as a lump sum distribution ("Lump Sum
Distribution") if it is made: (i) within one taxable year of the Member or
beneficiary; (ii) on account of the Member's death, disability or separation
from service, or after the Member attains age 59-1/2; and (iii) consists of the
balance to the credit of the Member 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 Member'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 Member to any other profit sharing plan
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 the 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 Member who has completed at least five years of
participation in the Plan before the taxable year in which the distribution is
made, or a beneficiary who receives a Lump Sum Distribution on account of the
Member's death (regardless of the period of the Member's participation in the
Plan or any other profit-sharing plan maintained by the Bank), 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
Member or beneficiary, provided such amount is received on or after the Member
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
1985 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 Member'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 the cost or other basis to the Trust. The tax basis of such
Common Stock to the Member 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 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
14
<PAGE>
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 IRS.
Contribution to Another Qualified Plan or to an IRA. A Member may defer
federal income taxation of all or any portion of the total taxable amount of a
Lump Sum Distribution (including the proceeds from the sale of any Common Stock
included in the Lump Sum Distribution) to the extent that such amount, or a
portion thereof, is contributed, within 60 days after the date of its receipt by
the Member, to another qualified plan or to an IRA. If less than the total
taxable amount of a Lump Sum Distribution is contributed to another qualified
plan or to an IRA within the applicable 60-day period, the amount not so
contributed must be included in the Member's income for federal income tax
purposes and will not be eligible for the special averaging rules or for capital
gains treatment. Additionally, a Member may defer the federal income taxation of
any portion of an amount distributed from the Plan on account of the Member's
disability or separation from service, generally, if the amount is distributed
within one taxable year of the Member, and such amount is contributed, within 60
days after the date of its receipt by the Member, to an IRA. Prior to 1993,
following the partial distribution of a Member's account, any remaining balance
under the Plan (and the balance to the credit of the Member under any other
profit sharing plan sponsored by the Bank) would not be eligible for the special
averaging rules or for capital gains treatment. For these purposes, a "partial
distribution" is a distribution within one taxable year of the Member equal to
at least 50% of the balance of a Member's account ("Partial Distribution").
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 IRA without regard to whether the distribution is a Lump Sum Distribution or
a Partial Distribution. Effective January 1, 1993, Members 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 Member 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 a 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 made (not less frequently than
annually ) over the Member's life or the joint life of the Member and the
Member's 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 beneficiary of a Member who is the Member's surviving spouse also may
defer federal income taxation of all or any portion of a distribution from the
Plan to the extent that such amount, or a portion thereof, is contributed within
60 days after the date of its receipt by the surviving spouse, to an IRA. If all
or any portion of the total taxable amount of a Lump Sum Distribution is
contributed by the surviving spouse of a Member to an IRA within the applicable
60-day period, any subsequent distribution from the IRA will not be eligible for
the special averaging rules or for capital gains treatment. Any amount received
by the Member's surviving spouse that is not contributed to another qualified
plan or to an IRA within the applicable 60-day period, and any amount received
by a
15
<PAGE>
nonspouse beneficiary will be included in such beneficiary's income for federal
tax purposes in the year in which it is received.
Additional Tax on Early Distributions. A Member who receives a distribution
from the Plan prior to attaining age 59-1/2 will be subject to an additional
income tax equal to 10% of the taxable amount of the distribution. The 10%
additional income tax will not apply, however, to the extent the distribution is
rolled over into an IRA or another qualified plan or the distribution is (i)
made to a beneficiary (or to the estate or a Member) on or after the death of
the Member, (ii) attributable to the Member's being disabled within the meaning
of Section 72(m)(7) of the Code, (iii) part of a series of substantially equal
periodic payments (not less frequently than annually) made for the life (or life
expectancy) of the Member or the joint lives (or joint life expectancies) of the
Member and his beneficiary, (iv) made to the Member after separation from
service on account of early retirement under the Plan after attainment of age
55, (v) made to pay medical expenses to the extent deductible for federal income
tax purposes, (vi) made to an alternate payee pursuant to a qualified domestic
relations order, or (vii) made to effect the distribution of excess
contributions or excess deferrals.
ERISA and Other Qualifications
As noted above, the Plan is subject to certain provisions of ERISA and has
applied for a favorable determination that it is qualified under Section 401(a)
of the Code.
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 Member is urged to consult a tax advisor concerning the
federal, state and local tax consequences of participating in and receiving
distributions from the Plan.
SEC Reporting and Short-Swing Profit Liability
Section 16 of the Exchange Act imposes reporting and liability requirements
on officers, directors, and persons beneficially owning more than 10% of public
companies such as the Company. Section 16(a) of the Exchange Act requires the
filing of reports of beneficial ownership. Within 10 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 ("SEC") . Certain changes in beneficial ownership, such as purchases,
sales and gifts must be reported periodically, either on a Form 4 within 10 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 Company's fiscal year. Certain
discretionary transactions in and beneficial ownership of the Common Stock
through the Employer Stock Fund of the Plan by officers, directors and persons
beneficially owning more than 10% of the Common Stock of the Company must be
reported to the SEC by such individuals.
In addition to the reporting requirements described above, Section 16(b) of
the Exchange Act provides for the recovery by the Company of profits realized by
an officer, director or any person
16
<PAGE>
beneficially owning more than 10% of the Company's Common Stock ("Section 16(b)
Persons") resulting from non-exempt purchases and sales of the 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 all transactions in employer securities 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 and are
prohibited from directing additional purchases of units within the Employer
Stock Fund for six months after receiving such a distribution.
Financial Information Regarding Plan Assets
Financial statements representing the net assets available for Plan
benefits at September 30, 1998, as prepared by Pentegra Group, are attached to
this Prospectus Supplement.
LEGAL OPINION
The validity of the issuance of the Common Stock will be passed upon by
Luse Lehman Gorman Pomerenk & Schick, A Professional Corporation, Washington,
D.C., which firm acted as special counsel to the Bank in connection with the
Company's Conversion from a mutual holding company to a stock form of ownership.
17
<PAGE>
FINANCIAL INSTITUTIONS THRIFT PLAN
As Adopted By
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
Statement of Net Assets Available for Plan Benefits
with Fund Information
September 30, 1998
<TABLE>
<CAPTION>
S&P Stable S&P Money Government
500 Value MidCap Market Bond
Stock Fund Fund Stock Fund Fund Fund
---------- ---- ---------- ---- ----
<S> <C> <C> <C> <C> <C>
Assets
Investments $ 251,996.09 42,617.02 93,286.67 26,711.97 39,888.16
Total Value of Accounts $ 479,263.27
Outstanding Loans Receivable $ 2,800.00
----------------
Total Assets $ 482,063.27
Liabilities $ 0
----------------
Net Assets Available for Plan Benefits $ 482,063.27
----------------
----------------
</TABLE>
<TABLE>
<CAPTION>
Income Growth & International
Plus Income Growth Stock
Fund Fund Fund Fund
---- ---- ---- ----
<S> <C> <C> <C> <C>
Assets
Investments 1,418.01 2,306.22 10,797.97 10,241.34
</TABLE>
18
<PAGE>
PROSPECTUS
FIRST FEDERAL BANKSHARES, INC.
(PROPOSED HOLDING COMPANY FOR FIRST FEDERAL
SAVINGS BANK OF SIOUXLAND, TO BE RENAMED "FIRST FEDERAL BANK")
BETWEEN 2,635,000 AND 3,565,000
SHARES OF COMMON STOCK
First Federal Savings Bank of Siouxland is converting from the mutual
holding company form of organization to the stock holding company form of
organization. As of September 30, 1998, First Federal Bankshares, M.H.C., a
federally-chartered mutual holding company, owned 53.6% of the outstanding
common stock of First Federal Savings Bank of Siouxland, $310,000 in cash or
cash equivalents, and other assets of $1.5 million. As a result of the
conversion, First Federal Bankshares, M.H.C. will cease to exist and First
Federal Savings Bank of Siouxland, under its new name "First Federal Bank,"will
become a wholly-owned subsidiary of First Federal Bankshares, Inc., a Delaware
corporation that was formed in December 1998. First Federal Bankshares, Inc. is
offering its common stock to the public under the terms of a Plan of Conversion
which must be approved by the members of First Federal Bankshares, M.H.C. and by
the stockholders of First Federal Savings Bank of Siouxland. The conversion will
not proceed without these approvals or if First Federal Bankshares, Inc. does
not sell at least the minimum number of shares set forth in the table below.
Pursuant to the Plan of Conversion, First Federal Bankshares, Inc. will issue
shares of its common stock in this offering that will represent a 53.6%
ownership interest in First Federal Bankshares, Inc., which is based on the
percentage ownership that First Federal Bankshares, M.H.C. currently maintains
in First Federal Savings Bank of Siouxland. First Federal Bankshares, Inc. will
also issue shares of its common stock to the public stockholders of First
Federal Savings Bank of Siouxland in exchange for their shares of First Federal
Savings Bank of Siouxland's common stock pursuant to an exchange ratio that will
result in the public stockholders owning in the aggregate approximately 46.4% of
the outstanding common stock of First Federal Bankshares, Inc.
OFFERING SUMMARY
Price Per Share: $10.00
<TABLE>
<CAPTION>
MAXIMUM
MINIMUM MIDPOINT MAXIMUM AS ADJUSTED
------- -------- ------- -----------
<S> <C> <C> <C> <C>
Number of Shares 2,635,000 3,100,000 3,565,000 4,099,750
Gross offering proceeds: $26,350,000 $31,000,000 $35,650,000 $40,997,500
Estimated underwriting commissions and $ 1,326,000 $ 1,375,000 $ 1,423,000 $ 1,479,000
other offering expenses:
Estimated net proceeds: $25,024,000 $29,625,000 $34,227,000 $39,518,500
Estimated net proceeds per share: $ 9.50 $ 9.56 $ 9.60 $ 9.64
</TABLE>
The amount of common stock being offered in the conversion is based on
an independent appraisal of the market value of First Federal Savings Bank of
Siouxland and First Federal Bankshares, M.H.C. after giving effect to the
conversion. The independent appraiser has stated that as of November 27, 1998,
the estimated market value of the converted First Federal Savings Bank of
Siouxland and First Federal Bankshares, M.H.C. ranged from $48.1 million to
$65.1 million, subject to adjustment. Based on this valuation and the 53.6%
ownership interest being sold in this offering, the minimum of the offering
range was set at 2,635,000 shares and the maximum was set at
<PAGE>
3,565,000 shares. Subject to approval of the Office of Thrift Supervision, an
additional 15% above the maximum number of shares may be sold.
Sandler O'Neill & Partners, L.P. and Investment Bank Services, Inc.
will use their best efforts to assist First Federal Bankshares, Inc. in selling
at least the minimum number of shares but do not guarantee that this number will
be sold. All funds received from subscribers will be held in an interest-bearing
savings account at First Federal Savings Bank of Siouxland until the completion
or termination of the conversion.
First Federal Bankshares, Inc. has received preliminary approval to
have its common stock quoted on the Nasdaq National Market under the symbol
FFSX.
The subscription offering will terminate at 12:00 Noon, Central Time,
on [ ], 1999, unless extended for up to __ days.
On August 17, 1998, First Federal Savings Bank of Siouxland and First
Federal Bankshares, M.H.C. agreed to acquire Mid-Iowa Financial Corp. and its
wholly-owned subsidiary, Mid-Iowa Savings Bank, FSB. Pursuant to this agreement,
First Federal Savings Bank of Siouxland will pay $15.00 in cash, subject to
adjustment in certain situations, for each share of common stock of Mid-Iowa
Financial Corp. This acquisition and the conversion are interdependent
transactions; neither transaction will occur unless both of them do.
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY.
FOR A DISCUSSION OF CERTAIN RISKS THAT YOU SHOULD CONSIDER, SEE "RISK
FACTORS" BEGINNING ON PAGE __.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT
SUPERVISION, NOR ANY STATE SECURITIES REGULATOR HAS APPROVED OR DISAPPROVED OF
THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
For additional information about the conversion, refer to the more
detailed information in this prospectus. For assistance, contact the conversion
center at [ ].
SANDLER O'NEILL & PARTNERS, L.P.
INVESTMENT BANK SERVICES, INC.
The date of this prospectus is February __, 1999
FORWARD-LOOKING STATEMENTS
Certain of the statements contained herein that are not historical
facts are forward-looking statements. These forward-looking statements include
statements of goals, intentions and expectations and involve risks and
uncertainties including, but not limited to, the following: changes in general
economic conditions; the performance of financial markets; interest rates; and
competitive, regulatory, legislative or tax changes that affect the cost of, or
demand for, the Bank's products. Because of these uncertainties, actual future
results may differ materially from those contemplated by such statements.
2
<PAGE>
- ------------------------------------------------------------------------------
[INSERT MAP]
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC"), THE
BANK INSURANCE FUND ("BIF"), THE SAVINGS ASSOCIATION INSURANCE FUND ("SAIF") OR
ANY OTHER GOVERNMENT AGENCY.
- ------------------------------------------------------------------------------
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary............................................................................................ 5
Selected Consolidated Financial and Other Data of the Bank and Subsidiary.......................... 14
Risk Factors....................................................................................... 19
The Company........................................................................................ 26
The Bank........................................................................................... 26
Historical Pro Forma Capital Compliance............................................................ 28
Use of Proceeds.................................................................................... 30
Dividend Policy.................................................................................... 31
Market for the Common Stock........................................................................ 32
Capitalization..................................................................................... 33
Pro Forma Data..................................................................................... 36
Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 45
Business of the Bank............................................................................... 58
Regulation......................................................................................... 80
Taxation .......................................................................................... 87
Management of the Company.......................................................................... 88
Management of the Bank............................................................................. 88
Beneficial Ownership of Common Stock............................................................... 100
Subscriptions by Executive Officers and Directors.................................................. 101
The Conversion..................................................................................... 102
Restrictions on the Acquisition of the Company and the Bank........................................ 121
Description of Capital Stock of the Company........................................................ 126
Description of Capital Stock of the Bank........................................................... 127
Transfer Agent and Registrar....................................................................... 127
Experts............................................................................................ 127
Legal Opinions..................................................................................... 128
Additional Information............................................................................. 128
First Federal Savings Bank of Siouxland and Subsidiaries Index to
Consolidated Financial Statements............................................................... F-1
Mid-Iowa Financial Corp. and Subsidiaries Index to Consolidated Financial Statements
and Other Information........................................................................... G-1
Glossary........................................................................................... H-1
</TABLE>
4
<PAGE>
SUMMARY
The following summary explains the significant aspects of the
conversion and the acquisition. For additional information, refer to the more
detailed information in this prospectus. Throughout this prospectus, First
Federal Savings Bank of Siouxland is referred to as the "Bank," First Federal
Bankshares, M.H.C. is referred to as the "Mutual Holding Company" and First
Federal Bankshares, Inc. is referred to as the "Company." See the glossary at
the back of this prospectus for the definitions of certain terms that are
printed in boldface type the first time they appear in this prospectus.
FIRST FEDERAL BANKSHARES, INC.
The Bank formed the Company under Delaware law in December 1998 for the
purpose of owning all of the Bank's capital stock following completion of the
conversion. The Company has received conditional approval from the OTS to become
a savings and loan holding company by acquiring the capital stock of the Bank in
the conversion. The Company intends to retain $5.0 million of the net proceeds
from the sale of its common stock in the Conversion, including the loan that the
Company intends to make to the Bank's ESOP (the remaining net proceeds will be
contributed to the Bank).
FIRST FEDERAL BANKSHARES, M.H.C.
The Mutual Holding Company is the federally-chartered mutual holding
company of the Bank. The Mutual Holding Company was formed in July 1992 as a
result of the reorganization of the Bank into a federally-chartered mutual
holding company structure. The Mutual Holding Company's sole business activity
is holding 1,524,600 shares of the Bank's common stock, which represents 53.6%
of the outstanding shares, as well as $310,000 in cash or cash equivalents and
other assets of $1.5 million as of September 30, 1998. As part of the
conversion, the Mutual Holding Company will merge into the Bank, with the Bank
as the surviving entity.
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
The Bank is a federally-chartered stock savings bank headquartered in
Sioux City, Iowa. The Bank's deposits have been federally insured since 1935.
The Bank has been a member of the Federal Home Loan Bank ("FHLB") of Des Moines
since 1935. At September 30, 1998, the Bank had total assets of $569.6 million,
total deposits of $392.7 million, and total stockholders' equity of $43.2
million.
The Bank is a community-oriented financial institution offering
traditional financial services to its local community. The Bank's primary
lending area includes northwest Iowa, contiguous portions of Nebraska and South
Dakota and central Iowa. The Bank's primary lending activity involves the
origination of fixed rate and adjustable rate mortgage (ARM) loans secured by
single family residential real estate. Fixed rate mortgage loans with terms
longer than fifteen years are originated primarily for sale in the secondary
market on a servicing released basis, while ARM loans are retained in the Bank's
portfolio. To a lesser extent, the Bank makes second mortgage loans secured by
the borrower's principal residence and other types of consumer loans, such as
auto loans and home improvement loans. In addition, the Bank makes commercial
and multi-family loans and the Bank anticipates an increase in its commercial
and multi-family loan portfolios in the future. In addition, the Bank invests in
mortgage-backed securities and in securities issued by the United States
Government and its agencies.
The Bank conducts operations through its main office in Sioux City,
Iowa, and its 12 branch offices.
The principal executive offices of the Company and the Bank are located
at 329 Pierce Street, Sioux City, Iowa 51101. Their telephone number at that
address is (712) 277-0200.
ACQUISITION OF MID-IOWA FINANCIAL CORP.
On August 17, 1998, the Mutual Holding Company and the Bank agreed to
acquire Mid-Iowa Financial Corp. and its wholly-owned subsidiary, Mid-Iowa
Savings Bank, FSB. Pursuant to the MERGER AGREEMENT,
5
<PAGE>
each share of MID-IOWA FINANCIAL COMMON STOCK (other than shares held as
treasury stock and any shares as to which dissenters' rights are exercised under
applicable law) will be converted into the right to receive $15.00 in cash,
subject to adjustment in certain situations, and each outstanding stock option
will be converted into the right to receive the amount by which the $15.00
purchase price exceeds the exercise price per share of Mid-Iowa Financial Common
Stock under such option. If the Merger is not completed by April 15, 1999, the
MERGER CONSIDERATION will be increased by $3,700 per day until the Merger is
completed. The Bank estimates that the Merger Consideration will be
approximately $27.8 million (or $29.0 million assuming full exercise of stock
options prior to the closing of the Merger), assuming that the Merger is
completed prior to April 15, 1999.
The Merger must be approved by stockholders of Mid-Iowa Financial Corp.
and by certain regulatory bodies, including the OTS. The Annual Meeting of
Stockholders of Mid-Iowa Financial Corp. is scheduled for March 22, 1999 to vote
on the Merger and other matters. The Merger is expected to occur simultaneously
with, or immediately after the conversion. Since neither the conversion nor the
Merger will occur unless both of them do, subscription funds for the shares to
be sold in this offering, with interest, will be returned to subscribers if the
Merger does not occur.
The Merger will expand the Bank's presence in communities located in
the Des Moines area and will increase its deposit base, loan portfolio and
number of full-service offices.
Mid-Iowa Savings Bank, FSB attracts retail deposits from the general
public in its primary market area of Jasper County and West Des Moines, Iowa,
and invests primarily in one-to-four family residential mortgage loans,
mortgage-backed and related securities, and to a lesser extent, consumer,
commercial real estate and commercial business loans.
Mid-Iowa Savings Bank, FSB serves its primary market area through two
offices in Newton and offices in Baxter, Colfax, Monroe, Prairie City and West
Des Moines. At September 30, 1998, Mid-Iowa Financial Corp. had assets of $147.5
million, deposits of $96.4 million and total stockholders' equity of $13.8
million.
The principal executive offices of Mid-Iowa Financial Corp. and
Mid-Iowa Savings Bank, FSB are located at 123 West Second Street North, Newton,
Iowa. Their telephone number at that address is (515) 792-6236.
For further information about Mid-Iowa Financial Corp. and Mid-Iowa
Savings Bank, FSB, see "Excerpts from Annual Report on Form 10-KSB for the year
ended September 30, 1998" attached to this prospectus.
THE CONVERSION
The conversion is being undertaken pursuant to the PLAN OF CONVERSION
that was adopted by the Board of Directors of the Mutual Holding Company on
October 1, 1998. Pursuant to the Plan of Conversion, (i) the Mutual Holding
Company will merge into the Bank, at which time the Mutual Holding Company will
cease to exist and the outstanding shares of the Bank's common stock held by the
Mutual Holding Company will be canceled, and (ii) the Bank will become a
wholly-owned subsidiary of the Company. As part of the conversion, the Company
will sell shares of its common stock in this offering that will represent an
ownership interest in the Company that is based on the percentage ownership that
the Mutual Holding Company currently maintains in the Bank. The Company will
also issue shares of its common stock to the public stockholders of the Bank
(i.e., stockholders other than the Mutual Holding Company) in exchange for their
shares of Bank common stock pursuant to an exchange ratio that will result in
the public stockholders of the Bank owning in the aggregate approximately 46.4%
of the Company, before giving effect to any (i) payment of cash in lieu of
issuing fractional shares, (ii) shares purchased by the stockholders of the Bank
in this offering, and (iii) the exercise of outstanding stock options.
6
<PAGE>
The following diagram illustrates the current organizational structure
and ownership of the Bank:
- ---------------------- --------------------- -------------------
First Federal Public Shareholders
Bankshares, M.H.C.
53.6% 46.4%
---------------------
First Federal Savings
Bank of Siouxland
---------------------
The following diagram reflects the post-conversion organizational
structure and ownership of the Company and the Bank. The ownership interests
presented assume fractional shares of the Company's common stock are issued and
does not give effect to purchases of any shares in this offering by the Bank's
public stockholders or to the exercise of outstanding stock options.
- ---------------------------- ----------------------
Purchasers in Offering Former Bank
Stockholders
- ---------------------------- ----------------------
54.7% 45.3%
-------------------------------
First Federal Bankshares,
Inc.
-------------------------------
100%
-------------------------------
First Federal Bank
-------------------------------
Completion of the conversion requires the following member and
shareholder approvals:
1. Approval by the holders of at least a majority of the
total number of votes eligible to be cast by the
members of the Mutual Holding Company.
2. Approval by the holders of at least two-thirds of the
outstanding shares of the Bank's common stock
(including those shares held by the Mutual Holding
Company).
3. Approval by the holders of at least a majority of the
shares of the Bank's common stock (not including
those shares held by the Mutual Holding Company)
present in person or by proxy at a meeting of
stockholders called for the purpose of considering
the Plan of Conversion.
The Mutual Holding Company has called a special meeting of its members
to be held on _________________________, 1999 for the purpose of considering the
Plan of Conversion. The Bank's stockholders will consider the Plan of Conversion
at a special meeting to be held on __________________, 1999. The Mutual Holding
Company intends to vote its shares of Bank common stock, which amounts to 53.6%
of the outstanding shares, in favor of the Plan of Conversion at the special
meeting of stockholders. As of September 30, 1998, directors and executive
officers of the Bank and their associates beneficially owned 134,788 shares (not
including shares that may be acquired through the exercise of stock options), or
4.7%, of the outstanding shares of Bank common stock held by the Bank's public
shareholders (i.e., shareholders other than the Mutual Holding Company), which
they intend to vote in favor of the Plan of Conversion.
7
<PAGE>
Under OTS regulations, stockholders of the Bank do not have
"dissenters' rights" or appraisal rights in connection with the exchange of
their shares for Company common stock.
REASONS FOR THE CONVERSION
The Boards of Directors of the Mutual Holding Company and the Bank
believe that the conversion is in the best interests of the Mutual Holding
Company and its members, the Bank and its stockholders, and the communities
served by the Mutual Holding Company and the Bank. The Boards of Directors
decided to pursue the conversion in order to increase the Bank's capital and to
maintain acceptable regulatory capital following the acquisition of Mid-Iowa
Financial Corp. In addition, the Boards of Directors considered the various
advantages of the stock holding company form of organization, including: (i) the
potential increased liquidity in the Company common stock relative to the Bank
common stock because of the larger number of shares to be outstanding after the
conversion and because of the listing of the Company's shares on the Nasdaq
National Market; (ii) the Company's ability to repurchase shares of its common
stock without adverse tax consequences; and (iii) the Company's greater
flexibility under current law and regulations relative to the Mutual Holding
Company to acquire other financial institutions and diversify operations.
Currently, the Boards of Directors of the Company and the Bank have no specific
plans, arrangements or understandings, written or oral, regarding any stock
repurchases, acquisitions or diversification of operations, except for the
acquisition of Mid-Iowa Financial Corp. See "THE CONVERSION -- Purposes of
Conversion."
THE SUBSCRIPTION OFFERING AND THE COMMUNITY OFFERING
The Company is offering shares of its common stock in a SUBSCRIPTION
OFFERING to current and former depositor and borrower customers of the Bank as
described below and to the Bank's tax-qualified employee stock benefit plans.
Pursuant to its Plan of Conversion, the Bank has granted subscription rights in
the following order of priority in accordance with applicable regulatory
requirements to:
1. "ELIGIBLE ACCOUNT HOLDERS" -- the Bank's depositors with $50
or more on deposit as of September 30, 1997.
2. The Bank's tax-qualified employee stock benefit plans,
including the ESOP.
3. "SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS" -- the Bank's
depositors with $50 or more on deposit as of December 31,
1998.
4. "OTHER MEMBERS" -- the Bank's depositors as of ____________,
1999 and borrowers of the Bank as of February 11, 1992, whose
loans continue to be outstanding as of _________________,
1999.
If the number of shares sold in the conversion is increased above the
maximum of the offering range, the ESOP will have first priority to purchase any
such shares over the maximum of the offering range, up to a total of 7% of the
common stock sold in this offering.
IMPORTANT: Subscription rights are not transferable, and persons with
subscription rights may not subscribe for shares for the benefit of any
other person. Persons violating this prohibition may lose their right
to purchase shares in the conversion and may be subject to criminal
prosecution and/or other sanctions.
The Subscription Offering will expire at 12:00 Noon, Central Time, on
the EXPIRATION DATE of __________________, 1999, unless extended by the Bank and
the Company for up to __ days. In the event of an oversubscription, shares will
be allocated in accordance with the Plan of Conversion.
Concurrently with the Subscription Offering, shares will be offered to
the general public in a COMMUNITY OFFERING. Public stockholders of the Bank will
have first preference to purchase shares in the Community Offering, depositors
of Mid-Iowa Savings Bank, FSB as of ______________, 1998 will have second
preference, and
8
<PAGE>
natural persons and trusts of natural persons who are residents of the Bank's
COMMUNITY will have third preference. The Community Offering will terminate on
the Expiration Date unless extended with approval of the OTS, if necessary. The
Subscription Offering and the Community Offering are being managed by SANDLER
and IBS. Sandler and IBS are registered broker-dealers and members of the NASD.
They are not obligated to purchase any shares of common stock in this offering.
Shares not sold in the Subscription Offering or Community Offering may be
offered for sale in a SYNDICATED COMMUNITY OFFERING, which would be an offering
to the general public on a best efforts basis by a selling group of
broker-dealers managed by Sandler. See "THE CONVERSION -- The Subscription,
Community and Syndicated Community Offerings."
EXCHANGE OF THE BANK'S COMMON STOCK
As part of the conversion, each share of Bank common stock held by the
Mutual Holding Company will be canceled and each share of Bank common stock held
by the Bank's public stockholders will be exchanged for shares of Company common
stock. The exchange will occur automatically; if you own shares of Bank common
stock in "street name," you need take no action. If you hold certificated
shares, you will receive a transmittal form within five (5) business days after
the Effective Date with instructions to surrender your certificates. You will
receive certificates of the Company's common stock within five (5) business days
after receipt of properly executed transmittal forms.
The number of shares of Company common stock to be issued to the Bank's
public stockholders will be based on an EXCHANGE RATIO that will result in the
Bank's public stockholders owning in the aggregate approximately 46.4% of the
outstanding shares of Company common stock before giving effect to any (i)
payment of cash in lieu of issuing fractional shares of Company common stock,
(ii) shares purchased by the Bank's public stockholders in this offering, and
(iii) the exercise of any outstanding stock options. THE FINAL EXCHANGE RATIO
WILL BE BASED ON THE PERCENTAGE OWNERSHIP INTEREST OF THE BANK'S PUBLIC
STOCKHOLDERS IN THE BANK AND THE NUMBER OF SHARES SOLD IN THIS OFFERING AND NOT
ON THE MARKET VALUE OF BANK COMMON STOCK. ACCORDINGLY, THE VALUE OF THE SHARES
OF COMPANY COMMON STOCK TO BE RECEIVED FOR EACH SHARE OF BANK COMMON STOCK MAY
BE MORE OR LESS THAN THE MARKET VALUE OF BANK COMMON STOCK AT THE TIME OF
EXCHANGE. See" -- Stock Pricing, Exchange Ratio and Number of Shares to be
Issued in the Conversion."
STOCK PRICING, EXCHANGE RATIO AND NUMBER OF SHARES TO BE ISSUED IN THE
CONVERSION
Between 2,635,000 and 3,565,000 shares of the Company common stock will
be sold in this offering, all at a price of $10.00 per share. The number of
shares sold in this offering may be increased to 4,099,750. There are no
commissions to pay in order to buy any shares in the conversion.
The amount of common stock being offered in the conversion is based on
an independent appraisal of the estimated pro forma market value of the Bank and
the Mutual Holding Company after giving effect to the conversion. RP FINANCIAL,
the independent appraiser, has estimated that, in its opinion, as of November
27, 1998, the aggregate pro forma market value of the Bank and the Mutual
Holding Company was in an ESTIMATED VALUATION RANGE of between $48.1 million and
$65.1 million (with a midpoint of $56.6 million). The pro forma market value is
the estimated market value of the Bank and the Mutual Holding Company after
taking into account the sale of shares in this offering and the formation of the
Company. The appraisal was based in part on the Bank's financial condition and
operations and the effect of the additional capital raised by the sale of common
stock in this offering. Based on this valuation and the approximate 53.6%
ownership interest being sold in this offering, the Board of Directors of the
Company and the Bank established an offering range between 2,635,000 to
3,565,000 shares. The independent appraisal will be updated prior to the
completion of the conversion. If the pro forma market value of the Bank and the
Mutual Holding Company changes to either below $48.1 million or above $74.9
million (the adjusted maximum of the Estimated Valuation Range), subscribers
will be notified and provided with the opportunity to modify or cancel their
orders. The $10.00 per share purchase price was determined by the Boards of
Directors of the Company and the Bank. See "THE CONVERSION -- Stock Pricing,
Exchange Ratio and Number of Shares to be Issued."
9
<PAGE>
Based on the 2,845,060 shares of Bank common stock outstanding at the
date of this prospectus, the 53.6% of the outstanding shares of Bank common
stock held by the Mutual Holding Company, and assuming a minimum of 2,635,000
and a maximum of 3,565,000 shares of Company common stock are sold in the
offering, the Exchange Ratio is expected to range from 1.6499 to 2.2323 as set
forth in the following table. If 4,099,750 shares of Company common stock are
sold, the Exchange Ratio will be 2.5671. The final Exchange Ratio will be
adjusted if any options to purchase shares of Bank common stock are exercised
after the date of this prospectus and before the consummation of the conversion.
<TABLE>
<CAPTION>
Shares to be Sold in this Shares to be Exchanged for Total Shares Exchange
Offering Bank Common Stock (1) of Common Ratio(1)
-------------------------- -------------------------- Stock to Be
Amount Percent Amount Percent Outstanding(1)
------ ------- ------ ------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
Minimum 2,635,000 53.6% 2,178,665 46.4% 4,813,665 1.6499
Midpoint 3,100,000 53.6 2,563,135 46.4 5,663,135 1.9411
Maximum 3,565,000 53.6 2,947,605 46.4 6,512,605 2.2323
15% above 4,099,750 53.6 3,389,746 46.4 7,489,496 2.5671
Maximum
</TABLE>
- ---------------
(1) Assumes that outstanding options at September 30, 1998 to purchase
37,574 shares of Bank common stock are not exercised before
consummation of the conversion.
PURCHASE LIMITATIONS
The minimum number of shares that may be purchased is 25. The Bank has
established the following additional purchase limitations:
1. No person may purchase more than 85,000 shares in this
offering.
2. No person, either alone or together with associates or persons
acting in concert, may purchase shares in an amount that, when
combined with shares received in exchange for Bank common
stock, exceeds 85,000 shares.
Persons owning shares of Bank common stock may be limited in their
ability to subscribe for and purchase shares in this offering because OTS policy
requires that the maximum purchase limitation include shares to be received in
exchange for shares of Bank common stock.
For further discussion of the purchase limits and definitions of
"associate" and "acting in concert," see "THE CONVERSION -- Limitations on
Purchases of Shares of Common Stock."
10
<PAGE>
PROCEDURE FOR PURCHASING COMMON STOCK
To subscribe for shares of common stock in the Subscription Offering,
send or deliver an original, signed stock order form together with full payment
(or appropriate instructions for withdrawal of full payment from permitted
deposit accounts, as described below) to the Bank in the postage-paid envelope
provided so that the Bank receives the stock order form before the end of the
Subscription Offering. The certification that is part of the stock order form
must also be signed. Payment for shares may be made in cash (if made in person)
or by check or money order. The Bank will pay interest at the rate of __% from
the date funds are received until completion or termination of the conversion.
Subscribers who have deposit accounts with the Bank may include instructions on
the stock order form requesting withdrawal from such deposit account(s) to
purchase shares. Withdrawals from certificates of deposit may be made without
incurring an early withdrawal penalty. All funds authorized for withdrawal from
deposit accounts with the Bank will earn interest at the applicable account
rate, but a hold will be placed on such funds making them unavailable until the
completion of the conversion. After the Bank receives an order, the order cannot
be withdrawn or changed, except with the consent of the Bank.
IMPORTANT: To ensure the proper identification of subscription rights,
list all qualifying deposit accounts and loans, as of the respective
qualifying dates, on the stock order form. Persons who do not list all
qualifying deposit accounts and loans may be subject to reduction or
rejection of their subscription.
The Company and the Bank have the discretion to accept or reject orders
received either through the Community Offering or the Syndicated Community
Offering. If an order is rejected in part, there is no right to cancel the
remainder of the order.
Owners of self-directed IRAs who are eligible to purchase common stock
may use the assets of their IRAs to purchase shares of common stock in the
conversion, provided that their IRAs are not maintained on deposit with the
Bank. If you want to use funds in a self-directed IRA maintained by the Bank to
purchase shares of common stock, you must transfer your account to an
unaffiliated institution or broker. If you are interested in doing so, you
should contact the stock information center at least one week before the
Expiration Date.
For further information on how to purchase stock, see "THE
CONVERSION--Procedure for Purchasing Shares in the Subscription and Direct
Community Offerings."
USE OF PROCEEDS
The Company will use the proceeds of this offering as follows:
1. The Company will retain $5 million of the net proceeds, which
will include a loan to the ESOP to fund its purchase of common
stock. The balance of the funds retained by the Company will
be used for general corporate purposes. These purposes may
include paying dividends or buying back shares of common
stock. In addition, these funds may be used for future
diversification or acquisition activities.
2. The remaining net proceeds, estimated to be between $20.0
million (at the minimum of the offering range) and $29.2
million (at the maximum of the offering range), will be
contributed to the Bank and used to fund a portion of the
Merger Consideration. Any additional funding required for the
Merger Consideration, will be obtained from cash on hand at
the Bank, including interest bearing deposits with the FHLB,
or FHLB advances.
For further discussion, see "USE OF PROCEEDS."
PURCHASES BY OFFICERS AND DIRECTORS
The Bank expects its directors and executive officers (together with
their associates) to subscribe for 76,500 shares, which equals approximately
2.5% of the shares sold at the midpoint of the offering range. The purchase
price
11
<PAGE>
paid by them will be the same $10.00 per share price as that paid by all other
persons who purchase shares in the conversion. See "SUBSCRIPTIONS BY EXECUTIVE
OFFICERS AND DIRECTORS."
BENEFITS OF THE CONVERSION TO MANAGEMENT
ESOP. The Bank's ESOP intends to purchase up to 7% of the shares of
common stock sold in this offering (249,550 shares of the maximum of the
Estimated Valuation Range for an aggregate value of $2,495,500 based on the
purchase price of $10.00 per share). If the ESOP's subscription is not filled in
its entirety, the ESOP may purchase shares in the open market or may purchase
shares directly from the Company. If the number of shares sold in the conversion
is increased above the maximum of the offering range, the ESOP will have a first
priority to purchase any such shares over the maximum of the offering range, up
to a total of 7% of the common stock sold in this offering. The Company will
recognize additional compensation expense as a result of the adoption of the
ESOP. For information about the ESOP, see "MANAGEMENT OF THE BANK -- Benefits --
Employee Stock Ownership Plan."
1999 RECOGNITION AND RETENTION PLAN. After the conversion, the Company
expects to adopt the 1999 RECOGNITION PLAN. If the 1999 Recognition Plan is
implemented within one year after the conversion, under current OTS regulations
the plan will be subject to approval by stockholders at a meeting which may be
held no earlier than six months after completion of the conversion. The 1999
Recognition Plan will reserve a number of shares equal to 3% of the number of
shares sold in this offering (106,950 shares at the maximum of the Estimated
Valuation Range for an aggregate value of $1,069,500 based on the purchase price
of $10.00 per share). Pursuant to the 1999 Recognition Plan, the Company would
be able to make awards of shares of common stock to key employees and directors
of the Company and the Bank at no cost to the recipient. All awards would be
subject to vesting over a period of years. The size of individual awards will be
determined prior to submitting the 1999 Recognition Plan for stockholder
approval, and disclosure of anticipated awards will be included in the proxy
materials for such meeting. The Company will recognize additional compensation
expense as a result of the adoption of the 1999 Recognition Plan. For additional
information about the 1999 Recognition Plan, see "MANAGEMENT OF THE BANK --
Benefits -- Management Recognition and Retention Plans."
STOCK OPTION PLAN. After the conversion, the Company expects to adopt
the 1999 OPTION PLAN. If the 1999 Option Plan is implemented within one year
after the conversion, under current OTS regulations the plan will be subject to
approval by stockholders at a meeting which may be held no earlier than six
months after completion of the conversion. The 1999 Option Plan will reserve a
number of shares equal to 10% of the number of shares sold in this offering
(356,500 shares at the maximum of the Estimated Valuation Range). Pursuant to
the 1999 Option Plan, the Company would be able to award options to acquire
shares of common stock to key employees and directors of the Company and the
Bank at no cost to the recipient. The exercise price of such options would be
100% of the fair market value of the common stock on the date the option is
granted. All awards would be subject to vesting over a period of years.
Disclosure of anticipated awards, including the size of such awards, will be
included in the proxy materials for the stockholder meeting. For additional
information about the 1999 Option Plan, see "MANAGEMENT OF THE BANK -- Benefits
- -- Stock Option Plans."
EMPLOYMENT AGREEMENTS AND SEVERANCE PLAN. In connection with the
conversion, the Bank plans to enter into employment agreements with Barry E.
Backhaus, President and Chief Executive Officer; Jon G. Cleghorn, Executive Vice
President and Chief Operating Officer; and Sandra Sabel, Senior Vice President.
In addition, the Bank intends to replace its current agreement with Steven L.
Opsal, Executive Vice President, with a new employment agreement. The employment
agreements will provide certain benefits to the executives if their employment
is terminated following a change in control of the Company or the Bank. If there
is a change in control of the Company or the Bank, each executive will be
entitled to a package of cash and/or benefits with a maximum value equal to up
to three times his or her average annual compensation during the three-year
period preceding the change in control. If a change in control had occurred as
of September 30, 1998, the aggregate value of the severance benefits payable to
the executives under the proposed employment agreements would have been
approximately $1.5 million. See "RISK FACTORS -- Possible Anti-takeover Effect
of Employment Agreements" and "MANAGEMENT OF THE BANK -- Executive Compensation
- -- Employment Agreements."
12
<PAGE>
ASSUMPTION OF EXISTING BENEFIT PLANS. When the Bank converted from
mutual to stock form in 1992 as part of its reorganization into the mutual
holding company structure, the Bank adopted the 1992 OPTION PLAN, and the 1992
RECOGNITION PLAN, both of which will be assumed by the Company upon consummation
of the conversion. All stock options awarded pursuant to the 1992 Option Plan
that are outstanding at the consummation of the conversion will be converted
into options to purchase shares of Company common stock, with the number of
shares subject to the option and the exercise price per share to be adjusted
based upon the Exchange Ratio so that the aggregate exercise price remains
unchanged. The duration of the options will also be unchanged. At September 30,
1998, there were outstanding options to purchase 37,574 shares of Bank common
stock at a weighted-average exercise price of $9.21 per share. All shares
awarded pursuant to the 1992 Recognition Plan that are outstanding at the
consummation of the conversion will be converted into shares of Company common
stock, with the number of shares based upon the Exchange Ratio. At September 30,
1998, there were no shares of Bank common stock available to be awarded pursuant
to this plan.
MARKET FOR COMMON STOCK
The Company has obtained preliminary approval for its common stock to
be listed on the Nasdaq National Market under the symbol "FFSX." The common
stock of the Bank is currently listed on the Nasdaq "SmallCap" Market under the
symbol "FFSX." When the conversion is completed, each outstanding share of the
Bank's common stock will be converted into shares of the Company's common stock,
based upon the Exchange Ratio. While it is expected that the Company's common
stock will be more liquid (i.e., more easily tradeable) because there will be
significantly more outstanding shares than for the Bank's common stock, there
can be no assurance of this.
Sandler has advised the Company that it intends to be a market maker in
the Company's common stock, and will assist the Company in obtaining additional
market makers.
DIVIDEND POLICY
The Bank now pays a cash dividend of $0.12 per share per quarter, or
$0.48 per share per year. After the conversion, the Company expects to maintain
this dividend rate. After adjustment for the Exchange Ratio, the Company would
pay $0.2909, $0.2473, $0.2150 and $0.1870 per share per annum at the minimum,
midpoint, maximum and adjusted maximum of the offering range, respectively. The
first dividend is expected to be declared for the quarter ending __________,
1999.
COMPARISON OF STOCKHOLDERS' RIGHTS
The Company is a Delaware corporation subject to the provisions of the
Delaware Business Corporation Code and the Bank is a federally-chartered savings
bank subject to federal laws and OTS regulations. After the conversion, the
stockholders of the Bank will become stockholders of the Company and their
rights as stockholders will be governed by the Company's Certificate of
Incorporation and Bylaws and Delaware law, rather than the Bank's Federal Stock
Charter and Bylaws, federal law and OTS regulations. For a discussion of certain
material differences in the rights of stockholders of the Company and the Bank
and an explanation of possible antitakeover effects of certain provisions of the
Company's Certificate of Incorporation and Bylaws, see "COMPARISON OF
STOCKHOLDERS' RIGHTS" and "RESTRICTIONS ON ACQUISITION OF THE COMPANY."
13
<PAGE>
RISK FACTORS
Before investing in the common stock, you should carefully consider the
matters discussed below. THE COMMON STOCK IS NOT A SAVINGS ACCOUNT OR DEPOSIT
AND IS NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY.
POTENTIAL NEGATIVE EFFECTS OF INCREASES IN MARKET INTEREST RATES
The Bank's net income and financial condition are significantly
affected by changes in market interest rates, and its results of operations are
substantially dependent on its net interest income. Net interest income is the
difference between the interest income earned on its interest-earning assets and
the interest expense paid on its interest-bearing liabilities. Because the
Bank's interest-bearing liabilities reprice or mature more quickly than its
interest-earning assets, an increase in interest rates would likely result in a
decrease in the average interest rate spread and net interest income. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Management of Market Risk."
Changes in interest rates also affect the value of the Bank's
interest-earning assets, and in particular its investment securities portfolio.
Generally, the value of investment securities fluctuates inversely with changes
in interest rates. That is, an increase in interest rates would result in a
decrease in the value of investment securities. At September 30, 1998, the
Bank's investment securities portfolio (excluding mortgage-backed securities)
totaled $84.4 million, and included $68.4 million of securities available for
sale. Unrealized gains and losses on securities available for sale are reported
on a quarterly basis as a separate component of equity. Decreases in the fair
value of securities available for sale therefore could have an adverse effect on
stockholders' equity.
The Bank is also subject to reinvestment risk relating to interest rate
movements. Changes in interest rates can affect the average life of loans and
mortgage-backed securities. Decreases in interest rates can result in increased
prepayments of loans and mortgage-backed securities, as borrowers refinance to
reduce borrowing costs. Under these circumstances, the Bank is subject to
reinvestment risk to the extent that it is not able to reinvest such prepayments
at rates that are comparable to the rates on the maturing loans or securities.
At September 30, 1998, ARM loans constituted 42.3% of the Bank's total
loan portfolio. ARM loans generally pose a risk that as interest rates rise, the
amount of a borrower's monthly loan payment also rises, thereby increasing the
potential for delinquencies and loan losses. At the same time, the marketability
of the underlying property may be adversely affected by higher interest rates.
DECREASED RETURN ON EQUITY AND INCREASED EXPENSES FOLLOWING THE CONVERSION
At September 30, 1998, the Bank's ratio of equity to assets was 7.58%.
The Company's equity will be significantly increased as a result of the
conversion. On a pro forma basis as of September 30, 1998, assuming the sale of
common stock at the midpoint of the offering range, the Company's ratio of
equity to assets would be 9.8% and, assuming the sale of common stock at the
adjusted maximum of the offering range, the Company's ratio of equity to assets
would be 10.8%. The Company currently anticipates that it will take time to
prudently deploy such capital and realize potential synergies relating to the
Mid-Iowa Financial Corp. acquisition. Until then its return on average equity
will be below the industry average.
In addition, the Company's expenses are expected to increase because of
(i) the costs associated with the ESOP, (ii) the restricted stock ownership plan
and stock option plan expected to be implemented following the conversion, (iii)
certain increases in executive compensation related to the responsibilities
associated with managing the Company as a fully converted company, (iv) the
deployment of the net proceeds of this offering, (v) the successful integration
of Grinnell Federal Savings Bank acquired in March 1998, and (vi) the successful
integration of the Mid-Iowa Financial acquisition. Because of the expected
increases in both equity and expenses, return on equity is expected to decrease
as compared to performance in recent years. A lower return on equity could
reduce the trading price of the Company's common stock.
14
<PAGE>
INDEPENDENT VALUATION AND POTENTIAL NEGATIVE IMPACT ON TRADING PRICE OF
COMMON STOCK
The offering price as a percentage of pro forma tangible book value of
the common stock sold in this offering ranges from 105.0% at the minimum of the
offering range to 127.2% at the adjusted maximum of the offering range. These
rates substantially exceed the ratios associated with common stock sold in most
mutual-to-stock conversions that do not involve a mutual holding company
conversion or reorganization. As a result of the relatively high valuation, the
price performance of the common stock is likely to be less favorable immediately
following the conversion than the price performance of common stock sold in
mutual-to-stock conversions that do not involve a mutual-to-stock conversion of
a mutual holding company.
CERTAIN LENDING RISKS
Consumer Lending Risks. At September 30, 1998, the Bank's consumer loan
portfolio (including a small number of commercial business loans) amounted to
$50.4 million, or 12.4% of total net loans. Subject to market conditions and
other factors, the Bank intends to expand its consumer lending activities within
its primary market area. Consumer lending is inherently riskier than one- to
four-family mortgage lending. Collateral such as automobiles, boats and other
personal property depreciate rapidly and are often an inadequate repayment
source if a borrower defaults. In addition, consumer loan repayments depend on
the borrower's continuing financial stability and are more likely to be
adversely affected by job loss, divorce, illness, personal bankruptcy and other
financial hardship. See "BUSINESS OF THE BANK -- Lending Activities -- Consumer
Loans."
Multi-Family and Commercial Real Estate Lending Risks. At September 30,
1998, the Bank's multi-family and commercial real estate loan portfolio amounted
to $60.7 million, or 14.9% of total loans. Multi-family and commercial real
estate lending is inherently riskier than one- to four-family mortgage lending.
Because payments on loans secured by multi-family and commercial properties
often depend upon the successful operation and management of the properties,
repayment of such loans may be affected by adverse conditions in the real estate
market or the economy, among other things. See "BUSINESS OF THE BANK -- Lending
Activities -- Multi-Family Residential Real Estate Loans" and " -- Commercial
Real Estate Loans."
POSSIBLE DILUTIVE EFFECT OF ISSUANCE OF ADDITIONAL SHARES
The 1999 Recognition Plan intends to acquire 3% of the shares of common
stock sold in the conversion. At $10.00 per share, the cost of such shares would
be $1.1 million, assuming the common stock is sold in the conversion at the
maximum of the offering range. Such common stock may be acquired in the open
market with funds provided by the Company, or from authorized but unissued
shares of common stock (in which event the voting interests of existing
stockholders will be diluted and net income per share and stockholders' equity
per share may be decreased).
The Company intends to reserve for the 1999 Stock Option Plan 10% of
the common stock sold in this offering (356,500 shares, based on the issuance of
3,565,000 shares at the maximum of the offering range). Such shares may be
purchased by the Company in the open market. If only authorized but unissued
shares are used under this plan, the voting interests of stockholders would be
diluted and net income per share and stockholders' equity per share may
decrease.
As of September 30, 1998, there are 37,574 options to purchase Bank
common stock outstanding; these options will be converted into options to
purchase Company common stock, based upon the Exchange Ratio. The exercise of
these options will dilute the voting interests of existing stockholders.
POSSIBLE INCREASE IN OFFERING RANGE AND NUMBER OF SHARES ISSUED
The number of shares to be sold in the conversion may be increased by
up to 15% (to 4,099,750 shares) to reflect changes in market and financial
conditions following the commencement of this offering. Such an increase will
decrease a subscriber's pro forma annualized net earnings per share and pro
forma stockholders' equity per
15
<PAGE>
share, but will increase the Company's consolidated pro forma stockholders'
equity and pro forma net income. See "Pro Forma Data."
ESOP COMPENSATION EXPENSE
The Bank is required to record compensation expense in an amount equal
to the fair value of shares committed to be released to employees from the ESOP.
Accordingly, future increases and decreases in fair value of common stock
committed to be released will have a corresponding effect on compensation
expense related to the ESOP. The annual pre-tax compensation expense of the ESOP
will be $144,667 at the midpoint of the offering range, assuming the fair value
of the common stock is $10.00 per share. To the extent that the fair value of
the ESOP shares differs from the cost of such shares, the differential will be
charged or credited to equity.
REGULATORY OVERSIGHT AND LEGISLATION
The Bank is subject to extensive regulation, supervision and
examination by the OTS and the FDIC. The Bank is a member of the FHLB system. As
the holding company of the Bank, the Company also will be subject to regulation
and oversight by the OTS. Such regulation and supervision govern the activities
in which an institution can engage and are intended primarily for the protection
of the insurance fund and depositors. Regulatory authorities have been granted
extensive discretion in connection with their supervisory and enforcement
activities which are intended to strengthen the financial condition of the
banking and thrift industries, including the imposition of restrictions on the
operation of an institution, the classification of assets by the institution and
the adequacy of an institution's allowance for loan losses. Any change in such
regulation and oversight, whether by the OTS, the FDIC or Congress, could have a
material impact on the Company, the Bank and their respective operations. See
"Regulation."
Recent federal legislation contemplates the development of a common
charter for all federally chartered depository institutions and the abolition of
separate charters for national banks and federal savings associations. It is not
known what form the common charter may take and what effect, if any, the
adoption of a new charter would have on the financial condition or results of
operations of the Bank. See "Regulation--Federal Regulation of Savings
Institutions."
Legislation is proposed periodically providing for a comprehensive
reform of the banking and thrift industries, and has included provisions that
would (i) require federal savings associations to convert to a national bank or
a state-chartered bank or thrift, (ii) require all savings and loan holding
companies to become bank holding companies, and (iii) abolish the OTS. It is
uncertain when or if any of this type of legislation will be passed and, if
passed, in what form the legislation would be passed. As a result, management
cannot accurately predict the possible impact of such legislation on the Bank.
CERTAIN ANTI-TAKEOVER CONSIDERATIONS
Provisions in the Company's and the Bank's Governing Documents.
Provisions in the Company's Certificate of Incorporation and the Bank's Charter
and their respective Bylaws limit stockholder voting rights. In addition, the
Bank's Federal Stock Charter and Bylaws, as well as certain federal regulations,
help the Company remain independent by preventing a change of control of the
Company even if desired by a majority of stockholders. These provisions provide
for, among other things, supermajority voting, staggered boards of directors,
noncumulative voting for directors, limits on the calling of special meetings,
and certain uniform price provisions for certain business combinations. In
particular, the Company's Certificate of Incorporation provides that beneficial
owners of more than 10% of the Company's outstanding Common Stock may not vote
the shares owned in excess of the 10% limit. The Bank's Charter also prohibits,
until five years following the completion of the Conversion, the acquisition,
directly or indirectly, of more than 10% of the Bank's voting securities. Any
person violating this restriction, except for the Company, may not vote any of
the Bank's securities held in excess of the 10% limitation. If holders of
revocable proxies for more than 10% of the shares of common stock of the Company
acting as a group or in concert with other proxy holders attempt actions that
could indirectly result in a change in control of the Bank, management of the
Bank will be able to assert this provision of the Bank's Charter against such
holders.
16
<PAGE>
Voting Control of Executive Officers and Directors. In addition,
officers and directors are expected to own between 6.26% and 6.83% of the Common
Stock at the adjusted maximum and the minimum of the offering range,
respectively (not including the 7% of the Company's common stock that will be
owned by the ESOP). The Certificate of Incorporation of the Company requires a
vote of 80% of the outstanding shares: (i) to remove a director for cause prior
to the expiration of his term; (ii) for certain business combinations, including
mergers, consolidations and sales of 25% or more of the assets of the Company
and its subsidiaries with "Interested Stockholders;" (iii) for amendment of
certain provisions of the Certificate of Incorporation; and (iv) for amendment
of the Bylaws. The potential voting control by directors and officers could,
together with additional stockholder support or upon exercise of their options,
defeat stockholder proposals requiring an 80% supermajority vote. As a result,
these provisions may preclude takeover attempts that certain stockholders deem
to be in their best interest and may tend to perpetuate existing management. See
"Restrictions on the Acquisition of the Company and the Bank."
Provisions of Compensation Plans and Employment Agreements. The Bank's
current employment agreements provide for benefits and cash payments in the
event of a change in control of the Company or the Bank. Additionally, the
Bank's current stock benefit plans, and the 1999 Recognition Plan and 1999 Stock
Option Plan may provide for accelerated vesting in the event of a change in
control. These provisions may have the effect of increasing the cost of
acquiring the Company, thereby discouraging future attempts to acquire control
of the Company or the Bank. See "Restrictions on the Acquisition of the Company
and the Bank--Restrictions in the Company's Certificate of Incorporation and
Bylaws," and "Management of the Bank--Benefits for Employees and Officers."
POSSIBLE YEAR 2000 COMPUTER PROGRAM PROBLEMS
In the year 2000, many computer programs that can only distinguish the
final two digits of the year entered (a common programming practice in earlier
years) are expected to read entries for the year 2000 as the year 1900 and
compute payment, interest or delinquency based on the wrong date or are expected
to be unable to compute payment, interest or delinquency. Rapid and accurate
data processing is essential to the operations of the Bank.
The Bank utilizes a number of computer programs across its entire
operation, and has initiated programming changes, system upgrades and
replacements and similar actions to prepare for the year 2000. However, since
all of the data processing of the Bank is critical to operations, if the Bank is
unable to resolve this potential problem in time, the Bank would likely
experience significant data processing delays, mistakes or failures, which would
have a significant adverse impact on the financial condition and results of
operations of the Bank.
In addition to expenses related to its own computer systems, the Bank
is aware of potential year 2000 risks to third parties including vendors,
depositors and borrowers, and the possible adverse impact on the Bank resulting
from failures by these parties to adequately address the problem. For example,
the Bank could incur losses if loan payments are delayed due to year 2000
problems affecting borrowers or impairing the payroll systems of large employers
in the Bank's market area. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Year 2000."
17
<PAGE>
DIRECTOR AND MANAGEMENT BENEFITS FROM THIS OFFERING
Subject to stockholder approval, the Bank or the Company intends to
adopt the 1999 Recognition Plan pursuant to which the Bank or the Company
intends to award to employees and directors of the Bank, at no cost to them, the
number of shares of common stock equal to up to 3% of the number of shares sold
in this offering (or 106,950 shares assuming the sale of 3,565,000 shares at the
maximum of the offering range), and (ii) the 1999 Stock Option Plan pursuant to
which the Company intends to award options to purchase a number of shares of
common stock equal to up to 10% of the number of shares sold in this offering
(or 356,500 options assuming the sale of 3,565,000 shares at the maximum of the
offering range) at an exercise price equal to the fair market value of the
common stock at the time of the award. If shares of common stock from the 1999
Recognition Plan and the 1999 Stock Option Plan were purchased by the Company in
the open market at the Subscription Price, the aggregate cost to the Company
would be $4.6 million (at the maximum of the offering range). The ESOP also is
expected to purchase up to 7% of the shares sold in this offering (or 249,550
shares assuming the sale of 3,565,000 shares at the maximum of the offering
range). The shares will be purchased by the ESOP at a cost of $2.5 million and
will be allocated to the accounts of executive officers and other employees
without payment by such persons of additional cash consideration.
RISKS RELATED TO THE ACQUISITION OF MID-IOWA FINANCIAL
The future growth of the Bank and the Company will depend, in part, on
the success of the Merger which will, in turn, depend, on a number of factors,
including: (i) the Bank's ability to integrate the Mid-Iowa Savings branches
into the current operations of the Bank; (ii) the Bank's ability to limit the
outflow of deposits held by customers in the Mid-Iowa Savings branches; (iii)
the Bank's ability to control the non-interest expense from the Merger in a
manner that enable the Bank to improve its overall operating efficiencies; and
(iv) the Bank's ability to retain and integrate the appropriate personnel of
Mid-Iowa Savings into the operations of the Bank. No assurance can be given that
the Bank will be able to integrate Mid-Iowa Savings successfully, that the Bank
will be able to achieve results in the future similar to those achieved by the
Bank in the past, or that the Bank will be able to manage its growth resulting
from the Merger effectively.
IRREVOCABILITY OF ORDERS; POTENTIAL DELAY IN COMPLETION OF THIS OFFERING
Orders submitted in the Subscription Offering and any Community
Offering or any Syndicated Community Offering are irrevocable. Funds submitted
in connection with any purchase of common stock in this offering will be held by
the Company until the completion or termination of the conversion, including any
extension of the Expiration Date. Because, among other factors, completion of
the conversion will be subject to an update of the independent appraisal
prepared by RP Financial, there may be one or more delays in the completion of
the conversion. Subscribers will have no access to subscription funds and/or
shares of common stock until the conversion is completed or terminated.
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
OF THE BANK AND SUBSIDIARIES
The following tables set forth selected consolidated historical
financial and other data of the Bank (including its subsidiaries) for the
periods and at the dates indicated. The information is derived in part from and
should be read in conjunction with the Consolidated Financial Statements and
Notes thereto of the Bank contained elsewhere herein. The selected consolidated
financial condition and operating data at and for the three month periods ended
September 30, 1998 and 1997 are derived from unaudited consolidated financial
statements and, in the opinion of management of the Bank, all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
the results for the unaudited periods have been made. The results of operations
data presented below for the three months ended September 30, 1998, are not
necessarily indicative of the results of the Bank that may be expected for the
entire year.
<TABLE>
<CAPTION>
At At June 30,
September 30, ----------------------------------------------------------
1998 1998(8) 1997 1996 1995 1994
----------- --------- --------- --------- --------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Selected Financial Condition Data
Total assets ..................... $569,612 $551,450 $468,568 $443,516 $434,122 $391,166
Loans receivable, net ............ 407,455 404,800 341,254 320,408 311,775 264,616
Securities held to maturity ...... 32,108 32,023 29,758 22,459 96,802 101,322
Securities, available for sale ... 87,457 65,195 64,098 74,498 -- --
FHLB stock, at cost .............. 6,270 5,671 5,000 4,769 4,675 4,675
Office property and equipment, net 11,071 10,845 9,638 8,697 7,559 7,549
Excess of cost over fair value of
assets acquired ................ 8,080 8,158 318 355 190 204
Deposits ......................... 392,677 392,425 326,734 335,223 339,426 343,588
FHLB advances .................... 124,885 107,901 96,500 66,000 54,500 10,000
Stockholders' equity ............. 43,167 42,020 38,865 36,857 34,864 33,029
</TABLE>
- ----------------------
(footnotes on next succeeding page)
19
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
September 30, Year Ended June 30,
-------------------- ----------------------------------------------------
1998 1997 1998(8) 1997 1996 1995 1994
-------- -------- --------- --------- -------- -------- ------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Operating Data
Total interest income .................... $10,056 $ 8,510 $35,364 $33,691 $31,686 $29,007 $27,460
Total interest expense ................... 6,283 5,172 21,377 20,328 19,645 17,707 15,642
------- ------- ------- ------- ------- ------- -------
Net interest income .................... 3,773 3,338 13,987 13,363 12,041 11,300 11,818
Provision for loan losses ................ 75 70 345 258 233 142 100
------- ------- ------- ------- ------- ------- -------
Net interest income after provision
for loan losses ..................... 3,698 3,268 13,642 13,105 11,808 11,158 11,718
------- ------- ------- ------- ------- ------- -------
Noninterest income
Fees and service charges ............... 449 287 1,392 1,143 1,092 771 800
Gain on sale of real estate owned ...... -- -- -- -- -- 3 870
Gain on sale of loans held for sale .... 87 49 242 207 290 160 261
Other income ........................... 366 339 1,544 1,201 1,124 689 862
------- ------- ------- ------- ------- ------- -------
Total noninterest income ............... 902 675 3,178 2,551 2,506 1,623 2,793
------- ------- ------- ------- ------- ------- -------
Noninterest expense:
Compensation and benefits .............. 1,452 1,466 6,702 5,655 5,150 4,615 4,225
Office property and equipment .......... 447 334 1,500 1,293 1,159 1,064 1,063
Special deposit insurance assessment ... -- -- -- 2,233 -- -- --
Other noninterest expense .............. 1,063 839 3,326 3,512 3,410 3,327 3,590
------- ------- ------- ------- ------- ------- -------
Total noninterest expense .............. 2,962 2,639 11,528 12,693 9,719 9,006 8,878
------- ------- ------- ------- ------- ------- -------
Earnings before income taxes and
cumulative effect of accounting change 1,638 1,304 5,292 2,963 4,595 3,775 5,633
Income taxes ............................. 620 463 1,874 1,024 1,543 1,259 1,556
------- ------- ------- ------- ------- ------- -------
Net earnings before cumulative effect of
accounting change ...................... 1,018 841 3,418 1,939 3,052 2,516 4,077
Cumulative effect of accounting change ... -- -- -- -- -- -- 732
------- ------- ------- ------- ------- ------- -------
Net earnings ............................. $ 1,018 $ 841 $ 3,418 $ 1,939 $ 3,052 $ 2,516 $ 4,809
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
Earnings per share(1)
Net earnings before cumulative effect of
accounting change ...................... $ .36 $ .30 $ 1.21 $ .69 $ 1.08 $ .90 $ 1.46
Cumulative effect of accounting change . $ -- $ -- -- -- -- -- .26
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
Basic earnings per share ............... $ .36 $ .30 $ 1.21 $ .69 $ 1.08 $ .90 $ 1.72
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
Diluted earnings per share ............. $ .35 $ .29 $ 1.19 $ .67 $ 1.06 $ .88 $ 1.70
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
Cash dividends declared per common share . $ .12 $ .12 $ .48 $ .47 $ .44 $ .36 $ .34
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
</TABLE>
- -------------------
(1)Adjusted for stock distributions.
(footnotes on next page)
- -------------------
20
<PAGE>
<TABLE>
<CAPTION>
At or for the
Three Months Ended
September 30, (9) At or for the Year Ended June 30,
------------------ --------------------------------------------------------
1998 1997 1998(8) 1997 1996 1995 1994
-------- -------- --------- --------- --------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Operating Ratios and Other Data (2)
Performance Ratios:
Return on assets (net income divided
by average total assets) (1) (2) ............ .73% .73% .71% .43% .70% .60% 1.22%
Return on equity (net income divided by
average equity) (1)(2) ...................... 9.57 8.51 8.39 5.20 8.44 7.42 15.49
Stockholder's equity to assets ratio (average
equity divided by average total assets) ..... 7.53 8.61 8.46 8.20 8.32 8.14 7.86
Average net interest rate spread (3) .......... 2.58 2.67 2.74 2.71 2.52 2.49 2.88
Net yield on average interest-earning assets(4) 2.87 3.05 3.07 3.07 2.88 2.82 3.13
Net interest income after provision for loan
losses to total other expenses (1) .......... 106.07 108.04 118.34 103.25 121.50 123.90 132.00
Asset Quality Ratios:
Nonperforming loans to total loans ............ .30 .28 .33 .15 .22 .22 .35
Nonperforming loans to total assets ........... .21 .21 .24 .11 .16 .16 .24
Nonperforming assets as a percentage
of total assets (5) ......................... .34 .22 .34 .11 .17 .17 .26
Nonperforming loans and real estate owned
to total loans and real estate owned ........ .47 .29 .47 .15 .24 .23 .38
Average interest-earning assets to average
interest-bearing liabilities ................ 106.07 108.04 107.14 107.69 107.74 107.27 105.98
Capital, Equity and Dividend Ratios:
Tangible capital(6) ........................... 6.17 8.62 6.20 8.24 8.37 7.99 8.39
Core capital (6) .............................. 6.17 8.62 6.20 8.24 8.37 7.99 8.77
Risk-based capital (6) ........................ 12.33 17.10 12.51 17.00 18.45 18.02 21.02
Average equity to average assets ratio ........ 7.58 8.61 8.46 8.20 8.32 8.14 7.86
Dividend payout ratio ......................... 33.33 40.00 39.67 68.12 40.74 40.00 19.77
Per Share Data:
Book value per share (7) ...................... 15.17 14.08 $ 14.80 $ 13.74 $ 13.08 $ 12.42 $ 11.81
Earnings per share (basic) .................... .36 .30 1.21 .69 1.08 .90 1.72
Other Data:
Full-service offices .......................... 15 13 15 13 13 12 12
</TABLE>
- -------------------
(1) Excluding the SAIF assessments, the Bank's return on assets, return on
equity, and net interest income after provision for loan losses to
total other expenses would have been .73%, 8.95%, and 125.29%,
respectively, for the year ended June 30, 1997.
(2) Includes the cumulative effect of change in the method of accounting
for income taxes of $732,000 for the year ended June 30, 1994,
representing .19% return on assets and 2.36% return on equity.
(3) Represents the difference between the average yield on interest-earning
assets and the average cost of interest-bearing liabilities.
(4) Represents net interest income as a percentage of average
interest-earning assets.
(5) Nonperforming assets include nonaccruing loans, accruing loans
delinquent 90 days or more, and foreclosed assets but do not include
restructured loans.
(6) End of period ratio.
(7) Adjusted for stock distributions.
(8) Data includes the effect of the Bank's acquisition of GFS Bancorp, Inc.
for periods subsequent to March 31, 1998.
(9) Annualized where appropriate.
21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF MID-IOWA FINANCIAL
The following table sets forth selected consolidated historical
financial and other data of Mid-Iowa Financial (including its subsidiaries) for
the periods and at the dates indicated. The information is derived in part from
and should be read in conjunction with the Consolidated Financial Statements and
Notes thereto of Mid-Iowa Financial contained elsewhere herein.
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------
1998 1997 1996 1995 1994
--------- --------- -------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
- ----------------------------------
Total assets .................................. $147,517 $128,017 $115,804 $108,221 $100,562
Loans receivable, net ......................... 71,436 66,418 62,123 57,847 54,269
Securities available for sale ................. 4,994 4,983 4,974 837 851
Mortgage-backed and related securities held for
investment .................................... 25,862 26,180 23,974 28,139 29,497
Investment securities ......................... 23,932 21,587 20,258 16,787 11,310
Deposits ...................................... 96,353 89,378 82,872 78,671 78,883
Total borrowings .............................. 36,000 25,000 20,500 18,000 10,750
Stockholder's equity - partially restricted ... 13,760 12,061 10,601 10,261 9,770
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Total interest income ................................................... $9,806 $8,963 $8,227 $7,330 $6,211
Total interest expense .................................................. 6,081 5,345 4,939 4,492 3,347
------ ------ ------ ------ ------
Net interest income ................................................... 3,725 3,618 3,288 2,838 2,864
Provision for losses on loans ........................................... 60 81 36 33 46
------ ------ ------ ------ ------
Net interest income after provision for losses on loans ............... 3,665 3,537 3,252 2,805 2,818
Fees and service charges ................................................ 395 365 325 314 428
Gains on loans, mortgage-backed and investment securities ............... 25 24 33 14 25
Other noninterest income ................................................ 928 1,073 741 650 449
Total noninterest expense ............................................... 3,081 2,658 3,115 2,394 2,247
------ ------ ------ ------ ------
Income before taxes on income and cumulative effect of accounting changes 1,932 2,341 1,236 1,389 1,473
Taxes on income ......................................................... 600 791 411 462 470
Cumulative effect of accounting changes ................................. -- -- -- -- 64
------ ------ ------ ------ ------
Net income .............................................................. $1,332 $1,550 $ 825 $ 927 $1,067
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Earnings per common share diluted (1) ................................... $ .73 $ .89 $ .47 $ .52 $ .58
Cash dividends per common share(1) ...................................... $ .08 $ .08 $ .08 $ .08 $ .07
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Other Data:
- -----------
Average interest rate spread .............................................. 2.38% 2.63% 2.54% 2.32% 2.72%
Net interest margin(2) .................................................... 2.77 3.04 2.97 2.74 3.07
Ratio of operating expense to average total assets(3) ..................... 1.62 1.57 2.16 1.79 1.97
Average interest-earning assets to average interest-bearing liabilities ... 108.51 108.95 109.55 109.61 109.81
Non-performing assets to total assets at end of period .................... .15 .01 .13 .13 .03
Stockholder's equity to total assets at end of period ..................... 9.33 9.42 9.15 9.48 9.72
Return on assets (net income to average total assets) ..................... .96 1.27 .73 .88 1.14
Return on stockholder's equity (net income to average stockholder's equity) 10.26 13.70 7.79 9.25 11.38
Stockholder's equity-to-assets ratio (average
stockholder's equity to average total assets) ........................... 9.37 9.27 9.36 9.61 9.98
Number of full-service offices ............................................ 7 7 6 6 6
</TABLE>
- --------------------
(1) As adjusted for Mid-Iowa Financial's 100% stock dividends paid on
February 24, 1995 and January 25, 1996.
(2) Net interest income divided by average interest-earning assets.
(3) Excludes the expenses of the subsidiaries of Mid-Iowa Savings. Such
ratios, including such expenses would be 2.22%, 2.18%, 2.76%, 2.30% and
2.39% for the years ended September 30, 1998, 1997, 1996, 1995 and
1994, respectively.
23
<PAGE>
SELECTED UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL DATA OF FIRST FEDERAL BANKSHARES, INC.
The following tables present certain unaudited pro forma consolidated
financial data with respect to the Company and its subsidiaries. For each period
presented below, the "Pro Forma for Acquisition" information gives effect to the
Acquisition, but not the Conversion. The "Pro Forma for Acquisition and
Conversion" information gives effect to the consummation of both the Conversion
and the Acquisition, including the sale of Subscription Shares in the Offering
and includes interest income on the investment of the net investable proceeds of
the sale of Subscription Shares and the anticipated expenses associated with the
ESOP and Recognition Plan. This financial data assumes that these transactions
occurred on each of the dates and at the beginning of each of the periods
presented, that Subscription Shares are sold in the Offering at the $10.00
Subscription Price per share, resulting in gross proceeds of $35.7 million (the
maximum of the Valuation Range). For information on net income, net income per
share, stockholders' equity and stockholders' equity per share at the minimum,
midpoint and 15% above the maximum of the Valuation Range, see "Pro Forma
Data--Pro Forma Conversion Data." For additional assumptions used in calculating
the pro forma data, see "Pro Forma Data--Unaudited Pro Forma Condensed
Consolidated Financial Information."
In accordance with generally accepted accounting principles ("GAAP"),
the Acquisition will be accounted for using the purchase method. Under the
purchase method of accounting, the recorded assets and liabilities of Mid-Iowa
Financial will be adjusted to fair value and the excess of the purchase price
over the fair value of net identifiable assets will be recorded as goodwill; the
results of operations will include Mid-Iowa Financial from the date of the
Acquisition.
The following selected unaudited pro forma financial data should be
read in conjunction with the consolidated financial statements and related notes
presented elsewhere in this Prospectus.
<TABLE>
<CAPTION>
At September 30, 1998(1) At June 30, 1998(1)
-------------------------------- --------------------------------
Pro Forma Pro Forma
Pro Forma For Acquisition Pro Forma For Acquisition
For Acquisition and Conversion For Acquisition and Conversion
--------------- -------------- --------------- --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Financial Condition
- -------------------
Total assets .................... $704,318 736,800 685,813 718,203
Loans receivable, net ........... 480,428 480,428 477,773 477,773
Securities available for sale ... 92,451 93,283 70,189 71,012
Securities held to maturity ..... 82,488 82,488 82,403 82,403
Intangible assets ............... 21,451 21,451 21,529 21,529
Deposits ........................ 489,126 489,126 488,874 488,874
Borrowed funds .................. 160,355 160,355 143,371 143,371
Total stockholders' equity ...... 43,167 75,565 42,020 74,330
Non-performing loans ............ 1,334 1,334 1,442 1,442
Non-performing assets ........... 2,144 2,144 2,022 2,022
Asset quality ratios (period end)
- ---------------------------------
Allowance for loan losses to
total loans ................. 0.62% 0.62% 0.61% 0.61%
Non-performing assets as
a percent of total assets ... 0.30% 0.29% 0.29% 0.28%
Allowance for loan losses to
non-performing loans ........ 223.69% 223.69% 202.08% 202.08%
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30,(1) For the Year Ended June 30,(1)
1998 1998
------------------------------------- -------------------------------------
Pro Forma Pro Forma
Pro Forma For Acquisition Pro Forma For Acquisition
For Acquisition and Conversion For Acquisition and Conversion
--------------- -------------- --------------- --------------
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
Results of Operations(2)
- ------------------------
Net interest income ............ $ 4,267 $ 4,678 $ 16,035 $ 17,678
Provision for loan losses ...... (90) (90) (405) (405)
-------- -------- -------- --------
Net interest income after
provision for loan losses .... $ 4,177 $ 4,588 $ 15,630 $ 17,273
Non-interest income ............ $ 1,245 $ 1,245 $ 4,525 $ 4,525
Non-interest expense ........... (3,936) (4,032) (15,300) (15,680)
-------- -------- -------- --------
Income before income taxes ..... $ 1,486 $ 1,801 $ 4,855 $ 6,118
Income taxes ................... (586) (702) (1,782) (2,250)
-------- -------- -------- --------
Net income ..................... $ 900 $ 1,099 $ 3,073 $ 3,868
-------- -------- -------- --------
-------- -------- -------- --------
Diluted earnings per share(5) .. $ 0.31 $ 0.18 $ 1.07 $ 0.62
-------- -------- -------- --------
-------- -------- -------- --------
Selected Ratios:
- ----------------
Performance ratios:
Return on average assets(3)(4) 0.52% 0.62% 0.48% 0.60%
Return on average equity(3)(4) 8.16% 6.01% 7.46% 5.58%
</TABLE>
- -------------------------------
(1) Mid-Iowa Financial data included is at September 30, 1998 and for the
three months ended and the fiscal year ended September 30, 1998.
(2) Does not reflect any cost savings or other benefits of the Acquisition.
(3) These ratios are based on average daily balances.
(4) Annualized.
(5) Diluted earnings per share have been computed as follows: for "Pro
Forma for Acquisition" purposes, historical shares for diluted earnings
per share of 2,873,593 and 2,883,764 were used for the three-month
period ended September 30, 1998 and the year ended June 30, 1998,
respectively; for "Pro Forma for Acquisition and Conversion" purposes,
post Conversion shares, including 69,742 and 109,512 incremental shares
related to outstanding stock options for the three month period ended
September 30, 1998 and the year ended June 30, 1998, respectively, were
used and ESOP shares were assumed to have been issued, but are not
treated as outstanding until committed to be released.
25
<PAGE>
THE COMPANY
The Company was organized in December 1998 for the purpose of acquiring
all of the outstanding shares of capital stock of the Bank. The Company has
applied to the OTS to become a savings and loan holding company and as such will
be subject to regulation by the OTS. After completion of the Conversion, the
Company will conduct business initially as a unitary savings and loan holding
company. See "Regulation--Holding Company Regulation." Upon consummation of the
Conversion, the Company's assets will be primarily the shares of the Bank's
capital stock acquired in the Conversion and that portion of the net proceeds of
the Conversion permitted by the OTS to be retained by the Company and the ESOP
loan. The Company anticipates retaining $5.0 million of the net proceeds of the
Offering. The Company initially will have no significant liabilities. See "Use
of Proceeds." The management of the Company is set forth under "Management of
the Company." Initially, the Company will neither own nor lease any property,
but instead will 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 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.
The Conversion will provide the Bank with additional capital to support
future growth (including the acquisition of Mid-Iowa Financial Corp.) and
enhance results of operations. Management believes that the holding company
structure will provide the Company with additional flexibility to diversify its
business activities through existing or newly formed subsidiaries, or through
acquisitions of or mergers with other financial institutions and financial
services related companies or for other business or investment purposes,
including the possible repurchase of Common Stock as permitted by the OTS.
Although there are no current arrangements, understandings or agreements,
written or oral, regarding any such opportunities or transactions, except for
the acquisition of Mid-Iowa Financial, 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 acquisition and expansion opportunities
that may arise. The initial activities of the Company are anticipated to be
funded by the proceeds permitted to be retained by the Company and earnings
thereon or, alternatively, through dividends received from the Bank.
The Company's executive office is located at 329 Pierce Street, Sioux
City, Iowa, and its telephone number is (712) 277-0200.
THE BANK
The Bank is a federally-chartered stock savings bank headquartered in
Sioux City, Iowa. Founded in 1923, First Federal's deposits have been federally
insured since 1935 by the Savings Association Insurance Fund and its
predecessor, the Federal Savings and Loan Insurance Corporation. The Bank has
been a member of the Federal Home Loan Bank ("FHLB") of Des Moines since 1935.
On July 13, 1992, the Bank's mutual predecessor reorganized from a federally
chartered mutual savings bank into the Mutual Holding Company and concurrently
formed the Bank, which succeeded to the name and operations of the Bank's mutual
predecessor (the "Reorganization"). At the time of the Reorganization, the Bank
conducted a stock offering (the "Minority Stock Offering") in which it raised
approximately $5.6 million of net proceeds. At September 30, 1998, the Bank had
total assets of $569.6 million, total deposits of $392.7 million, and
stockholders' equity of $43.2 million.
The Bank is a community-oriented financial institution offering
traditional financial services to its local community. The Bank's primary
lending area includes northwest Iowa, contiguous portions of Nebraska and South
Dakota and central Iowa. The Bank's primary lending activity involves the
origination of fixed rate and adjustable rate mortgage ("ARM") loans secured by
one- to four- family residential real estate. Fixed rate mortgage loans with
terms greater than fifteen years are originated primarily for sale in the
secondary market on a servicing released basis, while ARM loans are retained in
the Bank's portfolio. To a lesser extent, the Bank makes second mortgage loans
secured by the borrower's principal residence and other types of consumer loans
such as auto loans and home improvement loans. In addition, the Bank makes
commercial and multi-family loans and the Bank anticipates an increase in its
commercial and multi-family loan portfolios in the future. In addition, the Bank
invests in mortgage-backed securities issued or guaranteed by the Federal
National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage
Corporation ("FHLMC"), and in securities issued by the United States Government
and agencies thereof.
26
<PAGE>
The Bank conducts operations through its main office in Sioux City,
Iowa, and its 12 branch offices in northwest and central Iowa and northeast
Nebraska.
On March 31, 1998, the Bank consummated the acquisition of GFS Bancorp,
Inc. ("GFS Bancorp") and its subsidiary, Grinnell Federal Savings Bank
("Grinnell Federal"). As of March 31, 1998, GFS Bancorp had total assets of
$96.1 million and total deposits of $64.1 million. The acquisition was accounted
for under the purchase method of accounting. In late November 1998, the Bank
closed its branch offices located in Hartley and Sanborn, Iowa, and sold the
deposits relating to those branches. The Bank also plans to close its branch
office in Hawarden, Iowa, and has recently entered into an agreement to sell the
deposits relating to that office.
The Bank's principal executive office is located at 329 Pierce Street,
Sioux City, Iowa 51101, and its telephone number at that address is (712)
277-0200.
27
<PAGE>
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
At September 30, 1998, the Bank and Mid-Iowa Savings each exceeded all
of the applicable regulatory capital requirements. The table on the following
pages sets forth the historical regulatory capital of the Bank and Mid-Iowa
Savings at September 30, 1998 and the pro forma regulatory capital of the Bank
after giving effect to the Conversion and the Acquisition, based upon the sale
at $10.00 per share of the number of shares shown in the table. The pro forma
regulatory capital amounts reflect the receipt by the Bank of all of the net
Conversion proceeds, less the $5.0 million of proceeds which will be retained by
the Company and funding of the ESOP and the 1999 Recognition Plan. The pro forma
risk-based capital amounts assume the investment of the net proceeds received by
the Bank in assets which have a risk-weight of 20% under applicable regulations,
as if such net proceeds had been received and so applied at September 30, 1998.
See "Pro Forma Data" for the assumptions used to determine the net proceeds of
the Offering. 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
1999 Recognition Plan are deducted from pro forma regulatory capital.
28
<PAGE>
<TABLE>
<CAPTION>
First Federal Mid-Iowa Savings Pro Forma Consolidated
Historical at Historical at Historical at
September 30, 1998 September 30, 1998 September 30, 1998(5)
-------------------- -------------------- ---------------------
Percent Percent Percent
of of of
Amount Assets (2) Amount Assets (2) Amount Assets(2)
--------- -------- --------- --------- --------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
GAAP capital ...... $ 43,167 7.58% $ 13,760 9.33% $ 44,903 6.36%
Tangible capital:
Capital level ... $ 34,649 6.17% $ 11,158 7.67% $ 23,014 3.31%
Requirement ..... 8,418 1.50 2,181 1.50 10,426 1.50%
-------- ------ -------- ------ -------- ------
Excess ........ $ 26,231 4.67% $ 8,977 6.17% $ 12,588 1.81%
-------- ------ -------- ------ -------- ------
-------- ------ -------- ------ -------- ------
Core capital:
Capital level ... $ 34,649 6.17% $ 11,158 7.67% $ 23,014 3.31%
Requirement (3) . 16,837 3.00 4,361 3.00 20,852 3.00%
-------- ------ -------- ------ -------- ------
Excess ........ $ 17,812 3.17% $ 6,797 4.67% $ 2,162 0.31%
-------- ------ -------- ------ -------- ------
-------- ------ -------- ------ -------- ------
Risk-based capital:
Capital level (4) $ 37,326 12.33% $ 11,483 19.21% $ 25,998 7.41%
Requirement ..... 24,221 8.00 4,782 8.00 28,054 8.00%
-------- ------ -------- ------ -------- ------
Excess ........ $ 13,105 4.33% $ 6,701 11.21% $ (2,056) (0.59)%
-------- ------ -------- ------ -------- ------
-------- ------ -------- ------ -------- ------
</TABLE>
<TABLE>
<CAPTION>
Pro Forma at September 30, 1998, Based upon the Sale of
-------------------------------------------------------------------------------------------------
2,635,000 Shares 3,100,000 Shares 3,565,000 Shares 4,099,750 Shares(1)
------------------------ -------------------- --------------------- -----------------------
Percent Percent Percent Percent
of of of of
Amount Assets(2) Amount Assets(2) Amount Assets(2) Amount Assets(2)(3)
--------- --------- --------- -------- -------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP capital ...... $ 62,292 8.61% $ 66,428 9.13% $ 70,565 9.64% $ 75,322 10.23%
Tangible capital:
Capital level ... $ 40,403 5.65% $ 44,539 6.19% $ 48,676 6.72% $ 53,433 7.32%
Requirement ..... 10,726 1.50% 10,795 1.50% 10,864 1.50% 10,944 1.50%
-------- ------ --------- ------ -------- ----- -------- ------
Excess ........ $ 29,677 4.15% $ 33,744 4.69% $ 37,812 5.22% $ 42,489 5.82%
-------- ------ --------- ------ -------- ----- -------- ------
-------- ------ --------- ------ -------- ----- -------- ------
Core capital:
Capital level ... $ 40,403 5.65% $ 44,539 6.19% $ 48,676 6.72% $ 53,433 7.32%
Requirement (3) . 21,453 3.00% 21,591 3.00% 21,729 3.00% 21,887 3.00%
-------- ------ --------- ------ -------- ----- -------- ------
Excess ........ $ 18,950 2.65% $ 22,948 3.19% $ 26,947 3.72% $ 31,546 4.32%
-------- ------ --------- ------ -------- ----- -------- ------
-------- ------ --------- ------ -------- ----- -------- ------
Risk-based capital:
Capital level (4) $ 43,387 12.23% $ 47,523 13.36% $ 51,660 14.49% $ 56,417 15.78%
Requirement ..... 28,375 8.00% 28,448 8.00% 28,522 8.00% 28,607 8.00%
-------- ------ --------- ------ -------- ----- -------- ------
Excess ........ $ 15,012 4.23% $ 19,075 5.36% $ 23,138 6.49% $ 27,810 7.78%
-------- ------ --------- ------ -------- ----- -------- ------
-------- ------ --------- ------ -------- ----- -------- ------
</TABLE>
- -----------------------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to a 15% increase in the Offering Range to reflect
changes in market or general financial conditions following the
commencement of the Offering.
(2) Tangible and core capital levels are shown as a percentage of total
adjusted assets. Risk-based capital levels are shown as a percentage of
risk-weighted assets. Pro forma total adjusted and risk-weighted assets
used for the capital calculations include the proceeds of the ESOP's
purchase of 7% of the Common Stock in the Offering. Pro forma total
adjusted assets were $715.1 million, $719.7 million, $724.3 million and
$729.6 million, respectively, at the minimum, midpoint, maximum and
maximum, as adjusted, of the Offering Range. Pro forma risk-weighted
assets were $354.7 million, $355.6 million, $356.5 million and $357.6
million, respectively, at the minimum, midpoint, maximum, and maximum,
as adjusted, of the Offering Range.
(3) The current OTS core capital requirement for savings banks 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 savings banks that receive the highest supervisory rating for
safety and soundness, and a 4% to 5% core capital ratio requirement for
all other savings banks. See "Regulation--Federal Regulation of Savings
Institutions--Capital Requirements."
(4) Pro forma amounts and percentages assume net proceeds are invested in
assets that carry a 20% risk-weighting.
(5) Includes capital of the Mutual Holding Company of $1.7 million.
29
<PAGE>
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Common Stock in
the Offering cannot be determined until the Offering is completed, it is
presently anticipated that the net proceeds will be between $25.0 million and
$34.2 million (or $39.5 million if the Offering Range is increased by 15%). See
"Pro Forma Data" and "The Conversion --Share Exchange Ratio" and "--Stock
Pricing and Number of Shares to be Issued" as to the assumptions used to arrive
at such amounts. The Company will be unable to utilize any of the net proceeds
of the Offering until the consummation of the Conversion.
The Company estimates that it will use between $20.0 million and $29.2
million (or $34.5 million if the Offering Range is increased by 15%) to purchase
all of the capital stock of the Bank to be issued upon Conversion. The Company
will retain net proceeds in the amount of $5.0 million, including the ESOP loan.
The balance of funds retained by the Company will be used for general corporate
purposes. These purposes may include investment in federal funds, short-term
investment grade marketable securities and mortgage-backed securities.
The Company intends to use a portion of the net proceeds to loan funds
to the ESOP to enable the ESOP to purchase 7% of the shares of Common Stock
issued in the Offering. The Company and the Bank may alternatively choose to
fund the ESOP's stock purchases through a loan by a third party financial
institution. See "Management of the Bank--Benefits for Employees and Officers."
The net proceeds retained by the Company may also be used to support the future
expansion of operations through branch acquisitions, the establishment of new
branch offices, and the acquisition of other financial institutions or
diversification into other banking related businesses. The Company and the Bank
intend to actively explore additional acquisitions, although with the exception
of the Mid-Iowa Financial acquisition neither the Company nor the Bank has any
specific plans, arrangements or understandings regarding any additional
expansions or acquisitions at this time, nor have criteria been established to
identify potential candidates for acquisition.
Upon completion of the Conversion, the Board of Directors of the
Company will have the authority to repurchase stock, subject to statutory and
regulatory requirements. Unless approved by the OTS, the Company, pursuant to
OTS policy, generally 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 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 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 ten 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.
Based upon facts and circumstances following the 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 not
be 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 shareholders.
In the event the Company determines to repurchase stock, such repurchases may be
made at market prices which may be in excess of the Subscription Price in the
Offering. To the extent that the Company repurchases stock at market prices in
excess of the per share book value, such repurchases may have a dilutive effect
upon the interests of existing stockholders.
The portion of the net proceeds not retained by the Company, estimated
to be $29.2 million at the maximum of the Valuation Range, will be contributed
to the Bank. Such proceeds received by the Bank will serve to increase the
Bank's capital to support the Acquisition. The total cash cost of the
Acquisition to the Bank, which includes cash
30
<PAGE>
compensation to Mid-Iowa Financial stockholders and the cost of cashing out
outstanding options on Mid-Iowa Financial Common Stock, is expected to be $27.8
million. In the event all Mid-Iowa Financial's outstanding options were
exercised prior to the consummation of the Acquisition, the aggregate cash to be
paid would equal $29.0 million. A significant portion of the net proceeds
infused into the Bank may be used to fund all or a portion of the Merger
Consideration. Any funds not used to support the Acquisition will be added to
the Bank's general funds to be used for general corporate purposes, including
investment in one-to four-family residential mortgage loans, investment in
federal funds, short-term investment grade marketable securities and
mortgage-backed securities, and to fund the 1999 Recognition Plan. See
"Management of the Bank -- Benefits." 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. Except as described in "Acquisition of Mid-Iowa Financial" neither
the Bank nor the Company has yet determined the approximate amount of net
proceeds to be used for each of the purposes mentioned above.
DIVIDEND POLICY
The Company currently expects to maintain its existing per share cash
dividend policy of $0.12 per quarter or $0.48 per share on an annualized basis,
adjusted for the conversion exchange ratio. These dividends equate to $0.2909,
$0.2473, $0.2150 and $0.1870 per share on an annualized basis at the minimum,
midpoint, maximum, and 15% above the maximum of the Offering Range,
respectively. The first dividend is expected to be declared for the fiscal
quarter ending ________, 1999. Declarations of dividends by the Company's Board
of Directors will depend upon a number of factors, including the amount of the
net proceeds from the Offering retained by the Company, 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
operation, tax considerations and general economic conditions. Consequently,
there can be no assurance that dividends will in fact be paid on the Common
Stock or that, if paid, such dividends will not be reduced or eliminated in
future periods.
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 and state law and 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
"Taxation--Federal Taxation--Distributions" and "Regulation--Federal Regulation
of Savings Institutions--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) 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 declare
an extraordinary dividend to stockholders that would be treated by recipient
stockholders as a tax-free return of capital for federal income tax purposes
without prior approval of the OTS.
The Bank has paid cash dividends on the Bank Common Stock since the
completion of the first full fiscal quarter following the initial sale by the
Bank of the Bank Common Stock in July 1992. The Bank's current quarterly cash
dividend is $0.12 per share, and the Bank intends to continue to pay regular
quarterly cash dividends through the fiscal quarter ending _______, 1998.
31
<PAGE>
MARKET FOR THE COMMON STOCK
There is an established market for the Bank Common Stock which is
currently listed on the Nasdaq "SmallCap" Market under the symbol, "FFSX," and
the Bank had three market makers, including Sandler O'Neill, at September 30,
1998. As a newly formed company, however, the Company has never issued capital
stock and consequently there is no established market for its Common Stock. It
is expected that the Common Stock will be more liquid than the Bank Common Stock
since there will be significantly more outstanding shares owned by the public.
However, there can be no assurance that an active and liquid trading market for
the Common Stock will develop or, if developed, will be maintained. Minority
Shares will automatically, without further action by the holders thereof, be
converted into and become a right to receive a number of shares of Company
Common Stock that is determined pursuant to the Exchange Ratio. See "The
Conversion--Share Exchange Ratio."
The Company has applied to have its Common Stock listed on the Nasdaq
National Market under the symbol "FFSX." One of the requirements for quotation
of the Common Stock on the Nasdaq National Market is that there be at least
three market makers for the Common Stock. The Company will seek to encourage and
assist at least three market makers to make a market in its Common Stock. Making
a market involves maintaining bid and ask quotations and being able, as
principal, to effect transactions in reasonable quantities at those quoted
prices, subject to various securities laws and other regulatory requirements.
Although not legally or contractually required to do so, Sandler O'Neill has
advised the Company that upon completion of the Conversion, it intends to act as
a market maker in the Common Stock, depending upon the volume of trading and
subject to compliance with applicable laws and regulatory requirements. While
the Company has attempted to obtain commitments from other broker-dealers to act
as market makers, and anticipates that prior to the completion of the Conversion
it will be able to obtain the commitment from at least ____ other broker-dealers
to act as market makers for the Common Stock, there can be no assurance there
will be three or more market makers for the Common Stock or that the Company's
application for listing on the Nasdaq National Market will be approved. If such
application is not approved, management anticipates that the Company's Common
Stock will be listed on the Nasdaq "SmallCap" market.
Additionally, the development of a public market having the desirable
characteristics of depth, liquidity and orderliness depends on the existence of
willing buyers and sellers, the presence of which is not within the control of
the Company, the Bank or any market maker. In the event that institutional
investors buy a relatively large proportion of the Offering, the number of
active buyers and sellers of the Common Stock at any particular time may be
limited. There can be no assurance that persons purchasing the Common Stock will
be able to sell their shares at or above the Subscription Price. Therefore,
purchasers of the Common Stock should have a long-term investment intent and
should recognize that a possibly limited trading market may make it difficult to
sell the Common Stock after the Conversion and may have an adverse effect on the
price at which the Common Stock can be sold.
The following table sets forth the high and low bid quotes for the
Minority Shares and the adjusted cash dividends per share declared for the
periods indicated. These quotations represent prices between dealers and do not
include retail markups, markdowns, or commissions and do not reflect actual
transactions. This information has been obtained from monthly statistical
summaries provided by the Nasdaq Stock Market. As of September 30, 1998 there
were 1,320,460 Minority Shares outstanding.
32
<PAGE>
<TABLE>
<CAPTION>
High Low Cash Dividend
Fiscal 1998 Bid Bid Declared
--- --- -------------
<S> <C> <C> <C>
Quarter Ended June 30, 1998 $ 39.00 $ 34.75 $ 0.12
Quarter Ended March 31, 1998 $ 35.75 $ 30.25 $ 0.12
Quarter Ended December 31, 1997 $ 34.50 $ 29.50 $ 0.12
Quarter Ended September 30, 1997 $ 30.75 $ 22.00 $ 0.12
Fiscal 1997
Quarter Ended June 30, 1997 $ 24.00 $ 20.75 $ 0.12
Quarter Ended March 31, 1997 $ 22.33 $ 18.83 $ 0.12
Quarter Ended December 31, 1996 $ 20.17 $ 15.15 $ 0.12
Quarter Ended September 30, 1996 $ 16.06 $ 14.39 $ 0.12
</TABLE>
At August 14, 1998 (the business day immediately preceding the public
announcement of the Conversion) and at ___________, 1998, the last sale of
Minority Shares as reported on the Nasdaq "SmallCap" Market was at a price of
$30.00 per share and $______ per share, respectively. At September 30, 1998, the
Bank had 792 stockholders of record. All Minority Shares, including shares held
by the Bank's officers and directors, will on the Effective Date be
automatically converted into and become the right to receive a number of shares
of Common Stock of the Company determined pursuant to the Exchange Ratio, and
options to purchase Minority Shares will be converted into options to purchase a
number of shares of Common Stock determined pursuant to the Exchange Ratio, for
the same aggregate exercise price. See "Beneficial Ownership of Common Stock.
CAPITALIZATION
The following table presents the historical consolidated capitalization
of the Bank and Mid-Iowa Financial at September 30, 1998, and the pro forma
consolidated capitalization of the Company after giving effect to the
Acquisition and the Conversion, based upon the assumptions set forth in the "Pro
Forma Data" section.
33
<PAGE>
<TABLE>
<CAPTION>
First Federal Mid-Iowa Financial Purchase Pro Forma
Historical at Historical at Accounting Consolidate
September 30, 1998 September 30, 1998 Adjustments Historical
------------------ ------------------ ----------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Deposits (2)............................. $ 392,677 $ 96,353 $ 96 $489,126
Borrowed funds........................... 124,885 36,000 (530) 160,355
--------- -------- -------- ---------
Total deposits and borrowed funds........ $ 517,562 $132,353 $ (434) $649,481
--------- -------- -------- ---------
--------- -------- -------- ---------
Stockholders' equity:
Preferred Stock, $.01 par value, 2,000,000 shaares
authorized; none to be issued (3).... -- -- -- --
Common Stock, $.01 par value (post-conversion)),
18,000,000 shares authorized; shares to be
issued as reflected (3)............. 28 17 (17) 28
Additional paid-in capital (3)(4)...... 11,108 3,148 (3,148) 11,108
Retained income (5).................... 31,539 10,553 (10,553) 33,275
Unrealized gain (loss) on securities
available for sale................. 492 42 (42) 492
Less:
Common Stock to be
acquired by ESOP (6)............... -- -- -- --
Common Stock to be acquired by 1999
Recognition Plan (7)............... -- -- -- --
--------- -------- -------- ---------
Total stockholders' equity......... $ 43,167 $13,760 $(13,760) $ 44,903
--------- -------- -------- ---------
--------- -------- -------- ---------
Total stockholders' equity as a percentage of
pro forma total assets............... 7.58% 9.33% -- 6.36%
--------- -------- -------- ---------
--------- -------- -------- ---------
</TABLE>
<TABLE>
<CAPTION>
Pro Forma at September 30, 1998
--------------------------------------------------
Maximum
Minimum Midpoint Maximum as adjusted
2,635,000 3,100,000 3,565,000 4,099,750
shares at shares at shares at shares at
$10.00 $10.00 $10.00 $10.00
per share per share per share per share
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Deposits (2)............................. $489,126 $489,126 $489,126 $489,126
Borrowed funds........................... 160,355 160,355 160,355 160,355
--------- --------- --------- ---------
Total deposits and borrowed funds........ $649,481 $649,481 $649,481 $649,481
--------- --------- --------- ---------
--------- --------- --------- ---------
Stockholders' equity:
Preferred Stock, $.01 par value, 2,000,000 shares
authorized; none to be issued (3).... -- -- -- --
Common Stock, $.01 par value (post-conversion),
18,000,000 shares authorized; shares to be
issued as reflected (3)............. 48 57 65 75
Additional paid-in capital (3)(4)...... 36,112 40,704 45,299 50,580
Retained income (5).................... 33,275 33,275 33,275 33,275
Unrealized gain (loss) on securities
available for sale................. 492 492 492 492
Less:
Common Stock to be
acquired by ESOP (6)............... (1,845) (2,170) (2,496) (2,870)
Common Stock to be acquired by 1999
Recognition Plan (7)............... (791) (930) (1,070) (1,230)
--------- --------- --------- ---------
Total stockholders' equity......... 67,291 $ 71,428 $ 75,565 $ 80,322
--------- --------- --------- ---------
--------- --------- --------- ---------
Total stockholders' equity as a percentage of
pro forma total assets............... 9.25% 9.75% 10.26% 10.83%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
- ----------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to a 15% increase in the Offering Range to reflect changes
in market or general financial conditions following the commencement of the
Subscription and Community Offerings.
(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) The Bank has 10,000,000 authorized shares of preferred stock. The Bank has
20,000,000 authorized shares of Bank Common Stock, par value $1.00 per
share. First Federal common stock and additional paid-in capital have been
reclassified to conform to the $0.01 par value of the Company's common
stock.
(4) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the 1999 Stock Option Plan and 1999 Recognition Plan
expected to be adopted by the Company. If such plans are approved by
stockholders, an amount equal to 10% of the shares of Common Stock issued
in the Offering will be reserved for issuance upon the exercise of options
under the 1999 Stock Option Plan, and the 1999 Recognition Plan will
acquire an amount of Common Stock equal to 3% of the number of shares sold
in the Offering, either through open market purchases or from authorized
but unissued shares. No effect has been given to the exercise of options
currently outstanding. See "Management of the Bank--Benefits for Employees
and Officers."
(5) Pro forma retained income reflects consolidation of $1.7 million of capital
from the Mutual Holding Company. The retained income of the Bank will be
substantially restricted after the Conversion, see "The
Conversion--Liquidation Rights" and "Regulation --Federal Regulation of
Savings Institutions--Limitation on Capital Distributions."
(6) Assumes that 7% of the shares issued in the Offering will be acquired by
the ESOP financed by a loan from the Company. The loan will be repaid
principally from the Bank's contributions to the ESOP. Since the Company
will finance the ESOP debt, the ESOP debt will be eliminated through
consolidation and no liability will be reflected on the Company's
consolidated financial statements. Accordingly, the amount of stock
acquired by the ESOP is shown in this table as a reduction of total
stockholders' equity.
(7) Assumes a number of shares of Common Stock equal to 3% of the Common Stock
to be sold in the Offering will be purchased by the 1999 Recognition Plan
in open market purchases. The dollar amount of Common Stock to be purchased
is based on the $10.00 per share Subscription Price in the Offering and
represents unearned compensation and is reflected as a reduction of
capital.
34
<PAGE>
Such amount does not reflect possible increases or decreases in the
value of such stock relative to the Subscription Price in the Offering.
As the Bank accrues compensation expense to reflect the vesting of such
shares pursuant to the 1999 Recognition Plan, the deferred charge
against capital will be reduced through a charge to operations.
Implementation of the 1999 Recognition Plan will require stockholder
approval. If the shares to fund the plan are assumed to come from
authorized but unissued shares purchased by the 1999 Recognition Plan
from the Company at the Subscription Price, at the minimum, midpoint,
maximum and the maximum, as adjusted, of the Offering Range, the number
of outstanding shares would be 4,892,715, 5,756,135, 6,619,555 and
7,612,489, respectively, and total stockholders' equity would be $68.1
million, $72.4 million, $76.6 million and $81.6 million, respectively,
at September 30, 1998. As a result of the plan acquiring authorized but
unissued shares from the Company, stockholders' ownership in the
Company would be diluted by approximately 1.6%.
35
<PAGE>
PRO FORMA DATA
Unaudited Pro Forma Condensed Consolidated Financial Information
The following Unaudited Pro Forma Condensed Consolidated Balance Sheets
at September 30, 1998 and June 30, 1998 and Unaudited Pro Forma Condensed
Consolidated Statements of Income for the three months ended September 30, 1998
and for the year ended June 30, 1998, give effect to the Conversion and the
Acquisition based on the assumptions set forth below. The unaudited pro forma
consolidated financial statements are based on the unaudited consolidated
financial statements of First Federal and Mid-Iowa Financial for the three-month
period ended September 30, 1998 and on the audited consolidated financial
statements of First Federal for the year ended June 30, 1998 and of Mid-Iowa
Financial for the year ended September 30, 1998. The unaudited pro forma
consolidated financial statements give effect to the Acquisition using the
purchase method of accounting under GAAP.
The pro forma adjustments in the tables assume the sale of 3,565,000
Subscription Shares in the Offering at the $10.00 Purchase Price per share,
which is the maximum of the Estimated Valuation Range. The net proceeds in the
tables are based upon the following assumptions: (i) all Subscription Shares
will be sold in the Subscription and Community Offerings, (ii) no fees will be
paid to Sandler O'Neill or Investment Bank Services on shares purchased by the
ESOP or the 76,500 shares assumed purchased by officers, directors, employees
and members of their immediate families; (iii) Sandler O'Neill and Investment
Bank Services will receive an aggregate fee equal to 1.125% of the aggregate
Purchase Price for sales in the Subscription and Community Offerings (excluding
the sale of shares to the ESOP and to officers, directors, employees and their
immediate families), and (iv) total expenses of the Conversion, including the
marketing fees of $0.4 million paid to Sandler O'Neill and Investment Bank
Services will be $1.4 million. Actual expenses may vary from those estimated.
The actual amount of Subscription Shares sold may be more or less than the
maximum of the Estimated Valuation Range. For the effects of such possible
changes, see "--Pro Forma Conversion Data." In addition, the expenses of the
Conversion may vary from those estimated. The fees paid to Sandler O'Neill and
Investment Bank Services will vary from the amounts estimated if more or less
shares are sold, or if a Syndicated Community Offering is conducted. No cost
savings or other benefits of the Acquisition are reflected in the tables. The
Unaudited Pro Forma Condensed Consolidated Statements of Income do not reflect
investment income from investment of Conversion proceeds or anticipated ESOP and
1999 Recognition Plan expense. For the effects of such items, see--"Pro Forma
Conversion Data."
The unaudited pro forma information is provided for informational
purposes only. The pro forma financial information presented is not necessarily
indicative of the actual results that would have been achieved had the
Conversion and the Acquisition been consummated on the dates or at the beginning
of the periods presented, and is not necessarily indicative of future results.
The unaudited pro forma financial information should be read in conjunction with
the consolidated financial statements and the notes thereto of First Federal and
Mid-Iowa Financial contained elsewhere in this Prospectus.
The pro forma stockholders' equity is based upon the value of the
common stockholders' ownership of First Federal computed in accordance with
GAAP. This amount is not intended to represent fair market value and does not
represent amounts, if any, that would be available for distribution to
stockholders in the event of liquidation.
THE UNAUDITED PRO FORMA COMMON STOCKHOLDERS' EQUITY AND NET INCOME DERIVED FROM
THE ABOVE ASSUMPTIONS ARE QUALIFIED BY THE STATEMENTS SET FORTH UNDER THIS
CAPTION AND SHOULD NOT BE CONSIDERED INDICATIVE OF THE MARKET VALUE OF COMPANY
COMMON STOCK OR THE ACTUAL OR FUTURE RESULTS OF OPERATIONS OF FIRST FEDERAL AND
MID-IOWA FINANCIAL FOR ANY PERIOD. SUCH PRO FORMA DATA MAY BE MATERIALLY
AFFECTED BY THE ACTUAL GROSS AND NET PROCEEDS FROM THE SALE OF CONVERSION SHARES
IN THE CONVERSION AND OTHER FACTORS, SEE "USE OF PROCEEDS OF CONVERSION."
36
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1998 (1)
------------------------------------------------------------------------------
Pro Forma Company Pro forma
First Conversion as Mid-Iowa Acquisition Pro forma
Federal Adjustments Converted Financial Adjustments Consolidated
---------- ------------ --------- --------- ----------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and cash equivalents .......... $ 9,919 $ 310(3) $ 40,891 $ 15,458 $ (28,387) $ 27,962
30,662(5)
Securities available for sale ...... 87,457 832(3) 88,289 4,994 -- 93,283
Securities held to maturity ........ 32,108 -- 32,108 49,794 586 82,488
Loans held for sale ................ -- -- 50 -- 50
Loans, net ......................... 407,455 -- 407,455 71,436 1,537 480,428
Real estate owned .................. 718 664(3) 1,382 135 -- 1,517
Office property and equipment ...... 11,071 -- 11,071 2,630 -- 13,701
Federal Home Loan Bank stock ....... 6,270 -- 6,270 1,800 -- 8,070
Accrued interest receivable ........ 3,829 3(3) 3,832 1,017 -- 4,849
Excess of cost over fair value
of assets acquired ............... 8,080 -- 8,080 11 12,430 20,521
Other assets ..................... 2,798 11(3) 2,809 192 930 3,931
--------- --------- --------- --------- ---------- ---------
Total assets ..................... $ 569,705 $ 32,482 $ 602,187 $ 147,517 $ (12,904) $ 736,800
--------- --------- --------- --------- ---------- ---------
--------- --------- --------- --------- ---------- ---------
Liabilities and Stockholders Equity:
Deposits ........................... $ 392,677 $ -- $ 392,677 $ 96,353 $ 96 $ 489,126
Borrowed funds ..................... 124,885 -- 124,885 36,000 (530) 160,355
Deferred income taxes .............. 93 81(3) 174 83 1,290 1,547
Other liabilities .................. 8,883 3(3) 8,886 1,321 -- 10,207
--------- --------- --------- --------- ---------- ---------
Total liabilities ................ 526,538 84.0 526,622 133,757 856 661,235
--------- --------- --------- --------- ---------- ---------
Stockholders' equity:
Common stock ....................... 28 36(5) 64 17 (17) 64
Additional paid in capital ......... 11,108 34,191(5) 45,299 3,148 (3,148) 45,299
Retained earnings .................. 31,539 1,736(3) 33,275 10,553 (10,553) 33,275
Unearned compensation-ESOP ......... -- (2,496)(5) (2,496) -- -- (2,496)
Unearned compensation-RP ........... -- (1,069)(5) (1,069) -- -- (1,069)
Accumulated other
comprehensive income ............. 492 -- 492 42 (42) 492
--------- --------- --------- --------- ---------- ---------
Total stockholders' equity ....... 43,167 32,398 75,565 13,760 (13,760) 75,565
--------- --------- --------- --------- ---------- ---------
Total liabilities and
stockholders' equity ........... $ 569,705 $ 32,482 $ 602,187 $ 147,517 $ (12,904) $ 736,800
--------- --------- --------- --------- ---------- ---------
--------- --------- --------- --------- ---------- ---------
</TABLE>
(footnotes begin on following page)
37
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1998 (2)
----------------------------------------------------------------------------------
Pro Forma Company Pro forma
First Conversion as Mid-Iowa Acquisition Pro forma
Federal Adjustments Converted Financial Adjustments Consolidated
--------- ----------- --------- --------- ----------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and cash equivalents .......... $ 17,225 $ 43(4) $ 47,930 $ 15,458 $ (28,387) $ 35,001
30,662(5)
Securities available for sale ...... 65,195 823(4) 66,018 4,994 -- 71,012
Securities held to maturity ........ 32,023 -- 32,023 49,794 586 82,403
Loans held for sale ................ -- -- 50 -- 50
Loans, net ......................... 404,800 -- 404,800 71,436 1,537 477,773
Real estate owned .................. 489 838(4) 1,327 135 -- 1,462
Office property and equipment ...... 10,845 -- 10,845 2,630 -- 13,475
FHLB stock ......................... 5,671 -- 5,671 1,800 -- 7,471
Accrued interest receivable ........ 3,527 11(4) 3,538 1,017 -- 4,555
Excess of cost over fair value
of assets acquired .............. 8,158 -- 8,158 11 12,430 20,599
Other assets ....................... 3,267 13(4) 3,280 192 930 4,402
---------- --------- --------- --------- --------- ---------
Total assets .................... $ 551,200 $ 32,390 $ 583,590 $ 147,517 $ (12,904) $ 718,203
---------- --------- --------- --------- --------- ---------
---------- --------- --------- --------- --------- ---------
Liabilities and Stockholders Equity:
Deposits ........................... $ 392,425 $ -- $ 392,425 $ 96,353 $ 96 $ 488,874
Borrowed funds ..................... 107,901 -- 107,901 36,000 (530) 143,371
Deferred income taxes .............. (250) 78(4) (172) 83 1,290 1,201
Other liabilities .................. 9,104 2(4) 9,106 1,321 -- 10,427
---------- --------- --------- --------- --------- ---------
Total liabilities ............... 509,180 80 509,260 133,757 856 643,873
---------- --------- --------- --------- --------- ---------
Stockholders' equity:
Common stock ....................... 28 36(5) 64 17 (17) 64
Additional paid in capital ......... 11,079 34,191(5) 45,270 3,148 (3,148) 45,270
Retained earnings .................. 30,679 1,648(4) 32,327 10,553 (10,553) 32,327
Unearned compensation-ESOP ......... -- (2,496)(5) (2,496) -- -- (2,496)
Unearned compensation-RP ........... -- (1,069)(5) (1,069) -- -- (1,069)
Accumulated other
comprehensive income ............ 234 -- 234 42 (42) 234
---------- --------- --------- --------- --------- ---------
Total stockholders' equity ...... 42,020 32,310 74,330 13,760 (13,760) 74,330
---------- --------- --------- --------- --------- ---------
Total liabilities and
stockholders' equity .......... $ 551,200 $ 32,390 $ 583,590 $ 147,517 $ (12,904) $ 718,203
---------- --------- --------- --------- --------- ---------
---------- --------- --------- --------- --------- ---------
</TABLE>
- ----------
(1) Reflects the balance sheets of First Federal and Mid-Iowa Financial as of
September 30, 1998. First Federal common stock and additional paid in
capital have been reclassified to conform to the $0.01 par value of the
Company's common stock.
(2) Reflects the balance sheets of First Federal as of June 30, 1998 and
Mid-Iowa Financial as of September 30, 1998. First Federal common stock and
additional paid in capital have been reclassified to conform to the $0.01
par value of the Company's common stock.
(3) Reflects the inclusion of the non-bank assets of the Mutual Holding Company
as of September 30, 1998.
(4) Reflects the inclusion of the non-bank assets of the Mutual Holding Company
as of June 30, 1998.
(5) Reflects the gross proceeds of $35.7 million from the sale of Subscription
Shares, assuming the maximum of the Estimated Valuation Range less (i)
estimated expenses of the Conversion of $1.4 million, (ii) the purchase of
$2.5 million of Subscription Shares by the ESOP with a loan from the
Company, and (iii) the purchase of $1.1 million of Conversion Shares by the
1999 Retention Plan with funds provided by the Company.
38
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the three months ended September 30, 1998(1)
------------------------------------------------
First Mid-Iowa Purchase Pro forma
Federal Financial Adjustments Consolidated
------- --------- ----------- ------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income ................. $10,056 $ 2,451 $ (399) $12,108
Interest expense ................ 6,283 1,537 21 7,841
------- ------- -------- -------
Net interest income .......... 3,773 914 (420) 4,267
Provision for losses on loans ... 75 15 90
------- ------- -------- -------
Net interest income after
provision for losses on loans 3,698 899 (420) 4,177
Noninterest income .............. 902 343 1,245
Noninterest expense ............. 2,962 801 173 3,936
------- ------- -------- -------
Earnings before income taxes . 1,638 441 (593) 1,486
Income taxes .................... 620 139 (173) 586
------- ------- -------- -------
Net earnings ................. $ 1,018 $ 302 $ (420) $ 900
Earnings per share (3):
Basic ........................ $ 0.36 $ 0.32
Diluted ...................... $ 0.35 $ 0.31
------- -------
------- -------
</TABLE>
<TABLE>
<CAPTION>
For the year ended June 30, 1998(2)
-----------------------------------------------
First Mid-Iowa Purchase Pro forma
Federal Financial Adjustments Consolidated
------- --------- ----------- ------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income ................. $35,364 $ 9,806 $(1,595) $43,575
Interest expense ................ 21,377 6,081 82 27,540
------- ------- ------- -------
Net interest income .......... 13,987 3,725 (1,677) 16,035
Provision for losses on loans ... 345 60 405
------- ------- ------- -------
Net interest income after
provision for losses on loans 13,642 3,665 (1,677) 15,630
Noninterest income .............. 3,178 1,348 4,526
Noninterest expense ............. 11,528 3,081 692 15,301
------- ------- ------- -------
Earnings before income taxes . 5,292 1,932 (2,369) 4,855
Income taxes .................... 1,874 600 (692) 1,782
------- ------- ------- -------
Net earnings ................. $ 3,418 $ 1,332 $(1,677) $ 3,073
------- ------- ------- -------
------- ------- ------- -------
Earnings per share (3):
Basic ........................ $ 1.21 $ 1.08
Diluted ...................... $ 1.19 $ 1.07
-------- ---------
-------- ---------
</TABLE>
- ----------
(1) Reflects the statements of operations of First Federal and Mid-Iowa
Financial for the three months ended September 30, 1998.
(2) Reflects the statements of operations of First Federal for the year ended
June 30, 1998 and Mid-Iowa Financial for the year ended September 30, 1998.
(3) Earnings per share have been calculated using First Federal's historical
shares--see note 1 of notes to consolidated financial statements.
Pro Forma Conversion Data
The tables on the following pages provide unaudited pro forma data with
respect to the Company's stockholders' equity, net income and related per share
amounts based upon the minimum, midpoint, maximum and 15% above the maximum of
the Estimated Valuation Range at September 30, 1998 and for the three months
then ended and at June 30, 1998 and for the year then ended. The actual net
proceeds from the sale of the Subscription Shares cannot be determined until the
Conversion is completed. However, net proceeds are currently estimated to be
between $25.0 million and $34.2 million ($39.5 million in the event the
Estimated Valuation Range is increased by 15%) based upon the following
assumptions: (i) all Subscription Shares will be sold in the Subscription and
Community Offerings; (ii) Sandler O'Neill and Investment Bank Services will
receive an aggregate fee equal to 1.125% of the aggregate Purchase Price for
sales in the Subscription Offering (excluding the sale of shares to the ESOP and
the 76,500 shares assumed purchased by officers, directors, employees and their
immediate families); and (iii) total expenses of the Conversion, including the
marketing fees paid to Sandler O'Neill and Investment Bank Services, will range
from $1.3 million to $1.4 million ($1.5 million in the event the Estimated
Valuation Range is increased by 15%). Actual amounts may vary from those
estimated.
39
<PAGE>
Pro forma net income has been calculated for the three months ended
September 30, 1998 and the year ended June 30, 1998 as if the Subscription
Shares had been sold on the dates indicated and the net investable proceeds had
been invested at the yield on the one year U.S. Treasury Note in effect at the
beginning of the period for each of the periods presented (rates ranged from
5.36% to 5.37%). This yield is believed to reflect the interest rate at which
the Conversion proceeds will be initially invested. The effect of withdrawals
from deposit accounts at First Federal for the purchase of Subscription Shares
in the Offering has not been reflected. A combined effective federal and state
income tax rate of 37% has been assumed for pro forma adjustments in all
periods. Pro forma earnings per share amounts have been calculated by dividing
pro forma amounts by the number of outstanding shares of Company Common Stock
less ESOP shares which have not been committed to be released.
Pro forma unaudited stockholders' equity of the Company has been
calculated in the same manner and based upon the same assumptions as set forth
with respect to the preceding pro forma unaudited presentations. Pro forma
stockholders' equity per share has been calculated by dividing pro forma amounts
by the number of outstanding shares of Company Common Stock assuming ESOP shares
are issued and outstanding.
The following pro forma unaudited information is based, in part, on
historical information related to First Federal and Mid-Iowa Financial and on
assumptions as to future events. For these and other reasons, the pro forma
unaudited financial data may not be representative of the financial effects of
the Conversion and the Acquisition at the date on which such transactions
actually occur and should not be taken as indicative of future results of
operations. Pro forma stockholders' equity represents the difference between the
stated amount of assets and liabilities of the Company computed in accordance
with GAAP.
The pro forma stockholders' equity is not intended to represent the
fair market value of the Company Common Stock and may be different than amounts
that would be available for distribution to stockholders in the event of
liquidation of the Company.
40
<PAGE>
The following table summarizes historical data of the Bank and pro
forma data of the Company at or for the three months ended September 30, 1998
and for the fiscal year ended June 30, 1998, based on 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. No effect has been
given in the tables to the possible issuance of additional shares reserved for
future issuance pursuant to currently outstanding stock options or the 1999
Stock Option Plan, nor does book value give any effect to the liquidation
account to be established in the Conversion or the bad debt reserve in
liquidation. See "The Conversion--Liquidation Rights," and "Management of the
Bank--Directors' Compensation," and "--Executive Compensation."
<TABLE>
<CAPTION>
At or for the Three Months Ended September 30, 1998
Based upon the Sale for $10.00 of
-----------------------------------------------------------
2,635,000 3,100,000 3,565,000 4,099,750
Shares Shares Shares Shares (1)
---------- ---------- --------- ----------
(Dollars in Thousands, except per share data)
<S> <C> <C> <C> <C>
Gross proceeds .............................................. $ 26,350 $ 31,000 $ 35,650 $ 40,998
Expenses .................................................... 1,326 1,375 1,423 1,479
----------- ----------- ----------- -----------
Estimated net proceeds .................................... $ 25,024 $ 29,625 $ 34,227 $ 39,519
Common stock purchased by ESOP (2) ........................ (1,845) (2,170) (2,496) (2,870)
Common stock purchased by 1999 Recognition Plan (3) ....... (791) (930) (1,070) (1,230)
----------- ----------- ----------- -----------
Estimated net proceeds, as adjusted ................... $ 22,388 $ 26,525 $ 30,661 $ 35,419
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
For the three months ended September 30, 1998:
Consolidated net income:
Historical combined with Acquisition ...................... $ 900 $ 900 $ 900 $ 900
Pro forma adjustments:
Income on adjusted net proceeds ........................... 189 224 259 299
ESOP (2) .................................................. (19) (23) (26) (30)
1999 Recognition Plan (3) ................................. (25) (29) (34) (39)
----------- ----------- ----------- -----------
Pro forma net income .................................. $ 1,045 $ 1,072 $ 1,099 $ 1,130
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income per share (4):
Historical combined with Acquisition (8) .................. $ 0.19 $ 0.17 $ 0.14 $ 0.12
Pro forma adjustments:
Income on net proceeds .................................... 0.05 0.04 0.05 0.05
ESOP (2) .................................................. 0.00 0.00 0.00 0.00
1999 Recognition Plan (3) ................................. (0.01) (0.01) (0.01) (0.01)
----------- ----------- ----------- -----------
Pro forma net income per share (4) (5) .................. $ 0.23 $ 0.20 $ 0.18 $ 0.16
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Pro forma price to earnings ................................. 10.87x 12.50x 13.89x 15.63x
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Number of shares used in price-to-earnings ratio calculations 4,632,289 5,449,752 6,267,214 7,207,297
At September 30, 1998:
Stockholders' equity:
Historical combined with Acquisition (8) .................. $ 44,903 $ 44,903 $ 44,903 $ 44,903
Estimated net proceeds .................................... 25,024 29,625 34,227 39,519
Less: Common stock acquired by ESOP(2)..................... (1,845) (2,170) (2,496) (2,870)
Common Stock acquired by 1999
Recognition Plan (3) ............................... (791) (930) (1,070) (1,230)
----------- ----------- ----------- -----------
Pro forma stockholders' equity (6) .......................... $ 67,291 $ 71,428 $ 75,564 $ 80,322
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Stockholders' equity per share (7):
Historical combined with Acquisition ...................... $ 9.33 $ 7.93 $ 6.89 $ 6.00
Estimated net proceeds .................................... 5.19 5.22 5.25 5.26
Less:
Common stock acquired by ESOP (2) ........................... (0.38) (0.38) (0.38) (0.38)
Common Stock acquired by 1999
Recognition Plan (3) ................................ (0.16) (0.16) (0.16) (0.16)
----------- ----------- ----------- -----------
Pro forma stockholders' equity per share (6)(7) ........... $ 13.98 $ 12.61 $ 11.60 $ 10.72
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Offering price as a percentage of pro forma stockholders'
equity per share .......................................... 71.53% 79.30% 86.21% 93.28%
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Number of shares used in book value per share calculations 4,813,665 5,663,135 6,512,605 7,489,496
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
At or for the Year Ended June 30, 1998
Based upon the Sale for $10.00 of
----------------------------------------------------------
2,635,000 3,100,000 3,565,000 4,099,750
Shares Shares Shares Shares (1)
----------- ----------- ----------- -----------
(Dollars in Thousands, except per share data)
<S> <C> <C> <C> <C>
Gross proceeds .............................................. $ 26,350 $ 31,000 $ 35,650 $ 40,998
Expenses .................................................... 1,326 1,375 1,423 1,479
----------- ----------- ----------- -----------
Estimated net proceeds .................................... $ 25,024 $ 29,625 $ 34,227 $ 39,519
Common stock purchased by ESOP (2) ........................ (1,845) (2,170) (2,496) (2,870)
Common stock purchased by 1999 Recognition Plan (3) ....... (791) (930) (1,070) (1,230)
----------- ----------- ----------- -----------
Estimated net proceeds, as adjusted ................... $ 22,388 $ 26,525 $ 30,661 $ 35,419
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
For the fiscal year ended June 30, 1998:
Consolidated net income:
Historical combined with Acquisition ...................... $ 3,073 $ 3,073 $ 3,073 $ 3,073
Pro forma adjustments:
Income on adjusted net proceeds ........................... 756 896 1,035 1,196
ESOP (2) .................................................. (77) (91) (105) (121)
1999 Recognition Plan (3) ................................. (100) (117) (135) (155)
----------- ----------- ----------- -----------
Pro forma net income .................................. $ 3,652 $ 3,761 $ 3,868 $ 3,993
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income per share (4):
Historical combined with Acquisition (8) .................. $ 0.66 $ 0.56 $ 0.49 $ 0.43
Pro forma adjustments:
Income on net proceeds .................................... 0.17 0.17 0.17 0.16
ESOP (2) .................................................. (0.02) (0.02) (0.02) (0.02)
1999 Recognition Plan (3) ................................. (0.02) (0.02) (0.02) (0.02)
----------- ----------- ----------- -----------
Pro forma net income per share (4) (5) .................. $ 0.79 $ 0.69 $ 0.62 $ 0.55
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Pro forma price to earnings ................................. 12.66x 14.49x 16.13x 18.18x
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Number of shares used in price-to-earnings ratio calculations 4,641,512 5,460,602 6,279,692 7,221,646
At June 30, 1998:
Stockholders' equity:
Historical combined with Acquisition (8) .................. $ 43,668 $ 43,668 $ 43,668 $ 43,668
Estimated net proceeds .................................... 25,024 29,625 34,227 39,519
Less: Common stock acquired by ESOP(2)..................... (1,845) (2,170) (2,496) (2,870)
Common Stock acquired by 1999
Recognition Plan (3) ............................... (791) (930) (1,070) (1,230)
----------- ----------- ----------- -----------
Pro forma stockholders' equity (6) .......................... $ 66,056 $ 70,193 $ 74,329 $ 79,087
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Stockholders' equity per share (7):
Historical combined with Acquisition ...................... $ 9.07 $ 7.71 $ 6.71 $ 5.83
Estimated net proceeds .................................... 5.19 5.22 5.24 5.27
Less:Common stock acquired by ESOP (2) .................... (0.38) (0.38) (0.38) (0.38)
Common Stock acquired by 1999
Recognition Plan (3) ................................ (0.16) (0.16) (0.16) (0.16)
----------- ----------- ----------- -----------
Pro forma stockholders' equity per share (6)(7) ........... $ 13.72 $ 12.39 $ 11.41 $ 10.56
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Offering price as a percentage of pro forma stockholders'
equity per share .......................................... 72.89% 80.71% 87.64% 94.70%
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Number of shares used in book value per share calculations .. 4,813,665 5,663,135 6,512,605 7,489,496
</TABLE>
- ----------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to a 15% increase in the Offering Range to reflect changes
in market and financial conditions following the commencement of the
Offering.
(2) Assumes that 7% of shares of Common Stock sold in the Offering 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
net proceeds of the Offering retained by the Company. The Bank intends to
make annual contributions to the ESOP in an amount at least equal to the
principal of the debt. The Bank's total annual payments on the ESOP debt is
based upon 15 equal annual installments of principal. Statement of Position
93-6 requires that an employer record compensation expense in an amount
equal to the fair value of the shares committed to be released to
employees. The pro forma adjustments assume that the ESOP shares are
(footnotes continued on following page)
42
<PAGE>
(footnotes continued)
- ----------
allocated in equal annual installments based on the number of loan
repayment installments assumed to be paid by the Bank, the fair value of
the Common Stock remains at the Subscription Price and the ESOP expense
reflects an effective combined federal and state tax rate of 37.0%. The
unallocated ESOP shares are reflected as a reduction of stockholders'
equity. No reinvestment is assumed on proceeds contributed to fund the
ESOP. The pro forma net income further assumes (i) that 3,074, 3,617, 4,159
and 4,783 shares were committed to be released with respect to the three
months ended September 30, 1998 and that 12,297, 14,467, 16,637 and 19,133
shares were committed to be released with respect to the fiscal year ended
June 30, 1998, in each case at the minimum, midpoint, maximum, and adjusted
maximum of the Offering Range, respectively, and (ii) in accordance with
SOP 93-6, only the ESOP shares committed to be released during the
respective period were considered outstanding for purposes of net income
per share calculations. See "Management of the Bank--Benefits for Employees
and Officers--401(k) Savings and Employee Stock Ownership Plan."
(3) Subject to the approval of the Company's stockholders, the 1999 Recognition
Plan intends to purchase an aggregate number of shares of Common Stock
equal to 3% of the shares to be issued in the Offering. The shares may be
acquired directly from the Company, or through open market purchases. The
funds to be used by the 1999 Recognition Plan to purchase the shares will
be provided by the Bank or the Company. See "Management of the
Bank--Benefits for Employees and Officers--1999 Recognition Plan." Assumes
that the 1999 Recognition Plan acquires the shares through open market
purchases at the Subscription Price with funds contributed by the Bank, and
that 5% and 20% of the amount contributed to the 1999 Recognition Plan is
amortized as an expense during the three months ended September 30, 1998
and the fiscal year ended June 30, 1998, and the 1999 Recognition Plan
expense reflects an effective combined federal and state tax rate of 37.0%.
Assuming stockholder approval of the plan and that the plan shares are
awarded through the use of authorized-but-unissued shares of Common Stock,
stockholders would have their voting interests diluted by approximately
1.6%.
(4) Per share figures include shares of Common Stock that will be exchanged for
Minority Shares in the Share Exchange. Net income per share computations
are determined by taking the number of subscription shares assumed to be
sold in the Offering and the number of Exchange Shares assumed to be issued
in the Share Exchange and, in accordance with SOP 93-6, subtracting the
ESOP shares which have not been committed for release during the respective
period. See Note 2 above. The number of shares of Common Stock actually
sold and the corresponding number of Exchange Shares may be more or less
than the assumed amounts.
(5) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the 1998 Stock Option Plan, which is expected to be
adopted by the Company following the Offering and presented to stockholders
for approval. If the 1998 Stock Option Plan is approved by stockholders, an
amount equal to 10% of the Common Stock sold in the Offerings will be
reserved for future issuance upon the exercise of options to be granted
under the 1998 Stock Option Plan. The issuance of authorized but previously
unissued shares of Common Stock pursuant to the exercise of options under
such plan would dilute existing stockholders' interests. Assuming
stockholder approval of the plan, that all the options were exercised at
the end of the period at an exercise price equal to the Subscription Price,
and that the 1998 Recognition Plan purchases shares in the open market at
the Subscription Price, (i) pro forma net income per share for the three
months ended September 30, 1998 would be $0.21, $0.19, $0.17 and $0.15, and
the pro forma stockholders' equity per share at September 30, 1998 would be
$13.77, $12.48, $11.52 and $10.69, in each case at the minimum, midpoint,
maximum and adjusted maximum of the Offering Range, respectively, and (ii)
pro forma net income per share for the fiscal year ended June 30, 1998
would be $0.74, $0.65, $0.58 and $0.52, and the pro forma stockholders'
equity per share at June 30, 1998 would be $13.53, $12.27, $11.34 and
$10.53, in each case at the minimum, midpoint, maximum and adjusted maximum
of the Offering Range, respectively.
(6) The retained income of the Bank will be substantially restricted after the
Conversion. See "Dividend Policy," "The Conversion--Liquidation Rights" and
"Regulation--Federal Regulation of Savings Institutions--Limitation on
Capital Distributions."
(7) Per share figures include shares of Common Stock that will be exchanged for
Minority Shares in the Share Exchange. Stockholders' equity per share
calculations are based upon the sum of (i) the number of Subscription
Shares assumed to be sold in the Offering, and (ii) Exchange Shares equal
to the minimum, midpoint, maximum and adjusted maximum of the Offering
Range, respectively. The Exchange Shares reflect an Exchange Ratio of
1.64993, 1.94109, 2.23226 and 2.56709, respectively, at the minimum,
midpoint, maximum, and adjusted maximum of the Offering Range,
respectively. The number of Subscription Shares actually sold and the
corresponding number of Exchange Shares may be more or less than the
assumed amounts.
(8) Includes $1.7 million at September 30, 1998 and $1.6 million at June 30,
1998 in Mutual Holding Company capital.
43
<PAGE>
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATION
The following Consolidated Statements of Operations of the Bank for the
fiscal years ended June 30, 1998, 1997 and 1996 have been audited by KPMG Peat
Marwick LLP, independent certified public accountants, whose report thereon
appears elsewhere herein. The Consolidated Statements of Operations for the
three months ended September 30, 1998 and 1997 are unaudited and have been
prepared in accordance with the requirements for a presentation of interim
financial statements and are in accordance with generally accepted accounting
principles. In the opinion of management, all adjustments, consisting of normal
recurring adjustments, that are necessary for a fair presentation of the interim
periods, have been reflected. The results of operations for the three months
ended September 30, 1998 are not necessarily indicative of the results of
operations that may be expected for the fiscal year ending June 30, 1999. These
Statements should be read in conjunction with the Consolidated Financial
Statements of the Bank and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Three months Years Ended
ended September 30, June 30,
------------------------ --------------------------------------
1998 1997 1998 1997 1996
----------- ----------- ----------- ----------- ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Interest income:
Loans receivable..................................... $ 8,079,259 $ 6,920,785 $28,796,484 $26,562,097 $25,436,908
Mortgage-backed securities........................... 613,640 719,766 2,713,326 2,988,212 2,784,133
Investment securities................................ 1,322,356 863,883 3,694,024 4,124,948 3,433,390
Other interest-earning assets........................ 40,957 5,623 160,432 15,522 31,606
----------- ----------- ----------- ----------- -----------
Total interest income.............................. 10,056,212 8,510,057 35,364,266 33,690,779 31,686,037
----------- ----------- ----------- ----------- -----------
Interest expense:
Deposits (Note 7).................................... 4,574,293 3,828,547 15,826,758 15,376,823 16,242,637
Advances from FHLB and other borrowings 1,708,410 1,343,090 5,550,478 4,950,702 3,402,754
----------- ----------- ----------- ----------- -----------
Total interest expense............................. 6,282,703 5,171,637 21,377,236 20,327,525 19,645,391
----------- ----------- ----------- ----------- -----------
Net interest income................................ 3,773,509 3,338,420 13,987,030 13,363,254 12,040,646
Provision for loan losses (Note 4) 75,000 70,000 345,000 258,000 233,000
----------- ----------- ----------- ----------- -----------
Net interest income after provision for losses on loans 3,698,509 3,268,420 13,642,030 13,105,254 11,807,646
----------- ----------- ----------- ----------- -----------
Non-interest income:
Fees and service charges............................. 448,747 287,225 1,392,400 1,143,190 1,092,540
Gain on sale of loans held for sale.................. 87,408 49,262 241,690 206,898 289,564
Gain (loss) on sale of fixed assets.................. -- -- 103,936 (8,259) (1,029)
Abstracting income................................... 180,820 157,989 719,239 595,128 595,649
Other income, net.................................... 184,682 181,119 720,213 613,722 529,402
----------- ----------- ----------- ----------- -----------
Total non-interest income.......................... 901,657 675,595 3,177,478 2,550,679 2,506,126
----------- ----------- ----------- ----------- -----------
Non-interest expense:
Compensation and benefits (Note 10).................. 1,452,073 1,465,803 6,701,960 5,654,626 5,150,048
Office property and equipment........................ 447,122 333,908 1,500,265 1,293,189 1,158,841
Deposit insurance premiums........................... 60,697 52,465 216,405 456,651 781,390
Special deposit insurance assessment (Note 15)....... -- -- -- 2,232,519 --
Data processing...................................... 96,000 76,182 355,508 325,112 362,597
Advertising.......................................... 118,579 98,103 409,102 338,701 361,213
Net loss on sale of securities....................... -- -- -- 121,913 33,724
Amortization of excess purchase price 85,989 -- 108,244 26,244 20,072
Other expense, net................................... 701,780 612,805 2,236,111 2,243,777 1,850,453
----------- ----------- ----------- ----------- -----------
Total non-interest expense....................... 2,962,240 2,639,266 11,527,595 12,692,732 9,718,338
----------- ----------- ----------- ----------- -----------
Earnings before income taxes 1,637,926 1,304,749 5,291,913 2,963,201 4,595,434
Income taxes (Note 9).................................. 619,924 463,276 1,874,000 1,024,000 1,543,000
----------- ----------- ----------- ----------- -----------
Net earnings..................................... $ 1,018,002 $ 841,437 $ 3,417,913 $ 1,939,201 $ 3,052,434
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Earnings per share:
Basic earnings per share............................. $ .36 $ .30 $ 1.21 $ .69 $ 1.08
Diluted earnings per share........................... $ .35 $ .29 $ 1.19 $ .67 $ 1.06
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
- ----------
See accompanying notes to consolidated financial statements
44
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Bank is a federally-chartered savings bank headquartered in Sioux
City, Iowa. The Bank is the successor to First Federal Savings and Loan
Association of Sioux City, which was founded in 1923. The Bank's net income is
primarily dependent on its net interest income, which is the difference between
interest income earned on its loan, mortgage-backed securities and investment
portfolios, and its cost of funds consisting of interest paid on deposits and
borrowings. The Bank's net income also is affected by its provision for loan
losses, as well as the amount of noninterest income, including loan fees and
service charges, and noninterest expense, such as salaries and employee
benefits, deposit insurance premiums, occupancy and equipment costs and income
taxes. Earnings of the Bank also are affected significantly by general economic
and competitive conditions, particularly changes in market interest rates,
government policies and actions of regulatory authorities.
Business Strategy
The Bank's current business strategy is to operate as a well
capitalized, profitable and independent community savings bank dedicated to
providing quality banking services to its customers. The Bank has sought to
implement this strategy in recent years by: (1) closely monitoring the needs of
customers; (2) emphasizing family financial services such as residential
mortgage loans, consumer loans and various checking and savings products; (3)
offering commercial real estate loans and small business lending services; (4)
monitoring and reducing interest rate risk exposure; (5) controlling operating
expenses; and (6) maintaining strong asset quality.
Financial Condition
Total assets increased by $18.1 million, or 3.3%, to $569.6 million at
September 30, 1998 from $551.5 million at June 30, 1998. Cash and interest
bearing deposits decreased by $7.3 million, or 42.4%, while total loans
receivable increased by $2.7 million, or 0.7%, during the three month period
ended September 30, 1998. Securities available for sale increased by $22.3
million to $87.5 million at September 30, 1998 from $65.2 million at June 30,
1998. The increase in investment securities available for sale was primarily due
to management's strategy to leverage purchases with lower rate FHLB advances in
the generally lower interest rate environment. Deposits increased slightly to
$392.7 million at September 30, 1998 from $392.4 million at June 30, 1998. FHLB
advances increased by $17.0 million, or 15.7%, to $124.9 million at September
30, 1998 from $107.9 million at June 30, l998. The increase in FHLB advances
funded investment purchases. Total stockholders' equity increased by $1.1
million due primarily to earnings of $1.0 million for the three month period
ended September 30, 1998, less dividends declared totaling $158,000, and to an
improvement of $258,000 in unrealized gain on securities available for sale.
On March 31, 1998, the Bank acquired GFS Bancorp, Inc. ("GFS"), the
parent company of Grinnell Federal Savings Bank ("Grinnell Federal"), Grinnell,
Iowa, with assets of approximately $96.1 million. Total assets of the Bank
increased by $82.9 million, or 17.7%, to $551.5 million at June 30, 1998, from
$468.6 million at June 30, 1997. Total loans receivable increased by $63.5
million, or 18.6%, during the same period primarily due to the acquisition of
GFS. The increase in loans receivable was due to an increase of approximately
$29.8 million during fiscal 1998 in commercial multi-family loans and consumer
loans, and to an increase of approximately $33.7 million in single-family
owner-occupied loans. Deposits increased by $65.7 million, or 20.1%, to $392.4
million at June 30, 1998 from $326.7 million at June 30, 1997 and FHLB advances
increased by $11.4 million, or 11.8%, to $107.9 million from $96.5 million at
June 30, 1997. These increases were primarily attributable to the GFS
acquisition. The acquisition was accounted for as a purchase. The excess of cost
over fair value of assets acquired in this acquisition was approximately $7.9
million.
45
<PAGE>
Average Balance Sheet
The following table sets forth certain information relating to the
Bank's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated and the average yields
earned and rates paid. Such yields and costs are derived by dividing income or
expense by the average balance of assets or liabilities, respectively, for the
periods presented. Average balances are daily averages.
<TABLE>
<CAPTION>
Three Months Ended September 30,
-------------------------------------------------------------------------
1998 1997
Rate at ------------------------------------ ---------------------------------
September 30, Average Average Average Average
1998 Balance Interest Yield/Cost Balance Interest Yield/Cost
----------- -------- ----------- ----------- -------- -------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning Assets:
Loans receivable (1) ................... 8.00% $407,714 $ 8,079 7.93% $345,105 $ 6,921 8.02%
Mortgage-backed securities ............. 6.75 36,442 614 6.74 42,950 720 6.71
Investment securities .................. 6.78 79,671 1,322 6.64 49,273 864 7.01
Short-term investments and other
interest-earning assets (2) .......... 5.45 2,974 41 5.52 412 5 4.86
--------- -------- ----------- ----------- -------- -------- -----------
Total interest-earning assets ........ 7.67 526,801 10,056 7.64 437,740 8,510 7.78
--------- ----------- ----------- -------- -----------
Noninterest-earning assets ................ 34,155 21,213
-------- --------
Total assets ......................... $560,956 $458,953
-------- --------
-------- --------
Interest-bearing Liabilities:
Deposits ............................... 4.72 $383,613 4,574 4.77 $318,100 3,829 4.81
Borrowings ............................. 5.88 113,028 1,708 6.04 87,060 1,343 6.17
--------- -------- ----------- ----------- -------- -------- -----------
Total interest-bearing liabilities ... 5.00 496,641 6,282 5.06 405,160 5,172 5.11
--------- ----------- ----------- -------- -----------
Noninterest-bearing :
Deposits ............................... 10,962 7,442
Liabilities ............................ 10,793 6,815
-------- ---------
Total liabilities ......................... 518,396 419,417
Stockholders' equity ...................... 42,560 39,536
-------- ---------
Total liabilities and stock-
holders' equity ........................ $560,956 $ 458,953
-------- ---------
-------- ---------
Net interest income ....................... $ 3,774 $ 3,338
----------- --------
----------- --------
Interest rate spread (3) .................. 2.67% 2.58% 2.67%
--------- ----------- -----------
--------- ----------- -----------
Net yield on interest-
earning assets (4) ................... 2.86% 2.87% 3.05%
--------- ----------- -----------
--------- ----------- -----------
Ratio of average interest-earning assets to
average interest-bearing liabilities ... 106.07% 108.04%
----------- -----------
----------- -----------
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
Years Ended June 30,
1998 1997
------------------------------------ -------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
-------- -------- ----------- ---------- --------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning Assets:
Loans receivable (1) ................ $358,209 $ 28,797 8.04% $331,144 $ 26,562 8.02%
Mortgage-backed securities .......... 40,501 2,713 6.70 45,680 2,988 6.54
Investment securities ............... 53,720 3,694 6.88 58,660 4,125 7.03
Short-term investments and
other interest-earning
assets (2) ........................ 2,959 160 5.41 275 16 5.82
-------- ----------- ----------- ----------- -------- -----------
Total interest-earning assets ......... 455,389 35,364 7.77 435,759 33,691 7.73
----------- ----------- -------- -----------
Noninterest-earning assets ............ 26,303 18,999
-------- --------
Total assets .......................... $481,692 $454,758
-------- --------
-------- --------
Interest-bearing Liabilities:
Deposits ............................ $333,196 15,827 4.75 $322,426 15,377 4.77
Borrowings .......................... 91,863 5,550 6.04 82,206 4,951 6.02
-------- ----------- ----------- -------- -------- -----------
Total interest-bearing liabilities .... 425,059 21,377 5.03 404,632 20,328 5.02
----------- ----------- -------- -----------
Noninterest-bearing:
Deposits ............................ 8,527 6,346
Liabilities ......................... 7,356 6,473
-------- --------
Total liabilities ..................... 440,942 417,451
Stockholders' equity .................. 40,750 37,307
-------- --------
Total liabilities and
Stock-holders' equity ................. $481,692 $454,758
-------- --------
-------- --------
Net interest income ................... $ 13,987 $ 13,363
----------- ---------
----------- ---------
Interest rate spread(3) ............... 2.74% 2.71%
----------- -----------
----------- -----------
Net yield on interest-earning assets(4) 3.07% 3.07%
----------- -----------
----------- -----------
Ratio of average interest-earning
assets to average interest-
bearing liabilities ................. 107.14% 107.69%
----------- -----------
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Years Ended June 30,
1996
---------------------------------
Average Average
Balance Interest Yield/Cost
--------- --------- -----------
<S> <C> <C> <C>
Interest-earning Assets:
Loans receivable (1) ................ $317,037 $ 25,437 8.02%
Mortgage-backed securities .......... 42,989 2,784 6.48
Investment securities ............... 56,969 3,433 6.03
Short-term investments and
other interest-earning
assets (2) ........................ 572 32 5.59
-------- -------- -------
Total interest-earning assets ......... 417,567 31,686 7.59
-------- -------
Noninterest-earning assets ............ 17,098
---------
Total assets .......................... $434,665
---------
---------
Interest-bearing Liabilities:
Deposits ............................ $331,875 16,242 4.89
Borrowings .......................... 55,680 3,403 6.11
--------- -------- -------
Total interest-bearing liabilities .... 387,555 19,645 5.07
-------- -------
Noninterest-bearing:
Deposits ............................ 4,658
Liabilities ......................... 6,270
--------
Total liabilities ..................... 398,483
Stockholders' equity .................. 36,182
--------
Total liabilities and
Stock-holders' equity ................. $434,665
--------
--------
Net interest income ................... $ 12,041
--------
--------
Interest rate spread(3) ............... 2.52%
-------
-------
Net yield on interest-earning assets(4) 2.88%
-------
-------
Ratio of average interest-earning
assets to average interest-
bearing liabilities ................. 107.74%
-------
-------
</TABLE>
- -----------
(1) Average balances include nonaccrual loans.
(2) Includes interest-bearing deposits in other financial institutions.
(3) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
47
<PAGE>
Rate/Volume Analysis
The table below sets forth certain information regarding changes in
interest income and interest expense of the Bank for the periods indicated. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in average volume
(changes in average volume multiplied by old rate); (ii) changes in rates
(change in rate multiplied by old average volume); (iii) changes in rate-volume
(changes in rate multiplied by the change in average volume); and (iv) the net
change.
<TABLE>
<CAPTION>
Three months ended September 30, Years ended June 30,
1998 vs. 1997 1998 vs. 1997
------------------------------------------- -------------------------------------------
Increase (decrease) Increase (decrease)
due to Total due to Total
Rate/ Increase Rate/ Increase
Volume Rate Volume (decrease) Volume Rate Volume (decrease)
--------- -------- ---------- ----------- --------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans receivable .............. $ 1,256 $ (311) $ 213 $ 1,158 $ 2,171 $ 66 $ (2) $ 2,235
Mortgage-backed securities .... (109) 13 (10) (106) (339) 73 (9) (275)
Investments ................... 533 (182) 107 458 (347) (88) 4 (431)
Other interest-earning assets . 3 3 30 36 156 (1) (11) 144
--------- -------- ---------- ----------- --------- -------- ----------- ----------
Total interest-earning assets .... 1,683 (477) 340 1,546 1,641 50 (18) 1,673
--------- -------- ---------- ----------- --------- -------- ----------- ----------
Interest expense:
Savings deposits .............. $ 789 (127) 84 746 514 (64) -- 450
Borrowings .................... 401 (113) 77 365 582 16 1 599
--------- -------- ---------- ----------- --------- -------- ----------- ----------
Total interest-bearing liabilities $ 1,190 (240) 161 1,111 1,096 (48) 1 1,049
--------- -------- ---------- ----------- --------- -------- ----------- ----------
Net change in net
interest income .............. $ 493 $ (237) $ 179 $ 435 $ 545 $ 98 $ (19) $ 624
--------- -------- ---------- ----------- --------- -------- ----------- ----------
--------- -------- ---------- ----------- --------- -------- ----------- ----------
</TABLE>
<TABLE>
<CAPTION>
Years ended June 30,
1997 vs. 1996
------------------------------------------
Increase (decrease)
due to Total
Rate/ Increase
Volume Rate Volume (decrease)
---------- --------- --------- ----------
<S> <C> <C> <C> <C>
Interest Income:
Loans receivable .............. $ 1,132 $ -- $ (7) $ 1,125
Mortgage-backed securities .... 174 26 4 204
Investments ................... 102 570 20 692
Other interest-earning assets . (17) 1 -- (16)
---------- --------- --------- ----------
Total interest-earning assets .... 1,391 597 17 2,005
---------- --------- --------- ----------
Interest expense:
Savings deposits .............. (462) (398) (5) (865)
Borrowings .................... 1,621 (50) (23) 1,548
---------- --------- --------- ----------
Total interest-bearing liabilities 1,159 (448) (28) 683
------- ------- ------- -------
Net change in net
interest income .............. $ 232 $ 1,045 $ 45 $ 1,322
---------- --------- --------- ----------
---------- --------- --------- ----------
</TABLE>
48
<PAGE>
Comparison of Operating Results
The acquisition of GFS effective on March 31, 1998 was accounted for as
a purchase; therefore, GFS's results of operations are included in the Bank's
operating results from April 1, 1998 through June 30, 1998.
Interest Income
Interest income increased by $1.5 million, or 18.2%, to $10.0 million
for the three months ended September 30, 1998 from $8.5 million for the three
months ended September 30, 1997. The average yield on interest-earning assets
decreased to 7.64% for the three months ended September 30, 1998 from 7.78% for
the three months ended September 30, 1997. This decrease in yield was more than
offset by an increase of $89.1 million, or 20.4%, in the average balance of
interest-earning assets to $526.8 million for the three months ended September
30, 1998 from $437.7 million for the three months ended September 30, 1997. The
increase in average balances of interest earning assets was primarily due to the
acquisition of GFS in March 1998. Interest income on loans for the three months
ended September 30, 1998 increased by $1.2 million, or 16.7%, compared to the
three months ended September 30, 1997 due to an increase in average loans of
$62.6 million, or 18.l%, to $407.7 million for the three months ended September
30, 1998 from $345.1 million for the three months ended September 30, 1997. The
average yield on loans decreased to 7.93% for the three months ended September
30, 1998 from 8.02% for the three months ended September 30, 1997. Interest
income on mortgage-backed securities for the three months ended September 30,
1998 decreased by $106,000 when compared to the three months ended September 30,
1997. This decrease was due to a decrease of $6.5 million, or 15.2%, in the
average balance of mortgage backed securities to $36.4 million for the three
months ended September 30, 1998 from $42.9 million for the three months ended
September 30, 1997. The average yield on mortgage-backed securities increased to
6.74% for the three months ended September 30, 1998 from 6.71% for the three
months ended September 30, 1997 partially offsetting the decrease in interest
income due to reduced balances. Interest income on investment securities
increased by $458, 000, or 53.l%, as the average balance of investment
securities increased by $30.4 million, or 61.7%, to $79.7 million at September
30, 1998 from $49.3 million at September 30, 1997. The average yield on
investment securities decreased by 37 basis points to 6.64% for the three months
ended September 30, 1998 from 7.01% for the three months ended September 30,
1997. The increase in the average balance of investment securities was due to
the Bank's strategy of leveraging investment purchases with FHLB advance
borrowings. The yield on investments purchased during the quarter ended
September 30, 1998 was approximately 6.50% while the cost of FHLB borrowings
added during the same quarter was approximately 5.50%. Interest income on other
interest-earning assets increased by $35,000, to $41,000 for the three months
ended September 30, 1998 from $6,000 for the three months ended September 30,
1997. This increase was primarily due to an increase of $2.6 million in the
average balance of these assets as the Bank invested in more short-term, liquid
assets, such as commercial paper, than in the prior year quarter.
Interest income increased by $1.7 million, or 5.0%, to $35.4 million in
fiscal 1998 from $33.7 million in fiscal 1997. The average balance of
interest-earning assets increased by $19.6 million, or 4.5%, to $455.4 million
in fiscal 1998 from $435.8 million in fiscal 1997. In addition, the average
yield on interest-earning assets increased to 7.77% in fiscal 1998 from 7.73% in
fiscal 1997. The increase in interest income resulted primarily from a $2.2
million, or 8.4%, increase in interest on loans to $28.8 million in fiscal 1998
from $26.6 million in fiscal 1997. Interest income on mortgage-backed securities
(mortgage-backed securities) decreased by $275,000, or 9.2%, to $2.7 million in
fiscal 1998 from $3.0 million in fiscal 1997. During the same period, interest
income on investment securities decreased by $431,000, or 10.5%, to $3.7 million
from $4.1 million. The increase in interest income on loans resulted from an
increase of $27.1 million, or 8.2%, in the average balance of loans receivable
to $358.2 million at June 30, 1998, from $331.1 million at June 30, 1997. The
average yield on loans receivable was 8.04% and 8.02%, respectively, for fiscal
1998 and 1997. The decrease in interest income on mortgage-backed securities was
primarily due to a decrease of $5.2 million in the average balance of
mortgage-backed securities to $40.5 million in fiscal 1998 from $45.7 million in
fiscal 1997. Partially offsetting the decrease in mortgage-backed securities
balances was an increase of 16 basis points in the average yield on
mortgage-backed securities to 6.70% in fiscal 1998 from 6.54% in fiscal 1997.
The decrease in interest income on investment securities was primarily due to a
decrease of $5.0 million in the average balance of investment securities to
$53.7 million in fiscal 1998 from $58.7 million in fiscal 1997. In addition, the
yield on investment securities decreased to 6.88% in fiscal 1998 from 7.03% in
fiscal 1997. The generally lower interest rate environment during fiscal 1998
resulted in declining yields on investment securities.
49
<PAGE>
Interest income increased by $2.0 million, or 6.3%, to $33.7 million in
fiscal 1997 from $31.7 million in fiscal 1996. The average balance of
interest-earning assets increased by $18.2 million, or 4.4%, to $435.8 million
in fiscal 1997 from $417.6 million in fiscal 1996. In addition, the average
yield on interest-earning assets increased to 7.73% in fiscal 1997 from 7.59% in
fiscal 1996. The increase in interest income resulted primarily from a $1.1
million, or 4.4%, increase in interest on loans to $26.5 million in fiscal 1997
from $25.4 million in fiscal 1996. Interest income on mortgage-backed securities
(mortgage-backed securities) increased by $204,000, or 7.3%, to $3.0 million in
fiscal 1997 from $2.8 million in fiscal 1996. During the same period, interest
income on investment securities increased by $692,000, or 20.1%, to $4.1 million
from $3.4 million. The increase in interest income on loans resulted from an
increase of $14.1 million, or 4.4%, in the average balance of loans receivable
to $331.1 million at June 30, 1997, from $317.0 million at June 30, 1996. The
average yield on loans receivable was 8.02% for fiscal 1997 and 1996. The
increase in interest income on mortgage-backed securities was primarily due to
an increase of $2.7 million in the average balance of mortgage-backed securities
to $45.7 million in fiscal 1997 from $43.0 million in fiscal 1996 and to an
increase in the average yield on mortgage-backed securities to 6.54% in fiscal
1997 from 6.48% in fiscal 1996. The increase in interest income on investment
securities was primarily due to an increase in the average yield on investments
securities to 7.03% in fiscal 1997 from 6.03% in fiscal 1996. The generally
higher interest rate environment during fiscal 1997 resulted in improved yields.
In addition, an increase of $1.7 million in the average balance of investment
securities contributed to the increase in interest income on investment
securities.
Interest Expense
Interest expense increased by $l.1 million, or 21.5%, to $6.3 million
for the three months ended September 30, 1998 from $5.2 million for the three
months ended September 30, 1997. Interest on deposits increased by $746,000, or
19.5%, to $4.6 million for the three months ended September 30, 1998 from $3.8
million for the three months ended September 30, 1997. The increase in interest
on deposits was primarily due to an increase in the average balance of deposits
as a result of the GFS acquisition. The average balance of deposits increased by
$65.5 million, or 20.6%, to $383.6 million at September 30, 1998 from $318.1
million at September 30, 1997. Interest on borrowings increased by $365,000, or
27.2%, to $1.7 million for the three months ended September 30, 1998 from $1.3
million for the three months ended September 30, 1997. The increase in interest
on borrowings was primarily due to an increase in the average balance of FHLB
advances. Average FHLB advance balances increased by $26.0 million, or 29.8%, to
$113.0 million at September 30, 1998 from $87.0 million at September 30, 1997.
The increases in interest expense due to increased balances were partly offset
by decreases in the average cost of deposits and borrowings to 4.77% and 6.04%,
respectively, for the three months ended September 30, 1998 from 4.81% and
6.17%, respectively, for the three months ended September 30, 1997.
Interest expense totaled $21.4 million in fiscal 1998, representing a
$1.1 million, or 5.2%, increase from $20.3 million in fiscal 1997. The increase
was due to an increase of $20.4 million in the average balance of
interest-bearing liabilities to $425.0 million in fiscal 1998 from $404.6
million in fiscal 1997. The average cost of interest-bearing liabilities
increased slightly to 5.03% in fiscal 1998 from 5.02% in fiscal 1997. Interest
expense on deposits increased by $450,000, or 2.9%, to $15.8 million in fiscal
1998 from $15.4 million in fiscal 1997 and interest paid on borrowings increased
by $600,000, or 12.1%, to $5.6 million in fiscal 1998 from $5.0 million in
fiscal 1997. The increase in interest expense on deposits was primarily due to
an increase of $10.8 million, or 3.3%, in the average balance of deposits. The
average rate paid on deposits declined slightly to 4.75% in fiscal 1998 from
4.77% in fiscal 1997. The increase in interest expense on borrowings resulted
from a $9.6 million increase in the average balance of borrowings to $91.9
million in fiscal 1998 from $82.2 million in fiscal 1997. In addition, the
average rate paid on borrowings increased slightly to 6.04% in fiscal 1998 from
6.02% in fiscal 1997.
Interest expense totaled $20.3 million in fiscal 1997, representing a
$682,000, or 3.5%, increase from $19.6 million in fiscal 1996. The increase was
due to an increase of $17.1 million in the average balance of interest-bearing
liabilities to $404.6 million in fiscal 1997 from $387.6 million in fiscal 1996,
which was partly offset by a decrease in the average cost of interest-bearing
liabilities to 5.02% in fiscal 1997 from 5.07% in fiscal 1996. The increase in
interest expense resulted from an increase in interest paid on borrowings of
$1.5 million, or 45.5%, to $5.0 million in fiscal 1997 from $3.4 million in
fiscal 1996. The increase in interest expense on borrowings resulted from a
$26.5 million increase in the average balance of borrowings to $82.2 million in
fiscal 1997 from $55.7 million in fiscal 1996. This increase in the average
balance of borrowings was partially offset by a decrease in the average rate
paid on borrowings to 6.02% in fiscal 1997 from 6.11% in fiscal 1996. The
increase in borrowing
50
<PAGE>
balances was due to the Bank using Federal Home Loan Bank (FHLB) advances to
fund loan growth and investment purchases. Interest expense on deposits
decreased by $866,000, or 5.3%, to $15.4 million in fiscal 1997 from $16.2
million in fiscal 1996, partially offsetting the increased interest expense on
borrowings. The decrease in interest expense on deposits was primarily due to a
decrease of $9.5 million, or 2.8%, in the average balance of deposits and to a
decrease in the average rate paid on deposits to 4.77% in fiscal 1997 from 4.89%
in fiscal 1996.
Net Interest Income
Net interest income totaled $3.8 million for the three months ended
September 30, 1998 compared to a total of $3.3 million for the three months
ended September 30, 1997. The Bank's interest rate spread for the three months
ended September 30, 1998 decreased to 2.58% from 2.67% for the quarter ended
September 30, 1997. Net interest income totaled $14.0 million, $13.4 million,
and $12.0 million for fiscal 1998, 1997, and 1996, respectively. The increase of
$624,000 in net interest income in fiscal 1998 when compared to fiscal 1997 was
primarily due to volume changes. The increase in interest income in fiscal 1998
due to the increase in volume of interest-earning assets from 1997 totaled
approximately $1.6 million, while the increase in interest expense in fiscal
1998 over fiscal 1997 due to changes in volume of interest-bearing liabilities
totaled approximately $1.1 million. Net interest income for fiscal 1998
increased by approximately $545,000 over fiscal 1997 due to the net volume
changes. The increase in net interest income in fiscal 1998 was also due to an
increase in the Bank's interest rate spread as the yield on interest-earning
assets increased to 7.77% from 7.73% in fiscal 1997. The Bank's interest rate
spread was 2.74% in fiscal 1998, 2.71% in fiscal 1997, and 2.52% in fiscal 1996.
Provision for Loan Losses
The Bank maintains an allowance for loan losses through a provision for
loan losses based on management's periodic evaluation of the loan portfolio and
reflects an amount that, in management's opinion, is adequate to absorb losses
in the current portfolio. Provision for loan loss expense was $75, 000 and
$70,000, respectively, for the three months ended September 30, 1998 and 1997.
During fiscal 1998, 1997, and 1996, the Bank provided $345,000, $258,000, and
$233,000, respectively, for loan losses. Net charge-offs as a percentage of
average loans outstanding were .09%, .06%, and .04%, respectively, for fiscal
years 1998, 1997, and 1996. In evaluating the portfolio, management takes into
consideration numerous factors, including current economic conditions, prior
loan loss experience, the composition of the loan portfolio, and management's
estimate of anticipated credit losses.
Noninterest Income
Noninterest income increased by $226,000, or 33.5% to $902,000 for the
three months ended September 30, 1998 from $676,000 for the three months ended
September 30, 1997. The increase in noninterest income was due to increases in
service charges and other fees, gain on sale of loans held for sale, and
abstracting income totaling $162,000, $38,000, and $23,000, respectively, for
the three months ended September 30, 1998 as compared to the three months ended
September 30, 1997.
Noninterest income increased by $627,000, or 24.6%, to $3.2 million for
fiscal 1998 from $2.6 million for fiscal 1997. Income from fees and service
charges, abstracting income and other noninterest income increased by $249,000,
$124,000 and $106,000, respectively, in fiscal 1998 when compared to fiscal
1997. The increase in abstracting income was due primarily to increased
refinancing activity. Gain on sale of loans held for sale in connection with the
Bank's ongoing mortgage banking activities increased by $35,000 over the prior
year, and a gain on sale of fixed assets totaling $104,000 was recorded in
fiscal 1998. The increase in fees and service charges was partially due to
increases in transaction accounts that typically generate more service charge
income than fixed maturity deposits and also to the addition of the GFS deposit
accounts. The increase in other income was primarily due to increased activity
in the Bank's non-bank subsidiaries.
Noninterest income increased by $45,000, or 1.8%, remaining at $2.5
million for fiscal 1997 and 1996. An increase of $51,000, or 4.6%, in fees and
service charges and an increase of $77,000, or 14.6%, in other income was
largely offset by a decrease of $83,000, or 28.5%, in gain on sale of loans held
for sale as the volume of loans originated for sale to investors declined to
$12.8 million in fiscal 1997 from $18.0 million in fiscal 1996. The increase in
fees and service charges was largely due to increases in transaction accounts
which typically generate
51
<PAGE>
more service charge income than fixed maturity deposits. The increase in other
income was primarily due to increased activity in the Bank's non-bank
subsidiaries.
Noninterest Expense
Noninterest expense increased by $323,000, or 12.2%, to $3.0 million
for the three months ended September 30, 1998 from $2.6 million for the three
months ended September 30, 1997. Compensation and benefits expense totaled $1.5
million for each of the three months ended September 30, 1998 and 1997. An
adjustment to record the change in the Bank's liability for stock appreciation
rights ("SARs") reduced expense for the three months ended September 30, 1998 by
approximately $469,000. In connection with the GFS acquisition, GFS stock
options were exchanged for Bank SARs. At September 30, 1998 the Bank's liability
for SARs was approximately $478,000 as compared to a liability of approximately
$947,000 at June 30, 1998. Excluding the SARs adjustment, compensation and
benefits expense increased by $454,000, or 31.0%, to $l.9 million for the three
months ended September 30, 1998 from $1.5 million for the three months ended
September 30, 1997. The Bank's staff increased by approximately twenty-three
full-time-equivalent employees due to the acquisition of Grinnell Federal and to
the addition of a new branch office in South Sioux City, Nebraska. Office
property and equipment expense increased by $113,000, or 33.9%, over the prior
year partially due to the implementation of a new platform banking system, to
the addition of a new office in South Sioux City, Nebraska and to the
acquisition of the Grinnell office. Deposit insurance premium expense, data
processing expense and advertising expense increased by $8,000, $20,000 and
$20,000, respectively, for the three months ended September 30, 1998 as compared
to the three months ended September 30, 1997. Amortization of intangibles
increased by $80,000 to $86,000 for the three months ended September 30, 1998
from $6,000 for the three months ended September 30, 1997 due to amortization of
the goodwill related to the GFS acquisition. Other general and administrative
expenses increased by $96,000, or 15.8%, for the three months ended September
30, 1998 as compared to the three months ended September 30, 1997.
Noninterest expense decreased by $1.2 million, or 9.2%, to $11.5
million in fiscal 1998 from $12.7 million in fiscal 1997. Fiscal 1997 included a
$2.2 million charge for the special deposit insurance assessment that was
mandated in September, 1996. Excluding this one-time assessment, the principal
component of the Bank's noninterest expense has been and continues to be
salaries and employee benefits. Compensation and benefit expense increased by
$1.0 million, or 18.5%, to $6.7 million in fiscal 1998 from $5.7 million in
fiscal 1997. During fiscal 1998, the Bank recognized the liability for an early
retirement incentive program that totaled approximately $277,000. Office
property and equipment expense increased by $207,000, or 16.0%. Deposit
insurance premium expense decreased by $240,000, or 52.6%, to $216,000 in fiscal
1998 from $457,000 in fiscal 1997 due to a reduction in premium rates which was
a direct result of the recapitalization of the SAIF and the payment of the
special assessment mentioned above. Deposits totaling approximately $62.3
million were added to the Bank's assessment base with the GFS acquisition. Data
processing expense and advertising expense increased by $30,000, or 9.4%, and by
$70,000, or 20.8%, respectively, in fiscal 1998 as compared to fiscal 1997. No
loss on sale of securities available for sale was recorded in fiscal 1998 as
compared to a loss of $122,000 in fiscal 1997. Amortization of intangibles
increased by $82,000, to $108,000 in fiscal 1998, from $26,000 in fiscal 1997
primarily due to the excess of cost over fair value of assets added in the GFS
acquisition that totaled approximately $7.9 million. This excess is being
amortized over a period of 25 years.
Noninterest expense increased by $3.0 million, or 30.6%, to $12.7
million in fiscal 1997 from $9.7 million in fiscal 1996 largely due to the
special deposit insurance assessment which totalled $2.2 million. Excluding this
one-time assessment, the principal component of the Bank's noninterest expense
has been and continues to be salaries and employee benefits. Compensation and
benefit expense increased by $505,000, or 9.8%, to $5.7 million in fiscal 1997
from $5.2 million in fiscal 1996. Office property and equipment expense
increased by $134,000, or 11.6%, largely due to significant improvements at
branch locations. Deposit insurance premium expense decreased by $325,000, or
41.6%, to $456,000 in fiscal 1997 from $781,000 in fiscal 1996 due to a
reduction in premium rates which was a direct result of the recapitalization of
the SAIF and the payment of the special assessment mentioned above. Data
processing expense and advertising expense decreased by $37,000, or 10.3%, and
by $23,000, or 6.2%, respectively, in fiscal 1997 as compared to fiscal 1996.
The net loss on sale of securities available for sale totaling $122,000 in
fiscal 1997 was the result of liquidating a mutual fund investment and some
low-yielding available-for-sale investment securities in order to invest in
higher-yielding investments. Other general and administrative expenses increased
by $399,000, or 21.4%, to $2.3 million in fiscal 1997 from $1.9 million in
fiscal 1996.
52
<PAGE>
Net Earnings
Net earnings totaled $1.0 million for the three months ended September
30, 1998, compared to $841,000 for the three months ended September 30, 1997.
This represents an increase of $177,000, or 21.0%, over the prior year period.
The Bank's effective tax rate increased to 37.8% for the three months ended
September 30, 1998 from 35.5% for the three months ended September 30, 1997. Net
earnings totaled $3.4 million, $1.9 million, and $3.1 million, respectively, for
fiscal years 1998, 1997, and 1996. Net earnings for fiscal 1997, excluding the
SAIF one-time assessment, net of tax effect, totaled $3.3 million. The federal
and state effective tax rate on earnings was 35.4%, 34.6%, and 33.6%,
respectively, for fiscal years 1998, 1997, and 1996.
Asset and Liability Management - Interest Rate Sensitivity 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 an institution's interest rate sensitivity "gap." An asset or
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 time period. 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
adversely affect net interest income while a positive gap would tend to
positively affect net interest income. During a period of falling interest rates
a negative gap would tend to positively affect net interest income while a
positive gap would tend to negatively affect net interest income.
The Bank's strategy in recent years has been to reduce its exposure to
interest rate risk by better matching the maturities of its interest rate
sensitive assets and liabilities. This strategy has been implemented by
originating investments. The Bank seeks to lengthen the maturities of its
deposits by promoting longer-term certificates. The Bank does not solicit
negotiated high-rate jumbo certificates of deposit or brokered deposits.
At September 30, 1998, total interest-bearing liabilities maturing or
repricing within one year exceeded total interest-earning assets maturing or
repricing in the same period by $59.5 million, representing a cumulative
one-year gap ratio of 10.5%. The Bank has established an Asset-Liability
Management Committee which is responsible for reviewing the Bank's asset and
liability policies. The Committee meets weekly and reports quarterly to the
Board of Directors on interest rate risks and trends, as well as liquidity and
capital ratios and requirements.
Market Risk Management
Market risk is the risk of loss arising from adverse changes in market
prices and rates. The Bank's market risk is comprised primarily of interest rate
risk resulting from its core banking activities of lending and deposit taking.
Interest rate risk is the risk that changes in market interest rates that might
adversely affect the Bank's net interest income or the economic value of its
portfolio of assets, liabilities, and off-balance sheet contracts. Management
continually develops and applies strategies to mitigate this risk. Management
does not believe that the Bank's primary market risk exposures and how those
exposures were managed in fiscal 1998 have changed when compared to fiscal 1997.
Market risk limits have been established by the Board of Directors based on the
Bank's tolerance for risk.
The Bank primarily relies on the OTS Net Portfolio Value Model (the
"Model") to measure its susceptibility to interest rate changes. Net portfolio
value ("NPV") is defined as the present value of expected net cash flows from
existing assets minus the present value of expected net cash flows from existing
liabilities plus or minus the present value of net expected cash flows from
existing off-balance-sheet contracts. The Model estimates the current economic
value of each type of asset, liability, and off-balance sheet contract after
various assumed instantaneous, parallel shifts in the Treasury yield curve both
upward and downward.
53
<PAGE>
The NPV Model uses an option-based pricing approach to value one- to
four-family mortgages, mortgages serviced by or for others, and firm commitments
to buy, sell, or originate mortgages. This approach makes use of an interest
rate simulation program to generate numerous random interest rate paths that, in
conjunction with a prepayment model, are used to estimate mortgage cash flows.
Prepayment options and interest rate caps and floors contained in mortgages and
mortgage-related securities introduce significant uncertainty in estimating the
timing of cash flows for these instruments that warrants the use of this
sophisticated methodology. All other financial instruments are valued using a
static discounted cash flow method. Under this approach, the present value is
determined by discounting the cash flows the instrument is expected to generate
by the yields currently available to investors from an instrument of comparable
risk and duration.
The following table sets forth the present value estimates for major
categories of financial instruments of the Bank at September 30, 1998, as
calculated by the OTS NPV Model. The table shows the present value of the
instruments under rate shock scenarios of -300 basis points to +300 basis points
in increments of 100 basis points. As illustrated in the table, the Bank's NPV
is more sensitive in a rising rate scenario than in a falling rate scenario. As
market rates increase, the market value of the Bank's large portfolio of
mortgage loans and securities declines significantly and prepayments slow. As
rates decrease, the market value of mortgage loans and securities increase only
modestly due to prepayment risk, periodic rate caps, and other embedded options.
Actual changes in market value will differ from estimated changes set
forth in this table due to various risks and uncertainties.
54
<PAGE>
<TABLE>
<CAPTION>
Present Value Estimates by Interest Rate Scenario
Calculated at September 30, 1998
-----------------------------------------------------------------------------
Base
-300 bp -200 bp -100 bp 0 bp +100 bp +200 bp +300 bp
--------- -------- --------- -------- -------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Financial Instrument:
Mortgage loans and
securities................... $444,761 $438,800 $433,581 $428,000 $420,112 $410,478 $399,868
Non-mortgage loans........... 28,507 28,103 27,711 27,330 26,959 26,598 26,247
Cash, deposits and
securities................... 98,373 97,492 96,637 95,806 95,001 94,219 93,461
Other assets................. 20,418 20,958 21,922 23,707 26,154 29,092 31,855
--------- -------- --------- -------- -------- --------- ---------
Total assets................. 592,059 585,353 579,851 574,843 568,226 560,387 551,431
Deposits..................... 406,178 402,672 399,258 395,912 392,660 389,480 386,364
Borrowings................... 134,736 132,041 129,446 126,947 124,538 122,217 119,978
Other liabilities............ 9,049 9,045 9,041 9,038 9,035 9,031 9,028
--------- -------- --------- -------- -------- --------- ---------
Total liabilities............ 549,963 543,758 537,745 531,897 526,233 520,728 515,370
--------- -------- --------- -------- -------- --------- ---------
Commitments.................. 1,164 884 619 336 10 (324) (650)
--------- -------- --------- -------- -------- --------- ---------
Net portfolio value.......... $43,260 42,479 42,725 43,282 42,003 39,335 35,411
--------- -------- --------- -------- -------- --------- ---------
--------- -------- --------- -------- -------- --------- ---------
$ Change from base........... $22 $803 $557 - ($1,279) ($3,947) ($7,871)
--------- -------- --------- -------- -------- --------- ---------
--------- -------- --------- -------- -------- --------- ---------
% Change from base........... 0% -2% -1% - -3% -9% -18%
--------- -------- --------- -------- -------- --------- ---------
--------- -------- --------- -------- -------- --------- ---------
% Change: board limit........ -20% -15% -10% - -20% -40% -55%
--------- -------- --------- -------- -------- --------- ---------
--------- -------- --------- -------- -------- --------- ---------
</TABLE>
Liquidity and Capital Resources
The Bank is required to maintain minimum levels of liquid assets as
defined by OTS regulations. This requirement, which varies from time to time
depending upon economic conditions and deposit flows, is based upon a percentage
of deposits and short-term borrowings. In November 1997, the OTS revised its
liquidity rule to lower the required ratio to 4% from 5% of deposits and
short-term borrowings. The OTS also expanded the types of investments considered
to be liquid assets and removed the requirement that certain investments must
mature within five years in order to qualify as liquid assets. The Bank
historically has maintained a level of liquid assets in excess of regulatory
requirements, and the Bank's liquidity ratio averaged 27.0% during the quarter
ended September 30, 1998. Liquidity ratios averaged 26.6% for the three quarters
ended June 30, 1998 under the new OTS rules. The Bank adjusts its liquidity
levels in order to meet funding needs for deposit outflows, payment of real
estate taxes from escrowed funds, when applicable, and loan commitments. The
Bank also adjusts liquidity as appropriate to meet its asset/liability
objectives.
The Bank's primary sources of funds are deposits, amortization and
prepayment of loans and mortgage-backed securities, FHLB advances, maturities of
investment securities and other short-term investments, and funds provided from
operations. While scheduled loan and mortgage-backed securities repayments are a
relatively predictable source of funds, deposit flows and loan prepayments are
greatly influenced by general interest rates, economic conditions and
competition. The Bank manages the pricing of its deposits to maintain a steady
deposit balance. In addition, the Bank invests excess funds in federal funds and
other short-term interest-earning assets and other assets which provides
liquidity to meet lending requirements.
Federal funds sold and other assets qualifying for liquidity,
outstanding at September 30, 1998 and June 30, 1998, 1997, and 1996, amounted to
$119.1 million, $96.4 million, $28.4 million, and $42.7 million, respectively.
55
<PAGE>
Deposits are the Bank's primary source of externally generated funds.
The level of deposit inflows during any given period is heavily influenced by
factors outside of management's control, such as the general level of short-and
long-term interest rates in the economy, as well as higher alternative yields
that investors may obtain on competing investment instruments such as money
market mutual funds. The Bank's net deposits before interest credited decreased
by $3.6 million for the three months ended September 30, 1998, increased by
$49.1 million for fiscal 1998, due primarily to the GFS acquisition, and
decreased by $21.9 million and $12.1 million for fiscal years 1997 and 1996,
respectively.
Similarly, the amount of principal repayments on loans and mortgage
securities are heavily influenced by the general level of interest rates in the
economy. Funds received from principal repayments on mortgage securities for the
three months ended September 30, 1998 and fiscal 1998, 1997 and 1996, totaled
$2.8 million, $11.0 million, $9.3 million, and $7.7 million, respectively.
Principal repayments on loans totaled $25.2 million for the three months ended
September 30, 1998, $123.3 million for fiscal 1998, $81.6 million in fiscal 1997
and $74.0 million in fiscal 1996. The acceleration of loan and mortgage
securities principal repayments over the respective periods reflects the
refinancing activity of homeowners due to generally lower mortgage interest
rates in recent years.
Liquidity management is both a daily and long-term function of business
management. If the Bank requires funds beyond its ability to generate them
internally, borrowing agreements exist with the FHLB which provides an
additional source of funds. At September 30, 1998, the Bank had $124.9 million
in outstanding advances from the FHLB.
At September 30, 1998, the Bank had outstanding loan commitments
totaling $32.1 million. Certificates of deposit scheduled to mature or reprice
in one year or less at September 30, 1998 totaled $121.3 million. Management
believes that a significant portion of such deposits will remain with the Bank.
Impact of Inflation and Changing Prices
The consolidated financial statements of the Bank and notes thereto,
presented elsewhere herein, have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time and
due to inflation. The impact of inflation is reflected in the increased cost of
the Bank's operations. Unlike most industrial companies, nearly all the assets
and liabilities of the Bank are monetary. 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 price of goods and services.
Effect of New Accounting Standards
SFAS 130, Reporting Comprehensive Income, establishes the standards for
the reporting and display of comprehensive income in the financial statements.
Comprehensive income represents net earnings and certain amounts reported
directly in stockholders' equity, such as the net unrealized gain or loss on
available-for-sale securities. The Bank adopted SFAS 130 on July 1, 1998.
SFAS 131, Disclosure about Segments of an Enterprise and Related
Information, establishes disclosure requirements for segment operations. The
Bank adopted SFAS 131 on July 1, 1998.
SFAS 132, Employers' Disclosures about Pensions and other
Postretirement Benefits, revises the disclosure requirements for pension and
other postretirement benefit plans. The Bank adopted SFAS 132 on July 1, 1998.
SFAS 133, Accounting for Derivative Instruments and Hedging Activities,
will be effective for the Bank for years beginning after July 1, 1999. The Bank
has no activity covered by SFAS 133. The Bank expects to adopt SFAS 133 when
required.
56
<PAGE>
Year 2000
The Year 2000 (Y2K) issue is a serious operational problem that is
widespread and complex, affecting all industries. The problem consists
essentially of the risk that programming code in existing computer systems will
fail to properly recognize the new millennium when it occurs in the year 2000.
Many computer programs and related hard-printed memory circuits were developed
with six-digit date fields (YYMMDD, or some variation) with the YY two-digit
field representing the year that is used in calculations related to that field.
Any of the Bank's programs that recognize a date using "00" as the year 1900
rather than the year 2000 could cause miscalculations or system failures.
The Bank has identified the systems that will be affected by the Y2K
problem. The Bank's Y2K action team has completed the awareness and inventory
phases of Y2K in which potential Y2K risk areas and systems have been
identified; and, assessment of the Bank 's Y2K exposures is complete.
Programming changes, system upgrades and replacements and other actions
necessary to prepare for Y2K continue and are expected to extend into the first
quarter of calendar 1999. In addition, testing and assessing the validity of Y2K
changes was begun during the quarter ended September 30, 1998 and will continue
through the first calendar quarter of 1999 during which quarter Y2K-ready
systems are expected to be implemented.
Management anticipates that the enhancements necessary to prepare its
mission-critical systems for the year 2000 will be completed in early 1999.
Although the effort to prepare for Y2K is intended to address all Y2K issues,
the Bank's disaster recovery/contingency plan will encompass Y2K elements and
address potential Y2K issues in the year 2000.
The Bank anticipates that it will incur internal staff costs as well as
consulting and other expenses related to enhancements necessary to prepare its
systems for Year 2000. Based on the Bank's current estimate, fiscal 1999
expenses of the Year 2000 project are not expected to exceed $100,000.
In addition to expenses related to its own computer systems, the Bank
is aware of potential Y2K risks to third parties, including vendors (and to the
extent appropriate, depositors and borrowers) and the possible adverse impact on
the Bank resulting from failures by these parties to adequately address the Year
2000 problem. The Bank could incur losses if loan payments are delayed due to
Year 2000 problems affecting borrowers or impairing the payroll systems of large
employers in the Bank's market area. To date, the Bank has not been advised by
such parties that they do not have plans in place to address and correct the
issues associated with the Year 2000 problem; however, no assurance can be given
as to the adequacy of such plans or to the timeliness of their implementation.
The preceding paragraphs include forward-looking statements that
involve inherent risks and uncertainties. The actual costs of Year 2000
compliance and the impact of Year 2000 issues could differ materially from what
is currently anticipated. Factors that might result in such differences include
incomplete inventory and assessment results, higher than anticipated costs to
update software and hardware and vendors', customers' and other third parties'
inability to effectively address the Year 2000 issue.
SAIF Recapitalization
On September 30, 1996, legislation went into effect to resolve the
deposit insurance premium disparity between savings institutions (such as the
Bank) and banks which included the payment of a one-time special assessment to
recapitalize the SAIF. The required payment resulted in a non-recurring expense
for the Bank totalling $2.2 million ($1.4 million, or $.49 per share, after tax
effect) for fiscal 1997. The industry-wide assessment was supported by savings
institutions to fully capitalize the SAIF fund and reduce future deposit
insurance premium costs to a level at which SAIF-insured institutions can
compete with Bank Insurance Fund (BIF) institutions.
57
<PAGE>
BUSINESS OF THE BANK
General
The Bank operates, and intends to continue to operate, as a
community-oriented financial institution. The Bank's business consists primarily
of attracting retail deposits from the general public and using those funds,
together with other funds to originate one-to four-family mortgage loans and
other loans.
Market Area
The Bank conducts operations through its main office in Sioux City, Iowa,
which is located on the Western border of Iowa, and its 15 branch offices in
northwest and central Iowa and northeast Nebraska. The Bank gained access to the
central Iowa market area after its acquisition in March 1998 of GFS Bancorp,
Inc. Grinnell is located in Poweshiek County, fifty-five miles east of Des
Moines, Iowa, the state capital and largest metropolitan area. The population of
Sioux City is approximately 85,000, and the population of Grinnell and Poweshiek
County is approximately 9,000 and 19,000, respectively. The total population of
the Bank's primary market area is approximately 250,000. Most employment in the
Bank's primary market area is in the agriculture and agriculture-related
industries, but also includes significant manufacturing and service businesses.
Major employers in the primary market area include Iowa Beef Processors, MCI
Telemarketing, Sioux Honey Association, Wells Dairy, Interbake Foods, Gateway
Computers, Great West Casualty, the 185th Fighter Group of the Iowa Air National
Guard, Marian Health Center, St. Luke's Regional Medical Center, K-Products,
Diamond Vogel Paint, Grinnell College, Grinnell Mutual Insurance Company, GTE,
Grinnell Regional Medical Center, and Donaldson Company.
The Bank's business and operating results are significantly affected by the
general economic conditions prevalent in its primary market area. The Bank's
primary market area is projected to experience only moderate population growth
for the foreseeable future.
Lending Activities
General. Historically, the principal lending activity of the Bank has been
the origination or purchase of mortgage loans secured by one- to four-family
residential properties. The Bank also originates loans secured by commercial
real estate and multi-family units and purchases participation interests in
multi-family loans and commercial real estate loans originated primarily by
other lenders in the midwest. Multi-family and commercial real estate loans
totaled $60.7 million, $58.4 million, $34.9 million and $23.4 million,
respectively, at September 30, 1998 and June 30, 1998, 1997 and 1996. In recent
years, the Bank has increased its consumer lending activities to broaden
services offered to customers and to improve the Bank's interest rate risk
exposure.
The Bank has sought to make its interest earning assets more interest rate
sensitive by actively originating and purchasing variable rate loans, such as
adjustable rate mortgage ("ARM") loans secured by single family residential real
estate, adjustable rate second mortgage loans and medium-term consumer loans.
The Bank also purchases mortgage-backed securities with adjustable rates. At
September 30, 1998, approximately $193.0 million or 43.2% of the Bank's total
loan and mortgage-backed securities portfolio consisted of loans with variable
interest rates.
The Bank actively originates fixed rate mortgage loans, generally with 10
to 30 year terms to maturity secured by one- to four-family residential
properties. One- to four-family fixed rate loans generally are originated and
underwritten for resale in the secondary mortgage market. The Bank also actively
originates loans insured or guaranteed by the United States Government or
agencies thereof, such as VA and FHA loans. The Bank also originates interim
construction loans on one- to four-family residential properties.
58
<PAGE>
Analysis of Loan Portfolio. Set forth below are selected data relating to
the composition of the Bank's loan portfolio, by type of loan on the dates
indicated.
<TABLE>
<CAPTION>
June 30,
------------------------------------------------
At September 30, 1998 1998 1997
--------------------- -------------------- ----------------------
Amount Percent Amount Percent Amount Percent
--------- ------- --------- ------- --------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential real estate:
One- to four-family units (1)......... $ 300,466 73.74% $ 301,415 74.46% $ 267,724 78.45%
Multi-family dwelling units........... 41,056 10.07 43,146 10.66 27,618 8.09
Commercial real estate................... 19,675 4.83 15,294 3.78 7,278 2.13
Home equity and second mortgage.......... 22,110 5.43 21,682 5.36 17,193 5.04
Home improvement loans................... 600 .15 728 0.18 1,425 0.42
Auto loans............................... 15,799 3.88 16,417 4.06 15,488 4.54
Loans on deposits........................ 627 .15 584 .14 484 0.14
Other non-mortgage loans (2)............. 11,255 2.76 9,689 2.39 7,882 2.31
---------- ------ ---------- ------ ---------- ------
Total................................. 411,588 101.01 408,955 101.03 345,092 101.12
Less
Allowance for loan losses (3)......... (2,677) (.65) (2,607) (.64) (1,796) (.53)
Loans in process...................... (606) (.15) (875) (.22) (327) (.10)
Net unearned premiums (discounts)
on loans.............................. 1,396 .34 1,483 .36 211 .07
Deferred loan fees (4)................. (2,246) (.55) (2,156) (.53) (1,926) (.56)
---------- ------ ---------- ------ ---------- ------
Total loans, net.................... $407,455 100.00% $ 404,800 100.00% $ 341,254 100.00%
---------- ------ ---------- ------ ---------- ------
---------- ------ ---------- ------ ---------- ------
</TABLE>
<TABLE>
<CAPTION> June 30,
----------------------------------------------------------------------------
1996 1995 1994
------------------- -------------------- -------------------
Amount Percent Amount Percent Amount Percent
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Residential real estate:
One- to four-family units (1)........ $ 264,304 82.49% $ 270,960 86.91% $ 234,719 88.70%
Multi-family dwelling units.......... 19,619 6.12 12,635 4.05 11,639 4.39
Commercial real estate.................. 3,771 1.18 5,982 1.92 5,711 2.16
Home equity and second mortgage......... 11,732 3.66 9,667 3.10 8,497 3.21
Home improvement loans.................. 2,082 0.65 2,078 0.67 1,814 0.69
Auto loans.............................. 12,488 3.90 8,301 2.66 2,810 1.06
Loans on deposits....................... 592 0.18 501 0.16 616 0.23
Other non-mortgage loans (2)............ 9,969 3.11 5,981 1.92 4,207 1.59
---------- ------ ---------- ------ ---------- ------
Total................................ 324,557 101.29 316,105 101.39 270,013 102.03
---------- ------ ---------- ------ ---------- ------
Less
Allowance for loan losses (3)........ (1,730) (.54) (1,621) (.52) (1,766) (0.67)
Loans in process..................... (388) (.12) (401) (.13) (911) (0.34)
Net unearned premiums (discounts)
on loans............................. (33) (.01) (292) (.09) (612) (0.23)
Deferred loan fees (4)................ (1,998) (.62) (2,016) (.65) (2,109) (0.79)
---------- ------ ---------- ------ ---------- ------
Total loans, net................... $ 320,408 100.00% $ 311,775 100.00% $ 264,615 100.00%
---------- ------ ---------- ------ ---------- ------
---------- ------ ---------- ------ ---------- ------
</TABLE>
- ------------------------------------
(1) Includes loans held for sale and construction loans.
(2) Includes credit card loans, education loans and unsecured personal loans,
and secured and unsecured commercial loans.
(3) Includes lower of cost or market adjustment on loans held for sale.
(4) Includes deferred loan origination fees on loans held for sale.
59
<PAGE>
Loan and Mortgage-Backed Securities Maturity Schedule. The following
table sets forth certain information as of September 30, 1998, regarding the
dollar amount of loans and mortgage-backed securities maturing in the Bank's
portfolio based on their contractual terms to maturity. Demand loans, loans
having no stated schedule of repayments and no stated maturity, and overdrafts
are reported as due in one year or less. Adjustable and floating rate loans are
included in the period in which interest rates are next scheduled to adjust
rather than in which they mature, and fixed rate loans and mortgage-backed
securities are included in the period in which the final contractual repayment
is due. Fixed rate mortgage-backed securities are assumed to mature in the
period in which the final contractual payment is due on the underlying mortgage.
<TABLE>
<CAPTION>
One Three Five
Within Through Through Through
One Year Three Years Five Years Ten Years
------------- ------------- ------------- ------------
(In Thousands)
<S> <C> <C> <C> <C>
First mortgage loans:
One- to four-family residences:
Adjustable.............................. $ 54,783 $ 40,302 $ 19,688 $ 9,614
Fixed................................... 3,816 1,900 6,033 49,297
---------- ---------- ---------- -----------
Total one- to four-family............... 58,599 42,202 25,721 58,911
Multi-family and commercial real estate:
Adjustable.............................. 22,569 20,935 757 --
Fixed..................................... 7,395 3,228 3,096 776
---------- ---------- ---------- -----------
Total multi-family and commercial....... 29,964 24,163 3,853 776
Consumer and other non- mortgage loans:
Adjustable.............................. 5,330 -- -- --
Fixed................................... 3,068 13,698 18,400 8,482
---------- ---------- ---------- -----------
Total consumer and other non- mortgage
loans................................... 8,398 13,698 18,400 8,482
---------- ---------- ---------- -----------
Total loans receivable...................... $ 96,961 $ 80,063 $ 47,974 $ 68,169
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
Mortgage-backed securities:
Fixed-rate mortgage-backed securities -
held to maturity.......................... $ 396 $ 1,952 $ 650 $ 6,212
Adjustable-rate mortgage-backed
securities - available for sale........... 14,700 2,116 2,215 --
---------- ---------- ---------- -----------
Total mortgage-backed securities............ $ 15,096 $ 4,068 $ 2,865 $ 6,212
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
</TABLE>
<TABLE>
<CAPTION>
Ten Beyond
Through Twenty
Twenty Years Years Total
------------- -------------- ----------
<S> <C> <C> <C>
First mortgage loans:
One- to four-family residences:
Adjustable.............................. $ -- $ -- $ 124,387
Fixed................................... 92,402 22,631 176,079
--------- --------- ----------
Total one- to four-family............... 92,402 22,631 300,466
Multi-family and commercial real estate:
Adjustable.............................. -- -- 44,261
Fixed..................................... 734 1,241 16,470
--------- --------- ----------
Total multi-family and commercial....... 734 1,241 60,731
Consumer and other non- mortgage loans:
Adjustable.............................. -- -- 5,330
Fixed................................... 1,413 -- 45,061
--------- --------- ----------
Total consumer and other non-mortgage
loan.................................... 1,413 0 50,391
--------- --------- ----------
Total loans receivable...................... $ 94,549 $ 23,872 $ 411,588
Mortgage-backed securities:
Fixed-rate mortgage-backed securities -
held to maturity.......................... $ 5,487 $ 1,411 $ 16,108
Adjustable-rate mortgage-backed
securities - available for sale........... -- -- 19,031
--------- --------- ----------
Total mortgage-backed securities $ 5,487 $ 1,411 $ 35,139
--------- --------- ----------
--------- --------- ----------
</TABLE>
60
<PAGE>
The following table sets forth the dollar amount of all loans maturing
or repricing after September 30, 1999 which have predetermined interest rates
and have floating or adjustable interest rates.
<TABLE>
<CAPTION>
Floating or
Predetermined Adjustable
Rates Rates Total
------------- ------------ -------------
<S> <C> <C> <C>
Real estate mortgage:
One- to four-family.................................... $ 172,263 $ 69,604 $ 241,867
Other mortgage loans................................... 9,075 21,692 30,767
Consumer............................................... 41,993 -- 41,993
---------- --------- ----------
Total................................................ $ 223,331 $ 91,296 $ 314,627
---------- --------- ----------
---------- --------- ----------
</TABLE>
Residential Real Estate Loans. The Bank's primary lending activity
consists of the origination of one-to four-family, owner-occupied, residential
mortgage loans secured by property located in the Bank's primary market area.
The majority of the Bank's residential mortgage loans consists of loans secured
by owner-occupied, single-family residences. The Bank generally has limited its
real estate loan originations to properties within its primary market area.
However, the Bank also purchases whole loans originated by others, with an
emphasis on single-family ARM loans having interest rate caps generally of 2%
annually and 5% over the life of the loan and with margins over various indexes
ranging from 180 to 275 basis points depending on the index. During the period
from July 1, 1993 through September 30, 1998, the Bank purchased approximately
$84.8 million of one-to four-family residential loans. Loans purchased outside
of the Bank's primary lending area totaled approximately $47.4 million at
September 30, 1998 and include approximately $36.2 million of loans that are
geographically distributed in the midwestern United States. The remaining loans
are scattered throughout the United States with the largest geographic
concentrations including Connecticut with $3.4 million, Georgia with $1.2
million, Arizona with $1.5 million and Florida with $1.1 million.
The delinquency rate on purchased loans and on loans originated by the
Bank was 1.8% and 0.3% respectively at September 30, 1998. Loans purchased
primarily consist of single-family residential loans secured by properties
located in the Midwest. Management attributes the low delinquency rates to the
current relative strength of the economy in the Midwest. The Bank purchases
loans from other institutions as market conditions permit in order to reduce the
Bank's overall credit risk by increasing geographical diversity and to
supplement its loan portfolio in periods of weaker local demand.
At September 30, 1998, the Bank had $300.5 million, or 73.7% of its
total loan portfolio invested in first mortgage loans secured by one-to
four-family residences.
The Bank currently offers residential mortgage loans for terms ranging
from 10 to 30 years, and with adjustable or fixed interest rates. Origination of
fixed rate mortgage loans versus ARM loans is monitored on an ongoing basis and
is affected significantly by the level of market interest rates, customer
preference, the Bank's interest rate GAP position and loan products offered by
the Bank's competitors. During the three months ended September 30, 1998, one-
to four-family residential ARM loans decreased by $9.2 million, or 6.9%, to
$124.4 million from $133.6 million at June 30, 1998. During fiscal 1998, one-to
four- family residential ARM loans decreased by $10.5 million, or 7.3%, to
$133.6 million from $144.1 million at June 30, 1997. During these periods ARM
borrowers refinanced in the generally lower interest rate environment, most
frequently choosing fixed rate mortgages.
The Bank's long-term fixed rate loans generally are originated and
underwritten for resale in the secondary mortgage market. Whether the Bank can
or will sell fixed rate loans to the secondary market, however, depends on a
number of factors including the yield on the loan and the term of the loan,
market conditions and the Bank's current GAP position. For example, 15-year
fixed rate loans are likely to be retained by the Bank. Moreover, the Bank is
more likely to retain fixed rate loan originations if its one year GAP is
positive. The Bank generally sells long-term, fixed-rate loans at origination,
servicing-released. Servicing release premium is determined at loan closing,
thus assuring the profit at current market rates. The Bank's fixed rate mortgage
loans are amortized on a monthly basis with principal and interest due each
month. Residential
61
<PAGE>
real estate loans often remain outstanding for significantly shorter periods
than their contractual terms because borrowers may refinance or prepay loans at
their option.
The Bank's ARM loans adjust annually and semi-annually with interest
rate adjustment limitations ranging from one to two percentage points per year
and with a cap on total rate increases over the life of the loan. The Bank has
used different interest indexes for ARM loans, such as the one-year Treasury
Constant Maturity, the Monthly National Median Cost of Funds, the National
Average Contract Rate for Previously Occupied Homes and the Eleventh District
Cost of Funds. The Bank also has purchased ARM loans with various interest rate
indexes. Consequently, the interest rate adjustments on the Bank's portfolio of
ARM loans do not reflect changes in a particular interest rate index.
The Bank's residential first mortgage loans customarily include
due-on-sale clauses, which are provisions giving the Bank the right to declare a
loan immediately due and payable in the event, among other things, that the
borrower sells or otherwise disposes of the underlying real property serving as
security for the loan. Due-on-sale clauses are an important means of adjusting
the rates on the Bank's fixed rate mortgage loan portfolio, and the Bank has
generally exercised its rights under these clauses.
Regulations limit the amount that a savings bank may lend relative to
the appraised value of the real estate securing the loan, as determined by an
appraisal at the time of loan origination. Such regulations permit a maximum
loan-to-value ratio of 100% for residential property and 90% for all other real
estate loans. The Bank's lending policies, however, generally limit the maximum
loan-to-value ratio on both fixed rate and ARM loans to 80% of the lesser of the
appraised value or the purchase price of the property to serve as security for
the loan.
The Bank occasionally makes real estate loans with loan-to-value
ratios in excess of 80%. For real estate loans with loan-to-value ratios of
between 80% and 90%, the Bank requires the first 12% to 20% of the loan to be
covered by private mortgage insurance. For real estate loans with loan-to-value
ratios of between 90% and 95%, the Bank requires private mortgage insurance to
cover the first 25% to 30% of the loan amount. The Bank requires fire and
casualty insurance, and flood insurance where appropriate, as well as title
insurance or an opinion of counsel regarding good title, on all properties
securing real estate loans made by the Bank.
Construction Loans. The Bank originates loans to finance the
construction of single family residential property. However, construction
lending is not a significant part of the Bank's overall lending activities
because of the low level of new home construction in the Bank's primary market
area. At September 30, 1998, the Bank had $5.8 million, or 1.4%, of its total
loan portfolio invested in interim construction loans. The Bank makes
construction loans to private individuals and to builders. Construction loans
generally are made with either adjustable or fixed rate terms. Loan proceeds are
disbursed in increments as construction progresses and as inspections warrant.
Construction loans are structured to be converted to permanent loans originated
by the Bank at the end of the construction period, which is generally six
months, not to exceed 12 months.
Multi-Family Residential Real Estate Loans. In fiscal 1993 the Bank
formed a commercial loan department responsible for the origination and purchase
of multifamily and commercial loans. Loans secured by multi-family real estate
constituted approximately $41.1 million or 10.1% of the Bank's total loan
portfolio at September 30, 1998, compared to $43.1 million or 10.7% of the
Bank's total loan portfolio at June 30, 1998, $27.6 million, or 8.1% of the
total loan portfolio at June 30, 1997, and $19.6 million, or 6.1% of the total
loan portfolio at June 30, 1996. The increase in multi-family real estate loans
during these periods was primarily due to purchases of multi-family loans from
several financial institutions in the mid-west region, and to the GFS
acquisition in March 1998. See "--Loan Originations, Purchases and Sales." The
Bank's multi-family real estate loans are secured by multi-family residences,
such as apartment buildings. At September 30, 1998, approximately 30.0% of the
Bank's multi-family loans were secured by properties located within the Bank's
market area. At September 30, 1998, the Bank's multi-family real estate loans
had an average balance of $375,000 and the largest multi-family real estate
borrower had an aggregate principal balance of $4.4 million. The terms of each
multi-family loan are negotiated on a case by case basis, although such loans
typically have adjustable interest rates tied to a market index or fixed rates
to amortize over 10 to 20 years with a three to ten year balloon.
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<PAGE>
Loans secured by multi-family real estate generally involve a greater
degree of credit risk than one- to four-family residential mortgage loans and
carry larger loan balances. This increased credit risk is a result of several
factors, including the concentration of principal in a limited number of loans
and borrowers, the effects of general economic conditions on income-producing
properties and the increased difficulty of evaluating and monitoring these types
of loans. Furthermore, the repayment of loans secured by multi-family real
estate is typically dependent upon the successful operation of the related real
estate property. If the cash flow from the project is reduced, the borrower's
ability to repay the loan may be impaired.
Commercial Real Estate Loans. Loans secured by commercial real estate
constituted approximately $19.7 million, or 4.8%, of the Bank's total loan
portfolio at September 30, 1998. By comparison, commercial real estate loans
totaled $15.3 million, $7.3 million and $3.8 million at June 30, 1998, 1997 and
1996, respectively. The Bank's commercial real estate loans are secured by
improved property such as offices, small business facilities, and other
non-residential buildings. Of the improved properties securing such commercial
real estate loans at September 30, 1998, approximately 50.0% were located within
the Bank's primary market area. Commercial real estate loans are offered with
fixed and adjustable interest rates. At September 30, 1998, the Bank's largest
commercial real estate borrower had an aggregate principal outstanding balance
of $5.7 million, which balance was within the Bank's loan-to-one borrower limit.
Loans secured by commercial real estate generally involve a greater
degree of risk than residential mortgage loans and carry larger loan balances.
This increased credit risk is a result of several factors, including the
concentration of principal in a limited number of loans and borrowers, the
effects of general economic conditions on income producing properties and the
increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by commercial real estate is
typically dependent upon the successful operation of the related real estate
project. If the cash flow from the project is reduced, the borrower's ability to
repay the loan may be impaired.
Consumer Loans. Federal savings associations are authorized to make
secured and unsecured consumer loans in an aggregate amount up to 35% of their
assets. In addition, the Bank has lending authority above the 35% category for
certain consumer loans, such as second mortgage, home property improvement
loans, mobile home loans and loans secured by savings accounts.
As of September 30, 1998, consumer loans totaled $48.4 million, or
11.8% of the Bank's total loan portfolio. The principal types of consumer loans
offered by the Bank are second mortgage loans, auto loans, home improvement
loans, credit card loans, unsecured loans and loans secured by deposit accounts.
Consumer loans are offered primarily on a fixed rate basis, and at September 30,
1998 had an average maturity of 51 months. The Bank's home equity loans, second
mortgage loans, and home improvement loans, are generally secured by the
borrower's principal residence. At September 30, 1998, home equity loans, second
mortgage loans, and home improvement loans, totaled $22.7 million, or 46.9% of
consumer loans.
The underwriting standards employed by the Bank for consumer loans
include a determination of the applicant's credit history and an assessment of
ability to meet existing obligations and payments on the proposed loan. The
stability of the applicant's monthly income may be determined by verification of
gross monthly income from primary employment, and additionally from any
verifiable secondary income. Creditworthiness of the applicant is of primary
consideration; however, the underwriting process also includes a comparison of
the value of the collateral in relation to the proposed loan amount. At
September 30, 1998, the percentage of delinquent consumer loans was 0.3%.
The Bank's consumer loan portfolio increased from $36.9 million at
June 30, 1996 to $49.1 million at June 30, 1998 and decreased slightly to $48.4
million at September 30, 1998. It is expected that the Bank's consumer loan
portfolio will continue to grow during the foreseeable future. Consumer loans
tend to have higher interest rates than residential mortgage loans, but also
tend to have a higher risk of default than residential mortgage loans. See
"Non-Performing Assets and Asset Classification" for information regarding the
Bank's loan loss experience and reserve policy.
Mortgage-Backed Securities. The Bank also invests in mortgage-backed
securities issued or guaranteed by the United States Government or agencies
thereof in order to reduce interest rate risk exposure and improve
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<PAGE>
liquidity. These securities, which consist primarily of mortgage-backed
securities issued or guaranteed by Fannie Mae ("FNMA"), Freddie Mae ("FHLMC")
and Ginnie Mae ("GNMA"), totaled $35.1 million at September 30, 1998. The Bank's
objective in investing in mortgage-backed securities varies from time to time
depending upon market interest rates, local mortgage loan demand, and the Bank's
level of liquidity. The Bank's fixed-rate mortgage-backed securities are held
for investment, and management has the intent and ability to hold such
securities on a long-term basis or to maturity. Adjustable rate mortgage-backed
securities are available for sale and are carried at estimated fair value.
Mortgage-backed securities have lower credit risk than direct loans because
principal and interest on the securities are either insured or guaranteed by the
United States Government or agencies thereof.
Loan Solicitation and Processing. Loan originations are derived from a
number of sources such as real estate broker referrals, existing customers,
borrowers, builders, attorneys and walk-in customers. Upon receipt of a loan
application, a credit report is made to verify specific information relating to
the applicant's employment, income, and credit standing. In the case of a real
estate loan, an appraisal of the real estate intended to secure the proposed
loan is made by an independent appraiser approved by the Bank. A loan
application file is first reviewed by an underwriter in the Bank's loan
department who checks applications for accuracy and completeness, and verifies
the information provided. The loan is then reviewed by at least one person of a
seven-person loan committee. One- to four-family residential mortgage loans with
principal balances in excess of $500,000 and multi-family and commercial real
estate loans with principal balances in excess of $500,000 must be submitted by
the loan department directly to the loan committee of the Board of Directors for
approval. Approvals subsequently are ratified by the full Board of Directors.
Fire and casualty insurance are required at the time the loan is made and
throughout the term of the loan and flood insurance is required on all
collateral where appropriate. Once the loan is approved a loan commitment is
promptly issued to the borrower.
If the loan is approved, the commitment letter specifies the terms and
conditions of the proposed loan including the amount of the loan, interest rate,
amortization term, a brief description of the required collateral, and required
insurance coverage. The borrower must provide proof of fire and casualty
insurance on the property serving as collateral which insurance must be
maintained during the full term of the loan. Title insurance or an attorney's
opinion based on a title search of the property is required on all first lien
loans secured by real property.
Loan Originations, Purchases and Sales. Approximately 80.5% of all
loans in the Bank's portfolio at September 30, 1998 were originated by the Bank.
The Bank also purchases loans originated by others with an emphasis on
single-family residential ARM loans. At September 30, 1998, the Bank had $80.4
million of loans purchased from others. Included in the total of loans purchased
outside of the Bank's primary lending area are loans purchased from a mortgage
banking firm headquartered in Madison, Wisconsin. The Bank has an exclusive
agreement with this firm, which gives the Bank first right of refusal on any
real estate loans generated including one-to-four family, multi-family,
commercial real estate and land development loans secured by properties located
primarily in the Madison, Wisconsin metropolitan area. It is the Bank's policy
to only purchase loans that meet its underwriting standards used in originating
loans in its market area and to perform periodic site inspections. The Bank has
sold, and anticipates that it will continue to sell, participation interests in
these loans to other financial institutions located in Iowa and contiguous
states. At September 30, 1998, the outstanding principal balance of loans
purchased under the above agreement was approximately $61.2 million and partial
interests in this balance sold to other financial institutions totaled
approximately $50.1 million.
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<PAGE>
The following table sets forth the Bank's gross loan originations,
loans purchased and loans sold for the periods indicated.
<TABLE>
<CAPTION>
Three months
ended Years ended June 30,
September 30, ---------------------------------------------------------------
1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- -----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans originated:
Conventional one- to four-family real
estate loans:
Construction loans.................. $ 4,114 $ 10,910 $ 8,546 $ 6,590 $ 4,136 $ 5,227
Loans on existing property.......... 11,603 33,885 25,091 26,779 23,648 26,317
Loans refinanced/modified........... 7,168 32,980 8,612 16,971 4,303 45,305
Insured and guaranteed loans.......... 1,445 6,178 6,976 8,885 7,267 9,680
Multi-family and commercial........... 8,320 12,715 3,420 3,153 2,100 221
Consumer loans........................ 8,126 29,064 29,477 23,760 19,734 13,687
--------- --------- -------- -------- --------- --------
Total loans originated $ 40,776 $ 125,732 $ 82,122 $ 86,138 $ 61,188 $100,437
--------- --------- -------- -------- --------- --------
--------- --------- -------- -------- --------- --------
Loans purchased:
One- to four-family................... $ 482 $ 6,466 $ 17,394 $ 9,537 $ 41,424 $ 9,466
Multi-family and commercial........... 1,036 7,303 16,342 7,256 5,948 6,283
--------- --------- -------- -------- --------- --------
Total loans purchased............. $ 1,518 $ 13,769 $ 33,736 $ 16,793 $ 47,372 $ 15,749
--------- --------- -------- -------- --------- --------
--------- --------- -------- -------- --------- --------
Loans sold.............................. $ 7,432 $ 24,816 $ 12,797 $ 18,191 $ 11,105 $ 28,066
--------- --------- -------- -------- --------- --------
--------- --------- -------- -------- --------- --------
</TABLE>
Loan Commitments. The Bank issues standby loan origination commitments
to qualified borrowers primarily for the construction and purchase of
residential real estate. Such commitments are made on specified terms and
conditions and are made for periods of up to 60 days, during which time the
interest rate is locked-in. The Bank generally charges a loan fee based on a
percentage of the loan amount. The Bank also charges a commitment fee of $225 if
the borrower receives the loan from the Bank. At September 30, 1998, the Bank
had commitments to originate and purchase $32.1 million of mortgage loans. The
Bank's experience has been that very few commitments expire without being funded
by the Bank.
Loan Origination and Other Fees. In addition to interest earned on
loans, the Bank generally receives loan origination fees. To the extent that
loans are originated or acquired for the Bank's portfolio, the Bank defers loan
origination fees and costs and amortizes such amounts as yield adjustments over
the life of the loans using the interest method of amortization. Fees and costs
deferred are recognized into income immediately upon the sale of the related
loan. At September 30, 1998, the Bank had $2.2 million of deferred loan fees.
In addition to loan origination fees, the Bank also receives other
fees and service charges that consist primarily of late charges and loan
servicing fees on loans sold. The Bank recognized loan servicing fees on loans
sold and late charges of $72,000, $139,000, $122,000 and $138,000 for the three
months ended September 30, 1998 and the years ended June 30, 1998, 1997 and
1996, respectively.
Loan origination and commitment fees are volatile sources of income.
Such fees vary with the volume and type of loans and commitments made and
purchased and with competitive conditions in the mortgage markets, which in turn
respond to the demand and availability of money.
Loans to One Borrower. Under federal law, savings associations are
subject to the same limits as those applicable to national banks, which limit
loans to one borrower to the greater of $500,000 or 15% of unimpaired capital
and unimpaired surplus and an additional amount equal to 10% of unimpaired
capital and unimpaired surplus if the loan is secured by readily marketable
collateral (generally, financial instruments and bullion, but not real estate).
The Bank's largest aggregate loans to any one borrower, including outstanding
balances and unfunded commitments, was $5.7 million at September 30, 1998. The
Bank currently is in compliance with its loans-to-one borrower limitations.
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<PAGE>
Delinquencies and Classified Assets
Delinquencies. The Bank's collection procedures provide that when a
loan is 15 days past due, a late charge is added and the borrower is contacted
by mail and payment is requested. If the delinquency continues, subsequent
efforts are made to contact the delinquent borrower. Additional late charges may
be added and, if the loan continues in a delinquent status for 90 days or more,
the Bank generally initiates foreclosure proceedings.
Non-Performing Assets and Asset Classification. Loans are reviewed on
a regular basis and are placed on a non-accrual status when, in the opinion of
management, the collection of additional interest is doubtful. Residential and
commercial mortgage loans are placed on non-accrual status generally when either
principal or interest is 90 days or more past due and management considers the
interest uncollectible or when the Bank commences foreclosure proceedings.
Interest accrued and unpaid at the time a loan is placed on non-accrual status
is charged against interest income.
Real estate acquired by the Bank as a result of foreclosure or by deed
in lieu of foreclosure is classified as real estate owned until such time as it
is sold. When REO is acquired, it is recorded at the lower of the unpaid
principal balance of the related loan or its fair market value. Any write-down
of REO is charged to the allowance for real estate losses.
At September 30, 1998, the Bank's total of property acquired as the
result of foreclosure or by deed in lieu of foreclosure was $718,000. The
largest such property, which was acquired through the acquisition of Grinnell
Federal, consists of a 104-unit multi-family property and two 96-unit
multi-family properties obtained through foreclosure. The three properties,
located in Madison, Wisconsin's south side are managed as one project. Grinnell
Federal held a 9% to 10% participation in the project. The REO was adjusted to
the estimated market value prior to the GFS acquisition on March 31, 1998. At
September 30, 1998, the REO carrying value totaled $457,000. The second largest
such property, which was also acquired through the acquisition of Grinnell
Federal, consists of a loan secured by commercial real estate in Grinnell, Iowa.
The borrower has declared bankruptcy and ceased payments on the loan. A
sheriff's sale took place on September 23, 1998, at which sale the Bank took
possession of the property. The loan had been written down to its estimated
market value of $200,000 prior to the GFS acquisition. The appraised value of
the property, which includes office, warehouse and manufacturing space in three
building is $257,000. The principal balance at September 30, 1998 was $205,000.
The Bank had no allowance for losses on real estate owned as of September 30,
1998, or June 30, 1998, 1997 and 1996.
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<PAGE>
Non-Performing Loans. The following table sets forth information
regarding non-accrual loans, accruing loans delinquent 90 days or more, other
non-performing assets and restructured loans at the dates indicated:
<TABLE>
<CAPTION>
At At June 30,
September 30,-----------------------------------------
1998 1998 1997 1996 1995 1994
-------- ------ ------- ------- ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis:
Residential..................................... $ 779 $ 920 $ 242 $ 615 $ 596 $ 276
Commercial...................................... 109 200 -- -- -- 528
-------- ------ ------- ------- ------ ------
Total......................................... 888 1,120 242 615 596 804
-------- ------ ------- ------- ------ ------
Accruing loans delinquent 90 days or more (1)(2):
Residential..................................... 138 144 173 21 58 110
Commercial...................................... 51 -- -- -- -- --
Consumer(3)..................................... 131 71 110 74 25 6
-------- ------ ------- ------- ------ ------
Total......................................... 320 215 283 95 83 116
-------- ------ ------- ------- ------ ------
Total non-performing loans......................... 1,208 1,335 525 710 679 920
Other non-performing assets (4).................... 718 489 -- 45 48 82
Total non-performing assets........................ $ 1,926 $1,824 $ 525 $ 755 $ 727 $1,002
-------- ------ ------- ------- ------ ------
-------- ------ ------- ------- ------ ------
Restructured loans (5)............................. $ 450 $ 452 $ 460 $ 1,287 $1,984 $2,283
-------- ------ ------- ------- ------ ------
-------- ------ ------- ------- ------ ------
Non-performing loans as a percentage
of total loans.................................. 0.30% 0.33% 0.15% 0.22% 0.23% 0.35%
Non-performing loans as a percentage
of total assets................................. 0.21% 0.24% 0.11% 0.16% 0.17% 0.24%
Non-performing loans and real estate owned
to total loans and real estate owned............ 0.47% 0.47% 0.15% 0.24% 0.23% 0.38%
Non-performing assets as a percentage
of total assets................................. 0.34% 0.34% 0.11% 0.17% 0.17% 0.26%
</TABLE>
- ------------------------------------
(1) Includes all loans 90 days or more contractually delinquent.
(2) Delinquent FHA/VA guaranteed loans are not placed on non-accrual
status.
(3) Delinquent consumer loans are not placed on non-accrual status.
(4) Represents the net book value of property acquired by the Bank through
foreclosure or deed in lieu of foreclosure. Upon acquisition, this
property is carried at the lower of cost or fair market value less
estimated costs of disposition.
(5) Restructured loans represent performing loans for which concessions
(such as reductions of interest rates to below market terms and/or
extension of repayment terms) have been granted due to a borrower's
financial condition.
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<PAGE>
The following table sets forth information with respect to the Bank's
delinquent loans and other problem assets at September 30, 1998.
<TABLE>
<CAPTION>
At September 30, 1998
-------------------------
Balance Number
----------- ----------
(In Thousands)
<S> <C> <C>
Residential real estate:
Loans past due 60-89 days............................................... $ 1,384 32
Loans past due 90 days or more.......................................... 801 20
Commercial real estate:
Loans past due 60-89 days............................................... 219 5
Loans past due 90 days or more.......................................... 207 4
Consumer loans (past due 60 days or more).................................. 256 53
Foreclosed real estate and repossessions................................... 718 4
Other non-performing assets................................................ -- --
Restructured loans not included
in other nonperforming categories above................................. 450 1
Loans to facilitate sale of real estate owned 525 3
</TABLE>
Classified Assets. Federal regulations provide for the classification
of loans and other assets such as debt and equity securities considered by the
OTS to be of lesser quality 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 savings 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
that do not expose the savings institution to risk sufficient to warrant
classification in one of the aforementioned categories, but which assets possess
some weaknesses, are required to be designated "special mention" by management.
When a savings institution classifies problem assets as either
substandard or doubtful, it is required to establish general allowances for loan
losses in an amount deemed prudent by management. General allowances represent
loss allowances that 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 a savings institution
classifies problem assets as "loss," it is required either to establish a
specific allowance for losses equal to 100% of the amount of the assets 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 Bank regularly reviews the
problem loans in its portfolio to determine whether any loans require
classification in accordance with applicable regulations.
At September 30, 1998 the aggregate amount of the Bank's classified
assets, and of the Bank's general and specific loss allowances and charge-offs
were as follows:
<TABLE>
<CAPTION>
September 30, 1998
------------------
(In Thousands)
<S> <C>
Substandard assets.............................................................. $ 1,570
Doubtful assets................................................................. 9
Loss assets..................................................................... --
--------
Total classified assets................................................ $ 1,579
--------
--------
General loss allowances......................................................... $ 2,677
Specific loss allowances........................................................ --
--------
Total allowances....................................................... $ 2,677
--------
--------
</TABLE>
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<PAGE>
A summary of the Bank's principal classified assets is as follows:
The Bank acquired a $600,000 loan in 1985 on a 48-unit apartment
complex in Southern Iowa. The loan was restructured into a $500,000 loan in
1991. The loan bears an interest rate of 10% through maturity in August 2001. At
the time the loan was restructured, the Bank wrote off $50,000 of the loan
balance which is due in a balloon payment at maturity. No interest is being
accrued on this $50,000 amount. The outstanding balance of the loan at September
30, 1998 was $449,000. The loan is now current and the apartment complex was 95%
leased at September 30, 1998. The Bank's classified assets also include two REO
properties acquired by the Bank in connection with the GFS acquisition. For
further information see "--Non-Performing Assets and Asset Classification."
With respect to each of the classified assets described above, except
as otherwise noted, management of the Bank believes the specific reserves that
have been established are adequate and that the net realizable value of the
identified collateral exceeds the balances due.
Allowance for Loan Losses. Management's policy is to provide for
estimated losses on the Bank's loan portfolio based on management's evaluation
of the potential losses that may be incurred. Such evaluation, which includes a
review of all loans of which full collectibility of interest and principal may
not be reasonably assured, considers, among other matters, the estimated net
realizable value of the underlying collateral. Other factors considered by
management include the size and risk exposure of each segment of the loan
portfolio, present indicators such as delinquency rates and the borrower's
current financial condition, and the potential for losses in future periods.
Management calculates the allowance for loan losses based on asset type, as
follows: 100% of portions of loan balances classified as loss, 50% of portions
of loan balances classified as doubtful, 15% of portions of loan balances
classified as substandard, and 5% of portions of loan balances classified as
special mention. Management calculates additional allowances for loan losses on
loans not classified in the categories delineated above, as follows: .25% for
mortgage loans, .5% for consumer loans, and 1.25% for multifamily and
nonresidential loans.
The breakdown of general loss allowances and specific loss allowances
is made for regulatory accounting purposes only. While both general and specific
loss allowances are charged against earnings, general loan loss allowances are
added back to GAAP capital in computing risk-based capital under OTS
regulations. The financial statements of the Bank are prepared in accordance
with GAAP and, accordingly, provisions for loan losses are based on management's
estimate of net realizable value or fair value of the collateral, as applicable.
The Bank regularly reviews its loan portfolio, including problem loans, to
determine whether any loans require classification or the establishment of
appropriate reserves.
During fiscal 1998, 1997 and 1996, the Bank credited $345,000,
$258,000 and $233,000, respectively, to the allowance for loan losses. During
the three months ended September 30, 1998, the Bank credited $75,000 to the
allowance for loan losses. Management periodically reviews the entire loan
portfolio to determine the extent, if any, to which further additional loan loss
provisions may be deemed necessary. There can be no assurance that the allowance
for loan losses will be adequate to cover losses that may in fact be realized in
the future and that additional provisions for loan losses will not be required.
69
<PAGE>
Analysis of the Allowance for Loan Losses. The following table sets
forth information regarding the Bank's allowance for loan losses at the dates
indicated.
<TABLE>
<CAPTION>
At At June 30,
September 30, ---------------------------------------------------------------
1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total loans outstanding(1)........................ $ 411,588 $ 408,955 $ 345,092 $ 324,557 $ 316,105 $ 270,013
Average loans outstanding(1)...................... 407,417 358,209 331,144 317,037 293,102 261,318
Allowance balance (at beginning of period)........ 2,607 1,796 1,731 1,621 1,766 1,666
Additions related to acquisition.................. -- 801 -- -- -- --
Provision:
Residential.................................... -- 100 140 145 120 100
Commercial real estate......................... 30 65 -- -- -- --
Consumer....................................... 45 180 118 88 22 --
Charge-offs:
Residential.................................... -- (155) (65) -- -- --
Commercial real estate......................... -- -- -- (51) (290) --
Consumer....................................... (34) (267) (136) (78) (6) (2)
Recoveries........................................ 29 87 8 6 9 2
----------- ----------- ----------- ----------- ----------- -----------
Allowance balance (at end of period).............. $ 2,677 $ 2,607 $ 1,796 $ 1,731 $ 1,621 $ 1,766
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Allowance for loan losses as a percent of total
loans outstanding.............................. 0.65% 0.64% 0.52% 0.53% 0.51% 0.65%
Net loans charged off as a percent of average
loans outstanding............................. 0.01% 0.09% 0.06% 0.04% 0.10% 0.00%
</TABLE>
- -----------------------------
(1) Includes loans held for sale.
70
<PAGE>
Allocation of Allowance for Loan Losses. The following table sets forth the
allocation for loan losses by loan category at the dates indicated.
<TABLE>
<CAPTION>
At At June 30,
September 30, --------------------------------------------------
1998 1998 1997
---------------------- --------------------- ---------------------
% of Loans in % of Loans in % of Loans in
Each Category Each Category Each Category
Amount to Total Loans Amount to Total Loans Amount to Total Loans
------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at end of period applicable to:
One- to four-family residential........ $ 781 73.00% $ 830 73.70% $ 613 77.58%
Multi-family residential............... 996 9.98 1,087 10.55 681 8.00
Commercial real estate................. 637 4.78 433 3.74 267 2.11
Consumer and other non-mortgage loans (1) 263 12.24 257 12.01 235 12.31
-------- -------- -------- ------- -------- --------
Total allowance for loan losses...... $2,677 100.00% $ 2,607 100.00% $ 1,796 100.00%
-------- -------- -------- ------- -------- --------
-------- -------- -------- ------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
1996 1995 1994
----------------------- -------------------- ----------------------
% of Loans in % of Loans in % of Loans in
Each Category Each Category Each Category
Amount to Total Loans Amount to Total Loans Amount to Total Loans
------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at end of period applicable to:
One- to four-family residential........ $ 649 81.44% $ 660 85.72% $ 570 86.93%
Multi-family residential............... 699 6.04 271 4.00 230 4.31
Commercial real estate................. 201 1.16 557 1.89 878 2.12
Consumer and other non-mortgage loans (1) 182 11.36 133 8.39 88 6.65
-------- -------- -------- -------- -------- --------
Total allowance for loan losses...... $ 1,731 100.00% $1,621 100.00% $ 1,766 100.00%
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>
- ---------------------------
(1) Includes home equity, home improvement, second mortgage, auto loans, loans
on deposits, and other non-mortgage loans.
71
<PAGE>
Investment Activities
The Bank's portfolio of investment securities, excluding investments
in mortgage-backed securities, totaled $84.4 million, $59.2 million, $49.9
million and $54.8 million, respectively, at September 30, 1998 and June 30,
1998, 1997 and 1996. The purpose of the Bank's investment portfolio is to (i)
improve the Bank's interest rate sensitivity gap by reducing the average term to
maturity of the Bank's assets, (ii) improve liquidity, and (iii) effectively
reinvest funds generated from amortization and prepayment on the Bank's
traditional loan portfolio.
The Bank is required under federal regulations to maintain a minimum
amount of liquid assets that may be invested in specified short-term securities
and certain other investments. See "Regulation--Federal Regulations--Liquidity
Requirements" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources." The Bank generally
has maintained a liquidity portfolio in excess of regulatory requirements.
Liquidity levels may be increased or decreased depending upon the yields on
investment alternatives and upon management's judgment as to the attractiveness
of the yields then available in relation to other opportunities and its
expectation of the level of yield that will be available in the future, as well
as management's projections as to the short term demand for funds to be used in
the Bank's loan origination and other activities.
Investment Portfolio. The following table sets forth the carrying
value of the Bank's investment securities portfolio, short-term investments and
FHLB stock, at the dates indicated. At September 30, 1998, the Bank's FHLB stock
yielded 6.75%. At September 30, 1998, the market value of the Bank's investment
securities - held to maturity portfolio was $16.3 million.
<TABLE>
<CAPTION>
At At June 30,
September 30, ---------------------------------
1998 1998 1997 1996
------------- ---------- --------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Investment securities - held to maturity:
U.S. Government and agency securities..................... $ 11,097 $ 9,819 $ 10,462 $ 5,984
Other securities.......................................... 4,903 4,911 818 235
----------- -------- -------- --------
Total investment securities held to maturity............ 16,000 14,730 11,280 6,219
----------- -------- -------- --------
Investment securities - available for sale:
U.S. Government and agency securities..................... 68,426 44,517 38,658 43,625
Other securities.......................................... -- -- -- 4,968
----------- -------- -------- --------
Total investment securities available for sale.......... 68,426 44,517 38,658 48,593
----------- -------- -------- --------
Totals................................................ 84,426 59,247 49,938 54,812
----------- -------- -------- --------
Interest-bearing deposits................................... 1,000 7,500 3,387 300
FHLB stock.................................................. 6,270 5,671 5,000 4,769
----------- -------- -------- --------
Total investments....................................... $ 91,221 $ 72,418 $ 58,325 $ 59,881
----------- -------- -------- --------
----------- -------- -------- --------
</TABLE>
72
<PAGE>
Investment Portfolio Maturities
The table below sets forth the scheduled maturities, carrying values,
and average yields for the Bank's investment securities at September 30, 1998.
<TABLE>
<CAPTION>
At September 30, 1998
-------------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More than 10 Years
--------------------- --------------------- ------------------- -------------------
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
--------- --------- --------- --------- --------- --------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities - held
to maturity................. $ 5,154 6.06% $ 5,739 5.65% $4,416 6.21% $ 691 6.92%
Investment securities -
available for sale.......... 15,062 7.07 2,513 6.09% 38,953 6.65% 11,898 6.85%
-------- --------- --------- --------- --------- --------- --------- ---------
Total investment
securities.................. $ 20,216 6.81% $ 8,252 5.78% $43,369 6.61% $12,589 6.85%
-------- --------- --------- --------- --------- --------- --------- ---------
-------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
Total Investment
Securities
-------------------
Carrying Average
Value Yield
--------- -------
<S> <C> <C>
Investment securities - held
to maturity.................... $ 16,000 6.11%
Investment securities -
available for sale............. 68,426 6.76%
--------- -------
Total investment
securities..................... $ 84,426 6.61%
--------- -------
--------- -------
</TABLE>
Subsidiary Activities
The Bank has one active wholly owned subsidiary, First Financial
Corporation, an Iowa corporation. The Mutual Holding Company, through its wholly
owned Iowa subsidiary, Sioux Financial Corporation, operates a title search and
abstract continuation business. During fiscal year 1996, First Financial
Corporation purchased a majority ownership in United Escrow, which serves as an
escrow agent in Woodbury County, Iowa.
The Bank sold a wholly owned subsidiary, Equity Services, Inc., to the
Mutual Holding Company, in July 1993 for its then current book value of $52,000.
Equity Services, Inc. is in the business of developing residential lots in the
Bank's primary market area.
Under federal law, SAIF-insured institutions are required to provide
30 days' advance notice to the OTS and FDIC before establishing or acquiring a
subsidiary or conducting a new activity in a subsidiary. The insured institution
must also provide the FDIC and the OTS such information as may be required by
applicable regulations and must conduct the activity in accordance with the
rules and orders of the OTS. In addition to other enforcement and supervision
powers, the OTS may determine after notice and opportunity for a hearing that
the continuation of a savings institution's ownership of or relation to a
subsidiary (i) constitutes a serious risk to the safety, soundness or stability
of the savings institution, or (ii) is inconsistent with the purposes of FIRREA.
Upon the making of such determination, the OTS may order the savings institution
to divest the subsidiary or take other actions.
Sources of Funds
General. Deposits are the major source of the Bank's funds for lending
and other investment purposes. In addition to deposits, the Bank derives funds
from the amortization and prepayment of loans and mortgage-backed securities,
the sale or maturity of investment securities, operations and, if needed,
advances from the FHLB of Des Moines. Scheduled loan principal repayments are a
relatively stable source of funds, while deposit inflows and outflows and loan
prepayments are influenced significantly by general interest rates and market
conditions. Borrowings may be used on a short-term basis to compensate for
reductions in the availability of funds from other sources or on a longer term
basis for general business purposes.
Deposits. Consumer and commercial deposits are attracted principally
from within the Bank's primary market area through the offering of a broad
selection of deposit instruments including checking, regular savings, money
market deposits, term certificate accounts and individual retirement accounts.
Currently the Bank does not generally negotiate interest rates to attract jumbo
certificates, but may accept deposits of $100,000 or more based on posted rates.
Deposit account terms vary according to the minimum balance required, the time
periods the funds must remain on deposit and the interest rate, among other
factors. The Bank regularly evaluates the internal cost of funds, surveys rates
offered by competing institutions, reviews the Bank's cash flow requirements for
lending, evaluating deposit withdrawal trends and liquidity and executes rate
changes when deemed appropriate. The Bank does not obtain funds through brokers,
nor does it actively solicit funds outside its primary market area.
Historically, the Bank has rarely used premiums to attract savings deposits.
73
<PAGE>
Deposit Portfolio. Savings and other deposits in the Bank as of
September 30, 1998, are composed of the following:
<TABLE>
<CAPTION>
Weighted Percentage
Average Minimum of Total
Interest Rate(1) Minimum Term Category Amount Balances Deposits
---------------- ------------ -------- ------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
0.00% None Noninterest bearing checking accounts None $ 10,902 2.78%
1.67% None Interest bearing checking accounts $ 200 36,639 9.33%
2.03% None Money Market Plus accounts 200 6,968 1.77%
4.70% None Money Market Select accounts 10,000 56,744 14.44%
1.78% None Savings accounts/Club accounts 10/5 25,385 6.46%
1.75% None Unredeemed certificates 1,000 825 0.21%
3.72% 3 months Fixed term, fixed rate 1,000 650 0.17%
5.53% 5 months Fixed term, fixed rate 1,000 746 0.19%
3.95% 6 months Fixed term, fixed rate (2) 100/1,000 7,843 2.00%
5.08% 8 months Fixed term, fixed rate 5,000 4,647 1.18%
5.38% 1 year Fixed term, fixed rate (2) 100/1,000 28,580 7.28%
5.48% 14 months Fixed term, fixed rate 5,000 6,644 1.69%
5.76% 16 months Fixed term, fixed rate 5,000 1,447 0.37%
5.83% 17 months Fixed term, fixed rate 5,000 19,104 4.87%
5.71% 1.5 year Fixed term, fixed rate 1,000 7,527 1.92%
5.73% 19 months Fixed term, fixed rate 5,000 2,377 0.61%
5.42% 2 year Fixed term, fixed rate (2) 100/1,000 16,185 4.12%
5.10% 2 year Fixed term, variable rate IRA 100 1,227 0.31%
5.89% 26 months Fixed term, fixed rate 5,000 25,682 6.54%
5.01% 2.5 year Fixed term, fixed rate 1,000 4,834 1.23%
4.94% 2.5 year Fixed term, option rate (3) 1,000 2,471 0.63%
6.22% 32 months Fixed term, fixed rate 5,000 16,694 4.25%
5.95% 35 months Change up term and rate (4) 1,000 34,506 8.78%
5.31% 3 year Fixed term, fixed rate (2) 100/1,000 30,519 7.77%
6.47% 45 months Fixed term, fixed rate 5,000 5,401 1.38%
5.42% 4 year Fixed term, fixed rate 1,000 6,275 1.60%
6.74% 58 months Fixed term, fixed rate 5,000 7,768 1.98%
5.67% 5 year Fixed term, fixed rate 1,000 6,146 1.57%
6.11% 6 year Fixed term, fixed rate 1,000 11,706 2.98%
6.64% 8 year Fixed term, fixed rate 1,000 5,330 1.36%
8.61% 10 year Fixed term, fixed rate-education CD 5,000 905 0.23%
----- ----------- -------------
4.69% $ 392,677 100.00%
----------- -------------
----------- -------------
</TABLE>
- -------------------------------------------------------
(1) Yield rates for fixed term, fixed rate certificates.
(2) Individual retirement accounts (IRAs) are offered for this term. The
minimum for IRAs is $100 and the minimum for other certificates is $1,000.
The minimum for additions to IRAs is $25, while the minimum for additions
to other certificates is $1,000.
(3) The rate on the option rate certificate may be changed once during the
term to the currently offered rate at the certificate holder's option.
(4) The certificate holder may change to another certificate product on the
first or second anniversary.
74
<PAGE>
The following table sets forth the change in dollar amount of deposits
in the various types of deposit accounts offered by the Bank between the dates
indicated.
<TABLE>
<CAPTION>
Balance at Balance at
September 30, % Increase June 30, % Increase
1998 Deposits (Decrease) 1998 Deposits (Decrease)
------------- -------- ---------- -------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Checking accounts .............. $ 47,541 12.11 (827) $ 48,368 12.33 $ 10,297
Savings accounts ............... 25,385 6.46 (846) 26,231 6.68 3,148
Money market accounts .......... 63,712 16.24 1,918 61,794 15.75 15,373
Option rate certificates (1) ... 2,471 0.63 (433) 2,904 0.74 (2,593)
Change up certificates (2) ..... 9,586 2.44 548 9,038 2.30 3,314
3 to 11 month certificates ..... 13,757 3.50 2,693 11,064 2.82 (3,684)
12 thru 18 month certificates .. 57,681 14.69 170 57,511 14.66 18,445
19 thru 30 month certificates .. 43,730 11.14 1,233 42,497 10.83 14,617
32 and 36 month certificates ... 24,265 6.18 (828) 25,093 6.39 1,899
45 and 48 month certificates ... 11,676 2.97 (435) 12,111 3.09 175
58 through 96 month certificates 30,950 7.88 (2,826) 33,776 8.61 2,102
IRA certificates ............... 60,193 15.32 (464) 60,657 15.45 3,599
Other certificates ............. 1,730 0.44 349 1,381 0.35 (1,001)
--------- ------ ------- ---------- ------ ---------
$ 392,677 100.00 $ 252 $ 392,425 100.00 $ 65,691
--------- ------ ------- ---------- ------ ---------
--------- ------ ------- ---------- ------ ---------
</TABLE>
<TABLE>
<CAPTION>
Balance at Balance at
June 30, % Increase June 30, %
1997 Deposits (Decrease) 1996 Deposits
---------- --------- ----------- ----------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Checking accounts .............. $ 38,071 11.65% $ 3,200 $ 34,871 10.40
Savings accounts ............... 23,083 7.06 (1,568) 24,651 7.35
Money market accounts .......... 46,421 14.22 5,190 41,231 12.30
Option rate certificates (1) ... 5,497 1.68 (3,518) 9,015 2.69
Change up certificates (2) ..... 5,724 1.75 5,724 -- --
3 to 11 month certificates ..... 14,748 4.51 (16,462) 31,210 9.31
12 thru 18 month certificates .. 39,066 11.96 (1,483) 40,549 12.10
19 thru 30 month certificates .. 27,880 8.53 10,263 17,617 5.26
32 and 36 month certificates ... 23,194 7.11 8,020 15,174 4.53
45 and 48 month certificates ... 11,936 3.65 (8,032) 19,968 5.96
58 through 96 month certificates 31,674 9.69 (7,115) 38,789 11.57
IRA certificates ............... 57,058 17.46 (3,383) 60,441 18.03
Other certificates ............. 2,382 0.73 675 1,707 0.50
-------- ----- --------- -------- -----
$ 326,734 100.00% $ (8,489) $335,223 100.00%
-------- ----- --------- -------- -----
-------- ----- --------- -------- -----
</TABLE>
- -------------------------------------------
(1) This certificate is a 30-month certificate, during which term the rate may
be changed to a currently offered rate, once, at the customer's option.
(2) This certificate is a 35-month certificate, during which term the
certificate may be changed to a product with a different term and/or rate,
once, on the first or second anniversary of the opening of the certificate.
75
<PAGE>
Time Deposits by Rates
The following table sets forth the time deposits in the Bank classified
by rates as of the dates indicated.
<TABLE>
<CAPTION>
At At June 30,
September 30, --------------------------------------
1998 1998 1997 1996
------------- ------------ ----------- -----------
(In Thousands)
<S> <C> <C> <C> <C>
4% or less.............................. $ 12,730 $ 14,684 $ 18,026 $ 24,863
4.01-6.00%.............................. 192,712 178,324 166,126 158,476
6.01-8.00%.............................. 49,585 61,348 31,702 43,880
8.01-9.00%.............................. 1,012 1,676 3,305 7,251
------------- ------------ ----------- -----------
Total.............................. $ 256,039 $ 256,032 $ 219,159 $ 234,470
------------- ------------ ----------- -----------
------------- ------------ ----------- -----------
</TABLE>
Time Deposit Maturity Schedule. The following table sets forth the amount
and maturities of certificates of deposit at September 30, 1998.
<TABLE>
<CAPTION>
Amount Due
--------------------------------------------------------------
Less Than 1-2 2-3 After
Weighted Average One Year Years Years 3 Years Total
Rate --------- -------- ------- -------- ---------
-------- (In Thousands)
<S> <C> <C> <C> <C> <C>
4% or less................................ $ 12,459 $ 271 $ -- $ -- $ 12,730
4.01-6.00%................................ 92,638 70,301 24,817 4,956 192,712
6.01-8.00%................................ 15,391 16,619 9,120 8,454 49,584
8.01-9.00%................................ 1,010 -- -- 3 1,013
--------- -------- --------- --------- ---------
Total................................ $ 121,498 $ 87,191 $ 33,937 $ 13,413 $ 256,039
--------- -------- --------- --------- ---------
--------- -------- --------- --------- ---------
</TABLE>
Certificates of Deposit $100,000 and Over. The following table
indicates the amount of the Bank's certificates of deposit and other time
deposits of $100,000 or more by time remaining until maturity as of September
30, 1998.
<TABLE>
Maturity Period Certificates of Deposits
------------------------
(In Thousands)
<S> <C>
Three months or less.......................................... $ 2,583
Three through six months...................................... 2,937
Six through twelve months..................................... 5,694
Over twelve months............................................ 8,720
----------
Total.................................................... $ 19,934
----------
----------
</TABLE>
76
<PAGE>
Deposit Activity. The following table sets forth the savings activities
of the Bank for the periods indicated:
<TABLE>
<CAPTION>
Three Months
Ended Year Ended June 30,
September 30, -------------------------------------
1998 1998 1997 1996
------------- ----- ----- ------
(In Thousands)
<S> <C> <C> <C> <C>
Additions related to GFS acquisition ............ $ -- $ 64,792 $ -- $ --
Net withdrawals in excess of deposits ........... (3,630) (15,748) (21,895) (12,076)
Interest credited................................ 3,882 16,647 13,406 7,873
--------- ----------- ----------- ---------
Net increase (decrease) in deposits ........... $ 252 $ 65,691 $ (8,489) $ (4,203)
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
</TABLE>
In the unlikely event of a liquidation of the Bank, depositors will be
entitled to full payment of their deposit accounts prior to any payment being
made to the stockholders of the Bank. The majority of the Bank's depositors are
residents of Iowa, Nebraska and South Dakota.
Borrowings. Savings deposits are the primary source of funds of the
Bank's lending and investment activities and for its general business purposes.
The Bank, if the need arises, may rely upon advances from the FHLB and the
Federal Reserve Bank discount window to supplement its supply of lendable funds
and to meet deposit withdrawal requirements. Advances from the FHLB are secured
by the Bank's stock in the FHLB and a portion of the Bank's first mortgage loans
and investment securities. At September 30, 1998, the Bank had $124.9 million of
advances outstanding from the FHLB.
The FHLB functions as a central reserve bank providing credit for the
Bank and other member savings associations and financial institutions. As a
member, the Bank is required to own capital stock in the FHLB and is authorized
to apply for advances on the security of such stock and certain of its home
mortgages and other assets (principally, securities that are obligations of, or
guaranteed by, the United States) provided certain standards related to
creditworthiness have been met. Advances are made pursuant to several different
programs. Each credit program has its own interest rate and range of maturities.
Depending on the program, limitations on the amount of advances are based either
on a fixed percentage of a member institution's net worth or on the FHLB's
assessment of the institution's creditworthiness.
The following table sets forth certain information regarding borrowings
by the Bank at the dates indicated. The Bank had no borrowings outstanding other
than advances from the FHLB as of September 30, 1998.
<TABLE>
<CAPTION>
At At June 30,
September 30, -------------------------------------
1998 1998 1997 1996
------------- ------- ------- --------
<S> <C> <C> <C> <C>
Weighted average rate paid
on FHLB advances.............................. 5.90% 5.94% 6.01% 6.00%
Rate paid on ESOP borrowing(1) ................. N/A N/A N/A 8.50
</TABLE>
- ---------------
(1) The final payment on the ESOP borrowing was made on December 30, 1996.
77
<PAGE>
<TABLE>
<CAPTION>
During the Three Months Ended
September 30, During the Year Ended June 30,
----------------------------- ------------------------------------
1998 1997 1998 1997 1996
--------- -------- ---------- ---------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Maximum amount of FHLB advances
outstanding at any month ................... $ 125,900 $ 89,500 $ 113,400 $ 100,000 $ 69,000
Approximate average FHLB advances
outstanding.................................. 113,028 87,060 $ 91,863 $ 82,200 $ 55,596
Approximate weighted average rate
paid on FHLB advances....................... 6.04% 6.17% 6.04% 6.02% 6.12%
Approximate average ESOP
borrowing outstanding(1) .................... N/A N/A $ N/A $ 9 $ 84
Average rate paid on ESOP borrowing(1) ........ N/A N/A N/A 9.03% 8.76%
</TABLE>
- --------------
(1) The final payment on the ESOP borrowing was made on December 30, 1996.
Competition
The Bank encounters strong competition both in attracting deposits and
in originating real estate and other loans. Its most direct competition for
deposits has come historically from commercial banks, brokerage houses, other
savings associations and credit unions in its market area, and the Bank expects
continued strong competition from such financial institutions in the foreseeable
future. The Bank's market area includes branches of several commercial banks
that are substantially larger than the Bank in terms of state-wide deposits. The
Bank competes for savings by offering depositors a high level of personal
service, competitive rates and expertise together with a wide range of financial
services.
The competition for real estate and other loans comes principally from
commercial banks, mortgage banking companies and other savings associations.
This competition for loans has increased substantially in recent years as a
result of the large number of institutions choosing to compete in the Bank's
market area.
The Bank competes for loans primarily through the interest rates and
loan fees it charges and the efficiency and quality of services it provides
borrowers, real estate brokers and builders. Factors that affect competition
include general and local economic conditions, current interest rate levels and
volatility of the mortgage markets. Management's strategy has been to offer
several new product offerings in certificate and retirement accounts to help
retain current deposits and reduce shrinkage. Recent product offerings have been
made available in transaction accounts to increase customer base and to position
the Bank as a family financial center.
Properties
The Bank conducts its business through its main office located in Sioux
City, Iowa, and fifteen branch offices located in the market area. The following
table sets forth certain information concerning the main office and each branch
office of the Bank at September 30, 1998. The aggregate net book value of the
Bank's premises and equipment was $11.1 million at September 30, 1998.
78
<PAGE>
<TABLE>
<CAPTION>
Owned Lease
Year or Expiration
Opened or Acquired Leased Date
------------------ -------- ----------
<S> <C> <C> <C>
329 Pierce Street 1988 Owned --
Sioux City, Iowa 51102
924 Pierce Street 1991 Owned --
Sioux City, Iowa 51101
2727 Hamilton Blvd. 1981 Owned --
Sioux City, Iowa 51104
2 Bow Drive 1978 Owned --
Cherokee, Iowa 51012
301 Plymouth St., N.W. 1990 Owned --
Le Mars, Iowa 51031
209 Main St. (1) 1976 Leased --
Box 545
Sanborn, Iowa
3839 Indian Hills Dr. 1978 Owned --
Sioux City, Iowa 51104
826 Central Avenue (1) 1986 Owned --
Hawarden, Iowa 51023
921 Iowa Avenue 1972 Owned --
Onawa, Iowa 51040
1201 2nd Avenue 1976 Owned --
Box 277
Sheldon, Iowa 51201
4211 Morningside Avenue 1965 Owned --
Sioux City, Iowa 51106
148 South Central Avenue (1) 1986 Owned --
Hartley, Iowa 51346
104 1st Street, S.E. 1974 Owned --
Orange City, Iowa 51041
4701 Singing Hills Blvd.
Sioux City, Iowa 51106 1995 Owned --
2738 Cornhusker Drive
South Sioux City, Nebraska 68776 1998 Owned --
1025 Main Street
Grinnell, Iowa 50112 1998 Owned --
</TABLE>
- -----------------------------
(1) In November 1998, the Bank consummated the sale of the deposit accounts
relating to its branch offices located in Sanborn and Hartley, Iowa, and closed
those branches. In December 1998, the Bank consummated the sale of the deposit
accounts relating to its office in Hawarden, Iowa, and closed that branch.
79
<PAGE>
The Bank's accounting and record keeping activities are maintained on
an in-house data processing system. The Bank owns data processing equipment it
uses for its internal processing needs. The net book value of such data
processing equipment and related software at September 30, 1998, was $681,000.
Legal Proceedings
There are various claims and lawsuits in which the Bank is periodically
involved incident to the Bank's business. In the opinion of management, no
material loss is expected from any of such pending claims or lawsuits.
REGULATION
As a federally chartered SAIF-insured savings association, the Bank is
subject to examination, supervision and extensive regulation by the OTS and the
FDIC. The Bank is a member of and owns stock in the FHLB of Des Moines, which is
one of the twelve regional banks in the Federal Home Loan Bank System. 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 Bank also is subject to regulation by
the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board") governing reserves to be maintained against deposits and certain other
matters. The OTS examines the Bank and prepares reports for the consideration of
the Bank's Board of Directors on any deficiencies that they may find in the
Bank's operations. The FDIC also examines the Bank in its role as the
administrator of the SAIF. The Bank's relationship with its depositors and
borrowers also is regulated to a great extent by both federal and state laws
especially in such matters as the ownership of savings accounts and the form and
content of the Bank's mortgage documents. Any change in such regulation, whether
by the FDIC, OTS, or Congress, could have a material adverse impact on the
Holding Company and the Bank and their operations.
Federal Regulation of Savings Institutions
Business Activities. The activities of 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"). The federal banking
statutes, as amended by the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") and Federal Deposit Insurance Corporation
Improvement Act ("FDICIA") (1) restrict the solicitation of brokered deposits by
savings institutions that are troubled or not well-capitalized, (2) prohibit the
acquisition of any corporate debt security that is not rated in one of the four
highest rating categories, (3) restrict the aggregate amount of loans secured by
non-residential real estate property to 400% of capital, (4) permit savings and
loan holding companies to acquire up to 5% of the voting shares of
non-subsidiary savings institutions or savings and loan holding companies
without prior approval, and (5) permit bank holding companies to acquire healthy
savings institutions. The description of statutory provisions and regulations
applicable to savings associations set forth herein does not purport to be a
complete description of such statutes and regulations and their effect on the
Bank.
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limits on loans to one borrower.
Generally, savings institutions may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of the Bank's unimpaired capital
and surplus on an unsecured basis. An additional amount may be lent, equal to
10% of unimpaired capital and surplus, if such loan is secured by
readily-marketable collateral, which is defined to include certain securities
and bullion, but generally does not include real estate. The Bank's maximum
loans to one borrower limit was $10.5 million at September 30, 1998. As of
September 30, 1998, the Bank was in compliance with its loans-to-one-borrower
limitations.
Qualified Thrift Lender Test. The HOLA requires savings institutions to
meet a qualified thrift lender ("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 on a monthly average basis in 9 out of every 12 months. A savings
association that fails the QTL test must either convert to a bank charter or
operate under certain restrictions. As of September 30, 1998, the Bank
maintained 92.1% of its portfolio assets in qualified thrift investments and,
therefore, met the QTL test.
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Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to stockholders
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. An institution, such as the
Bank, that exceeds all fully phased-in capital requirements before and after a
proposed capital distribution ("Tier 1 Association") and has not been advised by
the OTS that it is in need of more than normal supervision, could, after prior
notice 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; provided that the institution would not
be undercapitalized, as that term is defined in the OTS Prompt Corrective Action
regulations, following the capital distribution. Any additional capital
distributions would require prior regulatory approval. In the event the Bank's
capital fell below its fully-phased in requirement 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.
In addition, OTS regulations require First Federal Bankshares, M.H.C.,
(the "Holding Company") the mutual holding company which owns the majority of
the Bank's common stock, to notify the OTS of any proposed waiver of its right
to receive dividends. It is the OTS' practice to review dividend waiver notices
on a case-by-case basis, and, in general, not object to any such waiver if: (i)
the mutual holding company's board of directors determines that such waiver is
consistent with such directors' fiduciary duties to the mutual holding company's
members; (ii) for as long as the savings association subsidiary is controlled by
the mutual holding company, the dollar amount of dividends waived by the mutual
holding company are considered as a restriction on the retained earnings of the
savings association, which restriction, if material, is disclosed in the public
financial statements of the savings association as a note to the financial
statements; (iii) the amount of any dividend waived by the mutual holding
company is available for declaration as a dividend solely to the mutual holding
company, and, in accordance with SFAS 5, where the savings association
determines that the payment of such dividend to the mutual holding company is
probable, an appropriate dollar amount is recorded as a liability; (iv) the
amount of any waived dividend is considered as having been paid by the savings
association (and the savings association's capital ratios adjusted accordingly)
in evaluating any proposed dividend under OTS capital distribution regulations;
and (v) in the event the mutual holding company converts to stock form, the
appraisal submitted to the OTS in connection with the conversion application
takes into account the aggregate amount of the dividends waived by the mutual
holding company, which totaled $2.4 million at September 30, 1998.
Liquidity. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a quarterly average of not less than a
specified percentage (currently 4%) of its net withdrawable deposit accounts
plus borrowings payable in one year or less. The Bank's average liquidity ratio
for the quarter ended September 30, 1998 was 27.0%, which exceeded the then
applicable requirements.
Community Reinvestment Act and Fair Lending Laws. Savings association
share a responsibility under the Community Reinvestment Act ("CRA") and related
regulations of the OTS to help meet the credit needs of their communities,
including low- and moderate-income neighborhoods. In addition, the Equal Credit
Opportunity Act and the Fair Housing Act (together, the "Fair Lending Laws")
prohibit lenders from discriminating in their lending practices on the basis of
characteristics specified in those statutes. An institution's failure to comply
with the provisions of CRA could, at a minimum, result in regulatory
restrictions on its activities, and failure to comply with the Fair Lending Laws
could result in enforcement actions by the OTS, as well as other federal
regulatory agencies and the Department of Justice. The Bank received a
satisfactory CRA rating under the current CRA regulations in its most recent
federal examination by the OTS.
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 its non-savings institution subsidiaries) or to make loans to certain
insiders, is limited by Sections 23A and 23B of the Federal Reserve Act ("FRA").
Section 23A limits the aggregate amount of 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
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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 provides 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. In addition, savings
institutions are prohibited from lending to any affiliate that is engaged in
activities that are not permissible for bank holding companies and no savings
institution may purchase the securities of any affiliate other than a
subsidiary.
The Bank's authority to extend credit to executive officers, directors
and 10% stockholders, as well as entities controlled by such persons, is
currently governed by Sections 22(g) and 22(h) of the FRA, and Regulation O
thereunder. Among other things, these regulations generally require such loans
to be made on terms substantially the same as those offered to unaffiliated
individuals and do not involve more than the normal risk of repayment. However,
recent regulations now permit executive officers and directors to receive the
same terms through benefit or compensation plans, that are widely available to
other employees, as long as the director or executive officer is not given
preferential treatment compared to other participating employees. Regulation O
also places individual and aggregate limits on the amount of loans the Bank may
make to such persons based, in part, on the Bank's capital position, and
requires certain approval procedures to be followed. At September 30, 1998, the
Bank was in compliance with the regulations.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-related parties," including
stockholders, and 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 and/or
directors of the institutions, receivership, conservatorship or the termination
of deposit insurance. Civil penalties cover a wide range of violations and
actions, and range up to $25,000 per day, unless a finding of reckless disregard
is made, in which case penalties may be as high as $1 million per day. Under the
FDI Act, the FDIC has the authority to recommend to the Director of 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.
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, compensation, and such other operational and managerial
standards as the agency deems appropriate. The federal banking agencies adopted
Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") to implement the safety and soundness standards required under
the FDI Act. 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 systems; credit
underwriting; loan documentation; interest rate risk exposure; asset growth; 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. If an institution fails to meet these standards, the appropriate federal
banking agency may require the institution to submit a compliance plan.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital standard,
a 3.0% leverage ratio (or core capital ratio) and an 8.0% risk-based capital
standard. Core capital is defined as common stockholders' 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 qualifying supervisory goodwill and certain
mortgage servicing rights ("MSRs"). Tangible capital is defined as core capital
less all intangible assets (including supervisory goodwill) plus a specified
amount of MSRs. The OTS regulations also require that, in meeting the tangible,
leverage and risk-based capital standards, institutions must deduct investments
in and loans to subsidiaries engaged in activities not permissible for a
national bank, and unrealized gains (losses) on certain available for sale
securities.
The risk-based capital standard for savings institutions requires the
maintenance of Tier 2 (core) and total capital (which is defined as core capital
and supplementary capital) to risk weighted assets of 4.0% and 8.0%,
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respectively. 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 the OTS
believes are inherent in the type of asset. The components of Tier 1 (core)
capital are equivalent to those discussed earlier under the 3.0% leverage ratio
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 allowance for
loan and lease losses. Allowance for loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25% of risk-weighted assets.
Overall, the amount of supplementary capital included as part of total capital
cannot exceed 100% of core capital.
OTS regulatory capital rules also incorporate an interest rate risk
component. Savings associations with "above normal" interest rate risk exposure
are 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. In
calculating its total capital under the risk-based rule, a savings association
whose measured interest rate risk exposure exceeds 2%, must deduct an interest
rate component equal to one-half of the excess change. The OTS has deferred, for
the present time, the date on which the interest rate component is to be
deducted from total capital. The rule also provides that the Director of the OTS
may waive or defer an institution's interest rate risk component on a
case-by-case basis.
At September 30, 1998, the Bank exceeded each of the three OTS capital
requirements. Set forth below is a summary of the Bank's compliance with the OTS
capital standards as of September 30, 1998.
<TABLE>
<CAPTION>
At September 30, 1998
------------------------
Percent of
Amount Assets (1)
-------- ---------
(Dollars in Thousands)
<S> <C> <C>
Tangible capital:
Capital level....................................................... $ 34,649 6.2%
Requirement......................................................... 8,418 1.5
-------- ---------
Excess.............................................................. $ 26,231 4.7%
-------- ---------
-------- ---------
Core capital:
Capital level....................................................... $ 24,649 6.2%
Requirement ........................................................ 16,837 3.0
-------- ---------
Excess.............................................................. $ 17,812 3.2%
-------- ---------
-------- ---------
To be well capitalized under prompt
corrective action provisions...................................... $ 28,061 5.0%
-------- ---------
-------- ---------
Fully phased-in risk-based capital:
Capital level....................................................... $ 37,326 12.3%
Requirement ........................................................ 24,221 8.0
-------- ---------
Excess.............................................................. $ 13,105 4.3%
-------- ---------
-------- ---------
To be well capitalized under prompt
corrective action provisions. . . . .............................. $ 30,276 10.0%
-------- ---------
-------- ---------
</TABLE>
(1) Tangible and core capital levels are calculated on the basis of a
percentage of total adjusted assets; risk-based capital levels are
calculated on the basis of a percentage of risk-weighted assets.
See "Historical and Pro Forma 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, 1998, and pro forma amounts and percentages based upon the
issuance of the shares within the Offering Range and assuming that a portion of
the net proceeds are retained by the Company.
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
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capitalization. Generally, a savings institution that has total risk-based
capital of less than 8.0% or a leverage ratio or a Tier 1 core capital ratio
that is less than 4.0% is considered to be undercapitalized. A savings
institution that has the total risk-based capital less than 6.0%, a Tier 1 core
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 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 institution receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." In addition, numerous mandatory supervisory actions become
immediately applicable to the institution, including, but not limited to,
restrictions on growth, investment activities, capital distributions, and
affiliate transactions. 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 deposit 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, consisting of (1) well capitalized, (2)
adequately capitalized or (3) undercapitalized, and 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 which 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. 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.
Federal Home Loan Bank System
The Bank, as a federal association, is required to be 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 of Des Moines, is required to acquire and hold shares of capital stock in
that 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. As of September 30, 1998, the Bank was in compliance with this
requirement. 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.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain noninterest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). At September 30, 1998, the Bank
was in compliance with these reserve requirements. The balances maintained to
meet the reserve requirements imposed by the FRB may be used to satisfy
liquidity requirements imposed by the OTS.
Thrift Charter
Congress has been considering legislation in various forms that would
require federal thrifts, such as the Bank, to convert their charters to national
or state bank charters. Recent legislation required the Treasury Department to
prepare for Congress a comprehensive study on development of a common charter
for federal savings associations and commercial banks and, in the event that the
thrift charter is eliminated by January 1, 1999, also would require the merger
of the BIF and the SAIF into a single deposit insurance fund on that date. The
Bank cannot determine whether, or in what form, such legislation may eventually
be enacted and there can be no assurance that any legislation that is enacted
would not adversely affect the Bank and the Company.
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Holding Company Regulation
The Company. The Company will be a non-diversified unitary savings and
loan holding company within the meaning of the HOLA. As such, 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 institution. The Bank must notify the OTS 30 days before declaring any
dividend to the Company.
As a unitary savings and loan holding company, the Company generally
will not be restricted under existing laws as to the types of business
activities in which it may engage, provided that the Bank continues to be a QTL.
See "--Federal Regulation of Savings Institutions--Qualified Thrift Lender Test"
for a discussion of the QTL requirements. Upon any non-supervisory acquisition
by the Company of another savings association, the Company would become a
multiple savings and loan holding company (if the acquired institution is held
as a separate subsidiary) and would be subject to extensive limitations on the
types of business activities in which it could 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 ("BHC") Act of 1956,
subject to the prior approval of the OTS, and to other activities authorized by
OTS regulation. Recently proposed legislation would treat all savings and loan
holding companies as bank holding companies and limit the activities of such
companies to those permissible for bank holding companies. See "Risk
Factors--Regulatory Oversight and Legislation."
The HOLA prohibits a savings and loan holding company, including the
Mutual Holding Company, directly or indirectly, or through one or more
subsidiaries, from acquiring another savings institution or holding company
thereof, without prior written approval of the OTS. It also prohibits the
acquisition or retention of, with certain exceptions, more than 5% of a
non-subsidiary savings institution, a non-subsidiary holding company, or a
non-subsidiary company engaged in activities other than those permitted by the
HOLA; or acquiring or retaining control of an institution that is not federally
insured. In evaluating applications by holding companies to acquire savings
institutions, the OTS must consider the financial and managerial resources,
future prospects of the company and institution involved, the effect of the
acquisition on the risk to the insurance fund, 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, subject to two exceptions: (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.
The Mutual Holding Company. The Mutual Holding Company is a
non-diversified mutual savings and loan holding company within the meaning of
the HOLA, as amended. As such, the Mutual Holding Company is registered with the
OTS and is subject to OTS regulations, examinations, supervision and reporting
requirements. In addition, the OTS has enforcement authority over the Mutual
Holding Company and any 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 institution.
Pursuant to Section 10(o) of the HOLA and OTS regulations and policy, a
mutual holding company may engage in the following activities: (i) investing in
the stock of a savings association; (ii) acquiring a mutual association through
the merger of such association into a savings association subsidiary of such
holding company or an interim savings association subsidiary of such holding
company; (iii) merging with or acquiring another holding company, one of whose
subsidiaries is a savings association; (iv) investing in a corporation, the
capital stock of which is available for purchase by a savings association under
federal law or under the law of any state where the subsidiary savings
association or associations share their home offices; (v) furnishing or
performing management services for a savings association subsidiary of such
company; (vi) holding, managing or liquidating assets owned or acquired from a
savings association subsidiary of such company; (vii) holding or managing
properties used or occupied by a savings association subsidiary of such company;
(viii) acting as trustee under deeds
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of trust; (ix) any other activity (A) that the Federal Reserve Board, by
regulation, has determined to be permissible for bank holding companies under
Section 4(c) of the BHC Act of 1956, unless the Director, by regulation,
prohibits or limits any such activity for savings and loan holding companies; or
(B) in which multiple savings and loan holding companies were authorized (by
regulation) to directly engage on March 5, 1987; and (x) purchasing, holding, or
disposing of stock acquired in connection with a qualified stock issuance if the
purchase of such stock by such savings and loan holding company is approved by
the Director. If a mutual holding company acquires or merges with another
holding company, the holding company acquired or the holding company resulting
from such merger or acquisition may only invest in assets and engage in
activities listed in (i) through (x) above, and has a period of two years to
cease any non-conforming activities and divest any non-conforming investments.
In addition, OTS regulations require the mutual holding company to
notify the OTS of any proposed waiver of its right to receive dividends. It is
the OTS' recent practice to review dividend waiver notices on a case-by-case
basis and, in general, not to object to any such waiver if: (i) the mutual
holding company's board of directors determines that such waiver is consistent
with such directors' fiduciary duties to the mutual holding company's members;
(ii) for as long as the savings association subsidiary is controlled by the
mutual holding company, the dollar amount of dividends waived by the mutual
holding company are considered as a restriction on the retained earnings of the
savings association, which restriction, if material, is disclosed in the public
financial statements of the savings association as a note to the financial
statements; (iii) the amount of any dividend waived by the mutual holding
company is available for declaration as a dividend solely to the mutual holding
company and, in accordance with SFAS 5, where the savings association determines
that the payment of such dividend to the mutual holding company is probable, an
appropriate dollar amount is recorded as a liability; (iv) the amount of any
waived dividend is considered as having been paid by the savings association in
evaluating any proposed dividend under OTS capital distribution regulations; and
(v) in the event the mutual holding company converts to stock form, the
appraisal submitted to the OTS in connection with the conversion application
takes into account the aggregate amount of the dividends waived by the mutual
holding company.
Federal Securities Laws
The Company has filed with the SEC a registration statement under the
Securities Act of 1933, as amended (the "Securities Act"), for the registration
of the Common Stock to be issued pursuant to the Conversion. Upon completion of
the Conversion, the Company's Common Stock will be registered with the SEC under
the Exchange Act. The Company will then be subject to the information, proxy
solicitation, insider trading restrictions and other requirements under the
Exchange Act.
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.
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TAXATION
Federal Taxation
For federal income tax purposes, the Bank and its subsidiaries file a
consolidated federal income tax return on a fiscal year basis using the accrual
method of accounting.
As a result of the enactment of the Small Business Job Protection Act
of 1996, all savings banks and savings associations may convert to a commercial
bank charter, diversify their lending, or be merged into a commercial bank
without having to recapture any of their pre-1988 tax bad debt reserve
accumulations. Any post- 1987 reserves will be subject to recapture, regardless
of whether or not a particular thrift intends to convert its charter, be
acquired, or diversify its activities. The recapture tax on post-1987 reserves
is assessed in equal installments over the six taxable years beginning in 1996.
However, if a thrift meets the residential loan requirement (i.e., if the
thrift's level of mortgage lending activity (re-financings and home equity loans
do not count) is equal to or exceeds its average mortgage lending activity for
the six years preceding 1996, adjusted for inflation), then the thrift may
suspend its tax bad debt recapture for the 1996 and 1997 tax years. At September
30, 1998, the Bank had a balance of approximately $515,000 of bad debt reserves
in retained income that would be recaptured under this legislation.
Deferred income taxes arise from the recognition of certain items of
income and expense for tax purposes in years different from those in which they
are recognized in the consolidated financial statements.
The Bank accounts for deferred income taxes by the liability method,
applying the enacted statutory rates in effect at the balance sheet date to
differences between the book cost and the tax cost of assets and liabilities.
The resulting deferred tax liabilities and assets are adjusted to reflect
changes in the tax laws.
The Bank is subject to the corporate alternative minimum tax which is
imposed to the extent it exceeds the Bank's regular income tax for the year. The
alternative minimum tax will be imposed at the rate of 20% of a specially
computed tax base. Included in this base are a number of preference items,
including the following:(i) interest on certain tax-exempt bonds issued after
August 7, 1986; and (ii) an "adjusted current earnings" computation which is
similar to a tax earnings and profits computation. In addition, for purposes of
the alternative minimum tax, the amount of alternative minimum taxable income
that may be offset by net operating losses is limited to 90% of alternative
minimum taxable income.
The Bank has not been audited by the Internal Revenue Service for the
past seven years. For additional information regarding taxation, see Note 9 of
Notes to Consolidated Financial Statements.
Iowa Taxation.
The Bank currently files an Iowa franchise tax return, and its
subsidiaries file Iowa corporation tax returns on a fiscal-year basis. The state
of Iowa imposes a tax on the Iowa franchise taxable income of savings
institutions at the rate of 5%. Iowa franchise taxable income is generally
similar to federal taxable income except that interest from state and municipal
obligations is taxable, and no deduction is allowed for state franchise taxes.
The Company will be required to file an Iowa income tax return because
it will be doing business in Iowa. For Iowa tax purposes, the state corporation
income tax ranges from 6% to 12% depending upon Iowa corporation taxable income.
Interest from federal securities is not taxable for purposes of the Iowa
corporation income tax. For this purpose, "taxable income" generally means
federal taxable income subject to certain adjustments (including addition of
interest income on state and municipal obligation).
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.
87
<PAGE>
MANAGEMENT OF THE COMPANY
The Board of Directors of the Company consists of those persons who
currently serve as Directors of the Bank. The Board of Directors 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 Directors Gary L. Evans, Allen J. Johnson and
Harland D. Johnson have terms of office expiring in 1999; a second class,
consisting of Directors Dr. Nancy A. Boysen, David Van Engelenhoven, Jon G.
Cleghorn, and Steven L. Opsal have terms of office expiring in 2000; and a third
class, consisting of Directors Barry E. Backhaus, Paul W. Olson, Dennis B.
Swanstrom and David S. Clay have terms of office expiring in 2001. Their names
and biographical information are set forth under "Management of the
Bank--Directors."
The following individuals hold positions as executive officers of the
Company as is set forth below opposite their names.
<TABLE>
<CAPTION>
Name Position With the Company
----- ----------------------------
<S> <C>
Barry E. Backhaus............................................. Chairman of the Board, President
and Chief Executive Officer
Jon G. Cleghorn............................................... Executive Vice President, Chief
Operating Officer and Director
Steven L. Opsal............................................... Executive Vice President and
Director
Sandra Sabel.................................................. Senior Vice President
</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 by 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 compensation of
the directors and officers of the Company during the past five years is set
forth under "Management of the Bank."
MANAGEMENT OF THE BANK
Directors
The Bank's Board of Directors is composed of eleven members. Directors
of the Bank are generally elected to serve for a three year period or until
their respective successors shall have been elected and shall qualify. The
following table sets forth certain information regarding the composition of the
Bank's Board of Directors at September 30, 1998, including the terms of office
of Board members.
88
<PAGE>
<TABLE>
<CAPTION>
Shares of
Common Stock
Beneficially
Positions Owned on
Held in the Director Current Term September 30, Percent
Name (1) Age(2) Bank Since (3) to Expire 1998 Of Class
-------- ------ -------- --------- --------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Barry E. Backhaus 53 President, Chief Executive 1987 2001 39,015(6) 1.38%
Officer and Chairman of
the Board
Dr. Nancy A. Boysen 69 Director 1979 2000 11,076 *
David S. Clay 40 Director 1998 2001 1,500 (5)
Jon G. Cleghorn 56 Executive Vice 1997 2000 24,711 (8) *
President, Chief Operating Officer
and Director
Gary L. Evans 59 Director 1989 1999 6,620 (5) *
Allen J. Johnson 59 Director 1993 1999 990 *
Harland D. Johnson 68 Director 1979 1999 22,169 *
Paul W. Olson 68 Director 1974 2001 13,525 *
Steven L. Opsal 44 Executive Vice President & 1998 2000 3,648 (7) *
Director
Dennis B. Swanstrom 55 Director 1993 2001 1,055 *
David Van
Engelenhoven 55 Director 1993 2000 990 *
</TABLE>
(*) Less than 1%.
(1) The mailing address for each person listed is 329 Pierce Street, Sioux
City, Iowa 51101. Each of the persons listed is also a director of the
Mutual Holding Company.
(2) As of September 30, 1998.
(3) Reflects initial appointment to the Board of Directors of the Bank or
its mutual predecessor, First Federal Savings and Loan Association of
Sioux City, as the case may be. The Bank was chartered as a result of
the reorganization of First Federal Savings and Loan Association of
Sioux City in July 1992 (the "Reorganization").
(4) Includes all shares of Common Stock held directly as well as by spouses
and minor children, in trust and other indirect ownership, over which
shares the executive officers and directors effectively exercise sole
or shared voting and investment power.
(5) Includes shares subject to options under the Director's Plan that may
be exercised within 60 days of September 30, 1998 in the following
amounts: Director Clay 500 shares; and Director Evans 2,370 shares
(adjusted).
(6) Includes 11,195 shares (adjusted) awarded under the Recognition Plan
that have vested to date and been distributed to Mr. Backhaus. Also
includes 8,979 shares (adjusted) subject to options under the Stock
Plan that may be exercised within 60 days of September 30, 1998.
(7) Including 500 shares awarded under the Recognition Plan that have
vested to date and been distributed to Mr. Opsal. Also includes 1,000
shares subject to options under the Stock Plan that may be exercised
within 60 days of September 30, 1998.
(8) Includes 8,047 shares (adjusted) awarded under the Recognition Plan
that have vested to date and been distributed to Mr. Cleghorn. Also
includes 5,293 shares (adjusted) subject to options under the Stock
Plan that may be exercised within 60 days of the September 30, 1998.
(9) In connection with the Bank's acquisition of Grinnell Federal Savings
Bank in March 1998, Messrs. Opsal and Clay were appointed to the Board
of Directors for terms expiring at the 1998 Annual Meeting of
Stockholders.
The business experience of each of the above directors for at least the
past five years is as follows:
Barry E. Backhaus has been President and Chief Executive Officer of
First Federal since 1990 and Chairman of the Board since 1997; he has been
affiliated with First Federal since 1969.
Dr. Nancy A. Boysen is a homemaker.
David S. Clay is Vice President and Treasurer of Grinnell College,
Grinnell, Iowa.
Jon G. Cleghorn has been Executive Vice President of First Federal
since 1990 and has been affiliated with First Federal in various capacities
since 1974.
Gary L. Evans is President and Chief Executive Officer of Sioux Honey
Association.
Allen J. Johnson is President and Chief Executive Officer of Great West
Casualty Company, a property and casualty company located in South Sioux City,
Nebraska.
89
<PAGE>
Harland D. Johnson is the retired owner/operator of Johnson Hardware, a
retail hardware store.
Paul W. Olson is President and General Manager of radio stations
KLEM/KKMA in Le Mars, Iowa.
Steven L. Opsal is the Executive Vice President of First Federal. Mr.
Opsal was previously the President and Chief Executive Officer of Grinnell
Federal Savings Bank and GFS Bancorp, Inc. prior to their merger into First
Federal.
Dennis B. Swanstrom is the Group Commander of the 185th Fighter Group
of the Iowa Air National Guard.
David Van Engelenhoven is the owner of Van Engelenhoven Agency, Inc.,
an insurance agency located in Orange City, Iowa.
Executive Officer Who Is Not a Director
The following table sets forth information regarding the executive
officer of the Bank who is not also a director.
<TABLE>
<CAPTION>
Position
Held in the
Name Age Bank
----- ---- --------------
<S> <C> <C>
Sandra Sabel 59 Senior Vice President
</TABLE>
Executive Compensation
The following table sets forth for the fiscal years ended June 30,
1998, 1997, and 1996, certain information as to the total remuneration paid by
the Bank to the Chief Executive Officer of the Bank and the only other executive
officer of the Bank who received salary and bonuses that in the aggregate
exceeded $100,000 for fiscal year 1998.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Annual Compensation (1) Long-Term Compensation
---------------------------------------- ------------------------------------
Awards Payouts
------------------------ -----------
Year Other
Name and Ended Annual Restricted Options/ All
principal position June Bonus Compensation Stock SARS LTIP Other
30, Salary (4) (2) Awards(3) (#) Payouts Compensation
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Barry E. Backhaus, 1998 180,000 11,100 $ ---- $15,712 ---- $ ---- $ ----
President and Chief 1997 163,500 5,250 ---- ---- ---- ---- ----
Executive Officer 1996 139,250 4,560 ---- ---- ---- ---- ----
- -------------------------------------------------------------------------------------------------------------------------------
Jon G. Cleghorn, 1998 113,250 3,540 $ ---- $10,117 ---- $ ---- $ ----
Executive Vice 1997 105,250 3,255 ---- ---- ---- ---- ----
President and Chief 1996 93,167 1,530 ---- ---- ---- ---- ----
Operating Officer
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------------------
(1) The Bank does not maintain a deferred compensation plan for employees.
Does not include benefits pursuant to the Bank's Pension Plan. See
"Benefits."
(2) The Bank also provides certain members of senior management with the
use of an automobile, membership dues and other personal benefits. The
aggregate amount of such other benefits provided to each of the named
executive officers did not exceed the lesser of $50,000 or 10% of his
cash compensation.
(3) On July 13, 1992, Mr. Backhaus and Mr. Cleghorn were awarded 10,726 and
8,107 shares (adjusted), respectively, of common stock pursuant to the
Recognition Plan. The shares awarded vest at the rate of 20% per year
commencing one year from the date of the award and were fully vested at
June 30, 1998. Awards of 469 and 302 shares, respectively, were granted
during fiscal 1998 to Mr. Barry Backhaus and Mr. Cleghorn.
(4) Represents payout to the executive officer pursuant to the Bank's
Incentive Pay Plan. See "Benefits--Incentive Pay Plan."
90
<PAGE>
Employment and Severance Agreements
The continued success of the Bank depends to a significant degree on
the skills and competence of its officers. The Bank has entered into severance
agreements with the following executive officers: Barry E. Backhaus, President
and Chief Executive Officer; Jon G. Cleghorn, Executive Vice President; and
Sandra Sabel, Senior Vice President. The severance agreements are intended to
assist the Bank in maintaining a stable and competent management base by
enabling the Bank to offer to designated employees certain protections against
termination without cause in the event of a "change in control" as defined in
the severance agreements.
The severance agreements provide that at any time following a "change
in control" of the Bank, if the officer's employment with the Bank is
involuntarily, or in certain circumstances voluntarily, terminated during the
term of the agreement for any reason other than "cause" (as defined in the
agreement), the officer would be entitled to receive a payment in an amount
equal to three times the preceding year's base salary (as defined in the
agreement). For the purposes of the severance agreements, a "change in control"
is defined to include any acquisition of control of the Bank that would require
the filing of an application for acquisition of control or notice of change of
control pursuant to OTS regulations, and that had at any time been opposed by
the Board of Directors.
Under the terms of the severance agreements, officers Backhaus,
Cleghorn and Sabel would receive approximately $555,000, $354,000 and $228,000,
respectively, in severance compensation if such officer's employment had been
terminated in the fiscal year ended June 30, 1998, for any reason other than
cause following a change in control.
In connection with the acquisition of GFS and Grinnell Federal, the
Bank entered into employment agreements with five officers of Grinnell Federal,
including Steven L. Opsal. Mr. Opsal's employment agreement runs for a term of
three years and provides him with an initial base salary of $110,000. Under the
employment agreement, Mr. Opsal is also entitled to (i) participate in all
employee benefit plans generally available to employees of the Bank, (ii) the
award of 4,000 options and 2,000 shares of restricted stock under the Bank's
Stock Plan and Recognition Plan, (iii) the use of a bank-owned automobile, (iv)
maintenance of Mr. Opsal's country club membership and (v) reimbursement of all
reasonable expenses incurred in performing services under the employment
agreement. The employment agreement protects Mr. Opsal from involuntary
termination without cause, or in the event of a change in control of the Bank or
the Company. Under the terms of the employment agreement, Mr. Opsal would
receive approximately $383,000 if his employment had been terminated in the
fiscal year ended June 30, 1998, in the event of a change in control.
In connection with the Conversion, the Bank intends to enter into
employment agreements with Messrs. Backhaus and Cleghorn and Ms. Sabel, and to
replace the employment agreement between the Bank and Mr. Opsal with a new
employment agreement, each of which will provide for a term of up to 36 months.
On each day during the term of an agreement, the agreement automatically renews
so that the agreement shall continually be for a three-year term unless notice
of non-renewal is provided within 60 days prior to any anniversary of the date
on which the agreement was entered into (the "Anniversary Date"). In the event
that notice of non-renewal is given, the agreement will expire at the end of its
three-year term. The agreement provides for, among other things, base salary
(which may be increased, but not decreased), participation in stock benefit
plans and other employee and fringe benefits applicable to executive personnel.
The agreement provides for termination by the Bank for cause at any time. In the
event the Bank terminates the executive's employment for reasons other than
disability, retirement or for cause, or in the event of the executive's
resignation from the Bank upon (i) failure to re-elect the executive to his or
her current offices, (ii) a material change in the executive's functions, duties
or responsibilities, (iii) liquidation or dissolution of the Bank or Company,
(iv) a breach of the agreement by the Bank or, (v) a change in control of the
Bank or Company, the executive, or in the event of death, the executive's
beneficiary would be entitled to severance pay in an amount equal to up to three
times the annual rate of Base Salary (which includes any salary deferred at the
election of the executive) at the time of termination, plus the highest annual
cash bonus paid to him or her during the prior three years. The Bank would also
continue the executive's life, health, dental and disability coverage for up to
36 months from the date of termination. In the event the payments to the
executive would include an "excess parachute payment" as defined by Code Section
280G (relating to payments made in connection with a change in control), the
payments would be reduced in order to avoid having an excess parachute payment.
91
<PAGE>
An executive's employment may be terminated by the executive's
retirement in accordance with the Bank's retirement policy, or in accordance
with any retirement arrangement established by the Bank with the executive's
consent. Upon the executive's retirement, he/she will be entitled to all
benefits available to him/her under any retirement or other benefit plan
maintained by the Bank. In the event of the executive's disability for a period
of six months, the Bank may terminate the agreement provided that the Bank will
be obligated to pay the executive his/her Base Salary for the remaining term of
the agreement or one year, whichever is longer, reduced by any benefits paid to
the executive pursuant to any disability insurance policy or similar arrangement
maintained by the Bank. In the event of the executive's death, the Bank will pay
his/her Base Salary to his/her named beneficiaries for one year following
his/her death, and will also continue medical, dental, and other benefits to
his/her family (as applicable) for one year.
The employment agreements provides that, following termination of
employment other than in connection with a change in control, the executive will
not compete with the Bank for a period of one year in any city, town, or county
in which the Bank and/or Company has filed for regulatory approval to establish
an office.
Directors' Compensation
Outside Members of the Board of Directors of First Federal received
fees of $500 for each meeting attended in fiscal 1998. Outside Members of Board
committees were paid $200 for each committee meeting attended during fiscal
1998. During the fiscal year ended June 30, 1998, First Federal paid a total of
$61,200 in directors' and committee fees, which amounts include fees deferred at
the election of directors pursuant to the Deferred Compensation Plan for
Directors. See "Benefits--Deferred Compensation Plan for Directors."
In addition to the foregoing fees, First Federal pays annual retainer
fees of $4,000 for each outside director. Such retainer fees are paid on a
quarterly basis.
During fiscal 1998, First Federal also awarded 500 options to Director
David S. Clay under the 1992 Stock Option Plan for Outside Directors.
Following the Conversion, the Company intends to adopt the 1999 Stock
Option Plan and 1999 Recognition Plan pursuant to which awards will be made to
Directors of the Bank. No awards will be made prior to shareholder approval of
the plans. See "--Benefits--1999 Stock Option Plan" and "--Benefits--1999
Recognition Plan."
Benefits
Insurance. Full-time and regular part-time employees may elect to be
covered by First Federal's group health insurance plan, which, if elected,
becomes effective (as of September 1, 1998) the first day of the month following
hire. The health insurance includes vision coverage and prescription drug
coverage. A portion of the premium is paid by First Federal, with full-time
employees currently paying either $64.94 or $75.90 monthly for single coverage,
and either $205.50 or $177.50 monthly for family coverage. Two different plans
with different deductibles are offered. Dental insurance is offered at the
employee's option and expense. Full-time employees also are covered by a term
life insurance policy equal to their annual base salary as of January 1st of
each year and a long-term disability insurance policy, all provided at no cost
to the employee, effective the first day of the month following 90 days of
full-time employment. Dependent and additional life insurance is also available.
Defined Contribution Plan. Effective September 1, 1996, the Bank
adopted the Financial Institutions Thrift Plan, which is a qualified, tax-exempt
defined contribution plan (the "Prior Plan"). In connection with the Conversion,
effective December 1, 1998, the Bank withdrew from the Prior Plan and adopted
the First Federal Bank Employees' Savings & Profit Sharing Plan and Trust (the
"401(k) Plan") in order to permit the investment of plan assets in Common Stock.
Employees are eligible to join the 401(k) Plan on the first of the month
following completion of one year of continuous employment (during which 1,000
hours are completed). The first year eligibility period runs from the date of
hire to the anniversary of such date. If an employee does not satisfy the
eligibility requirements during such period then the next eligibility period
shall be the calendar year. Employees are eligible to contribute, on a pre-tax
basis, up to 15% of their eligible salary, in increments of 1%. The Bank may
make a matching contribution equal to 25% of a member's contributions on up to
4% of a member's compensation.
92
<PAGE>
In addition, the Bank may make an additional discretionary contribution
allocated among members' accounts on the basis of compensation. All employee
contributions and earnings thereon under the 401(k) Plan are at all times fully
100% vested. A member vests in employer matching and discretionary contributions
at the rate of 25% per year beginning after one year of employment and
continuing until the member is 100% vested after four years of employment.
Employees are entitled to borrow, within tax law limits, from amounts allocated
to their accounts.
401(k) Plan benefits will be paid to each member in a lump sum or in
equal payments over a fixed period upon termination, disability or death. In
addition, the 401(k) Plan permits employees to withdraw salary reduction
contributions prior to age 59-1/2 or termination in the event the employee
suffers a financial hardship. In certain circumstances, the 401(k) Plan permits
employees to withdraw the Bank's matching contributions to their accounts. The
401(k) Plan permits employees to direct the investment of their own accounts
into various investment options.
At September 30, 1998, the market value of the active members' accounts
under the Prior Plan trust fund equaled approximately $408,343. The total
contribution (i.e, both the employee and Bank contributions) to the Prior Plan
for the Prior Plan year ended December 31, 1997, was approximately $198,898.
Defined Benefit Pension Plan. The Bank maintains the Financial
Institutions Retirement Fund, which is a qualified, tax-exempt defined benefit
plan ("Retirement Plan"). All employees age 21 or older who have worked at the
Bank for a period of one year in which they have 1,000 or more hours of service
are eligible for membership in the Plan. Once eligible, an employee must have
been credited with 1,000 or more hours of service with the Bank during the year
in order to accrue benefits under the Retirement Plan. The Bank annually
contributes an amount to the Retirement Plan necessary to satisfy the
actuarially determined minimum funding requirements in accordance with the
Employee Retirement Income Security Act ("ERISA").
The regular form of all retirement benefits (i.e., normal, early or
disability) is a life annuity with a guaranteed term of 10 years. For a married
participant, the normal form of benefit is a joint and survivor annuity where,
upon the participant's death, the participant's spouse is entitled to receive a
benefit equal to 50% of that paid during the participant's lifetime. An optional
form of benefit may be selected instead of the normal form of benefits. These
optional forms include various annuity forms. Benefits payable upon death may be
made in a lump sum, installments over 10 years, or a lifetime annuity.
The normal retirement benefit payable at or after age 65, is an amount
equal to 1.5% multiplied by years of benefit service (not to exceed 30) times
average compensation based on the average of the five years providing the
highest average. A reduced benefit is payable upon retirement at age 45 at or
after completion of five years of service. A member is fully vested in his
account upon completion of 5 or more years of employment or upon attaining
normal retirement age.
The following table indicates the annual retirement benefit that would
be payable under the Retirement Plan upon retirement at age 65 in calendar year
1998, expressed in the form of a single life annuity for the average salary and
benefit service classifications specified below.
<TABLE>
<CAPTION>
Years of Benefit Service
-------------------------------------------------------------------------------
Average Salary 10 15 20 25 30(1)
-------------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
$ 20,000 $ 3,000 $ 4,500 $ 6,000 $ 7,500 $ 9,000
$ 30,000 $ 4,500 $ 6,750 $ 9,000 $11,250 $13,500
$ 50,000 $ 7,500 $11,250 $15,000 $18,750 $22,500
$ 75,000 $11,250 $16,875 $22,500 $28,125 $33,750
$100,000 $15,000 $22,500 $30,000 $37,500 $45,000
$150,000 $22,500 $33,750 $45,000 $56,250 $67,500
</TABLE>
- -----------------
(1) No additional credit is received for years of service in excess of 30,
however, increases in compensation after 30 years will generally cause
an increase in benefits.
As of June 30, 1998, Mr. Backhaus had 28 years of credited service and
Mr. Cleghorn had 23 years of credited service under the pension plan.
93
<PAGE>
Employee Stock Ownership Plan and Trust. The Bank established the
Employee Stock Ownership Plan (the "ESOP") for eligible employees in connection
with the Bank's initial stock offering, in 1992. The ESOP is a tax-qualified
plan which invests primarily in Bank Common Stock (or following the Conversion,
Company Common Stock) and is subject to the requirements of ERISA and the
Internal Revenue Code of 1986, as amended (the "Code"). Employees with a
12-month period of employment with the Bank during which they worked at least
1,000 hours and who have attained age 21 are eligible to participate. Shares
purchased by the ESOP are held in a suspense account for allocation among
participants.
As part of the Offering, the ESOP intends to borrow funds from the
Company or from a third party lender and to use those funds to purchase a number
of shares equal to up to 7% of the Common Stock to be issued in the Offering.
Collateral for the loan will be the Common Stock purchased by the ESOP. Share
purchased with the ESOP loan will be held in a suspense account for allocation
among participants as the loan is repaid. As the ESOP loan is repaid from
contributions the Bank makes to the ESOP, shares will be released from the
suspense account in an amount proportional to the repayment of the ESOP loan.
Shares released from the suspense account are allocated among
participants on the basis of compensation in the year of allocation, up to an
annual adjusted maximum level of compensation. Benefits generally become 100%
vested after five years of credited service. Participants were credited for
years of service with the Bank prior to the effective date of the ESOP.
Forfeitures are reallocated among remaining participating employees in the same
proportion as contributions. Benefits may be payable upon death, retirement,
early retirement, disability, or separation from service. The Bank's
contributions to the ESOP are not fixed, so benefits payable under the ESOP
cannot be estimated.
In connection with the establishment of the ESOP, a committee of the
Board of Directors was appointed to administer the ESOP (the "Compensation and
Benefits Committee"). The Compensation and Benefits Committee may instruct the
trustee of the ESOP regarding investment of funds contributed to the ESOP. The
ESOP trustee must vote all allocated shares held in the ESOP in accordance with
the instructions of the participating employees. Under the ESOP, nondirected
shares and shares held in the suspense account will be voted in a manner
calculated to most accurately reflect the instructions the ESOP trustee has
received from participants regarding allocated stock, subject to and in
accordance with the fiduciary duties under ERISA owed by the trustee to the ESOP
participants.
Stock Option Plan. In 1992, the Bank adopted the First Federal Savings
Bank of Siouxland 1992 Incentive Stock Option Plan (the "Stock Plan") for
officers and employees of the Bank and its affiliates and such plan was
subsequently approved by the Bank's shareholders. The Stock Plan is administered
by the non-employee directors of the Bank's Compensation and Benefits Committee
("Benefits Committee"). The Stock Plan has granted stock options and limited
rights for 94,813 shares of Bank Common Stock, as adjusted for stock
distributions. The Stock Plan, authorizes the grant of (i) options to purchase
Bank Common Stock intended to qualify as incentive stock options under Section
422 of the Code, (ii) options that do not so qualify ("non-statutory options"),
and (iii) limited rights exercisable only upon a change in control of the Bank.
Options (with limited rights) for 89,813 (as adjusted) shares of Bank
Common Stock were granted contemporaneously with the completion of the Bank's
initial stock offering in July 1992. During the fiscal year ended June 30, 1998,
4,000 options were granted to Steven L. Opsal. In fiscal 1998, 17 Bank employees
exercised options for 11,674 shares (adjusted, in the aggregate).
At June 30, 1998, the number of shares of Bank Common Stock underlying
unexercised options granted to all executive officers as a group (four persons)
was 19,372 (adjusted) and the unrealized value of such stock options was
$485,763. The number of shares of Bank Common Stock underlying unexercised
options granted to all employees as a group (excluding executive officers) was
19,459 and the unrealized value of such stock options was $573,837. All such
options granted are exercisable at $5.05 per share, as adjusted for stock
dividends and stock splits, except for Mr. Opsal's options which are exercisable
at $33.50 per share. The unrealized value of stock options equals the difference
between the aggregate price of such options and the aggregate fair market value
of such stock options assuming they were all eligible to be exercised and
further assuming such exercise occurred on June 30, 1998 at which date the last
sale of the Bank Common Stock as quoted on the Nasdaq Small-Cap-SM- System was
at $36.00.
94
<PAGE>
The following table sets forth certain information regarding
the shares acquired and the value realized during fiscal year ended June 30,
1998, by certain executive officers of the Bank. To the extent not exercised by
the Effective Date of the Conversion, the options to purchase Bank Common Stock
will be converted into and become options to purchase Common Stock. The number
of shares of Common Stock to be received upon exercise of such options will be
determined pursuant to the Exchange Ratio. The aggregate exercise price,
duration and vesting schedule of such options will not be affected.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options at In-The-Money
Fiscal Year-End Options at Fiscal Year-End
Upon Value ------------------------- --------------------------
Name Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Barry E. Backhaus -- $ -- 9,979/0 $308,853/$0
Jon G. Cleghorm 1,600 49,520 5,393/0 $166,913/$0
Steven L. Opsal -- -- 1,000/3,000 $2,500/$7,500
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
</TABLE>
Stock Option Plan for Outside Directors. In 1992, the Bank adopted the
First Federal Savings Bank of Siouxland 1992 Stock Option Plan for Outside
Directors (the "Directors' Plan") for non-employee Directors of the Bank, and
such Director's Plan was ratified by the stockholders of the Bank at the 1992
Annual Meeting. The Directors' Plan reserved non-statutory stock options for
24,948 shares (adjusted) of Bank Common Stock for non-employee directors of the
Bank. Each director of the Bank at the time of the completion of the
Reorganization was granted non-statutory options to purchase 2,369 shares
(adjusted) of Bank Common Stock at an exercise price of $5.05 per share
(adjusted). The Chairman of the Board received options for an additional 2,370
shares (adjusted) of Bank Common Stock. The Directors' Plan further provides
that each new director shall be granted options to purchase 500 shares to the
extent options remain available in, or are returned to, the Directors' Plan.
The exercise price per share of each option will be equal to the fair
market value of the shares of Common Stock underlying such option on the date
the option is granted. All options granted under the Directors' Plan expire upon
the earlier of ten years following the date of grant or one year following the
date the optionee ceases to be a director. During the fiscal year ended June 30,
1998, 500 options were granted to David S. Clay under the Directors' Plan. As of
June 30, 1998, the sales price of the Bank Common Stock as reported on the
Nasdaq Small-Cap System was $36.00 per share.
To the extent not exercised by the Effective Date of the Conversion,
the options to purchase Bank common stock will be converted into options to
purchase Common Stock. The number of shares of Common Stock to be received upon
exercise of such options will be determined pursuant to the Exchange Ratio. The
aggregate exercise price, duration and vesting schedule of such options will not
be affected.
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<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised In-
Options at The-Money Options at
Fiscal Year-End Fiscal Year-End
Shared Acquired Value ------------------------- -------------------------
Name Upon Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dr. Nancy A. Boysen -- $ -- 0 $ --
David S. Clay -- -- 500/0 1,250/0
Gary L. Evans -- -- 2,370/0 73,352/0
Allen J. Johnson -- -- 0 --
Harland D. Johnson -- -- 0 --
Paul W. Olson -- -- 0 --
Dennis B. Swanstrom -- -- 0 --
David Van Engelenhoven -- -- 990/0 27,141/0
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Recognition and Retention Plan. In 1992, the Bank established the First
Federal Bank of Siouxland Recognition and Retention Plan and Trust (the
"Recognition Plan") as a method of providing officers and key employees of the
Bank with a proprietary interest in the Bank in a manner designed to encourage
such persons to remain with the Bank. The Bank contributed funds to the
Recognition Plan to enable the Recognition Plan to acquire in the aggregate
37,422 shares (adjusted) of Bank Common Stock. At the time of implementation of
this plan, 17,073 shares of Bank Common Stock were awarded to officers and key
employees.
The Recognition Plan is administered by the non-employee directors of
the Bank's Compensation and Benefits Committee ("Benefits Committee"). Awards
have been granted in the form of shares of Bank Common Stock that were
restricted by the terms of the Recognition Plan ("Restricted Stock"). Restricted
Stock in nontransferable and nonassignable and the shares awarded are earned
(i.e., become vested) at a rate of 20% per year commencing one year from the
date of the award. The Benefits Committee may provide for a less or more rapid
earning rate with respect to awards granted under the Recognition Plan. Awards
become fully vested upon termination of employment due to death, disability,
normal retirement or following a termination of employment in connection with a
change in the control of the Bank. In the event that before reaching normal
retirement an officer terminates employment with the Bank, the officer's
nonvested awards will be forfeited. When shares become vested in accordance with
the Recognition Plan, the participants recognize income equal to the fair market
value of the Common Stock at that time. The amount of income recognized by a
participant is a deductible expense for federal income tax purposes for the
Bank. When shares become vested and are actually distributed in accordance with
the Recognition Plan, participants receive amounts equal to any accrued
dividends (and interest thereon) with respect thereto. Prior to vesting,
recipients of awards under the Recognition Plan may direct the voting of the
shares allocated to them. Earned shares are distributed to participants as soon
as practicable following the day on which they are earned.
During the fiscal year ended June 30, 1998, Messrs. Barry E. Backhaus,
Jon G. Cleghorn and Steven L. Opsal were awarded 469, 302 and 2,000 shares,
respectively, under the Recognition Plan.
On the Effective Date of the Conversion, unvested shares of Restricted
Stock will be converted into shares of Common Stock pursuant to the Exchange
Ratio and will be restricted on the same terms as the Restricted Stock
Deferred Compensation Plan for Directors. In March 1995, the Board of
Directors of the Bank adopted a Deferred Compensation Plan for Directors (the
"Deferred Plan"), which became effective on January 1, 1995. Pursuant to the
Deferred Plan, directors of the Bank may elect to defer all or one-half of their
fees received for service on the Board of Directors and on committees of the
Board of Directors. The Bank credits the deferred fees
96
<PAGE>
to a special memorandum account as of the last day of each month. Amounts
credited to a Director's account earn interest at a rate equal to the average
weighted cost of certificates of deposit of the Bank for the previous month.
Deferred fees will be paid out upon the death, disability or termination of a
director as a director of the Bank. At the election of the director, the
distribution may be paid out in a lump sum or in equal monthly installments over
a period of ten years, or such shorter period as shall be approved by the
Committee.
Supplemental Executive Retirement and Deferred Compensation Plan. In
connection with the Conversion, the Bank intends to adopt a non-qualified
supplemental executive retirement and deferred compensation plan ("SERP") for
certain executives of the Bank to compensate those executive participants in the
Bank's tax-qualified benefit plans whose benefits are limited by any of Sections
401(a)(17), 401(k), 401(m), 402(g) or 415 of the Code. The SERP provides
participants with supplemental pension benefits generally equal to the
difference between the annual benefit the participant would have received under
the Bank's Pension Plan if such benefits were computed without giving effect to
the limitations on benefits imposed by application of Section 401(a)(17) and
Section 415 of the Code and the amounts actually payable to the participant
under the terms of the Pension Plan. In addition, the participant is entitled to
a supplemental ESOP benefit in a dollar amount equal to the difference between
the fair market value of the number of shares of Common Stock that would have
been allocated to the account of the participant had the limitations of Section
401(a)(17) and 415 of the Code not been applicable and the fair market value of
the number of shares of Common Stock actually allocated to the account of the
participant. Finally, the SERP provides participants with a supplemental 401(k)
benefit equal to the product of the Bank's contributions (other than employee
salary deferrals) that could not be credited to the participant's 401(k) Plan
account due to tax law limitations, including the limitations of Code Section
401(m), together with the interest deemed earned on such contributions
multiplied by the participant's vested percentage at termination of employment.
Under the supplemental 401(k) portion of the Plan, the participant can make
salary deferrals of amounts that cannot be contributed to the Bank's 401(k) Plan
due to the limitations of Code Sections 401(k) and 402(g). The participant's
account attributable to the 401(k) portion of the SERP will earn interest at the
average interest rate on certificates of deposit maturing in twelve (12) months.
Benefits are payable in the same form as benefits in the Pension Plan and the
ESOP. See the descriptions of the Pension Plan, the 401(k) Plan and Employee
Stock Ownership Plan for timing and form of payment for benefits under such
plans.
The SERP is considered an unfunded plan for tax and ERISA purposes. All
obligations arising under the SERP are payable from the general assets of the
Bank, however, the Bank has set up a trust to ensure that sufficient assets will
be available to pay the benefits under the SERP.
Incentive Pay Plan. In December 1994, the Board of Directors of the
Bank established the Bank's Performance Pay Plan pursuant to which substantially
all employees of the Savings Bank are eligible for cash payments. In April 1997,
the plan was changed to the Bank's Incentive Pay Plan. Performance payouts for
non-executive employees are now made quarterly and are based on individualized
performance goals as much as possible, with bank-wide performance goals also
used. Incentive payouts for executive officers are made based on the Bank's
achievement of certain performance ratios at the end of each fiscal year.
Pursuant to the Incentive Pay Plan for executive officers, the payout percentage
for each participant ranges from 0% of salary to 30% of salary. The payout
percentage is calculated using a weighted scoring of the Bank's return on
average assets, return on average equity, operating expenses divided by average
assets, and nonperforming assets ratio. For the fiscal year ended June 30, 1998,
the aggregate payout for executive officers under the Incentive Pay Plan was
$18,924, of which $11,100 was paid to Mr. Backhaus and $3,540 was paid to Mr.
Cleghorn.
Cash Only SAR Plan. In connection with the acquisition of GFS and
Grinnell Federal, the Bank succeeded to the Cash Only SAR Plan ("SAR Plan") for
former officers of GFS and Grinnell Federal. The SAR Plan replaced the option
plans previously adopted by GFS and Grinnell Federal, and provided replacement
cash-only SARs to officers of GFS and Grinnell Federal in exchange for and upon
surrender of options awarded to such persons under the GFS and Grinnell Federal
option plans. The exchange of SARs for options occurred pursuant to an exchange
ratio to ensure that the value of the GFS options were preserved for the
optionees. The SAR Plan is administered by a Committee consisting of two
persons, Messrs. Steve Opsal and Ted Mokricky, both former officers of Grinnell
Federal. Under the SAR Plan, a participant (or the beneficiary of a deceased
participant) may elect to exercise his or her SARs at any time by delivering a
written notice of such election to the Bank's President. Upon receipt of an
election, the Bank will pay a lump sum cash payment to the participant equal to
the product of the number of SARs exercised multiplied by the excess of the fair
market value of the Bank Common Stock over the exercise price of the
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<PAGE>
SAR. In December 1998, the Bank's Board adopted a resolution giving SAR holders
a window of opportunity during December 1998 and January 1999 to exercise their
SARs at a premium. During such window period, persons who exercised SARs that
replaced options under the GFS 1993 stock option plan were able to receive a
cash payment with respect to each SAR exercised equal to the difference between
$32 and the exercise price of the SAR and persons who exercised SARs that
replace options under the GFS 1997 stock option plan were able to receive a cash
payment with respect to each SAR exercised equal to the difference between $34
and the exercise price of the SAR.
1999 Stock Option Plan. At a meeting of the Company's stockholders to
be held at least six months after the completion of the Offering, the Board of
Directors intends to submit for stockholder approval the 1999 Stock Option Plan
for Directors and officers of the Bank and of the Company. If approved by the
stockholders, Common Stock in an aggregate amount equal to 10% of the shares
issued in the Offering would be reserved for issuance by the Company upon the
exercise of the stock options granted under the 1999 Stock Option Plan. Ten
percent of the shares issued in the Offering would amount to 263,500 shares,
310,000 shares, 356,500 shares or 409,975 shares at the minimum, midpoint,
maximum and adjusted maximum of the Offering Range, respectively. No options
would be granted under the 1999 Stock Option Plan until the date on which
stockholder approval is received.
The exercise price of the options granted under the 1999 Stock Option
Plan will be equal to the fair market value of the shares on the date of grant
of the stock options. If the 1999 Stock Option Plan is adopted within one year
following the Offering, options will become exercisable at a rate of 20% at the
end of each twelve months of service with the Bank after the date of grant,
subject to early vesting in the event of death or disability. Options granted
under the 1999 Stock Option Plan would be adjusted for capital changes such as
stock splits and stock dividends. Notwithstanding the foregoing, awards will be
100% vested upon termination of employment due to death or disability, and if
the 1999 Stock Option Plan is adopted more than 12 months after the Offering,
awards would be 100% vested upon normal retirement or a change in control of the
Bank or the Company. Under OTS rules, if the 1999 Stock Option Plan is adopted
within the first 12 months after the Offering, no individual officer can receive
more than 25% of the awards under the plan, no outside Director can receive more
than 5% of the awards under the plan, and all outside Directors as a group can
receive no more than 30% of the awards under the plan.
The 1999 Stock Option Plan would be administered by a Committee of
non-employee members of the Company's Benefits Committee. Options granted under
the 1999 Stock Option Plan to employees could be "incentive" stock options
designed to result in beneficial tax treatment to the employee but no tax
deduction to the Company. Non-qualified stock options could also be granted
under the 1999 Stock Option Plan, and will be granted to the non-employee
Directors who receive grants of stock options. In the event an option recipient
terminated his employment or service as an employee or Director, the options
would terminate during certain specified periods.
1999 Recognition Plan. At a meeting of the Company's stockholders to be
held at least six months after the completion of the Offering, the Board of
Directors also intends to submit a Recognition and Retention Plan (the "1999
Recognition Plan") for stockholder approval. The 1999 Recognition Plan will
provide the Bank's Directors and officers an ownership interest in the Company
in a manner designed to encourage them to continue their service with the Bank.
The Bank will contribute funds to the 1999 Recognition Plan from time to time to
enable it to acquire an aggregate amount of Common Stock equal to up to 3% of
the shares of Common Stock issued in the Offering, either directly from the
Company or in open market purchases. Three percent of the shares issued in the
Offering would amount to 79,050 shares, 93,000 shares, 106,950 or 122,992 shares
at the minimum, midpoint, maximum and adjusted maximum of the Offering Range,
respectively. In the event that additional authorized but unissued shares would
be acquired by the 1999 Recognition Plan after the Offering, the interests of
existing stockholders would be diluted. The executive officers and Directors
will be awarded Common Stock under the 1999 Recognition Plan without having to
pay cash for the shares. No awards under the 1999 Recognition Plan would be made
until the date the 1999 Recognition Plan is approved by the Company's
stockholders.
Awards under the 1999 Recognition Plan would be nontransferable and
nonassignable, and during the lifetime of the recipient could only be earned by
him. If the 1999 Recognition Plan is adopted within one year following the
Offering, the shares which are subject to an award would vest and be earned by
the recipient at a rate of 20% of the shares awarded at the end of each full 12
months of service with the Bank after the date of grant of the award. Awards
would be adjusted for capital changes such as stock dividends and stock splits.
Notwithstanding the foregoing, awards would be 100% vested upon termination of
employment or service due to death or disability, and if the 1999 Recognition
Plan is adopted more than 12 months after the Offering, awards would be 100%
vested
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<PAGE>
upon normal retirement or a change in control of the Bank or the Company. If
employment or service were to terminate for other reasons, the award recipient
would forfeit any nonvested award. If employment or service is terminated for
cause (as would be defined in the 1999 Recognition Plan), shares not already
delivered under the 1999 Recognition Plan would be forfeited. Under OTS rules,
if the 1999 Recognition Plan is adopted within the first 12 months after the
Offering, no individual officer can receive more than 25% of the awards under
the plan, no outside Director can receive more than 5% of the awards under the
plan, and all outside Directors as a group can receive no more than 30% of the
awards under the plan.
When shares become vested under the 1999 Recognition Plan, the
participant will recognize income equal to the fair market value of the Common
Stock earned, determined as of the date of vesting, unless the recipient makes
an election under Section 83(b) of the Code to be taxed earlier. The amount of
income recognized by the participant would be a deductible expense for tax
purposes for the Company. If the 1999 Recognition Plan is adopted within one
year following the Offering, dividends and other earnings will accrue and be
payable to the award recipient when the shares vest. If the 1999 Recognition
Plan is adopted within one year following the Offering, shares not yet vested
under the 1999 Recognition Plan will be voted by the trustee of the 1999
Recognition Plan, taking into account the best interests of the recipients of
the 1999 Recognition Plan awards. If the 1999 Recognition Plan is adopted more
than one year following the Offering, dividends declared on unvested shares will
be distributed to the participant when paid, and the participant will be
entitled to vote the unvested shares.
Transactions with Certain Related Persons
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
requires 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. However, recent regulations now permit
executive officers and directors to receive the same terms through benefit or
compensation plans that are widely available to other employees, as long as the
director or executive officer is not given preferential treatment compared to
the other participating employees. In addition, loans made to a director or
executive officer in excess of the greater of $25,000 or 5% of the Savings
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.
All loans made by First Federal to its officers, directors, and executive
officers were made in the ordinary course of business, were made on the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with other persons and did not involve more than the
normal risk of collectibility or present other unfavorable features.
As of September 30, 1998, the aggregate principal balance of loans
outstanding for all executive officers and directors, and family members was
$2.2 million.
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<PAGE>
BENEFICIAL OWNERSHIP OF COMMON STOCK
Beneficial Ownership of Bank Common Stock
The following table includes, as of September 30, 1998, certain
information as to the Bank Common Stock beneficially owned by (i) the only
persons or entities, including any "group" as that term issued in Section
13(d)(3) of the Exchange Act, who or which was known to the Bank to be the
beneficial owner of more than 5% of the issued and outstanding Bank Common
Stock, and (ii) all Directors and executive officer of the Bank as a group. For
information concerning proposed subscriptions by Directors and executive
officers and the anticipated ownership of Common Stock by such persons upon
consummation of the Conversion, see "--Subscriptions by Executive Officers and
Directors."
<TABLE>
<CAPTION>
Amount of Shares
Owned and Nature Percent of Shares
Name and Address of of Beneficial of Common Stock
Beneficial Owners Ownership (1) Outstanding
- ------------------------------- ----------------------- ------------------------
<S> <C> <C>
First Federal Bankshares, M.H.C. (2) 1,524,600 53.60%
329 Pierce Street
Sioux City, Iowa 51102
All Directors and Executive Officers 52,930(3) 5.38%
as a Group (12 persons)
</TABLE>
(1) In accordance with Rule 13d-3 under the Securities Exchange Act of
1934, a person is deemed to be the beneficial owner for purposes of
this table, of any shares of Common Stock if he has shared voting or
investment power with respect to such security, or has a right to
acquire beneficial ownership at any time within 60 days from September
30, 1998. As used herein, "voting power" is the power to vote or direct
the voting of shares and "investment power" is the power to dispose or
direct the disposition of shares. Includes all shares held directly as
well as by spouses and minor children, in trust and other indirect
ownership, over which shares the named individuals effectively exercise
sole or shared voting and investment power.
(2) The Bank's executive officers and directors are also executive
officers and directors of First Federal Bankshares, M.H.C.
(3) Includes all shares of Common Stock held directly as well as
by spouses and minor children, in trust and other indirect
ownership, over which shares the executive officers and
directors effectively exercise sole or shared voting and
investment power. Also includes 12,947 shares (as adjusted) of
common stock underlying options granted pursuant to the First
Federal Savings Bank of Siouxland 1992 Stock Option Plan for
Outside Directors (the "Directors' Plan") and 15,272 shares
(as adjusted) subject to options under the First Federal
Savings Bank of Siouxland 1992 Incentive Stock Option Plan
(the "Stock Plan") that may be exercised within 60 days of
September 30, 1998; and 25,656 shares (as adjusted) awarded
under the First Federal Savings Bank of Siouxland Recognition
and Retention Plan and Trust (the "Recognition Plan") that
have vested or been distributed to participants.
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<PAGE>
SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth, for each of the Company's Directors and
executive officers and for all of the Directors and executive officers as a
group, (i) the number of Exchange Shares to be held upon consummation of the
Conversion, based upon their beneficial ownership of the Bank Common Stock as of
September 30, 1998, (ii) the proposed purchases of Subscription Shares, assuming
sufficient shares are available to satisfy their subscriptions, and (iii) the
total amount of Common Stock to be held upon consummation of the Conversion, in
each case assuming that Subscription Shares are sold at the midpoint of the
Offering Range. Because of limitations on the purchase of Subscription Shares,
one of the following individuals (Mr. Backhaus) may be precluded from purchasing
Subscription Shares if the Offering is sold at the maximum or the maximum, as
adjusted, of the Offering Range. See "The Conversion--Limitations on Common
Stock Purchases."
<TABLE>
<CAPTION>
Number of
Exchange Shares Proposed Purchases of Total Common Stock
to be Held (2)(3) Conversion Stock (1) To Be Held
----------------- -------------------- --------------------------
Number Number Percentage
of Shares Amount of Shares of Total
----------- ------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Barry E. Backhaus.............. 75,731 10,000(4) $ 100,000 85,731 1.51%
Dr. Nancy A. Boysen ........... 21,499 2,000 20,000 23,499 0.41
David S. Clay.................. 2,911 7,500 75,000 10,411 0.18
Jon G. Cleghorn................ 47,966 10,000 100,000 57,966 1.02
Gary L. Evans.................. 12,850 6,000 60,000 18,850 0.33
Allen J. Johnson............... 1,921 5,000 50,000 6,921 0.12
Harland D. Johnson ............ 43,032 10,000 100,000 53,032 0.94
Paul W. Olson.................. 26,253 2,000 20,000 28,253 0.50
Steven L. Opsal................ 7,081 10,000 100,000 17,081 0.30
Dennis B. Swanstrom ........... 2,047 2,000 20,000 4,047 0.07
David Van Engelenhoven ........ 1,921 2,000 20,000 3,921 0.07
Sandra Sabel................... 53,634 10,000 100,000 63,634 1.12
All Directors and Executive
Officers as a Group (12 persons) 296,846 76,500 $ 765,000 373,346 6.57%
</TABLE>
- -----------------------
(1) Includes proposed subscriptions, if any, by associates. Does not
include the subscription order by the ESOP. Purchases by the ESOP are
expected to be 7% of the shares issued in the Offering.
(2) Includes shares underlying options that may be exercised within 60 days
of the date as of which ownership is being determined, and vested
shares of restricted stock. See "--Beneficial Ownership of Bank Common
Stock."
(3) Does not include stock options and awards that may be granted under the
Company's 1999 Stock Option Plan and 1999 Recognition Plan if such
plans are approved by stockholders at an annual meeting or special
meeting of shareholders at least six months following the Conversion.
See "Management of the Bank--Benefits for Employees and Officers."
(4) If necessary to achieve compliance with the overall 85,000 share
purchase limitation, Mr. Backhaus may reduce slightly his proposed
purchase of Conversion stock.
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<PAGE>
THE CONVERSION
THE BOARD OF DIRECTORS OF THE MUTUAL HOLDING COMPANY AND THE OTS HAVE
APPROVED THE PLAN OF CONVERSION, SUBJECT TO APPROVAL BY THE MEMBERS OF THE
MUTUAL HOLDING COMPANY ENTITLED TO VOTE ON THE MATTER, THE STOCKHOLDERS 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.
General
On October 1, 1998, the Board of Directors of the Mutual Holding
Company adopted the Plan of Conversion, pursuant to which the Mutual Holding
Company will be converted from a federally chartered mutual holding company to a
Delaware stock corporation to be named "First Federal Bankshares, Inc." It is
currently intended that all of the capital stock of the Bank will be held by the
Company after the Conversion. The Plan of Conversion was approved by the OTS,
subject to, among other things, approval of the Plan of Conversion by the Mutual
Holding Company's members and the stockholders of the Bank. The Special Meeting
of Members and the Special Meeting of Stockholders have been called for this
purpose.
As part of the Conversion, each of the Minority Shares will
automatically, without further action by the holder thereof, be converted into
and become a right to receive a number of shares of Common Stock determined
pursuant to the Exchange Ratio, which ensures that immediately after the
Conversion and the Share Exchange, Minority Stockholders will own the same
aggregate percentage of the Company's Common Stock as they owned of the Bank's
common stock immediately prior to the Conversion, subject to certain adjustments
discussed below. Pursuant to the Plan of Conversion, the Conversion will be
effected as follows or in any other manner that is consistent with applicable
federal law and regulations and the intent of the Plan of Conversion. Except for
step (i), each of the following steps in the Conversion will be completed
contemporaneously on the Effective Date:
(i) The Bank will organize the Company (which will become the
stock holding company of the Bank) as a direct subsidiary of
the Bank;
(ii) The Company will organize an interim savings bank (the
"Interim Savings Bank") as a wholly owned federal stock
savings bank subsidiary of the Company;
(iii) The Mutual Holding Company will convert into an interim
federal stock savings association and simultaneously merge
with and into the Bank (the "MHC Merger") pursuant to the
Agreement of Merger between the Mutual Holding Company and the
Bank, whereby each Eligible Account Holder and Supplemental
Eligible Account Holder will receive an interest in the
liquidation account established in the Bank pursuant to
regulations of the OTS in exchange for such member's ownership
interest in the Mutual Holding Company, and the Bank's common
stock held by the Mutual Holding Company will be canceled;
(iv) The Interim Savings Bank will merge with and into the Bank
with the Bank as the resulting institution (the "Bank Merger")
pursuant to the Agreement of Merger among the Bank, the
Company and the Interim Savings Bank, the Company's stock held
by the Bank will be canceled, the Interim Savings Bank stock
held by the Company will become Bank common stock by operation
of law and Minority Stockholders will receive Common Stock in
the Share Exchange; and
(v) Contemporaneously with the Bank Merger, the Company will offer
for sale in the Offering Subscription Shares representing the
pro forma market value of the Company, immediately prior to
the Conversion.
The Company expects to receive the approval of the OTS to become a
savings and loan holding company and to own all of the common stock of the Bank.
The Company intends to retain $5.0 million of the net proceeds of the Offering
and to contribute the balance of the net proceeds of the Offering to the Bank.
The Conversion will
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<PAGE>
be effected only upon completion of the sale of all of the shares of Common
Stock of the Company to be issued pursuant to the Plan of Conversion. In
connection with the Conversion, the Bank will change its name to "First Federal
Bank."
The Plan of Conversion provides generally that (i) the Mutual Holding
Company will convert from a federal mutual holding company to a federal stock
savings association and simultaneously merge with and into the Bank and (ii) the
Company will offer shares of Common Stock for sale in the Subscription Offering
to Eligible Account Holders, the Bank's ESOP, Supplemental Eligible Account
Holders and Other Members. Subject to the prior rights of these holders of
subscription rights, the Company will offer Common Stock for sale in a
concurrent Community Offering to certain members of the general public, with a
preference given to Minority Stockholders, and then to depositors of Mid-Iowa
Savings as of __________, 1998, and then to natural persons residing in the
Community. 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. The Community Offering must be completed within 45 days after the
completion of the Subscription Offering unless otherwise extended by the OTS.
See "--Community Offering."
The number of shares of Common Stock to be issued in the Offering will
be determined based upon an independent appraisal of the estimated pro forma
market value of the Common Stock of the Company. All shares of Common Stock to
be issued and sold in the Offering will be sold at the same price. The
Independent Valuation will be updated and the final number of the shares to be
issued in the Offering will be determined at the completion of the Offering. See
"--Stock Pricing and Number of Shares to be Issued" for more information as to
the determination of the estimated pro forma market value of the Common Stock.
The following is a brief summary of the Conversion. The summary is
qualified in its entirety by reference to the provisions of the Plan of
Conversion. A copy of the Plan of Conversion is available for inspection at each
branch of the Bank and at the Midwest Regional and Washington, D.C. offices of
the OTS. The Plan of Conversion is also filed as an Exhibit to the Application
to Convert from Mutual to Stock Form of which this Prospectus is a part, copies
of which may be obtained from the OTS. See "Additional Information."
Purposes of Conversion
The Mutual Holding Company, as a federally chartered mutual holding
company, does not have stockholders and has no authority to issue capital stock.
As a result of the Conversion, the Mutual Holding Company will be restructured
into the form used by holding companies of commercial banks, many business
entities and a growing number of savings institutions. An important distinction
between the mutual holding company form of organization and the fully public
form is that, by federal law, a mutual holding company must always own over 50%
of the common stock of its savings institution subsidiary. Only a minority of
the subsidiary's outstanding stock can be sold to investors. If the Bank had
undertaken a full conversion to public ownership in 1992, a much greater amount
of Bank common stock would have been offered, resulting in more stock offering
proceeds than management believes could have been effectively deployed at that
time. High levels of capital might, in the opinion of management, have exceeded
the available opportunities in the Bank's market area in 1992. Management
determined therefore that the amount of capital raised in the MHC Reorganization
was consistent with its capabilities and loan demand in its market at that time.
Through the Conversion, the Company will become the stock holding
company of the Bank, which will complete the transition to full public
ownership. The stock holding company form of organization will provide the
Company with the ability to diversify the Company's and the Bank's business
activities through the acquisition of or mergers with both stock savings
institutions and commercial banks, as well as other companies. There has been
significant consolidation in Iowa where the Bank conducts its operations, and
although there are no current arrangements, understanding or agreements
regarding any such opportunities (other than the Acquisition), the Company will
be in a position (subject to regulatory limitations and the Company's financial
position) to take advantage of any such opportunities that may arise.
The proceeds of the Conversion received by the Bank will serve to
increase the Bank's capital to support the Acquisition and to fund a substantial
portion of the Merger Consideration to be paid to the shareholders of Mid-Iowa
Financial to consummate the Acquisition. The potential impact of the Conversion
upon the Bank's capital base is significant. The Bank had equity in accordance
with GAAP of $43.2 million, or 7.6% of assets at September 30,
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1998. Assuming that $31.0 million (the mid-point of the Offering Range
established by the Board of Directors based on the estimated pro forma market
value of the Common Stock which has been estimated by RP Financial to be from a
minimum of $26.4 million to a maximum of $35.7 million) of gross proceeds are
realized from the sale of Common Stock (see "Pro Forma Data" for the basis of
this assumption) and assuming that all except $5.0 million of the net proceeds
are used by the Company to purchase the capital stock of the Bank, the Bank's
ratio of GAAP capital to adjusted assets, on a pro forma basis, will increase to
9.1% after the Conversion and taking into account the Acquisition and the
consolidation of the Mutual Holding Company into the Bank. The investment of the
net proceeds from the sale of the Common Stock will provide the Bank with
additional income to further increase its capital position. The additional
capital may also assist the Bank in offering new programs and expanded services
to its customers.
After completion of the Conversion, the unissued common and preferred
stock authorized by the Company's Certificate of Incorporation will permit the
Company, subject to market conditions, 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 or the possible issuance of
authorized but unissued shares to the Company's stock benefit program. 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--Executive Compensation."
Approvals Required
The affirmative vote of a majority of the total eligible votes of the
members of the Mutual Holding Company at the Special Meeting of Members is
required to approve the Plan of Conversion. By their approval of the Plan of
Conversion, the members of the Mutual Holding Company will also be deemed to
approve the MHC Merger and the Bank Merger. The affirmative vote of the holders
of (i) at least two-thirds of the outstanding common stock of the Bank and (ii)
a majority of the Minority Shares at the Special Meeting of Stockholders is
required to approve the Plan of Conversion. Consummation of the Conversion is
also subject to the approval of the OTS.
Share Exchange Ratio
OTS regulations provide that in a conversion of a mutual holding
company to stock form, the minority stockholders will be entitled to exchange
their shares of subsidiary savings bank common stock for common stock of the
converted holding company, provided that the bank and the mutual holding company
demonstrate to the satisfaction of the OTS that the basis for the exchange is
fair and reasonable. The Boards of Directors of the Bank and of the Company have
determined that each Minority Share will on the Effective Date be automatically
converted into and become the right to receive a number of Exchange Shares
determined pursuant to the Exchange Ratio, which ensures that after the
Conversion (and subject to an adjustment required by the OTS to reflect (i) the
Mutual Holding Company's waiver of certain dividends in the amount of $0.5
million out of the aggregate waived dividends of $2.7 million and (ii)
approximately $0.8 million of assets out of $1.8 million held by the Mutual
Holding Company solely for the benefit of members), Minority Stockholders will
own a slightly lower aggregate percentage of the Company's Common Stock as they
owned of the Bank Common Stock immediately prior to the Conversion. The total
number of shares held by Minority Stockholders after the Conversion would also
be affected by any purchases by such persons in the Offering and by the receipt
of cash in lieu of fractional shares. At September 30, 1998, there were
2,845,060 shares of the Bank Common Stock outstanding, 1,320,460, or 46.4%, of
which were Minority Shares. Based on the percentage of the Bank Common Stock
held by Minority Stockholders and the Offering Range, the Exchange Ratio is
expected to range from approximately 1.64993 Exchange Shares for each Minority
Share at the minimum of the Offering Range to 2.56709 Exchange Shares for each
Minority Share at the adjusted maximum of the Offering Range.
Based on the Independent Valuation, the 53.6% of the outstanding shares
of the Bank Common Stock held by the Mutual Holding Company as of the date of
the Independent Valuation, and the Mutual Holding Company's waiver of certain
dividends and consolidation of Mutual Holding Company assets as described above
which reduced the Minority Stockholders' aggregate ownership interest in the
Bank from 46.41% to 45.26%, the following table sets forth, at the minimum,
midpoint, maximum, and adjusted maximum of the Offering Range, the following:
(i) the total number of Subscription Shares and Exchange Shares to be issued in
the Conversion; (ii) the percentage of
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Common Stock outstanding after the Conversion that will be sold in the Offering
and issued in the Share Exchange; and (iii) the Exchange Ratio.
<TABLE>
<CAPTION>
Total Shares
Subscription Shares Exchange Shares of Common
to be Issued to be Issued Stock to be Exchange
Amount Percent Amount Percent Outstanding Ratio
------------------- ---------------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Minimum.................... 2,635,000 54.74% 2,178,000 45.26% 4,813,665 1.64993
Midpoint................... 3,100,000 54.74 2,563,135 45.26 5,663,135 1.94109
Maximum.................... 3,565,000 54.74 2,947,605 45.26 6,512,605 2.23226
Adjusted maximum .......... 4,099,750 54.74 3,389,746 45.26 7,489,496 2.56709
</TABLE>
Options to purchase Minority Shares will also be converted into and
become options to purchase Common Stock. At September 30, 1998, there were
outstanding options to purchase 37,574 Minority Shares. The number of shares of
Common Stock to be received upon exercise of such options will be determined
pursuant to the Exchange Ratio. The aggregate exercise price, duration, and
vesting schedule of such options will not be affected. At September 30, 1998,
options to purchase 34,574 shares were vested. If all such options to purchase
Minority Shares are exercised prior to the Effective Date, then there will be
(i) an increase in the percentage of the Bank Common Stock held by Minority
Stockholders to 47.1%, (ii) an increase in the number of shares of Common Stock
issued to Minority Stockholders in the Share Exchange, (iii) a decrease in the
Exchange Ratio to 1.64919, 1.94022, 2.23125, and 2.56594 at the minimum,
midpoint, maximum and adjusted maximum, respectively, of the Offering Range.
Executive officers and directors of the Bank do not intend to exercise options
prior to the Effective Date. The Bank has no plans to grant additional stock
options prior to the Effective Date.
Effect of the Conversion on Minority Stockholders
Effect on Stockholders' Equity per Share of the Shares Exchanged. The
Conversion will increase the stockholders' equity of Minority Stockholders. At
September 30, 1998, the stockholders' equity per share of Bank Common Stock was
$15.17, including shares held by the Mutual Holding Company. As adjusted at such
date for the Exchange Ratio, such stockholders' equity per share would be $9.19,
$7.82, $6.80, and $5.91 at the minimum, midpoint, maximum, and adjusted maximum,
of the Offering Range. Based on the pro forma information set forth for
September 30, 1998, in "Pro Forma Data," pro forma stockholders' equity per
share following the Conversion will be $13.98, $12.61, $11.60, and $10.72 at the
minimum, midpoint, maximum, and adjusted maximum, of the Offering Range.
Effect on Earnings per Share of the Shares Exchanged. The Conversion
will also affect Minority Stockholders' pro forma earnings per share. For the
three months ended September 30, 1998 and the fiscal year ended June 30, 1998,
basic earnings per share of Bank Common Stock were $0.36 and $1.21,
respectively, including shares held by the Mutual Holding Company. As adjusted
at such dates for the Exchange Ratio, such earnings per share amounts would
range from $0.22 to $0.14 and $0.73 to $0.47, respectively, for the minimum to
the adjusted maximum of the Offering Range. Based on the pro forma information
set forth for the three months ended September 30, 1998 and the fiscal year
ended June 30, 1998 in "Pro Forma Data", earnings per share of Common Stock
following the Conversion will range from $0.23 to $0.16 and $0.79 to $0.55,
respectively, for the minimum to the adjusted maximum of the Offering Range.
Effect on Dividends per Share. The Company's Board of Directors
anticipates declaring and paying quarterly cash dividends on the Common Stock of
approximately $341,000, or $0.0727, $0.0618, $0.0538 and $0.0467 per share on a
quarterly basis, at the minimum, midpoint, maximum and adjusted maximum of the
Offering Range, respectively. Dividends, when and if paid, will be subject to
determination and declaration by the Board of Directors in its discretion, which
will take into account the Company's consolidated financial condition and
results of operations, tax considerations, industry standards, economic
conditions, regulatory restrictions on dividend payments by the Bank to the
Company, general business practices and other factors. See "Dividend Policy."
The Bank has paid a quarterly cash dividend to Minority Stockholders for each of
the full fiscal quarters since its initial public offering in July, 1992. See
"Market for Common Stock" and "Regulation--Federal Regulation of Savings
Institutions--Limitation on Capital Distributions." The Bank intends to continue
to pay a quarterly cash dividend
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of $0.12 per share through the fiscal quarter ending __________, 1998. The
Mutual Holding Company intends to waive the receipt of such dividends.
Effect on the Market and Appraised Value of the Shares Exchanged. The
aggregate Subscription Price of the shares of Common Stock received in exchange
for the Minority Shares is $21.8 million, $ 25.6 million, $29.5 million, and
$33.9 million at the minimum, midpoint, maximum and adjusted maximum,
respectively, of the Offering Range. The last trade of Bank Common Stock on
August 14, 1998, the last trading day preceding the announcement of the
Conversion, was $30.00 per share, and the price at which Bank Common Stock last
traded on ___________, 1999, was $________ per share.
Dissenters' and Appraisal Rights. Under OTS regulations, Minority
Stockholders will not have dissenters' rights or appraisal rights in connection
with the exchange of Minority Shares for shares of Common Stock of the Company.
Effects of Conversion on Depositors, Borrowers and Members
General. Each depositor in the Bank has both a deposit account in the
Bank and a pro rata ownership interest in the net worth of the Mutual Holding
Company based upon the balance in his or her account, which interest may only be
realized in the event of a liquidation of the Mutual Holding Company and the
Bank. 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 Mutual
Holding Company (which owns a majority of the common stock of the Bank) 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 Mutual Holding
Company, which is lost to the extent that the balance in the account is reduced
or closed.
Consequently, depositors in a stock subsidiary of a mutual holding
company normally have no way of realizing the value of their ownership interest,
which has realizable value only in the unlikely event that the Mutual Holding
Company and the Bank are liquidated. In such event, the depositors of record at
that time, as owners, would share pro rata in any residual surplus and reserves
of the Mutual Holding Company after other claims, including claims of depositors
to the amounts of their deposits, are paid.
When a mutual holding company converts to stock form, permanent
nonwithdrawable capital stock is created in the stock holding company to
represent the ownership of the subsidiary 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 Bank.
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 the
Conversion will serve as Directors of the Bank after the Conversion. The
Directors of the Company will consist of individuals currently serving on the
Board of Directors of the Bank.
Effect on Deposit Accounts. Under the Plan of Conversion, each
depositor in the Bank at the time of the 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. Depositors will continue to hold their existing certificates,
passbooks and other evidences of their accounts.
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.
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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
Mutual Holding Company as to all matters requiring membership action. Upon
completion of the Conversion, depositors and borrowers will cease to be members
of the Mutual Holding Company and will no longer be entitled to vote at meetings
of the Mutual Holding Company. Upon completion of the Conversion, all voting
rights in the Bank will be vested in the Company as the sole shareholder 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 will receive an opinion of counsel or tax advisor
with regard to federal and state income taxation to the effect that the adoption
and implementation of the Plan of Conversion will not be taxable for federal or
state income tax purposes to the Bank, the Mutual Holding Company, the Minority
Stockholders, the Interim Savings Bank, members of the Mutual Holding Company,
eligible account holders or the Company. See "--Tax Aspects."
Effect on Liquidation Rights. Were the Bank to liquidate prior to the
Conversion, all claims of creditors of the Bank, including those of depositors
to the extent of their deposit balances, would be paid first. Thereafter, if
there were any assets of the Bank remaining, such assets would be distributed to
the Mutual Holding Company, to the extent of its stock ownership interest in the
Bank. Were the Mutual Holding Company to liquidate, all claims of creditors
would be paid first. Thereafter, if there were any assets of the Mutual Holding
Company remaining, members of the Mutual Holding Company would receive such
remaining assets, pro rata, based upon the deposit balances in their deposit
account in the Bank immediately prior to liquidation. In the unlikely event that
the Bank were to liquidate after the 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 and Number of Shares to be Issued
The Plan of Conversion and federal regulations require that the
aggregate purchase price of the Common Stock in the Offering must be based on
the appraised pro forma market value of the Common Stock, as determined by the
Independent Valuation. The Bank and the Company have retained RP Financial to
make such valuation. For its services in making such appraisal, RP Financial
will receive a fee of $35,000 (which amount does not include a fee of $10,000 to
be paid to RP Financial for assistance in preparation of a business plan). The
Bank and the Company have agreed to indemnify RP Financial 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 RP Financial's liability results from its negligence or
bad faith.
The Independent Valuation was prepared by RP Financial in reliance upon
the information contained in this Prospectus, including the Consolidated
Financial Statements. RP Financial 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 publicly traded savings
institutions located in the Bank's region and on a national basis; the aggregate
size of the Offering of the Common Stock; the impact of the Conversion on the
Bank's stockholders' equity and earnings potential; the pro forma impact of the
Mid-Iowa Financial Acquisition; 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.
The Independent Valuation was prepared based on the assumption that the
aggregate amount of Common Stock sold in the Offering would be equal to the
estimated pro forma market value of the Company multiplied by the Majority
Ownership Percentage. The Independent Valuation states that as of November 27,
1998, the estimated pro forma market value of the Company ranged from a minimum
of $48,136,650 to a maximum of $65,126,050 with
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a midpoint of $56,631,350 (the "Valuation Range"). The Board of Directors
determined to offer the Subscription Shares for $10.00 per share (the
"Subscription Price"). The aggregate offering price of the Subscription Shares
offered in the Offering will be equal to the Valuation Range multiplied by the
Majority Ownership Percentage. The number of Subscription Shares offered in the
Offering will be equal to the aggregate offering price of the Subscription
Shares divided by the Subscription Price. Based on the Valuation Range, the
Majority Ownership Percentage and the Subscription Price, the minimum of the
Offering Range will be 2,635,000 Subscription Shares, the midpoint of the
Offering Range will be 3,100,000 Subscription Shares, and the maximum of the
Offering Range will be 3,565,000 Subscription Shares.
The Board of Directors reviewed the Independent Valuation and, in
particular, considered (i) the Bank's financial condition and results of
operations, (ii) financial comparisons of the Bank in relation to financial
institutions of similar size and asset quality, (iii) stock market conditions
generally and in particular for financial institutions, and (iv) the historical
trading price of the Minority Shares, all of which are set forth in the
Independent Valuation. The Board also reviewed the methodology and the
assumptions used by RP Financial in preparing the Independent Valuation. The
Offering 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. In the event the Independent
Valuation is updated to amend the pro forma market value of the Company to less
than $48,136,650 or more than $74,894,960, such appraisal will be filed with the
Securities and Exchange Commission by post-effective amendment.
The Independent Valuation, however, is not intended, and must not be
construed, as a recommendation of any kind as to the advisability of purchasing
such shares. RP Financial did not independently verify the Consolidated
Financial Statements and other information provided by the Bank, nor did RP
Financial value independently the assets or liabilities of the Bank. The
Independent Valuation 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 valuation 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 such shares in the Offering will
thereafter be able to sell such shares at prices at or above the Subscription
Price.
Following commencement of the Subscription Offering, the maximum of the
Valuation Range may be increased by up to 15% to up to $74,894,960, which will
result in a corresponding increase of up to 15% in the maximum of the Offering
Range to up to 4,099,750 shares, to reflect changes in the market and financial
conditions, without the resolicitation of subscribers. The minimum of the
Valuation Range and of the Offering Range may not be decreased without a
resolicitation of subscribers. The Subscription Price of $10.00 per share will
remain fixed. 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 Offering Range to fill unfilled orders in the Subscription
and Community Offerings.
If the update to the Independent Valuation at the conclusion of the
Offering results in an increase in the maximum of the Valuation Range to more
than $74,894,960 and a corresponding increase in the Offering Range to more than
4,099,750 shares, or a decrease in the minimum of the Valuation Range to less
than $48,136,650 and a corresponding decrease in the Offering Range to fewer
than 2,635,000 shares, then the Company, after consulting with the OTS, may
terminate the Plan of Conversion and return all funds promptly with interest at
the Bank's passbook rate of interest on payments made by check, certified or
teller's check, bank draft or money order, extend or hold a new Subscription
Offering, Community Offering, or both, establish a new Offering Range, commence
a resolicitation of subscribers or take such other actions as permitted by the
OTS in order to complete the Conversion. In the event that a resolicitation is
commenced, unless an affirmative response is received within a reasonable period
of time, all funds will be promptly returned to investors as described above. A
resolicitation, if any, following the conclusion of the Subscription and
Community Offerings would not exceed 45 days unless further extended by the OTS
for periods of up to 90 days not to extend beyond ________, 2001 (two years
after the Special Meeting of Members of the Mutual Holding Company to approve
the Conversion).
An increase in the number of shares to be issued in the Offering would
decrease both a subscriber's ownership interest and the Company's pro forma
earnings and stockholders' equity on a per share basis while increasing pro
forma earnings and stockholders' equity on an aggregate basis. A decrease in the
number of shares to be issued in the Offering would increase both a subscriber's
ownership interest and the Company's pro forma
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earnings and stockholders' equity on a per share basis while decreasing pro
forma net income and stockholders' equity on an aggregate basis. For a
presentation of the effects of such changes, see "Pro Forma Data."
Copies of the appraisal report of RP Financial 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."
Exchange of Stock Certificates
Until the Effective Date of the Conversion, Minority Shares will
continue to be available for trading on the Nasdaq "SmallCap" Market. The
conversion of the Bank Common Stock into Company Common Stock will occur
automatically on the Effective Date of the Conversion. After the Effective Date
of the Conversion, former holders of the Bank Common Stock will have no further
equity interest in the Bank (other than as stockholders of the Company) and
there will be no further transfers of the Bank Common Stock on the stock
transfer records of the Bank.
As soon as practicable after the Effective Date of the Conversion, the
Company, or a bank or trust company designated by the Company, in the capacity
of exchange agent (the "Exchange Agent"), will send a transmittal form to each
Minority Stockholder. The transmittal forms are expected to be mailed within
five business days after the Effective Date of the Conversion and will contain
instructions with respect to the surrender of certificates representing the Bank
Common Stock to be exchanged into the Company's Common Stock. It is expected
that certificates for shares of the Company's Common Stock will be distributed
within five business days after the receipt of properly executed transmittal
forms and other required documents.
THE BANK'S STOCKHOLDERS SHOULD NOT FORWARD FIRST FEDERAL SAVINGS BANK
OF SIOUXLAND STOCK CERTIFICATES TO THE BANK OR THE EXCHANGE AGENT UNTIL THEY
HAVE RECEIVED TRANSMITTAL FORMS.
Until the certificates representing the Bank Common Stock are
surrendered for exchange after consummation of the Conversion, upon compliance
with the terms of the transmittal form, holders of such certificates will not
receive the shares of the Company's Common Stock and will not be paid dividends
on the Company Common Stock into which such shares have been converted. When
such certificates are surrendered, any unpaid dividends will be paid without
interest. For all other purposes, however, each certificate which represents
shares of the Bank Common Stock outstanding at the Effective Date of the
Conversion will be deemed to evidence ownership of the shares of the Company's
Common Stock into which those shares have been converted by virtue of the
Conversion.
All shares of the Company Common Stock issued upon exchange of shares
of the Bank Common Stock shall be deemed to have been issued in full
satisfaction of all rights pertaining to such shares of the Bank Common Stock,
subject, however, to the Company's obligation to pay any dividends or make any
other distributions with a record date prior to the Effective Date which may
have been declared or made by the Bank on such shares of the Bank Common Stock
on or prior to the Effective Date and which remain unpaid at the Effective Date.
The Bank intends to continue to pay a quarterly cash dividend of $0.12 per share
through the earlier of (i) the Effective Date (on a pro rata basis), or (ii) the
fiscal quarter ending ________, 1998. The Mutual Holding Company intends to
waive the receipt of such dividend.
No fractional shares of the Company's Common Stock will be issued to
any Minority Stockholder upon consummation of the Conversion. For each
fractional share that would otherwise be issued, the Company will pay by check
an amount equal to the product obtained by multiplying the fractional share
interest to which such holder would otherwise be entitled by the Subscription
Price. Payment for fractional shares will be made as soon as practicable after
the receipt by the Exchange Agent of surrendered First Federal Savings Bank of
Siouxland stock certificates.
If a certificate for the Bank Common Stock has been lost, stolen or
destroyed, the Exchange Agent will issue the consideration properly payable upon
receipt of appropriate evidence as to such loss, theft or destruction,
appropriate evidence as to the ownership of such certificate by the claimant,
and appropriate and customary indemnification.
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Subscription Offering and Subscription Rights
In accordance with the Plan of Conversion, rights to subscribe for the
purchase of Common Stock in the Subscription Offering have been granted under
the Plan of Conversion in the following order of descending priority. 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, minimum, and overall purchase
limitations set forth in the Plan of Conversion and as described below under
"--Limitations on Common Stock Purchases."
Priority 1: Eligible Account Holders. Each depositor with aggregate
deposit account balances (including demand deposit accounts) of $50 or more (a
"Qualifying Deposit") at September 30, 1997 (the "Eligibility Record Date," and
such account holders, "Eligible Account Holders") will receive, without payment
therefor, nontransferable subscription rights to subscribe in the Subscription
Offering for the greater of 85,000 subscription shares (i.e., approximately
2.74% of the shares offered at the midpoint of the Offering Range), .10% of the
total offering of shares, or fifteen times the product (rounded down to the next
whole number) obtained by multiplying the aggregate number of Exchange Shares
and Subscription Shares issued in the Conversion by a fraction of which the
numerator is the amount of the Eligible Account Holder's Qualifying Deposit 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 limitations and exclusive of shares purchased by the ESOP from
any increase in the shares offered pursuant to an increase in the maximum of the
Offering Range. See "--Limitations on Common Stock Purchases." If there are not
sufficient shares available to satisfy all subscriptions, shares first will be
allocated so as to permit each subscribing Eligible Account Holder to purchase a
number of shares sufficient to make his total allocation equal to the lesser of
100 shares or the number of shares for which he subscribed. Thereafter,
unallocated shares (except for additional shares issued to the ESOP upon an
increase in the maximum of the Offering Range) will be allocated to each
subscribing Eligible Account Holder whose subscription remains unfilled in the
proportion that the amount of his aggregate Qualifying Deposit bears to the
total amount of Qualifying Deposits of all subscribing Eligible Account Holders
whose subscriptions remain unfilled. If an amount so allocated exceeds the
amount subscribed for by any one or more Eligible Account Holders, the excess
shall be reallocated among those Eligible Account Holders whose subscriptions
are not fully satisfied until all available shares have been allocated.
To ensure proper allocation of stock, each Eligible Account Holder must
list on his subscription order form and certification form all deposit accounts
in which he has an ownership interest on the Eligibility Record Date. Failure to
list an account could result in fewer 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 twelve months preceding the
Eligibility Record Date.
Priority 2: Tax-qualified Plans. To the extent that there are
sufficient shares remaining after satisfaction of subscriptions by Eligible
Account Holders, the tax-qualified employee stock benefit plans of the Company
and the Bank, including the ESOP, will receive, without payment therefor,
nontransferable subscription rights to purchase in the aggregate up to 8% of the
Common Stock offered in the Subscription Offering, including any shares to be
issued in the Subscription Offering as a result of an increase in the Estimated
Price Range after commencement of the Subscription Offering and prior to
completion of the Conversion.
Priority 3: Supplemental Eligible Account Holders. To the extent that
there are sufficient shares remaining after satisfaction of subscriptions by
Eligible Account Holders and the tax-qualified employee stock benefit plans,
each depositor with a Qualifying Deposit at ____________, 1998 (the
"Supplemental Eligibility Record Date") who is not an Eligible Account Holder
("Supplemental Eligible Account Holder") will receive, without payment therefor,
nontransferable subscription rights to subscribe in the Subscription Offering
for the greater of 85,000 shares (i.e., approximately 2.74% of the shares
offered at the midpoint of the Offering Range), .10% of the total offering of
shares, or fifteen times the product (rounded down to the next whole number)
obtained by multiplying the aggregate number of Exchange Shares and Subscription
Shares issued in the Conversion 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 limitations. See "--Limitations on Common
Stock Purchases." If there are not sufficient shares available to satisfy all
subscriptions, shares will be allocated so as to
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permit each subscribing Supplemental Eligible Account Holder to purchase a
number of shares sufficient to make his total allocation equal to the lesser of
100 shares or the number of shares for which he subscribed. Thereafter,
unallocated shares will be allocated to each subscribing Supplemental Eligible
Account Holder whose subscription remains unfilled in the proportion that the
amount of his Qualifying Deposit bears to the total amount of Qualifying
Deposits of all subscribing Supplemental Eligible Account Holders whose
subscriptions remain unfilled.
To ensure proper allocation of stock, each Supplemental Eligible
Account Holder must list on his subscription order form and certification form
all deposit accounts in which he has an ownership interest at __________, 1998.
Failure to list an account could result in less shares being allocated than if
all accounts had been disclosed.
Priority 4: Other Members. To the extent that there are shares
remaining after satisfaction of subscriptions by Eligible Account Holders, the
tax-qualified employee stock benefit plans, and Supplemental Eligible Account
Holders, each member of the Mutual Holding Company on the Voting Record Date who
is not an Eligible Account Holder or Supplemental Eligible Account Holder
("Other Members") will receive, without payment therefor, nontransferable
subscription rights to subscribe in the Subscription Offering for the greater of
85,000 shares (i.e., approximately 2.74% of the shares offered at the midpoint
of the Offering Range), or .10% of the total offering of shares, subject to the
overall purchase limitations. See "--Limitations on Common Stock Purchases." If
there are not sufficient shares available to satisfy all subscriptions,
available shares will be allocated on a pro rata basis based on the size of the
order of each Other Member.
Expiration Date for the Subscription Offering. The Subscription
Offering will expire on ______, 1999 (the "Expiration Date"), unless extended
for up to 45 days or such additional periods by the Bank with the approval of
the OTS, if necessary. The Bank and the Company may determine to extend the
Subscription Offering and/or the Community Offering for any reason, whether or
not subscriptions have been received for shares at the minimum, midpoint, or
maximum of the Offering Range, and are not required to give subscribers notice
of any such extension. Subscription rights which have not been exercised prior
to the Expiration Date will become void.
The Company will not execute orders until all shares of Common Stock
have been subscribed for or otherwise sold. If 2,635,000 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 cancelled.
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. Such extensions
may not go beyond _________, 2001 (two years after the Special Meeting of
Members of the Mutual Holding Company to approve the Conversion).
Persons in Nonqualified States or Foreign Countries. The Company 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 of Conversion reside. However, the Company is not required to offer stock
in the Offering to any person who resides in a foreign country or resides in a
state of the United States with respect to which: (i) a small number of persons
otherwise eligible to subscribe for shares of Common Stock reside; or (ii) the
Company 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 or its officers or directors, under the securities
laws of such state, register as a broker, dealer, salesman or selling agent or
register or otherwise qualify the subscription rights or Common Stock for sale
in such state. Where the number of persons eligible to subscribe for shares in
one state is small, the Company will base its decision as to whether or not to
offer the Common Stock in such state on a number of factors, including the size
of accounts being 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.
Community Offering
To the extent that shares remain available for purchase after
satisfaction of all subscriptions of the Eligible Account Holders, the
tax-qualified employee stock benefit plans, Supplemental Eligible Account
Holders, and Other Members, the Company has determined to offer shares pursuant
to the Plan of Conversion to certain members of
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the general public in a direct community offering (the "Community Offering"),
with preference given first to Minority Stockholders, and then to depositors of
Mid-Iowa Savings as of _____, 1998, and then to natural persons residing in the
Community (such persons referred to as "Preferred Subscribers"). Such persons,
together with associates of and persons acting in concert with such persons, may
subscribe for up to 85,000 Subscription Shares (i.e., approximately 2.74% of the
shares offered at the midpoint of the Offering Range), subject to the overall
purchase limitations. See "--Limitations on Common Stock Purchases." Depending
upon market or financial conditions, this amount may be increased to up to a
maximum of 5%. The minimum purchase is 25 shares. The opportunity to subscribe
for shares of Common Stock in the Community Offering category is subject to the
right of the Company, in its 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. If the Bank with the approval of
the OTS increases the maximum purchase limitation, the Company is only required
to resolicit persons who subscribed for the maximum purchase amount and may, in
the sole discretion of the Company, resolicit certain other large subscribers.
In the event that the maximum purchase limitation is increased to 5%, such
limitation may be further increased to 9.99% provided that orders for Common
Stock exceeding 5% of the Subscription Shares issued in the Offering shall not
exceed in the aggregate 10% of the total Subscription Shares issued in the
Offering. Requests to purchase additional shares of the Common Stock in the
event that the purchase limitation is so increased will be determined by the
Board of Directors of the Company in its sole discretion.
Subject to the foregoing, if the amount of stock remaining is
insufficient to fill the orders of Preferred Subscribers, such stock will be
allocated among the Preferred Subscribers in the manner that permits each such
person, to the extent possible, to purchase the number of shares necessary to
make his total allocation of Common Stock equal to the lesser of 100 shares
offered or the number of shares subscribed for by each such Preferred
Subscriber; provided that if there are insufficient shares available for such
allocation, then shares will be allocated among Preferred Subscribers whose
orders remain unsatisfied in the proportion that the unfilled subscription of
each bears to the total unfilled subscriptions of all Preferred Subscribers
whose subscription remain unsatisfied. If all orders of Preferred Subscribers
are filled, any shares remaining will be allocated to other persons who purchase
in the Community Offering applying the same allocation described above for
Preferred Subscribers.
The term "resided" or "residing" as used herein shall mean any person
who occupies a dwelling within the Community, has a present intent to remain
within the Community for a period of time, and manifests the genuineness of that
intent by establishing an ongoing physical presence within the Community
together with an indication that such presence within the Community is something
other than merely transitory in nature. To the extent the person is a
corporation or other business entity, the principal place of business or
headquarters shall be in the Community. To the extent a person is a personal
benefit plan, the circumstances of the beneficiary shall apply with respect to
this definition. In the case of all other benefit plans, circumstances of the
trustee shall be examined for purposes of this definition. The Bank may utilize
deposit or loan records or such other evidence provided to it to make a
determination as to whether a person is a resident. In all cases, however, such
a determination shall be in the sole discretion of the Bank.
The Community Offering will terminate no more than 45 days following
the Expiration Date, unless extended by the Bank and the Company with the
approval of the OTS, if necessary. The Bank and the Company may determine to
extend the Subscription Offering and/or the Community Offering for any reason,
whether or not subscriptions have been received for shares at the minimum,
midpoint, or maximum of the Offering Range, and are not required to give
subscribers notice of any such extension. The Company will not execute orders
until all shares of Common Stock have been subscribed for or otherwise sold. If
2,635,000 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 cancelled. 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. Such extensions may not go beyond _________, 2001 (two
years after the Special Meeting of Members of the Mutual Holding Company to
approve the Conversion).
The Board of Directors has the right to reject any order submitted in
the Offering by a person whose representations the Board of Directors believes
to be false or who it otherwise believes, either alone or acting in concert with
others, is violating, evading, circumventing, or intends to violate, evade or
circumvent the terms and conditions of the Plan of Conversion.
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Syndicated Community Offering
If feasible, the Board of Directors may determine to offer all
Subscription Shares not subscribed for in the Subscription and Community
Offerings in a Syndicated Community Offering, subject to such terms, conditions
and procedures as may be determined by the Company, in a manner that will
achieve the widest distribution of the Common Stock subject to the right of the
Bank to accept or reject in whole or in part any subscriptions in the Syndicated
Community Offering. In the Syndicated Community Offering, any person together
with any associate or group of persons acting in concert may purchase a number
of Subscription Shares that when combined with Exchange Shares received by such
person, together with any associate or group of persons acting in concert is
equal to 85,000 shares, subject to the overall maximum purchase limitations;
provided, however, that the shares purchased by any person together with an
associate or group of persons acting in concert in the Community Offering shall
be counted toward meeting the overall purchase limitations. Provided that the
Subscription Offering has commenced, the Company may commence the Syndicated
Community Offering at any time after the mailing to the members of the Proxy
Statement to be used in connection with the Special Meeting of Members of the
Mutual Holding Company, provided that the completion of the offer and sale of
the Subscription Shares shall be conditioned upon the approval of the Plan of
Conversion by the members. If the Syndicated Community Offering is not sooner
commenced pursuant to the provisions of the preceding sentence, the Syndicated
Community Offering will be commenced as soon as practicable following the date
upon which the Subscription and Community Offerings terminate.
Alternatively, if a Syndicated Community Offering is not held, the Bank
shall have the right to sell any Subscription Shares remaining following the
Subscription and Community Offerings in an underwritten firm commitment public
offering. The overall purchase limitations shall not be applicable to sales to
underwriters for purposes of such an offering but shall be applicable to the
sales by the underwriters to the public. The price to be paid by the
underwriters in such an offering shall be equal to the Subscription Price less
an underwriting discount to be negotiated among such underwriters and the Bank,
which will in no event exceed an amount deemed to be acceptable by the OTS.
If for any reason a Syndicated Community Offering or an underwritten
firm commitment public offering of shares of Subscription Shares not sold in the
Subscription and Community Offerings cannot be effected, or in the event that
any insignificant residue of shares of Subscription Shares is not sold in the
Subscription and Community Offerings or in the Syndicated Community or
underwritten firm commitment public offering, other arrangements will be made
for the disposition of unsubscribed shares by the Bank, if possible. Such other
purchase arrangements will be subject to the approval of the OTS.
Plan of Distribution and Selling Commissions
Offering materials for the Offering initially have been distributed to
certain persons by mail, with additional copies made available at the Bank's
office and by Sandler O'Neill and Investment Bank Services. All prospective
purchasers are to send payment along with a completed Order Form and
certification form directly to the Bank, where such funds will be held in a
segregated special escrow account and not released until the Offering is
completed or terminated.
To assist in the marketing of the Common Stock, the Bank has retained
Sandler O'Neill and Investment Bank Services, which are broker-dealers
registered with the National Association of Securities Dealers, Inc. (the
"NASD"). Sandler O'Neill and Investor Bank Services will assist the Bank in the
Offering as follows: (i) in training and educating the Bank's employees
regarding the mechanics and regulatory requirements of the Conversion; (ii) in
conducting any informational meetings for employees, customers and the general
public; (iii) in coordinating the selling efforts in the Bank's local
communities; and (iv) keeping records of all orders for Common Stock. For these
services, Sandler O'Neill and Investment Bank Services will receive a marketing
fee of 1.125% of the total dollar amount of the Common Stock sold in the
Subscription and Community Offerings. No fee shall be payable by the Bank in
connection with the sale of Common Stock to the ESOP or to the Bank's or the
Company's Directors, officers, or employees, and such persons' immediate family
members. Sandler O'Neill will also perform proxy solicitation services, offering
agent services and records management services for the Bank in the Offering and
will receive a fee for these services of $35,000 plus up to $5,000 for
out-of-pocket expenses. The Bank will also pay Professional Bank Services Inc.,
an affiliate of Investment Bank Services, a fee of $20,000, plus out of pocket
expenses, for services rendered to the Bank in connection with the Acquisition.
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The Bank also will reimburse Sandler O'Neill and Investment Bank
Services for their reasonable out-of-pocket expenses associated with their
marketing effort, up to an aggregate maximum of $75,000, including legal fees
and expenses. The Bank has made an advance payment to Sandler O'Neill and
Investment Bank Services in the amount of $25,000. The Bank will indemnify
Sandler O'Neill and Investment Bank Services against liabilities and expenses
(including legal fees) incurred in connection with certain claims or litigation
arising out of or based upon untrue statements or omissions contained in the
offering material for the Common Stock, including liabilities under the
Securities Act of 1933.
Certain Directors and executive officers of the Company and Bank may
participate in the solicitation of offers to purchase Common Stock. Such persons
will be reimbursed by the Mutual Holding Company and/or the Bank for their
reasonable out-of-pocket expenses, including, but not limited to, de minimis
telephone and postage expenses, incurred in connection with such solicitation.
Other regular, full-time employees of the Bank may participate in the Offering
but only in ministerial capacities, providing clerical work in effecting a sales
transaction or answering questions of a potential purchaser, provided that the
content of the employee's responses is limited to information contained in the
Prospectus or other offering documents, and no offers or sales may be made by
tellers or at the teller counter. All sales activity will be conducted in a
segregated or separately identifiable area of the Bank's offices apart from the
area accessible to the general public for the purpose of making deposits or
withdrawals. Other questions of prospective purchasers will be directed to
executive officers or registered representatives. 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 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.
Procedure for Purchasing Shares
Expiration Date. The Offering will terminate at noon, Central time, on
__________, 1999, unless extended by the Bank and the Company, with the approval
of the OTS, if required. Such extension may be approved by the Bank and the
Company, in their sole discretion, without further approval or additional notice
to purchasers in the Offering. Any extension of the Offering beyond 45 days
after the Expiration Date would be subject to OTS approval and potential
purchasers would be given the right to increase, decrease, or rescind their
orders for Common Stock. If the minimum number of shares offered in the Offering
is not sold by the Expiration Date, the Company may terminate the Offering and
promptly refund all orders for Common Stock. A reduction in the number of shares
below the minimum of the Offering Range will not require the approval of the
Mutual Holding Company's members or the Bank's stockholders, or an amendment to
the Independent Valuation. If the number of shares is reduced below the minimum
of the Offering Range, purchasers will be given an opportunity to increase,
decrease, or rescind their orders.
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 an Order Form
will confirm receipt of delivery in accordance with Rule 15c2-8. Order Forms
will be distributed only with a Prospectus.
The Company reserves the right in its sole discretion to terminate the
Offering at any time and for any reason, in which case the Company will return
all purchase orders, plus interest at its current passbook rate from the date of
receipt.
Use of Order and Certification Forms. In order to purchase shares of
the Common Stock, each purchaser must complete an Order Form and a certification
form. Incomplete Order Forms, or Order Forms that are not accompanied by a
certification form, will not be accepted. The Bank will not be required to
accept orders submitted on photocopied or facsimilied stock order forms. Any
person receiving an Order Form who desires to purchase shares of Common Stock
must do so prior to noon, Central time, on _________, 1999 by delivering (by
mail or in person) to the Company a properly executed and completed Order Form
and a certification form, together with full payment for the shares purchased.
Once tendered, an Order Form cannot be modified or revoked without the consent
of the Company. The Company reserves the absolute right, in its sole discretion,
to reject orders received in the
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Community Offering, in whole or in part, at the time of receipt or at any time
prior to completion of the Offering. Each person ordering shares is required to
represent that he is purchasing such shares for his own account and that he has
no agreement or understanding with any person for the sale or transfer of such
shares. The interpretation by the Company of the terms and conditions of the
Plan of Conversion and of the acceptability of the Order Forms and certification
forms will be final.
Payment for Shares. Payment for all shares will be required to
accompany all completed Order Forms for the purchase to be valid. Payment for
shares may be made by (i) cash (if delivered in person), (ii) check, money
order, certified or teller's check or bank draft made payable to First Federal
Bankshares, Inc., or (iii) authorization of withdrawal from savings accounts
(including certificates of deposit) maintained with the Bank. Appropriate means
by which such withdrawals may be authorized are provided in the Order Forms.
Once such a withdrawal amount has been authorized, a hold will be placed on such
funds, making them unavailable to the depositor until the Offering has been
completed or terminated. In the case of payments authorized to be made through
withdrawal from deposit accounts, all funds authorized for withdrawal will
continue to earn interest at the contract rate until the Offering is completed
or terminated. Interest penalties for early withdrawal applicable to certificate
accounts will not apply to withdrawals authorized for the purchase of shares of
Common Stock; however, if a withdrawal results in a certificate account with a
balance less than the applicable minimum balance requirement, the certificate
shall be cancelled at the time of withdrawal without penalty, and the remaining
balance will earn interest at the passbook rate subsequent to the withdrawal. In
the case of payments made by cash, check or money order, such funds will be
placed in a segregated savings account and interest will be paid by the Bank at
the current passbook rate per annum from the date payment is received until the
Offering is completed or terminated. An executed Order Form, once received by
the Bank, may not be modified, amended or rescinded without the consent of the
Bank, unless the Offering is not completed by the Expiration Date, in which
event purchasers may be given the opportunity to increase, decrease, or rescind
their orders for a specified period of time.
A depositor interested in using his or her IRA funds to purchase Common
Stock must do so through a self-directed IRA. Since the Bank does not offer such
accounts, it will allow a depositor to make a trustee-to-trustee transfer of the
IRA funds to a trustee offering a self-directed IRA program with the agreement
that such funds will be used to purchase the Company's Common Stock in the
Offering. There will be no early withdrawal or IRS interest penalties for such
transfers. The new trustee would hold the Common Stock in a self-directed
account in the same manner as the Bank now holds the depositor's IRA funds. An
annual administrative fee may be payable to the new trustee. Depositors
interested in using funds in a Bank IRA to purchase Common Stock should contact
the Stock Center at the Bank as soon as possible so that the necessary forms may
be forwarded for execution and returned prior to the Expiration Date.
The ESOP will not be required to pay for shares purchased until
consummation of the Offering, provided that there is in force from the time the
order is received a loan commitment from an unrelated financial institution or
the Company to lend to the ESOP the necessary amount to fund the purchase.
Delivery of Stock Certificates. Certificates representing Common Stock
issued in the Offering and Bank checks representing interest paid on
subscriptions made by cash, check, or money order will be mailed by the Bank to
the persons entitled thereto at the address noted on the Order Form, as soon as
practicable following consummation of the Offering and receipt of all necessary
regulatory approvals. Any certificates returned as undeliverable will be held by
the Bank until claimed by persons legally entitled thereto or otherwise disposed
of in accordance with applicable law. Until certificates for the Common Stock
are available and delivered to purchasers, purchasers may not be able to sell
the shares of stock which they ordered. Regulations prohibit the Bank from
lending funds or extending credit to any persons to purchase Common Stock in the
Offering.
Other Restrictions. Notwithstanding any other provision of the Plan of
Conversion, no person is entitled to purchase any Common Stock to the extent
such purchase would be illegal under any federal or state law or regulation
(including state "blue-sky" registrations), or would violate regulations or
policies of the NASD, particularly those regarding free riding and withholding.
The Bank and/or its agents may ask for an acceptable legal opinion from any
purchaser as to the legality of such purchase and may refuse to honor any such
purchase order if such opinion is not timely furnished.
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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, Supplemental Eligible Account Holders and Other Members of the
Bank, from transferring or entering into any agreement or understanding to
transfer the legal or beneficial ownership of the subscription rights issued
under the Plan of Conversion 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 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.
Limitations on Common Stock Purchases
The Plan of Conversion includes the following limitations on the number
of shares of Common Stock which may be purchased during the Conversion:
(1) No person may purchase less than 25 shares of Common Stock.
(2) The tax-qualified employee stock benefit plans, including the ESOP,
may purchase in the aggregate up to 8% of the Subscription Shares issued in the
Offering, including shares issued in the event of an increase in the Offering
Range of up to 15%.
(3) No person (or persons through a single account), together with
associates of and groups of persons acting in concert with such person, may
purchase in the Offering more than 85,000 Subscription Shares except for the
ESOP, which may subscribe for up to 8% of the Common Stock offered in the
Subscription Offering (including shares issued in the event of an increase in
the Estimated Price Range of up to 15%) and no person (or persons through a
single account), together with associates of and groups of persons acting in
concert with such person, may purchase in the Offering a number of Subscription
Shares that when combined with Exchange Shares received by any such person,
together with associates of and persons acting in concert with such person
exceeds 85,000 shares, except for the ESOP, which may subscribe for up to 8% of
the Common Stock offered in the Subscription Offering (including shares issued
in the event of an increase in the Estimated Price Range of up to 15%);
provided, however, that notwithstanding this limitation, no Minority Stockholder
who receives more than 85,000 shares issued in the Conversion shall be required
to divest any such shares except as otherwise may be required by the OTS, and
provided further that in the event the maximum purchase limitation is increased,
orders for Subscription Shares in the Community Offering and in the Syndicated
Offering (or, alternatively, an underwritten firm commitment public offering),
if any, shall as determined by the Bank, first be filled to a maximum of 85,000
shares and thereafter remaining shares shall be allocated, on an equal number of
shares basis per order until all orders have been filled. As a result, Minority
Stockholders who receive Exchange Shares in excess of these purchase limitations
may be precluded from purchasing Subscription Shares.
(4) The maximum number of shares of Common Stock which may be purchased
in all categories of the Offering by officers and Directors of the Bank and
their associates in the aggregate, shall not exceed 25% of the Subscription
Shares offered in the Offering.
Depending upon market or financial conditions, the Board of Directors
of the Company, with the approval of the OTS and without further approval of
members of the Mutual Holding Company, may decrease or further increase the
purchase limitations. Subject to any required regulatory approval and the
requirements of applicable laws and regulations, but without further approval of
the members of the Company, both the individual amount permitted to be
subscribed for and the overall 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
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will be, and certain other large subscribers who through their subscriptions
evidence a desire to purchase the maximum allowable number of shares in the sole
discretion of the Bank may be, given the opportunity to increase their
subscriptions up to the then applicable limit. The effect of such a
resolicitation will be an increase in the number of shares owned by subscribers
who choose to increase their subscriptions. 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 shall not exceed, in the
aggregate, 10% of the total offering. Requests to purchase additional shares
under this provision will be determined by the respective Boards of Directors in
their sole discretion.
In the event of an increase in the total number of shares offered in
the Offering due to an increase in the Offering Range of up to 15%, the maximum
number of shares that may be purchased as restricted by the purchase limitations
shall not be increased proportionately (except for the ESOP), and the additional
shares sold will be allocated in the following order of priority in accordance
with the Plan of Conversion: (i) to fill the ESOP's subscription for 7% of the
total number of shares sold; (ii) in the event that there is an oversubscription
at the Eligible Account Holder, Supplemental Eligible Account Holder, Other
Member, or Minority Stockholder levels, to fill unfulfilled subscriptions of
such subscribers according to such respective priorities; and (iii) to fill
unfulfilled subscriptions in the Community Offering with preference given to
natural persons residing in the Community.
The term "associate" of a person is defined to mean: (i) any
corporation or organization (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 director or in a similar fiduciary capacity; provided,
however, such term shall not include any employee stock benefit plan in which
such person has a substantial beneficial interest or serves as director or in a
similar fiduciary capacity; and (iii) any relative or spouse of such persons, 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
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," and "The
Conversion--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 prior to
the Conversion, all claims of creditors of the Bank, including those of
depositors to the extent of their deposit balances, would be paid first.
Thereafter, if there were any assets of the Bank remaining, such assets would be
distributed to stockholders, including the Mutual Holding Company. Were the
Mutual Holding Company and the Bank to liquidate prior to the Conversion, all
claims of creditors would be paid first. Thereafter, if there were any assets of
the Mutual Holding Company remaining, members of the Mutual Holding Company
would receive such remaining assets, pro rata, based upon the deposit balances
in their deposit account in the Bank 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, 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.
The Plan of Conversion 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 equal to the greater of: (a) the sum of (i) the Mutual Holding Company's
ownership interest in the surplus and reserves of the Bank as of the date of its
latest balance sheet contained in this Prospectus, and (ii) the restricted
retained income account that reflects certain dividends waived by the Mutual
Holding Company; or (b) the retained earnings of the Bank at the time that the
Bank reorganized into the Mutual Holding Company on July __, 1992. The purpose
of the liquidation account is to provide Eligible Account Holders and each
Supplemental Eligible Account Holders who maintain their deposit accounts with
the Bank after the conversion with a distribution upon complete liquidation of
the Bank after the Conversion. Each Eligible Account Holder and Supplemental
Eligible Account
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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 each 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 the Eligibility Record Date, or the
Supplemental Eligibility Record Date, respectively ("Deposit Accounts"). Each
Eligible Account Holder and Supplemental Eligible Account Holder will have a pro
rata interest in the total liquidation account for each of his Deposit Accounts
based on the proportion that the balance of each such Deposit Account on the
Eligibility Record Date, or the Supplemental Eligibility Record Date,
respectively, bore to the balance of all Deposit Accounts in the Bank on such
dates.
If, however, on any June 30 annual closing date of the Bank, commencing
after June 30, 1999, the amount in any Deposit Account is less than the amount
in such Deposit Account on the Eligibility Record Date, or the Supplemental
Eligibility Record Date, respectively, or any other annual closing date, then
the interest in the liquidation account relating to such Deposit Account would
be reduced from time to time by the proportion of any such reduction, and such
interest will cease to exist if such Deposit Account is closed. In addition, no
interest in the liquidation account would ever be increased despite any
subsequent increase in the related Deposit Account. Payment pursuant to
liquidation rights of Eligible Account Holders and Supplemental Eligible Account
Holders would be separate and apart from any insured deposit accounts to such
depositor. 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 shareholder of the Bank.
Tax Aspects
The Conversion will be effected as (i) an exchange of the Mutual
Holding Company's charter for an interim stock savings association charter and
simultaneous merger into the Bank in a tax-free reorganization under Section
368(a)(1)(A) of the Code and (ii) a merger of the Interim Savings Bank into the
Bank with the Bank's stockholders exchanging their Bank Common Stock for Common
Stock of the Company in a tax-free reorganization under Code Section
368(a)(1)(A) by reason of Code Section 368(a)(2)(E). Consummation of the
Conversion is expressly conditioned upon the prior receipt of an opinion of
counsel or tax advisor with respect to federal and state income taxation that
indicates that the Conversion will not be a taxable transaction to the Mutual
Holding Company, the Bank, the Company, the Interim Savings Bank, Eligible
Account Holders, Supplemental Eligible Account Holders, or members of the Mutual
Holding Company.
Pursuant to Revenue Procedure 97-3, the IRS has stated that it will not
rule on whether a transaction qualifies as a tax-free reorganization under Code
Section 368(a)(1)(A), including a transaction that qualifies under Code Section
368(a)(1)(A) by reason of Code Section 368(a)(2)(E), or whether the taxpayer is
subject to the consequences of qualification under that section (such as
nonrecognition and basis issues) but that it would rule on significant
sub-issues that must be resolved to determine whether the transaction qualifies
under the above sections. In several instances over the last two years, the IRS
ruled favorably on certain significant sub-issues associated with downstream
mergers of mutual holding companies into their less than 80 percent owned
subsidiary savings associations. In such cases, the IRS has ruled that: (i) the
exchange of the member's equity interests in the mutual holding company for
interests in a liquidation account established at the savings association will
satisfy the continuity of interest requirement with respect to the merger of the
mutual holding company into the savings association; (ii) pursuant to the merger
of an interim savings association into the savings association, the stock
holding company will acquire control (as defined in Code Section 368(c)) of the
savings association as the interests in the liquidation account and the shares
of savings association stock previously held by the mutual holding company will
be disregarded; and (iii) the continuity of interest requirement will not be
violated by the exchange of stock holding company stock for savings association
stock in the merger of an interim savings association into the savings
association.
In December 1994, the IRS issued Revenue Procedure 94-76 which states
that the IRS will not issue private letter rulings with respect to downstream
mergers of a corporation into a "less than 80 percent distributee", i.e., a
corporation, such as the Bank, in which the merging corporation (i.e., the
Mutual Holding Company) possesses less than 80 percent of the total voting power
of the stock of such corporation and less than 80 percent of the total value of
the stock of such corporation. The IRS assumed this "no-rule" position to study
whether such downstream
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mergers circumvent the purpose behind the repeal of General Utilities &
Operating Co. v. Helvering, 296 U.S. 200 (1935). In Notice 96-6, the IRS
indicated that it intended to close its study project on this issue, however,
Rev. Proc. 96-22 made permanent the IRS decision not to issue advance rulings on
such downstream mergers. Counsel to the Company is of a view that the downstream
merger to effect the Conversion of the Mutual Holding Company to stock form,
where after consummation of the Conversion, the Company holds 100% of the shares
of the Bank and the untaxed appreciation of the Bank remains in corporate
solution, is not the type of downstream merger that can be considered as
circumventing the repeal of General Utilities. If, however, the IRS were to
conclude that such mergers circumvent the repeal of General Utilities, the IRS
could issue correcting regulations that could have the effect of taxing to the
merging corporation, as of the effective time of the merger, the fair market
value of the assets of such corporation over its basis in such assets. If such
regulations are issued, it is expected that they would apply on a prospective
basis and would have no effect on transactions consummated before their
issuance. The Company will receive an opinion of counsel that, in the absence of
a change in the regulations prior to the consummation of the Conversion, and
based on current law and regulations, the merger of the Mutual Holding Company
into the Bank will qualify as a tax-free merger under Code Section 368(a)(1)(A),
as more fully discussed below.
On the Effective Date of the Conversion, the Mutual Holding Company and
the Bank will receive an opinion of counsel, Luse Lehman Gorman Pomerenk &
Schick, A Professional Corporation, which will indicate that the federal income
tax consequences of the Conversion will be as follows: (i) the conversion of the
Mutual Holding Company from mutual to stock form (which company in its mutual
and stock form is referred to herein as the "Mutual Holding Company") will
constitute a mere change in identity, form or place of reorganization within the
meaning of Section 368(a)(1)(F) of the Code; (ii) the merger of the Mutual
Holding Company with and into the Bank will qualify as a reorganization within
the meaning of Section 368(a)(1)(A) of the Code; (iii) the exchange of the
members' equity interests in the Mutual Holding Company for interests in a
liquidation account established at the Bank will satisfy the continuity of
interest requirement with respect to the merger of the Mutual Holding Company
into the Bank; (iv) the Mutual Holding Company will not recognize any gain or
loss on the transfer of its assets to the Bank in exchange for a liquidation
account in Bank; (v) no gain or loss will be recognized by the Bank upon the
receipt of the assets of the Mutual Holding Company in exchange for a
liquidation account in the Bank; (vi) the basis of the assets of the Mutual
Holding Company (other than Bank Common Stock) to be received by the Bank will
be the same as the basis of such assets in the hands of the Mutual Holding
Company immediately prior to the transfer (the basis of the Bank Common Stock
will be -0-); (vii) the holding period of the assets of the Mutual Holding
Company to be received by the Bank will include the holding period of those
assets in the hands of the Mutual Holding Company immediately prior to the
transfer; (viii) the Mutual Holding Company members will recognize no gain or
loss upon the receipt of an interest in the liquidation account in the Bank in
exchange for their membership interest in the Mutual Holding Company; (ix) the
merger of the Interim Savings Bank into the Bank with the Bank as the surviving
institution qualifies as a reorganization within the meaning of Section
368(a)(1)(A) of the Code, pursuant to Section 368(a)(2)(E) of the Code; (x) the
Interim Savings Bank will not recognize any gain or loss on the transfer of its
assets to the Bank in exchange for Bank stock and the assumption by the Bank of
the liabilities, if any, of the Interim Savings Bank; (xi) the Bank will not
recognize any gain or loss on the receipt of the assets of the Interim Savings
Bank in exchange for Bank stock; (xii) the Bank's basis in the assets received
from the Interim Savings Bank in the proposed transaction will, in each case, be
the same as the basis of such assets in the hands of the Interim Savings Bank
immediately prior to the transaction; (xiii) the Company will not recognize any
gain or loss upon its receipt of Bank stock solely in exchange for stock; (xiv)
the Bank's holding period for the assets received from the Interim Savings Bank
in the proposed transaction will, in each instance, include the period during
which such assets were held by the Interim Savings Bank; (xv) Bank stockholders
will not recognize any gain or loss upon their exchange of Bank stock solely for
shares of Company Common Stock; (xvi) cash received in the Bank Merger by a Bank
stockholder in lieu of a fractional share interest of Company Common Stock will
be treated as having been received as a distribution in full payment in exchange
for a fractional share interest of Bank Common Stock which such stockholders
would otherwise be entitled to receive, and will qualify as capital gain or loss
(assuming the Bank Common Stock surrendered in exchange therefor was held as a
capital asset by such stockholder); (xvii) each Bank stockholders' basis in his
or her Company Common Stock received in the exchange (including fractional
shares which the Bank stockholder's otherwise would be entitled to receive) will
be the same as the basis of the Bank Common Stock surrendered in exchange
therefor; (xviii) each Bank stockholder's holding period in his or her Company
Common Stock received in the exchange (including fractional shares which the
Bank stockholder's otherwise would be entitled to receive) will include the
period during which the Bank Common Stock surrendered was held, provided that
the Bank Common Stock surrendered is a capital asset in the hands of the Bank
stockholder on the date of the exchange; (xix) the Company's basis in the Bank
Common Stock which it receives would be the same as the basis
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of the property exchanged therefor; (xx) no gain or loss will be recognized by
the Company on the receipt of money in exchange for Company Common Stock in the
Offering; and (xxi) no gain or loss will be recognized by Eligible Account
Holders and Supplemental Eligible Account Holders upon distribution to them of
nontransferable subscription rights to purchase Company Common Stock, provided
that the amount paid for the Company Common Stock equals its fair market value.
The form of such opinion has been filed with the SEC as an exhibit to the
Company's registration statement.
An opinion on the Iowa state income tax consequences which will be
consistent with the federal tax opinion will also be issued on the Effective
Date of the Conversion by the Mutual Holding Company and Bank tax advisor, KPMG
Peat Marwick LLP.
In the view of RP Financial, which view is not binding on the IRS, 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 Subscription Price for the unsubscribed shares of Common Stock. If
the subscription rights granted to Eligible Account Holders and Supplemental
Eligible Account Holders are deemed to have an ascertainable value, receipt of
such rights could result in taxable gain to those Eligible Account Holders and
Supplemental Eligible Account Holders who 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 advisors as to the tax consequences
in the event that such subscription rights are deemed to have an ascertainable
value.
Unlike private rulings, an opinion of counsel is not binding on the IRS
and the IRS could disagree with the conclusions reached therein. Depending on
the conclusion or conclusions with which the IRS disagrees, the IRS may take the
position that the transaction is taxable to any one or more of the Mutual
Holding Company and/or the members of the Mutual Holding Company, the Bank, the
Minority Stockholders, and/or the Eligible Account Holders and Supplemental
Eligible Account Holders who exercise their subscription rights. In the event of
such disagreement, there can be no assurance that the IRS would not prevail in a
judicial or administrative proceeding.
Certain Restrictions on Purchase or Transfer of Shares after Conversion
All Subscription Shares purchased in the Offering 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.
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 the 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% of the Company's outstanding
Common Stock or to the purchase of stock pursuant to a stock option plan or any
tax qualified employee stock benefit plan or non-tax qualified employee stock
benefit plan of the Bank or the Company (including any employee plans,
recognition plans or restricted stock plans).
OTS regulations applicable to the Company as a result of the Conversion
prohibit the Company from repurchasing shares of its Common Stock for three
years, except for: (i) an offer to all stockholders on a pro rata basis; or (ii)
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 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 Bank to become
"undercapitalized" within the meaning of the OTS prompt corrective action
regulation; and (iii) the
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Company provides to the Regional Director of the OTS no later than ten 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 the Conversion and in amounts greater than
5% in the second and third years following the Conversion provided there are
valid and compelling business reasons for such repurchases and the OTS does not
object to such repurchases.
RESTRICTIONS ON THE ACQUISITION OF THE COMPANY AND THE BANK
General
The Plan of Conversion provides for the Conversion of the Mutual
Holding Company from the mutual to the stock form of organization and in
connection therewith, the Company, as a new Delaware stock corporation, has been
organized to become the sole stockholder of the Bank following the Conversion.
Provisions in the Company's Certificate of Incorporation and Bylaws together
with provisions of Delaware corporate law, may have anti-takeover effects. In
addition, certain provisions of the Company's and Bank's compensation plans
contain provisions that may discourage or make more difficult persons or
companies acquiring control of either the Company or the Bank. Also, the Bank's
Stock Charter and Bylaws and compensation plans entered into in connection with
the Conversion may have anti-takeover effects as described below. Finally,
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, 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 or change of control which is not approved by the Board
of Directors but which a majority of 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 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 of the 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.
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 the 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 the provision limiting voting
rights may only be amended upon the vote of 80% of the outstanding shares of
voting stock.
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 the 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,
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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
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.
The Company will have a Nominating Committee which will be responsible
for nominations of Directors. A stockholder who wishes to nominate persons for
election to the Board of Directors may do so if the stockholder makes timely
written notice to the Company's Secretary. Generally, to be timely, such notice,
which must include all information required to be disclosed pursuant to
Regulation 14A promulgated under the Exchange Act, must be received at the
Company's principal executive offices no later than ninety (90) days prior to
the date of the meeting.
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 18,000,000 shares of Common Stock and 2,000,000 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
employee stock options. 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 terms 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 currently has no plans for the issuance of additional
shares, other than the issuance of additional shares upon exercise of stock
options and to permit the 1999 Recognition Plan to obtain the equivalent of 3%
of the shares sold in the Offering.
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 exceptions, be
approved by the vote of the holders of only a majority 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 stockholders is required
in connection with any Business Combination 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 stockholder became an Interested
Stockholder or (ii) if the proposed transaction met certain conditions set forth
therein which are designed to afford the stockholders a fair price in
consideration for their shares, in which cases approval of only a majority of
the outstanding shares of voting stock is required. The term "Interested
Stockholder" is defined to include any individual, corporation, partnership or
other entity (other than the Company or its subsidiary) 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)
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any sale, lease, exchange, mortgage, transfer, pledge or other disposition to or
with any Interested Stockholder or Affiliate of an Interested Stockholder of 25%
or more of the assets of the Company or combined assets of the Company and its
subsidiary; (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
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 that 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.
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 association 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 provide 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.
The provisions described above are intended to reduce the Company's
vulnerability to takeover attempts and certain other transactions that have not
been negotiated with and approved by members of its Board of Directors. The
provisions of the Bank's current and proposed employment agreements and stock
benefit plans 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--Benefits for Employees and Officers."
The foregoing provisions and limitations may make it more difficult for
companies or persons to acquire control of the Bank. Additionally, the
provisions could deter offers to the stockholders that might be viewed by such
stockholders to be in their best interests.
The Company's Board of Directors believes that the provisions of the
Certificate of Incorporation, Bylaws and compensation plans are in the best
interests 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.
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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
In 1988, Delaware enacted 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 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, calculated without regard to those
shares owned by the corporation's directors who are also officers or 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 of the Company does not
intend to propose any such amendment.
Restrictions in the Bank's Federal Stock Charter and Bylaws
The Bank's Stock Charter contains certain anti-takeover provisions
which will be effective for a period of five years following the completion of
the Conversion. These provisions include (i) a prohibition on the acquisition of
beneficial ownership of more than 10% of the issued and outstanding shares of
any class of equity securities of the Bank by any person, (ii) a restriction on
the ability of stockholders to call a special meeting of stockholders relating
to a change of control of the Bank or a Charter amendment or (iii) a restriction
on the ability of stockholders to cumulate their votes in the election of
Directors.
Although the Bank has no arrangements, understandings or plans at the
present time 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 financing 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 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 that could impede
the completion of such a transaction. An effect of the possible issuance of such
preferred stock, therefore, may be to deter or render more difficult a future
takeover attempt. The Board of Directors of the Bank does not intend to issue
any preferred stock except on terms that the Board deems to be in the best
interests of the Bank and its then existing stockholders.
124
<PAGE>
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 of Conversion or the
Common Stock to be issued upon their exercise. The Plan of Conversion 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, either directly or indirectly, or making an offer to
acquire more than 10% of the stock of any converted savings institution, without
the prior written approval of the OTS, 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 in the
aggregate for up to 24.99% by the ESOP of the Company or the Bank, and (iii)
offers that are not opposed by the Board of Directors of the Bank and which
receive prior OTS approval. Such prohibition is also applicable to the
acquisition of the Common Stock of the Company. 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 Savings and Loan Holding Company 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. 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 that
have not received prior regulatory approval.
Additional Antitakeover Effects
Assuming executive officers and directors (i) purchase 76,500
Subscription Shares in the Offering, (ii) receive Exchange Shares in the Share
Exchange as described above, (iii) receive a number of shares of Common Stock
equal to 3% and 10% of the number of Subscription Shares sold in the Offering
pursuant to the 1999 Recognition Plan and the 1999 Stock Option Plan,
respectively (assuming such plans are approved by stockholders, that all awards
are vested and all options exercised, and the 1999 Recognition Plan shares are
purchased in the open market), and (iv) receive all stock benefits that were not
vested as of September 30, 1998, and exercised all such stock options, then
executive officers and directors will own between 6.99% and 6.42% of the
Company's Common Stock at the minimum and adjusted maximum of the Offering
Range, respectively. Such amount does not include the 6.5% of the Company's
Common Stock that will be owned by the ESOP at the conclusion of the Conversion,
assuming the ESOP purchases 7% of the Subscription Shares sold in the Offering,
and assuming that all participants vote the shares allocated to their ESOP
account in accordance with management's recommendations. Under the terms of the
ESOP, the unallocated shares will be voted by the independent ESOP trustee in
the same proportion as the allocated shares. Accordingly, directors and officers
will have effective voting control over a substantial amount of Common Stock
issued and outstanding at the completion of the Conversion. The potential voting
control by directors and officers could, together with additional stockholder
support or upon exercise of their options, defeat stockholder proposals
requiring an 80% supermajority vote. As a result, these provisions may preclude
takeover attempts that certain stockholders deem to be in their best interest
and may tend to perpetuate existing management.
125
<PAGE>
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
General
At the Effective Date, the Company will be authorized to issue
18,000,000 shares of Common Stock having a par value of $.01 per share and
2,000,000 shares of preferred stock (the "Preferred Stock"). The Company
currently expects to issue up to 3,565,000 (subject to adjustment) shares of
Common Stock in the Offering, and up to 2,947,605 shares (subject to adjustment)
in exchange for Minority Shares in the Conversion. The Company does not intend
to issue shares of Preferred Stock in the Conversion. Each share of the
Company's 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 Subscription Price for the Common Stock, in accordance with the Plan of
Conversion, all such stock will be duly authorized, fully paid and
nonassessable.
The Common Stock of the Company will represent nonwithdrawable capital,
will not be an account of an insurable type, and will not be insured by the FDIC
or any other government agency.
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 that are imposed
by law and applicable regulation. See "Dividend Policy." The holders of Common
Stock of the Company 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.
Voting Rights. Upon the 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 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% stockholder vote.
See "Restrictions on the Acquisition of the Company and the Bank."
As a federal stock savings association, 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 the
Conversion. Voting rights of the Bank are 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.
126
<PAGE>
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 that 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.
DESCRIPTION OF CAPITAL STOCK OF THE BANK
General. The Charter of the Bank authorizes the issuance of capital
stock consisting of 20,000,000 shares of common stock, par value $1.00 per
share, and 10,000,000 shares of preferred stock, 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 has the same relative rights as, and is identical in all respects
with, each other share of common stock. The Board of Directors of the Bank is
authorized to approve the issuance of common stock up to the amount authorized
by the Charter without the approval of the Bank's stockholders. All of the
issued and outstanding Common Stock of the Bank will be held by the Company as
the Bank's sole stockholder.
Dividends. The holders of the Bank's common stock are 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.
Voting Rights. The holders of the Bank Common Stock possess exclusive
voting rights in the Bank. Each holder of shares of common stock is entitled to
one vote for each share held, subject to any right of stockholders to cumulate
their votes for the election of directors. During the period from the
consummation of the Reorganization to July 1997, the holders of the Bank's
common stock were not permitted to cumulate their votes for the election of
directors. See "Restrictions on the Acquisition of the Company and the
Bank--Restrictions in the Bank's Federal Stock Charter and Bylaws," and
"--Additional Antitakeover Effects."
Liquidation. In the event of any liquidation, dissolution, or winding
up of the Bank, the holders of the Bank 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, all assets of
the Bank available for distribution in cash or in kind. If additional 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
that 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 nonassessable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is the
Registrar and Transfer Company.
EXPERTS
The consolidated financial statements of the Bank included in this
Prospectus have been audited by KPMG Peat Marwick LLP, independent auditors, as
stated in their report appearing herein and are included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
The consolidated financial statements of Mid-Iowa Financial included in
this Prospectus have been audited by KPMG Peat Marwick LLP, independent
auditors, as stated in their report appearing herein and are included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
127
<PAGE>
RP Financial has consented to the publication herein of the summary of
its report to the Bank and the Company setting forth its opinion as to the
estimated pro forma market value of the Common Stock upon Conversion and its
view with respect to subscription rights.
LEGAL 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 Luse Lehman Gorman Pomerenk & Schick, A Professional Corporation, Washington,
D.C., special counsel to the Bank and the Company. Certain legal matters will be
passed upon for Sandler O'Neill and Investment Bank Services by Muldoon Murphy &
Faucette, Washington, D.C.
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, including
the Conversion Valuation Appraisal Report which is an exhibit to the
Registration Statement, 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 website; the address of the website is
"http://www.sec.gov." 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.
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 West John Carpenter Freeway, Irving, Texas 75039.
In connection with the Conversion, the Company will register its Common
Stock with the SEC under Section 12(g) 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 of Conversion, 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 of Conversion 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(g) of the Exchange
Act and, upon such registration, the Bank and the holders of the Conversion
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.
128
<PAGE>
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report .............................................................. F-2
Consolidated Balance Sheets
as of September 30, 1998 (Unaudited) and June 30, 1998 and 1997 ...................... F-3
Consolidated Statements of Operations
for the three months ended September 30, 1998 and 1997 (Unaudited) and the years ended
June 30, 1998, 1997 and 1996 ......................................................... ___
Consolidated Statements of Stockholders' Equity
for the three months ended September 30, 1998 (Unaudited) and the years ended
June 30, 1998, 1997 and 1996 ......................................................... F-4
Consolidated Statements of Cash Flows
for the three months ended September 30, 1998 and 1997 (Unaudited) and the
years ended June 30, 1998, 1997 and 1996 ............................................. F-5
Notes to Consolidated Financial Statements ................................................ F-7
</TABLE>
All schedules are omitted as the required information is not applicable or the
information is presented in the consolidated financial statements.
Financial statements of First Federal Bankshares, Inc. (the "Company") are not
presented herein because the Company has not yet issued any stock, has no assets
and no liabilities, and has not conducted any business other than of an
organizational nature.
Financial statements of First Federal Bankshares, M.H.C. are not presented
herein because the Mutual Holding Company's only assets are $310,000 in cash or
cash equivalents, other assets and investments of approximately $1.5 million and
its stock investment in First Federal Savings Bank of Siouxland, and it has no
significant liabilities and conducts no other business.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors
First Federal Savings Bank of Siouxland
Sioux City, Iowa:
We have audited the accompanying consolidated balance sheets of First Federal
Savings Bank of Siouxland and subsidiaries (the Bank) as of June 30, 1998 and
1997, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended June
30, 1998. These consolidated financial statements are the responsibility of the
Bank's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Federal
Savings Bank of Siouxland and subsidiaries as of June 30, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended June 30, 1998, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Des Moines, Iowa
July 30, 1998, except for
note 16, which is as
of August 17, 1998
F-2
<PAGE>
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, June 30,
------------- ---------------------------
1998 1998 1997
------------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
Assets
------
Cash and cash equivalents $ 8,919,400 9,725,007 9,090,714
Interest-bearing deposits in other financial institutions 1,000,000 7,500,000 3,387,453
Securities available for sale (note 2) 87,457,398 65,194,875 64,097,913
Securities held to maturity 32,107,702 32,023,240 29,757,806
Real estate owned and in judgment, net 718,038 489,055 --
Loans receivable, net (notes 3 and 4) 407,455,369 404,800,425 341,253,966
Office property and equipment, net (note 5) 11,070,549 10,844,964 9,638,274
Federal Home Loan Bank (FHLB) stock, at cost 6,269,600 5,670,600 5,000,000
Accrued interest receivable (note 6) 3,828,661 3,526,679 3,374,659
Deferred income taxes (note 9) (93,000) 250,000 348,200
Excess of cost over fair value of assets acquired 8,079,931 8,158,212 318,381
Other assets 2,798,341 3,267,043 2,300,508
------------- ----------- -----------
Total assets $ 569,611,989 551,450,100 468,567,874
------------- ----------- -----------
------------- ----------- -----------
Liabilities
-----------
Deposits (note 7) $ 392,677,194 392,425,285 326,733,945
Advances from FHLB (notes 2 and 8) 124,885,063 107,900,878 96,500,000
Advance payments by borrowers for taxes and insurance 1,496,696 2,276,049 1,385,006
Accrued income taxes (note 9) 120,431 (84,884) 360,126
Accrued interest payable (notes 7 and 8) 4,428,256 3,636,142 2,714,349
Accrued expenses and other liabilities 2,837,240 3,276,547 2,009,182
------------- ----------- -----------
Total liabilities 526,444,880 509,430,017 429,702,608
------------- ----------- -----------
Stockholders' Equity
--------------------
Preferred stock, $1 par value;
authorized 10,000,000 shares, none issued -- -- --
Common stock, $1 par value, 20,000,000 shares authorized;
2,845,060; 2,839,943 and 2,828,269 shares issued and outstanding
at September 30, 1998 and June 30, 1998 and 1997, respectively 2,845,060 2,839,943 2,828,269
Additional paid-in capital 8,291,019 8,266,796 8,219,516
Retained earnings, substantially restricted (note 11) 31,538,832 30,678,991 27,890,096
Accumulated other comprehensive income 492,198 234,353 (72,615)
------------- ----------- -----------
Total stockholders' equity 43,167,109 42,020,083 38,865,266
Contingencies (note 14)
------------- ----------- -----------
Total liabilities and stockholders' equity $ 569,611,989 551,450,100 468,567,874
------------- ----------- -----------
------------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Additional
Comprehensive Capital paid-in Retained
Income stock capital earnings
------------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at June 30, 1995 $ -- 1,700,763 5,210,217 28,094,769
Net earnings 3,052,434 -- -- 3,052,434
Stock options exercised -- 6,446 50,771 --
Principal payment on ESOP borrowing -- -- -- --
Amortization of recognition --
and retention plan -- -- -- --
Net change in unrealized gain/loss --
on securities available for sale (658,700) -- -- --
Dividends on common stock --
at $.4364 per share (note 11) -- -- -- (562,409)
-----------
Comprehensive income (unaudited) $ 2,393,734 -- -- --
----------- --------- --------- ----------
-----------
Balance at June 30, 1996 1,707,209 5,260,988 30,584,794
Net earnings 1,939,201 -- -- 1,939,201
Stock options exercised -- 7,095 50,397 --
Principal payment on ESOP borrowing -- -- -- --
Amortization of recognition
and retention plan -- -- -- --
Net change in unrealized gain/loss
on securities available for sale 586,065 -- -- --
Issuance of 10% stock dividend
(171,153 shares) -- 171,153 3,850,943 (4,022,096)
3-for-2 stock split in the form of
a stock dividend (942,812 shares) -- 942,812 (942,812) --
Dividends on common stock
at $.4691 per share (note 11) -- -- -- (611,803)
-----------
Comprehensive income (unaudited) $ 2,525,266 -- -- --
----------- --------- --------- ----------
-----------
Balance at June 30, 1997 2,828,269 8,219,516 27,890,096
Net earnings 3,417,913 -- -- 3,417,913
Stock options exercised -- 11,674 47,280 --
Net change in unrealized gain/loss
on securities available for sale 306,968 -- -- --
Dividends on common stock
at $.48 per share (note 11) -- -- -- (629,018)
-----------
Comprehensive income (unaudited) $ 3,724,881 -- -- --
----------- --------- --------- ----------
-----------
Balance at June 30, 1998 2,839,943 8,266,796 30,678,991
--------- --------- -----------
Net earnings (unaudited) 1,018,002 -- -- 1,018,002
Stock options exercised (unaudited) 5,117 24,223 --
Net change in unrealized gain/loss on
securities available for sale (unaudited) 257,845 -- -- --
Dividends on common stock at $.12
per share (unaudited) -- -- -- (158,161)
-----------
Comprehensive income (unaudited) $ 1,275,847 -- -- --
----------- --------- --------- ----------
-----------
Balance at September 30, 1998
(unaudited) $ 2,845,060 8,291,019 31,538,832
--------- --------- ----------
--------- --------- ----------
</TABLE>
<TABLE>
<CAPTION>
Accumulated Recognition
other ESOP and
Comprehensive borrowing retention
income guarantee plan Total
------------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Balance at June 30, 1995 -- (117,670) (24,570) 34,863,509
Net earnings -- -- -- 3,052,434
Stock options exercised -- -- -- 57,217
Principal payment on ESOP borrowing -- 88,200 -- 88,200
Amortization of recognition
and retention plan -- -- 17,010 17,010
Net change in unrealized gain/loss
on securities available for sale (658,700) -- -- (658,700)
Dividends on common stock
at $.4364 per share (note 11) -- -- -- (562,409)
Comprehensive income (unaudited) -- -- -- --
-------- -------- ------ ----------
Balance at June 30, 1996 (658,700) (29,470) (7,560) 36,857,261
Net earnings -- -- -- 1,939,201
Stock options exercised -- -- -- 57,492
Principal payment on ESOP borrowing -- 29,470 -- 29,470
Amortization of recognition
and retention plan -- -- 7,560 7,560
Net change in unrealized gain/loss
on securities available for sale 586,085 -- -- 586,085
Issuance of 10% stock dividend
(171,153 shares) -- -- -- --
3-for-2 stock split in the form of
a stock dividend (942,812 shares) -- -- -- --
Dividends on common stock
at $.4691 per share (note 11) -- -- -- (611,803)
Comprehensive income (unaudited) -- -- -- --
-------- -------- ------ ----------
Balance at June 30, 1997 (72,615) -- -- 38,865,266
Net earnings -- -- -- 3,417,913
Stock options exercised -- -- -- 58,954
Net change in unrealized gain/loss
on securities available for sale 306,968 -- -- 306,968
Dividends on common stock
at $.48 per share (note 11) -- -- -- (629,018)
Comprehensive income (unaudited) -- -- -- --
-------- -------- ------ ----------
Balance at June 30, 1998 234,353 -- -- 42,020,083
-------- -------- ------ ----------
Net earnings (unaudited) -- -- -- 1,018,002
Stock options exercised (unaudited) -- -- -- 29,340
Net change in unrealized gain/loss on
securities available for sale (unaudited) 257,845 -- -- 257,845
Dividends on common stock at $.12
per share (unaudited) -- -- -- (158,161)
Comprehensive income (unaudited) -- -- -- --
-------- -------- ------ ----------
Balance at September 30, 1998
(unaudited) 492,198 -- -- 43,167,109
-------- -------- ------ ----------
-------- -------- ------ ----------
</TABLE>
Comprehensive income for the three months ended September 30, 1997 (unaudited)
was composed of net earnings of $841,473 plus the net change in unrealized
gain/loss on securities available for sale of $308,612, totaling $1,150,085.
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the three
months ended
September 30, Years ended June 30,
---------------------------------------------------------------------
1998 1997 1998 1997 1996
--------- --------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 1,018,002 841,473 3,417,913 1,939,201 3,052,434
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Loans originated for sale to
investors (7,432,410) (3,533,220) (24,816,168) (12,797,315) (18,018,220)
Proceeds from sale of loans
originated for sale 8,012,032 3,662,073 24,282,687 12,798,822 18,445,467
Provision for losses on loans
and other assets 75,000 70,000 345,000 258,000 233,000
Depreciation and amortization 302,257 152,137 814,703 618,381 488,335
Provision for deferred taxes 190,000 -- 354,000 -- 116,000
Net gain on sale of loans (87,408) (49,262) (241,690) (206,898) (289,564)
Net loss on sale of securities
available for sale -- -- -- 121,913 33,724
Net (gain) loss on sale of office
property and equipment -- -- (103,936) 8,259 1,029
Net loan fees deferred 89,650 (14,858) 230,147 122,839 (14,127)
Amortization of premiums and
discounts on loans,
mortgage-backed securities, and
investment securities (33,367) 57,844 (61,505) (190,969) (96,794)
FHLB stock dividend -- -- -- -- (94,200)
Decrease (increase) in accrued
interest receivable (301,982) 318,409 381,057 (100,569) (448,951)
(Increase) decrease in other
assets 458,352 556,048 (70,700) (300,417) 966,124
Increase (decrease) in accrued
interest payable 792,114 528,550 920,719 481,768 (477,210)
(Decrease) increase in accrued
expenses and other liabilities (439,306) (231,651) (370,743) 620,828 542,459
(Decrease) increase in
taxes payable 205,315 312,272 (607,177) 92,902 113,050
--------- --------- --------- --------- ---------
Net cash provided by operating
activities 2,848,249 2,669,815 4,474,307 3,466,745 4,552,556
--------- --------- --------- --------- ---------
</TABLE>
F-5
<PAGE>
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
For the three
months ended
September 30, Years ended June 30,
----------------------------------------------------------------------------
1998 1997 1998 1997 1996
------------ --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Cash flows from
investing activities:
Purchase of securities
held to maturity $ (5,983,751) (390,000) (21,986,639) (17,171,388) (13,743,459)
Proceeds from maturities of
securities held to maturity 5,199,611 1,901,064 24,771,834 9,873,142 11,700,136
Proceeds from sale of
securities available for sale -- -- -- 35,096,652 15,154,934
Purchase of securities
available for sale (32,461,356) -- (43,965,468) (45,706,062) (34,219,299)
Proceeds from maturities of
securities available for sale 11,372,940 10,000,000 43,875,540 21,919,842 19,970,579
Redemption (purchase) of
FHLB stock (599,000) -- 488,400 (231,200) --
Loans purchased (1,518,000) (4,853,000) (13,769,000) (33,736,000) (16,793,188)
Decrease in loans receivable (2,051,618) 353,968 28,961,591 12,808,438 7,796,735
Proceeds from sale of office
property and equipment -- -- 293,303 -- --
Purchase of office property
and equipment (440,602) (265,480) (1,880,935) (1,552,896) (1,604,330)
Net cash and cash equivalents
of acquisition -- -- (8,195,352) -- --
------------ --------- ---------- ---------- ---------
Net cash provided by
(used in) investing activities (26,481,776) 6,746,552 8,593,274 (18,699,472) (11,737,892)
------------ --------- ---------- ---------- ---------
------------ --------- ---------- ---------- ---------
Cash flows from
financing activities:
Increase (decrease) in deposits 251,909 (2,339,636) 899,482 (8,488,951) (4,203,287)
Proceeds from advances from FHLB 24,000,000 23,000,000 62,000,000 91,500,000 102,000,000
Repayment of advances from FHLB
and other borrowings (7,015,815) (33,000,000) (71,015,544) (61,000,000) (90,500,000)
Issuance of common stock 29,340 24,108 58,954 57,492 57,217
Cash dividends paid (158,161) (156,905) (629,018) (611,803) (562,409)
Net increase (decrease) in
advances from borrowers for
taxes and insurance (779,353) (1,004,464) 365,385 (132,822) 13,035
------------ --------- ---------- ---------- ---------
Net cash (used in) provided by
financing activities 16,327,920 (13,476,897) (8,320,741) 21,323,916 6,804,556
------------ --------- ---------- ---------- ---------
Net increase (decrease) in
cash and cash equivalents (7,305,607) (4,060,530) 4,746,840 6,091,189 (380,780)
Cash and cash equivalents at
beginning of year 17,225,007 12,478,167 12,478,167 6,386,978 6,767,758
------------ --------- ---------- ---------- ---------
Cash and cash equivalents at
end of year $ 9,919,400 8,417,637 17,225,007 12,478,167 6,386,978
------------ --------- ---------- ---------- ---------
------------ --------- ---------- ---------- ---------
Supplemental disclosures:
Cash paid during the period for:
Interest 3,785,665 3,248,599 20,455,443 19,845,757 20,098,750
Taxes on income $ 400,000 151,040 1,700,105 908,529 1,341,347
------------ --------- ---------- ---------- ---------
------------ --------- ---------- ---------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies and Practices
Organization
First Federal Savings Bank of Siouxland and subsidiaries (the Bank) is
organized as a federally chartered stock savings bank engaging in
retail and commercial banking and related financial services,
primarily in the Sioux City metropolitan area, adjacent counties,
including parts of Nebraska and South Dakota, and in Central Iowa.
The Bank provides traditional products and services of banking, such
as deposits and mortgage, consumer, and commercial loans.
Approximately 54 percent of the Bank's capital stock is owned by
First Federal Bankshares, M.H.C. (the Parent Company), a mutual
holding company originally formed to hold the stock. The remaining 46
percent of the shares are owned by the general public.
Principles of Presentation
The accompanying consolidated financial statements include the accounts
of the Bank and its wholly owned subsidiary First Financial
Corporation of Sioux City (FFC) and FFC's wholly owned subsidiary,
Sioux Financial Co., which operates abstract companies in Sioux and
O'Brien counties, and FFC's majority owned subsidiary United Escrow,
which serves as an escrow agent in Woodbury County. All significant
intercompany balances and transactions have been eliminated in
consolidation.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the requirements for presentation of
interim financial statements and, therefore, do not include all
information and footnotes necessary for a fair presentation of
financial position, results of operations, and cash flows in
conformity with generally accepted accounting principles. In the
opinion of management, all adjustments consisting only of normal
recurring adjustments that are necessary for a fair presentation for
interim periods presented have been reflected.
The Bank's presentation of comprehensive income is comprised of net
earnings and the net change in unrealized gain/loss on securities
available for sale, net of income taxes.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Regulatory Capital
The Bank is required by the Office of Thrift Supervision (OTS) to
maintain prescribed levels of regulatory capital. At September 30,
1998 and June 30, 1998, the Bank met the requirements, and management
anticipates meeting the requirements at June 30, 1999 (see note 11).
Acquisition
On March 31, 1998, the Bank acquired GFS Bancorp, Inc, Grinnell, Iowa
(GFS), parent company of Grinnell Federal Savings Bank. The
shareholders of GFS received $18,108,547 cash for all outstanding
shares. The excess of the purchase price over the fair value of the
net identifiable assets of $7,938,000 has been recorded as goodwill
and is being amortized on a straight-line basis over 25 years. The
acquisition was accounted for as a purchase; accordingly, GFS's
results of operations were included in the financial statements from
the acquisition date.
F-7
<PAGE>
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies and Practices, Continued
Acquisition, Continued
The following unaudited pro forma financial information presents the
combined results of operations as if the acquisition of GFS had
occurred at the beginning of the years ended June 30, 1998 and 1997,
after giving effect to certain adjustments relating to goodwill,
premiums on loans and deposits, and related income tax effects. The
pro forma information does not necessarily reflect the results of
operations that would have occurred from a single entity during such
periods.
<TABLE>
<CAPTION>
1998 1997
---- ----
($000's, except earnings
per share) (unaudited)
<S> <C> <C>
Interest income $ 41,141 40,709
Interest expense 24,648 24,926
Provision for losses on loans 1,166 379
Noninterest income 3,569 2,700
Noninterest expense 13,589 14,879
----------- --------------
Income before income taxes 5,307 3,225
Income taxes 1,867 1,188
----------- --------------
Net income $ 3,440 2,037
----------- --------------
----------- --------------
Earnings per common share - basic $ 1.22 $ 0.72
----------- --------------
----------- --------------
</TABLE>
Cash and Cash Equivalents
For purposes of reporting cash flows, the Bank includes cash and due from
other financial institutions and interest-bearing deposits with
original maturities of three months or less in cash and cash
equivalents. Amounts of interest-bearing deposits included as cash
equivalents at September 30, 1998 (unaudited), June 30, 1998 and
1997, were approximately $1,000,000, $7,500,000 and $3,387,000,
respectively.
Earnings Per Share
Basic earnings per share computations for the three month periods ended
September 30, 1998 and 1997 and the years ended June 30, 1998, 1997,
and 1996, were determined by dividing net earnings by the
weighted-average number of common shares outstanding during the
periods then ended. Diluted net earnings per common share amounts are
computed by dividing net income by the weighted-average number of
common shares and all dilutive potential common shares outstanding
during the period. The average number of common shares have been
restated for stock distributions in 1997.
F-8
<PAGE>
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies and Practices, Continued
Earnings Per Share, Continued
The following information was used in the computation of net income per
common share on both a basic and diluted basis.
<TABLE>
<CAPTION>
Three months ended
September, 30, Years ended June 30,
----------------------------- ---------------------------------------------
1998 1997 1998 1997 1996
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Net earnings $ 1,018,002 841,473 3,417,913 1,939,201 3,052,434
-------------- -------------- --------------- -------------- --------------
-------------- -------------- --------------- -------------- --------------
Basic EPS computation:
Weighted-average common shares outstanding 2,842,350 2,831,010 2,834,705 2,825,342 2,812,960
Basic EPS $
0.36 0.30 1.21 0.69 1.08
-------------- -------------- --------------- -------------- --------------
-------------- -------------- --------------- -------------- --------------
Diluted EPS computation: 3,417,913 1,939,201 3,052,434
Weighted-average common shares outstanding 2,842,350 2,831,010 2,834,705 2,825,342 2,812,960
Incremental option shares using
treasury stock method 31,243 50,493 49,059 51,335 55,389
-------------- -------------- --------------- -------------- --------------
Diluted shares outstanding 2,873,593 2,881,503 2,883,764 2,876,677 2,868,349
Diluted EPS $
0.35 0.29 1.19 0.67 1.06
-------------- -------------- --------------- -------------- --------------
-------------- -------------- --------------- -------------- --------------
</TABLE>
Securities
Securities which the Bank has the positive intent and ability to hold to
maturity are classified as held to maturity. Such securities are
carried at cost, adjusted for unamortized premiums and unearned
discounts. Premiums are amortized and discounts are accreted using
the interest method over the remaining period to contractual
maturity, adjusted in the case of mortgage-backed securities for
actual prepayments. Original issue discounts on short-term securities
are accreted as accrued interest receivable over the lives of such
securities.
Securities classified as available for sale are carried at estimated fair
value. Unrealized gains and losses on such securities are reported as
a separate component of stockholders' equity, net of deferred taxes.
Securities transferred from the available for sale category are
recorded in the held to maturity category at estimated fair value at
the transfer date. Unrealized gains and losses at transfer, which are
reflected in stockholders' equity, are amortized to interest income
over the remaining term of the securities. Realized gains and losses
from the sale of securities are recognized using the specific
identification method.
F-9
<PAGE>
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies and Practices, Continued
Loans Receivable
Loans receivable are stated at unpaid principal balances less the
allowances for loan losses and net of deferred loan origination fees
and discounts. Discounts on first mortgage loans are amortized to
income using the interest method over the remaining period to
contractual maturity, adjusted for anticipated prepayments.
Allowances for Losses on Loans and Real Estate
The allowance for losses on loans is based on management's periodic
evaluation of the loan portfolio and reflects an amount that, in
management's opinion, is adequate to absorb losses in the existing
portfolio. In evaluating the portfolio, management takes into
consideration numerous factors, including current economic
conditions, prior loan loss experience, the composition of the loan
portfolio, and management's estimate of anticipated credit losses.
Under the Bank's credit policies, all loans with interest more than 90
days in arrears and restructured loans are considered impaired loans.
Loan impairment is measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate
except, where more practical, at the observable market price of the
loan or the fair value of the collateral if the loan is collateral
dependent.
Real estate acquired is carried at the lower of cost or fair value less
estimated costs of disposition. When a property is acquired through
foreclosure or a loan is considered impaired, any excess of the loan
balance over fair value of the property is charged to the allowance
for losses on loans. When circumstances indicate additional loss on
the property, a direct charge to the provision for losses on real
estate is made, and the real estate is recorded net of such
provision.
Accrued interest receivable in arrears which management believes is
doubtful of collection (generally when a loan becomes 90 days
delinquent) is charged to income. Subsequent interest income is not
recognized on such loans until collected or until determined by
management to be collectible.
Financial Instruments with Off Balance Sheet Risk
In the normal course of business to meet the financing needs of its
customers, the Bank is a party to financial instruments with off
balance sheet risk, which include commitments to extend credit. The
Bank's exposure to credit loss in the event of nonperformance by the
other party to the commitments to extend credit is represented by the
contractual amount of those instruments. The Bank uses the same
credit policies in making commitments as it does for on balance sheet
instruments.
Commitments to extend credit are agreements to lend to a customer as long
as there are no violations of any conditions established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since certain
of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. The Bank evaluated each customer's creditworthiness on
a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank, upon extension of credit is based on
management's credit evaluation of the counterparty.
F-10
<PAGE>
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies and Practices, Continued
Unearned Loan Fees and Discounts
Certain fees and direct expenses incurred in the loan origination process
are deferred, with recognition thereof over the contractual life of
the related loan as a yield adjustment using the interest method of
amortization. Any unamortized fees on loans sold are credited to
income in the year such loans are sold.
Premiums and discounts in connection with mortgage loans purchased are
amortized over the terms of the loans using the interest method.
Office Property and Equipment
Office property and equipment are recorded at cost, and depreciation is
provided primarily on a straight-line basis over the estimated
useful lives of the related assets, which range from 15 to 40 years
for office buildings and from 3 to 10 years for automobiles and
equipment.
Maintenance and repairs are charged against income. Betterments are
capitalized and subsequently depreciated. The cost and accumulated
depreciation of properties retired or otherwise disposed of are
eliminated from the asset and accumulated depreciation accounts.
Related profit or loss from such transactions is credited or charged
to income.
Taxes on Income
The Bank files a consolidated federal income tax return. Federal income
taxes are allocated based on taxable income or loss included on the
consolidated return. For state tax purposes, the bank files a
franchise tax return, and its subsidiaries file corporate income tax
returns. The Parent Company also files a corporate income tax return.
The Bank utilizes the asset and liability method for taxes on income, and
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. 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 of a change in tax rates on deferred
tax assets and liabilities is recognized in income in the period that
includes the enactment date.
Stock Option Plan
The Bank provides pro forma net income and pro forma earnings per share
disclosures for material employee stock option grants made after 1996
as if the fair-value-based method, which recognizes as expense over
the vesting period the fair value of stock-based awards at the date
of grant, had been applied.
F-11
<PAGE>
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies and Practices, Continued
Reclassifications
Certain amounts previously reported have been reclassified to conform
with the presentation in these consolidated financial statements.
These reclassifications did not affect previously reported net income
or retained earnings.
Fair Value of Financial Instruments
The Bank's fair value estimates, methods, and assumptions for its
financial instruments are set forth below:
Securities
The fair value of securities is estimated based on bid prices
published in financial newspapers, bid quotations received from
securities dealers, or quoted market prices of similar instruments,
adjusted for differences between the quoted instruments and the
instruments being valued. The fair value of mortgage-backed and
related securities is estimated based on bid prices published in
financial newspapers and bid quotations received from securities
dealers.
Loans
Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as real
estate, consumer, and commercial.
The fair value of loans is calculated by discounting scheduled cash
flows through the estimated maturity using estimated market discount
rates that reflect the credit and interest rate risk inherent in the
loan. The estimate of maturity is based on the Bank's historical
experience with repayments for each loan classification, modified, as
required, by an estimate of the effect of current economic and
lending conditions. The effect of nonperforming loans is considered
in assessing the credit risk inherent in the fair value estimate.
Federal Home Loan Bank Stock
The value of FHLB stock is equivalent to its carrying value because
it is redeemable at par value.
Deposits
The fair value of deposits with no stated maturity, such as passbook;
money market; noninterest bearing checking; and checking accounts, is
equal to the amount payable on demand. The fair value of certificates
of deposit 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. The fair value
estimates do not include the benefit that results from the low-cost
funding provided by the deposit liabilities compared to the cost of
borrowing funds in the market.
F-12
<PAGE>
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies and Practices, Continued
Advances from Federal Home Loan Bank
The fair value of advances from FHLB is based on the discounted value
of contractual cash flows.
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. Because no market exists for a significant portion of the
Bank's financial instruments, fair value estimates are based on
judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments,
and other factors. 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 these estimates.
Effect of New Accounting Standards
Statement of Financial Accounting Standards (SFAS) No. 130, Reporting
Comprehensive Income, will be effective for the Bank for the year
beginning July 1, 1998, and establishes the standards for the
reporting and display of comprehensive income in the financial
statements. Comprehensive income represents net earnings and certain
amounts reported directly in stockholders' equity, such as the net
unrealized gain or loss on available-for-sale securities. The Bank
expects to adopt SFAS No 130 when required.
SFAS No. 131, Disclosure About Segments of an Enterprise and Related
Information, will be effective for the Bank for the year beginning
July 1, 1998 and establishes disclosure requirements for segment
operations. The Bank expects to adopt SFAS No. 131 when required.
SFAS No 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits, will be effective for the Bank for the year
beginning July 1, 1998, and revises the disclosure requirements for
pension and other postretirement benefit plans. The Bank expects to
adopt SFAS 132 when required.
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, will be effective for the Company for years beginning
after July 1, 1999. The Bank has no activity subject to SFAS 133. The
Bank expects to adopt SFAS 133 when required.
F-13
<PAGE>
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) Securities
Following is a schedule of amortized costs and estimated fair values of
securities:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
As of September 30, 1998 (unaudited)
Available for sale:
Mortgage-backed securities:
Government National Mortgage Association (GNMA)...................... $11,259,632 231,470 -- 11,491,102
Federal Home Loan Mortgage Corporation (FHLMC)....................... 4,533,407 49,218 -- 4,582,625
Federal National Mortgage Association (FNMA)......................... 2,928,666 28,929 -- 2,957,595
United States government agency securities............................. 67,950,689 490,410 15,023 68,426,076
----------- ---------- ---------- ----------
$86,672,894 800,027 15,023 87,457,398
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Held to maturity:
Mortgage-backed securities:
(GNMA)............................................................... $ 3,014,374 112,948 -- 3,127,327
(FHLMC).............................................................. 1,912,722 26,701 -- 1,939,423
(FNMA)............................................................... 11,181,032 396,472 -- 11,577,504
U.S. Government agency................................................. 5,076,667 55,767 -- 5,132,434
U.S. Treasury securities............................................... 6,020,176 120,605 -- 6,140,781
Local government & commercial paper.................................... 4,902,731 97,243 -- 4,999,974
----------- ---------- ---------- ----------
32,107,702 809,736 -- 32,917,438
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
As of June 30, 1998:
Available for sale:
Mortgage-backed securities:
(GNMA)............................................................... $12,350,708 262,953 -- 12,613,661
(FHLMC).............................................................. 4,855,529 39,653 -- 4,895,182
(FNMA)............................................................... 3,137,515 31,301 -- 3,168,816
United States government agency securities............................. 44,477,355 89,041 49,180 44,517,216
----------- ---------- ---------- ----------
$64,821,107 422,948 49,180 65,194,875
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Held to maturity:
Mortgage-backed securities:
GNMA................................................................. $ 3,244,845 79,910 -- 3,324,755
FHLMC................................................................ 2,138,801 10,553 2,227 2,147,127
FNMA................................................................. 11,909,059 217,394 10,787 12,115,666
United States government agency securities............................. 4,819,611 5,920 -- 4,825,531
United States treasury securities...................................... 4,999,371 10,629 312 5,009,688
Local government securities and commercial paper....................... 4,911,553 37,905 235 4,949,223
----------- ---------- ---------- ----------
$32,023,240 362,311 13,561 32,371,990
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
As of June 30, 1997:
Available for sale:
Mortgage-backed securities:
GNMA................................................................. $15,643,145 329,565 -- 15,972,710
FHLMC................................................................ 5,608,070 -- 66,333 5,541,737
FNMA................................................................. 3,964,069 748 39,711 3,925,106
United States government agency securities............................. 38,998,444 3,750 343,834 38,658,360
----------- ---------- ---------- ----------
$64,213,725 334,063 449,878 64,097,913
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
</TABLE>
F-14
<PAGE>
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) Securities, Continued
Following is a schedule of amortized costs and estimated fair values of
securities, Continued:
<TABLE>
<CAPTION>
As of June 30, 1997:
Available for sale
<S> <C> <C> <C> <C>
Mortgage-backed securities:
GNMA......................... $15,643,145 329,565 -- 15,972,710
FHLMC........................ 5,608,070 -- 66,333 5,541,737
FNMA......................... 3,964,069 748 39,711 3,925,106
United States government agency
securities....................... 38,998,444 3,750 343,834 38,658,360
----------- -------- ------- ----------
$64,213,728 334,063 449,878 64,097,913
----------- -------- ------- ----------
----------- -------- ------- ----------
Held to maturity:
Mortgage-backed securities:
GNMA......................... $ 1,371,231 -- 8,805 1,362,426
FHLMC........................ 4,974,119 -- 91,363 4,882,756
FNMA......................... 12,132,267 33,058 92,726 12,072,599
United States government agency
securities....................... 5,470,000 -- 38,867 5,431,133
United States treasury securities. 4,991,832 6,918 -- 4,998,750
Local government securities....... 818,357 9,599 -- 827,956
---------- ------ ------- ----------
$29,757,806 49,575 231,761 29,575,620
----------- ------ ------- ----------
----------- ------ ------- ----------
</TABLE>
F-15
<PAGE>
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) Securities, Continued
The amortized cost and fair value at September 30, 1998 (unaudited) and
June 30, 1998, are shown below by contractual maturity. Expected
maturities will differ from contractual maturities because issuers
may have the right to call or prepay obligations with or without call
or prepayment penalties.
<TABLE>
<CAPTION>
September 30, 1998 (unaudited)
Available for sale Held to maturity
------------------------------------ ---------------------------------
Estimated Estimated
Amortized fair Amortized fair
cost value cost value
---- ----- ---- -----
<S> <C> <C> <C> <C> <C>
Due in 1 year or less $ 14,990,956 15,062,187 5,154,083 5,185,737
Due after 1 year through 5 years 2,498,377 2,513,359 5,739,296 5,891,016
Due after 5 years through 10 years 38,611,356 38,953,127 4,415,000 4,484,769
Due after 10 years 11,850,000 11,897,402 691,195 711,667
--------------- ---------------- ---------------- ---------------
67,950,689 68,426,075 15,999,574 16,273,189
Mortgage-backed securities 18,721,705 19,031,323 16,108,128 16,644,249
--------------- ---------------- ---------------- ---------------
$ 86,672,394 87,457,398 32,107,702 32,917,438
--------------- ---------------- ---------------- ---------------
--------------- ---------------- ---------------- ---------------
</TABLE>
<TABLE>
<CAPTION>
June 30, 1998
Available for sale Held to maturity
------------------------------------ ---------------------------------
Estimated Estimated
Amortized fair Amortized fair
cost value cost value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due in 1 year or less $ - - 5,080,619 5,093,508
Due after 1 year through 5 years 2,498,282 2,505,410 4,375,210 4,392,569
Due after 5 years through 10 years 32,980,158 33,019,109 4,579,001 4,586,771
Due after 10 years 8,998,915 8,992,696 695,705 711,594
--------------- ---------------- ---------------- ---------------
44,477,355 44,517,215 14,730,535 14,784,442
Mortgage-backed securities 20,343,752 20,677,660 17,292,705 17,587,548
--------------- ---------------- ---------------- ---------------
$ 64,821,107 65,194,875 32,023,240 32,371,990
--------------- ---------------- ---------------- ---------------
--------------- ---------------- ---------------- ---------------
</TABLE>
F-16
<PAGE>
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) Securities, Continued
There were no sales of securities during the three months ended September
30, 1998 (unaudited) or for the year ended June 30, 1998. Proceeds
from the sale of securities available for sale were $35,096,652 and
$15,154,934 during 1997 and 1996, respectively. Gross realized gains
on these sales were $73,466 and $230,026 and gross realized losses on
these sales were $195,379 and $263,750 in 1997 and 1996,
respectively.
Securities with an amortized cost of $9,069,000 and $6,207,000 and a
market value of approximately $9,247,000 and $6,300,000 at September
30, 1998 (unaudited) and June 30, 1998, respectively, were pledged to
various public entities.
(3) Loans Receivable
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
September 30, June 30,
----------------- ------------------------------------
1998 1998 1997
---- ---- ----
(unaudited)
<S> <C> <C> <C>
First mortgage loans:
Secured by one to four family residences $ 300,465,504 301,414,974 267,724,195
Secured by other properties 60,731,944 58,440,141 34,895,710
Home equity and second mortgage loans 22,109,997 21,682,284 17,192,900
Home improvement loans 600,005 727,553 1,425,534
Automobile loans 15,799,301 16,417,179 15,487,585
Other nonmortgage loans 11,881,712 10,273,113 8,365,821
----------------- ----------------- -----------------
411,588,463 408,955,244 345,091,745
Less:
Allowance for loan losses (2,676,748) (2,607,167) (1,795,791)
Undisbursed portion of loans in process (606,413) (874,752) (327,072)
Net unearned premiums on loans 1,395,827 1,483,404 211,241
Deferred loan fees (2,245,760) (2,156,304) (1,926,157)
----------------- ----------------- -----------------
$ 407,455,369 404,800,425 341,253,966
----------------- ----------------- -----------------
----------------- ----------------- -----------------
</TABLE>
F-17
<PAGE>
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3) Loans Receivable, Continued
Troubled Debt Restructurings
At September 30, 1998 (unaudited) and June 30, 1998, 1997, and 1996,
the Bank had nonaccrual loans of $888,000 $1,120,000; $242,000;
and $615,000, respectively, and restructured loans of $723,000
$694,000; $460,000; and $1,300,000, respectively. Interest income
recorded during the three months ended September 30, 1998 and 1997
(unaudited) and the years ended June 30, 1998, 1997, and 1996 on
restructured loans was not materially different than interest
income which would have been recorded if these loans had been
current in accordance with their original terms. Interest forgone
on nonaccrual loans was $72,122 and $20,596 in the three months
ended September 30, 1998 and 1997 (unaudited) and in the fiscal
years ended June 30, was $48,293 in 1998; $1,611 in 1997; and
$34,842 in 1996.
Loan Servicing
The Bank originates mortgage loans for portfolio investment or sale in
the secondary market. During the period of origination, mortgage
loans are designated as held either for sale or for investment
purposes. Mortgage loans held for sale are carried at the lower of
cost or market value, determined on an aggregate basis.
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal
balance of these loans was $57,753,221 at September 30, 1998,
(unaudited) and $54,669,613; $28,574,337; and $32,352,527 at June 30,
1998, 1997, and 1996, respectively. Servicing loans for others
generally consists of collecting mortgage payments, maintaining
escrow accounts, disbursing payments to investors and foreclosure
processing.
Loan servicing income is recorded on the accrual basis and includes
servicing fees from investors and certain charges collected from
borrowers, such as late payment fees. In connection with these loans
serviced for others, the Company held borrowers' escrow balances of
approximately $43,000 at September 30, 1998, (unaudited) and
$158,660; $189,529; and $222,387 at June 30, 1998, 1997, and 1996,
respectively.
Concentrations of Credit Risk
The Bank conducts the majority of its loan origination activities in its
market area, which includes Northwest and Central Iowa and portions
of Nebraska and South Dakota. In addition to loan origination, the
Bank has purchased loans outside of its primary lending area.
Although the Bank has a diversified loan portfolio, a substantial
portion of its borrowers' ability to repay their loans is dependent
upon economic conditions in the Bank's market area.
Loans purchased outside of the Bank's primary lending area totaled
approximately $92,000,000 at September 30, 1998 (unaudited) and
$77,000,000 at June 30, 1998, and included approximately $62,000,000
in loans that are geographically distributed in the midwestern United
States. The remaining loans are scattered throughout the United
States, with the largest geographic concentrations at June 30, 1998
including Connecticut with $3,400,000; Georgia with $1,700,000;
California and Arizona with $1,600,000 each; and Florida with
$1,200,000.
F-18
<PAGE>
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3) Loans Receivable, Continued
Included in the totals of loans purchased outside of the Bank's primary
lending area are loans purchased from a mortgage banking firm
headquartered in Madison, Wisconsin. The Bank has an exclusive
agreement with this firm, which gives the Bank first right of refusal
on any real estate loans generated, including one-to-four family,
multi-family, commercial real estate and land development loans
secured by properties located primarily in the Madison, Wisconsin
metropolitan area. The Bank has sold, and anticipates that is will
continue to sell, a majority participation interest in these loans to
other financial institutions located in Iowa and contiguous states.
At September 30, 1998 (unaudited) and June 30, 1998 the outstanding
principal balance of loans purchased under the above agreement was
approximately $61.2 million and $50.1 million, respectively, and
partial interests in these balances sold to other financial
institutions totaled approximately $35.4 million and $30.3 million,
respectively.
(4) Allowance for Losses and Loans
A summary of the allowance for losses on loans follows:
<TABLE>
<CAPTION>
Three months ended
September, 30, Years ended June 30,
--------------------------------------------------------------------------
1998 1997 1998 1997 1996
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 2,607,167 1,795,791 1,795,791 1,730,691 1,620,951
Additions related to acquisition - - 801,486 - -
Provision for losses 75,000 70,000 345,000 258,000 233,000
Charge-offs (34,411) (29,537) (422,140) (200,797) (129,113)
Recoveries 28,992 12,620 87,030 7,897 5,853
-------------- -------------- -------------- -------------- --------------
Balance at end of year $ 2,676,748 1,848,874 2,607,167 1,795,791 1,730,691
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
</TABLE>
F-19
<PAGE>
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5) Office Property and Equipment
The cost and accumulated depreciation of office property and equipment
were as follows:
<TABLE>
<CAPTION>
September 30, June 30,
----------------- --------------------------------
1998 1998 1997
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Office property and equipment:
Land and improvements $ 2,794,142 2,779,662 2,530,050
Building and improvements 7,800,523 7,738,325 6,794,224
Furniture, fixtures, equipment, and automobiles 4,163,134 4,019,215 3,395,842
Deposits on assets not in service and not depreciated 305,907 108,964 685,770
----------------- --------------- ----------------
Total cost - office properties 15,063,706 14,646,166 13,405,886
Less accumulated depreciation (4,179,003) 3,989,380 3,959,166
----------------- --------------- ----------------
Office property and equipment, net 10,884,703 10,656,786 9,446,720
Rental properties:
Real estate rental property (including land of $44,536) 368,266 368,266 362,594
Less accumulated depreciation 182,420 180,088 171,040
----------------- --------------- ----------------
Rental properties, net 185,846 188,178 191,554
----------------- --------------- ----------------
Property and equipment, net $ 11,070,549 10,844,964 9,638,274
----------------- --------------- ----------------
----------------- --------------- ----------------
</TABLE>
(5) Office Property and Equipment, Continued
Rental properties have operating leases with varying maturities and
amounts. Total rental income was $19,050 and $17,814 for the three
months ended September 30, 1998 and 1997 (unaudited), respectivelly,
and $74,485; $72,547; and $72,123 for the years ended June 30, 1998,
1997, and 1996, respectively.
F-20
<PAGE>
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(6) Accrued Interest Receivable
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
September 30, June 30,
----------------- -------------------------------
1998 1998 1997
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Loans receivable $ 2,486,081 2,533,664 2,215,735
Mortgage-backed securities 220,177 238,557 270,434
Investment securities 1,122,403 754,458 888,490
----------------- ----------- ---------
$ 3,828,661 3,526,679 3,374,659
----------------- ----------- ---------
----------------- ----------- ---------
</TABLE>
(7) Deposits
Deposits are summarized as follows:
<TABLE>
<CAPTION>
September 30, June 30,
----------------- ------------------------------------
1998 1998 1997
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Noninterest-bearing checking $ 10,945,428 11,284,489 8,448,176
Savings accounts 25,385,308 26,230,786 23,083,205
Demand and NOW accounts 37,091,499 37,083,820 29,622,994
Money market accounts 63,392,001 61,793,831 46,420,926
Certificates of deposit 255,862,958 256,032,359 219,158,644
----------------- -------------- --------------
$ 392,677,194 392,425,285 326,733,945
----------------- -------------- --------------
----------------- -------------- --------------
</TABLE>
The aggregate amount of certificates of deposit with a minimum
denomination of $100,000 was approximately $19,934,000 at September
30, 1998 (unaudited) and $16,651,000 and $8,802,000 at June 30, 1998
and 1997, respectively.
F-21
<PAGE>
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(7) Deposits, Continued
The scheduled maturities of certificates of deposit were as follows:
<TABLE>
<CAPTION>
Years ended
-------------------------------------------
September 30, June 30,
----------------- --------------
(unaudited)
<S> <C> <C>
1999 $ 121,322,248 118,516,752
2000 87,191,368 83,172,742
2001 32,646,532 38,127,386
2002 11,756,683 7,170,707
2003 and thereafter 2,946,127 9,044,772
----------------- --------------
$ 255,862,958 256,032,359
----------------- --------------
----------------- --------------
</TABLE>
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
September 30, June 30,
--------------------------- ----------------------------------------------
1998 1997 1998 1997 1996
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Passbook $ 119,647 97,518 656,199 416,814 464,991
Money market and checking 904,591 648,197 2,301,888 2,326,764 1,782,389
Certificates of deposit 3,550,055 3,082,832 12,868,671 12,633,245 13,995,257
----------- ------------- -------------- ------------ ------------
$ 4,574,293 3,828,547 15,826,758 15,376,823 16,242,637
----------- ------------- -------------- ------------ ------------
----------- ------------- -------------- ------------ ------------
</TABLE>
At September 30, 1998 (unaudited) and June 30, 1998 and 1997, accrued
interest payable on deposits totaled $4,404,499, $3,615,871 and
$2,643,996, respectively.
F-22
<PAGE>
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(8) Advances from FHLB
A summary of advances from FHLB, follows:
<TABLE>
<CAPTION>
June 30,
Weighted-average September 30, ---------------------
interest rate 1998 1998 1997
------------- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
FHLB of Des Moines (A)
Maturity in fiscal year
year ending June 30:
1998 5.99 $ - - 37,000,000
1999 6.09 10,000,000 17,000,000 14,000,000
2000 5.95 15,500,000 15,500,000 6,000,000
2001 6.10 23,450,000 23,450,000 11,000,000
2002 6.31 11,000,000 11,000,000 11,000,000
2003 and thereafter 5.59 47,000,000 38,000,000 -
--------------- -------------- ------------
5.875 106,950,000 104,950,000 79,000,000
Amortizing Advances 935,063 950,878 -
--------------- -------------- ------------
Line of credit with FHLB (B) Variable 15,000,000 - 15,500,000
LIBOR advances with FHLB (C) Variable 2,000,000 2,000,000 2,000,000
--------------- -------------- -------------
$ 124,885,063 107,900,878 96,500,000
--------------- -------------- -------------
--------------- -------------- -------------
</TABLE>
(A) Advances from the FHLB are secured by stock in the FHLB. In
addition, the Bank has agreed to maintain unencumbered
additional security in the form of certain residential
mortgage loans aggregating no less than 150 percent of
outstanding balances.
(B) Line of credit with the FHLB with a limit of $20 million
matures on January 8, 1999, at which time the Bank anticipates
renewing the agreement. The line has an interest rate which
fluctuates daily, and it is prepayable without penalty. During
1998, the interest rate ranged from 5.33 percent to 6.90
percent and at June 30, 1998, was 6.37 percent. At September
30, 1998 (unaudited) the rate was 6.13 percent. The line is
collateralized as described in (A) above.
(C) London Interbank Offered Rate (LIBOR) advances from the FHLB
are collateralized as described in (A) above. A $1 million
advance matures October 9, 1998, and accrues interest at a
rate of .09 percent below the published LIBOR rate. In
addition, a $1 million advance matures July 2, 2012; is
callable by the FHLB after July 2, 1998; and accrues interest
at a rate of .04 percent below the published LIBOR rate. Both
of the LIBOR advances are prepayable by the Bank.
At September 30, 1998 (unaudited), June 30, 1998 and 1997, accrued
interest payable on advances from FHLB totaled $23,757, $20,271, and
$70,353, respectively.
F-23
<PAGE>
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9) Taxes on Income
Taxes on income were comprised as follows:
<TABLE>
<CAPTION>
Three months ended September 30, 1998 Three months ended September 30, 1997
(unaudited) (unaudited)
------------------------------------------------ -----------------------------------------------
Federal State Total Federal State Total
------- ----- ----- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Current $ 368,924 61,000 429,924 $ 257,276 41,000 298,276
Deferred 165,000 25,000 190,000 143,000 22,000 165,000
----------- ---------- ------------ ----------- --------- -----------
$ 533,924 86,000 619,924 $ 400,276 63,000 463,276
----------- ---------- ------------ ----------- --------- -----------
----------- ---------- ------------ ----------- --------- -----------
</TABLE>
<TABLE>
<CAPTION>
Year ended June 30, 1998 Year ended June 30, 1997
------------------------------------------------ -----------------------------------------------
Federal State Total Federal State Total
------- ----- ----- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Current $ 1,315,000 205,000 1,520,000 $ 881,000 143,000 1,024,000
Deferred 308,000 46,000 354,000 - - -
----------- ---------- ------------ ----------- --------- ----------
$ 1,623,000 251,000 1,874,000 $ 881,000 143,000 1,024,000
----------- ---------- ------------ ----------- --------- ----------
----------- ---------- ------------ ----------- --------- ----------
</TABLE>
<TABLE>
<CAPTION>
Year ended June 30, 1996
-------------------------------------------------
Federal State Total
<S> <C> <C> <C>
Current $ 1,229,000 198,000 1,427,000
Deferred 101,000 15,000 116,000
----------- --------- -----------
$ 1,330,000 213,000 1,543,000
----------- --------- -----------
----------- --------- -----------
</TABLE>
Taxes on income differ from the amounts computed by applying the federal
income tax rate of 34 percent to earnings from continuing operations
before taxes on income for the following reasons:
<TABLE>
<CAPTION>
September 30, June 30,
-------------------------- --------------------------------------------
1998 1997 1998 1997 1996
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Computed "expected" tax expense $ 556,895 443,615 1,799,250 1,007,488 1,562,448
Decrease in valuation allowance - - - (125,000) (124,000)
State income taxes 56,760 41,580 165,660 94,380 140,580
Other, net 6,269 (21,919) (90,910) 47,132 (36,028)
------------- ------------ -------------- -------------- --------------
$ 619,924 463,276 1,874,000 1,024,000 1,543,000
------------- ------------ -------------- -------------- --------------
------------- ------------ -------------- -------------- --------------
</TABLE>
F-24
<PAGE>
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9) Taxes on Income, Continued
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities, are
presented below:
<TABLE>
<CAPTION>
September 30, June 30,
------------- --------
1998 1998 1997
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Deferred tax assets:
Deferred loan fees $ 248,000 261,000 382,000
Loan loss allowance 898,000 880,000 625,000
Unrealized loss on securities available for sale - - 43,200
Deferred compensation 282,000 513,000 -
Accrued vacation pay 99,000 95,000 67,000
Deferred directors fees 66,000 62,000 44,000
Other 69,000 57,000 118,000
------------ ------------ -----------
Total gross deferred tax assets 1,662,000 1,868,000 1,279,200
------------ ------------ ---------
Deferred tax liabilities:
Unrealized gain on securities available for sale (293,000) (140,000) -
FHLB stock dividends (725,000) (791,000) (608,000)
Bad debt reserve in excess of base year (323,000) (336,000) (235,000)
Fixed assets (167,000) (112,000) (88,000)
Purchase accounting adjustments (247,000) (239,000) -
------------- ------------ ----------
Total gross deferred tax liabilities (1,755,000) (1,618,000) (931,000)
------------- ------------ -----------
Net deferred tax asset (liability) $ (93,000) 250,000 348,200
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
The net change in the valuation allowance for the year ended June 30,
1997 was a decrease of $125,000.
(9) Taxes on Income, Continued
Based upon the Bank's level of historical taxable income and anticipated
future taxable income over the periods which the deferred tax assets
are deductible, management believes it is more likely than not the
Bank will realize the benefits of these deductible differences.
F-25
<PAGE>
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10) Employee Benefit Plans
Pension Plan
The Bank is a participant in the Financial Institutions Retirement Fund
(FIRF), and substantially all of its officers and employees are
covered by the plan. FIRF does not segregate the assets, liabilities,
or costs by participating employer. According to FIRF's
administrators, as of June 30, 1997, the date of the latest actuarial
valuation, the book and market values of the fund assets exceeded the
value of vested benefits in the aggregate. In accordance with FIRF's
instructions, there was no pension contribution in the three months
ended September 30, 1998 (unaudited) nor in the years ended June 30,
1998 or 1997 because the plan was fully funded. In 1996, the Bank was
required to make a contribution of $56,736 to fund the FIRF.
Effective September 1, 1996, Bank employees began participating in the
Financial Institutions Thrift Plan (the Thrift Plan). Employees who
are at least 21 years of age become eligible for participation after
12 months of continuous employment (during which at least 1,000 hours
of service are completed). The Bank matches an amount equal to 25
percent of the first 4 percent of the employee's contributions.
Thrift Plan expense for the three months ended September 30, 1998 and
1997 (unaudited) was $11,494 and $7,890, respectively, and for the
years ended June 30, 1998 and 1997, was $29,213 and $21,167,
respectively.
ESOP
All employees meeting the age and service requirements are eligible to
participate in an ESOP (the Plan). Contributions made by the Bank to
the Plan are allocated to participants by using a formula based on
compensation. Participant benefits become 100 percent vested after
five years of service. The ESOP is accounted for under "Employers'
Accounting for Employee Stock Ownership Plans" (SOP 93-6). At June
30, 1998, all shares owned by the Plan had been fully allocated to
participants. Plan expense was $96,000; $112,888; and $82,394 for the
years ending June 30, 1998, 1997, and 1996, respectively. The Plan
borrowing bore interest at the prime interest rate plus .25 percent
and required equal quarterly principal payments of $22,050 commencing
September 1992 through payoff. Interest expense was $0; $813; and
$7,594 on the Plan's borrowing for the years ending June 30, 1998,
1997, and 1996, respectively.
Stock Appreciation Rights
In connection with the acquisition of GFS certain GFS stock options were
exchanged for Bank stock appreciation rights (SAR). The SAR entitle
the holder to receive a cash payment equal to the appreciation in
value of the SAR over a base amount. At September 30, 1998
(unaudited) the Bank's liability was approximately $478,000 and
expense for the three months then ended was approximately ($469,000).
At June 30, 1998, the Bank's liability was approximately $947,000 and
expense for the three months then ended was approximately $23,000.
F-26
<PAGE>
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10) Employee Benefit Plans, Continued
Stock Options
The Bank's stock option plan permits the board of directors to grant
options to purchase up to 75,600 shares of the Bank's $1 par value
common stock. The options may be granted to directors and officers of
the Bank. The price at which options may be exercised cannot be less
than the fair value of the shares at the date the options are
granted. The options are subject to certain vesting requirements and
maximum exercise periods, as established by the board of directors.
Changes in options outstanding and exercisable, as restated for stock
distributions, were as follows:
<TABLE>
<CAPTION>
Exercisable Outstanding Option price
options options per share
------- ------- ---------
<S> <C> <C> <C>
June 30, 1995 23,309 72,059 5.05 - 8.59
Forfeited (791) (791) 5.05
Vested 17,411 - 5.05
Exercised (10,636) (10,636) 5.05 - 8.59
--------- --------
June 30, 1996 29,293 60,632 5.05 - 8.59
Forfeited (302) (378) 5.05
Vested 16,273 - 5.05
Exercised (11,389) (11,389) 5.05 - 8.59
--------- --------
June 30, 1997 33,875 48,865 5.05 - 8.59
Granted - 5,500 33.50
Vested 17,490 - 5.05 - 33.50
Exercised (11,674) (11,674) 5.05
--------- --------
June 30, 1998 39,691 42,691 5.05 - 33.50
Exercised (unaudited) (5,117) (5,117) 5.05 - 8.59
--------- --------
September 30, 1998
(unaudited) 34,574 37,574 5.05 - 33.50
------------ ------------ -----------------
------------ ------------ -----------------
</TABLE>
Recognition and Retention Plan
The Bank has a recognition and retention plan (RRP) for certain executive
officers. The employees vest in the shares of stock over a period of
time as determined by the Management Retention Plan committee of the
board of directors. RRP expense for the years ended June 30, 1998,
1997, and 1996, was $0; $7,560; and $17,010, respectively, and for
the three month periods ended September 30, 1998 and 1997 was $0
(unaudited).
F-27
<PAGE>
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11) Stockholders' Equity
Regulatory Capital Requirements
The Financial Institution Reform, Recovery, and Enforcement Act of 1989
(FIRREA) and the capital regulations of the OTS promulgated
thereunder require institutions to have minimum regulatory tangible
capital equal to 1.5 percent of total assets, a minimum 3 percent
leverage capital ratio, and a minimum 8 percent risk-based capital
ratio. These capital standards set forth in the capital regulations
must generally be no less stringent than the capital standards
applicable to national banks. FIRREA also specifies the required
ratio of housing-related assets in order to qualify as a savings
institution.
The Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA) established additional capital requirements which require
regulatory action against depository institutions in one of the
undercapitalized categories defined in implementing regulations.
Institutions such as the Bank, which are defined as well capitalized,
must generally have a leverage capital (core) ratio of at least 5
percent, a tier risk-based capital ratio of at least 6 percent, and a
total risk-based capital ratio of at least 10 percent. FDICIA also
provides for increased supervision by federal regulatory agencies,
increased reporting requirements for insured depository institutions,
and other changes in the legal and regulatory environment for such
institutions.
The Bank met all regulatory capital requirements at September 30, 1998
(unaudited), June 30, 1998 and 1997.
F-28
<PAGE>
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11) Stockholders' Equity, Continued
The Bank's actual and required capital amounts and ratios are presented
in the following table:
<TABLE>
<CAPTION>
September 30, 1998 (unaudited)
----------------------------------------------------------------------------------------
To be well capitalized
For capital under prompt corrective
Actual adequacy purposes action provisions
---------------------------- ---------------------------- ----------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
Tangible capital $ 34,649,000 6.2 % $ 8,418,000 1.5 % $ - - %
Tier 1 leverage (core) capital 34,649,000 6.2 16,837,000 3.0 28,061,000 5.0
Risk-based capital 37,326,000 12.3 24,221,000 8.0 30,276,000 10.0
Tier 1 risk-based capital 34,694,000 11.4 - - 18,166,000 6.0
</TABLE>
<TABLE>
<CAPTION>
June 30, 1998
----------------------------------------------------------------------------------------
To be well capitalized
For capital under prompt corrective
Actual adequacy purposes action provisions
---------------------------- ---------------------------- ----------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
Tangible capital $ 33,667,000 6.2 % $ 8,148,000 1.5 % $ - - %
Tier 1 leverage (core) capital 33,667,000 6.2 16,296,000 3.0 27,160,000 5.0
Risk-based capital 36,270,000 12.5 23,192,000 8.0 28,991,000 10.0
Tier 1 risk-based capital 33,667,000 11.6 - - 17,394,000 6.0
</TABLE>
Retained earnings at June 30, 1998 and 1997, included approximately
$7,380,000 and $6,030,000, respectively, which constitute allocations
to bad debt reserves for federal income tax purposes and for which no
provision for taxes on income has been made. If such allocations are
charged for other than bad debt losses, taxable income is created to
the extent of the charges.
Dividends and Restrictions Thereon
On July 16, 1998, the board of directors of the Bank declared a dividend
of 12(cent) per share, payable on August 28, 1998, to shareholders of
record as of August 14, 1998. On October 22, 1998, the board of
directors of the Bank declared a dividend of 12(cent) per share
(unaudited), payable on November 27, 1998 to stockholders of record
as of November 13, 1998.
The Parent Company waived its right to receive $731,808 in dividends
declared by the Bank during the year ended June 30, 1998. The OTS has
required that retained earnings be restricted by the amount of such
waived dividends. Such restricted amounts aggregated $2,250,864 at
June 30, 1998.
F-29
<PAGE>
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11) Stockholders' Equity, Continued
Dividends and Restrictions Thereon, Continued
Federal regulations impose certain limitations on the payment of
dividends and other capital distributions by the Bank. Under these
regulations, a savings institution, such as the Bank, that will meet
the fully phased-in capital requirements (as defined by OTS
regulations) subsequent to a capital distribution is generally
permitted to make such a capital distribution without OTS approval,
subject to certain limitations and restrictions as described in the
regulations. A savings institution with total capital in excess of
current minimum capital requirements but not in excess of the fully
phased-in requirements is permitted by the new regulations to make,
without OTS approval, capital distributions of between 25 percent and
75 percent of its net earnings for the previous four quarters less
dividends already paid for such period. A savings institution that
fails to meet current minimum capital requirements is prohibited from
making any capital distributions without prior approval from the OTS.
The Bank's current compliance with fully phased-in capital
requirements would permit payment of dividends upon notice to the
OTS.
(12) Financial Instruments with Off Balance Sheet Risk
The Bank is a party to various transactions with off balance sheet risk
in the normal course of business. These transactions are primarily
commitments to originate loans. These instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the
amount recorded in the consolidated financial statements.
At September 30, 1998 (unaudited) and June 30, 1998 and 1997, the Bank
had commitments to originate and purchase mortgage loans
approximating $20,711,000, $21,943,000 and $12,293,000, respectively,
excluding undisbursed portions of loans in process. Commitments,
which are disbursed subject to certain limitations, extend over
various periods of time. Generally, unused commitments are canceled
upon expiration of the commitment term as outlined in each individual
contract. Because the credit worthiness of each customer is reviewed
prior to extension of the commitment, the Bank adequately controls
its credit risk on these commitments, as it does for loans recorded
on the statement of financial condition.
The Bank had approved, but unused, consumer lines of credit of
approximately $10,497,000, (unaudited) $10,110,000 and $7,906,000 at
September 30, 1998 and June 30, 1998 and 1997, respectively. At both
dates, over 75 percent of the consumer lines outstanding were for the
Bank's credit card program. The Bank had approved, but unused,
commercial lines of credit of approximately $885,000 (unaudited)
$2,060,000 and $864,000 at September 30, 1998 and June 30, 1998 and
1997, respectively.
At September 30, 1998 and June 30, 1998 and 1997, the Bank had
commitments to sell loans approximating $975,000 (unaudited)
$1,055,000 and $533,000, respectively.
F-30
<PAGE>
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(13) Fair Value of Financial Instruments
The estimated fair values of Bank's financial instruments (as described
in note 1) were as follows:
<TABLE>
<CAPTION>
September 30, 1998 June 30, 1998 June 30, 1997
Carrying Fair Carrying Fair Carrying Fair
amount value amount value amount value
--------------- ------------- --------------- -------------- ------------- ---------------
(unaudited)
Financial assets:
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 8,919,400 8,919,400 $ 9,725,007 9,725,007 $ 9,090,714 9,090,714
Interest-bearing deposits in other
financial institutions 1,000,000 1,000,000 7,500,000 7,500,000 3,387,453 3,387,453
Investment securities available for sale 87,457,398 87,457,398 65,194,875 65,194,875 64,097,913 64,097,913
Investment securities held to maturity 32,107,702 32,917,438 32,023,240 32,371,990 29,757,806 29,575,620
Loans receivable, net 407,455,369 416,948,000 404,800,425 412,045,000 341,253,966 345,550,000
FHLB stock 6,269,600 6,269,600 5,670,600 5,670,600 5,000,000 5,000,000
Financial liabilities:
Deposits 392,677,194 395,912,000 392,425,285 392,578,000 326,733,945 325,615,000
Other borrowings 124,885,063 126,947,000 107,900,878 107,809,000 96,500,000 95,887,000
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
Unrealized Notional Unrealized Notional Unrealized Notional Unrealized
gain (loss) amount gain (loss) amount gain (loss) amount gain (loss)
--------------- -------------- ------------- -------------- ------------ -----------
Off balance sheet assets (liabilities):
<S> <C> <C> <C> <C> <C> <C>
Commitments to extend credit $ 20,711,000 -- $ 21,943,000 -- $ 12,293,000 --
Consumer lines of credit 10,497,000 -- 10,110,000 -- 7,906,000 --
Commercial lines of credit 885,000 -- 2,060,000 -- 864,000 --
Commitments to sell loans 975,000 -- (1,055,000) -- (533,000) --
--------------- -------------- ------------- -------------- ------------ -----------
--------------- -------------- ------------- -------------- ------------ -----------
</TABLE>
(14) Contingencies
The Bank is involved with various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material
adverse effect on the Bank's financial position or results of its
operations.
(15) Federal Deposit Insurance Corporation (FDIC) Special Assessment
On September 30, 1996, the United States Congress passed, and the
President signed, legislation that imposed a one-time assessment of
65.7 basis points on deposits insured by the Savings Association
Insurance Fund (SAIF). Substantially all of the deposits of the Bank
are SAIF-insured. The Bank incurred a one-time pre-tax expense of
$2,232,519 that is recorded in the Bank's statement of operations for
the year ended June 30, 1997.
F-31
<PAGE>
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(16) Subsequent Events
On August 17, 1998 the Bank announced execution of a definitive
agreement to acquire Mid-Iowa Financial Corp, Newton, Iowa. The
acquisition is subject to regulatory and shareholder approvals and is
anticipated to result in payment to Mid-Iowa Financial Corp
shareholders of approximately $29,000,000. The Bank's parent company,
First Federal Bankshares, M.H.C. also announced its intention to
convert to a capital stock corporation.
(17) Sale of Branch Offices (unaudited)
The Bank sold, at a profit, approximately $19,400,000 of deposits at
branch offices in Hartley, Hawarden and Sanborn, Iowa during November
and December 1998.
(18) The Conversion (unaudited)
On September 17, 1998, the Board of Directors of the Parent Company
adopted a plan of conversion (the "Plan") pursuant to which the
Parent Company is converting to a capital stock corporation organized
under Delaware law (the "Holding Company"). The purpose of the
conversion is to convert the Parent Company to the capital stock form
of organization, which is intended to provide the Parent Company and
the Bank with greater flexibility and capital resources to respond to
changing regulatory and market conditions and to effect corporate
transactions, including mergers and acquisitions.
The plan was adopted by the Board of Directors of the Parent Company, and
must also be approved by (i) a majority of the total number of votes
entitled to be cast by voting members of the Parent Company at a
special meeting to be called for that purpose, and (ii) at least
two-thirds of the outstanding common stock of the Bank at the special
meeting of stockholders, including at least a majority of the votes
cast, in person or by proxy of the minority stockholders. Prior to
the submission of the Plan to the voting members and stockholders of
the Bank for consideration, the Plan must be approved by the OTS.
The plan of conversion provides for the establishment, upon the
completion of the conversion, of a special liquidation account for
the benefit of eligible account holders and the supplemental eligible
account holders in an amount equal the net worth of the Bank as of
the date of its latest statement of financial condition contained in
the final offering circular used in connection with the conversion.
The liquidation account will be maintained for the benefit of
eligible account holders and supplemental eligible account holders
who continue to maintain their accounts in the Bank after conversion.
In the event of a complete liquidation (and only in such event), each
eligible and supplemental eligible account holder will be entitled to
receive a liquidation distribution from the liquidation account in an
amount proportionate to the current adjusted qualifying balances for
accounts then held.
The Bank may not declare or pay cash dividends on its shares of common
stock if the effect thereof would cause the Bank's stockholders'
equity to be reduced below applicable regulatory capital maintenance
requirements for insured institutions or below the special
liquidation account referred to above.
F-32
<PAGE>
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(19) Quarterly Results of Operations (unaudited)
The quarterly results of operations for the years ended June 30, 1998
and 1997 are as follows (in thousands, except per share data)
<TABLE>
<CAPTION>
For the three months ended fiscal 1998
-----------------------------------------------------------------------------
June March December September
---------------- ---------------- --------------- ------------
<S> <C> <C> <C> <C>
Interest income $ 9,966 8,486 8,402 8,510
Interest expense 6,050 5,066 5,089 5,172
---------------- ---------------- --------------- ------------
Net interest income 3,916 3,420 3,313 3,338
Provision for losses on loans 105 95 75 70
---------------- ---------------- --------------- ------------
Net interest income after provision 3,811 3,325 3,238 3,268
Noninterest income 1,139 691 672 675
Noninterest expense 3,437 2,826 2,626 2,639
---------------- ---------------- --------------- ------------
Earnings before income taxes 1,513 1,190 1,284 1,304
Income taxes 526 417 467 463
---------------- ---------------- --------------- ------------
Net Earnings $ 987 773 817 841
---------------- ---------------- --------------- ------------
---------------- ---------------- --------------- ------------
Earnings per share:
Basic $ .35 .27 .29 .30
Diluted .34 .27 .28 .29
---------------- ---------------- --------------- ------------
---------------- ---------------- --------------- ------------
</TABLE>
<TABLE>
<CAPTION>
For the three months ended fiscal 1997
-----------------------------------------------------------------------------
June March December September
---------------- ---------------- --------------- ------------
<S> <C> <C> <C> <C>
Interest income $ 8,646 8,522 8,310 8,213
Interest expense 5,186 5,117 5,064 4,961
---------------- ---------------- --------------- ------------
Net interest income 3,460 3,405 3,246 3,252
Provision for losses on loans 80 83 48 47
---------------- ---------------- --------------- ------------
Net interest income after provision 3,380 3,322 3,198 3,205
Noninterest income 712 566 636 637
Special deposit insurance assessment - - - 2,233
Noninterst expense 2,761 2,532 2,625 2,542
---------------- ---------------- --------------- ------------
Earnings before income taxes 1,331 1,356 1,209 (933)
Income taxes 480 482 434 (372)
---------------- ---------------- --------------- -------------
Net Earnings $ 851 874 775 (561)
---------------- ---------------- --------------- ------------
---------------- ---------------- --------------- ------------
Earnings per share: (1)
Basic $ .30 .31 .28 (.20)
Diluted .30 .30 .27 (.20)
---------------- ---------------- --------------- ------------
---------------- ---------------- --------------- ------------
</TABLE>
- ------------------------------------------------
(1) Adjusted for stock distributions.
F-33
<PAGE>
MID-IOWA FINANCIAL CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND OTHER INFORMATION
Excerpts from Mid-Iowa Financial's Annual Report on Form 10-KSB for the Year
Ended September 30, 1998
<TABLE>
<CAPTION>
<S> <C>
Part II, Item 7. Audited Consolidated Financial Statements of Mid-Iowa Financial Corp.
and Subsidiaries and Independent Auditors' Report Thereon:
Independent Auditors' Report..................................................................G-2
Consolidated Balance Sheets as of September 30, 1998 and 1997.................................G-3
Consolidated Statements of Operations for the years ended September 30, 1998,
1997 and 1996...............................................................................G-4
Consolidated Statements of Stockholder's Equity for the years ended
September 30, 1998, 1997 and 1996...........................................................G-5
Consolidated Statements of Cash Flows for the years ended September 30, 1998,
1997 and 1996...............................................................................G-6
Notes to Consolidated Financial Statements....................................................G-8
Part II, Item 6. Management's Discussion and Analysis of Plan of Operation ...................................G-30
Part I, Item 1. Description of Business .....................................................................G-44
</TABLE>
G-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Mid-Iowa Financial Corp.
Newton, Iowa:
We have audited the accompanying consolidated balance sheets of Mid-Iowa
Financial Corp. and subsidiaries as of September 30, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended September 30, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Mid-Iowa Financial
Corp. and subsidiaries as of September 30, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended September 30, 1998, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Des Moines, Iowa
November 6, 1998
G-2
<PAGE>
MID-IOWA FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30,
---------------------------
1998 1997
---- ----
<S> <C> <C>
Assets
Cash and cash equivalents (note 1) ....................................... $ 15,457,949 3,563,299
Securities available for sale (note 2) ................................... 4,994,247 4,982,662
Securities held to maturity (fair value of $50,380,170 in 1998 and
$48,231,573 in 1997) (notes 3 and 7) .................................... 49,793,789 47,767,121
Loans held for resale .................................................... 49,900 --
Loans receivable, net (notes 4, 5 and 8) ................................. 71,435,579 66,417,985
Accrued interest receivable .............................................. 1,017,122 867,663
Federal Home Loan Bank stock, at cost .................................... 1,800,000 1,650,000
Real estate .............................................................. 135,438 33,865
Office properties and equipment, net (note 6) ............................ 2,630,366 2,587,127
Intangibles, net ......................................................... 10,872 12,978
Prepaid expenses and other assets ........................................ 191,663 134,051
------------ -------------
Total assets .......................................... $147,516,925 128,016,751
------------ -------------
------------ -------------
Liabilities and Stockholders' Equity
Liabilities:
Deposits (note 7) ................................................... $ 96,352,659 89,377,718
Borrowed funds (note 8).............................................. 36,000,000 25,000,000
Advance payments by borrowers for taxes and insurance ............... 162,572 179,982
Accrued interest payable............................................. 939,041 945,890
Accounts payable and accrued expenses ............................... 302,188 452,033
------------ -------------
Total liabilities ..................................... 133,756,460 115,955,623
------------ -------------
Stockholders' equity (note 11):
Common stock, $.01 par value; authorized 2,000,000
shares; 1,741,148 and 1,729,880 shares issued and
outstanding in 1998 and 1997, respectively ..................... 17,411 17,299
Additional paid-in capital .......................................... 3,147,692 3,040,211
Retained earnings, partially restricted ............................. 10,553,062 9,298,166
Treasury stock, at cost (51,792 shares in 1997) ..................... -- (325,600)
Unrealized gain on securities available for
sale, net .......................................................... 42,300 31,052
------------ -------------
Total stockholders' equity ............................ 13,760,465 12,061,128
------------ -------------
Total liabilities and stockholders' equity ............ $147,516,925 128,016,751
------------ -------------
------------ -------------
</TABLE>
See accompanying notes to consolidated financial statements.
G-3
<PAGE>
MID-IOWA FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years ended September 30,
----------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest income:
Loans ........................................................ $ 5,788,795 5,309,865 4,880,247
Securities available for sale ................................ 276,202 327,497 259,975
Securities held to maturity .................................. 3,246,933 3,069,225 2,831,439
Other ........................................................ 494,143 256,768 255,898
----------------- ---------------- ---------------
Total interest income .............................. 9,806,073 8,963,355 8,227,559
----------------- ---------------- ---------------
Interest expense:
Deposits (note 7) ............................................ 4,102,644 3,787,690 3,710,324
Borrowed funds ............................................... 1,978,758 1,557,800 1,229,114
----------------- ---------------- ---------------
Total interest expense ............................. 6,081,402 5,345,490 4,939,438
----------------- ---------------- ---------------
Net interest income ................................ 3,724,671 3,617,865 3,288,121
Provision for losses on loans (note 5) ........................... 60,000 81,000 36,000
----------------- ---------------- ---------------
Net interest income after
provision for losses on loans .................... 3,664,671 3,536,865 3,252,121
----------------- ---------------- ---------------
Noninterest income:
Gain on sale of other assets ................................. 25,484 24,233 33,227
Fees and service charges ..................................... 394,571 365,413 325,193
Commissions .................................................. 927,963 852,247 740,527
Other income ................................................. -- 221,000 --
----------------- ---------------- ---------------
Total noninterest income ........................... 1,348,018 1,462,893 1,098,947
----------------- ---------------- ---------------
Noninterest expense:
Compensation, payroll taxes,
and employee benefits (note 10) .......................... 1,301,300 1,191,590 1,119,610
Office properties and equipment .............................. 379,853 261,599 243,225
Deposit insurance premiums ................................... 55,714 75,724 188,325
Special deposit insurance assessment (note 13) ............... -- -- 530,421
Data processing services ..................................... 168,569 147,468 134,574
Other real estate (income) expense, net ...................... (3,566) (12,118) 2,340
Other ........................................................ 1,178,976 994,860 896,799
----------------- ---------------- ---------------
Total noninterest expense .......................... 3,080,846 2,659,123 3,115,294
----------------- ---------------- ---------------
Income before taxes on income ...................... 1,931,843 2,340,635 1,235,774
Taxes on income (note 9) ......................................... 600,000 790,800 411,200
----------------- ---------------- ---------------
Net income ......................................... $ 1,331,843 1,549,835 824,574
----------------- ---------------- ---------------
----------------- ---------------- ---------------
Earnings per common share:
Basic ........................................................ $ .78 .93 .49
----------------- ---------------- ---------------
----------------- ---------------- ---------------
Diluted ...................................................... $ .73 .89 .47
----------------- ---------------- ---------------
----------------- ---------------- ---------------
</TABLE>
See accompanying notes to consolidated financial statements.
G-4
<PAGE>
MID-IOWA FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Recognition
Additional and Unrealized
Common paid-in Retained retention gains Treasury
stock capital earnings plan (losses), net stock Total
------ -------- -------- ---- ------------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of September 30, 1995 .. 8,395 3,049,634 7,197,953 (3,672) 8,673 -- 10,260,983
Net income ........................ -- -- 824,574 -- -- -- 824,574
Repurchase of common stock
(72,700 shares) .............. -- -- -- -- (462,950 ) (462,950)
Exercise of options
(50,328 shares) .............. 503 110,240 -- -- -- -- 110,743
Amortization of recognition
and retention plan .......... -- -- -- 3,672 -- -- 3,672
Dividends paid ($.10 per share) ... -- -- (135,049) -- -- -- (135,049)
Stock dividend (100%) ............. 8,401 (17,251) (5,400) -- -- 14,250 --
Change in unrealized gain on
securities available for sale -- -- -- -- (851) -- (851)
--------- ------------- ------------ -------- ---------- ------------ -----------
Balance as of September 30, 1996 .. 17,299 3,142,623 7,882,078 -- 7,822 (448,700) 10,601,122
Net income ........................ -- -- 1,549,835 -- -- -- 1,549,835
Repurchase of common stock
(7,500 shares) ............... -- -- -- -- -- (47,812) (47,812)
Exercise of options
(27,208 shares) .............. -- (102,412) -- -- -- 170,912 68,500
Dividends paid ($.08 per share) ... -- -- (133,747) -- -- -- (133,747)
Change in unrealized gain on
securities available for sale -- -- -- -- 23,230 -- 23,230
--------- ------------- ------------ -------- ---------- ------------ -----------
Balance as of September 30, 1997 .. $ 17,299 3,040,211 9,298,166 -- 31,052 (325,600) 12,061,128
Net income ........................ -- -- 1,331,843 -- -- -- 1,331,843
Exercise of options
(63,060 shares) .............. 112 107,481 60,000 -- -- 325,600 493,193
Dividends paid ($.08 per share) ... -- -- (136,947) -- -- -- (136,947)
Change in unrealized gain on
securities available for sale -- -- -- -- 11,248 -- 11,248
--------- ------------- ------------ -------- ---------- ------------ -----------
Balance as of September 30, 1998 .. $ 17,411 3,147,692 10,553,062 -- 42,300 -- 13,760,465
--------- ------------- ------------ -------- ---------- ------------ -----------
--------- ------------- ------------ -------- ---------- ------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements.
G-5
<PAGE>
MID-IOWA FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended September 30,
----------------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .................................................... $ 1,331,843 1,549,835 824,574
Origination of loans held for sale ............................ (314,800) -- --
Proceeds from sale of loans held for sale ..................... 264,900 -- 309,867
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation ......................................... 167,069 108,104 103,594
Amortization of recognition
and retention plan benefits ...................... -- -- 3,672
Amortization of premiums and discounts
on loans and mortgage-backed securities .......... (74,208) (67,570) (64,019)
Provision for losses on loans ........................ 60,000 81,000 36,000
Gain on sale of real estate, net ..................... (22,509) (23,230) (33,227)
Increase in accrued interest receivable .............. (149,459) (38,069) (22,861)
(Decrease) increase in accrued interest payable ...... (6,849) 101,433 36,267
(Decrease) increase in current taxes on income ....... (98,237) (50,795) 49,168
Deferred taxes on income ............................. 11,000 185,905 (153,934)
Other, net ........................................... (126,978) (462,679) 581,330
----------------- ------------------- -----------------
Net cash provided by operating activities ... 1,041,772 1,383,934 1,670,431
----------------- ------------------- -----------------
Cash flows from investing activities:
Securities available for sale:
Purchases ................................................ (500,000) (388,439) (2,607,612)
Principal repayments of mortgage-backed securities ....... 501,736 413,544 545,044
Securities held to maturity:
Proceeds from maturities ................................. 16,161,677 6,538,323 7,062,151
Purchases ................................................ (24,712,342) (13,708,139) (12,341,227)
Principal repayments of mortgage-backed securities ....... 6,626,807 3,706,386 4,025,149
Net change in loans ........................................... (5,191,807) (4,376,114) (4,312,278)
Proceeds from sale of real estate ............................. 13,338 26,623 75,000
Capitalized real estate costs ................................. -- -- (5,440)
Purchase of office properties and equipment, net .............. (210,308) (1,727,780) (208,206)
Purchase of Federal Home Loan Bank stock ...................... (300,000) (325,000) (425,000)
Proceeds on sale of Federal Home Loan Bank stock .............. 150,000 -- --
----------------- ------------------- -----------------
Net cash used in investing activities ....... (7,460,899) (9,840,596) (8,192,419)
----------------- ------------------- -----------------
</TABLE>
G-6
<PAGE>
MID-IOWA FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
Years ended September 30,
----------------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Net change in deposits ........................................ $ 6,974,941 6,505,755 4,200,511
Receipt of borrowed funds ..................................... 26,000,000 26,500,000 23,000,000
Payments on borrowed funds .................................... (15,000,000) (22,000,000) (20,500,000)
(Decrease) increase in advance payments
by borrowers for taxes and insurance ..................... (17,410) (19,939) 39,529
Stock options exercised ....................................... 493,193 68,500 110,743
Payments to acquire treasury stock ............................ - (47,812) (462,950)
Dividends paid ................................................ (136,947) (133,747) (135,049)
----------------- ------------------- -----------------
Net cash provided by financing activities ... 18,313,777 10,872,757 6,252,784
----------------- ------------------- -----------------
Net increase (decrease)
in cash and cash equivalents ............ 11,894,650 2,416,095 (269,204)
Cash and cash equivalents at beginning of year ..................... 3,563,299 1,147,204 1,416,408
----------------- ------------------- -----------------
Cash and cash equivalents at end of year ........................... $ 15,457,949 3,563,299 1,147,204
----------------- ------------------- -----------------
----------------- ------------------- -----------------
Supplemental disclosures:
Cash paid during the year for:
Interest, net of interest capitalized of $30,872 in 1997 . $ 6,088,251 4,903,171 4,375,153
Taxes on income 625,513 516,527 460,866
Noncash investing and financing activities -
Reclassification of securities from
held to maturity to available for sale ............... -- 2,079,143 --
----------------- ------------------- -----------------
----------------- ------------------- -----------------
</TABLE>
See accompanying notes to consolidated financial statements.
G-7
<PAGE>
MID-IOWA FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
(1) Summary of Significant Accounting Policies
Description of the Business
Mid-Iowa Financial Corp., headquartered in Newton, Iowa, is a savings and
loan holding company comprised of a federally chartered stock savings
bank operating offices in Central Iowa; a real estate brokerage and
development company; and a company which provides credit reporting and
collection services, sells investment products, and provides discount
securities brokerage. Mid-Iowa Financial Corp. was organized as a
Delaware Corporation in June 1992 at the direction of Mid-Iowa Savings
Bank for the purpose of becoming a savings and loan holding company, as
part of the Mid-Iowa Savings Bank conversion from a mutual to a stock
institution.
Mid-Iowa Financial Corp. is primarily a retail banking operation offering
loans, deposits, and related financial services to customers in its
market area. Loans primarily consist of single-family residential
mortgage loans, commercial loans, and consumer loans.
Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of Mid-Iowa
Financial Corp. and its wholly owned subsidiaries, Mid-Iowa Security
Corporation and Mid-Iowa Savings Bank (the Bank), and the Bank's wholly
owned subsidiary, Center of Iowa Investments, Limited (collectively the
Company).
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Concentrations of Credit Risk
The Company originates residential and commercial real estate loans
primarily in its central Iowa market area. Although the Company has a
diversified loan portfolio, a substantial portion of its borrowers'
ability to repay their loans is dependent upon economic conditions in
the Company's market areas.
Earnings Per Share
Basic earnings per share computations for the years ended September 30,
1998, 1997 and 1996, were determined by dividing net income by the
weighted-average number of common share amounts outstanding during the
years then ended. Diluted earnings per common share amounts are computed
by dividing net income by the weighted-average number of common shares
and all dilutive common shares outstanding during the year.
G-8
<PAGE>
MID-IOWA FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
Earnings Per Share, Continued
The following was used in the computation of net income per common share on
both a basic and diluted basis for the years ended September 30, 1998,
1997, and 1996.
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Basic EPS computation:
Net income $ 1,331,843 1,549,835 824,574
Weighted-average common shares outstanding 1,718,243 1,670,834 1,699,252
Basic EPS $ 0.78 0.93 0.49
----------------- ----------------- -----------------
----------------- ----------------- -----------------
Diluted EPS computation:
Net income $ 1,331,843 1,549,835 824,574
Weighted-average common shares outstanding 1,718,243 1,670,834 1,699,252
Incremental option shares using treasury
stock method 115,500 66,207 66,590
----------------- ----------------- -----------------
Diluted shares outstanding 1,833,743 1,737,041 1,765,842
----------------- ----------------- -----------------
----------------- ----------------- -----------------
Diluted EPS $ 0.73 0.89 0.47
----------------- ----------------- -----------------
----------------- ----------------- -----------------
</TABLE>
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company includes all short-term
investments with original maturities of three months or less at date of
purchase in cash and cash equivalents. Amounts of interest bearing
deposits included as cash equivalents were $15,071,769 and $3,104,940 at
September 30, 1998 and 1997, respectively.
Securities Available for Sale
Securities to be held for indefinite periods of time, including securities
the Company intends to utilize as part of its asset/liability management
strategy and may sell in response to changes in interest rates; changes
in prepayment risk; liquidity needs; and when needed to increase
regulatory capital or other similar factors, are classified as available
for sale.
Securities available for sale are recorded at fair value. The aggregate
unrealized gains or losses, net of the income tax effect, are recorded
as a component of stockholders' equity.
G-9
<PAGE>
MID-IOWA FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
Securities Available for Sale, Continued
Discounts and premiums on securities available for sale are
accreted/amortized using the interest method. The timing of the
accretion/amortization for mortgage-backed securities is adjusted for
actual prepayment experience.
Gain or loss is recognized using the specific identification method, and is
reflected in the statements of operations.
Securities Held to Maturity
Securities which the Company intends to hold until maturity are stated at
cost, adjusted for accretion of discount and amortization of premiums
computed using the interest method. The timing of the amortization and
accretion for mortgage-backed securities are adjusted for actual
prepayment experience. The Company has the ability, and it is
management's intent, to hold these securities to maturity.
Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated fair value in the aggregate.
Net unrealized losses are recognized through a valuation allowance by
charges to operations.
Loans Receivable
Loans are stated at the principal amounts outstanding, net of unearned
income, deferred loan fees, and discounts. Unearned income, net deferred
loan fees, and discounts on loans which are probable of collection are
amortized over the terms of the loans using a method that approximates
the interest method.
Interest on loans is accrued and credited to operations, based primarily on
the principal amount outstanding.
The Company did not adopt Statement of Financial Accounting Standards
(SFAS) No. 122, "Accounting for Mortgage Servicing Rights," because the
adoption would not have a material effect on the financial position or
the statement of operations.
Allowances for Losses on Loans and Real Estate
The allowances for losses on loans and real estate are maintained at
amounts considered adequate to provide for such losses. The allowance
for losses on loans is based on management's periodic evaluation of the
loan portfolio and reflects an amount that, in management's opinion, is
adequate to absorb losses in the existing portfolio. In evaluating the
portfolio, management takes into consideration numerous factors,
including current economic conditions, prior loan loss experience, the
composition of the loan portfolio, and management's estimate of
anticipated credit losses.
G-10
<PAGE>
MID-IOWA FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
Allowances for Losses on Loans and Real Estate, Continued
Realestate, acquired through foreclosure, is carried at the lower of cost
or fair value. When a property is acquired through foreclosure or a loan
is considered impaired, any excess of the loan balance over fair value
of the property is charged to the allowance for losses on loans. Costs
relating to the development and improvement of property are capitalized,
whereas those relating to holding the property are charged to expense.
An allowance for losses on real estate is provided when it is determined
that the investment in real estate is greater than its estimated fair
value. There were no provisions and no charge-offs for real estate in
the years ended September 30, 1998, 1997, and 1996.
The accrual of interest income on any loan is discontinued (generally when
a loan becomes 90 days delinquent) when, in the opinion of management,
there is reasonable doubt as to the timely collection of interest or
principal. When interest accruals are discontinued, accrued interest
receivable is charged to income. Subsequent interest income is not
recognized on such loans until collected.
Loan Origination Fees and Related Costs
Mortgage loan origination fees and certain direct loan origination costs,
if material, are deferred, and the net fee or cost is recognized in
operations using the interest method. Direct loan origination costs for
other loans are expensed, as such costs are not material in amount.
Financial Instruments with Off Balance Sheet Risk
In the normal course of business to meet the financing needs of its
customers, the Company is a party to financial instruments with off
balance sheet risk, which principally include commitments to extend
credit. The Company's exposure to credit loss in the event of
nonperformance by the other party to the commitments to extend credit is
represented by the contractual amount of those instruments. The Company
uses the same credit policies in making commitments as it does for on
balance sheet instruments.
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 or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements (see note
4). The Company evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company upon extension of credit, is based on
management's credit evaluation of the counterparty.
G-11
<PAGE>
MID-IOWA FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
Carrying Costs of Real Estate Held for Development
Interest costs and real estate taxes applicable to real estate held for
development are capitalized during the period that such real estate is
in the process of development. Prior to the time that development
activities commence and after such time as the real estate is ready for
sale, interest and real estate taxes are charged to operations as
incurred. There was no capitalized interest for the years ended
September 30, 1998, 1997, and 1996.
Office Properties and Equipment
Office properties and equipment are recorded at cost, and depreciation is
provided principally using the straight-line method over the estimated
useful lives of the related assets, which range from 5 to 40 years.
Maintenance and repairs are charged against income. Expenditures for
improvements are capitalized and subsequently depreciated. The cost and
accumulated depreciation of properties retired or otherwise disposed of
are eliminated from the asset and accumulated depreciation accounts.
Related profit or loss from such transactions is credited or charged to
income.
During the year ended September 30, 1997, approximately $31,000 in interest
expense related to the construction of a branch facility was
capitalized.
Taxes on Income
The Company files a consolidated federal income tax return. Federal income
taxes are allocated based on taxable income or loss included in the
consolidated return. For state tax purposes, the Bank files a franchise
tax return and the other entities file a corporate income tax return.
The Company utilizes the asset and liability method for taxes on income,
and deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. 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 of a change in tax rates on deferred tax assets and
liabilities is recognized in income in the period that includes the
enactment date.
Stock Option Plan
The Company provides pro forma net income and pro forma earnings per share
disclosures for material employee stock option grants made after 1996 as
if the fair-value-based method, which recognizes as expense over the
vesting period the fair value of stock-based awards at the date of
grant, had been applied.
G-12
<PAGE>
MID-IOWA FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
Effect of New Accounting Standards
SFAS No. 130, Reporting Comprehensive Income, will be effective for the
Company for the year beginning October 1, 1998, and establishes the
standards for the reporting and display of comprehensive income in the
financial statements. Comprehensive income represents net income and
certain amounts reported directly in stockholders= equity, such as the
net unrealized gain or loss on available-for-sale securities. The
Company will adopt SFAS No. 130 when required.
SFAS No. 131, Disclosure About Segments of an Enterprise and Related
Information, will be effective for the Company for the year beginning
October 1, 1998, and establishes disclosure requirements for segment
operations. The Company expects to adopt SFAS No. 131 when required.
SFAS No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits, will be effective for the Company for the year
beginning October 1, 1998, and revises the disclosure requirements for
pension and other postretirement benefit plans. The Company expects to
adopt SFAS No. 132 when required.
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
will be effective for the Company for the year beginning October 1,
1999. Management is evaluating the impact the adoption of SFAS No. 133
will have on the Company=s consolidated financial statements. The
Company expects to adopt SFAS No. 133 when required
Fair Value of Financial Instruments
The Company's fair value estimates, methods, and assumptions for its
financial instruments are set forth below:
Cash and Cash Equivalents, Accrued Interest Receivable, Advance
Payments by Borrowers for Taxes and Insurance, and Accrued Interest
Payable
The recorded amount approximates fair value due to the short-term
nature of the instruments.
Securities Available for Sale and Securities Held to Maturity
The fair value of securities is estimated based on bid prices published
in financial newspapers, bid quotations received from securities
dealers, or quoted market prices of similar instruments, adjusted for
differences between the quoted instruments and the instruments being
valued.
Loans
Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type, such as
commercial, real estate, and installment.
G-13
<PAGE>
MID-IOWA FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
Fair Value of Financial Instruments, Continued
Loans, continued
The fair value of a loan is calculated by discounting scheduled cash
flows through the estimated maturity using estimated market discount
rates that reflect the credit and interest rate risk inherent in the
loan. The estimate of maturity is based on the subsidiary banks'
historical experience with repayments for each loan classification,
modified as required by an estimate of the effect of current economic
and lending conditions. The effect of nonperforming loans is considered
in assessing the credit risk inherent in the fair value estimate.
Federal Home Loan Bank (FHLB) Stock
The value of FHLB stock is equivalent to its carrying value, as the
stock is redeemable at par value.
Deposits
The fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, savings, and NOW accounts, is equal
to the amount payable on demand. The fair value of certificates of
deposit 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. The fair value estimates do
not include the benefit that results from the low-cost funding provided
by the deposit liabilities compared to the cost of borrowing funds in
the market.
Borrowed Funds
The fair value of borrowed funds is based on the discounted value of
contractual cash flows.
Off Balance Sheet Instruments
The fair value of commitments to extend credit and commitments to
purchase or sell loans is estimated using the difference between current
levels of interest rates and committed rates. The fair value of letters
of credit is based on fees currently charged for similar agreements.
Management estimates the fair value of commitments to purchase or sell
loans approximates the carrying value, as applicable.
G-14
<PAGE>
MID-IOWA FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
Fair Value of Financial Instruments, Continued
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. Because no market exists for a significant portion of the
subsidiary bank's financial instruments, fair value estimates are based
on judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and
other factors. 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.
(2) Securities Available for Sale
Securities available for sale at September 30, 1998 and 1997, were as
follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
Description cost gains losses value
----------- ------------ ----------- ----------- ---------
<S> <C> <C> <C> <C>
1998:
Mortgage-backed securities:
Federal National Mortgage
Association (FNMA) $ 729,667 11,962 -- 741,629
Government National Mortgage
Association (GNMA) 971,817 17,873 1,797 987,893
Federal Home Loan Mortgage
Corporation (FHLMC) 121,388 3,405 -- 124,793
Collateralized mortgage obligations 2,007,130 16,690 -- 2,023,820
Other investment securities 1,100,112 23,500 7,500 1,116,112
------------ ---------- ------------ -----------
$ 4,930,114 73,430 9,297 4,994,247
------------ ---------- ------------ -----------
------------ ---------- ------------ -----------
1997:
Mortgage-backed securities:
FNMA $ 930,039 16,286 -- 946,325
GNMA 1,247,358 28,971 -- 1,276,329
FHLMC 150,508 4,878 -- 155,386
Collateralized mortgage obligations 2,007,298 -- 17,538 1,989,760
Other investment securities 600,112 14,750 -- 614,862
------------ ---------- ------------ -----------
$ 4,935,315 64,885 17,538 4,982,662
------------ ---------- ------------ -----------
------------ ---------- ------------ -----------
</TABLE>
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
G-15
<PAGE>
MID-IOWA FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) Securities Available for Sale, Continued
At September 30, 1998 and 1997, the net valuation amount of $42,300 and
$31,052, respectively, was reflected as a component of stockholders'
equity, including the effect of taxes on income of $21,833 and $16,295,
respectively.
There were no sales of securities available for sale during 1998, 1997, and
1996.
At September 30, 1998 and 1997, accrued interest receivable for securities
available for sale totaled $14,911 and $17,508, respectively.
(3) Securities Held to Maturity
Securities held to maturity at September 30, 1998 and 1997, were as
follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
Description cost gains losses value
----------- ---- ----- ------ -----
<S> <C> <C> <C> <C>
1998:
U.S. agency securities $ 18,929,802 198,778 -- 19,128,580
Mortgage-backed and related securities:
FNMA 3,854,778 61,532 9,017 3,907,293
GNMA 9,691,297 206,239 -- 9,897,536
FHLMC 3,234,465 47,459 -- 3,281,924
Collateralized mortgage obligations 9,081,190 5,777 105,619 8,981,348
Nontaxable municipal bonds 5,002,257 181,232 -- 5,183,489
------------- ------------- ------------- -------------
$ 49,793,789 701,017 114,636 50,380,170
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
1997:
U.S. agency securities $ 18,359,588 105,899 62,302 18,403,185
Mortgage-backed and related securities:
FNMA 4,414,248 69,766 6,047 4,477,967
GNMA 12,727,233 321,803 5,293 13,043,743
FHLMC 1,633,085 1,264 126 1,634,223
Collateralized mortgage obligations 7,405,811 -- 111,191 7,294,620
Taxable municipal bonds 509,552 39,193 -- 548,745
Nontaxable municipal bonds 2,717,604 117,533 6,047 2,829,090
------------- ------------- ------------- -------------
$ 47,767,121 655,458 191,006 48,231,573
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
G-16
<PAGE>
MID-IOWA FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3) Securities Held to Maturity, Continued
The amortized cost and estimated fair value of securities held to maturity
at September 30, 1998, are shown below by contractual maturity. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
---- -----
<S> <C> <C>
Due in 1 year or less $ 50,000 50,112
Due after 1 year through 5 years 5,230,197 5,328,409
Due after 5 years, but less than 10 years 15,378,333 15,629,774
Due after 10 years 3,273,529 3,303,774
Mortgage-backed and related securities 25,861,730 26,068,101
------------- ------------
$ 49,793,789 50,380,170
------------- ------------
------------- ------------
</TABLE>
There were no sales of securities held to maturity during the years ended
September 30, 1998, 1997, or 1996.
At September 30, 1998 and 1997, accrued interest receivable for securities
held to maturity totaled $500,667 and $381,238, respectively.
(4) Loans Receivable
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
September 30,
-------------------------------------------
1998 1997
---- ----
<S> <C> <C>
Real estate loans:
One- to four-family $ 47,232,641 46,107,239
Commercial 13,461,213 10,150,075
Construction 1,057,538 1,338,796
-------------- ------------
61,751,392 57,596,110
-------------- ------------
Other loans:
Second mortgages 4,966,545 4,497,874
Commercial business 1,600,196 1,394,076
Automobile 1,736,376 1,405,748
Home equity 1,536,990 1,176,502
Student 327,568 306,162
Unsecured consumer 157,019 174,704
Loans on deposits 109,816 180,639
Other 275,939 352,423
-------------- ------------
10,710,449 9,488,228
-------------- ------------
72,461,841 67,084,338
Less:
Loans in process 647,286 275,553
Deferred loan fees 71,748 88,848
Allowance for losses on loans 307,228 301,952
-------------- ------------
Total loans receivable $ 71,435,579 66,417,985
-------------- ------------
-------------- ------------
</TABLE>
G-17
<PAGE>
MID-IOWA FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(4) Loans Receivable, Continued
At September 30, 1998 and 1997, net accrued interest on loans receivable
totaled $499,489 and $473,270, respectively.
At September 30, 1998, the Bank was committed to originate $915,850 of
fixed rate loans at interest rates ranging from 6.8 to 7.5 percent. In
addition, the Bank's customers had unused lines of credit totaling
approximately $2,822,000 at September 30, 1998.
Loan customers of the Bank include certain executive officers and directors
and their related interests and associates. All loans to this group were
made in the ordinary course of business at prevailing terms and
conditions. Such loans at September 30, 1998 and 1997, amounted to
$238,420 and $258,243, respectively. During the year ended September 30,
1998, repayments totaled $19,823.
The amount of loans serviced by the Bank for the benefit of others was
$1,325,044, $2,401,830, and $2,785,992 at September 30, 1998, 1997, and
1996, respectively.
(5) Allowance for Losses on Loans
A summary of the allowance for losses on loans follows:
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 301,952 273,819 248,028
Provision for losses 60,000 81,000 36,000
Charge-offs (58,922) (54,387) (29,599)
Recoveries 4,198 1,520 19,390
---------- ---------- ----------
Balance at end of year $ 307,228 301,952 273,819
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
At September 30, 1998, 1997, and 1996, the Company had nonaccrual loans of
approximately $126,000; $17,092; and $151,000 and restructured loans of
$-0-; $24,000; and $54,000, respectively. The allowance for loan losses
related to these impaired loans was approximately $17,300; $4,000; and
$7,500, respectively. The average balances of such loans for the years
ended September 30, 1998, 1997, and 1996, were $128,750; $95,500; and
$119,750, respectively. For the years ended September 30, 1998, 1997,
and 1996, interest income which would have been recorded under the
original terms of such loans was approximately $4,400; $3,200; and
$10,300, respectively, with $-0-; $1,900; and $3,250, respectively,
recorded.
As of September 30, 1998, there were no material commitments to lend
additional funds to customers whose loans were classified as nonaccrual
or restructured.
G-18
<PAGE>
MID-IOWA FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(6) Office Properties and Equipment
At September 30, 1998 and 1997, the cost and accumulated depreciation of
office properties and equipment were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Land $ 442,399 442,399
Buildings and improvements 2,856,942 2,708,891
Furniture and fixtures 868,194 805,936
------------ ------------
4,167,535 3,957,226
Less accumulated depreciation 1,537,169 1,370,099
------------ ------------
$ 2,630,366 2,587,127
------------ ------------
------------ ------------
</TABLE>
(7) Deposits
A summary of deposits at September 30, 1998 and 1997, is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Balance by account type:
NOW accounts $ 5,831,078 5,992,220
Passbook 5,473,380 5,798,282
Money market 17,940,818 17,571,218
Certificates of deposit 67,107,383 60,015,998
----------- -----------
$ 96,352,659 89,377,718
----------- -----------
----------- -----------
</TABLE>
At September 30, 1998, the scheduled maturities of certificates of deposit
were as follows:
<TABLE>
<S> <C>
1999 $ 58,111,784
2000 5,179,184
2001 2,235,354
2002 1,328,062
2003 and thereafter 252,999
-----------
$ 67,107,383
-----------
-----------
</TABLE>
The aggregate amount of jumbo certificates of deposit with a minimum
denomination of $100,000 was approximately $14,200,000 and $9,700,000 at
September 30, 1998 and 1997, respectively.
Interest expense on deposits consisted of the following:
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
NOW accounts $ 42,040 39,145 37,278
Savings accounts 647,625 580,565 429,754
Certificates of deposit 3,427,566 3,176,534 3,253,557
------------ ------------ ------------
4,117,231 3,796,244 3,720,589
Less penalties on early withdrawals 14,587 8,554 10,265
------------ ------------ ------------
Net interest expense $ 4,102,644 3,787,690 3,710,324
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
G-19
<PAGE>
MID-IOWA FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(7) Deposits, Continued
At September 30, 1998 and 1997, accrued interest payable on deposits
totaled $939,041 and $939,893, respectively.
At September 30, 1998 and 1997, the Bank had mortgage-backed and other
investment securities with a carrying value of approximately $21,717,000
and $24,704,000, respectively, pledged as collateral for deposits.
(8) Borrowed Funds
At September 30, 1998 and 1997, borrowed funds consisted of the
following:
<TABLE>
<CAPTION>
Weighted- Weighted-
average Average
interest rate 1998 interest rate 1997
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
FHLB(A):
Maturity in fiscal year ending September 30:
1998 -- % $ -- 5.72 $ 16,000,000
1999 5.50 5,000,000 5.48 4,000,000
2000 5.86 1,000,000 5.83 5,000,000
2001 5.76 7,000,000 -- --
2002 5.33 6,000,000 -- --
2008 5.45 17,000,000 -- --
Amount drawn on line of credit (B) -- -- Variable --
------------- -------------
$ 36,000,000 $ 25,000,000
------------- -------------
------------- -------------
</TABLE>
(A) Advances from the FHLB are secured by stock in the FHLB. In addition,
the Bank has agreed to maintain unencumbered additional security in the
form of certain residential mortgage loans aggregating no less than 150
percent of outstanding advances.
(B) Line of credit with the FHLB with a limit of $10,000,000, was cancelled
by the Bank on March 31, 1998.
At September 30, 1998 and 1997, accrued interest payable on advances from
the FHLB and other borrowings totaled $-0- and $5,997, respectively.
G-20
<PAGE>
MID-IOWA FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9) Taxes on Income
Taxes on income are comprised as follows:
<TABLE>
<CAPTION>
Years ended September 30,
-------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------- ------------------------------- -------------------------------
Federal State Total Federal State Total Federal State Total
--------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current $ 516,000 73,000 589,000 537,800 67,000 604,800 495,000 70,200 565,200
Deferred 9,000 2,000 11,000 162,000 24,000 186,000 (134,000) (20,000) (154,000)
--------- --------- --------- --------- --------- --------- --------- --------- ---------
$ 525,000 75,000 600,000 699,800 91,000 790,800 361,000 50,200 411,200
--------- --------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
Taxes on income differ from the "expected" amounts computed by applying the
federal income tax rate of 34 percent to income before taxes on income
for the following reasons:
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Computed "expected" taxes on income $ 656,826 795,827 420,170
State taxes, net of federal benefit 49,500 60,060 33,146
Tax-exempt interest (50,000) (38,000) (34,000)
Reduction of valuation allowance - (10,000) (17,000)
Other (56,326) (17,087) 8,884
-------- -------- --------
$ 600,000 790,800 411,200
-------- -------- --------
-------- -------- --------
</TABLE>
G-21
<PAGE>
MID-IOWA FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9) Taxes on Income, Continued
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
presented below:
<TABLE>
<CAPTION>
September 30,
----------------------------------------
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Loan and real estate loss allowance $ 129,000 136,000
---------- ----------
Total gross deferred tax assets 129,000 136,000
Less valuation allowance - -
---------- ----------
Deferred tax assets net of allowance 129,000 136,000
---------- ----------
Deferred tax liabilities:
Unrealized gain on securities held for sale 21,833 16,295
Tax bad debt reserve 179,000 179,000
Other 11,000 7,000
---------- ----------
Total gross deferred tax liabilities 211,833 202,295
---------- ----------
Net deferred tax liability $ (82,833) (66,295)
---------- ----------
---------- ----------
</TABLE>
Based upon the Company's level of historical taxable income and anticipated
future taxable income over the periods which the deferred tax assets are
deductible, management believes it is more likely than not the Company
will realize the benefits of these deductible differences.
(10) Employee Benefit Plans
Defined Contribution Retirement Plan
The Bank and its subsidiaries maintain two defined contribution retirement
plans for their employees. Under one plan, the Bank contributes 9
percent of the participants' earnings. Under the second plan, the
participants contribute from 0 to 12 percent and the Bank matches 50
percent of the contribution up to 3 percent. Plan expense for the years
ended September 30, 1998, 1997, and 1996, was $111,871, $112,822, and
$79,247, respectively.
Management Recognition and Retention Plan
In connection with its stock conversion, the Bank established a management
recognition and retention plan as a method of providing directors and
key officers of the Bank with a proprietary interest in the Bank in a
manner designed to encourage such persons to remain with the Bank. The
Bank contributed funds to the plan to acquire in the aggregate up to 3
percent of the common stock issued in the offering. During 1996, all
rights in the plan became fully vested.
G-22
<PAGE>
MID-IOWA FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10) Employee Benefit Plans, Continued
Stock Incentive Plan
The Company has a stock incentive plan under which up to 211,047 shares of
common stock are reserved for issuance pursuant to options or other
awards which may be granted to officers, key employees, and certain
nonaffiliated directors of the Company. The exercise price of each
option equals the market price of the Company's stock on the date of
grant. The option's maximum term is ten years, with vesting occurring at
the time the options are granted.
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its plan. Accordingly, no compensation
cost has been recognized for its stock options in the financial
statements. Had compensation cost for the Company's stock incentive plan
been determined consistent with SFAS 123, the Company's net income and
earnings per share for options granted in 1997 would have been reduced
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net income:
As reported $ 1,331,843 1,549,835
Pro forma 1,331,843 1,177,397
Basic earnings per share:
As reported $ .78 .93
Pro forma .78 .68
Diluted earnings per share:
As reported $ .73 .89
Pro forma .73 .64
</TABLE>
The fair value of each option grant has been estimated using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997: dividend yield of 1.00 percent;
expected volatility of 26.00 percent; risk free interest rate of 6.10
percent; and expected life of 6 years. There were no options granted in
1998.
G-23
<PAGE>
MID-IOWA FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10) Employee Benefit Plans, Continued
Stock Incentive Plan, Continued
A summary of the status of the Company's stock incentive plan as of
September 30, 1998, 1997, and 1996, and the activity during the years
ended on those dates is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- --------------------- ------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year 260,756 $6.58 78,964 $2.08 137,088 $2.08
Granted -- -- 209,000 7.75 -- --
Exercised (63,060) 4.20 (27,208) 2.52 (53,228) 2.08
Repurchased and canceled
(4,000) 7.75 -- -- (4,896) 2.08
-------- -------- --------
Outstanding at end of year 193,696 6.46 260,756 6.58 78,964 2.08
------- ----- ------- ----- -------- -----
------- ----- ------- ----- -------- -----
Weighted-average fair
value of options granted
during the year $ -- $2.70 $ --
----- ----- -----
----- ----- -----
</TABLE>
(11) Stockholders' Equity
In order to grant a priority to eligible account holders in the event of
future liquidation, the Bank, at the time of its stock conversion,
established a liquidation account in an amount equal to the regulatory
capital as of December 31, 1991. In the event of future liquidation of
the Bank, eligible account holders who continue to maintain their
deposit accounts shall be entitled to receive a distribution from the
liquidation account. The total amount of the liquidation account will be
decreased as the balances of eligible account holders are reduced
subsequent to the conversion, based on an annual determination of such
balances.
Regulatory Capital Requirements
The Financial Institution Reform, Recovery, and Enforcement Act of 1989
(FIRREA) and the capital regulations of the Office of Thrift Supervision
(OTS) promulgated thereunder require institutions to have a minimum
regulatory tangible capital equal to 1.5 percent of total assets; a
minimum 3 percent core capital ratio; and, after December 31, 1992, a
minimum 8 percent risk-based capital ratio. These capital standards set
forth in the capital regulations must generally be no less stringent
than the capital standards applicable to national banks. FIRREA also
specifies the required ratio of housing-related assets in order to
qualify as a savings institution. The Bank met the regulatory capital
requirements at September 30, 1998 and 1997.
G-24
<PAGE>
MID-IOWA FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11) Stockholders' Equity, Continued
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
established additional capital requirements which require regulatory
action against depository institutions in one of the undercapitalized
categories defined in implementing regulations. Institutions such as the
Bank, which are defined as well capitalized, must generally have a
leverage capital (core) ratio of at least 5 percent, a tier 1 risk-based
capital ratio of at least 6 percent, and a total risk-based capital
ratio of at least 10 percent. FDICIA also provides for increased
supervision by federal regulatory agencies, increased reporting
requirements for insured depository institutions, and other changes in
the legal and regulatory environment for such institutions. The Bank met
the regulatory capital requirements at September 30, 1998 and 1997.
The Bank's capital amounts and ratios as of September 30, 1998, were as
follows:
<TABLE>
<CAPTION>
For capital To be well capitalized
adequacy under prompt corrective
Actual purposes action provisions
------------------------------ ---------------------------- ----------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Tangible capital $ 11,157,881 7.68% $ 2,180,742 1.5% $ 7,269,141 5.0%
Core capital 11,157,881 7.68 4,361,484 3.0 7,269,141 5.0
Risk-based capital 11,483,337 19.21 4,782,440 8.0 5,978,051 10.0
</TABLE>
At September 30, 1998 and 1997, the Bank had federal income tax bad debt
reserves of approximately $1,785,000, which constitute allocations to
bad debt reserves for federal income tax purposes for which no provision
for taxes on income had been made. If such allocations are charged for
other than bad debt losses, taxable income is created to the extent of
the charges. The Bank's retained earnings at September 30, 1998 and
1997, were partially restricted because of the effect of these tax bad
debt reserves.
Dividend Restrictions
Federal regulations impose certain limitations on the payment of dividends
and other capital distributions by the Bank. Under the regulations, a
savings institution, such as the Bank, that will meet the fully
phased-in capital requirements (as defined by the OTS regulations)
subsequent to a capital distribution is generally permitted to make such
capital distribution without OTS approval so long as they have not been
notified of the need for more than normal supervision by the OTS. The
Bank has not been so notified and, therefore, may make capital
distributions during a calendar year equal to net income plus 50 percent
of the amount by which the Bank's capital exceeds the fully phased-in
capital requirement as measured at the beginning of the calendar year. A
savings institution with total capital in excess of current minimum
capital requirements but not in excess of the fully phased-in
requirements is permitted by the new regulations to make, without OTS
approval, capital distributions of between 25 and 75 percent of its net
income for the previous four quarters, less dividends already paid for
such period. A savings institution that fails to meet current minimum
capital requirements is prohibited from making any capital distributions
without prior approval from the OTS.
G-25
<PAGE>
MID-IOWA FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(12) Fair Value of Financial Instruments
The estimated fair values of the Bank's financial instruments (as described
in note 1) at September 30, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------- -----------------------
Recorded Fair Recorded Fair
amount value amount value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 15,457,949 15,457,949 3,563,299 3,563,299
Securities available for sale 4,994,247 4,994,247 4,982,662 4,982,662
Securities held to maturity 49,793,789 50,380,170 47,767,121 48,231,573
Loans, net 71,435,479 72,972,766 66,417,985 67,619,505
FHLB stock 1,800,000 1,800,000 1,650,000 1,650,000
Accrued interest receivable 1,017,122 1,017,122 867,663 867,663
Financial liabilities:
Deposits 96,352,659 96,448,925 89,377,718 89,434,588
Borrowed funds 36,000,000 35,469,911 25,000,000 24,857,404
Advanced payments by borrowers
for taxes and insurance 162,572 162,572 179,982 179,982
Accrued interest payable 939,041 939,041 945,890 945,890
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
Notional Unrealized Notional Unrealized
value gain (loss) value gain (loss)
----- ----------- ------ -----------
<S> <C> <C> <C> <C>
Off balance sheet instruments:
Commitments to extend credit $ 915,850 -- 1,626,000 --
Line of credit to customers 2,822,000 -- 2,614,000 --
Line of credit unused by the Company -- -- 10,000,000 --
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
</TABLE>
(13) Special Deposit Insurance Assessment
On September 30, 1996, the Deposit Insurance Funds Act of 1996 (the Act)
was signed into law. The Act imposed a one-time special assessment of
65.7 basis points of the deposits held as of March 31, 1995, to
capitalize the Savings Association Insurance Fund (SAIF). All of the
deposits of the Bank are SAIF-insured. The Bank incurred a one-time
pre-tax expense of $530,421 that is recorded in the Bank's statement of
operations for the year ended September 30, 1996.
G-26
<PAGE>
MID-IOWA FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(14) Contingencies
The Company is involved with various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material
adverse effect on the Company's consolidated financial statements.
(15) Mid-Iowa Financial Corp. (Parent Company Only) Financial Information
The Parent Company's principal asset is its 100 percent ownership of the
Bank and its subsidiary. Following are the condensed financial
statements for the Parent Company:
<TABLE>
<CAPTION>
September 30,
-----------------------------------------
Condensed Balance Sheets 1998 1997
------------------------ ---- ----
<S> <C> <C>
Cash $ 790,539 781,075
Securities available for sale 1,318,866 1,065,257
Securities held to maturity 200,000 200,000
Accrued interest receivable 10,441 11,261
Investment in nonbank subsidiary 260,301 206,184
Investment in Bank 11,203,704 9,846,219
Prepaid expenses and other assets 4,999 5,218
------------- -----------
Total assets $13,788,850 12,115,214
------------- -----------
------------- -----------
Accrued expenses and other liabilities $ 28,385 54,086
------------- -----------
Common stock 17,411 17,299
Additional paid-in capital 3,147,692 3,040,211
Retained earnings 10,553,062 9,298,166
Treasury stock -- (325,600)
Unrealized gain on securities available for sale, net 42,300 31,052
------------- -----------
Total stockholders' equity 13,760,465 12,061,128
------------- -----------
Total liabilities and stockholders' equity $13,788,850 12,115,214
------------- -----------
------------- -----------
</TABLE>
G-27
<PAGE>
MID-IOWA FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(15) Mid-Iowa Financial Corp. (Parent Company Only)
Financial Information, Continued
<TABLE>
<CAPTION>
Years ended September 30,
-------------------------------------------------
Condensed Statements of Operations 1998 1997 1996
- ---------------------------------- ----- ------ ------
<S> <C> <C> <C>
Interest income $ 90,826 109,130 103,040
Other income 33,316 221,000 --
Equity in net income of subsidiaries 1,329,399 1,383,352 816,027
Other expenses (149,525) (80,772) (97,993)
----------- --------- -------
Income before income tax expense (benefit) 1,304,016 1,632,710 821,074
Income tax (benefit) expense (27,827) 82,875 (3,500)
----------- --------- -------
Net income $ 1,331,843 1,549,835 824,574
----------- --------- -------
----------- --------- -------
</TABLE>
<TABLE>
<CAPTION>
Years ended September 30,
-------------------------------------------------
Condensed Statements of Cash Flows 1998 1997 1996
- ---------------------------------- ---------- --------- ------
<S> <C> <C> <C>
Operating activities:
Net income $ 1,331,843 1,549,835 824,574
Equity in net income of subsidiaries (1,329,399) (1,383,352) (816,027)
Amortization 420 (88) (248)
Change in assets and liabilities:
Decrease in accrued interest 820 344 3,178
(Decrease) increase in current taxes on income (7,703) 26,766 27,412
Other, net (11,878) (4,670) 6,642
----------- --------- -------
Net cash (used in) provided by operation activities (15,897) 188,835 (9,293)
----------- --------- -------
Investing activies:
Securities available for sale:
Purchase of securities available for sale (500,000) (388,439) (100,000)
Proceeds from sale of subsidiary stock -- 200,000 --
Principal repayments on mortgage-backed
securities available for sale 229,114 140,600 126,456
Net change in loans -- 155,000 --
----------- --------- ---------
Net cash (used in) provided by investing activities (270,886) 107,161 26,456
----------- --------- ---------
Financing activities:
Payments to acquire treasury stock -- (47,812) (462,950)
Stock options exercised 433,193 68,500 110,743
Net dividends (paid) received (136,946) 366,253 164,951
----------- --------- ---------
Net cash provided by (used in) financing activities 296,247 386,941 (187,256)
----------- --------- ---------
Net increase (decrease) in cash 9,464 682,937 (170,093)
Cash at beginning of year 781,075 98,138 268,231
----------- --------- ---------
Cash at end of year $ 790,539 781,075 98,138
----------- --------- ---------
----------- --------- ---------
</TABLE>
G-28
<PAGE>
MID-IOWA FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(16) Proposed Transaction
On August 17, 1998 the Company announced the execution of a definitive
agreement to be acquired by a newly formed holding company that will
be the successor of First Federal Savings Bank of Siouxland and First
Federal Bankshares, M.H.C. The transaction is subject to regulatory
and shareholder approvals and is anticipated to result in payment to
Mid-Iowa Financial Corp. shareholders of approximately $29,000,000.
G-29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Mid-Iowa Financial Corp. ("Mid-Iowa" or the "Company") was formed in
June of 1992 by Mid-Iowa Savings Bank, F.S.B. (the "Bank") to become the thrift
institution holding company of the Bank. The acquisition of the Bank by the
Company was consummated on October 13, 1992 in connection with the Bank's
conversion from the mutual to the stock form (the "Conversion").
The primary business of the Company has historically consisted of
attracting deposits from the general public and providing financing for the
purchase of residential properties. The operations of the Company are
significantly affected by prevailing economic conditions as well as by
government policies and regulations relating to monetary and fiscal affairs,
housing and financial institutions.
The Company's net income is primarily dependent upon the difference (or
"spread") between the average yield earned on loans, mortgage-backed and related
securities and investments, and the average rate paid on deposits and
borrowings, as well as the relative amounts of such assets and liabilities. The
interest rate spread is affected by regulatory, economic and competitive factors
that influence interest rates, loan demand and deposit flows. The Company, like
other thrift institutions, is subject to interest rate risk to the degree that
its interest-bearing liabilities mature or reprice at different times, or on a
different basis, than its interest-earning assets.
The Company's net income is also affected by, among other things, gains
and losses on sales of loans and foreclosed assets, provisions for possible loan
losses, service charges and other fees, commissions received from subsidiary
operations, operating expenses and income taxes. Mid-Iowa Security Corporation,
a wholly-owned subsidiary of the Company, generates revenues primarily by
providing real estate brokerage services. Center of Iowa Investments, Limited, a
wholly-owned subsidiary of the Bank, generates revenues by providing credit
reporting, collection services and by sale of insurance, annuities, mutual fund
and other investment products to its customers as well as providing discount
securities brokerage services. The Company also opened a new branch at 39th and
Westown Parkway in West Des Moines, Iowa during the fiscal year ended September
30, 1997.
Recent Developments
On August 17, 1998, the Company and the Bank entered into a definitive
agreement to be acquired by First Federal Bankshares, M.H.C. ("Bancorp")( a
federally-chartered mutual holding company) and First Federal Savings Bank of
Siouxland ("First Federal") (53.8% owned by Bancorp), headquartered in Sioux
City, Iowa. The terms of the acquisition call for First Federal to pay $15.00 in
cash, subject to upward price adjustment, for each outstanding share of Company
common stock. The transaction, with an aggregate value of approximately $29.0
million, will be accounted for as a purchase. The acquisition is subject, among
other conditions, to regulatory approval, the approval of the Company's
stockholders and the successful completion of First Federal's second step
conversion.
Financial Condition
Total assets increased by $19.5 million to $147.5 million for the year
ended September 30, 1998 compared to $128.0 million for the year ended September
30, 1997. Total loans receivable increased to $71.4 million at September 30,
1998 from $66.4 million at September 30, 1997. In response to customer demand,
the Company originated $27.4 million of loans during fiscal year 1998, including
$18.1 million in fixed-rate mortgage loans and $9.3 million in adjustable-rate
mortgage ("ARM") loans. The Company's customers refinancing existing mortgage
loans accounted for approximately $5.5 million of these originations. Total
mortgage-backed and related securities decreased to $29.7 million (including
mortgage-backed securities available for sale) at September 30, 1998, from $30.5
million at September 30, 1997. Investment securities increased $2.8 million to
$25.0 million at September 30, 1998 from $22.2 million at September 30, 1997.
The increases in loans receivable and investment securities were funded
primarily by
G-30
<PAGE>
proceeds received from an increase in deposits of $7.0 million from $89.4
million at September 30, 1997 to $96.4 million at September 30, 1998 and by an
increase in Federal Home Loan Bank (FHLB) borrowings of $9.0 million from $25.0
million at September 30, 1997 to $36.0 million at September 30, 1998.
Stockholders' equity increased $1.7 million to $13.8 million at
September 30, 1998 from $12.1 million at September 30, 1997.
Results of Operations
The Company's results of operations depend primarily on the level of
its net interest income and noninterest income and the level of its operating
expenses. Net interest income depends upon the volume of interest-earning assets
and interest-bearing liabilities and interest rates earned or paid on them.
During the year ended September 30, 1998, the Company's operating
strategy to improve its profitability and capital position continued to
emphasize (i) maintenance of the Company's asset quality, (ii) asset-liability
management, (iii) management of operating expenses to improve operating income,
and (iv) expanding loan originations.
Comparison of Fiscal Years Ended September 30, 1998 and September 30, 1997
General. The Company's net income decreased by $218,000 to $1.3 million
in fiscal year 1998 from net income of $1.5 million in fiscal 1997. The primary
reasons for this decrease were the increase in non-interest expense of $422,000,
a decrease of $115,000 in non-interest income offset by an increase of $107,000
in net interest income. The increase in non-interest expense was due primarily
to additional operating expense for the West Des Moines branch which opened in
September of 1997 and an increase in legal and accounting expenses relating to
the merger with First Federal of Siouxland.
Interest Income. Interest income increased $843,000 to $9.8 million for
fiscal 1998 from $9.0 million for fiscal 1997 primarily as a result of an
increase in interest-earning assets of $10.8 million at September 30, 1998. The
increase was partially offset by a decrease in the average yield on interest
earning assets from 7.52% at September 30, 1997 to 7.28% at September 30, 1998.
Interest Expense. Interest expense increased $736,000 to $6.1 million
in fiscal 1998 from $5.3 million in fiscal 1997 due primarily to an increase in
the average balances of the Company's deposits and FHLB borrowings and an
increase in interest rates paid on deposits to 4.54% at September 30, 1998 from
4.50% at September 30, 1997.
Net Interest Income. Net interest income increased $107,000 to $3.7
million at September 30, 1998 from $3.6 million at September 30, 1997. The
Company's average spread (the mathematical difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities) decreased
to 2.38% for the year ended September 30, 1998 from 2.63% for the year ended
September 30, 1997. The Company's net interest margin (net interest income
divided by average interest-earning assets) decreased to 2.77% at September 30,
1998 from 3.04 at September 30, 1997.
While the interest rate environment of recent years has proven
beneficial to most financial institutions, including the Company, increases in
market rates of interest generally adversely affect the net income of most
financial institutions. Because the Company's assets reprice more quickly than
its liabilities, interest margins will likely decrease if interest rates fall.
Non-Performing Assets and Provision for Losses on Loans. Management
establishes specific reserves for estimated losses on loans when it determines
that losses are anticipated on these loans. The Company calculates any allowance
for possible loan losses based upon its ongoing evaluation of pertinent factors
underlying the types and quality of its loans. These factors include but are not
limited to the current and anticipated economic conditions, including
uncertainties in the national real estate market which may affect the Company's
purchased loans, the level
G-31
<PAGE>
of classified assets, historical loan loss experience, a detailed analysis of
individual loans for which full collectibility many not be assured, a
determination of the existence and fair value of the collateral, the ability of
the borrower to repay and the guarantees securing such loans.
Management, as a result of this review process, recorded provisions for
losses on loans in the amount of $60,000 for the year ended September 30, 1998
as compared to $81,000 for the year ended September 30, 1997. The Company's
allowance for losses on loans at September 30, 1998 was $307,000 as compared to
$302,000 at September 30, 1997. Total non-performing assets at September 30,
1998 increased to $218,000, or 0.15% of total assets, from $17,000, or .01% of
total assets, at September 30, 1997. Subsequent to September 30, 1998 the
Company sold a residential non-performing property at a gain of $11,000 reducing
total non-performing assets to $126,000.
The Company will continue to monitor and adjust its allowance on loans
as management's analysis of its loan portfolio and economic conditions dictate.
However, although the Company maintains its allowance for losses on loans at a
level which it considers to be adequate to provide for potential losses, in view
of the continued uncertainties in the economy generally and the regulatory
uncertainty pertaining to reserve levels for the thrift industry generally,
there can be no assurance that such losses will not exceed the estimated amounts
or that the Company will not be required to make additional substantial
additions to its allowance for losses on loans in the future.
Noninterest Income. Noninterest income, consisting primarily of income
generated from the Bank's subsidiaries, decreased $115,000 to 1.3 million for
the year ended September 30, 1998 from $1.5 million for the year ended September
30, 1997. The decrease was due primarily to restitution paid in the year ended
September 30, 1997 in the amount of $221,000 paid to the Company from certain
outside investors found by the Office of Thrift Supervision to have violated the
OTS Change in Control Laws and Regulations partially offset by increased
commissions income of the real estate brokerage operation conducted through a
subsidiary of the Company for the fiscal year ending September 30, 1998. Other
noninterest income generated by the subsidiaries totaled $854,000 and $820,000
for the years ended September 30, 1998 and 1997, respectively.
Noninterest Expenses. Noninterest expenses increased $420,000 to $3.1
million for the year ended September 30, 1998 as compared to $2.7 million for
the year ended September 30, 1997. The increase was primarily due to increased
operating expense for the West Des Moines branch which opened in September of
1997 of approximately $300,000 and an increase in legal and other merger related
expenses of $65,000 in the year ended September 30, 1998. Non-interest expense
attributable to the Bank's subsidiaries totaled $736,000 and $702,000 in fiscal
1998 and 1997, respectively.
Income Taxes. Income taxes for fiscal year 1998 decreased to $600,000
due to a $235,000 decrease in taxable income.
Comparison of Fiscal Years Ended September 30, 1997 and September 30, 1996
General. The Company's net income increased by $725,000 to $1.5 million
in fiscal year 1997 from net income of $825,000 in fiscal 1996. The primary
reasons for this increase were the decrease in non-interest expense of $455,000,
an increase of $330,000 in net interest income and an increase of $360,000 in
non-interest income. The decrease in non-interest expense was due primarily to a
one time FDIC assessment of $530,000 in the year ended September 30, 1996 and a
decrease in the FDIC insurance rate from .23% of deposits to .06% of deposits
effective January 1, 1997.
Interest Income. Interest income increased $800,000 to $9.0 million for
fiscal 1997 from $8.2 million for fiscal 1996 primarily as a result of an
increase in interest-earning assets of $10.1 million at September 30, 1997. The
increase was partially offset by a decrease in the average yield on interest
earning assets from 7.62% at September 30, 1996 to 7.52% at September 30, 1997.
G-32
<PAGE>
Interest Expense. Interest expense increased $400,000 to $5.3 million
in fiscal 1997 from $4.9 million in fiscal 1996 due primarily to an increase in
the average balances of the Company's deposits and FHLB borrowings and an
increase in interest rates paid on deposits to 4.89% at September 30, 1997 from
4.48% at September 30, 1996.
Net Interest Income. Net interest income increased $300,000 to $3.6
million at September 30, 1997 from $3.3 million at September 30, 1996. The
Company's average spread (the mathematical difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities) decreased
to 2.63% for the year ended September 30, 1997 from 2.64% for the year ended
September 30, 1996. The Company's net interest margin (net interest income
divided by average interest-earning assets) increased to 3.04% at September 30,
1997 from 3.01% at September 30, 1996.
While the interest rate environment of recent years has proven
beneficial to most financial institutions, including the Company, increases in
market rates of interest generally adversely affect the net income of most
financial institutions. Because the Company's liabilities generally reprice more
quickly than its assets, interest margins will likely decrease if interest rates
rise.
Non-Performing Assets and Provision for Losses on Loans. Management
establishes specific reserves for estimated losses on loans when it determines
that losses are anticipated on these loans. The Company calculates any allowance
for possible loan losses based upon its ongoing evaluation of pertinent factors
underlying the types and quality of its loans. These factors include but are not
limited to the current and anticipated economic conditions, including
uncertainties in the national real estate market which may affect the Company's
purchased loans, the level of classified assets, historical loan loss
experience, a detailed analysis of individual loans for which full
collectibility may not be assured, a determination of the existence and fair
value of the collateral, the ability of the borrower to repay and the guarantees
securing such loans.
Management, as a result of this review process, recorded provisions for
losses on loans in the amount of $81,000 for the year ended September 30, 1997
as compared to $36,000 for the year ended September 30, 1996. The Company's
allowance for losses on loans on September 30, 1997 was $302,000 as compared to
$274,000 at September 30, 1996. Total nonperforming assets at September 30, 1997
decreased to $17,000, or .1% of total assets, from $151,000, or .13% of total
assets, at September 30, 1996.
The Company will continue to monitor and adjust its allowance on loans
as management's analysis of its loan portfolio and economic conditions dictate.
However, although the Company maintains its allowance for losses on loans at a
level which it considers to be adequate to provide for potential losses, in view
of the continued uncertainties in the economy generally and the regulatory
uncertainty pertaining to reserve levels for the thrift industry generally,
there can be no assurance that such losses will not exceed the estimated amounts
or that the Company will not be required to make additional substantial
additions to its allowance for losses on loans in the future.
Noninterest Income. Noninterest income, consisting primarily of income
generated from the Bank's subsidiaries, increased $400,000 to $1.5 million for
the year ended September 30, 1997 from $1.1 million for the year ended September
30, 1996. The increase was due primarily to restitution in the amount of
$221,000 paid to the Company from certain outside investors found by the Office
of Thrift Supervision to have violated the OTS Change in Control Laws and
Regulations and from increased commissions income of the real estate brokerage
operation conducted through a subsidiary of the Company. Other noninterest
income generated by the subsidiaries totaled $820,000 and $692,000 for the years
ended September 30, 1997 and 1996, respectively.
Noninterest Expenses. Noninterest expenses decreased $400,000 to $2.7
million for the year ended September 30, 1997 as compared to $3.1 million for
the year ended September 30, 1996. The decrease was primarily due to a one time
assessment of $530,000 by the FDIC in the year ended September 30, 1996 and a
$130,000 increase in other noninterest expense in the year ended September 30,
1997. The assessment was levied by the FDIC on all institutions with deposits
insured by the Savings Association Insurance Fund (the "SAIF") in order to
recapitalize the SAIF. The
G-33
<PAGE>
assessment, set by the FDIC at .65% of SAIF-insured deposits as of March 31,
1995, was paid on November 27, 1996. As a result of the SAIF recapitalization
legislation, the Company's deposit insurance premiums declined from the current
.23% of insured deposits to .06% of insured deposits commencing on January 1,
1997. Noninterest expense attributable to the Bank's subsidiaries totaled
$702,000 and $625,000 in fiscal 1997 and 1996, respectively.
Income Taxes. Income taxes for fiscal 1997 increased to $791,000 due to
a $1.1 million increase in taxable income.
Asset Liability Management
Interest Rate Gap. 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 an institution's interest rate
sensitivity "gap." An asset or 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 anticipated, based upon certain
assumptions, to mature or reprice within a specific time period and the amount
of interest-bearing liabilities anticipated, based upon certain assumptions, to
mature or reprice within that time period. A gap is considered positive when the
amount of interest rate sensitive assets exceed 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 adversely
affect net interest income while a positive gap would tend to result in an
increase in net interest income. During a period of falling interest rates, a
negative gap would tend to result in an increase in net interest income while a
positive gap would tend to adversely affect net interest income. Management
believes that the Company will experience more favorable results during periods
of declining (or low) interest rates than during periods of rising (or high)
interest rates.
Since the mid 1980's, the Company's asset-liability management strategy
has been directed toward reducing the Company's exposure to fluctuations in
interest rates. In order to properly monitor interest rate risk, the Board of
Directors in 1989 created an Asset/Liability Committee composed principally of
its President and savings and finance department officers, which meets quarterly
to review the Company's interest rate risk position. The principal
responsibilities of this Committee are to assess the Company's asset/liability
mix and recommend strategies to the Board that will enhance income while
managing the Company's vulnerability to changes in interest rates.
At September 30, 1998, total interest-earning assets maturing or
repricing within one year exceeded total interest-bearing liabilities maturing
or repricing in the same period by $4.3 million, representing a positive
cumulative one-year gap ratio of 2.94% as compared to a negative cumulative gap
ratio of 7.65% and 1.10% at September 30, 1997 and 1996, respectively.
The Company's asset liability management strategy emphasizes the
purchase of mortgage-backed and related securities and investment securities
with adjustable rates or estimated maturities of seven years or less, and the
origination of adjustable rate loans and short- and intermediate-term
non-residential loans. These types of loans and investment products have shorter
terms to maturity and tend to reprice more frequently than do longer term
fixed-rate mortgage loans, yet can provide a positive margin over the Company's
cost of funds.
In the future, the Company intends, subject to market conditions, to
continue to stress the origination of intermediate-term and ARM loans and
commercial business and consumer loans.
As part of its asset-liability management strategy, the Company has
also emphasized low-rate, long-term core deposits. Consumer passbook savings
accounts, money market deposit accounts and NOW accounts amounted to $29.2
million, or 30.4% of the Company's total deposits, as of September 30, 1998.
Based on its experience, the Company's certificates of deposit have been a
relatively stable source of long-term funds as such certificates are generally
renewed upon maturity since the Company has established long-term banking
relationships with its customers. The Company also maintains a substantial
portfolio of short-term liquid assets. As of September 30, 1998, the Company had
$40.0
G-34
<PAGE>
million of investment securities and interest-bearing deposits with other
financial institutions that mature within one year.
In managing its asset-liability mix, Mid-Iowa may, at times, depending
on the relationship between long and short term interest rates, market
conditions and consumer preference, place greater emphasis on maximizing its net
interest margin than on better matching the interest rate sensitivity of its
assets and liabilities in an effort to improve its spread. Management believes
that the increased net income resulting from a mismatch in the maturity of its
asset and liability portfolios can, during periods of declining or stable
interest rates, provide high enough returns to justify the increased
vulnerability to sudden and unexpected increases in interest rates which can
result from such a mismatch.
The following table sets forth the repricing dates of the Company's
interest-earning assets and interest-bearing liabilities at September 30, 1998.
The Company's interest rate sensitivity "gap" is defined as the amount by which
assets repricing within the respective periods exceed liabilities repricing
within such periods. One- to four-family fixed-rate mortgage loans are assumed
to prepay at an annual rate of 6% for the first five years and from 7% to 30%
per year during the subsequent periods, depending on the stated interest rate.
Adjustable-rate mortgage loans are assumed to prepay at a rate of 12% per year.
Second mortgage loans and all other loans are assumed to prepay at annual rates
of 12%. Passbook accounts are assumed to be withdrawn at annual rates of 17%,
17%, 17% and 17%, respectively, during the period shown. Money market deposit
accounts are assumed to decay at annual rates of 79% in the first period shown
and 31% per period during the subsequent periods. Finally, transaction accounts
are assumed to decay at annual rates of 37%, 32%, 17% and 17% respectively, in
each of the periods shown.
<TABLE>
<CAPTION>
Maturing or Repricing
Over 1-3 Over 3-5 Over
Within One Year Years Years 5 Years Total
--------------------- --------- --------- ------- -----
Amount Rate Amount Amount Amount Amount
------ ---- ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed rate one- to four-family (including
mortgage-backed and related securities),
commercial real estate and construction
loans .................................... $ 3,003 8.21% $ 8,405 $ 11,185 $ 11,838 $ 34,431
Adjustable rate one- to four- family
(including mortgage-backed and related
securities), mortgage-backed securities
held for sale, commercial real estate and
construction loans ...................... 50,761 7.41 6,350 -- -- 57,111
Other securities ......................... 26,006 6.45 2,684 3,485 2,871 35,048
Commercial loans ......................... 448 9.32 478 448 226 1,600
Consumer loans ........................... 4,712 8.71 4,395 28 -- 9,135
------ ---- ------ ------ ------ -------
Total interest-earning assets ....... 84,930 7.22 22,314 15,146 14,935 137,325
Transaction accounts ..................... 2,158 .88 2,216 879 579 5,832
Savings deposits ......................... 15,284 3.40 3,427 1,850 2,853 23,414
Certificates of Deposit .................. 58,155 5.46 7,362 1,472 118 67,107
Borrowings ............................... 5,000 5.55 8,000 6,000 17,000 36,000
------ ---- ------ ------ ------ -------
Total interest-bearing liabilities ... 80,597 4.95 21,005 10,201 20,550 132,353
------ ---- ------ ------ ------ -------
Interest-earning assets less
interest-bearing liabilities ............ $ 4,333 2.27% $ 1,309 $ 4,945 $ (5,615) $ 4,972
--------- -------- --------- --------- ---------
--------- -------- --------- --------- ---------
Difference as a percent of interest-
earning assets .......................... 3.16% .95 3.60% (4.09)% 3.62%
--------- -------- --------- --------- ---------
--------- -------- --------- --------- ---------
Cumulative interest rate sensitivity gap . $ 4,333 $ 5,642 $ 10,587 $ 4,972 $ 4,972
--------- -------- --------- --------- ---------
--------- -------- --------- --------- ---------
Cumulative interest rate sensitivity gap
as a percent of total assets ............ 2.94% 3.82% 7.18% 3.37% 3.37%
--------- -------- --------- --------- ---------
--------- -------- --------- --------- ---------
</TABLE>
G-35
<PAGE>
The following table sets forth the interest rate sensitivity of the
Company's assets and liabilities, at the periods presented on the basis of the
factors and assumptions set forth above.
<TABLE>
<CAPTION>
September 30,
-------------------------------------------
1998 1997 1996
------ ------ -----
(Dollars in thousands)
<S> <C> <C> <C>
Fixed rate residential (including mortgage-
backed and related securities), commercial
real estate and construction loans........................... $ 3,003 $ 3,040 $ 3,103
Adjustable rate residential (including
mortgage-backed and related securities and
mortgage-backed securities held for sale),
commercial real estate and construction
loans........................................................ 50,761 55,989 56,836
Commercial business loans..................................... 448 1,612 570
Consumer loans................................................ 4,712 4,412 3,331
Investment securities and other............................... 26,006 6,155 4,930
--------- -------- ----------
Total interest rate sensitive assets
repricing within one year............................... 84,930 71,208 68,770
--------- -------- ----------
NOW accounts.................................................. 2,158 2,213 2,970
Savings deposits.............................................. 15,284 14,315 10,522
Certificates of deposit....................................... 58,155 48,479 45,049
--------- -------- ----------
Total deposits........................................... 75,597 65,007 58,541
Borrowings.................................................... 5,000 16,000 11,500
--------- -------- ----------
Total interest rate sensitive
liabilities repricing within one year................... 80,597 81,007 70,041
--------- -------- ----------
Gap........................................................... $ 4,333 $ (9,799) $ (1,271)
--------- -------- ----------
--------- -------- ----------
Interest rate sensitive assets repricing
within one year/interest rate sensitive
liabilities repricing within one year........................ 105.38% 87.90% 98.19%
Gap as a percent of total interest-earning assets............. 3.16% (8.61)% (1.12)%
Gap as a percent of total assets.............................. 2.94% (7.65)% (1.10)%
</TABLE>
Net Portfolio Value. The Office of Thrift Supervision (the "OTS")
provides a Net Portfolio Value ("NPV") approach to the quantification of
interest rate risk. This approach calculates the difference between the present
value of expected cash flows from assets and the present value of expected cash
flows from liabilities, as well as cash flows from off-balance sheet contracts.
OTS regulations use net market value methodology to measure the
interest rate risk exposure of thrift institutions. Under OTS regulations, an
institution's "normal" level of interest rate risk in the event of an assumed
change in interest rates is a decrease in the institution's NPV in an amount not
exceeding 2% of the present value of its assets. Thrift institutions with
greater than "normal" interest rate exposure must take a deduction from their
total capital available to meet their risk-based capital requirement. The amount
of that deduction is one-half of the difference between (i) the institution's
actual calculated exposure to a 200 basis point interest rate increase or
decrease (whichever
G-36
<PAGE>
results in the greater pro forma decrease in NPV) and (ii) its "normal" level of
exposure which is 2% of the present value of its assets. Because of the Bank's
asset size and level of risk-based capital, the Bank is exempt from this
requirement. As of September 30, 1998, a change in interest rates of positive
200 basis points would have resulted in a 3% increase in NPV (as a percentage of
the net present value of the Bank's assets), while a change in interest rates of
negative 200 basis points would have resulted in a 7% decrease in NPV (as a
percentage of the net present value of the Bank's assets).
Presented below, as of September 30, 1998, is an analysis of the Bank's
interest rate risk as calculated by the OTS, measured by changes in NPV for
instantaneous and sustained parallel shifts in the yield curve, in 100 basis
point increments, up and down 400 basis points. As illustrated in the table, NPV
is more sensitive to rising rates than declining rates. This occurs principally
because, as rates rise, the market value of fixed-rate loans declines due to
both the rate increase and slowing prepayments. When rates decline, the Bank
does not experience a significant rise in market value for these loans because
borrowers prepay at relatively high rates.
<TABLE>
<CAPTION>
Change in
Interest Rate At September 30, 1998
(Basis Points) $ Change % Change
--------------- --------- ----------
(Dollars in Thousands)
<S> <C> <C>
+400 $(404) (3)
+300 116 1
+200 384 3
+100 313 3
0
-100 (461) (4)
-200 (832) (7)
-300 (1,061) (9)
-400 (1,221) (10)
</TABLE>
Management reviews the OTS measurements on a quarterly basis. In
addition to monitoring selected measures on NPV, management also monitors
effects on net interest income resulting from increases or decreases in rates.
This measure is used in conjunction with NPV measures to identify excessive
interest rate risk.
Certain shortcomings are inherent in the method of analysis presented
in the foregoing tables. For example, although certain assets and liabilities
may have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as ARM loans, have features
which restrict changes in interest rates on a short-term basis and over the life
of the asset. Further, in the event of a change in interest rates, prepayment
and early withdrawal levels would likely deviate significantly from those
assumed in calculating the table. Finally, the ability of many borrowers to
service their debt may decrease in the event of an interest rate increase.
In addition, the previous tables do not necessarily indicate the impact
of general interest rate movements on the Company's net interest income because
the repricing of certain categories of assets and liabilities is subject to
competitive and other pressures beyond the Company's control. As a result,
certain assets and liabilities indicated as maturing or otherwise repricing
within a stated period may in fact mature or reprice at different times and at
different volumes.
G-37
<PAGE>
The following table presents for the periods indicated the total dollar
amount of interest income from average interest earning assets and the resultant
yields, as well as the interest expense on average interest bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made.
All average balances are monthly average balances.
<TABLE>
<CAPTION>
Year Ended September 30,
1998 1997 1996
------------------------------------------------------------------------------------
Yield/Rate at Average Interest Average Interest Average Interest
September 30, Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
1998 Balance Paid Rate Balance Paid Rate Balance Paid Rate
---------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable ............... 8.09% $ 70,376 $ 5,789 8.23% $ 64,474 $ 5,310 8.24% $ 60,104 $ 4,880 8.12%
Mortgage-backed and related
securities (including
securities available
for sale) ..................... 6.38 29,581 1,863 6.30 29,628 1,967 6.64 28,238 1,896 6.71
Investment securities .......... 6.57 28,017 1,852 6.61 23,616 1,572 6.66 18,747 1,195 6.37
Other interest-earning assets .. 5.50 6,708 302 4.50 1,455 115 7.90 2,194 256 11.67
Total interest-earning assets .. 7.26% $134,682 $ 9,806 7.28 $119,173 $ 8,964 7.52% $109,283 $ 8,227 7.53
---- ------- ----- ---- ------- ----- ---- -------- ------- ----
Interest-bearing liabilities:
NOW accounts ................... 0.68% $ 6,068 $ 42 0.69% $ 5,627 $ 39 0.69% $ 4,694 $ 37 0.79%
Savings deposits ............... 3.60 21,594 648 3.00 19,410 581 2.99 15,112 430 2.85
Certificates of deposit ........ 5.42 62,788 3,413 5.44 59,048 3,168 5.37 60,402 3,243 5.37
---- ------- ----- ---- ------- ----- ---- -------- ------- ----
Total deposits ................ 4.68 90,450 4,103 4.54 84,085 3,788 4.50 80,208 3,710 4.63
Borrowings ...................... 5.50 33,600 1,979 5.89 25,300 1,558 6.16 20,917 1,229 5.88
---- ------- ----- ---- ------- ----- ---- -------- ------- ----
Total interest-bearing
liabilities .................... 4.90 124,050 6,082 4.90 109,385 5,346 4.89 101,125 4,939 4.88
---- ------- ----- ---- ------- ----- ---- -------- ------- ----
Net interest income; interest
rate spread .................... 2.36% $ 3,724 2.38% $ 3,618 2.63% $ 3,288 2.64%
---- -------- ---- --------- ----- ------- ----
---- -------- ---- --------- ----- ------- ----
Net earning assets/net yield on
average interest earning assets . $ 10,632 2.77% $ 9,788 3.04% $ 8,158 3.01%
-------- ---- -------- ---- -------- ----
-------- ---- -------- ---- -------- ----
Average interest-earning assets
to average interest-bearing
liabilities...................... 108.57% 108.95 108.07%
------ ------ ------
------ ------ ------
</TABLE>
G-38
<PAGE>
Rate/Volume Analysis of Net Interest Income
The following schedule presents the dollar amount of changes in
interest income and interest expense for major components of interest-earning
assets and interest-bearing liabilities. It distinguishes between the increase
related to higher outstanding balances and that due to the levels and volatility
of interest rates. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii)
changes in rate (i.e., changes in rate multiplied by old volume). For purposes
of this table, changes attributable to both rate and volume, which cannot be
segregated have been allocated proportionately to the change due to volume and
the change due to rate.
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
---------------------------------- --------------------------------
Increase (Decrease) Increase (Decrease)
Due to Total Due to Total
------------------- ------------------
Increase Increase
Rate Volume (Decrease) Rate Volume (Decrease)
---- ------ ----------- ---- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans ................................ $ (6) $ 485 $ 479 $ 191 $ 75 $ 265
Mortgage-backed and related securities
(including mortgage-backed securities
available for sale) ................. (101) (3) (104) 86 (20) 66
Investment securities ................ (183) 463 280 176 60 236
Other interest earning assets ........ (10) 197 187 (68) (77) (145)
------- ------- ------- ------- ------- -------
Total interest-earning assets .... $ (300) $ 1,142 $ 842 $ 385 $ 38 $ 423
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
NOW accounts ......................... $ -- $ 3 $ 3 $ 5 $ (5) $ --
Savings deposits ..................... 2 65 67 (11) 28 17
Certificates of deposit .............. 42 203 245 32 -- 32
Borrowings ........................... (65) 486 420 282 57 340
------- ------- ------- ------- ------- -------
Total interest-bearing
liabilities ..................... $ 21 $ 757 $ 735 $ 308 $ 80 $ 388
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
Change net interest income ............ $ 107 $ 35
------- -------
------- -------
</TABLE>
Liquidity and Capital Resources
The Company's sources of funds are deposits, sales of mortgage loans,
amortization and repayment of loan principal and mortgage-backed and related
securities and, to a lesser extent, maturation of investments and funds from
other operations. While maturing investments are predictable, deposit flows and
loan repayments are influenced by interest rates, general economic conditions,
and competition making it less predictable. The Company attempts to price its
deposits to achieve its asset/liability objectives discussed above, giving
consideration to local market conditions. The Company also has the ability to
supplement deposits with longer term and/or less expensive alternate sources of
funds including FHLB advances. In this regard, the Company had outstanding
advances from the FHLB of Des Moines in the amount of $36.0 million at September
30, 1998 compared to $25.0 million at September 30, 1997, and had the capacity
to borrow up to an additional $22.0 million.
Federal regulations historically have required the Bank to maintain
minimum levels of liquid assets. The required percentage has varied from time to
time based on economic conditions and savings flows, and is currently 4% of net
withdrawable savings deposits and borrowings payable on demand or in one year or
less during the preceding calendar month. Liquid assets for purposes of this
ratio include cash, certain time deposits, U.S. government and certain
G-39
<PAGE>
corporate securities and other obligations generally having remaining maturities
of less than five years. The Bank has historically maintained its liquidity
ratio at levels in excess of those required. At September 30, 1998, the amount
of the Bank's liquidity was $39.4 million, resulting in a liquidity ratio of
42.4%. At September 30, 1997, the Bank's liquidity totaled $5.9 million,
resulting in a liquidity ratio of 6.5%.
The primary investing activities of the Company are lending and
purchasing mortgage-backed and related securities and investment securities.
Liquidity management is both a daily and long-term responsibility of
management. The Company adjusts its investments in liquid assets based upon
management's assessment of (i) expected loan demand, (ii) expected deposit
flows, (iii) yields available on interest-bearing deposits, and (iv) the
objectives of its asset/liability management program. Excess liquidity is
invested generally in interest-bearing overnight deposits and other short-term
government and agency obligations. If the Company requires additional funds,
beyond its internal ability to generate, it has additional borrowing capacity
with the FHLB of Des Moines and collateral eligible for repurchase agreements.
The Company uses its liquidity resources principally to meet on-going
commitments, to fund maturing certificates of deposit and deposit withdrawals,
to invest, to fund existing and future loan commitments, to maintain liquidity,
and to meet operating expenses.
At September 30, 1998, the Company had $918,000 of loan commitments and
an additional $2.8 million available to customers under existing lines of
credit.
Certificates of deposit scheduled to mature in one year or less at
September 30, 1998, totaled $58.2 million. Based on historical experience,
management believes that a significant portion of such deposits will remain with
the Company, however, there can be no assurance that the Company can retain all
such deposits.
Management believes that loan repayments and other sources of funds
will be adequate to meet and exceed the Company's foreseeable short- and
long-term liquidity needs.
The Company's liquidity, represented by cash, is a combination of its
operating, investing, and financing activities. These activities are summarized
below for the years indicated.
<TABLE>
<CAPTION>
September 30,
---------------------------------------
1998 1997 1996
------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C>
Operating Activities:
Net Income.................................................... $ 1,332 $ 1,550 $ 825
Adjustment to reconcile net income to net cash
provided by (used in) operating activities .................. (290) (166) 845
--------- -------- --------
Net cash provided by (used in) operating activities ........... 1,042 1,384 1,670
Net cash provided by (used in) investment activities .......... (7,461) (9,841) (8,192)
Net cash provided by (used in) financing activities ........... 18,314 10,873 6,253
--------- -------- --------
Net increase (decrease) in cash and cash equivalents .......... 11,895 2,416 (269)
Cash at beginning of year ..................................... 3,563 1,147 1,416
--------- -------- --------
Cash at end of year........................................... $ 15,458 $ 3,563 $ 1,147
--------- -------- --------
--------- -------- --------
</TABLE>
The primary investing activities of the Company include investing in
loans, investment securities and mortgage-backed and related securities. The
purchases are funded primarily from loan repayments, maturities of securities
and deposits and increases in customer deposit liabilities. During the year
ended September 30, 1998, purchases of investment securities totaled $24.7
million, while loans receivable increased $5.0 million. Customer deposits
increased $7.0 million in fiscal 1998. During the year ended September 30, 1997,
purchases of investment securities totaled $15.0 million, while loans receivable
increased $4.3 million. Customer deposits increased $6.5 million in fiscal 1997.
In the
G-40
<PAGE>
event that investment and mortgage-backed and related securities purchases
increase in the future, the Company's net interest spread and income may be
adversely affected as these assets typically yield less than loans receivable.
At September 30, 1998, the Bank had tangible and core capital of $11.2
million, or 7.7% of adjusted total assets, respectively, which was approximately
$9.0 million and $6.8 million above the minimum requirements of 1.5% and 3.0%,
respectively, of adjusted total assets in effect on that date. On September 30,
1998, the Bank had risk-based capital of $11.5 million (including $11.2 million
in core capital), or 19.2% of risk-weighted assets of $59.8 million. This amount
was $6.7 million above the 8% requirement in effect on that date. The Bank is
presently in compliance with the fully phased-in capital requirements.
The Company paid a quarterly cash dividend of $.02 per share in each of
the quarters of fiscal year 1998. For a tabular presentation of the dividends
declared on the Company's common stock for the past two fiscal years, see "Price
Range of and Dividends on Common Stock" below. To the extent future dividends
are considered by the Board of Directors, the availability of funds to pay such
dividends are subject to regulatory and other restrictions and considerations.
Impact of Year 2000 Issue
A great deal of information has been disseminated about the global
computer crash that may occur in the year 2000. Many computer programs that can
only distinguish the final two digits of the year entered (a common programming
practice in earlier years) are expected to read entries for the year 2000 as the
year 1900 and compute payment, interest or delinquency based on the wrong date
or are expected to be unable to compute payment, interest or delinquency. Rapid
and accurate data processing is essential to the operations of the Company. Data
processing is also essential to most other financial institutions and many other
companies.
The Company began its Year 2000 efforts in the Spring of 1997 with the
sponsorship of its executive management and guidance of legal counsel. A Year
2000 committee was formed with representation from management of every area of
the Company and chaired by the Executive Vice President. The Year 2000 issue has
been identified as a top priority. The Company has dedicated resources to
assess, repair and test programs, applications, equipment and facilities. The
Company's Year 2000 Program is coordinating with each vendor and supplier of the
Company to ensure Year 2000 Compliance. The Company has substantially completed
its assessment of the Year 2000 issue, and is currently repairing systems,
developing test strategies and working with its customers and vendors. At this
time, the Company anticipates that remediation and internal testing of its
mission critical applications will be completed by March 31, 1999.
Management anticipates that the enhancements necessary to prepare its
mission-critical systems for the year 2000 will be completed in early 1999.
Although the efforts to prepare for the Year 2000 is intended to address all
Year 2000 issues, the Bank's disaster recovery/contingency plan will encompass
Year 2000 elements and address potential Year 2000 issues in the year 2000. The
Bank's contingency plan was developed to mitigate the risk associated with the
failure of any of the Bank's computer systems as well as mission critical
systems of outside software vendors and third-party service providers.
The Bank anticipates that it will incur internal staff costs as well as
consulting and other expenses related to enhancements necessary to prepare its
systems for Year 2000. Based on the Bank's current estimate, fiscal 1999
expenses of the Year 2000 project are not expected to exceed $100,000. The
expenses incurred to date are not material to the financial statements.
In addition to expenses related to its own computer systems, the Bank
is aware of potential Year 2000 risks to third parties, including vendors (and
to the extent appropriate, depositors and borrowers) and the possible adverse
impact on the Bank resulting from failures by those parties to adequately
address the Year 2000 problem. The Bank could incur losses if loan payments are
delayed due to Year 2000 problems affecting borrowers or impairing the payroll
systems of large employers in the Bank's market area. To date, the Bank has not
been advised by such parties that they do not have plans in place to address and
correct the issues associated with the Year 2000 problem; however, no assurance
can be given as to the adequacy of such plans or to the timeliness of their
implementation.
G-41
<PAGE>
The actual costs of Year 2000 compliance and the impact of Year 2000
issues could differ materially from what is currently anticipated. Factors that
might result in such differences include incomplete inventory and assessment
results, higher than anticipated costs to update software and hardware and
vendors', customers' and other third parties' inability to effectively address
the Year 2000 issue.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering the change in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations. Unlike
most industrial companies, however, nearly all the assets and liabilities of the
Company are monetary in nature. As a result, interest rates have a greater
impact on the Company'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
Comprehensive Income. In June 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. SFAS No. 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. It does not require a specific format for that
financial statement but requires that an enterprise display an amount
representing total comprehensive income for the period in that financial
statement.
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial condition. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. SFAS No. 130 is not expected to
have a material impact on the Company's financial statements.
Business Segments. In June 1997, the FASB issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 significantly changes the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about reportable segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. SFAS No. 131 uses a "management approach" to disclose financial and
descriptive information about the way that management organizes the segments
within the enterprise for making operating decisions and assessing performance.
For many enterprises, the management approach will likely result in more
segments being reported. In addition, SFAS No. 131 requires significantly more
information to be disclosed for each reportable segment than is presently being
reported in annual financial statements and also requires that selected
information be reported in interim financial statements. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997. SFAS No. 131 is
not expected to have a material impact on the Company's financial statements.
Derivatives and Hedging Activities. In June 1998, the FASB issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" which
requires entities to recognize all derivatives in their financial statements as
either assets or liabilities measured at fair value. SFAS No. 133 also specifies
new methods of accounting for hedging transactions, prescribes the items and
transactions that may be hedged, and specifies detailed criteria to be met to
qualify for hedge accounting.
G-42
<PAGE>
The definition of a derivative financial instrument is complex, but in
general it is an instrument with one or more underlyings, such as an interest
rate or foreign exchange rate, that is applied to a notional amount, such as an
amount of currency, to determine the settlement amount(s). It generally requires
no significant initial investment and can be settled net or by delivery of an
asset that is readily convertible to cash. SFAS No. 133 applies to derivatives
embedded in other contracts, unless the underlying of the embedded derivative is
clearly and closely related to the host contract.
SFAS No. 133 is effective for fiscal years beginning after June 15,
1999. On adoption, entities are permitted to transfer held-to-maturity debt
securities to the available-for-sale category or trading category without
calling into question their intent to hold other debt securities to maturity in
the future. Management is evaluating the effect of SFAS No. 133 on the Company's
financial statements.
G-43
<PAGE>
Item 1. Description of Business
General
Mid-Iowa Financial Corp. (the "Company" or "Mid-Iowa") is a Delaware
corporation which was organized in 1992 by Mid-Iowa Savings Bank, FSB (the
"Bank") for the purpose of becoming a savings and loan holding company. The
Company owns all of the outstanding stock of the Bank issued on October 13,
1992, in connection with the completion of the Bank's conversion from the mutual
to the stock form of organization (the "Conversion"). The Company issued 408,000
(not restated for stock dividends) shares of Common Stock at a price of $10.00
per share in the Conversion. The Bank was initially chartered as an Iowa state
chartered savings and loan association in 1913. The Bank converted to a federal
mutual charter in 1991 and changed its name to Mid-Iowa Savings Bank, FSB. The
Bank amended its charter in October 1992 in connection with the Conversion to
become a federal stock savings bank. All references to the Company, unless
otherwise indicated refer to the Bank and its subsidiaries on a consolidated
basis. The Company's Common Stock is quoted on the Nasdaq SmallCap Market under
the symbol "MIFC".
The Company and the Bank are subject to comprehensive regulation,
examination and supervision by the Office of Thrift Supervision, Department of
the Treasury ("OTS") and by the Federal Deposit Insurance Corporation ("FDIC").
The Bank is a member of the Federal Home Loan Bank ("FHLB") System and its
deposits are backed by the full faith and credit of the United States Government
and are insured by the Savings Association Insurance Fund ("SAIF") to the
maximum extent permitted by the FDIC.
Mid-Iowa's primary market area of Jasper County and West Des Moines,
Iowa is serviced by its two offices in Newton and offices in Baxter, Colfax,
Monroe, Prairie City and West Des Moines. The Company opened a branch facility
in West Des Moines, Iowa in September of 1997. At September 30, 1998, Mid-Iowa
had assets of $147.5 million, deposits of $96.4 million and stockholders' equity
of $13.8 million.
The Company, through its wholly-owned subsidiary, Mid-Iowa Security
Corporation ("Mid-Iowa Security") offers real estate brokerage services and is
involved in the development of a residential subdivision located in Newton,
Iowa. The Bank, through its wholly-owned subsidiary, Center of Iowa Investments,
Limited ("CII"), offers mutual funds, annuities, discount securities brokerage
services, credit reporting and collection services. See "-- Subsidiary
Activities."
Mid-Iowa has been, and intends to continue to be, a financial
corporation that offers a variety of financial services to meet the needs of the
families in the communities it serves. The Company attracts retail deposits from
the general public and uses such deposits, together with borrowings and other
funds, to invest in primarily one- to four-family residential mortgage loans and
mortgage-backed and related securities, and to a lesser extent, consumer,
commercial real estate, and commercial business loans. Most loans are presently
originated in the Company's primary market area, Jasper County and West Des
Moines, Iowa; to a lesser extent loans are also originated in other parts of
Iowa. See "-- Lending Activities" and "-- Non-Performing Assets and Classified
Loans."
The Company also invests in U.S. Government and agency obligations and
other permissible investments and occasionally purchases loan participations.
The Company's revenues are derived from interest on mortgage loans,
mortgage-backed and related securities, investments and consumer loans, income
from service charges and loan originations, loan servicing fee income and income
from the sale of mutual funds, annuities, discount securities brokerage
services, real estate brokerage services, real estate development and credit
reporting and collection services through the service corporation subsidiaries
of the Company and the Bank. Mid-Iowa's operations are materially affected by
general economic conditions, the monetary and fiscal policies of the federal
government and the policies of the various regulatory authorities, including the
OTS and the Board of Governors of the Federal Reserve System ("Federal Reserve
Board"). Its results of operations are largely dependent upon its net interest
income, which is the difference between the interest it receives on its loan
portfolio and its investment securities portfolio and the interest it pays on
its deposit accounts and borrowings.
G-44
<PAGE>
Mid-Iowa's main office is located at 123 West Second Street North,
Newton, Iowa. The Company's telephone number is (515) 792-6236.
Recent Developments
On August 17, 1998, the Company and the Bank entered into a definitive
agreement to be acquired by First Federal Bankshares, M.H.C. ("Bancorp")( a
federally-chartered mutual holding company) and First Federal Savings Bank of
Siouxland ("First Federal") (53.8% owned by Bancorp), headquartered in Sioux
City, Iowa. The terms of the acquisition call for First Federal to pay $15.00 in
cash, subject to upward price adjustment, for each outstanding share of Company
common stock. The transaction, with an aggregate value of approximately $29.0
million, will be accounted for as a purchase. The acquisition is subject, among
other conditions, to regulatory approval, the approval of the Company's
stockholders and the successful completion of First Federal's second step
conversion.
Market Area
Mid-Iowa offers a range of retail banking services primarily to the
residents of Jasper County and West Des Moines, Iowa, through the Company's two
offices located in Newton and offices in Baxter, Colfax, Monroe, Prairie City
and West Des Moines. Mid-Iowa considers its primary market area to be Jasper
County and West Des Moines.
Newton, Iowa, is a city located approximately 35 miles east of the
Iowa capital of Des Moines, in the center of Jasper County, Iowa. Jasper County
has a population of approximately 35,000 persons. Newton is an industrial
community with a population of approximately 15,000 people. The major employer
is the Maytag Corporation, headquartered in Newton, which employs approximately
3,000 employees in Newton. Other major employers are Newton Manufacturing
Company, the Vernon Company, Cline Tool and Service Company, Thombert, Inc.,
Walmart and Skiff Medical Center.
At September 30, 1998, 84.8% of the Company's real estate mortgage
loans (excluding mortgage-backed and related securities) were secured by
properties located in Iowa. The remaining loans, a mix of single family and
commercial real estate loans, are primarily located throughout the United
States, including the midwest, the northwest, the middle-Atlantic states, and
the pacific northwest. At September 30, 1998, all of these out-of-state loans
and loan participations were performing in accordance with their repayment
terms. See "- Non-Performing Assets and Classified Assets" and "- Originations,
Purchases, Sales and Servicing of Loans and Mortgage-Backed and Related
Securities."
Recent Developments
Proposed Regulatory and Legislative Changes. On May 13, 1998, the U.S.
House of Representatives passed H.R. 10 (the "Act"), the "Financial Services
Competition Act of 1998," which calls for a sweeping modernization of the
banking system that would permit affiliations between commercial banks,
securities firms, insurance companies and, subject to certain limitations, other
commercial enterprises. The stated purposes of the Act are to enhance consumer
choice in the financial services marketplace, level the playing field among
providers of financial services and increase competition.
H.R. 10 removes the restrictions contained in the Glass-Steagall Act
of 1933 and the Bank Holding Company Act of 1956, thereby allowing qualified
financial holding companies to control banks, securities firms, insurance
companies, and other financial firms. Conversely, securities firms, insurance
companies and financial firms would be allowed to own or affiliate with a
commercial bank. Under the new framework, the Federal Reserve would serve as an
umbrella regulator to oversee the new financial holding company structure.
Securities affiliates would be required to comply with all applicable federal
securities laws, including registration and other requirements applicable to
broker-dealers. The Act also provides that insurance affiliates be subject to
applicable state insurance regulations and supervision. The Act preserves the
thrift charter and all existing thrift powers, but restricts the activities of
new unitary thrift holding companies.
G-45
<PAGE>
The Senate is now considering the legislation and has further modified
the Act. At the adjournment of Congress in October 1998, the Act had been
recommitted to the Senate Banking Committee. At this time, it is unknown whether
the Act will be enacted, or if enacted, what form the final version of such
legislation might take.
Lending Activities
General. Historically, the Company has originated fixed-rate one- to
four-family mortgage loans. In the mid 1980s, the Company introduced adjustable
rate mortgage ("ARM") loans and short-term loans for retention in its portfolio,
in order to increase the percentage of loans with more frequent repricing or
shorter maturities, and in some cases higher yields, than fixed-rate mortgage
loans. The Company has continued, however, to originate fixed-rate mortgage
loans in response to customer demand.
While the Company primarily focuses its lending activities on the
origination of loans secured by first mortgages on owner-occupied, one- to
four-family residences, it also originates consumer, commercial real estate,
commercial business, and a limited amount of residential construction loans in
its primary market area. At September 30, 1998, the Company's gross real estate
loan and mortgage-backed and related securities portfolio totaled $102.3
million, of which $47.3 million were comprised of one- to four- family first
mortgage loans and $29.7 million were comprised of mortgage-backed and related
securities held for investment and available for sale.
Senior lending officers have authority to approve up to $10,000 of
consumer and commercial business loans. Otherwise, the approval of the reviewing
loan officer and one of two senior officers of the Company is required. First
mortgage residential mortgage loans require the approval of two officers, one of
whom must be the Company's President or Executive Vice President. Loans in
excess of $100,000, up to the Company's lending limit, require the approval of
the reviewing loan officer and the President. Loans in excess of $500,000
require the approval of the Board of Directors.
The aggregate amount of loans that the Company is permitted to make
under applicable federal regulations to any one borrower, including related
entities, is generally the greater of 15% of unimpaired capital and surplus or
$500,000. See "Regulation -- Federal Regulation of Savings Associations." At
September 30, 1998, the maximum amount which the Company could have lent to any
one borrower and the borrower's related entities was approximately $2.0 million.
At September 30, 1998, the Company had no loans with outstanding balances in
excess of this amount. At September 30, 1998, the principal balance of the
largest amount outstanding to any one borrower, or group of related borrowers,
was approximately $1.1 million which consisted of one commercial real estate
loan secured by property located in the Company's primary market area. Each of
these loans was performing in accordance with its respective repayment terms at
September 30, 1998. At that date, there was one other loan with a principal
balance in excess of $500,000.
G-46
<PAGE>
Loan Portfolio Composition. The following information sets forth the
composition of the Company's loan and mortgage-backed and related securities
portfolios in dollar amounts and in percentages (before deductions for loans in
process, deferred fees and discounts and allowance for losses on loans) as of
the dates indicated.
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------------------------
1998 1997 1996
------------------ ------------------ ------------------
Amount % Amount % Amount %
--------- ----- --------- ----- --------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans and mortgage-
backed and related securities:
One- to four-family........................ $ 47,283 46.2% $ 46,107 47.2% $ 45,986 50.4%
Commercial................................. 13,461 13.2 10,150 10.4 7,708 8.5
Construction............................... 1,058 1.0 1,339 1.4 884 1.0
Mortgage-backed securities available for
sale...................................... 3,878 3.8 4,368 4.5 4,373 4.8
Mortgage-backed and related securities..... 25,862 25.3 26,180 26.8 23,974 26.3
--------- --------- --------- --------- --------- ---------
Total real estate loans and mortgage-
backed and related securities held
for investment...................... 91,542 89.5 88,144 90.3 82,925 90.9
--------- --------- --------- --------- --------- ---------
Other Loans:
Consumer Loans:
Second mortgage........................... 4,967 4.9 4,498 4.6 3,143 3.4
Automobile................................ 1,736 1.7 1,407 1.4 1,342 1.5
Home equity............................... 1,537 1.5 1,177 1.2 740 .8
Student................................... 328 .3 306 .3 479 .5
Unsecured................................. 156 .2 175 .2 161 .2
Deposit account........................... 110 .1 181 .2 142 .2
Other..................................... 276 .3 351 .4 297 .3
--------- --------- --------- --------- --------- ---------
Total consumer loans................... 9,110 8.9 8,095 8.3 6,304 6.9
Commercial business loans.................. 1,600 1.6 1,394 1.4 1,982 2.2
--------- --------- --------- --------- --------- ---------
Total other loans...................... 10,710 10.5 9,489 9.7 8,286 9.1
--------- --------- --------- --------- --------- ---------
Total loans and mortgage-backed and
related securities.................. 102,277 100.0% 100.0% 100.0%
--------- --------- ---------
--------- --------- ---------
Less:
- ----
Loans in process........................... 647 276 550
Deferred fees and discounts................ 72 89 72
Allowance for losses on loans.............. 337 302 274
--------- --------- --------
Total loans and mortgage-backed
securities receivable, net............ $ 101,252 $ 96,966 $ 90,315
--------- --------- --------
--------- --------- --------
</TABLE>
G-47
<PAGE>
The following table shows the composition of the Company's loan and
mortgage-backed and related securities portfolios by fixed and adjustable rate
at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------------------------
1998 1997 1996
------------------ ------------------ ------------------
Amount % Amount % Amount %
--------- ----- --------- ----- --------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real Estate:
One- to four-family....................... $ 17,863 17.5% $ 15,526 15.9% $ 12,340 13.5%
Commercial................................ 6,378 6.2 5,280 5.4 6,319 6.9
Mortgage-backed and related securities.... 4,507 4.4 2,256 2.3 1,873 2.1
--------- ----- --------- ----- --------- -----
Total fixed-rate real estate loans and
mortgage-backed and related securities 28,748 28.1 23,062 23.6 20,532 22.5
Consumer................................... 7,573 7.4 6,918 7.1 5,403 5.9
Commercial business........................ 1,600 1.6 1,394 1.4 1,982 2.2
--------- ----- --------- ----- --------- -----
Total fixed-rate loans and mortgage-
backed and related securities......... 37,921 37.1 31,374 32.1 27,917 30.6
--------- ----- --------- ----- --------- -----
Adjustable-Rate Loans:
Real estate:
One- to four-family....................... 29,420 28.8 30,581 31.3 33,646 36.9
Commercial................................ 7,083 6.9 4,870 5.0 1,389 1.5
Construction.............................. 1,058 1.0 1,339 1.4 884 1.0
Mortgage-backed securities held for sale 3,878 3.8 4,368 4.5 4,373 4.8
Mortgage-backed and related securities
held for investment...................... 21,355 20.9 23,924 24.5 22,101 24.2
--------- ----- --------- ----- --------- -----
Total adjustable-rate real estate loans
and mortgage-backed and related
securities.............................. 62,794 61.4 65,082 66.7 62,393 68.4
--------- ----- --------- ----- --------- -----
Consumer................................... 1,537 1.5 1,177 1.2 901 1.0
--------- ----- --------- ----- --------- -----
Total adjustable-rate loans
and mortgage-backed and
related securities.................... 64,331 62.9 66,259 67.9 63,294 69.4
--------- ----- --------- ----- --------- -----
Total loans and mortgage-backed
and related securities................ 102,252 100.0% 97,633 100.0% 91,211 100.0%
--------- ----- --------- ----- --------- -----
----- ----- -----
Less:
Loans in process........................... 647 276 550
Deferred fees and discounts 72 89 72
Allowance for losses on loans 307 302 274
--------- --------- ---------
Total loans and mortgage-backed
securities receivable, net $ 101,226 $ 96,966 $ 90,315
--------- --------- ---------
--------- --------- ---------
</TABLE>
G-48
<PAGE>
The following schedule illustrates the interest rate sensitivity of
the Company's gross loan and mortgage-backed and related securities portfolio at
September 30, 1998. Mortgages and mortgage-backed and related securities which
have adjustable or renegotiable interest rates are shown as maturing in the
period during which the contract is due. The schedule does not reflect the
effects of possible prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
-------------------------------------------
One- to four-family
and mortgage-
backed securities Commercial Construction Consumer
-------------------- ------------------- ------------------- ---------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
------ ---------- ------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Due During
Years Ending
September 30,
- ---------------------
1999 (1)............. $ 1,685 8.21% $ 192 9.57% $ 1,058 8.61% $ 2,722 9.06%
2000 and 2001........ 346 6.92 477 9.75 -- -- 1,784 9.07
2002 and 2003........ 2,910 8.30 568 8.49 -- -- 3,875 8.69
2004 to 2008......... 7,475 7.95 1,941 8.74 -- -- 313 8.87
2009 to 2018......... 20,842 7.57 7,665 8.73 -- -- 441 9.53
2019 and thereafter.. 43,765 7.66 2,618 8.70 -- -- -- --
-------- -------- --------- ---------
$ 77,023 $ 13,461 $ 1,058 $ 9,135
-------- -------- --------- ---------
-------- -------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
Commercial
Business Total
--------------------- ------------------
Due During Weighted Weighted
Years Ending Average Average
September 30, Amount Rate Amount Rate
- --------------------- ------ ---------- ------ -------
<S> <C> <C> <C> <C>
1999 (1)............. $ 659 9.37% $ 6,316 8.81%
2000 and 2001........ 302 9.16 2,909 8.94
2002 and 2003........ 345 8.94 7,698 8.54
2004 to 2008......... 294 9.55 10,023 8.18
2009 to 2018......... -- -- 28,948 7.91
2019 and thereafter.. -- -- 46,383 7.72
------- --------
$ 1,600 $102,277
------- --------
------- --------
</TABLE>
- -------------------
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
G-49
<PAGE>
The total amount of loans and mortgage-backed securities due after
September 30, 1998 which have predetermined interest rates is $43.6 million,
while the total amount of loans due after such dates which have floating or
adjustable interest rates is $58.6 million.
One- to Four-Family Residential Mortgage Lending. Residential loan
originations are generated by the Company's marketing efforts, its present
customers, walk-in customers and referrals from real estate agents, builders and
loan brokers. The Company focuses its lending efforts primarily on the
origination of loans secured by first mortgages on owner-occupied, one- to
four-family residences See "- Originations, Purchases, Sales and Servicing of
Loans and Mortgage-Backed and Related Securities." At September 30, 1998, the
Company's one- to four-family residential mortgage loans and mortgage-backed and
related securities (all of which are collateralized by one- to four-family
loans) totaled $47.3 million, or approximately 46.2%, of the Company's gross
loan and mortgage-backed and related securities portfolio.
The Company currently originates fixed-rate monthly payment loans and
ARM loans. During the year ended September 30, 1998, the Company originated $9.6
million of fixed-rate real estate loans. During the same period, the Company
originated $4.9 million of adjustable-rate, one- to four-family real estate
loans. The Company's one- to four-family residential mortgage originations are
primarily in its market area.
The Company generally makes ARMs in amounts up to 80% of the appraised
value of the security property although the Company will loan in amounts up to
97% provided that private mortgage insurance is obtained in an amount sufficient
to reduce the Company's exposure at or below the 80% loan-to-value level. The
Company currently offers one, three and five year ARM loans with an interest
rate margin over the one-year Treasury Bill Index. These loans provide for up to
a 2.0% annual cap and a lifetime cap and floor of 6.0% from the initial rate. As
a consequence of using caps, the interest rates on these loans may not be as
rate sensitive as is the Company's cost of funds. Historically, the initial rate
used for the loan has been below the fully-indexed rate and is established by
the Company in accordance with market and competitive factors. The Company has
not experienced difficulty with the payment history for these loans.
From time to time the Company has originated ARMs which are
convertible into fixed-rate loans during stated time periods. Presently, the
Company originates only nonconvertible ARMs. The Company's ARMs do not permit
negative amortization of principal. Borrowers of adjustable rate loans are
qualified at the fully-indexed rate.
Due to consumer demand, the Company also offers fixed-rate, 15- and
30-year mortgage loans that conform to secondary market sales standards (i.e.,
Federal National Mortgage Association ("FNMA"), Government National Mortgage
Association ("GNMA") or Federal Home Loan Mortgage Corporation ("FHLMC")
standards). Interest rates charged on these fixed-rate loans are competitively
priced on a daily basis according to market conditions. Residential loans
generally do not include prepayment penalties. Federal Housing Administration
("FHA") and Veterans' Administration ("VA") fixed rate loans have been
originated to be sold in the secondary market. The Company generally sells such
loans servicing released. The Company reserves the right to discontinue, adjust
or create new lending programs to respond to its needs and to competitive
factors.
In underwriting one- to four-family residential real estate loans,
Mid-Iowa evaluates (among other factors) both the borrower's ability to make
monthly payments and the value of the property securing the loan. Most
properties securing real estate loans made by Mid-Iowa are appraised by an
independent fee appraiser approved and qualified by management. Mid-Iowa
generally requires borrowers to obtain an attorney's title opinion, and fire and
casualty insurance in an amount not less than the amount of the loan. Real
estate loans originated by the Company generally contain a "due on sale" clause
allowing the Company to declare the unpaid principal balance due and payable
upon the sale of the security property.
Construction Lending. The Company engages in limited amounts of
construction lending to individuals for the construction of their residences
and, on rare occasions, to builders for the construction of single family homes
in the Company's primary market area. At September 30, 1998, the Company had
$1.1 million of outstanding construction loans.
Construction loans to individuals for their residences are structured
to be converted to permanent loans at the end of the construction phase, which
typically runs for six to 12 months. During the construction phase, the borrower
G-50
<PAGE>
pays interest only. These construction loans have rates and terms which match
the one- to four-family permanent loans then offered by the Company, except that
a higher loan fee is typically charged to the construction borrower. Residential
construction loans are generally underwritten pursuant to the same guidelines
used for originating permanent residential loans. At September 30, 1998, the
Company had seven construction loans for one- to four-family residences totaling
$590,000 and one construction loans for commercial real estate totaling
$468,000.
Construction loans are generally made up to a maximum loan-to-value
ratio of 80% based upon an appraisal. Because of the uncertainties inherent in
estimating construction costs and the market for the project upon completion,
however, it is relatively difficult to evaluate accurately the total loan funds
required to complete a project, the related loan-to-value ratios and the
likelihood of ultimate success of the project. Construction loans to borrowers
other than owner occupants also involve many of the same risks discussed below
regarding commercial real estate loans and tend to be more sensitive to general
economic conditions than many other types of loans.
Prior to making a commitment to fund a construction loan, the Company
requires an appraisal of the property. The Company's construction loan policy
provides for the inspection of properties by Company personnel at the
commencement of construction and prior to disbursement of funds during the term
of the construction loan.
Mortgage-backed and related securities. Mid-Iowa has a substantial
portfolio of mortgage-backed and related securities which it holds for
investment. Such securities can serve as collateral for borrowings and, through
repayments, as a source of liquidity. For information regarding the carrying and
market values of Mid-Iowa's mortgage-backed and related securities portfolio,
see Notes 2 and 3 of the Notes to Consolidated Financial Statements in the
Annual Report to Stockholders attached hereto as Exhibit 13. Under the Company's
risk-based capital requirement, mortgage-backed and related securities have a
risk weight of 20% (or 0% in the case of GNMA securities) in contrast to the 50%
risk weight assigned to residential loans. See "Regulation -- Regulatory Capital
Requirements."
At September 30, 1998, the Company's holdings of mortgage-backed and
related securities, including those available for sale, totaled $29.7 million,
or 29.1%, of the Company's gross loan and mortgage-backed and related securities
portfolio. Consistent with the Company's asset/liability policy, most of the
mortgage-backed and related securities purchased by the Company in recent
periods carry adjustable interest rates or are for short or intermediate
effective terms.
As part of its mortgage-backed and related security portfolio, the
Company has also purchased investment grade or federal agency guaranteed
collateralized mortgage obligations ("CMOs") and real estate mortgage investment
conduits ("REMICs") having adjustable interest rates or effective terms to
maturity of seven years or less. Such securities are derived by reallocating
cash flows from mortgage pass-through securities or from pools of mortgage
loans. The CMOs and REMICs acquired by the Company are not interest only, or
principal only or residual interests.
Because federal agency mortgage-backed and related securities
generally carry a yield approximately 50 to 100 basis points below that of the
corresponding type of residential loan, in the event that these purchases
increase, the Company's asset yields could be adversely affected. Due to the
existence of the federal agency guarantee on the Company's mortgage-backed and
related securities and the availability of adjustable rate mortgage-backed and
related securities, the Company's interest rate risk and credit risk would not
necessarily be increased by a future increase in mortgage-backed and related
securities volume. The Company will evaluate mortgage-backed and related
securities acquisitions in the future based on its asset/liability objectives,
market conditions and its alternate investment opportunities.
G-51
<PAGE>
The following table sets forth the balance outstanding on the
Company's mortgage-backed and related securities at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------
1998 1997 1996
------ ------ -----
(In thousands)
<S> <C> <C> <C>
Federal Home Loan Mortgage Corporation............... $ 3,359 $ 1,788 $ 1,163
Federal National Mortgage Association................ 4,597 5,360 6,251
Government National Mortgage Association............. 10,679 14,004 10,785
Collateralized Mortgage Obligations.................. 11,105 9,396 10,148
-------- --------- ---------
Total............................................. $ 29,740 $ 30,548 $ 28,347
-------- --------- ---------
-------- --------- ---------
</TABLE>
Commercial Real Estate Lending. The Company has from time to time
engaged in commercial real estate lending, including multi-family lending, in
its market area and has purchased whole commercial loans and participation
interests in loans from other financial institutions secured by properties
located in Iowa, Colorado, Tennessee and Wisconsin. At September 30, 1998, the
Company had $13.5 million of commercial real estate loans, which represented
13.2% of the Company's gross loan and mortgage-backed and related securities
portfolio. At September 30, 1998, all of the Company's commercial real estate
portfolio was performing in accordance with its terms. At September 30, 1998,
76.0% of the Company's commercial real estate loan portfolio was secured by
properties located in the State of Iowa.
The Company originates commercial real estate loans and purchases
whole loans and participation interests in commercial real estate loans. The
Company's commercial real estate loan portfolio is secured primarily by
apartment buildings, office buildings, retail stores, nursing homes, churches
and warehouses. Commercial real estate loans may have terms up to 30 years.
Generally, the loans are made in amounts up to 75% of the appraised value of the
security property. The underwriting standards employed by the Company for
commercial real estate loans include a review of the financial condition of the
borrower, the borrower's credit history, and the reliability and predictability
of the net income generated by the property securing the loan. The Company
generally requires the submission of personal financial statements and personal
guarantees of the borrowers. Appraisals on properties securing commercial real
estate loans originated by the Company are performed by independent appraisers
selected by Mid-Iowa.
Loans secured by commercial real estate properties are generally
larger and involve a greater degree of credit risk than one- to four-family
residential mortgage loans. Because payments on loans secured by commercial real
estate properties are often dependent on the 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. If the cash flow from the project is
reduced (for example, if leases are not obtained or renewed), the borrower's
ability to repay the loan may be impaired.
Consumer Lending. Mid-Iowa offers a variety of secured consumer loans,
including home equity, second mortgage (including home improvement) and
automobile loans and loans secured by savings deposits. In addition, Mid- Iowa
offers other secured and unsecured consumer loans, including Visa and Mastercard
credit cards. At September 30, 1998, the Company's consumer loan portfolio
totaled $9.1 million, or 8.9%, of its gross loan and mortgage-backed and related
securities portfolio. The Company currently originates most of its consumer
loans in its primary market area. The Company originates consumer loans on both
a direct and indirect basis. Direct loans are made when the Company extends
credit directly to the borrower. Indirect loans are obtained when the Company
purchases loan contracts from retailers of goods or services which have extended
credit to their customers. The only indirect lending by Mid-Iowa is with
selected automobile dealers located in the Company's lending area. The Company
underwrites each indirect loan in accordance with its normal consumer loan
standards.
G-52
<PAGE>
Consumer loan terms vary according to the type and value of
collateral. The underwriting standards employed by the Company for consumer
loans include an application, a determination of the applicant's payment history
on other debts and an assessment of ability to meet existing obligations and
payments on the proposed loan. Although creditworthiness of the applicant is a
primary consideration, the underwriting process also includes a comparison of
the value of the security, if any, in relation to the proposed loan amount.
The largest component of Mid-Iowa's consumer loan portfolio consists
of second mortgage loans. At September 30, 1998, second mortgage loans totaled
$5.0 million, or approximately 4.9%, of the Company's gross loan and
mortgage-backed and related securities portfolio. Loans secured by second
mortgages, together with loans secured by all prior liens, are limited to 100%
or less of the appraised value of the property securing the loan and generally
have maximum terms that do not exceed seven years.
Consumer loans may entail greater credit risk than do residential
mortgage loans, particularly in the case of consumer loans which are unsecured
or are secured by rapidly depreciable assets, such as automobiles. In such
cases, any repossessed collateral for a defaulted consumer loan may not provide
an adequate source of repayment of the outstanding loan balance as a result of
the greater likelihood of damage, loss or depreciation. In addition, consumer
loan collections are dependent on the borrower's continuing financial stability,
and thus are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various federal and state laws, including
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans. At September 30, 1998, $43,000, or .47%, of the consumer loan
portfolio was non-performing. There can be no assurance that delinquencies will
not increase in the future.
Commercial Business Lending. The Company originates a limited number
of commercial business loans. At September 30, 1998, approximately $1.6 million,
or 1.6%, of the Company's total loans and mortgage-backed and related securities
portfolio was comprised of commercial business loans. Mid-Iowa's commercial
business lending activities consist primarily of loans to agricultural borrowers
in its primary market area.
The Company recognizes the generally increased risks associated with
commercial business lending. Mid- Iowa's commercial business lending policy
emphasizes credit file documentation and analysis of the borrower's character,
capacity to repay the loan, the adequacy of the borrower's capital and
collateral as well as an evaluation of the industry conditions affecting the
borrower. Analysis of the borrower's past, present and future cash flows is also
an important aspect of Mid-Iowa's credit analysis.
Unlike residential mortgage loans, which generally are made on the
basis of the borrower's ability to make repayment from his or her employment and
other income and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans typically are made on the basis
of the borrower's ability to make repayment from the cash flow of the borrower's
business. As a result, the availability of funds for the repayment of commercial
business loans may be substantially dependent on the success of the business
itself (which, in turn, is likely to be dependent upon the general economic
environment). The Company's commercial business loans are generally secured by
business assets. However, the collateral securing the loans may depreciate over
time, may be difficult to appraise and may fluctuate in value based on the
success of the business. At September 30, 1998, all of Mid-Iowa's commercial
business loan portfolio was performing in accordance with its terms.
Originations, Purchases, Sales and Servicing of Loans and Mortgage-backed and
Related Securities
Real estate loans are primarily originated by Mid-Iowa's staff of
salaried loan officers. In addition, Mid-Iowa originates residential loans
through brokers secured by properties located in other markets. The Company
reviews the underlying documentation and relies on its own underwriting process
in determining whether to grant or deny a loan.
While the Company originates both adjustable-rate and fixed-rate
loans, its ability to generate loans is dependent upon the relative customer
demand for loans in its market. Customer demand is affected primarily by the
interest rate environment.
Mid-Iowa has a substantial portfolio of fixed-rate and
adjustable-rate mortgage-backed and related securities which it purchases and
holds for investment consistent with its asset/liability objectives. At
September 30, 1998,
G-53
<PAGE>
mortgage-backed and related securities, including securities held for sale,
totaled $29.7 million, or 29.1% of Mid-Iowa's total loan and mortgage-backed and
related securities portfolio. See "- Mortgage-backed and related securities."
At September 30, 1998, the Company had 19 groups of whole loans and
loan participations totaling $9.5 million secured by property primarily located
outside the Company's primary market area. These loans and participation
interests are secured primarily by properties located in the midwest, Colorado
and Wisconsin. At September 30, 1998, none of these loans was included in the
Company's non-performing assets as a non-performing loan. See "- NonPerforming
Assets and Classified Assets."
From time to time, the Company has sold whole loans and loan
participations. Sales of whole loans and loan participations generally have been
beneficial to the Company since these sales usually generate income at the time
of sale and provide funds for additional lending and other investments.
Otherwise, the Company typically retains its fixed rate one- to four-family
loans because such loans are originated for retention consistent with the
Company's asset/liability objectives.
With the exception of FHA and VA loans, when loans are sold the
Company typically retains the responsibility for collecting and remitting loan
payments, making certain that real estate tax payments are made on behalf of
borrowers, and otherwise servicing the loans. The Company receives a servicing
fee for performing these services. The amount of servicing fees received by the
Company varies but is generally calculated on the basis of the outstanding
principal amount of the loans serviced. The servicing fees are earned and
recognized as income as each loan payment is received. The Company services for
others mortgage loans that it originated and sold amounting to approximately
$1.3 million at September 30, 1998.
In periods of economic uncertainty, the Company's ability to originate
large dollar volumes of real estate loans may be substantially reduced or
restricted, with a resultant decrease in related loan origination fees, other
fee income and operating earnings.
G-54
<PAGE>
The following table shows the loan origination, purchase and repayment
activities of the Company for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------
1998 1997 1996
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Originations by type:
Adjustable rate:
Real estate - one- to four-family........................... $ 4,872 $ 3,944 $ 7,397
- commercial.............................. 3,013 -- 80
Non-real estate consumer.................................... 1,458 1,117 630
Total adjustable-rate................................ 9,343 5,061 8,107
Fixed rate:
Real estate - one- to four-family........................... 9,597 5,977 4,149
- commercial.................................... 1,423 2,284 2,155
Non-real estate - consumer.................................. 6,068 5,602 3,831
- commercial business....................... 978 2,137 2,535
Total fixed-rate..................................... 18,066 16,000 12,670
Total loans originated............................... 27,409 21,061 20,777
Purchases:
Fixed rate mortgage-backed and related securities........... 3,307 1,010 --
Adjustable rate mortgage-backed and related securities....... 2,999 4,861 3,937
Total purchased...................................... 6,307 5,871 3,937
Sales and Repayments:
Real estate loans........................................... 265 -- 2,415
Mortgage-backed and related securities..................... -- -- --
Total sales.......................................... 265 -- 2,415
Principal repayments........................................ -- 20,965 18,822
Total reductions..................................... -- 20,965 21,237
Increase (decrease) in other items, net..................... -- 684 16
--------- --------- ---------
Net increase......................................... $ 4,260 $ 6,651 $ 3,493
--------- --------- ---------
--------- --------- ---------
</TABLE>
Non-Performing Assets and Classified Assets
When a borrower fails to make a required payment on real estate
secured loans, consumer loans and commercial business loans within 20, 11 and
ten days, respectively, after the payment is due, the Company generally
institutes collection procedures by mailing a notice and calling the customer.
The customer is contacted again when the payment continues to be an additional
five to ten days past due and in the case of real estate loans, when 60 days
past due, a "right-to-cure" notice is sent. In most cases, delinquencies are
cured promptly; however, the Company will meet with the borrower in order to
determine the reason for the delinquency and to effect a cure, and, where
appropriate, review the condition of the property and the financial
circumstances of the borrower. Based upon the results of any such investigation,
the Company may: (i) accept a repayment program which under appropriate
circumstances could involve an extension for the arrearage from the borrower;
(ii) seek evidence, in the form of a listing contract, of efforts by the
borrower to sell the property if the borrower has stated that he is attempting
to sell; (iii) attempt to involve the private mortgage insurer in a work-out of
the loan; or (iv) initiate foreclosure proceedings.
Generally, when a loan becomes delinquent 90 days or more or when the
collection of principal and/or interest become doubtful, the Company will place
the loan on a non-accrual status and, as a result, interest income receivable is
charged to an allowance which is established by a charge to interest income.
Future interest income is recognized on a cash basis only, until, in
management's opinion, the borrower's ability to make periodic interest and
principal payments has been normalized.
G-55
<PAGE>
The following table sets forth information concerning delinquent
mortgage and other loans at September 30, 1998. The amounts presented represent
the total remaining principal balances of the related loans, rather than the
actual payment amounts which are overdue and are reflected as a percentage of
loans in the related portfolio.
<TABLE>
<CAPTION>
Loans Delinquent For:
-------------------------------------------------------------------------------------------------
30-59 days 60-89 days 90 days and over
------------------------------ ---------------------------- ----------------------------
Number Amount Percent Number Amount Percent Number Amount Percent
------ ------ ------- ------ ------ ------- ------ ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family.. 5 $ 124 .26 % -- $ -- -- % 1 $ 83 .18 %
Consumer............. 10 71 .78 5 7 .01 13 43 .47
------- ------- ------- ------- ------- -------
Total............... 15 $ 195 .35 % 5 $ 7 -- % 14 $ 126 .22 %
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
</TABLE>
The table below sets forth the gross amounts and categories of
non-performing assets in the Company's loan portfolio. For all years presented,
the Company has had no troubled debt restructurings (which involve forgiving a
portion of interest or principal on any loans or making loans at a rate
materially less than that of market rates) or accruing loans delinquent more
than 90 days. Foreclosed assets include assets acquired in settlement of loans.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-performing assets
Non-accruing loans:
One- to four-family......................... $ 83 $ -- $ 142 $ 138 $ --
Commercial real estate...................... -- -- -- -- --
Consumer.................................... 43 17 9 3 33
-------- -------- ------- -------- ---------
Total..................................... 126 17 151 141 33
-------- -------- ------- -------- ---------
Foreclosed assets:
One- to four-family......................... 92 -- -- -- --
Commercial real estate...................... -- -- -- -- --
-------- -------- ------- -------- ---------
Total..................................... 92 -- -- -- --
-------- -------- ------- -------- ---------
Total non-performing assets............... $ 218 $ 17 $ 151 $ 141 $ 33
-------- -------- -------- -------- ---------
-------- -------- -------- -------- ---------
Total non-performing assets as a
percentage of total assets................ .15% .01% .13% .13% .03%
-------- -------- -------- -------- ---------
-------- -------- -------- -------- ---------
</TABLE>
For the year ended September 30, 1998, net interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $4,400. No interest income was recognized on
such loans for the year ended September 30, 1998.
Non-accruing loans. As of September 30, 1998, the Company had $126,000
in net book value of non-accruing loans consisting of one- to four-family and
consumer loans.
Foreclosed Assets. The Company had one foreclosed loan in real estate
owned totaling $92,000 at September 30, 1998.
Other Loans of Concern. In addition to the non-performing loans set
forth in the tables above, as of September 30, 1998 there was also an aggregate
of $165,000 in net book value of loans classified by the Company with respect to
which known information about the possible credit problems of the borrowers or
the cash flows of the security properties have caused management to have some
doubts as to the ability of the borrowers to comply with present loan repayment
terms and which may result in the future inclusion of such items in the
non-performing asset categories. The balance of these loans "of concern"
consisted of consumer loans.
G-56
<PAGE>
As of September 30, 1998, there were no other loans not included on
the table or discussed above where known information about the possible credit
problems of borrowers caused management to have serious doubts as to the ability
of the borrower to comply with present loan repayment terms and which may result
in disclosure of such loans in the future.
Classified Assets. Federal regulations provide for the classification
of loans and other assets such as debt and equity securities considered by the
OTS to be of lesser quality as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current retained
earnings and paying capacity of the obligor or of the collateral pledged, if
any. "Substandard" assets include those characterized by the "distinct
possibility" that the savings association 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.
When a savings association classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General 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 a savings association classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of that portion of the asset so classified or
to charge-off such amount. A savings association's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the savings association's Regional Director at the regional
OTS office, who may order the establishment of additional general or specific
loss allowances.
In accordance with its classification of assets policy, the Company
regularly reviews the loans and other assets in its portfolio to determine
whether any loans require classification in accordance with applicable
regulations. On the basis of management's monthly review of its assets, at
September 30, 1998, the Company had classified $165,000 of its assets as
substandard, no assets classified as doubtful and $25,000 of assets classified
as loss. Such classified assets at September 30, 1998 included $126,000 of
non-performing loans and $14,000 of the other loans of concern, discussed above.
Allowance for Losses on Loans. The allowance for loan losses is
established through a provision for loan losses based on management's evaluation
of the risk inherent in its loan portfolio and changes in the nature and volume
of its loan activity. Such evaluation, which includes a review of all loans of
which full collectibility may not be reasonably assured, considers among other
matters, the estimated fair value of the underlying collateral, economic
conditions, historical loan loss experience and other factors that warrant
recognition in providing for an adequate loan allowance.
Real estate properties acquired through foreclosure are recorded at
the lower of the related loan balance, net of any specific loan loss provision
(which is charged-off at the time of transfer), or fair value at the date of
foreclosure. Valuations are periodically updated by management and a specific
provision for losses on such property is established by a charge to operations
if the carrying value of the property exceeds its estimated fair value.
G-57
<PAGE>
Although management believes that it uses the best information
available to determine the allowances, unforeseen market conditions could result
in adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. Future additions to the Company's allowances are the result of
periodic loan, property and collateral reviews and thus cannot be predicted in
advance. At September 30, 1998, the Company had a total allowance for losses on
loans of $307,000, or .46%, of total loans (excluding mortgage-backed and
related securities). See "Regulation - Federal Regulation of Savings
Associations".
The following table sets forth an analysis of the Company's allowance
for loan losses.
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------
1998 1997 1996
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of period............................... $ 301,952 $ 273,819 $ 248,028
Charge-offs:
One- to four-family......................................... -- -- --
Commercial.................................................. 16,287 -- --
Consumer.................................................... 42,635 54,387 19,390
---------- --------- ---------
Total Chargeoffs............................................. 58,922 54,387 19,390
Recoveries:
One- to four-family......................................... -- -- --
Consumer.................................................... 4,198 1,520 9,181
---------- --------- ---------
Total Recoveries............................................ 4,198 1,520 9,181
---------- --------- ---------
Net charge-offs............................................... 54,724 52,867 10,209
Additions charged to operations............................... 60,000 81,000 36,000
---------- --------- ---------
Balance at end of period...................................... $ 307,228 $ 301,952 $ 273,819
---------- --------- ---------
---------- --------- ---------
Ratio of net charge-offs during the period to
average loans outstanding during the period.................. .08% .09% .02%
Allowance for loan losses to total
non-performing assets at end of period...................... 152.29% 1,776.19 181.34
Allowance for loan losses to non-performing
loans at end of period....................................... 263.49 1,766.19 181.34
Allowance for loan losses to total loans at
end of period............................................... .46 .45 .44
</TABLE>
G-58
<PAGE>
The distribution of the Company's allowance for losses on loans at the
dates indicated is summarized as follows:
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- ---------------------
Percent of Percent of Percent of
Loans in Loans in Loans in
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family..................... $167,691 65.18% $160,142 68.73% $139,173 73.17%
Commercial real estate.................. 54,787 18.56 55,869 15.13 50,943 12.26
Construction or development............. 1,000 1.46 1,000 2.00 1,000 1.41
Consumer................................ 71,350 12.59 73,399 12.07 68,571 10.03
Commercial business..................... 12,400 2.21 11,542 2.08 14,132 3.13
-------- -------- -------- -------- -------- --------
Total............................... $307,228 100.00% $301,952 100.00% $273,819 100.00%
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>
Investment Activities
Mid-Iowa must maintain minimum levels of investments that qualify as
liquid assets under OTS regulations. Liquidity may increase or decrease
depending upon the availability of funds and comparative yields on investments
in relation to the return on loans. Historically, the Company has maintained its
liquid assets above the minimum requirements imposed by the OTS regulations and
at a level believed adequate to meet requirements of normal daily activities,
repayment of maturing debt and potential deposit outflows. As of September 30,
1998, the Company's liquidity ratio (liquid assets as a percentage of net
withdrawable savings deposits and current borrowings) was 42.4%. See "Regulation
- - Liquidity."
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, certain certificates of deposit of
insured banks and savings institutions, certain 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.
Generally, the investment policy of the Company is to invest funds
among various categories of investments and maturities based upon the Company's
asset/liability management policies, investment quality and marketability,
liquidity needs and performance objectives.
At September 30, 1998, the Company's interest-bearing deposits in
other financial institutions totaled $15.1 million, or 10.2% of its total
assets, and investment securities totaled $25.0 million, or 16.9% of its total
assets. As of such date, the Company also had a $1.8 million investment in the
common stock of the FHLB of Des Moines in order to satisfy the requirement for
membership in such institution. It is the Company's general policy to purchase
investment securities which are U.S. Government securities and federal agency
obligations, state and local government obligations, commercial paper,
short-term corporate debt securities and overnight federal funds. At September
30, 1998, the average term to maturity or repricing of the investment securities
portfolio was 2.0 years.
G-59
<PAGE>
The following table sets forth the composition of the Company's
investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------------------------
1998 1997 1996
-------------------- --------------------- --------------------
Book % of Book % of Book % of
Value Total Value Total Value Total
---------- --------- ---------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits with other
financial institutions................. $ 15,072 100.00% $ 3,445 100.00% $ 810 100.0%
---------- --------- ---------- --------- --------- ---------
---------- --------- ---------- --------- --------- ---------
Investment securities:
Federal agency obligations $ 20,046 74.66% $ 18,974 79.55% $ 17,991 81.1%
State and local government obligations. 5,002 18.63 3,227 13.53 2,867 12.9
---------- --------- ---------- --------- --------- ---------
Subtotal........................... 25,048 93.30 22,201 93.08 20,858 94.0
FHLB stock.............................. 1,800 6.70 1,650 6.92 1,325 6.0
---------- --------- ---------- --------- --------- ---------
Total investment securities
and FHLB stock....................... $ 26,848 100.00% $ 23,851 100.00% $ 22,183 100.0%
---------- --------- ---------- --------- --------- ---------
---------- --------- ---------- --------- --------- ---------
Average remaining life or term to
repricing, excluding FHLB stock and
other marketable equity securities..... 2.0 years 4.1 years 3.8 years
</TABLE>
The composition and maturities of the investment securities portfolio,
excluding FHLB of Des Moines stock are indicated in the following table.
<TABLE>
<CAPTION>
At September 30, 1998
----------------------------------------------------------------------------------------
Over Over
1 Year 1 to 5 5 to 10 Over Total Investment
or Less Years Years 10 Years Securities
---------- ---------- ---------- ---------- ------------------------------
Book Value Book Value Book Value Book Value Book Value Market Value
---------- ---------- ----------- ---------- ---------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Federal agency obligations... $ 15,956 $ 3,104 $ 986 $ -- $ 20,046 $ 20,245
State and local government
obligations................ 50 1,883 2,484 585 5,002 5,183
--------- -------- -------- --------- ----------- ------------
Total investment securities.. $ 16,006 $ 4,987 $ 3,470 $ 585 $ 25,048 $ 25,428
--------- -------- -------- --------- ----------- ------------
--------- -------- -------- --------- ----------- ------------
Weighted average yield....... 6.01% 5.95% 6.00% 5.95% 6.00%
--------- -------- -------- --------- -----------
--------- -------- -------- --------- -----------
</TABLE>
The Company's investment securities portfolio at September 30, 1998
contained neither tax-exempt securities nor securities of any issuer with an
aggregate book value in excess of 10% of the Company's stockholder equity,
excluding those issued by the United States Government, or its agencies.
Mid-Iowa's investment security portfolio is managed in accordance with
a written investment policy adopted by the Board of Directors and implemented by
its Investment Committee, consisting of the Company's President and Treasurer.
At the present time, Mid-Iowa does not have any investments that are held for
trading purposes.
The OTS maintains guidelines regarding management oversight and
accounting treatment for securities, including investment securities, loans,
mortgage-backed and related securities and derivative securities. The guidelines
require thrift institutions to reduce the carrying value of securities to the
lesser of cost or market value unless it can be demonstrated that a class of
securities is intended to be held to maturity. As of September 30, 1998, the
Company held $25.9 million and $23.9 million, respectively, of principal amount
of mortgage-backed and related securities and investment securities which the
Company intends to hold until maturity. As of such date, these securities had a
market value of $26.1 million and $24.3 million, respectively.
G-60
<PAGE>
Sources of Funds
General. The Company's primary sources of funds are deposits,
amortization and prepayment of loan principal (including interest earned on
mortgage-backed and related securities), interest earned on or maturation of
investment securities and short-term investments, and funds provided from
operations.
Borrowings will be used to compensate for reductions in deposits or
deposit inflows at less than projected levels, and may be used on a longer-term
basis to support expanded lending activities.
Deposits. Mid-Iowa offers a variety of deposit accounts having a wide
range of interest rates and terms. The Company's deposits consist of passbook
accounts, club accounts, money market deposit accounts, NOW and checking
accounts, and certificate accounts ranging in terms from three months to eight
years. The Company primarily solicits deposits from its market area and does not
use brokers to obtain deposits. The Company relies primarily on competitive
pricing policies, advertising, and customer service to attract and retain these
deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates, and
competition.
The variety of deposit accounts offered by the Company has allowed it
to be competitive in obtaining funds and to respond with flexibility to changes
in consumer demand. The Company has become more susceptible to short-term
fluctuations in deposit flows, as customers have become more interest rate
conscious. The Company manages the pricing of its deposits in keeping with its
asset/liability management and profitability objectives. Based on its
experience, the Company believes that its passbook savings, money market deposit
accounts, and NOW accounts are relatively stable sources of deposits. However,
the ability of the Company to attract and maintain certificates of deposits, and
the rates paid on these deposits, has been and will continue to be significantly
affected by market conditions.
The following table sets forth the savings flows of the Company during
the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------
1998 1997 1996
---------- --------- ----------
(In thousands)
<S> <C> <C> <C>
Opening balance............................................... $ 89,378 $ 82,872 $ 78,671
Deposits...................................................... 195,532 165,470 130,584
Withdrawals................................................... 191,374 161,419 128,746
Interest credited............................................. 2,817 2,455 2,363
---------- --------- ---------
Ending balance................................................ $ 96,353 $ 89,378 $ 82,872
---------- --------- ---------
---------- --------- ---------
Net increase (decrease)....................................... $ 6,975 $ 6,506 $ 4,201
---------- --------- ---------
---------- --------- ---------
Percent increase (decrease)................................... 7.80% 7.85% 5.34%
---------- --------- ---------
---------- --------- ---------
</TABLE>
G-61
<PAGE>
The following table sets forth the dollar amount of deposits in the
various types of deposit programs offered by the Company for the periods
indicated.
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
Amount % Amount % Amount %
--------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Rate Range:
Market Rate Accounts................... $ 17,941 18.62% $ 17,572 19.66 $ 13,421 16.10%
Passbook Accounts 2.15-2.25%........... 5,473 5.68 5,798 6.49 6,050 7.30
NOW Accounts 0-1.05%................... 5,832 6.05 5,992 6.70 4,951 6.07
--------- -------- -------- -------- -------- --------
Total Non-Certificates................. 29,246 30.35 29,362 32.85 24,422 29.47
--------- -------- -------- -------- -------- --------
Certificates of Deposit:
0.00 - 3.99%......................... 4,187 4.35 4,590 5.14 6,408 7.73
4.00 - 5.99%......................... 46,737 48.50 43,982 49.21 49,285 59.47
6.00 - 7.99%......................... 16,183 16.80 11,444 12.81 2,756 3.33
8.00 - 9.99%......................... -- -- -- -- 1 --
--------- -------- -------- -------- -------- --------
Total Certificates of Deposit.......... 67,107 69.65 60,016 67.15 58,450 70.53
--------- -------- -------- -------- -------- --------
Total Deposits......................... $ 96,353 100.00% $ 89,378 100.00% $ 82,872 100.00%
--------- -------- -------- -------- -------- --------
--------- -------- -------- -------- -------- --------
</TABLE>
The following table shows rate and maturity information for the
Company's certificates of deposit as of September 30, 1998.
<TABLE>
<CAPTION>
0.00- 4.00- 6.00- 8.00- Percent
3.99% 5.99% 7.99% 9.99% Total of Total
----- ----- ----- ----- ----- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
December 31, 1998......................... $ 1,222 $ 14,789 $ 4,581 $ -- $20,592 30.69%
March 31, 1999............................ 1,409 15,813 3,484 -- 20,706 30.86
June 30, 1999............................. 471 4,093 4,359 -- 8,923 13.30
September 30, 1999........................ 730 4,448 2,714 -- 7,892 11.76
December 31, 1999......................... 13 2,111 168 -- 2,292 3.42
March 31, 2000............................ 93 1,245 112 -- 1,450 2.16
June 30, 2000............................. 50 743 62 -- 855 1.27
September 30, 2000........................ 148 418 16 -- 582 .87
December 31, 2000......................... 16 267 73 -- 356 .53
March 31, 2001............................ 7 470 84 -- 561 .84
June 30, 2001............................. 3 29 422 -- 454 .68
September 30, 2001........................ 25 838 -- -- 863 1.29
December 31, 2001......................... -- 341 28 -- 369 .55
Thereafter................................ -- 1,132 80 -- 1,212 1.81
-------- --------- --------- -------- -------- --------
Total................................ $ 4,187 $ 46,737 $ 16,183 $ -- $67,107 100.00%
-------- --------- --------- -------- -------- --------
-------- --------- --------- -------- -------- --------
Percent of total..................... 6.24% 69.65% 24.12% --%
-------- --------- --------- --------
-------- --------- --------- --------
</TABLE>
G-62
<PAGE>
The following table indicates the amount of the Company's certificates
of deposit by time remaining until maturity as of September 30, 1998.
<TABLE>
<CAPTION>
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 Months Total
---------- ---------- ---------- ----------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000... $ 15,688 $ 14,491 $ 14,445 $ 8,274 $ 52,898
Certificates of deposit of $100,000 or more.. 3,569 4,909 2,270 720 11,468
Public funds (1)............................. 1,335 1,306 100 -- 2,741
--------- --------- --------- ---------- ---------
Total certificates of deposit................ $ 20,592 $ 20,706 $ 16,815 $ 8,994 $ 67,107
--------- --------- --------- ---------- ---------
--------- --------- --------- ---------- ---------
</TABLE>
- ---------------
(1) Deposits from governmental and other public entities.
The following tables sets forth the maximum month-end balance and
average balance of FHLB advances and other borrowings during the periods
indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------
1998 1997 1996
---------- ---------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Maximum Balance:
FHLB advances and other borrowings............................. $ 36,000 $ 25,000 $ 20,500
Average Balance:
FHLB advances and other borrowings............................. $ 33,600 $ 27,625 $ 19,250
Weighted average interest rate of FHLB advances................ 5.52% 5.64% 5.61%
</TABLE>
The following table sets forth certain information as to the Company's
FHLB advances and other borrowings at the dates indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
1998 1997 1996
--------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
FHLB advances.................................................. $ 36,000 $ 25,000 $ 20,500
--------- --------- ---------
Total borrowings............................................. $ 36,000 $ 25,000 $ 20,500
--------- --------- ---------
--------- --------- ---------
Weighted average interest rate
of FHLB advances............................................. 5.50% 5.70% 5.64%
</TABLE>
G-63
<PAGE>
Subsidiary Activities
As a federally chartered savings bank, the Bank is permitted by OTS
regulations to invest up to 2% of its assets, or $2.9 million at September 30,
1998, in the stock of, or loans to, service corporation subsidiaries. As of such
date, the net book value of the Bank's investment in and loans to its service
corporations was approximately $92,000. The Bank may invest an additional 1% of
its assets in service corporations where such additional funds are used for
inner-city or community development purposes.
Center of Iowa Investments ("CII"), the Bank's wholly owned
subsidiary, markets mutual funds, annuities, and discount securities brokerage
services to the Company's customer. CII recognized net income of $29,000, for
the 1998 fiscal year.
In addition to the Bank, the Company directly owns Mid-Iowa Security
Corp., which conducts real estate brokerage services and owns Quail Ridge
development, a single-family residential development located in Newton, Iowa,
consisting of 36 developed residential lots and 15 acres of additional land. At
September 30, 1998, residential lots and 4.5 acres of land remain to be sold. At
September 30, 1998, Mid-Iowa Security's investment in Quail Ridge development
was $90,000. Mid-Iowa Security maintains a $12,000 general valuation allowance
allocated to Quail Ridge. Mid-Iowa Security recognized net income of $54,000 for
the 1998 fiscal year.
Competition
Mid-Iowa faces strong competition, both in originating real estate and
other loans and in attracting deposits. Competition in originating real estate
loans comes primarily from other commercial banks, savings associations, credit
unions and mortgage bankers making loans secured by real estate located in the
Company's market area. Commercial banks and finance companies provide strong
competition in consumer lending. The Company competes for real estate and other
loans principally on the basis of the quality of services it provides to
borrowers, interest rates and loan fees it charges, and the types of loans it
originates.
The Company attracts nearly all of its deposits through its retail
banking offices, primarily from the communities in which those retail banking
offices are located; therefore, competition for those deposits is principally
from other commercial banks, savings associations and credit unions located in
the same communities. The Company competes for these deposits by offering a
variety of deposit accounts at competitive rates, convenient business hours, and
convenient branch locations with interbranch deposit and withdrawal privileges
at each branch.
The Company serves primarily Jasper County and West Des Moines, Iowa.
There are ten commercial banks and no other savings associations which compete
for deposits and loans in Jasper Country. Mid-Iowa estimates its share of the
residential mortgage loan market to be approximately 30% and its share of the
savings deposit base to be approximately 20% in Jasper County. The market share
in West Des Moines has not been determined.
Regulation
General. The Bank is a federally chartered savings bank, the deposits
of which are federally insured and backed by the full faith and credit of the
United States Government. Accordingly, the Bank is subject to broad federal
regulation and oversight extending to all its operations. The Bank is a member
of the FHLB of Des Moines and is subject to certain limited regulation by the
Board of Governors of the Federal Reserve System ("Federal Reserve Board"). As
the savings and loan holding company of the Bank, the Company also is subject to
federal regulation and oversight. The purpose of the regulation of the Company
and other holding companies is to protect subsidiary savings associations. The
Bank is a member of the SAIF and the deposits of the Bank are insured by the
FDIC. As a result, the FDIC has certain regulatory and examination authority
over the Bank.
Certain of these regulatory requirements and restrictions are
discussed below or elsewhere in this document.
Federal Regulation of Savings Associations. The OTS has extensive
authority over the operations of savings associations. As part of this
authority, the Bank is required to file periodic reports with the OTS and is
subject to periodic examinations by the OTS and the FDIC. All federal savings
associations are subject to a semi-annual
G-64
<PAGE>
assessment, based upon the association's total assets, to fund the operations of
the OTS. The Bank's OTS assessment for the fiscal year ended September 30, 1998
was $41,532.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Bank and the Company.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of the
Bank is prescribed by federal laws, and it is prohibited from engaging in any
activities not permitted by such laws. For instance, no savings institution may
invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal associations in loans secured by
non-residential real property may not exceed 400% of total capital, except with
approval of the OTS. Federal savings associations are also generally authorized
to branch nationwide. At September 30, 1998, the Bank was in compliance with the
noted restrictions.
The Bank's general permissible lending limit for loans-to-one-borrower
is equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus). At
September 30, 1998, the Bank's lending limit under this restriction was $1.7
million. The Bank is in compliance with the loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, internal controls and audit systems, interest
rate risk exposure and compensation and other employee benefits. Any institution
which fails to comply with these standards must submit a compliance plan. A
failure to submit a plan or to comply with an approved plan will subject the
institution to further enforcement action.
Insurance of Accounts and Regulation by the FDIC. The Bank is a member
of the SAIF, which is administered by the FDIC. Deposits are insured up to
applicable limits by the FDIC and such insurance is backed by the full faith and
credit of the United States Government. As insurer, the FDIC imposes deposit
insurance premiums and is authorized to conduct examinations of and to require
reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious risk to the FDIC. The FDIC also has the authority to
initiate enforcement actions against savings associations, after giving the OTS
an opportunity to take such action, and may terminate the deposit insurance if
it determines that the institution has engaged in unsafe or unsound practices or
is in an unsafe or unsound condition.
Under the Federal Deposit Insurance Act, the FDIC is required to set
semi-annual assessments for SAIF-insured institutions to maintain the designated
reserve ratio of the SAIF at 1.25% of estimated insured deposits or at a higher
percentage of estimated insured deposits that the FDIC determines to be
justified for that year by circumstances raising a significant risk of
substantial future losses to the SAIF.
Under the risk-based deposit insurance assessment system adopted by
the FDIC, the assessment rate for an insured depository institution depends on
the assessment risk classification assigned to the institution by the FDIC,
which is determined by the institution's capital level and supervisory
evaluations. Based on the data reported to regulators for the date closest to
the last day of the seventh month preceding the semi-annual assessment period,
institutions are assigned to one of three capital groups -- well capitalized,
adequately capitalized or undercapitalized." Within each capital group,
institutions are assigned to one of three subgroups on the basis of supervisory
evaluations by the institution's primary supervisory authority and such other
information as the FDIC determines to be relevant to the institution's financial
condition and the risk posed to the deposit insurance fund. Mid-Iowa currently
is classified as well capitalized under this assessment system.
Regulatory Capital Requirements. Federally insured savings
associations, such as the Bank, are required to maintain a minimum level of
regulatory capital. The OTS has established capital standards, including a
tangible capital requirement, a leverage ratio (or core capital) requirement and
a risk-based capital requirement applicable to such savings associations. These
capital requirements must be generally as stringent as the comparable capital
requirements
G-65
<PAGE>
for national banks. The OTS is also authorized to impose capital requirements in
excess of these standards on individual associations on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital. At September 30, 1998, CII, a
wholly owned subsidiary of the Bank, had $5,000 of goodwill qualifying as an
intangible asset and which was deducted from the Bank's tangible capital.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital. As of September 30, 1998, the Bank did not have any
investments or advances to its subsidiaries that are excluded from regulatory
capital.
At September 30, 1998, the Bank had tangible capital of $11.2 million,
or 7.7%, of adjusted total assets, which is approximately $9.0 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3%
of adjusted total assets. Core capital generally consists of tangible capital
plus certain intangible assets, including a limited amount of purchased credit
card relationships. As a result of the prompt corrective action provisions
discussed below, however, a savings association must maintain a core capital
ratio of at least 4% to be considered adequately capitalized unless its
supervisory condition is such to allow it to maintain a 3% ratio. At September
30, 1998, the Bank had no intangibles which were subject to these tests.
At September 30, 1998, the Bank had core capital equal to $11.2
million, or 7.7%, of adjusted total assets, which is $6.8 million above the
minimum leverage ratio requirement of 3% as in effect on that date.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk- weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS also is authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At September 30, 1998, the Bank had
$11.1 million of capital instruments (none of which qualify as supplementary
capital) and $307,000 of general loss reserves, which was 19.0% of risk-
weighted assets.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. The Bank did not have any
such exclusions from capital and assets at September 30, 1998.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan to value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by FNMA or FHLMC.
OTS risk-based capital requirements require savings institutions with
more than a "normal" level of interest rate risk to maintain additional total
capital. A savings institution's interest rate risk is measured in terms of the
sensitivity of its "net portfolio value" to changes in interest rates. Net
portfolio value is defined, generally, as the present value of expected cash
inflows from existing assets and off-balance sheet contracts less the present
value of expected cash outflows from existing liabilities. A savings institution
is considered to have a "normal" level of interest rate risk
G-66
<PAGE>
exposure if the decline in its net portfolio value after an immediate 200 basis
point increase or decrease in market interest rates (whichever results in the
greater decline) is less than two percent of the current estimated economic
value of its assets. A savings institution with a greater than normal interest
rate risk is required to deduct from total capital, for purposes of calculating
its risk-based capital requirement, an amount (the "interest rate risk
component") equal to one-half the difference between the institution's measured
interest rate risk and the normal level of interest rate risk, multiplied by the
economic value of its total assets.
The OTS calculates the sensitivity of a savings institution's net
portfolio value based on data submitted by the institution in a schedule to its
quarterly Thrift Financial Report and using the interest rate risk measurement
model adopted by the OTS. The amount of the interest rate risk component, if
any, to be deducted from a savings institution's total capital is based on the
institution's Thrift Financial Report filed two quarters earlier. Institutions
with less than $300 million in assets and a risk-based capital ratio above 12%,
like the Bank, generally are exempt from filing the interest rate risk schedule
with their Thrift Financial Reports. However, the OTS will require any exempt
institution that it determines may have a high level of interest rate risk
exposure to file such schedule on a quarterly basis and may be subject to an
additional capital requirement based upon its level of interest rate risk as
compared to its peers.
On September 30, 1998, the Bank had total capital of $11.5 million
(including $11.2 million in core capital and $307,000 in qualifying
supplementary capital) and risk-weighted assets of $59.8 million; or total
capital of 19.0% of risk-weighted assets. This amount was $6.6 million above the
8% requirement in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS generally is required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized associations.
Limitations on Dividends and Other Capital Distributions. OTS
regulations impose various restrictions or requirements on associations with
respect to their ability to pay dividends or make other distributions of
capital. OTS regulations prohibit an association from declaring or paying any
dividends or from repurchasing any of its stock if, as a result, the regulatory
capital of the association would be reduced below the amount required to be
maintained for the liquidation account established in connection with its mutual
to stock conversion.
The OTS utilizes a three-tiered approach to permit associations, based
on their capital level and supervisory condition, to make capital distributions
which include dividends, stock redemptions or repurchases, cash-out mergers and
other transactions charged to the capital account (see "-- Regulatory Capital
Requirements").
Generally, Tier 1 associations, which are associations that before and
after the proposed distribution meet their fully phased-in capital requirements,
may make capital distributions during any calendar year equal to the greater of
100% of net income for the year-to-date plus 50% of the amount by which the
lesser of the association's tangible, core or risk-based capital exceeds its
fully phased-in capital requirement for such capital component, as measured at
the beginning of the calendar year, or the amount authorized for a Tier 2
association. However, a Tier 1 association deemed to be in need of more than
normal supervision by the OTS may be downgraded to a Tier 2 or Tier 3
association as a result of such a determination. The Bank meets the requirements
for a Tier 1 association and has not been notified of a need for more than
normal supervision. Tier 2 associations, which are associations that before and
after the proposed distribution meet their current minimum capital requirements,
may make capital distributions of up to 75% of net income over the most recent
four quarter period.
Tier 3 associations (which are associations that do not meet current
minimum capital requirements) that propose to make any capital distribution and
Tier 2 associations that propose to make a capital distribution in excess of the
noted safe harbor level must obtain OTS approval prior to making such
distribution. Tier 2 associations proposing to make a capital distribution
within the safe harbor provisions and Tier 1 associations proposing to make any
capital distribution need only submit written notice to the OTS 30 days prior to
such distribution. As a subsidiary of the Company, the Bank also is required to
give the OTS 30 days' notice prior to declaring any dividend on its stock. The
OTS may object to
G-67
<PAGE>
the distribution during that 30-day period based on safety and soundness
concerns. See "-- Regulatory Capital Requirements."
Liquidity. All savings associations, including the Bank, are required
to maintain an average daily balance of liquid assets equal to a certain
percentage of the sum of its average daily balance of net withdrawable deposit
accounts and borrowings payable in one year or less. This liquid asset ratio
requirement may vary from time to time (between 4% and 10%) depending upon
economic conditions and savings flows of all savings associations. At the
present time, the minimum liquid asset ratio is 4%.
Penalties may be imposed upon associations for violations of liquid
asset ratio requirement. At September 30, 1998, the Bank was in compliance with
an overall liquid asset ratio of 42.4%.
Qualified Thrift Lender Test. All savings associations, including the
Bank, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. Such assets primarily consist of residential
housing related loans and investments. At September 30, 1998, the Bank met the
test and has always met the test since its inception.
Any savings association that fails to meet the QTL test must convert
to a national bank charter, unless it requalifies as a QTL and thereafter
remains a QTL. If an association does not requalify and converts to a national
bank charter, it must remain SAIF-insured unless it determines to become a BIF
member. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "-- Holding Company Regulation."
Community Reinvestment Act. Under the Community Reinvestment Act
("CRA"), every FDIC-insured institution has a continuing and affirmative
obligation consistent with safe and sound banking practices to help meet the
credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with the examination of the Bank, to assess the
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications, such as a
merger or the establishment of a branch, by the Bank. An unsatisfactory rating
may be used as the basis for the denial of an application by the OTS.
The federal banking agencies, including the OTS, have revised the CRA
regulations and the methodology for determining an institution's compliance with
the CRA. Due to the heightened attention being given to the CRA in the past few
years, the Bank may be required to devote additional funds for investment and
lending in its local community. The Bank was last examined for CRA compliance in
June 1998 and received a rating of "satisfactory."
Transactions with Affiliates. Generally, transactions between a
savings association or its subsidiaries and its affiliates are required to be on
terms as favorable to the association as transactions with non-affiliates. In
addition, certain of these transactions, such as loans to an affiliate, are
restricted to a percentage of the association's capital. Affiliates of the Bank
include the Company and any company which is under common control with the Bank.
In addition, a savings association may not lend to any affiliate engaged in
activities not permissible for a bank holding company or acquire the securities
of most affiliates. The Bank's subsidiaries are not deemed affiliates, however;
the OTS has the discretion to treat subsidiaries of savings associations as
affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
G-68
<PAGE>
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
Holding Company Regulation. The Company is a unitary savings and loan
holding company subject to regulatory oversight by the OTS. As such, the Company
is required to register and file reports with the OTS and is subject to
regulation and examination by the OTS. In addition, the OTS has enforcement
authority over the Company and its non-savings association subsidiaries which
also permits the OTS to restrict or prohibit activities that are determined to
be a serious risk to the subsidiary savings association.
As a unitary savings and loan holding company, the Company generally
is not subject to activity restrictions. If the Company acquires control of
another savings association as a separate subsidiary, it would become a multiple
savings and loan holding company, and the activities of the Company and any of
its subsidiaries (other than the Bank or any other SAIF-insured savings
association) would become subject to such restrictions unless such other
associations each qualify as a QTL and were acquired in a supervisory
acquisition.
If the Bank fails the QTL test, the Company must obtain the approval
of the OTS prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure the Company must register as, and will become subject
to, the restrictions applicable to bank holding companies. The activities
authorized for a bank holding company are more limited than are the activities
authorized for a unitary or multiple savings and loan holding company. See
"--Qualified Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control
of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.
Federal Securities Law. The stock of the Company is registered with
the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The Company is subject to the information, proxy solicitation, insider
trading restrictions and other requirements of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At September 30, 1998, the Bank was in compliance with these
reserve requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve Board may be used to satisfy liquidity
requirements that may be imposed by the OTS. See "-- Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System. The Bank is a member of the FHLB of Des
Moines, which is one of 12 regional FHLBs, that administers the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the board of directors of the FHLB, which are
subject to the oversight of the Federal Housing Finance Board. All advances from
the FHLB are required to be fully secured by sufficient collateral as determined
by the FHLB. In addition, all long-term advances are required to provide funds
for residential home financing.
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<PAGE>
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.
As a member of the FHLB, the Bank is required to purchase and maintain
stock in the FHLB of Des Moines. At September 30, 1998, the Bank had $1.8
million in FHLB stock, which was in compliance with this requirement. For the
year ended September 30, 1998, dividends paid by the FHLB of Des Moines to the
Bank totaled $122,650.
Federal and State Taxation. Savings associations such as the Bank that
meet certain definitional tests relating to the composition of assets and other
conditions prescribed by the Internal Revenue Code of 1986, as amended (the
"Code"), are permitted to establish reserves for bad debts and to make annual
additions thereto which may, within specified formula limits, be taken as a
deduction in computing taxable income for federal income tax purposes (for
taxable years beginning before December 31, 1995) the amount of the bad debt
reserve deduction for "non-qualifying loans" is computed under the experience
method. The amount of the bad debt reserve deduction for "qualifying real
property loans" (generally loans secured by improved real estate) may be
computed under either the experience method or the percentage of taxable income
method (based on an annual election).
Under the experience method, the bad debt reserve deduction is an
amount determined under a formula based generally upon the bad debts actually
sustained by the savings association over a period of years.
The percentage of specially computed taxable income that is used to
compute a savings association's bad debt reserve deduction under the percentage
of taxable income method (the "percentage bad debt deduction") is 8%. The
percentage bad debt deduction thus computed is reduced by the amount permitted
as a deduction for non-qualifying loans under the experience method. The
availability of the percentage of taxable income method permits qualifying
savings associations to be taxed at a lower effective federal income tax rate
than that applicable to corporations generally (approximately 31.3% assuming the
maximum percentage bad debt deduction).
Under the percentage of taxable income method, the percentage bad debt
deduction cannot exceed the amount necessary to increase the balance in the
reserve for "qualifying real property loans" to an amount equal to 6% of such
loans outstanding at the end of the taxable year or the greater of (i) the
amount deductible under the experience method or (ii) the amount which when
added to the bad debt deduction for "non-qualifying loans" equals the amount by
which 12% of the amount comprising savings accounts at year-end exceeds the sum
of surplus, undivided profits and reserves at the beginning of the year. At
September 30, 1996, the 6% and 12% limitations did not restrict the percentage
bad debt deduction available to the Bank.
Legislation enacted in August 1996 repealed the percentage of taxable
income method of calculating the bad debt reserve. Savings institutions, like
the Bank, which have previously used that method are required to recapture into
taxable income post-1987 reserves in excess of the reserves calculated under the
experience method over a six-year period beginning with the first taxable year
beginning after December 31, 1995. The Bank will recapture approximately
$480,000 of its tax bad debt reserves. The recapture will not have any effect on
the Company's net income because the related tax expense has already been
accrued.
The start of such recapture may be delayed until the third taxable
year beginning after December 31, 1995 if the dollar amount of the institution's
residential loan originations in each year is not less than the average dollar
amount of residential loan originated in each of the six most recent years
disregarding the years with the highest and lowest originations during such
period. For purposes of this test, residential loan originations would not
include refinancings and home equity loans.
Beginning with the first taxable year beginning after December 31,
1995, savings institutions, such as the Bank, are being treated the same as
commercial banks. Institutions with $500 million or more in assets will be able
to take a tax deduction only when a loan is actually charged off. Institutions
with less than $500 million in assets will still be permitted to make deductible
bad debt additions to reserves, but only using the experience method.
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<PAGE>
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
the Bank, are also subject to an environmental tax equal to .12% of the excess
of alternative minimum taxable income for the taxable year (determined without
regard to net operating losses and the deduction for the environmental tax) over
$2 million.
To the extent earnings appropriated to a savings association's bad
debt reserves for "qualifying real property loans" and deducted for federal
income tax purposes exceed the allowable amount of such reserves computed under
the experience method and to the extent of the association's supplemental
reserves for losses on loans ("Excess"), such Excess may not, without adverse
tax consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of September 30, 1998, the Bank's excess for tax purposes totaled
approximately $1.8 million.
The Company and its subsidiaries, including the Bank, file
consolidated federal income tax returns on a fiscal year basis using the accrual
method of accounting. Savings associations, such as the Bank, that file federal
income tax returns as part of a consolidated group are required by applicable
Treasury regulations to reduce their taxable income for purposes of computing
the percentage bad debt deduction for losses attributable to activities of the
non-savings association members of the consolidated group that are functionally
related to the activities of the savings association member.
The tax returns of the Company and its subsidiaries have not been
audited by the IRS with respect to consolidated federal income tax returns
subsequent to 1988. With respect to prior years examined by the IRS, all
deficiencies have been satisfied. In the opinion of management, any examination
of still open returns (including returns of subsidiaries and predecessors of, or
entities merged into, the Company) would not result in a deficiency which could
have a material adverse effect on the financial condition of the Bank and its
consolidated subsidiaries.
Iowa Taxation. The Bank currently files an Iowa franchise tax return.
The Company, its non-bank subsidiary and the Bank's subsidiary file Iowa
corporation tax returns on a fiscal year end basis.
Iowa imposes a franchise tax on the taxable income of stock savings
banks. The tax rate is 5%, which may effectively be increased, in individual
cases, by application of a minimum tax provision. Taxable income under the
franchise tax is generally similar to taxable income under the federal corporate
income tax, except that, under the Iowa franchise tax, no deduction is allowed
for Iowa franchise tax payments and taxable income includes interest on state
and municipal obligations. Interest on U.S. obligations is taxable under the
Iowa franchise tax and under the federal corporate income tax.
Taxable income under the Iowa corporate income tax is generally
similar to taxable income under the federal corporate income tax, except that,
under the Iowa tax, no deduction is allowed for Iowa income tax payments;
interest from state and municipal obligations is included in income; interest
from U.S. obligations is excluded from income; and 50% of federal corporate
income tax is excluded from income. The Iowa corporate income tax rates range
from 6% to 12% and may be effectively increased, in individual cases, by
application of a minimum tax provision.
Delaware Taxation. As a Delaware holding company, the Company is
exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. The Company is also
subject to an annual franchise tax imposed by the State of Delaware.
G-71
<PAGE>
Employees
At September 30, 1998, the Company and its subsidiaries had a total of
42 employees, including eight part-time employees. The Company's employees are
not represented by any collective bargaining group. Management considers its
employee relations to be satisfactory.
Executive Officers of the Company
The executive officers of the Company, each of whom is currently an
executive officer of the Bank, are identified below. The executive officers of
the Company are elected annually by the Company's Board of Directors. The Bank
has entered into employment agreements with both of its executive officers.
Name Position With Holding Company
- ----------------- -------------------------------------------------
Kevin D. Ulmer President and Chief Executive Officer
Gary R. Hill Executive Vice President, Secretary and Treasurer
G-72
<PAGE>
GLOSSARY
<TABLE>
<CAPTION>
<S> <C>
Acquisition ....................... The acquisition of Mid-Iowa Financial and Mid-Iowa Savings by the Bank,
pursuant to the Merger Agreement
ARM ............................... Adjustable Rate Mortgage
Associate ......................... "Associate" of a person means: (i) any corporation or organization (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 director or in a similar
fiduciary capacity; provided, however that such term shall not include any
employee stock benefit plan in which such a person has a substantial beneficial
interest or as a trustee or in a similar fiduciary capacity; and (iii) any relative or
spouse of such persons, 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 solely because of their Board membership.
Bank .............................. First Federal Savings Bank of Siouxland
Bank Merger ....................... Merger of Interim Savings Bank with and into the Bank with the Bank as the
resulting institution
BIF ............................... The Bank Insurance Fund of the FDIC
BHC ............................... Bank Holding Company
Code .............................. The Internal Revenue Code of 1986, as amended
Common Stock ...................... Common Stock, par value $.01 per share, of the Company
Community ......................... The State of Iowa, the Nebraska counties of Dakota, Dixon, Thurston, Cedar and
Wayne, and the South Dakota Counties of Union, Clay, Yankton, Lincoln and
Turner
Community Offering ................ The offering for sale to the general public of shares of Common Stock
not subscribed for in the Subscription Offering, with preference given to public
stockholders of the Bank, depositors of Mid-Iowa Savings Bank, FSB as of
_____________, 1998 and natural persons and trusts of natural persons who are
residents of the Bank's Community
Company ........................... First Federal Bankshares, Inc., the parent holding company for First Federal Savings
Bank of Siouxland and the issuer of the shares of Common Stock in the Offering
Conversion ........................ The conversion of the Mutual Holding Company from mutual to stock form
pursuant to the Plan of Conversion.
CRA ............................... Community Reinvestment Act
Director's Plan ................... First Federal Savings Bank of Siouxland 1992 Stock Plan for Outside Directors.
Eligible Account Holders .......... Depositors of the Bank with aggregate account balances of at least $50 as of the
close of business on September 30, 1997
</TABLE>
H-1
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Eligible Record Date .............. September 30, 1997
ERISA ............................. Employee Retirement Income Security Act of 1974, as amended
ESOP .............................. First Federal Bankshares, Inc. Employee Stock Ownership Plan and Trust
Estimated Valuation Range ......... The estimated pro forma market value of the Common Stock
to be issued in the Reorganization, or $48.1 million to $65.1 million.
The maximum of the Estimated Valuation Range may be increased to $74.9
million without a resolicitation of subscribers
Expiration Date ................... [12:00 noon, Central Time, on] ________, 1999
Fair Lending Laws ................. The Equal Credit Opportunity Act and the Fair Housing Act
FASB .............................. Financial Accounting Standards Board
FDIA .............................. Federal Deposit Insurance Act
FDIC .............................. Federal Deposit Insurance Corporation
FDICIA ............................ Federal Deposit Insurance Corporation Improvement Act of 1991, as amended
Federal Reserve Board ............. Board of Governors of the Federal Reserve System
FIRREA ............................ Financial Institutions Reform, Recovery and Enforcement Act of 1989
FHA ............................... Federal Housing Administration
FHLB .............................. The Federal Home Loan Bank
FHLMC ............................. Federal Home Loan Mortgage Corporation
FNMA .............................. Federal National Mortgage Association
FRA ............................... Federal Reserve Act
GFS Bancorp ....................... GFS Bancorp, Inc.
GNMA .............................. Government National Mortgage Association
Grinnell Federal .................. Grinnell Federal Savings Bank
Guidelines ........................ Interagency Guidelines Prescribing Standards for Safety and Soundness
HOLA .............................. Home Owners' Loan Act
IBS ............................... Investment Bank Services, Inc.
Independent Valuation ............. The appraisal of the pro forma market value of the Common Stock to be issued
</TABLE>
H-2
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
in the Reorganization, as determined by RP Financial
Interested Stockholder ............ Any individual, corporation, partnership or other entity (other than
the Company or its subsidiary) which owns beneficially or controls,
directly or indirectly, 10% or more of the outstanding shares of the voting stock
of the Company
IRA ............................... Individual retirement account or arrangement
IRS ............................... Internal Revenue Service
KPMG .............................. KPMG Peat Marwick LLP, auditor for the Company
Luse Lehman ....................... Luse Lehman Gorman Pomerenk & Schick, P.C., special counsel for the Company
Merger Agreement .................. Agreement dated August 17, 1998, between the Mutual Holding
Company, the Bank, Mid-Iowa Financial and Mid-Iowa Savings,
whereby the Bank, will pay $15.00 in cash, subject to adjustments in
certain situations, for each share of common stock of Mid-Iowa Financial
Merger Consideration .............. The consideration of $15.00 per share is cash to be received by the stockholders of
Mid-Iowa Financial pursuant to the Merger Agreement
Mid-Iowa Financial ................ Mid-Iowa Financial Corp., the holding company of Mid-Iowa Savings Bank, FSB
Mid-Iowa Financial
Common Stock .................. Common Stock, par value $.01 per share, of Mid-Iowa Financial
Mid-Iowa Savings .................. Mid-Iowa Savings Bank, FSB
Minority Stockholders ............. Stockholders of the Company other than the Mutual Holding Company
MMDA .............................. Money Market Demand Account
Model ............................. OTS Net Portfolio Value Model
MSRs .............................. Mortgage Servicing Rights
Muldoon Murphy .................... Muldoon, Murphy & Faucette, counsel to Sandler and IBS
Mutual Holding Company ............ First Federal Bankshares, MHC, a federal mutual holding company
NASD .............................. National Association of Securities Dealers, Inc.
NOW account ....................... Negotiable Order of Withdrawal account
NPV ............................... Net portfolio value
Offering .......................... The offer and sale of between 2,635,000 and 3,565,000 shares of Common Stock, subject to
adjustment to 4,099,750 shares of Common Stock to depositors and others in the
Subscription Offering and the Community Offering pursuant to the Prospectus
Order Form ........................ The form for ordering Common Stock accompanied by a certification concerning
certain matters
</TABLE>
H-3
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Other Members ..................... Depositors of the Bank as of __________, 1999, who are not Eligible Account
Holders or Supplemental Eligible Account Holders
OTS ............................... Office of Thrift Supervision
Plan of Conversion ................ The Plan of Conversion, whereby, (i) the Mutual Holding Company will merge into
the Bank, at which time the Mutual Holding Company will cease to exist and the
outstanding shares of the Bank's common stock held by the Mutual Holding
Company will be canceled, and (ii) the Bank will become a wholly-owned
subsidiary of the Company. As part of the conversion, the Company will sell
shares of its common stock in this offering that will represent an ownership interest
in the Company that is based on the percentage ownership that the Mutual Holding
Company currently maintains in the Bank. The Company will also issue shares of
its common stock to the public stockholders of the Bank (i.e., stockholders other
than the Mutual Holding Company) in exchange for their shares of Bank common
stock pursuant to an exchange ratio that will result in the public stockholders of the
Bank owning in the aggregate approximately 46.4% of the Company, before giving
effect to any (i) payment of cash in lieu of issuing fractional shares, (ii) shares
purchased by the stockholders of the Bank in this offering, and (iii) the exercise of
outstanding stock options.
QTL ............................... qualified thrift lender
Qualifying Deposits ............... Deposit accounts with aggregate balances of $50.00 or more as of specified dates
REO ............................... Real Estate Owned
RP Financial ...................... Appraiser
SAIF .............................. The Savings Association Insurance Fund of the FDIC
Sandler ........................... Sandler O'Neill & Partners, Inc.
SARs .............................. Stock Appreciation Rights
SEC ............................... Securities and Exchange Commission
Securities Act .................... Securities Act of 1933
Special Meeting ................... The Special Meeting of members of the Bank called for the purpose of approving
the Plan of Conversion
Stock Option Plan ................. The stock option plan for directors, officers and employees to be submitted for
approval at a meeting of the Company's shareholders to be held no earlier than
six months after the completion of the Offering
Subscription Offering ............. The offering of nontransferable rights to subscribe for the Common
Stock, in order of priority, to Eligible Account Holders, the ESOP,
Supplemental Eligible Account
</TABLE>
H-4
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Holders and Other Members
Subscription Price ................ The $10.00 price per share at which the Common Stock will be sold in the Offering
Supplemental Eligible
Account Holders ................... Depositors of the Bank with aggregate account balances of at least $50 on
December 31, 1998, who are not Eligible Account Holders
Supplemental Record Date .......... _____________________, 1998
Syndicated Community Offering ..... Offering of the Common Stock to the general public on a best
efforts basis by a selling group of broker-dealers managed by Sandler and IBS
Transfer Agent and Registrar ...... Register and Transfer Company
Voting Record Date ................ The close of business on ____________________________, 1998, the date for determining
depositors entitled to vote at the Special Meeting
401(k) Plan ....................... First Federal Bank Employee Savings' & Profit Sharing Plan and Trust
</TABLE>
H-5
<PAGE>
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representation other than as contained in this Prospectus, and, if given or
made, such other information or representation must not be relied upon as having
been authorized by First Federal Bankshares, Inc., or First Federal Savings Bank
of Siouxland. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any of the securities offered hereby to any
person in 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 whom it is unlawful to make such offer or solicitation in
such jurisdiction. Neither the delivery of this Prospectus nor any sale
hereunder shall under any circumstances create any implication that there has
been no change in the affairs of First Federal Bankshares, Inc. or First Federal
Savings Bank of Siouxland since any of the dates as of which information is
furnished herein or since the date hereof.
------------------
Up to 3,565,000 Shares
(Anticipated Maximum)
First Federal Bankshares, Inc.
(Proposed Holding Company for
First Federal Savings
Bank of Siouxland,
to be named First Federal Bank)
COMMON STOCK
Par Value $.01 per share
------------------
PROSPECTUS
------------------
Sandler O'Neill & Partners, L.P.
Investment Bank Services, Inc.
February __, 1999
------------------
These securities are not deposits or accounts and are not federally insured or
guaranteed.
------------------
Until _____ , 1999 or 25 days after commencement of the Syndicated
Community Offering, if any, whichever is later, all dealers effecting
transactions in the registered securities, whether or not participating in this
distribution, may be required to deliver a Prospectus when acting as
underwriters and with respect to their unsold allotments of subscriptions.
- --------------------------------------------------------------------------------
<PAGE>
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
<TABLE>
<CAPTION>
Amount
------
<S> <C> <C>
* Legal Fees and Expenses...................................................... $ 270,000
* Printing and Mailing......................................................... 370,000
* Appraisal and Business Plan Fees and Expenses................................ 52,500
* Accounting Fees and Expenses................................................. 75,000
** Marketing Fees and Expenses.................................................. 390,731
* Filing Fees (SEC and OTS).................................................... 36,500
* Data Processing.............................................................. 40,000
* Conversion Center............................................................ 40,000
* Other Expenses............................................................... 100,000
--------------
** Total ....................................................................... $ 1,374,731
--------------
--------------
</TABLE>
- --------------------------
* Estimated
** The Bank and the Company have retained Sandler O'Neill & Partners, L.P.
and Investment Bank Services, Inc. (collectively, the "Agents") to
assist in the sale of common stock on a best efforts basis in the
Subscription and Community Offerings. For purposes of computing
estimated expenses, it has been assumed that the Agents will receive
fees of approximately $315,731, exclusive of expenses of $75,000.
Item 14. Indemnification of Directors and Officers
Articles TENTH and ELEVENTH of the Certificate of Incorporation of
First Federal Bankshares, Inc. (the "Corporation") sets forth circumstances
under which directors, officers, employees and agents of the Corporation may be
insured or indemnified against liability which they incur in their capacities as
such.
TENTH:
A. Each person who was or is made a party or is threatened to be made a
party to or is otherwise involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (hereinafter a "proceeding"),
by reason of the fact that he or she is or was a Director or an Officer of the
Corporation or is or was serving at the request of the Corporation as a
Director, Officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to an
employee benefit plan (hereinafter an "indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as a Director, Officer,
employee or agent or in any other capacity while serving as a Director, Officer,
employee or agent, shall be indemnified and held harmless by the Corporation to
the fullest extent authorized by the Delaware General Corporation Law, as the
same exists or may hereafter be amended (but, in the case of any such amendment,
only to the extent that such amendment permits the Corporation to provide
broader indemnification rights than such law permitted the Corporation to
provide prior to such amendment), against all expense, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties
and amounts paid in settlement) reasonably incurred or suffered by such
indemnitee in connection therewith; provided, however, that, except as provided
in Section C hereof with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee only
if such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation.
B. The right to indemnification conferred in Section A of this Article
TENTH shall include the right to be paid by the Corporation the expenses
incurred in defending any such proceeding in advance of its final disposition
(hereinafter an "advancement of expenses"); provided, however, that, if the
Delaware General Corporation Law requires, an advancement of expenses incurred
by an indemnitee in his or her capacity as a Director or Officer (and not in any
other capacity in which service was or is rendered by such indemnitee,
including, without limitation, service to an employee benefit plan) shall be
made only upon delivery to the Corporation of an undertaking
II-1
<PAGE>
(hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all
amounts so advanced if it shall ultimately be determined by final judicial
decision from which there is no further right to appeal (hereinafter a "final
adjudication") that such indemnitee is not entitled to be indemnified for such
expenses under this Section or otherwise. The rights to indemnification and to
the advancement of expenses conferred in Sections A and B of this Article TENTH
shall be contract rights and such rights shall continue as to an indemnitee who
has ceased to be a Director, Officer, employee or agent and shall inure to the
benefit of the indemnitee's heirs, executors and administrators.
C. If a claim under Section A or B of this Article TENTH is not paid in
full by the Corporation within sixty days after a written claim has been
received by the Corporation, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be twenty days, the
indemnitee may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim. If successful in whole or in part in any
such suit, or in a suit brought by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, the indemnitee shall be
entitled to be paid also the expense of prosecuting or defending such suit. In
(i) any suit brought by the indemnitee to enforce a right to indemnification
hereunder (but not in a suit brought by the indemnitee to enforce a right to an
advancement of expenses) it shall be a defense that, and (ii) in any suit by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking the Corporation shall be entitled to recover such expenses upon a
final adjudication that, the indemnitee has not met any applicable standard for
indemnification set forth in the Delaware General Corporation Law. Neither the
failure of the Corporation (including its Board of Directors, independent legal
counsel, or its stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the indemnitee is proper in
the circumstances because the indemnitee has met the applicable standard of
conduct set forth in the Delaware General Corporation Law, nor an actual
determination by the Corporation (including its Board of Directors, independent
legal counsel, or its stockholders) that the indemnitee has not met such
applicable standard of conduct, shall create a presumption that the indemnitee
has not met the applicable standard of conduct or, in the case of such a suit
brought by the indemnitee, be a defense to such suit. In any suit brought by the
indemnitee to enforce a right to indemnification or to an advancement of
expenses hereunder, or by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the burden of proving that the
indemnitee is not entitled to be indemnified, or to such advancement of
expenses, under this Article TENTH or otherwise shall be on the Corporation.
D. The rights to indemnification and to the advancement of expenses
conferred in this Article TENTH shall not be exclusive of any other right which
any person may have or hereafter acquire under any statute, the Corporation's
Certificate of Incorporation, Bylaws, agreement, vote of stockholders or
disinterested Directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to protect
itself and any Director, Officer, employee or agent of the Corporation or
another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the Corporation would
have the power to indemnify such person against such expense, liability or loss
under the Delaware General Corporation Law.
F. The Corporation may, to the extent authorized from time to time by
the Board of Directors, grant rights to indemnification and to the advancement
of expenses to any employee or agent of the Corporation to the fullest extent of
the provisions of this Article TENTH with respect to the indemnification and
advancement of expenses of Directors and Officers of the Corporation.
ELEVENTH: A Director of this Corporation shall not be personally liable
to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a Director, except for liability (i) for any breach of the
Director's duty of loyalty to the Corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law, or (iv) for any transaction from which the Director derived an
improper personal benefit. If the Delaware General Corporation Law is amended to
authorize corporate action further eliminating or limiting the personal
liability of Directors, then the liability of a Director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the Delaware
General Corporation Law, as so amended.
II-2
<PAGE>
Any repeal or modification of the foregoing paragraph by the
stockholders of the Corporation shall not adversely affect any right or
protection of a Director of the Corporation existing at the time of such repeal
or modification.
Item 15. Recent Sales of Unregistered Securities.
Not Applicable.
II-3
<PAGE>
Item 16. Exhibits and Financial Statement Schedules:
The exhibits and financial statement schedules filed as part
of this registration statement are as follows:
(a) List of Exhibits
1.1 Engagement Letter between First Federal Savings Bank of Siouxland,
Sandler O'Neill & Partners, L.P. and Investment Bank Services, Inc.
1.2* Form of Agency Agreement among First Federal Bankshares, Inc., First
Federal Savings Bank of Siouxland, Sandler O'Neill & Partners, L.P.
and Investment Bank Services, Inc.
2 Plan of Conversion and Reorganization
3.1 Certificate of Incorporation of First Federal Bankshares, Inc.
(Incorporated herein by reference to Exhibit D of the Plan of
Conversion and Reorganization)
3.2 Bylaws of First Federal Bankshares, Inc. (Incorporated herein by
reference to Exhibit E of the Plan of Conversion and Reorganization)
4 Form of Common Stock Certificate of First Federal Bankshares, Inc.
5 Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C. regarding
legality of securities being registered
8.1 Form of Federal Tax Opinion of Luse Lehman Gorman Pomerenk & Schick,
P.C.
8.2* Form of State Tax Opinion of KPMG Peat Marwick, LLP
8.3 Letter from RP Financial, LC with respect to Subscription Rights
10.1* Severance Agreement for Barry E. Backhaus
10.2* Severance Agreement for Jon G. Cleghorn
10.3* Severance Agreement for Sandra Sabel
10.4* Employment Agreement for Steven L. Opsal
10.5 Form of Employment Agreement for Barry E. Backhaus, Jon G. Cleghorn,
Sandra Sabel and Steven L. Opsal
10.6* 1992 Stock Option Plan for Outside Directors
10.7* 1992 Incentive Stock Option Plan
10.8* 1992 Recognition Plan and Trust
10.9* Deferred Compensation Plan for Directors
10.10 Supplemental Executive Retirement and Deferred Compensation Plan
10.11* Incentive Pay Plan
10.12* Cash Only SAR Plan
10.13* Employee Stock Ownership Plan
II-4
<PAGE>
10.14 Agreement and Plan of Reorganization By and Among First Federal
Bankshares, M.H.C., First Federal Savings Bank of Siouxland, Mid-Iowa
Financial Corp. and Mid-Iowa Savings Bank, FSB
21 Subsidiaries of the Registrant
23.1 Consent of Luse Lehman Gorman Pomerenk & Schick, P.C. (contained in
opinion filed as Exhibit 5)
23.2 Consent of KPMG Peat Marwick LLP as to First Federal Savings Bank of
Siouxland
23.3 Consent of RP Financial, LC
23.4 Consent of KPMG Peat Marwick LLP as to Mid-Iowa Financial Corp.
24 Power of Attorney (set forth on Signature Page)
27 EDGAR Financial Data Schedule
99.1** Appraisal Report of RP Financial, LC
99.2* Appraisal Agreement between First Federal Savings Bank of Siouxland and
RP Financial, LC
99.3* Marketing Materials
99.4* Order and Acknowledgment Form
- ------------------------------------
* To be filed supplementally or by amendment.
** Filed pursuant to Rule 202 of Regulation S-T
(b) Financial Statement Schedules
No financial statement schedules are filed because the
required information is not applicable or is included in the consolidated
financial statements or related notes.
Item 17. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
II-5
<PAGE>
(4) To provide to the underwriter at the closing specified in the
underwriting agreements, certificates in such denominations and registered in
such names as required by the underwriter to permit prompt delivery to each
purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the questions whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Sioux City, Iowa on
December 17, 1998.
FIRST FEDERAL BANKSHARES, INC.
By: /s/ Barry E. Backhaus
-------------------------------------
Barry E. Backhaus
President and Chief Executive Officer
(Duly Authorized Representative)
POWER OF ATTORNEY
We, the undersigned directors and officers of First Federal Bankshares,
Inc. (the "Company") hereby severally constitute and appoint Barry E. Backhaus
as our true and lawful attorney and agent, to do any and all things in our names
in the capacities indicated below which said Barry E. Backhaus may deem
necessary or advisable to enable the Company to comply with the Securities Act
of 1933, and any rules, regulations and requirements of the Securities and
Exchange Commission, in connection with the registration statement on Form S-1
relating to the offering of the Company's Common Stock, including specifically,
but not limited to, power and authority to sign for us in our names in the
capacities indicated below the registration statement and any and all amendments
(including post-effective amendments) thereto; and we hereby approve, ratify and
confirm all that said Barry E. Backhaus shall do or cause to be done by virtue
thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and as of the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ Barry E. Backhaus President, Chief Executive December 17, 1998
- ---------------------------- Officer and Chairman of the Board
Barry E. Backhaus (Principal Executive Officer)
/s/ Jon G. Cleghorn Executive Vice President and December 17, 1998
- ---------------------------- Director
Jon G. Cleghorn
/s/ Katherine A. Bousquet Vice President and Treasurer December 17, 1998
- ---------------------------- (Principal Financial and
Katherine A. Bousquet Accounting Officer)
/s/ Dr. Nancy A. Boysen Director December 17, 1998
- ----------------------------
Dr. Nancy A. Boysen
/s/ Harland D. Johnson Director December 17, 1998
- ----------------------------
Harland D. Johnson
/s/ Allen J. Johnson Director December 17, 1998
- ----------------------------
Allen J. Johnson
II-7
<PAGE>
/s/ Dennis B. Swanstrom Director December 17, 1998
- ----------------------------
Dennis B. Swanstrom
/s/ Gary L. Evans Director December 17, 1998
- ----------------------------
Gary L. Evans
/s/ Paul W. Olson Director December 17, 1998
- ----------------------------
Paul W. Olson
/s/ David Van Engelenhoven Director December 17, 1998
- ----------------------------
David Van Engelenhoven
/s/ David S. Clay Director December 17, 1998
- ----------------------------
David S. Clay
/s/ Steven L. Opsal Executive Vice President December 17, 1998
- ----------------------------- and Director
Steven L. Opsal
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
1.1 Engagement Letter between First Federal Savings Bank of Siouxland,
Sandler O'Neill & Partners, L.P. and Investment Bank Services, Inc.
1.2* Form of Agency Agreement among First Federal Bankshares, Inc., First
Federal Savings Bank of Siouxland, Sandler O'Neill & Partners, L.P. and
Investment Bank Services, Inc.
2 Plan of Conversion and Reorganization
3.1 Certificate of Incorporation of First Federal Bankshares, Inc.
(Incorporated herein by reference to Exhibit D of the Plan of
Conversion and Reorganization)
3.2 Bylaws of First Federal Bankshares, Inc. (Incorporated herein by
reference to Exhibit E of the Plan of Conversion and Reorganization)
4 Form of Common Stock Certificate of First Federal Bankshares, Inc.
5 Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C. regarding
legality of securities being registered
8.1 Form of Federal Tax Opinion of Luse Lehman Gorman Pomerenk & Schick,
P.C.
8.2* Form of State Tax Opinion of KPMG Peat Marwick, LLP
8.3 Letter from RP Financial, LC with respect to Subscription Rights
10.1* Severance Agreement for Barry E. Backhaus
10.2* Severance Agreement for Jon G. Cleghorn
10.3* Severance Agreement for Sandra Sabel
10.4* Employment Agreement for Steven L. Opsal
10.5 Form of Employment Agreement for Barry E. Backhaus, Jon G. Cleghorn,
Sandra Sabel and Steven L. Opsal
10.6* 1992 Stock Option Plan for Outside Directors
10.7* 1992 Incentive Stock Option Plan
10.8* 1992 Recognition Plan and Trust
10.9* Deferred Compensation Plan for Directors
10.10 Supplemental Executive Retirement and Deferred Compensation Plan
10.11* Incentive Pay Plan
10.12* Cash Only SAR Plan
10.13* Employee Stock Ownership Plan
<PAGE>
10.14 Agreement and Plan of Reorganization By and Among First Federal
Bankshares, M.H.C., First Federal Savings Bank of Siouxland, Mid-Iowa
Financial Corp. and Mid-Iowa Savings Bank, FSB
21 Subsidiaries of the Registrant
23.1 Consent of Luse Lehman Gorman Pomerenk & Schick, P.C. (contained in
opinion filed as Exhibit 5)
23.2 Consent of KPMG Peat Marwick LLP as to First Federal Savings Bank of
Siouxland
23.3 Consent of RP Financial, LC
23.4 Consent of KPMG Peat Marwick LLP as to Mid-Iowa Financial Corp.
24 Power of Attorney (set forth on Signature Page)
27 EDGAR Financial Data Schedule
99.1** Appraisal Report of RP Financial, LC
99.2* Appraisal Agreement between First Federal Savings Bank of Siouxland and
RP Financial, LC
99.3* Marketing Materials
99.4* Order and Acknowledgment Form
- ------------------------------------
* To be filed supplementally or by amendment.
** Filed pursuant to Rule 202 of Regulation S-T
<PAGE>
As filed with the Securities and Exchange Commission on December 18, 1998
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
EXHIBITS
TO
REGISTRATION STATEMENT
ON
FORM S-1
------------------------------------
FIRST FEDERAL BANKSHARES, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Exhibit 1.1
November 1, 1998
Board of Directors
First Federal Savings Bank of Siouxland
329 Pierce Street
Sioux City, Iowa 51101-1411
Attention: Mr. Barry E. Backhaus
President and Chief Executive Officer
Ladies and Gentlemen:
Sandler O'Neill & Partners, L.P. ("Sandler O'Neill") and Investment
Bank Services, Inc. ("Investment Bank") (collectively, the "Advisors") are
pleased to act as independent financial advisors to First Federal Savings Bank
of Siouxland (the "Bank") in connection with the Bank's proposed conversion from
mutual holding company status to full stock form (the "Conversion"), including
the offer and sale of certain shares of the common stock of the proposed new
holding company for the Bank (the "Holding Company") to the Bank's eligible
account holders and other eligible purchasers in a Subscription Offering, to
members of the Bank's community in a Direct Community Offering and, under
certain circumstances, to the general public in a Syndicated Community Offering
(collectively, the "Offerings"). For purposes of this letter, the term "Actual
Purchase Price" shall mean the price at which the shares of the Holding
Company's common stock are sold in the Conversion. This letter is to confirm the
terms and conditions of our engagement.
ADVISORY SERVICES
The Advisors will consult with and advise the Bank and the Holding
Company and will work with the Bank's management, counsel, accountants and other
advisors in connection with the Conversion and the Offerings. We anticipate that
our services will include the following, each as may be necessary and as the
Bank may reasonably request:
1. Consulting as to the securities marketing implications of any
aspect of the Plan of Conversion or related corporate documents;
2. Reviewing with the Board of Directors the independent appraiser's
appraisal of the common stock, particularly with regard to aspects
of the appraisal involving the methodology employed;
<PAGE>
First Federal Savings Bank of Siouxland
November 1, 1998
Page 2
3. Reviewing all offering documents, including the Prospectus, stock
order forms and related offering materials (it being understood
that preparation and filing of such documents will be the
responsibility of the Bank and the Holding Company and their
counsel);
4. Assisting in the design and implementation of a marketing strategy
for the Offerings;
5. Assisting in obtaining all requisite regulatory approvals;
6. Assisting Bank management in scheduling and preparing for meetings
with potential investors and broker-dealers; and
7. Providing such other general advice and assistance as may be
requested to promote the successful completion of the Conversion.
FEES
If the Conversion is consummated, the Bank agrees to pay the Advisors
for their services hereunder the fees set forth below:
1. a fee of one and one-eighth percent (1.125%) of the aggregate
Actual Purchase Price of the shares of common stock sold in the
Subscription Offering and in the Direct Community Offering,
excluding in each case shares purchased by (i) any employee
benefit plan of the Holding Company or the Bank established for
the benefit of their respective directors, officers and employees,
and (ii) any director, officer or employee of the Holding Company
or the Bank or members of their immediate families; and
2. with respect to any shares of the Holding Company's common stock
sold by any NASD member firm under any selected dealers agreement
in the Syndicated Community Offering, (a) the sales commission
payable to the selected dealer under such agreement, (b) any
sponsoring dealer's fees, and (c) a management fee to the Advisors
of one and one-eighth percent (1.125%) of the Aggregate Purchase
Price. Any fees payable to the Advisors for common stock sold by
the Advisors under any such agreement shall be limited to an
aggregate of one and one-eighth percent (1.125%) of the Actual
Purchase Price of such shares.
If (i) the Advisor's engagement hereunder is terminated for any of the
reasons provided for under the second paragraph of the section of this letter
captioned "Definitive Agreement," or (ii) the
<PAGE>
First Federal Savings Bank of Siouxland
November 1, 1998
Page 3
Conversion is terminated by the Bank, no fees shall be payable by the Bank to
the Advisors hereunder; however, the Bank shall reimburse the Advisors for their
reasonable out-of-pocket expenses incurred in connection with their engagement
hereunder as set forth under the caption "Costs and Expenses" below.
All fees payable to the Advisors hereunder shall be payable in cash to
Sandler O'Neill, as representative of the Advisors, at the time of the closing
of the Conversion, or upon the termination of the Conversion, if applicable. In
recognition of the long lead times involved in the conversion process, the Bank
agrees to make advance payments to the Advisors in the aggregate amount of
$50,000, $25,000 of which shall be payable upon execution of this letter and the
remaining $25,000 of which shall be payable upon commencement of the
Subscription Offering, which shall be credited against any fees or reimbursement
of expenses payable hereunder with any remaining balance refunded to the Bank.
SYNDICATED COMMUNITY OFFERING
If any shares of the Holding Company's common stock remain available
after the expiration of the Subscription Offering and the Direct Community
Offering, at the request of the Bank and subject to the continued satisfaction
of the conditions set forth in the second paragraph under the caption
"Definitive Agreement" below, the Advisors will seek to form a syndicate of
registered dealers to assist in the sale of such common stock in a Syndicated
Community Offering on a best efforts basis, subject to the terms and conditions
set forth in a selected dealers agreement. The Advisors will endeavor to limit
the aggregate fees to be paid by the Bank under any such selected dealers
agreement to an amount competitive with gross underwriting discounts charged at
such time for underwritings of comparable amounts of stock sold at a comparable
price per share in a similar market environment, which shall not exceed 7% of
the aggregate Actual Purchase Price of the shares sold under such agreements.
The Advisors will endeavor to distribute the common stock among dealers in a
fashion which best meets the distribution objectives of the Bank and the
requirements of the Plan of Conversion, which may result in limiting the
allocation of stock to certain selected dealers. It is understood that in no
event shall the Advisors be obligated to act as selected dealers or to take or
purchase any shares of the Holding Company's common stock.
COSTS AND EXPENSES
In addition to any fees that may be payable to the Advisors hereunder
and the expenses to be borne by the Bank pursuant to the following paragraph,
the Bank agrees to reimburse the Advisors, upon request made from time to time,
for their reasonable out-of-pocket expenses incurred in connection with their
engagement hereunder, regardless of whether the Conversion is consummated,
including, without limitation, legal fees, advertising, promotional,
syndication, and
<PAGE>
First Federal Savings Bank of Siouxland
November 1, 1998
Page 4
travel, up to the aggregate maximum amount of $75,000; provided, however, that
the Advisors shall document such expenses to the reasonable satisfaction of the
Bank. The provisions of this paragraph are not intended to apply to or in any
way impair the indemnification provisions of this letter.
As is customary, the Bank will bear all other expenses incurred in
connection with the Conversion and the Offerings, including, without limitation,
(i) the cost of obtaining all securities and bank regulatory approvals,
including any required NASD filing fees; (ii) the cost of printing and
distributing the offering materials; (iii) the costs of blue sky qualification
(including fees and expenses of blue sky counsel) of the shares in the various
states; (iv) listing fees; and (v) all fees and disbursements of the Bank's and
the Holding Company's counsel, accountants, conversion agent and other advisors.
In the event the Advisors incur any such fees and expenses on behalf of the Bank
or the Holding Company, the Bank will reimburse the Advisors for such fees and
expenses whether or not the Conversion is consummated; provided, however, theat
the Advisors shall not incur any substantial expenses on behalf of the Bank
pursuant to this paragraph without the prior approval of the Bank.
DUE DILIGENCE REVIEW
The Advisors' obligations to perform the services contemplated by this
letter shall be subject to the satisfactory completion of such investigation and
inquiries relating to the Bank and the Holding Company, and their respective
directors, officers, agents and employees, as the Advisors and their counsel in
their sole discretion may deem appropriate under the circumstances. In this
regard, the Bank agrees that, at its expense, it will make available to the
Advisors all information which the Advisors request, and will allow the Advisors
the opportunity to discuss with the Bank's and the Holding Company's management
the financial condition, business and operations of the Bank and the Holding
Company. The Bank and the Holding Company acknowledge that the Advisors will
rely upon the accuracy and completeness of all information received from the
Bank and the Holding Company and their directors, trustees, officers, employees,
agents, independent accountants and counsel.
BLUE SKY MATTERS
The Bank agrees that if counsel to the Advisors does not serve as
counsel with respect to blue sky matters in connection with the Offerings, the
Bank will cause the counsel performing such services to prepare a Blue Sky
Memorandum related to the Offerings including Sandler O'Neill's and Investment
Bank's participation therein and shall furnish each Advisor a copy thereof
addressed to both Sandler O'Neill and Investment Bank or upon which such counsel
shall state they may rely.
<PAGE>
First Federal Savings Bank of Siouxland
November 1, 1998
Page 5
CONFIDENTIALITY
Other than disclosure to other firms made part of any syndicate of
selected dealers or as required by law or regulation, the Advisors agree that
they will not disclose any Confidential Information relating to the Bank
obtained in connection with its engagement hereunder (whether or not the
Conversion is consummated). As used in this paragraph, the term "Confidential
Information" shall not include information which (i) is or becomes generally
available to the public other than as a result of a disclosure by the Advisors,
(ii) was available to the Advisors on a non-confidential basis prior to its
disclosure to the Advisors by the Bank, or (iii) becomes available to the
Advisors on a non-confidential basis from a person other than the Bank who is
not otherwise known to the Advisors to be bound not to disclose such information
pursuant to a contractual, legal or fiduciary obligation.
INDEMNIFICATION
Since the Advisors will be acting on behalf of the Bank and the Holding
Company in connection with the Conversion, the Holding Company and the Bank
agree to indemnify and hold each Advisor and each of their affiliates and their
respective partners, directors, officers, employees, agents and controlling
persons within the meaning of Section 15 of the Securities Act of 1933, as
amended or Section 20 of the Securities Exchange Act of 1934, as amended (such
Advisor and each such person being an "Indemnified Party") harmless from and
against any and all losses, claims, damages and liabilities, joint or several,
to which such Indemnified Party may become subject under applicable federal or
state law, or otherwise, related to or arising out of the Conversion or the
engagement of the Advisors pursuant to, or the performance by the Advisors of
the services contemplated by, this letter, and will reimburse any Indemnified
Party for all reasonable expenses (including reasonable legal fees and expenses)
as they are incurred, including expenses incurred in connection with the
investigation of, preparation for or defense of any pending or threatened claim
or any action or proceeding arising therefrom, whether or not such Indemnified
Party is a party; provided, however, that the Bank and the Holding Company will
not be liable in any such case to the extent that any such loss, claim, damage,
liability or expense (including previously reimbursed expenses) (i) arises out
of or is based upon any untrue statement of a material fact or the omission of a
material fact required to be stated therein or necessary to make not misleading
any statements contained in any proxy statement or prospectus (preliminary or
final), or any amendment or supplement thereto, or any of the applications,
notices, filings or documents related thereto made in reliance on and in
conformity with written information furnished to the Bank by the Advisors
expressly for use therein, or (ii) is primarily attributable to the gross
negligence, willful misconduct or bad faith of the Advisors. If the foregoing
indemnification is unavailable for any reason, the Bank and the Holding Company
agree to contribute to such losses, claims, damages, liabilities and expenses in
the proportion that its financial interest in the Conversion bears to that of
the Advisors.
<PAGE>
First Federal Savings Bank of Siouxland
November 1, 1998
Page 6
DEFINITIVE AGREEMENT
The Advisors and the Bank agree that (a) except as set forth in clause
(b), the foregoing represents the general intention of the Bank and the Advisors
with respect to the services to be provided by the Advisors in connection with
the Offerings, which will serve as a basis for the Advisors commencing
activities, and (b) the only legal and binding obligations of the Bank, the
Holding Company and the Advisors with respect to the subject matter hereof shall
be (1) the Bank's obligation to reimburse costs and expenses pursuant to the
section captioned "Costs and Expenses," (2) those set forth under the captions
"Confidentiality" and "Indemnification," and (3) as set forth in a duly
negotiated and executed definitive Agency Agreement to be entered into prior to
the commencement of the Subscription Offering relating to the services of the
Advisors in connection with the Offerings. Such Agency Agreement shall be in
form and content satisfactory to the Advisors, the Bank and the Holding Company
and their respective counsel and shall contain standard indemnification
provisions mutually acceptable to the Bank, the Holding Company and the
Advisors.
The Advisor's execution of such Agency Agreement shall also be subject
to (i) the Advisor's satisfaction with its investigation of the Bank's business,
financial condition and results of operations, (ii) preparation of offering
materials that are satisfactory to the Advisors and their counsel, (iii)
compliance with all relevant legal and regulatory requirements to the reasonable
satisfaction of counsel to the Advisors, (iv) agreement that the price
established by the independent appraiser is reasonable and (v) market conditions
at the time of the proposed offering. The Advisors may terminate this agreement
if such Agency Agreement is not entered into prior to June 30, 1999.
<PAGE>
First Federal Savings Bank of Siouxland
November 1, 1998
Page 7
Please confirm that the foregoing correctly sets forth our agreement by
signing and returning to Sandler O'Neill the duplicate copy of this letter
enclosed herewith.
Very truly yours,
Sandler O'Neill &
Partners, L.P.
By: Sandler O'Neill & Partners Corp.,
the sole general partner
By: /s/ Catherine A. Lawton
-----------------------------------
Catherine A. Lawton
Vice President
Investment Bank Services, Inc.
By: /s/ C. Hargrove
-----------------------------------
Accepted and agreed to as of
the date first above written:
First Federal Savings Bank of Siouxland
By: /s/ Barry E. Backhaus
----------------------------------------
Mr. Barry E. Backhaus
President and Chief Executive Officer
<PAGE>
Exhibit 2
PLAN OF CONVERSION AND REORGANIZATION
OF
FIRST FEDERAL BANKSHARES, M.H.C.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. INTRODUCTION.............................................................................................1
2. DEFINITIONS..............................................................................................1
3. PROCEDURES FOR CONVERSION................................................................................6
4. HOLDING COMPANY APPLICATIONS AND APPROVALS...............................................................8
5. SALE OF SUBSCRIPTION SHARES..............................................................................8
6. PURCHASE PRICE AND NUMBER OF SUBSCRIPTION SHARES.........................................................8
7. RETENTION OF CONVERSION PROCEEDS BY THE HOLDING COMPANY..................................................9
8. SUBSCRIPTION RIGHTS OF ELIGIBLE ACCOUNT HOLDERS (FIRST PRIORITY).........................................9
9. SUBSCRIPTION RIGHTS OF EMPLOYEE PLANS (SECOND PRIORITY).................................................10
10. SUBSCRIPTION RIGHTS OF SUPPLEMENTAL ELIGIBLE
ACCOUNT HOLDERS (THIRD PRIORITY) ...................................................................10
11. SUBSCRIPTION RIGHTS OF OTHER MEMBERS (FOURTH PRIORITY)..................................................10
12. COMMUNITY OFFERING......................................................................................11
13. SYNDICATED COMMUNITY OFFERING...........................................................................11
14. LIMITATION ON PURCHASES.................................................................................12
15. PAYMENT FOR SUBSCRIPTION SHARES.........................................................................13
16. MANNER OF EXERCISING SUBSCRIPTION RIGHTS THROUGH ORDER FORMS............................................14
17. UNDELIVERED, DEFECTIVE OR LATE ORDER FORM; INSUFFICIENT PAYMENT.........................................15
18. RESIDENTS OF FOREIGN COUNTRIES AND CERTAIN STATES.......................................................15
19. ESTABLISHMENT OF LIQUIDATION ACCOUNT....................................................................16
20. VOTING RIGHTS OF STOCKHOLDERS...........................................................................17
21. RESTRICTIONS ON RESALE OR SUBSEQUENT DISPOSITION........................................................17
22. REQUIREMENTS FOR STOCK PURCHASES BY DIRECTORS AND OFFICERS
FOLLOWING THE CONVERSION................................................................................17
23. TRANSFER OF DEPOSIT ACCOUNTS............................................................................18
24. REGISTRATION AND MARKETING..............................................................................18
</TABLE>
(i)
<PAGE>
<TABLE>
<S> <C>
25. TAX RULINGS OR OPINIONS.................................................................................18
26. STOCK BENEFIT PLANS AND EMPLOYMENT AGREEMENTS...........................................................18
27. RESTRICTIONS ON ACQUISITION OF BANK AND HOLDING COMPANY.................................................19
28. PAYMENT OF DIVIDENDS AND REPURCHASE OF STOCK............................................................19
29. CHARTER AND BYLAWS......................................................................................19
30. CONSUMMATION OF CONVERSION AND EFFECTIVE DATE...........................................................19
31. EXPENSES OF CONVERSION..................................................................................20
32. AMENDMENT OR TERMINATION OF PLAN........................................................................20
33. CONDITIONS TO CONVERSION................................................................................20
34. INTERPRETATION..........................................................................................20
</TABLE>
EXHIBIT A MHC AGREEMENT OF MERGER
EXHIBIT B BANK AGREEMENT OF MERGER
EXHIBIT C AMENDED CHARTER OF FIRST FEDERAL SAVINGS BANK OF
SIOUXLAND
EXHIBIT D CERTIFICATE OF INCORPORATION OF THE HOLDING COMPANY
EXHIBIT E BYLAWS OF HOLDING COMPANY
(ii)
<PAGE>
PLAN OF CONVERSION AND REORGANIZATION OF
FIRST FEDERAL BANKSHARES, M.H.C.
1. INTRODUCTION
This Plan of Conversion and Reorganization (the "Plan") provides for the
conversion of First Federal Bankshares, M.H.C. (the "Mutual Holding Company")
into First Federal Bankshares, Inc., a capital stock corporation organized under
Delaware law (the "Holding Company"). The Mutual Holding Company currently owns
a majority of the common stock of First Federal Savings Bank of Siouxland (the
"Bank"), a federal stock savings bank which is headquartered in Sioux City,
Iowa. The purpose of the Conversion is to convert the Mutual Holding Company to
the capital stock form of organization, which will provide the Holding Company
and the Bank with greater flexibility and capital resources to respond to
changing regulatory and market conditions and to effect corporate transactions,
including mergers and acquisitions. One of the specific purposes of the
Conversion is to enable the Bank to acquire Mid-Iowa Financial Corp. ("Mid-Iowa
Financial"), a Delaware-chartered holding company and parent of Mid-Iowa Savings
Bank, FSB ("Mid-Iowa Savings"), a federal stock savings bank. Pursuant to an
Agreement and Plan of Reorganization dated August 17, 1998 by and between the
Mutual Holding Company, the Bank, Mid-Iowa Financial and Mid-Iowa Savings, the
Bank will acquire Mid-Iowa Savings and each outstanding share of Mid-Iowa
Financial common stock will be converted into the right to receive $15 in cash.
The Conversion will generate capital to support the acquisition of Mid-Iowa
Financial. The Holding Company will offer its Common Stock upon the terms and
conditions set forth herein to Eligible Account Holders, the Employee Plans
established by the Bank or the Holding Company, Supplemental Eligible Account
Holders and Other Members in the respective priorities set forth in this Plan.
Any Subscription Shares not subscribed for by the foregoing classes of persons
will be offered for sale to certain members of the public directly by the
Holding Company through a Community Offering or a Syndicated Community Offering
or through an underwritten firm commitment public offering, or through a
combination thereof. As part of the Conversion, each Minority Stockholder will
receive Common Stock of the Holding Company in exchange for Minority Shares. The
Conversion will result in the voting interests of the Mutual Holding Company's
members being transferred to persons who purchase Subscription Shares in the
Offering and persons who exchange common stock of the Bank for Common Stock of
the Holding Company. The Conversion will have no impact on depositors, borrowers
or customers of the Bank. After the Conversion, the Bank will continue to be
regulated by the OTS as its chartering authority. The Bank also will continue to
be a member of the Federal Home Loan Bank System and all its insured savings
deposits will continue to be insured by the FDIC to the full extent provided by
applicable law.
This Plan has been adopted by the Board of Directors of the Mutual Holding
Company, and must also be approved by (i) a majority of the total number of
votes entitled to be cast by Voting Members of the Mutual Holding Company at a
Special Meeting of Members to be called for that purpose, and (ii) at least
two-thirds of the outstanding common stock of the Bank at the Special Meeting of
Stockholders, including at least a majority of the votes cast, in person or by
proxy, by the Minority Stockholders. Prior to the submission of this Plan to the
Voting Members and stockholders of the Bank for consideration, this Plan must be
approved by the OTS.
2. DEFINITIONS
For the purposes of this Plan, the following terms have the following
meanings:
Account Holder - Any Person holding a Deposit Account in the Bank.
Acting in Concert - The term Acting in Concert means (i) knowing
participation in a joint activity or interdependent conscious parallel action
towards a common goal whether or not pursuant to an express agreement; or (ii) a
combination or pooling of voting or other interests in the securities of an
issuer for a common purpose pursuant to any contract, understanding,
relationship, agreement or other arrangement, whether written or otherwise. A
person or company which acts in concert with another person or company ("other
party") shall also be deemed to
<PAGE>
be acting in concert with any person or company who is also acting in concert
with that other party, except that any tax-qualified employee stock benefit plan
will not be deemed to be acting in concert with its trustee or a person who
serves in a similar capacity solely for the purpose of determining whether stock
held by the trustee and stock held by the plan will be aggregated.
Actual Purchase Price - The per share price at which the Common Stock is
ultimately sold in accordance with the terms hereof.
Adjusted Majority Ownership Interest - The percentage of the Common Stock
of the Bank owned by the Mutual Holding Company as adjusted to reflect the MHC
Assets Adjustment.
Adjusted Minority Ownership Interest - The Minority Ownership Interest as
adjusted by the MHC Assets Adjustment.
Affiliate - Any person that controls, is controlled by, or is under common
control with another person.
Associate - The term Associate when used to indicate a relationship with
any person, means (i) any corporation or organization (other than the Holding
Company, the Bank or a majority-owned subsidiary of the Bank) of which such
person is an officer or partner or is, directly or indirectly, the beneficial
owner of 10% or more of any class of equity securities, (ii) any trust or other
estate in which such person has a substantial beneficial interest or as to which
such person serves as trustee or in a similar fiduciary capacity, except that
for the purposes of Sections 8 through 15, the term "Associate" does not include
any Non-Tax-Qualified Employee Stock Benefit Plan or any Tax-Qualified Employee
Stock Benefit Plan in which a person has a substantial beneficial interest or
serves as a trustee or in a similar fiduciary capacity, and except that, for
purposes of aggregating total shares that may be held by Officers and Directors
the term "Associate" does not include any Tax-Qualified Employee Stock Benefit
Plan, and (iii) any relative or spouse of such person, or any relative of such
spouse, who has the same home as such person or who is a Director or Officer of
the Bank or the Holding Company, or any of its parents or subsidiaries.
Bank - First Federal Savings Bank of Siouxland, Sioux City, Iowa.
Bank Merger - The merger of the Interim Savings Bank with the Bank as set
forth in this Plan.
Code - The Internal Revenue Code of 1986, as amended.
Common Stock - The common stock, par value $.01 per share, of the Holding
Company.
Community - The State of Iowa, the Nebraska counties of Dakota, Dixon,
Thurston, Cedar and Wayne, and the South Dakota counties of Union, Clay,
Yankton, Lincoln and Turner.
Community Offering - The offering for sale to certain members of the
general public directly by the Holding Company of any shares not subscribed for
in the Subscription Offering.
Control (including the terms "controlled by", "controlling" and "under
common control with") - The possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of a Person, whether
through the ownership of voting securities, by contract or otherwise.
Conversion - The conversion and reorganization of the Mutual Holding
Company to stock form pursuant to this Plan, and all steps incident or necessary
thereto, including the MHC Merger, the Share Exchange and the Offering.
Conversion Stock - The Subscription Shares and the Exchange Shares issued
in the Conversion.
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<PAGE>
Deposit Account - The term Deposit Account means any withdrawable account
as defined in Section 561.42 of the Rules and Regulations of the OTS, and shall
include all demand deposit accounts and certificates of deposit.
Director - A member of the Board of Directors of the Bank, the Holding
Company or the Mutual Holding Company, as appropriate in the context.
Eligible Account Holder - Any Person holding a Qualifying Deposit on the
Eligibility Record Date for purposes of determining subscription rights and
establishing subaccount balances in the Liquidation Account.
Eligibility Record Date - The date for determining Eligible Account Holders
of the Bank which is September 30, 1997.
Employees - All Persons who are employed by the Bank or any subsidiary of
the Bank, or the Mutual Holding Company.
Employee Plans - Any Tax-Qualified Employee Stock Benefit Plan of the Bank,
including the ESOP.
ESOP - An Employee Stock Ownership Plan and related trust established by
the Bank or the Holding Company.
Estimated Valuation Range - The range of the estimated consolidated pro
forma market value of the Holding Company, which shall also be equal to the
estimated pro forma market value of the total number of shares of Conversion
Stock to be issued in the Conversion, as determined by the Independent Appraiser
prior to the Subscription Offering and as it may be amended from time to time
thereafter. The maximum and minimum of the Estimated Valuation Range will vary
within 15% above and 15% below, respectively, the midpoint of the Estimated
Valuation Range.
Exchange Ratio - The rate at which shares of Holding Company Common Stock
are exchanged for Minority Shares upon consummation of the Conversion. The
Exchange Ratio shall be determined as of the closing of the Conversion and shall
be the ratio that will result in the Minority Stockholders owning in the
aggregate the same percentage of the outstanding shares of Common Stock of the
Holding Company immediately upon completion of the Conversion as the percentage
of Bank common stock owned by them in the aggregate immediately prior to the
consummation of the Conversion, before giving effect to (i) the payment of cash
in lieu of issuing fractional shares of Holding Company Common Stock, (ii) the
MHC Assets Adjustment, and (iii) any shares of Common Stock purchased by the
Minority Stockholders in the Conversion.
Exchange Shares - Shares of Common Stock, par value $.01 per share, of the
Holding Company issued to Minority Stockholders in exchange for Minority Shares.
FDIC - The Federal Deposit Insurance Corporation.
Holding Company - The Delaware (or other state) corporation formed for the
purpose of acquiring all of the shares of capital stock of the Bank in
connection with the Conversion. Shares of Common Stock of the Holding Company
will be issued in the Conversion to Participants and others in the Conversion.
Independent Appraiser - The appraiser retained by the Mutual Holding
Company and the Bank to prepare an appraisal of the pro forma market value of
the Conversion Stock.
Independent Valuation - The estimated pro forma market value of the Holding
Company and the Bank as determined by the Independent Appaiser.
3
<PAGE>
Interim Savings Bank - One or more interim savings bank subsidiaries of the
Bank or the Holding Company established by the Bank or the Holding Company to
effect the Conversion.
Liquidation Account - The account established for Eligible Account Holders
and Supplemental Eligible Account Holders as set forth in this Plan pursuant to
12 C.F.R. ss.563b.3(f) and OTS policy.
Member - Any Person or entity who qualifies as a member of the Mutual
Holding Company pursuant to its charter and bylaws.
MHC Assets Adjustment - The adjustment to the number of shares of Common
Stock issued in the Conversion to Minority Stockholders in exchange for their
shares of Bank common stock to reflect the market value of assets of the Mutual
Holding Company other than common stock of the Bank, which adjustment shall be
made by multiplying the Minority Ownership Interest by a fraction, (i) the
numerator of which is the pro forma market value of the Holding Company less the
market value of assets of the Holding Company other than the Bank common stock,
and (ii) the denominator of which is the pro forma market value of the Holding
Company.
MHC Merger - The merger of the Mutual Holding Company with the Bank as set
forth in this Plan.
Minority Ownership Interest - The percentage of the Bank's common stock
held by stockholders other than the Mutual Holding Company immediately prior to
the completion of the Conversion.
Minority Shares - Any outstanding common stock of the Bank, or shares of
common stock of the Bank issuable upon the exercise of options or grant of stock
awards, held by persons other than the Mutual Holding Company.
Minority Stockholder - Any owner of Minority Shares immediately prior to
the closing of the Conversion.
Mutual Holding Company - First Federal Bankshares, M.H.C., the mutual
holding company of the Bank.
OTS - The Office of Thrift Supervision of the Department of the Treasury or
any successor thereto.
Offering - The offering for sale, pursuant to this Plan, of Common Stock in
a Subscription Offering, Community Offering, and Syndicated Community Offering
(or underwritten public offering), as the case may be. The term "Offering" does
not include the Common Stock of the Holding Company issued in exchange for
Minority Shares pursuant to this Plan.
Offering Range - The aggregate purchase price of the Common Stock to be
sold in the Offering based on the Independent Valuation expressed as a range
which may vary within 15% above or 15% below the midpoint of such range, with a
possible adjustment by up to 15% above the maximum of such range. The Offering
Range will be equal to the Estimated Valuation Range multiplied by the Adjusted
Minority Ownership Interest.
Officer - An executive officer of the Bank or the Mutual Holding Company as
appropriate in the context, which includes the Chief Executive Officer,
President, Senior Vice Presidents, Vice President in charge of principal
business functions, Secretary and Controller and any Person performing functions
similar to those performed by the foregoing persons.
Order Form - Any form (together with any attached cover letter and/or
certifications or acknowledgments), sent by the Bank to any Participant or
Person containing among other things a description of the alternatives available
to such Person under this Plan and by which any such Person may make elections
regarding subscriptions for Conversion Stock in the Subscription Offering.
4
<PAGE>
Other Member - Any Member on the Voting Record Date who is not an Eligible
Account Holder or Supplemental Eligible Account Holder.
Participant - Any Eligible Account Holder, Employee Plan, Supplemental
Eligible Account Holder or Other Member.
Person - An individual, a corporation, a partnership, an association, a
joint-stock company, a trust (including Individual Retirement Accounts and KEOGH
Accounts), any unincorporated organization, a government or political
subdivision thereof or any other entity.
Plan - This Plan of Conversion and Reorganization of the Mutual Holding
Company, including the MHC Merger and the Bank Merger, as it exists on the date
hereof and as it may hereafter be amended in accordance with its terms.
Prospectus - The one or more documents used in offering the Conversion
Stock.
Qualifying Deposit - The aggregate balance of all Deposit Accounts in the
Bank of (i) an Eligible Account Holder at the close of business on the
Eligibility Record Date, provided such aggregate balance is not less than $50,
and (ii) a Supplemental Eligible Account Holder at the close of business on the
Supplemental Eligibility Record Date, provided such aggregate balance is not
less than $50.
Recognition Plans - The Bank's Recognition and Retention Plans and related
trusts adopted by the Board of Directors of the Bank and/or the Holding Company.
Resident - Any Person who occupies a dwelling within the Community, has a
present intent to remain within the Community for a period of time, and
manifests the genuineness of that intent by establishing an ongoing physical
presence within the Community together with an indication that such presence
within the Community is something other than merely transitory in nature. To the
extent the Person is a corporation or other business entity, the principal place
of business or headquarters shall be in the Community. To the extent a Person is
a personal benefit plan, the circumstances of the beneficiary shall apply with
respect to this definition. In the case of all other benefit plans,
circumstances of the trustee shall be examined for purposes of this definition.
The Bank may utilize deposit or loan records or such other evidence provided to
it to make a determination as to whether a Person is a resident. In all cases,
however, such a determination shall be in the sole discretion of the Bank. A
Participant must be a "Resident" for purposes of determining whether such Person
"resides" in the Community as such term is used in this Plan.
SEC - The Securities and Exchange Commission.
Share Exchange - The Exchange of Minority Shares for Holding Company Common
Stock in the Conversion.
Special Meeting of Members - The special meeting of members of the Mutual
Holding Company and any adjournments thereof held to consider and vote upon this
Plan.
Special Meeting of Stockholders - The special meeting of stockholders of
the Bank and any adjournments thereof held to consider and vote upon this Plan.
Subscription Offering - The offering of Subscription Shares to
Participants.
Subscription Price - The price per share of Subscription Shares to be paid
by Participants in the Subscription Offering and Persons in the Community
Offering.
5
<PAGE>
Subscription Shares - The $.01 par value common stock offered and issued by
the Holding Company in the Offering. Subscription Shares do not include shares
of Common Stock issued in exchange for Minority Shares in the Share Exchange.
Supplemental Eligible Account Holder - Any Person, other than Directors and
Officers of the Bank and their Associates, holding a Qualifying Deposit on the
Supplemental Eligibility Record Date, who is not an Eligible Account Holder.
Supplemental Eligibility Record Date - The date for determining
Supplemental Eligible Account Holders, which shall be the last day of the
calendar quarter preceding OTS approval of the application for conversion.
Syndicated Community Offering - The offering of Subscription Shares
following the Subscription and Community Offerings through a syndicate of
broker-dealers.
Tax-Qualified Employee Stock Benefit Plan - Any defined benefit plan or
defined contribution plan, such as an employee stock ownership plan, stock bonus
plan, profit-sharing plan or other plan, which, with its related trust, meets
the requirements to be "qualified" under Section 401 of the Internal Revenue
Code. The Bank may make scheduled discretionary contributions to a tax-qualified
employee stock benefit plan, provided such contributions do not cause the Bank
to fail to meet its regulatory capital requirement. A "Non-Tax-Qualified
Employee Stock Benefit Plan" is any defined benefit plan or defined contribution
plan which is not so qualified.
Voting Member - Any Person who at the close of business on the Voting
Record Date is entitled to vote as a member of the Mutual Holding Company
pursuant to its charter and bylaws.
Voting Record Date - The date fixed by the Directors in accordance with OTS
regulations for determining eligibility to vote at the Special Meeting of
Members and/or the Special Meeting of Stockholders.
3. PROCEDURES FOR CONVERSION
A. After approval of the Plan by the Board of Directors of the Bank and the
Mutual Holding Company, the Plan and all other necessary information will be
submitted to the OTS for its approval. Notice of the adoption of the Plan and
all other necessary information by the Board of Directors of the Bank and the
Mutual Holding Company and the submission of the Plan to the OTS for its
approval will be published in a newspaper having general circulation in each
community in which an office of the Bank is located, and copies of the Plan will
be made available at each office of the Bank for inspection by the Members. Upon
receipt of notice from the OTS to do so, the Mutual Holding Company also will
cause to be published a notice of the filing with the OTS of an application to
convert in accordance with the provisions of the Plan.
B. Promptly following approval by the OTS, the Plan will be submitted to a
vote of (i) the Voting Members, at the Special Meeting of Members, and (ii) the
stockholders of the Bank at the Special Meeting of Stockholders. The Mutual
Holding Company will mail to all Members as of the Voting Record Date, at their
last known address appearing on the records of the Bank, a proxy statement in
either long or summary form describing the Plan which will be submitted to a
vote of the Members at the Special Meeting of Members. The Mutual Holding
Company will also mail to all Participants either a Prospectus and Order Form
for the purchase of Subscription Shares or a letter informing them of their
right to receive a Prospectus and Order Form and a postage prepaid card to
request such materials, subject to the provisions of Sections 16 through 18 of
the Plan. In addition, all Participants will receive, or be given the
opportunity to request by either returning a postage prepaid card which will be
distributed with the proxy statement or by letter addressed to the Bank's
Secretary, a copy of the Plan as well as the certificate of incorporation or
bylaws of the Holding Company. Upon approval of the Plan by (i) a majority of
the total number of votes eligible to be cast by the Voting Members, (ii) at
least two-thirds of the outstanding common stock of the Bank, and (iii) a
majority vote of Minority Stockholders present in person or by proxy, the Mutual
Holding Company, the Holding Company and the Bank will take all other necessary
steps pursuant to applicable laws and regulations to
6
<PAGE>
consummate the Conversion and Offering. The Conversion must be completed within
24 months of the approval of this Plan by the Voting Members, unless a longer
time period is permitted by governing laws and regulations.
C. The Conversion will be effected as follows, or in any other manner
approved by the OTS which is consistent with the purposes of this Plan and
applicable laws and regulations. The choice of which method to use to effect the
Conversion will be made by the Board of Directors of the Mutual Holding Company
immediately prior to the closing of the Conversion. Each of the steps set forth
below shall be deemed to occur in such order as is necessary to consummate the
Conversion pursuant to (i) the Plan, (ii) the intent of the Board of Directors
of the Mutual Holding Company and the Bank, and (iii) OTS regulations. Approval
of this Plan by the Members and stockholders of the Bank shall also constitute
approval of each of the conditions to the implementation of this Plan, including
the Bank Merger and the MHC Merger, as discussed herein.
1. The Bank will organize the Holding Company (which will become the
stock holding company of the Bank) as a first-tier subsidiary of the
Bank.
2. The Holding Company will organize Interim Savings Bank as a
wholly-owned subsidiary of the Holding Company.
3. The Mutual Holding Company will convert into an interim federal stock
savings association and will simultaneously merge with and into the
Bank (the "MHC Merger") pursuant to the Agreement of Merger attached
hereto as Exhibit A between the Mutual Holding Company and the Bank,
whereby the shares of Bank common stock held by the Mutual Holding
Company will be canceled and each Eligible Account Holder and
Supplemental Eligible Account Holder will receive an interest in the
Liquidation Account of the Bank in exchange for such Member's interest
in the Mutual Holding Company.
4. Interim Savings Bank will merge with and into the Bank (the "Bank
Merger") with the Bank as the resulting entity pursuant to the
Agreement of Merger attached hereto as Exhibit B between the Bank, the
Holding Company and the Interim Savings Bank, whereby each Minority
Stockholder shall receive Common Stock of the Holding Company in
exchange for Minority Shares, based on the Exchange Ratio, with cash
paid in lieu of fractional shares based upon the Actual Purchase
Price.
5. All of the shares of common stock of Interim Savings Bank held by the
Holding Company shall be converted into shares of common stock of the
Bank.
6. Contemporaneously with the Bank Merger, the Holding Company will offer
for sale in the Offering Subscription Shares representing the pro
forma market value of the Holding Company immediately prior to the
Conversion.
D. As part of the Conversion, each of the Minority Shares shall
automatically, without further action of the holder thereof, be converted into
and become the right to receive Common Stock of the Holding Company based upon
the Exchange Ratio established by the Board of Directors of the Holding Company
and the Bank, subject to OTS approval. The basis for exchange of Minority Shares
for Common Stock of the Holding Company shall be fair and reasonable. Options to
purchase shares of Bank common stock which are outstanding immediately prior to
the consummation of the Conversion shall be converted into options to purchase
shares of Holding Company Common Stock, with the number of shares subject to the
option and the exercise price per share to be adjusted based upon the Exchange
Ratio so that the aggregate exercise price remains unchanged, and with the
duration of the option remaining unchanged.
E. Concurrently with the filing of the Conversion Application with the OTS,
the Holding Company will register the Conversion Stock with the SEC and any
appropriate state securities authorities. In addition, if required by applicable
law and regulations, the Board of Directors of the Bank will prepare preliminary
proxy
7
<PAGE>
materials as well as other applications and information for review by the OTS in
connection with the solicitation of stockholder and member approval of the Plan.
F. The Charter of the Bank will be amended upon consummation of the
Conversion to reflect the establishment of the Liquidation Account. The Charter,
as amended, will read in the form of Exhibit C. The Bylaws of the Bank shall be
unaffected by the Conversion.
G. The home office and branch offices of the Bank will be unaffected by the
Conversion. The executive offices of the Holding Company will be located at the
current offices of the Mutual Holding Company.
4. HOLDING COMPANY APPLICATIONS AND APPROVALS
The Board of Directors of the Holding Company and the Bank will take all
necessary steps to convert the Mutual Holding Company to stock form, form the
Holding Company and complete the Offering. The Holding Company shall make timely
applications for any requisite regulatory approvals, including an Application on
Form AC and a Holding Company Application on Form H-(e)1 or H-(e)1-S, to be
filed with the OTS and a Registration Statement on Form S-1 to be filed with the
SEC.
5. SALE OF SUBSCRIPTION SHARES
The Subscription Shares will be offered simultaneously in the Subscription
Offering to the Participants in the respective priorities set forth in Sections
8 through 12. The Subscription Offering may begin as early as the mailing of the
Proxy Statement for the Special Meeting of Members. The Common Stock will not be
insured by the FDIC. The Bank will not knowingly lend funds or otherwise extend
credit to any Person to purchase shares of the Common Stock.
Any shares of Common Stock not subscribed for in the Subscription Offering
will be offered for sale in the Community Offering as provided in Section 12.
The Subscription Offering may begin prior to the Special Meeting of Members and,
in that event, the Community Offering may also begin prior to the Special
Meeting of Members. The offer and sale of Common Stock prior to the Special
Meeting of Members, however, will be subject to the approval of this Plan by the
Voting Members and stockholders of the Bank.
If feasible, any shares of Common Stock remaining after the Subscription
and Community Offerings, will be sold in a Syndicated Community Offering in a
manner that will achieve the widest distribution of the Common Stock. The sale
of all Common Stock subscribed for in the Subscription and Community Offerings
will be consummated simultaneously on the date the sale of Common Stock in the
Syndicated Community Offering is consummated and only if all unsubscribed for
Common Stock is sold.
6. PURCHASE PRICE AND NUMBER OF SUBSCRIPTION SHARES
The total number of shares (or a range thereof) of Common Stock to be
issued and offered in the Conversion will be determined jointly by the Boards of
Directors of the Bank and of the Holding Company immediately prior to the
commencement of the Subscription and Community Offerings and will be based on
the Estimated Valuation Range divided by the Subscription Price. The Offering
Range will be equal to the Estimated Valuation Range multiplied by the Minority
Ownership Interest. The estimated pro forma consolidated market value of the
Holding Company will be subject to adjustment if necessitated by market or
financial conditions, with the approval of the OTS, if necessary, and the
maximum of the Estimated Valuation Range may be increased by up to 15%
subsequent to the commencement of the Subscription and Community Offerings to
reflect changes in market and financial conditions. The number of shares of
Conversion Stock issued in the Conversion will be equal to the estimated pro
forma market value of the Holding Company, as may be amended, divided by the
Subscription Price, and the number of Subscription Shares sold in the Offering
will be equal to the product of (i) the estimated pro forma consolidated market
value of the Holding Company, as may be amended, divided by the Subscription
Price, and (ii) the Adjusted Majority Ownership Interest.
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All shares sold in the Offering will be sold at a uniform price per share
referred to in this Plan as the Subscription Price. The estimated consolidated
pro forma market value of the Holding Company will be determined for such
purpose by the Independent Appraiser. Prior to the commencement of the
Subscription and Community Offerings, an Estimated Valuation Range will be
established, which range will vary within 15% above to 15% below the midpoint of
such range. The number of shares of Common Stock to be issued and the purchase
price per share may be increased or decreased by the Holding Company. In the
event that the aggregate purchase price of the Common Stock is below the minimum
of the Estimated Valuation Range, or materially above the maximum of the
Estimated Valuation Range, resolicitation of purchasers may be required,
provided that up to a 15% increase above the maximum of the Estimated Valuation
Range will not be deemed material so as to require a resolicitation. Any such
resolicitation shall be effected in such manner and within such time as the Bank
shall establish, with the approval of the OTS if required.
Notwithstanding the foregoing, no sale of Common Stock may be consummated
unless, prior to such consummation, the Independent Appraiser confirms to the
Holding Company and to the OTS that, to the best knowledge of the Independent
Appraiser, nothing of a material nature has occurred which, taking into account
all relevant factors, would cause the Independent Appraiser to conclude that the
number of shares of Conversion Sock issued in the Conversion multiplied by the
Subscription Price is incompatible with its estimate of the aggregate
consolidated pro forma market value of the Holding Company. An increase in the
aggregate value of the Conversion Stock by up to 15% above the maximum of the
Estimated Valuation Range would not be deemed to be material. If such
confirmation is not received, the Holding Company may cancel the Subscription
and Community Offerings and/or the Syndicated Community Offering, extend the
Conversion, establish a new Subscription Price and/or Estimated Valuation Range,
extend, reopen or hold new Subscription and Community Offerings and/or
Syndicated Community Offering or take such other action as the OTS may permit.
The Common Stock to be issued in the Conversion shall be fully paid and
nonassessable.
7. RETENTION OF CONVERSION PROCEEDS BY THE HOLDING COMPANY
Upon the consummation of the sale of all of the Common Stock and the
issuance of Exchange Shares to Minority Stockholders, the Holding Company will
own all of the capital stock of the Bank. The Holding Company will apply to the
OTS to retain up to 50% of the proceeds of the Offering. The Offering proceeds
will provide economic strength to the Holding Company and the Bank and may
facilitate the possible expansion of the Bank through acquisitions of other
financial service organizations and possible diversification into other related
businesses. The Offering proceeds also may be used by the Holding Company for
other business and investment purposes, including the possible payment of
dividends and future repurchases of the Common Stock as permitted by the OTS.
8. SUBSCRIPTION RIGHTS OF ELIGIBLE ACCOUNT HOLDERS (FIRST PRIORITY)
A. Each Eligible Account Holder shall receive, without payment,
nontransferable subscription rights to subscribe in the Subscription Offering
for the greater of 85,000 Subscription Shares, .10% of the total offering of
shares, or 15 times the product (rounded down to the next whole number) obtained
by multiplying the aggregate number of Exchange Shares and Subscription Shares
issued in the Conversion by a fraction of which the numerator is the amount of
the Eligible Account Holder's Qualifying Deposit 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 purchase limitations of
Section 14.
B. In the event that Eligible Account Holders exercise subscription rights
for a number of Subscription Shares in excess of the total number of such shares
eligible for subscription, the Subscription Shares 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 Subscription Shares equal to
the lesser of 100 shares or the number of shares subscribed for by the Eligible
Account Holder. Any
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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.
C. Subscription rights as Eligible Account Holders received by Directors
and Officers and their Associates which are based on increased deposits in the
Bank made by such persons during the 12 months preceding the Eligibility Record
Date shall be subordinated to the subscription rights of all other Eligible
Account Holders.
9. SUBSCRIPTION RIGHTS OF EMPLOYEE PLANS (SECOND PRIORITY)
At the discretion of the Board of Directors of the Bank, the Employee Plans
of the Holding Company and the Bank shall receive, without payment, subscription
rights to purchase in the aggregate up to 8% of the Common Stock offered in the
Subscription Offering, including any shares of Common Stock to be issued in the
Subscription Offering as a result of an increase in the Estimated Valuation
Range after commencement of the Subscription Offering and prior to completion of
the Conversion. Consistent with applicable laws and regulations and practices
and policies of the OTS, the Employee Plans may use funds contributed by the
Holding Company or the Bank and/or borrowed from an independent financial
institution to exercise such subscription rights, and the Holding Company and
the Bank may make scheduled discretionary contributions thereto, provided that
such contributions do not cause the Holding Company or the Bank to fail to meet
any applicable regulatory capital requirements. The Employee Plans shall not be
deemed to be Associates or Affiliates of or Persons Acting in Concert with any
Director or Officer of the Holding Company or the Bank.
10. SUBSCRIPTION RIGHTS OF SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS (THIRD
PRIORITY)
A. Each Supplemental Eligible Account Holder shall receive, without
payment, nontransferable subscription rights to subscribe in the Subscription
Offering for the greater of 85,000 Subscription Shares, .10% of the total
offering of shares, or 15 times the product (rounded down to the next whole
number) obtained by multiplying the aggregate number of Exchange Shares and
Subscription Shares issued in the Conversion 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 availability of sufficient shares after
filling in full all subscription orders of the Eligible Account Holders under
Section 8 and, at the discretion of the Board of Directors, the Employee Plans
under Section 9, and to the purchase limitations specified in Section 14.
B. In the event that Supplemental Eligible Account Holders exercise
Subscription Rights for a number of Subscription Shares in excess of the total
number of such shares eligible for subscription, the Subscription Shares shall
be allocated among the subscribing Supplemental Eligible Account Holders so as
to permit each such subscribing Supplemental Eligible Account Holder, to the
extent possible, to purchase a number of shares sufficient to make his or her
total allocation of Subscription Shares equal to the lesser of 100 shares or the
number of shares subscribed for by each such 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
such Supplemental Eligible Account Holder 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.
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11. SUBSCRIPTION RIGHTS OF OTHER MEMBERS (FOURTH PRIORITY)
A. Each Other Member shall receive, without payment, nontransferable
subscription rights to subscribe in the Subscription Offering for the greater of
85,000 Subscription Shares, or .10% of the total offering of shares, subject to
the purchase limitations specified in Section 14.
B. In the event that such Other Members subscribe for a number of
Subscription Shares which, when added to the Subscription Shares subscribed for
by the Eligible Account Holders, Employee Plans and Supplemental Eligible
Account Holders, is in excess of the total number of Subscription Shares being
issued, the subscriptions of such Other Members will be allocated to those Other
Members residing in the Community in proportion to the amounts of their relative
subscriptions and thereafter to those Other Members not residing in the
Community.
12. COMMUNITY OFFERING
If less than the total number of shares of Common Stock to be subscribed
for in the Offering are sold in the Subscription Offering, shares remaining
unsubscribed for will be made available for purchase in the Community
Offering to certain members of the general public, which may subscribe
together with any Associate or group of persons Acting in Concert for up to
85,000 Subscription Shares, subject to the purchase limitations specified in
Section 14. The shares may be made available in the Community Offering
through a direct community marketing program which may provide for
utilization of a broker, dealer, consultant or investment banking firm
experienced and expert in the sale of savings institutions securities. Such
entities may be compensated on a fixed fee basis or on a commission basis, or
a combination thereof. Shares offered in the Community Offering will be
available for purchase by the general public with preference given first to
Minority Stockholders, and then to depositors of Mid-Iowa Savings as of a
record date to be determined by the Board of Directors and then to natural
persons residing in the Community (such natural persons referred to as the
"Preferred Subscribers"). Any excess of shares will be available for purchase
by the general public. The Holding Company shall make distribution of the
Subscription Shares to be sold in the Community Offering in such a manner as
to promote a wide distribution of Common Stock. The Holding Company reserves
the right to reject any or all orders in whole or in part, which are received
in the Community Offering. The number of Subscription Shares that any person
may purchase in the Community Offering shall not exceed the purchase
limitations specified in Section 14.
Subject to the foregoing, if the amount of stock remaining is insufficient
to fill the orders of Preferred Subscribers, such stock will be allocated among
the Preferred Subscribers in the manner that permits each such person, to the
extent possible, to purchase the number of shares necessary to make his total
allocation of Common Stock equal to the lesser of 100 shares offered or the
number of shares subscribed for by each such Preferred Subscriber; provided that
if there are insufficient shares available for such allocation, then shares will
be allocated among Preferred Subscribers whose orders remain unsatisfied in the
proportion that the unfilled subscription of each bears to the total unfilled
subscriptions of all Preferred Subscribers whose subscription remain
unsatisfied. If all orders of Preferred Subscribers are filled, any shares
remaining will be allocated to other persons who purchase in the Community
Offering applying the same allocation described above for Preferred Subscribers.
The Bank may establish all other terms and conditions of such offer. It is
expected that the Community Offering will commence concurrently with the
Subscription Offering. The Community Offering must be completed within 45 days
after the completion of the Subscription Offering unless otherwise extended by
the OTS.
13. SYNDICATED COMMUNITY OFFERING
If feasible, the Board of Directors may determine to offer all Subscription
Shares not subscribed for in the Subscription and Community Offerings in a
Syndicated Community Offering, subject to such terms, conditions and procedures
as may be determined by the Holding Company, in a manner that will achieve the
widest distribution of the Common Stock subject to the right of the Bank to
accept or reject in whole or in part any subscriptions in the
Syndicated Community Offering. In the Syndicated Community Offering, any person
together with any Associate or group of Persons acting in concert may purchase a
number of Subscription Shares that when combined with Exchange Shares received
by such person, together with any Associate or group of Persons acting in
concert is equal to 85,000 shares, subject to the purchase limitations specified
in Section 14 and provided, however, that the shares
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<PAGE>
purchased by any Person together with an Associate or group of Persons acting in
concert pursuant to Section 12 shall be counted toward meeting the maximum
purchase limitation found in this Section 13. Provided that the Subscription
Offering has commenced, the Bank may commence the Syndicated Community Offering
at any time after the mailing to the Members of the Proxy Statement to be used
in connection with the Special Meeting of Members, provided that the completion
of the offer and sale of the Subscription Shares shall be conditioned upon the
approval of this Plan by the Voting Members. If the Syndicated Community
Offering is not sooner commenced pursuant to the provisions of the preceding
sentence, the Syndicated Community Offering will be commenced as soon as
practicable following the date upon which the Subscription and Community
Offerings terminate.
Alternatively, if a Syndicated Community Offering is not held, the Bank
shall have the right to sell any Subscription Shares remaining following the
Subscription and Community Offerings in an underwritten firm commitment public
offering. The provisions of Section 14 shall not be applicable to sales to
underwriters for purposes of such an offering but shall be applicable to the
sales by the underwriters to the public. The price to be paid by the
underwriters in such an offering shall be equal to the Subscription Price less
an underwriting discount to be negotiated among such underwriters and the Bank,
which will in no event exceed an amount deemed to be acceptable by the OTS.
If for any reason a Syndicated Community Offering or an underwritten firm
commitment public offering of shares of Subscription Shares not sold in the
Subscription and Community Offerings cannot be effected, or in the event that
any insignificant residue of shares of Subscription Shares is not sold in the
Subscription and Community Offerings or in the Syndicated Community or
underwritten firm commitment public offering, other arrangements will be made
for the disposition of unsubscribed shares by the Bank, if possible. Such other
purchase arrangements will be subject to the approval of the OTS.
14. LIMITATION ON PURCHASES
The following limitations shall apply to all purchases of shares of
Subscription Shares:
A. The maximum number of Subscription Shares which may be subscribed for or
purchased in all categories in the Offering by any Person or Participant
together with any Associate or group of Persons Acting in Concert shall not
exceed 85,000 shares, except for the Employee Plans which may subscribe for up
to 8% of the Common Stock offered in the Subscription Offering (including shares
issued in the event of an increase in the Estimated Valuation Range of 15%);
provided, however, that, in the event the maximum purchase limitation is
increased, orders for Subscription Shares in the Community Offering and in the
Syndicated Offering (or, alternatively, an underwritten firm commitment public
offering), if any, shall, as determined by the Bank, first be filled to a
maximum of 1,000 shares and thereafter remaining shares shall be allocated, on
an equal number of shares basis per order, until all orders have been filled.
B. The maximum number of shares of Common Stock which may be purchased in
all categories of the Offering by Officers and Directors of the Bank and their
Associates in the aggregate, when combined with Exchange Shares received by such
persons, shall not exceed 25% of the Conversion Stock offered in the Conversion.
C. The maximum number of Subscription Shares which may be subscribed for or
purchased in all categories in the Offering by any Person or Participant
together with any Associate or group of Persons Acting in Concert together with
Exchange Shares received in the Share Exchange by any such Person, or
Participant together with any Associate or group of Persons Acting in Concert
shall not exceed 85,000 shares, except for the Employee Plans which may
subscribe for up to 8% of the Holding Company Common Stock offered in the
Subscription Offering (including shares issued in the event of an increase in
the maximum of the Offering Range of 15%). Pursuant to this limitation, certain
depositors may not be permitted to purchase stock in the Offering.
Notwithstanding this limitation, Minority Stockholders who receive more than
85,000 shares issued in the Conversion shall not be required to divest any such
shares (except as otherwise may be required by the OTS).
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<PAGE>
D. A minimum of 25 shares of Common Stock must be purchased by each Person
purchasing shares in the Offering to the extent those shares are available;
provided, however, that in the event the minimum number of shares of Common
Stock purchased times the price per share exceeds $500, then such minimum
purchase requirement shall be reduced to such number of shares which when
multiplied by the price per share shall not exceed $500, as determined by the
Board.
If the number of shares of Common Stock otherwise allocable pursuant to
Sections 8 through 13, inclusive, to any Person or that Person's Associates
would be in excess of the maximum number of shares permitted as set forth above,
the number of shares of Common Stock allocated to each such person shall be
reduced to the lowest limitation applicable to that Person, and then the number
of shares allocated to each group consisting of a Person and that Person's
Associates shall be reduced so that the aggregate allocation to that Person and
his or her Associates complies with the above limits, and such maximum number of
shares shall be reallocated among that Person and his or her Associates as they
may agree, or in the absence of an agreement, in proportion to the shares
subscribed by each (after first applying the maximums applicable to each Person,
separately).
Depending upon market or financial conditions, the Board of Directors of
the Holding Company, with the approval of the OTS and without further approval
of the Members, may decrease or further increase the purchase limitations in
this Plan, provided that the maximum purchase limitations may not be increased
to a percentage in excess of 5% of the shares issued in the Conversion, except
as provided below. If the Holding Company increases the maximum purchase
limitations, the Holding Company is only required to resolicit Persons who
subscribed for the maximum purchase amount and may, in the sole discretion of
the Holding Company, resolicit certain other large subscribers. In the event
that the maximum purchase limitation is increased to 5% of the shares issued in
the Conversion, such limitation may be further increased to 9.99%, provided that
orders for Common Stock exceeding 5% of the shares issued in the Conversion,
shall not exceed in the aggregate 10% of the shares issued in the Conversion.
Requests to purchase additional Subscription Shares in the event that the
purchase limitation is so increased will be determined by the Board of Directors
of the Holding Company in its sole discretion.
In the event of an increase in the total number of shares offered in the
Subscription Offering due to an increase in the Estimated Valuation Range of up
to 15% (the "Adjusted Maximum"), the additional shares will be used in the
following order of priority: (i) to fill the Employee Plans' subscription to the
Adjusted Maximum; (ii) in the event that there is an oversubscription at the
Eligible Account Holder, Supplemental Eligible Account Holder or Other Member
levels, to fill unfulfilled subscriptions of such subscribers according to such
respective priorities exclusive of the Adjusted Maximum; and (iii) to fill
unfulfilled subscriptions in the Community Offering exclusive of the Adjusted
Maximum with preference given to Preferred Subscribers.
For purposes of this Section 14, the Directors of the Bank and the Holding
Company shall not be deemed to be Associates or a group affiliated with each
other or otherwise Acting in Concert solely as a result of their being Directors
of the Bank or the Holding Company.
Each Person purchasing Common Stock in the Offering shall be deemed to
confirm that such purchase does not conflict with the above purchase limitations
contained in this Plan.
15. PAYMENT FOR SUBSCRIPTION SHARES
All payments for Common Stock subscribed for in the Subscription, Community
and Syndicated Community Offerings must be delivered in full to the Holding
Company, together with a properly completed and executed Order Form and
certification or acknowledgment form, or purchase order in the case of the
Syndicated Community Offering, on or prior to the expiration date of the
Offering; provided, however, that if the Employee Plans subscribe for shares
during the Subscription Offering, such plans will not be required to pay for the
shares at the time they subscribe but rather may pay for such shares of Common
Stock subscribed for by such plans at the Subscription Price per share upon
consummation of the Conversion.
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Notwithstanding the foregoing, the Holding Company shall have the right, in
its sole discretion, to permit institutional investors to submit contractually
irrevocable orders in the Offering and to thereafter submit payment by wire
transfer for the Common Stock for which they are subscribing in the Offering at
any time prior to 48 hours before the completion of the Conversion, unless such
48 hour period is waived by the Holding Company in its sole discretion.
Payment for Common Stock subscribed for shall be made either by check,
money order, certified or teller's check or bank draft. Alternatively,
subscribers in the Subscription and Community Offerings may pay for the shares
subscribed for by authorizing the Bank on the Order Form to make a withdrawal
from the subscriber's Deposit Account at the Bank in an amount equal to the
Subscription Price for each of such shares. Such authorized withdrawal, whether
from a savings passbook or certificate account, shall be without penalty as to
premature withdrawal. If the authorized withdrawal is from a certificate
account, and the remaining balance does not meet the applicable minimum balance
requirement, the certificate shall be canceled at the time of withdrawal,
without penalty, and the remaining balance will earn interest at the passbook
rate. Funds for which a withdrawal is authorized will remain in the subscriber's
Deposit Account but may not be used by the subscriber during the Subscription
and Community Offerings. Thereafter, the withdrawal will be given effect only to
the extent necessary to satisfy the subscription (to the extent it can be
filled) at the Subscription Price per share. Interest will continue to be earned
on any amounts authorized for withdrawal until such withdrawal is given effect.
Interest will be paid by the Bank at not less than the passbook annual rate on
payments for Common Stock received in cash or by check. Such interest will be
paid from the date payment is received by the Bank until consummation or
termination of the Conversion. If for any reason the Conversion is not
consummated, all payments made by subscribers in the Subscription, Community and
Syndicated Community Offerings will be refunded to them with interest. In case
of amounts authorized for withdrawal from Deposit Accounts, refunds will be made
by canceling the authorization for withdrawal. The Bank is prohibited by
regulation from knowingly making any loans or granting any lines of credit for
the purchase of stock in the Conversion, and therefore, will not do so.
16. MANNER OF EXERCISING SUBSCRIPTION RIGHTS THROUGH ORDER FORMS
As soon as practicable after the Prospectus prepared by the Holding Company
and Bank has been declared effective by the SEC, Order Forms will be distributed
to the Eligible Account Holders, Employee Plans, Supplemental Eligible Account
Holders, Other Members and Minority Stockholders at their last known addresses
appearing on the records of the Bank for the purpose of subscribing for shares
of Common Stock in the Subscription Offering and will be made available for use
by those Persons entitled to purchase in the Community Offering. Notwithstanding
the foregoing, the Bank may elect to send Order Forms only to those Persons who
request them after receipt of such notice in a form approved by the OTS and
which is adequate to apprise the Eligible Account Holders, Employee Plans,
Supplemental Eligible Account Holders, Other Members and Minority Stockholders
of the pendency of the Subscription Offering. Such notice may be included with
the proxy statement for the Special Meeting of Members and the proxy statement
for the Special Meeting of Stockholders and may also be included in the notice
of the pendency of the Conversion and the Special Meeting of Members sent to all
Members in accordance with regulations of the OTS.
Each Order Form will be preceded or accompanied by the Prospectus
describing the Holding Company, the Bank, the Common Stock and the Subscription
and Community Offerings. Each Order Form will contain, among other things, the
following:
A. A specified date by which all Order Forms must be received by the
Holding Company, which date shall be not less than 20, nor more than 45 days,
following the date on which the Order Forms are mailed by the Holding Company,
and which date will constitute the termination of the Subscription Offering;
B. The Subscription Price per share for shares of Common Stock to be sold
in the Subscription and Community Offerings;
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C. A description of the minimum and maximum number of Subscription Shares
which may be subscribed for pursuant to the exercise of Subscription Rights or
otherwise purchased in the Community Offering;
D. Instructions as to how the recipient of the Order Form is to indicate
thereon the number of Subscription Shares for which such person elects to
subscribe and the available alternative methods of payment therefor;
E. An acknowledgment that the recipient of the Order Form has received a
final copy of the Prospectus prior to execution of the Order Form;
F. A statement to the effect that all subscription rights are
nontransferable, will be void at the end of the Subscription Offering, and can
only be exercised by delivering to the Holding Company within the subscription
period such properly completed and executed Order Form, together with payment in
the full amount of the aggregate purchase price as specified in the Order Form
for the shares of Common Stock for which the recipient elects to subscribe in
the Subscription Offering (or by authorizing on the Order Form that the Bank
withdraw said amount from the subscriber's Deposit Account at the Bank); and
G. A statement to the effect that the executed Order Form, once received by
the Holding Company, may not be modified or amended by the subscriber without
the consent of the Holding Company.
Notwithstanding the above, the Holding Company reserves the right in its
sole discretion to accept or reject orders received on photocopied or
facsimilied order forms.
17. UNDELIVERED, DEFECTIVE OR LATE ORDER FORM; INSUFFICIENT PAYMENT
In the event Order Forms (a) are not delivered and are returned to the
Holding Company or the Bank by the United States Postal Service or the Holding
Company is unable to locate the addressee, (b) are not received back by the
Holding Company or are received by the Holding Company after the expiration date
specified thereon, (c) are defectively filled out or executed, (d) are not
accompanied by the full required payment, or, in the case of institutional
investors in the Community Offering, by delivering irrevocable orders together
with a legally binding commitment to pay in cash, check, money order or wire
transfer the full amount of the Subscription Price prior to 48 hours before the
completion of the Conversion, unless waived by the Holding Company, for each of
the shares of Common Stock subscribed for (including cases in which deposit
accounts from which withdrawals are authorized are insufficient to cover the
amount of the required payment), or (e) are not mailed pursuant to a "no mail"
order placed in effect by the account holder, the subscription rights of the
Person to whom such rights have been granted will lapse as though such Person
failed to return the completed Order Form within the time period specified
thereon; provided, however, that the Holding Company may, but will not be
required to, waive any immaterial irregularity on any Order Form or require the
submission of corrected Order Forms or the remittance of full payment for
subscribed shares by such date as the Holding Company may specify. The
interpretation of the Holding Company of terms and conditions of this Plan and
of the Order Forms will be final, subject to the authority of the OTS.
18. RESIDENTS OF FOREIGN COUNTRIES AND CERTAIN STATES
The Holding Company will make reasonable efforts to comply with the
securities laws of all States in the United States in which Persons entitled to
subscribe for shares of Common Stock pursuant to this Plan reside. However, no
such Person will be issued subscription rights or be permitted to purchase
shares of Common Stock in the Subscription Offering if such Person resides in a
foreign country or in a State of the United States with respect to which all of
the following apply: (A) a small number of Persons otherwise eligible to
subscribe for shares under this Plan reside in such State; (B) the issuance of
subscription rights or the offer or sale of shares of Common Stock to such
Persons would require the Holding Company under the securities laws of such
state, to register as a broker, dealer, salesman or agent or to register or
otherwise qualify its securities for sale in such state; or (C) such
registration or qualification would be impracticable for reasons of cost or
otherwise.
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19. ESTABLISHMENT OF LIQUIDATION ACCOUNT
The Bank shall establish at the time of the Conversion a Liquidation
Account in an amount equal to the greater of: (a) approximately 51% (the Mutual
Holding Company stock ownership interest in the Bank) of the Bank's total
stockholders' equity as reflected in the latest statement of financial condition
contained in the final Prospectus utilized in the Conversion; or (b) the
retained earnings of the Bank at the time the Bank underwent its initial mutual
holding company reorganization. Following the Conversion, the Liquidation
Account will be maintained by the Bank for the benefit of the Eligible Account
Holders and Supplemental Eligible Account Holders who continue to maintain their
Deposit Accounts at the Bank. Each Eligible Account Holder and Supplemental
Eligible Account Holder shall, with respect to his Deposit Account, hold a
related inchoate interest in a portion of the liquidation account balance, in
relation to his Deposit Account balance at the Eligibility Record Date or
Supplemental Eligibility Record Date, respectively, or to such balance as it may
be subsequently reduced, as hereinafter provided.
In the unlikely event of a complete liquidation of the Bank (and only in
such event), following all liquidation payments to creditors (including those to
Account Holders to the extent of their Deposit Accounts) each Eligible Account
Holder and Supplemental Eligible Account Holder shall be entitled to receive a
liquidating distribution from the Liquidation Account, in the amount of the then
adjusted subaccount balance for his Deposit Account then held, before any
liquidation distribution may be made to any holders of the Bank's capital stock.
No merger, consolidation, purchase of bulk assets with assumption of Deposit
Accounts and other liabilities, or similar transactions with an FDIC-insured
institution, in which the Bank is not the surviving institution, shall be deemed
to be a complete liquidation for this purpose. In such transactions, the
Liquidation Account shall be assumed by the surviving institution.
The initial subaccount balance for a Deposit Account held by an Eligible
Account Holder and Supplemental Eligible Account Holder shall be determined by
multiplying the opening balance in the Liquidation Account by a fraction, the
numerator of which is the amount of the Qualifying Deposits of such account
holder and the denominator of which is the total amount of all Qualifying
Deposits of all Eligible Account Holders and Supplemental Eligible Account
Holders. Such initial subaccount balance shall not be increased, but shall be
subject to downward adjustment as described below.
If, at the close of business on any June 30 annual closing date, commencing
on or after the effective date of the Conversion, the deposit balance in the
Deposit Account of an Eligible Account Holder or Supplemental Eligible Account
Holder is less than the lesser of (i) the balance in the Deposit Account at the
close of business on any other annual closing date subsequent to the Eligibility
Record Date or Supplemental Eligibility Record Date, or (ii) the amount of the
Qualifying Deposit in such Deposit Account as of the Eligibility Record Date or
Supplemental Eligibility Record Date, the subaccount balance for such Deposit
Account shall be adjusted by reducing such subaccount balance in an amount
proportionate to the reduction in such deposit balance. In the event of such
downward adjustment, the subaccount balance shall not be subsequently increased,
notwithstanding any subsequent increase in the deposit balance of the related
Deposit Account. If any such Deposit Account is closed, the related subaccount
shall be reduced to zero.
The creation and maintenance of the Liquidation Account shall not operate
to restrict the use or application of any of the net worth accounts of the Bank,
except that the Bank shall not declare or pay a cash dividend on, or repurchase
any of, its capital stock if the effect thereof would cause its net worth to be
reduced below (i) the amount required for the Liquidation Account; or (ii) the
net worth requirements contained in Part 567 of the Rules and Regulations of the
OTS.
20. VOTING RIGHTS OF STOCKHOLDERS
Following consummation of the Conversion, voting rights with respect to the
Bank shall be held and exercised exclusively by the holders of its capital
stock. The holders of the voting capital stock of the Holding Company shall have
the exclusive voting rights with respect to the Holding Company.
16
<PAGE>
21. RESTRICTIONS ON RESALE OR SUBSEQUENT DISPOSITION
A. All Subscription Shares purchased by Directors or Officers of the
Holding Company or the Bank in the Offering shall be subject to the restriction
that, except as provided in Section 21B, or as may be approved by the OTS, no
interest in such shares may be sold or otherwise disposed of for value for a
period of one year following the date of purchase in the Offering.
B. The restriction on disposition of Subscription Shares set forth in
Section 21A above shall not apply to the following:
(i) Any exchange of such shares in connection with a merger or
acquisition involving the Bank or the Holding Company, as the case may be,
which has been approved by the OTS; and
(ii) Any disposition of such shares following the death of the person
to whom such shares were initially sold under the terms of this Plan.
C. With respect to all Subscription Shares subject to restrictions on
resale or subsequent disposition, each of the following provisions shall apply:
(i) Each certificate representing shares restricted by this Section,
shall bear a legend prominently stamped on its face giving notice of the
restriction;
(ii) Instructions shall be issued to the stock transfer agent for the
Holding Company not to recognize or effect any transfer of any certificate
or record of ownership of any such shares in violation of the restriction
on transfer; and
(iii) Any shares of capital stock of the Holding Company issued with
respect to a stock dividend, stock split, or otherwise with respect to
ownership of outstanding Subscription Shares subject to the restriction on
transfer hereunder shall be subject to the same restriction as is
applicable to such shares.
22. REQUIREMENTS FOR STOCK PURCHASES BY DIRECTORS AND OFFICERS FOLLOWING
THE CONVERSION
For a period of three years following the Conversion, no Officer, Director
or their Associates shall purchase, without the prior written approval of the
OTS, any outstanding shares of Common Stock of the Holding Company except from a
broker-dealer registered with the SEC. This provision shall not apply to
negotiated transactions involving more than 1% of the outstanding shares of
Common Stock of the Holding Company, the exercise of any options pursuant to a
stock option plan or purchases of common stock of the Holding Company made by or
held by any Tax-Qualified Employee Stock Benefit Plan or Non-Tax-Qualified
Employee Stock Benefit Plan of the Bank or the Holding Company (including the
Employee Plans or the Recognition Plans) which may be attributable to any
Officer or Director. As used herein, the term "negotiated transaction" means a
transaction in which the securities are offered and the terms and arrangements
relating to any sale are arrived at through direct communications between the
seller or any person acting on its behalf and the purchaser or his investment
representative. The term "investment representative" shall mean a professional
investment advisor acting as agent for the purchaser and independent of the
seller and not acting on behalf of the seller in connection with the
transaction.
23. TRANSFER OF DEPOSIT ACCOUNTS
Each person holding a Deposit Account at the Bank at the time of the
Conversion shall retain an identical Deposit Account at the Bank following the
Conversion in the same amount and subject to the same terms and conditions
(except as to voting and liquidation rights).
17
<PAGE>
24. REGISTRATION AND MARKETING
Within the time period required by applicable laws and regulations, the
Holding Company will register the securities issued in connection with the
Conversion pursuant to the Securities Exchange Act of 1934 and will not
deregister such securities for a period of at least three years thereafter,
except that the maintenance of registration for three years requirement may be
fulfilled by any successor to the Bank or any holding company of the Bank. In
addition, the Bank or Holding Company will use its best efforts to encourage and
assist a market-maker to establish and maintain a market for the Conversion
Stock and to list those securities on a national or regional securities exchange
or the Nasdaq Stock Market.
25. TAX RULINGS OR OPINIONS
Consummation of the Conversion is expressly conditioned upon prior receipt
by the Mutual Holding Company and the Bank of either a ruling or an opinion of
counsel with respect to federal tax laws, and either a ruling or an opinion of
counsel or tax advisor with respect to Iowa tax laws, to the effect that
consummation of the transactions contemplated by the Conversion and this Plan
will not result in a taxable reorganization under the provisions of the
applicable codes or otherwise result in any adverse tax consequences to the
Mutual Holding Company, the Holding Company or the Bank, or the account holders
receiving subscription rights before or after the Conversion, except in each
case to the extent, if any, that subscription rights are deemed to have value on
the date such rights are issued.
26. STOCK BENEFIT PLANS AND EMPLOYMENT AGREEMENTS
A. The Holding Company and the Bank are authorized to adopt Tax-Qualified
Employee Stock Benefit Plans in connection with the Conversion, including
without limitation, an ESOP. Existing as well as any newly created Tax-Qualified
Employee Stock Benefit Plans may purchase Subscription Shares in the Conversion,
to the extent permitted by the terms of such benefit plans and this Plan.
B. As a result of the Conversion, the Holding Company shall be deemed to
have ratified and approved the Bank's 1992 Incentive Stock Option Plan, and 1992
Stock Option Plan for Outside Directors (the "Option Plans") and the Recognition
and Retention Plan (the "Retention Plan"), and shall have agreed to issue (and
reserve for issuance) Holding Company Common Stock in lieu of Bank common stock
pursuant to the terms of such benefit plans. Upon consummation of the
Conversion, the Bank common stock held by such benefit plans shall be converted
into Holding Company Common Stock based upon the Exchange Ratio. Also upon
consummation of the Conversion, (i) all rights to purchase, sell or receive Bank
common stock and all rights to elect to make payment in Bank common stock under
any agreement between the Bank and any Director, Officer or Employee thereof or
under any plan or program of the Bank (including, without limitation, the Bank's
Employee Stock Ownership Plan and the Recognition Plan), shall automatically, by
operation of law, be converted into and shall become an identical right to
purchase, sell or receive Holding Company Common Stock and an identical right to
make payment in Holding Company Common Stock under any such agreement between
the Bank and any Director, Officer or Employee thereof or under such plan or
program of the Bank, and (ii) rights outstanding under the Option Plan shall be
assumed by the Holding Company and thereafter shall be rights only for shares of
Holding Company Common Stock, with each such right being for a number of shares
of Holding Company common stock based upon the Exchange Ratio and the number of
shares of Bank common stock that were available thereunder immediately prior to
consummation of the Conversion, with the price adjusted to reflect the Exchange
Ratio but with no change in any other term or condition of such right.
C. The Holding Company and the Bank are authorized to enter into employment
agreements with their executive officers.
D. The Holding Company and the Bank are authorized to adopt stock option
plans, restricted stock grant plans and other Non-Tax-Qualified Employee Stock
Benefit Plans, provided that no such plans will be established, no stock options
shall be granted, and no shares of Conversion Stock shall be purchased pursuant
to any of such plans prior to six months after the consummation of the
Conversion and the receipt of stockholder approval
18
<PAGE>
of such plans. All such plans implemented within one year following the
consummation of the Conversion shall be submitted to the Midwest Regional
Director of the OTS for approval in accordance with OTS regulations.
27. RESTRICTIONS ON ACQUISITION OF BANK AND HOLDING COMPANY
A. In accordance with OTS regulations, for a period of three years from the
date of consummation of the Conversion, no Person, other than the Holding
Company, shall directly or indirectly offer to acquire or acquire the beneficial
ownership of more than 10% of any class of an equity security of the Bank
without the prior written consent of the OTS.
B. The Certificate of Incorporation of the Holding Company will contain a
provision stipulating that in no event shall any record owner of any outstanding
shares of the Holding Company's Common Stock who beneficially owns in excess of
10% of such outstanding shares be entitled or permitted to any vote in respect
to any shares held in excess of 10%. In addition, the Certificate of
Incorporation and Bylaws of the Holding Company contain provisions which provide
for staggered terms of the directors, noncumulative voting for directors,
limitations on the calling of special meetings, a fair price provision for
certain business combinations and certain notice requirements.
28. PAYMENT OF DIVIDENDS AND REPURCHASE OF STOCK
A. The Holding Company may repurchase any shares of its capital stock
during the first three years following consummation of the Conversion, except as
prohibited by OTS regulations or authorization.
B. The Bank shall not declare or pay a cash dividend on, or repurchase any
of, its capital stock if the effect thereof would cause its regulatory capital
to be reduced below (i) the amount required for the Liquidation Account or (ii)
the federal regulatory capital requirement in Section 567.2 of the Rules and
Regulations of the OTS. Otherwise, the Bank may declare dividends or make
capital distributions in accordance with applicable law and regulations.
29. CHARTER AND BYLAWS
By voting to adopt this Plan, Members of the Mutual Holding Company will be
voting to adopt the Certificate of Incorporation and Bylaws for a Delaware
corporation attached as Exhibits D and E to this Plan.
30. CONSUMMATION OF CONVERSION AND EFFECTIVE DATE
The Effective Date of the Conversion shall be the date upon which the
Articles of Combination shall be filed with the OTS with respect to the MHC
Merger and the Bank Merger, with the Bank being the surviving institution in
each case. The Articles of Combination shall be filed with the OTS after all
requisite regulatory, member and stockholder approvals have been obtained, all
applicable waiting periods have expired, and sufficient subscriptions and orders
for Subscription Shares have been received. The sale of all Subscription Shares
in the Subscription Offering, Community Offering and/or Syndicated Community
Offering shall occur simultaneously on the closing date of the Conversion.
31. EXPENSES OF CONVERSION
The Mutual Holding Company, the Bank and the Holding Company may retain and
pay for the services of legal, financial and other advisors to assist in
connection with any or all aspects of the Conversion, including the Offering,
and such parties shall use their best efforts to assure that such expenses shall
be reasonable.
19
<PAGE>
32. AMENDMENT OR TERMINATION OF PLAN
If deemed necessary or desirable, this Plan may be substantively amended as
a result of comments from regulatory authorities or otherwise at any time prior
to solicitation of proxies from Members and Bank stockholders to vote on this
Plan by the Board of Directors of the Mutual Holding Company, and at any time
thereafter by the Board of Directors of the Mutual Holding Company with the
concurrence of the OTS. Any amendment to this Plan made after approval by the
Members and Bank stockholders with the approval of the OTS shall not necessitate
further approval by the Members unless otherwise required by the OTS. This Plan
may be terminated by the Board of Directors of the Mutual Holding Company at any
time prior to the Special Meeting of Members and the Special Meeting of
Stockholders to vote on this Plan, and at any time thereafter with the
concurrence of the OTS.
By adoption of this Plan, the Members of the Mutual Holding Company
authorize the Board of Directors of the Mutual Holding Company to amend or
terminate this Plan under the circumstances set forth in this Section.
33. CONDITIONS TO CONVERSION
Consummation of the Conversion pursuant to this Plan is expressly
conditioned upon the following:
A. Prior receipt by the Mutual Holding Company and the Bank of rulings of
the United States Internal Revenue Service and the state taxing
authorities, or opinions of counsel or tax advisers as described in
Section 25;
B. The sale of all of the Subscription Shares offered in the Conversion;
and
C. The completion of the Conversion within the time period specified in
Section 3.
34. INTERPRETATION
All interpretations of this Plan and application of its provisions to
particular circumstances by a majority of the Board of Directors of the Bank
shall be final, subject to the authority of the OTS.
Dated: October 1, 1998
20
<PAGE>
EXHIBIT A
MUTUAL HOLDING COMPANY AGREEMENT OF MERGER
<PAGE>
FORM OF
AGREEMENT OF MERGER BETWEEN
FIRST FEDERAL BANKSHARES, M.H.C. AND
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
THIS AGREEMENT OF MERGER (the "MHC Merger Agreement") dated as of_________,
1998, is made by and among First Federal Bankshares, M.H.C., a federal mutual
holding company (the "Mutual Holding Company") and First Federal Savings Bank of
Siouxland, a federal savings bank (the "Bank").
R E C I T A L S :
1. The Mutual Holding Company is a federal mutual holding company with no
authorized shares of capital stock.
2. The Bank is a federal savings bank.
3. The majority of the shares of common stock of the Bank are owned by the
Mutual Holding Company, and the remainder of the shares of common stock of the
Bank are owned by the Bank's employees, directors and the public (the "Minority
Stockholders").
4. As of the date hereof, the Bank has authorized capital stock consisting
of 20,000,000 shares of common stock and 10,000,000 shares of preferred stock,
of which there are _________ shares of common stock and no shares of preferred
stock issued and outstanding.
5. At least two-thirds of the members of the boards of directors of the
Bank and the Mutual Holding Company have approved this Merger Agreement and
authorized the execution and delivery thereof.
NOW, THEREFORE, in consideration of the premises and mutual agreements
contained herein, the parties hereto have agreed as follows:
1. Merger. At and on the Effective Date of the Merger (as defined below),
the Mutual Holding Company will convert into an interim federal stock savings
association and will simultaneously merge with and into the Bank, whereupon the
shares of Bank common stock owned by the Mutual Holding Company will be canceled
and each Eligible Account Holder and Supplemental Eligible Account Holder (as
defined in the Plan of Conversion and Reorganization (the "Plan")) shall
automatically receive an interest in the Liquidation Account, which shall be
established in the Bank, in exchange for such person's interest in the Mutual
Holding Company as set forth in the Plan.
2. Effective Date. The Merger shall not be effective until and unless it is
approved by the Director of the Office of Thrift Supervision (the "OTS") after
approval by (i) two-thirds of the outstanding common stock of the Bank, (ii) a
majority vote of Minority Stockholders of the Bank present in person or by proxy
at a meeting of stockholders, and (iii) a majority of the members of the Mutual
Holding Company, and the Articles of Combination shall have been filed with the
OTS with respect to the Merger. Approval of the Plan by the members of the
Mutual Holding Company shall also constitute approval of this MHC Merger
Agreement.
3. Name. The name of the Resulting Institution shall be First Federal
Savings Bank of Siouxland.
4. Offices. The headquarters of the Resulting Institution shall be 329
Pierce Street, Sioux City, Iowa 51101. The offices of the Bank that were in
lawful operation prior to the Merger shall continue to be operated as the branch
offices of the Bank.
5. Directors and Officers. The directors and officers of the Bank
immediately prior to the Effective Date shall be the directors and officers of
the Resulting Institution after the Effective Date.
6. Rights and Duties of the Resulting Institution. At the Effective Date,
the Mutual Holding Company shall be merged with and into the Bank with the Bank
as the Resulting Institution. The business of the Resulting
Institution
<PAGE>
shall be that of a federal savings association under the laws of the United
States, the regulations of the OTS, and as provided for in the Bank's Charter.
All assets, rights, interests, privileges, powers, franchises and property
(real, personal and mixed) of the Mutual Holding Company shall be automatically
transferred to and vested in the Resulting Institution by virtue of the Merger
without any deed or other document of transfer. The Resulting Institution,
without any order or action on the part of any court or otherwise and without
any documents of assumption or assignment, shall hold and enjoy all of the
properties, franchises and interests, including appointments, powers,
designations, nominations and all other rights and interests as the agent or
other fiduciary in the same manner and to the same extent as such rights,
franchises, and interests and powers were held or enjoyed by the Mutual Holding
Company. The Resulting Institution shall be responsible for all of the
liabilities, restrictions and duties of every kind and description of the Mutual
Holding Company immediately prior to the MHC Merger, including liabilities,
debts, obligations and contracts of the Mutual Holding Company, matured or
unmatured, whether accrued, absolute, contingent or otherwise and whether or not
reflected or reserved against on balance sheets, books or accounts or records of
the Mutual Holding Company. The stockholders of the Bank shall possess all
voting rights with respect to the shares of stock of the Bank. All rights of
creditors and other obligees and all liens on property of the Mutual Holding
Company shall be preserved and shall not be released or impaired.
7. Other Terms. All terms used in this MHC Merger Agreement shall, unless
defined herein, have the meanings set forth in the Plan. The Plan is
incorporated herein by this reference and made a part hereof to the extent
necessary or appropriate to effect and consummate the terms of this MHC Merger
Agreement and the Conversion.
IN WITNESS WHEREOF, the Bank and the Mutual Holding Company have caused
this Agreement to be executed as of the date first above written.
First Federal Bankshares, M.H.C.
(a federal mutual holding company)
ATTEST:
By:
- ---------------------------------- ----------------------------------
Suzette F. Hoevet, Secretary Barry Backhaus, President
First Federal Savings Bank of Siouxland
(a federal stock savings bank)
ATTEST:
By:
- ---------------------------------- ----------------------------------
Suzette F. Hoevet, Secretary Barry Backhaus, President
A-2
<PAGE>
EXHIBIT B
BANK AGREEMENT OF MERGER
<PAGE>
FORM OF AGREEMENT OF MERGER BETWEEN
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
AND FIRST FEDERAL INTERIM SAVINGS BANK OF SIOUXLAND
THIS AGREEMENT OF MERGER (the "Bank Merger Agreement") dated as of ______
__, 1998, is made by and among First Federal Savings Bank of Siouxland, a
federal savings bank (the "Bank") and First Federal Interim Savings Bank of
Siouxland, an interim federal savings bank ("Interim").
R E C I T A L S :
1. The Bank is a federal savings association that prior to the transactions
contemplated by this Bank Merger Agreement and the Plan of Conversion and
Reorganization of First Federal Bankshares, M.H.C. (the "Plan") was a majority
owned subsidiary of First Federal Bankshares, M.H.C. (the "Mutual Holding
Company"), a federal mutual holding company.
2. Contemporaneously with the transactions contemplated by this Bank Merger
Agreement, the Mutual Holding Company will convert into an interim federal stock
savings association and will simultaneously merge with and into the Bank (the
"MHC Merger"), whereby the shares of Bank common stock held by the Mutual
Holding Company will be canceled and each Eligible Account Holder and
Supplemental Eligible Account Holder will receive an interest in the liquidation
account of the Bank in exchange for such member's interest in the Mutual Holding
Company.
3. At least two-thirds of the members of the boards of directors of the
Bank and Interim have approved this Bank Merger Agreement under which Interim
shall be merged with and into the Bank with the Bank as the surviving or
resulting institution, and authorized the execution and delivery thereof.
NOW, THEREFORE, in consideration of the premises and mutual agreements
contained herein, the parties hereto have agreed as follows:
1. Merger. At and on the Effective Date of the Merger (as defined below)
and contemporaneously with the MHC Merger, Interim will merge with and into the
Bank with the Bank as the surviving entity (the "Bank Merger"). Shareholders of
the Bank (i.e., Minority Stockholders immediately prior to the Conversion) will
exchange their shares of Bank common stock for Holding Company Common Stock.
2. Stock Offering. Contemporaneously with the Bank Merger, _________
Bancorp, Inc., a Delaware corporation shall sell shares of its common stock in a
subscription offering as described in the Plan.
3. Effective Date. The Bank Merger shall not be effective until and unless
it is approved by the Director of the Office of Thrift Supervision (the "OTS")
after approval by at least two-thirds of the outstanding common stock of the
Bank, including at least a majority of the shares held by Minority Stockholders,
and the Articles of Combination shall have been filed with the OTS with respect
to the MHC Merger.
4. Name. The name of the Resulting Institution shall be First Federal
Savings Bank of Siouxland.
5. Offices. The main banking office of the Resulting Institution shall be
329 Pierce Street, Sioux City, Iowa 51101. The branch offices of the Bank that
were in lawful operation prior to the Merger shall be operated as branch offices
of the Bank.
6. Directors and Officers. The directors and officers of the Bank
immediately prior to the Effective Date shall be the directors and officers of
the Resulting Institution after the Effective Date.
7. Rights and Duties of the Resulting Institution. At the Effective Date,
Interim shall be merged with and into the Bank (the "Resulting Institution").
The business of the Resulting Institution shall be that of a federal savings
association as provided in its Charter. All assets, rights, interests,
privileges, powers, franchises and
<PAGE>
property (real, personal and mixed) of Interim shall be automatically
transferred to and vested in the Resulting Institution by virtue of such Merger
without any deed or other document of transfer. The Resulting Institution,
without any order or action on the part of any court or otherwise and without
any documents of assumption or assignment, shall hold and enjoy all of the
properties, franchises and interests, including appointments, powers,
designations, nominations and all other rights and interests as the agent or
other fiduciary in the same manner and to the same extent as such rights,
franchises, and interests and powers were held or enjoyed by Interim. The
Resulting Institution shall be responsible for all of the liabilities,
restrictions and duties of every kind and description of Interim, immediately
prior to the Bank Merger, including liabilities for all debts, obligations and
contracts of Interim, matured or unmatured, whether accrued, absolute,
contingent or otherwise and whether or not reflected or reserved against on
balance sheets, books or accounts or records of Interim. The stockholders of the
Bank shall possess all voting rights with respect to the shares of stock of the
Bank. All rights of creditors and other obligees and all liens on property of
Interim shall be preserved and shall not be released or impaired.
8. Other Terms. All terms used in this Bank Merger Agreement shall, unless
defined herein, have the meanings set forth in the Plan. The Plan is
incorporated herein by this reference and made a part hereof to the extent
necessary or appropriate to effect and consummate the terms of the Bank Merger
Agreement and the Conversion.
IN WITNESS WHEREOF, the Bank and Interim have caused this Merger Agreement
to be executed as of the date first above written.
First Federal Savings Bank of Siouxland
(a federal savings bank)
ATTEST:
By:
- ---------------------------------- ----------------------------------
Suzette F. Hoevet, Secretary Barry Backhaus, President
First Federal Interim Savings Bank of
Siouxland (a federal savings bank)
ATTEST:
By:
- ---------------------------------- ----------------------------------
Suzette F. Hoevet, Secretary Barry Backhaus, President
B-2
<PAGE>
EXHIBIT C
AMENDED CHARTER OF FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
<PAGE>
AMENDED CHARTER
OF
FIRST FEDERAL BANK
Section 1. Corporate Title. The full corporate title of the stock savings
bank is First Federal Bank (the "Savings Bank").
Section 2. Office. The home office shall be located in the city of Sioux
City, County of Woodbury, State of Iowa.
Section 3. Duration. The duration of the Savings Bank is perpetual.
Section 4. Purpose and Powers. The purpose of the Savings Bank is to pursue
any or all of the lawful objectives of a Federal savings bank chartered under
Section 5 of the Home Owners' Loan Act and to exercise all of the express,
implied, and incidental powers conferred thereby and by all acts amendatory
thereof and supplemental thereto, subject to the Constitution and laws of the
United States as they are now in effect, or as they may hereafter be amended,
and subject to all lawful and applicable rules, regulations, and orders of the
Office of Thrift Supervision (the "Office").
Section 5. Capital Stock. The total number of shares of all classes of the
capital stock which the Savings Bank has authority to issue is 30,000,000 of
which 20,000,000 shares shall be common stock, par value of $l.00 per share and
of which 10,000,000 shares shall be serial preferred stock The shares may be
issued from time to time as authorized by the board of directors without the
approval of its stockholders except as otherwise provided in this Section 5 or
to the extent that such approval is required by governing law, rule, or
regulation. The consideration for the issuance of the shares shall be paid in
full before their issuance and shall not be less than the par value. Neither
promissory notes nor future services shall constitute payment or part payment
for the issuance of shares of the Savings Bank. The consideration for the shares
shall be cash, tangible or intangible property (to the extent direct investment
in such property would be permitted to the Savings Bank), labor or services
actually performed for the Savings Bank, or any combination of the foregoing. In
the absence of actual fraud in the transaction, the value of such property,
labor, or services, as determined by the board of directors of the Savings Bank,
shall be conclusive. Upon payment of such consideration, such shares shall be
deemed to be fully paid and nonassessable. In the case of a stock dividends,
that part of the surplus of the Savings Bank which is transferred to stated
capital upon the issuance of shares as a share dividend shall be deemed to be
the consideration for their issuance.
Nothing contained in this Section 5 (or in any supplementary sections
hereto) shall entitle the holders of any class or series of capital stock to
vote as a separate class or series or to more than one vote per share, except as
to the cumulation of votes for the election of directors; provided, that this
restriction on voting separately by class or series shall not apply:
(i) To any provision which would authorize the holders of preferred
stock, voting as a class or series, to elect some members of the
board of directors, less than a majority thereof, in the event of
default in the payment of dividends on any class or series of
preferred stock;
(ii) To any provision which would require the holders of preferred stock,
voting as a class or series, to approve the merger or consolidation
of the Savings Bank with another corporation or the sale, lease, or
conveyance (other than by mortgage or pledge) of properties or
business in exchange for securities of a corporation other than the
Savings Bank if the preferred stock is exchanged for securities of
such other corporation; provided, that no provision may require such
approval for transactions undertaken with the assistance or pursuant
to the direction of the Office, the Federal Deposit Insurance
Corporation, or the Resolution Trust Corporation;
(iii) To any amendment which would adversely change the specific terms of
any class or series of capital stock as set forth in this Section 5
(or in any supplementary sections hereto), including any amendment
which would create or enlarge any class or series ranking prior
thereto in rights and
<PAGE>
preferences. An amendment which increases the number of authorized
shares of any class or series of capital stock, or substitutes the
surviving Savings Bank in a merger or consolidation for the Savings
Bank, shall not be considered to be such an adverse change.
A description of the different classes and series of the Savings Bank's
capital stock and a statement of the designations, and the relative rights,
preferences and limitations of the shares of each class of and series of capital
stock are as follows:
A. Common Stock. Except as provided in this Section 5 (or in any
supplementary sections thereto) the holders of common stock shall exclusively
possess all voting power. Each holder of shares of common stock shall be
entitled to one vote for each share held by such holder, except as to the
cumulation of votes for the election of directors.
Whenever there shall have been paid, or declared and set aside for payment,
to the holders of the outstanding shares of any class of stock having preference
over the common stock as to payment of dividends, the full amount of dividends
and of sinking fund, retirement fund or other retirement payments, if any, to
which such holders are respectively entitled in preference to the common stock,
then dividends may be paid on the common stock and on any class or series of
stock entitled to participate therewith as to dividends out of any assets
legally available for the payment of dividends.
In the event of any liquidation, dissolution, or winding up of the Savings
Bank the holders of the common stock (and the holders of any class or series of
stock entitled to participate with the common stock in the distribution of
assets) shall be entitled to receive, in cash or in kind, the assets of the
Savings Bank available for distribution remaining after: (i) payment or
provision for payment of the Savings Bank's debts and liabilities; (ii)
distributions or provision for distributions in settlement of its liquidation
account; and (iii) distributions or provisions for distributions to holders of
any class or series of stock having preference over the common stock in the
liquidation, dissolution, or winding up of the Savings Bank. Each share of
common stock shall have the same rights as and be identical in all respects with
all the other shares of common stock.
B. Preferred Stock. The Savings Bank may provide in supplementary sections
to its charter for one or more classes of preferred stock, which shall be
separately identified. The shares of any class may be divided into and issued in
series, with each series separately designated so as to distinguish the shares
thereof from the shares of all other series and classes. The terms of each
series shall be set forth in a supplementary section to the charter. All shares
of the same class shall be identical, except as to the following relative rights
and preferences, as to which there may be variations between different series:
(a) The distinctive serial designation and the number of shares
constituting such series;
(b) The dividend rate or the amount of dividends to be paid on the shares
of such series, whether dividends shall be cumulative and, if so, from
which date(s), the payment date(s) for dividends, and the
participating or other special rights, if any, with respect to
dividends;
(c) The voting powers, full or limited, if any, of shares of such series;
(d) Whether the shares of such series shall be redeemable and, if so, the
price(s) at which, and the terms and conditions of which, such shares
may be redeemed;
(e) The amount(s) payable upon the shares of such series in the event of
voluntary or involuntary liquidation, dissolution, or winding up of
the Savings Bank;
(f) Whether the shares of such series shall be entitled to the benefit of
a sinking or retirement fund to be applied to the purchase or
redemption of such shares, and if so entitled, the amount of such fund
and the manner of its application, including the price(s) at which
such shares may be redeemed or purchased through the application of
such fund;
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(g) Whether the shares of such series shall be convertible into, or
exchangeable for, shares of any other class or classes of stock of the
Savings Bank and, if so, the conversion price(s) or the rate(s) of
exchange, and the adjustments thereof, if any, at which such
conversion or exchange may be made, and any other terms and conditions
of such conversion or exchange;
(h) The price or other consideration for which the shares of such series
shall be issued; and
(i) Whether the shares of such series which are redeemed or converted
shall have the status of authorized but unissued shares of serial
preferred stock and whether such shares may be reissued as shares of
the same or any other series of serial preferred stock.
Each share of each series of serial preferred stock shall have the same
relative rights as and be identical in all respects with all the other shares of
the same series.
The board of directors shall have authority to divide, by the adoption of
supplementary charter sections, any authorized class of preferred stock into
series and, within the limitations set forth in this section and the remainder
of this charter, fix and determine the relative rights and preferences of the
shares of any series so established.
Prior to the issuance of any preferred shares of a series established by a
supplementary charter section adopted by the board of directors, the Savings
Bank shall file with the Secretary to the Office a dated copy of that
supplementary section of this charter establishing and designating the series
and fixing and determining the relative rights and preferences thereof.
Section 6. Preemptive Rights. Holders of the capital stock of the Savings
Bank shall not be entitled to preemptive rights with respect to any shares of
the Savings Bank which may be issued.
Section 7. Directors. The Savings Bank shall be under the direction of a
board of directors. The authorized number of directors, as stated in the Savings
Bank's bylaws, shall not be fewer than seven nor more than fifteen except when a
greater number is approved by the Office.
Section 8. Certain Provisions for Five Years. Notwithstanding anything
contained in the Savings Bank's charter or bylaws to the contrary, for a period
of five years from the effective date of this charter, the following provisions
shall apply:
A. Beneficial Ownership Limitation. No person, other than First Federal
Bankshares, Inc., the holding company of the Savings Bank, shall directly or
indirectly offer to acquire or acquire the beneficial ownership of more than 10
percent of the common stock of the Savings Bank. This limitation shall not apply
to a transaction in which the Savings Bank forms a stock holding company without
change in the respective beneficial ownership interests of its stockholders
other than pursuant to the exercise of any dissenter and appraisal rights, the
purchase of shares by underwriters in connection with a public offering, or the
purchase of shares by a tax-qualified employee stock benefit plan which is
exempt from the approval requirements under ss. 574.3(c)(1)(vi) of the
regulations of the Office.
In the event shares are acquired in violation of this Section 8, all shares
beneficially owned by any person in excess of 10% shall be considered "excess
shares" and 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 the stockholders for a vote.
For purposes of this Section 8, the following definitions apply:
(1) The term "person" includes an individual, a group acting in concert, a
corporation, a partnership, a savings bank, a joint stock company, a
trust, an unincorporated organization or similar company, a syndicate
or any other group formed for the purpose of acquiring, holding or
disposing of the common stock of the Savings Bank.
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(2) The term "offer" includes every offer to buy or otherwise acquire,
solicitation of an offer to sell, tender offer for, or request or
invitation for tenders of, a security or interest in a security for
value.
(3) The term "acquire" includes every type of acquisition, whether
effected by purchase, exchange, operation of law or otherwise.
(4) The term "acting in concert" means (a) knowing participation in a
joint activity or conscious parallel action towards a common goal
whether or not pursuant to an express agreement, or (b) a combination
or pooling of voting or other interests in the securities of an issuer
for a common purpose pursuant to any contract, understanding,
relationship, agreement or other arrangements, whether written or
otherwise.
Section 9. Amendment of Charter. Except as provided in Section 5, no
amendment, addition, alteration, change, or repeal of this charter shall be
made, unless such is first proposed by the board of directors of the Savings
Bank, then preliminarily approved by the Office, which preliminary approval may
be granted by the Office pursuant to regulations specifying preapproved charter
amendments, and thereafter approved by the shareholders of a majority of the
total votes eligible to be cast at a legal meeting. Any amendment, addition,
alteration, change, or repeal so acted upon shall be effective upon filing with
the Office in accordance with regulatory procedures on or such other date as the
Office may specify in its preliminary approval.
Section 10. Liquidation Account. Pursuant to the requirements of the
Office's regulations (12 C.F.R. Subchapter D), the Savings Bank shall establish
and maintain a liquidation account in an amount equal to the greater of: (a) the
percentage of the outstanding common stock held by First Federal Bankshares,
M.H.C. on September 30, 1998, multiplied by the Savings Bank's stockholders'
equity on such date, or (b) the Savings Bank's retained earnings as of the date
that the Savings Bank reorganized into the mutual holding company structure. The
liquidation account shall be established and maintained for the benefit of its
savings account holders who had an account balance of at least $50.00 as of the
close of business on either September 30, 1997 or December 31, 1998 ("Eligible
Depositors"). In the event of a complete liquidation of the Savings Bank, it
shall comply with such rules and regulations with respect to the amount and the
priorities on liquidation of each of the Savings Bank's Eligible Depositors'
inchoate interest in the liquidation account, to the extent it is still in
existence. An Eligible Depositor's inchoate interest in the liquidation account
shall not entitle such Eligible Depositor to any voting rights at meetings of
the Savings Bank's stockholders.
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Dated. This ____ day of ______
Attest: By:
---------------------------- ----------------------------
Secretary President
First Federal Bank First Federal Bank
Declared effective this __ day of _____
OFFICE OF THRIFT SUPERVISION
Attest: By:
---------------------------- ----------------------------
Corporate Secretary Acting Director
Office of Thrift Supervision Office of Thrift Supervision
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EXHIBIT D
CERTIFICATE OF INCORPORATION OF HOLDING COMPANY
<PAGE>
CERTIFICATE OF INCORPORATION
OF
FIRST FEDERAL BANKSHARES, INC.
FIRST: The name of the Corporation is First Federal Bankshares, Inc.
(hereinafter referred to as the "Corporation").
SECOND: The address of the registered office of the Corporation in the
State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City
of Wilmington, County of New Castle. The name of the registered agent at that
address is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware.
FOURTH:
A. The total number of shares of all classes of stock which the Corporation
shall have authority to issue is twenty million (20,000,000) consisting of:
1. Two million (2,000,000) shares of Preferred Stock, par value one
cent ($.01) per share (the "Preferred Stock"); and
2. Eighteen million (18,000,000) shares of Common Stock, par value one
cent ($.01) per share (the "Common Stock").
B. The Board of Directors is authorized, subject to any limitations
prescribed by law, to provide for the issuance of the shares of Preferred Stock
in series, and by filing a certificate pursuant to the applicable law of the
State of Delaware (such certificate being hereinafter referred to as a
"Preferred Stock Designation"), to establish from time to time the number of
shares to be included in each such series, and to fix the designation, powers,
preferences, and rights of the shares of each such series and any
qualifications, limitations or restrictions thereof. The number of authorized
shares of Preferred Stock may be increased or decreased (but not below the
number of shares thereof then outstanding) by the affirmative vote of the
holders of a majority of the Common Stock, without a vote of the holders of the
Preferred Stock, or of any series thereof, unless a vote of any such holders is
required pursuant to the terms of any Preferred Stock Designation.
C. 1. Notwithstanding any other provision of this Certificate of
Incorporation, in no event shall any record owner of any outstanding Common
Stock which is beneficially owned, directly or indirectly, by a person who, as
of any record date for the determination of stockholders entitled to vote on any
matter, 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. The number of votes which may be cast by
any record owner by virtue of the provisions hereof in respect of Common Stock
beneficially owned by such person owning shares in excess of the Limit shall be
a number equal to the total number of votes which a single record owner of all
Common Stock owned by such person would be entitled to cast, multiplied by a
fraction, the numerator of which is the number of shares of such class or series
which are both beneficially owned by such person and owned of record by such
record owner and the denominator of which is the total number of shares of
Common Stock beneficially owned by such person owning shares in excess of the
Limit.
2. The following definitions shall apply to this Section C of this
Article FOURTH:
(a) "Affiliate" shall have the meaning ascribed to it in Rule 12b-2
of the General Rules and Regulations under the Securities
Exchange Act of 1934, as in effect on the date of filing of
this Certificate of Incorporation.
<PAGE>
(b) "Beneficial ownership" shall be determined pursuant to Rule
13d-3 of the General Rules and Regulations under the Securities
Exchange Act of 1934 (or any successor rule or statutory
provision), or, if said Rule 13d-3 shall be rescinded and there
shall be no successor rule or statutory provision thereto,
pursuant to said Rule 13d-3 as in effect on the date of filing
of this Certificate of Incorporation; provided, however, that a
person shall, in any event, also be deemed the "beneficial
owner" of any Common Stock:
(1) which such person or any of its affiliates beneficially
owns, directly or indirectly; or
(2) which such person or any of its affiliates has (i) the
right to acquire (whether such right is exercisable
immediately or only after the passage of time), pursuant
to any agreement, arrangement or understanding (but shall
not be deemed to be the beneficial owner of any voting
shares solely by reason of an agreement, contract, or
other arrangement with this Corporation to effect any
transaction which is described in any one or more of
clauses of Section A of Article EIGHTH) or upon the
exercise of conversion rights, exchange rights, warrants,
or options or otherwise, or (ii) sole or shared voting or
investment power with respect thereto pursuant to any
agreement, arrangement, understanding, relationship or
otherwise (but shall not be deemed to be the beneficial
owner of any voting shares solely by reason of a revocable
proxy granted for a particular meeting of stockholders,
pursuant to a public solicitation of proxies for such
meeting, with respect to shares of which neither such
person nor any such Affiliate is otherwise deemed the
beneficial owner); or
(3) which is beneficially owned, directly or indirectly, by
any other person with which such first mentioned person or
any of its Affiliates acts as a partnership, limited
partnership, syndicate or other group pursuant to any
agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of any shares of
capital stock of this Corporation;
and provided further, however, that (1) no Director or Officer
of this Corporation (or any Affiliate of any such Director or
Officer) shall, solely by reason of any or all of such
Directors or Officers acting in their capacities as such, be
deemed, for any purposes hereof, to beneficially own any Common
Stock beneficially owned by another such Director or Officer
(or any Affiliate thereof), and (2) neither any employee stock
ownership plan or similar plan of this Corporation or any
subsidiary of this Corporation, nor any trustee with respect
thereto or any Affiliate of such trustee (solely by reason of
such capacity of such trustee), shall be deemed, for any
purposes hereof, to beneficially own any Common Stock held
under any such plan. For purposes of computing the percentage
beneficial ownership of Common Stock of a person the
outstanding Common Stock shall include shares deemed owned by
such person through application of this subsection but shall
not include any other Common Stock which may be issuable by
this Corporation pursuant to any agreement, or upon exercise of
conversion rights, warrants or options, or otherwise. For all
other purposes, the outstanding Common Stock shall include only
Common Stock then outstanding and shall not include any Common
Stock which may be issuable by this Corporation pursuant to any
agreement, or upon the exercise of conversion rights, warrants
or options, or otherwise.
(c) A "person" shall mean any individual, firm, corporation, or
other entity.
3. The Board of Directors shall have the power to construe and apply
the provisions of this section and to make all determinations necessary or
desirable to implement such provisions, including but not limited to matters
with respect to (i) determining the number of shares of Common Stock
beneficially owned by any person, (ii) determining whether a person is an
affiliate of another, (iii) determining whether a person has an agreement,
arrangement, or understanding with another as to the matters referred to in the
definition of beneficial ownership,
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(iv) determining the application of any other definition or operative provision
of the section to the given facts, or (v) any other matter relating to the
applicability or effect of this section.
4. The Board of Directors shall have the right to demand that any
person who is reasonably believed to beneficially own Common Stock in excess of
the Limit (or holds of record Common Stock beneficially owned by any person in
excess of the Limit) supply the Corporation with complete information as to (i)
the record owner(s) of all shares beneficially owned by such person who is
reasonably believed to own shares in excess of the Limit, (ii) any other factual
matter relating to the applicability or effect of this section as may reasonably
be requested of such person.
5. Except as otherwise provided by law or expressly provided in this
section, the presence, in person or by proxy, of the holders of record of shares
of capital stock of the Corporation entitling the holders thereof to cast a
majority of the votes (after giving effect, if required, to the provisions of
this section) entitled to be cast by the holders of shares of capital stock of
the Corporation entitled to vote shall constitute a quorum at all meetings of
the stockholders, and every reference in this Certificate of Incorporation to a
majority or other proportion of capital stock (or the holders thereof) for
purposes of determining any quorum requirement or any requirement for
stockholder consent or approval shall be deemed to refer to such majority or
other proportion of the votes (or the holders thereof) then entitled to be cast
in respect of such capital stock giving effect to the provisions of this Article
FOURTH.
6. Any constructions, applications, or determinations made by the
Board of Directors pursuant to this section in good faith and on the basis of
such information and assistance as was then reasonably available for such
purpose shall be conclusive and binding upon the Corporation and its
stockholders.
7. In the event any provision (or portion thereof) of this section
shall be found to be invalid, prohibited or unenforceable for any reason, the
remaining provisions (or portions thereof) of this section shall remain in full
force and effect, and shall be construed as if such invalid, prohibited or
unenforceable provision had been stricken herefrom or otherwise rendered
inapplicable, it being the intent of this Corporation and its stockholders that
such remaining provision (or portion thereof) of this section remain, to the
fullest extent permitted by law, applicable and enforceable as to all
stockholders, including stockholders owning an amount of stock over the Limit,
notwithstanding any such finding.
FIFTH: The following provisions are inserted for the management of the
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and
of its Directors and stockholders:
A. The business and affairs of the Corporation shall be managed
by or under the direction of the Board of Directors. In addition to the
powers and authority expressly conferred upon them by statute or by this
Certificate of Incorporation or the Bylaws of the Corporation, the
Directors are hereby empowered to exercise all such powers and do all such
acts and things as may be exercised or done by the Corporation.
B. The Directors of the Corporation need not be elected by
written ballot unless the Bylaws so provide.
C. Any action required or permitted to be taken by the
stockholders of the Corporation must be effected at a duly called annual or
special meeting of stockholders of the Corporation and may not be effected
by any consent in writing by such stockholders.
D. Special meetings of stockholders of the Corporation may be
called only by the Board of Directors pursuant to a resolution adopted by a
majority of the total number of authorized directorships whether or not
there exist any vacancies in previously authorized directorships at the
time any such resolution is presented to the Board for adoption (the "Whole
Board") or as otherwise provided in the Bylaws.
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SIXTH:
A. The number of Directors shall be fixed from time to time exclusively by
the Board of Directors pursuant to a resolution adopted by a majority of the
Whole Board. The Directors shall be divided into three classes, with the term of
office of the first class to expire at the first annual meeting of stockholders,
the term of office of the second class to expire at the annual meeting of
stockholders one year thereafter and the term of office of the third class to
expire at the annual meeting of stockholders two years thereafter with each
director to hold office until his or her successor shall have been duly elected
and qualified. At each annual meeting of stockholders following such initial
classification and election, Directors elected to succeed those Directors whose
terms expire shall be elected for a term of office to expire at the third
succeeding annual meeting of stockholders after their election with each
director to hold office until his or her successor shall have been duly elected
and qualified.
B. Subject to the rights of the holders of any series of Preferred Stock
then outstanding, newly created directorships resulting from any increase in the
authorized number of Directors or any vacancies in the Board of Directors
resulting from death, resignation, retirement, disqualification, removal from
office or other cause may be filled only by a majority vote of the Directors
then in office, though less than a quorum, and Directors so chosen shall hold
office for a term expiring at the annual meeting of stockholders at which the
term of office of the class to which they have been chosen expires. No decrease
in the number of Directors constituting the Board of Directors shall shorten the
term of any incumbent Director.
C. Advance notice of stockholder nominations for the election of Directors
and of business to be brought by stockholders before any meeting of the
stockholders of the Corporation shall be given in the manner provided in the
Bylaws of the Corporation.
D. Subject to the rights of the holders of any series of Preferred Stock
then outstanding, any Director, or the entire Board of Directors, may be removed
from office at any time, but only for cause and only by the affirmative vote of
the holders of at least 80 percent of the voting power of all of the
then-outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of Directors (after giving effect to the provisions of
Article FOURTH of this Certificate of Incorporation ("Article FOURTH")), voting
together as a single class.
SEVENTH: The Board of Directors is expressly empowered to adopt, amend or
repeal the Bylaws of the Corporation. Any adoption, amendment or repeal of the
Bylaws of the Corporation by the Board of Directors shall require the approval
of a majority of the Whole Board. The stockholders shall also have power to
adopt, amend or repeal the Bylaws of the Corporation; provided, however, that,
in addition to any vote of the holders of any class or series of stock of the
Corporation required by law or by this Certificate of Incorporation, the
affirmative vote of the holders of at least 80 percent of the voting power of
all of the then-outstanding shares of the capital stock of the Corporation
entitled to vote generally in the election of Directors (after giving effect to
the provisions of Article FOURTH), voting together as a single class, shall be
required to adopt, amend or repeal any provisions of the Bylaws of the
Corporation.
EIGHTH:
A. In addition to any affirmative vote required by law or this Certificate
of Incorporation, and except as otherwise expressly provided in this section:
1. any merger or consolidation of the Corporation or any Subsidiary
(as hereinafter defined) with (i) any Interested Stockholder (as
hereinafter defined) or (ii) any other corporation (whether or not itself
an Interested Stockholder) which is, or after such merger or consolidation
would be, an Affiliate (as hereinafter defined) of an Interested
Stockholder; or
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<PAGE>
2. any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of transactions) to or with any
Interested Stockholder, or any Affiliate of any Interested Stockholder, of
any assets of the Corporation or any Subsidiary having an aggregate Fair
Market Value (as hereinafter defined) equaling or exceeding 25% or more of
the combined assets of the Corporation and its Subsidiaries; or
3. the issuance or transfer by the Corporation or any Subsidiary (in
one transaction or a series of transactions) of any securities of the
Corporation or any Subsidiary to any Interested Stockholder or any
Affiliate of any Interested Stockholder in exchange for cash, securities or
other property (or a combination thereof) having an aggregate Fair Market
Value (as hereinafter defined) equaling or exceeding 25% of the combined
Fair Market Value of the then-outstanding common stock of the Corporation
and its Subsidiaries, except to an employee benefit plan of the Corporation
or any Subsidiary thereof; or
4. the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation proposed by or on behalf of an Interested
Stockholder or any Affiliate of an Interested Stockholder; or
5. any reclassification of securities (including any reverse stock
split), or recapitalization of the Corporation, or any merger or
consolidation of the Corporation with any of its Subsidiaries or any other
transaction (whether or not with or into or otherwise involving an
Interested Stockholder) which has the effect, directly or indirectly, of
increasing the proportional share of the outstanding shares of any class of
equity or convertible securities of the Corporation or any Subsidiary which
is directly or indirectly owned by an Interested Stockholder or any
Affiliate of an Interested Stockholder;
shall require the affirmative vote of the holders of at least 80% of the voting
power of the then-outstanding shares of stock of the Corporation entitled to
vote in the election of Directors (the "Voting Stock") (after giving effect to
the provisions of Article FOURTH), voting together as a single class. Such
affirmative vote shall be required notwithstanding the fact that no vote may be
required, or that a lesser percentage may be specified, by law or by any other
provisions of this Certificate of Incorporation or any Preferred Stock
Designation or in any agreement with any national securities exchange or
otherwise.
The term "Business Combination" as used in this Article EIGHTH shall mean
any transaction which is referred to in any one or more of paragraphs 1 through
5 of Section A of this Article EIGHTH.
B. The provisions of Section A of this Article EIGHTH shall not be
applicable to any particular Business Combination, and such Business Combination
shall require only the affirmative vote of the majority of the outstanding
shares of capital stock entitled to vote, or such vote as is required by law or
by this Certificate of Incorporation, if, in the case of any Business
Combination that does not involve any cash or other consideration being received
by the stockholders of the Corporation solely in their capacity as stockholders
of the Corporation, the condition specified in the following paragraph 1 is met
or, in the case of any other Business Combination, all of the conditions
specified in either of the following paragraphs 1 or 2 are met:
1. The Business Combination shall have been approved by two-thirds of
the Disinterested Directors (as hereinafter defined).
2. All of the following conditions shall have been met:
(a) The aggregate amount of the cash and the Fair Market Value as
of the date of the consummation of the Business Combination of
consideration other than cash to be received per share by the
holders of Common Stock in such Business Combination shall at
least be equal to the higher of the following:
(1) (if applicable) the Highest Per Share Price (as
hereinafter defined), including any brokerage commissions,
transfer taxes and soliciting dealers' fees, paid by the
Interested Stockholder or any of its Affiliates for any
shares of Common Stock
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<PAGE>
acquired by it (i) within the two-year period immediately
prior to the first public announcement of the proposal of
the Business Combination (the "Announcement Date"), or
(ii) in the transaction in which it became an Interested
Stockholder, whichever is higher.
(2) the Fair Market Value per share of Common Stock on the
Announcement Date or on the date on which the Interested
Stockholder became an Interested Stockholder (such latter
date is referred to in this Article EIGHTH as the
"Determination Date"), whichever is higher.
(b) The aggregate amount of the cash and the Fair Market Value as
of the date of the consummation of the Business Combination of
consideration other than cash to be received per share by
holders of shares of any class of outstanding Voting Stock
other than Common Stock shall be at least equal to the highest
of the following (it being intended that the requirements of
this subparagraph (b) shall be required to be met with respect
to every such class of outstanding Voting Stock, whether or not
the Interested Stockholder has previously acquired any shares
of a particular class of Voting Stock):
(1) (if applicable) the Highest Per Share Price (as
hereinafter defined), including any brokerage commissions,
transfer taxes and soliciting dealers' fees, paid by the
Interested Stockholder for any shares of such class of
Voting Stock acquired by it (i) within the two-year period
immediately prior to the Announcement Date, or (ii) in the
transaction in which it became an Interested Stockholder,
whichever is higher;
(2) (if applicable) the highest preferential amount per share
to which the holders of shares of such class of Voting
Stock are entitled in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the
Corporation; and
(3) the Fair Market Value per share of such class of Voting
Stock on the Announcement Date or on the Determination
Date, whichever is higher.
(c) The consideration to be received by holders of a particular
class of outstanding Voting Stock (including Common Stock)
shall be in cash or in the same form as the Interested
Stockholder has paid for shares of such class of Voting Stock.
If the Interested Stockholder has previously paid for shares of
any class of Voting Stock with varying forms of consideration,
the form of consideration to be received per share by holders
of shares of such class of Voting Stock shall be either cash or
the form used to acquire the largest number of shares of such
class of Voting Stock previously acquired by the Interested
Stockholder. The price determined in accordance with
subparagraph B.2 of this Article EIGHTH shall be subject to
appropriate adjustment in the event of any stock dividend,
stock split, combination of shares or similar event.
(d) After such Interested Stockholder has become an Interested
Stockholder and prior to the consummation of such Business
Combination: (1) except as approved by a majority of the
Disinterested Directors, there shall have been no failure to
declare and pay at the regular date therefor any full quarterly
dividends (whether or not cumulative) on any outstanding stock
having preference over the Common Stock as to dividends or
liquidation; (2) there shall have been (i) no reduction in the
annual rate of dividends paid on the Common Stock (except as
necessary to reflect any subdivision of the Common Stock),
except as approved by a majority of the Disinterested
Directors, and (ii) an increase in such annual rate of
dividends as necessary to reflect any reclassification
(including any reverse stock split), recapitalization,
reorganization or any similar transaction which has the effect
of reducing the number of outstanding shares of the Common
Stock, unless the failure to so increase such annual rate is
approved by a
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majority of the Disinterested Directors; and (3) neither such
Interested Stockholder or any of its Affiliates shall have
become the beneficial owner of any additional shares of Voting
Stock except as part of the transaction which results in such
Interested Stockholder becoming an Interested Stockholder.
(e) After such Interested Stockholder has become an Interested
Stockholder, such Interested Stockholder shall not have
received the benefit, directly or indirectly (except
proportionately as a stockholder), of any loans, advances,
guarantees, pledges or other financial assistance or any tax
credits or other tax advantages provided by the Corporation,
whether in anticipation of or in connection with such Business
Combination or otherwise.
(f) A proxy or information statement describing the proposed
Business Combination and complying with the requirements of the
Securities Exchange Act of 1934 and the rules and regulations
thereunder (or any subsequent provisions replacing such Act,
rules or regulations) shall be mailed to stockholders of the
Corporation at least 30 days prior to the consummation of such
Business Combination (whether or not such proxy or information
statement is required to be mailed pursuant to such Act or
subsequent provisions).
C. For the purposes of this Article EIGHTH:
1. A "Person" shall include an individual, a group acting in concert,
a corporation, a partnership, an association, a joint venture, a pool, a
joint stock company, a trust, an unincorporated organization or similar
company, a syndicate or any other group formed for the purpose of
acquiring, holding or disposing of securities.
2. "Interested Stockholder" shall mean any person (other than the
Corporation or any holding company or Subsidiary thereof) who or which:
(a) is the beneficial owner, directly or indirectly, of more than
10% of the voting power of the outstanding Voting Stock; or
(b) is an Affiliate of the Corporation and at any time within the
two-year period immediately prior to the date in question was the
beneficial owner, directly or indirectly, of 10% or more of the voting
power of the then-outstanding Voting Stock; or
(c) is an assignee of or has otherwise succeeded to any shares of
Voting Stock which were at any time within the two-year period
immediately prior to the date in question beneficially owned by an
Interested Stockholder, if such assignment or succession shall have
occurred in the course of a transaction or series of transactions not
involving a public offering within the meaning of the Securities Act of
1933.
3. For purposes of this Article EIGHTH, "beneficial ownership" shall
be determined in the manner provided in Section C of Article FOURTH hereof.
4. "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations
under the Securities Exchange Act of 1934, as in effect on the date of
filing of this Certificate of Incorporation.
5. "Subsidiary" means any corporation of which a majority of any class
of equity security is owned, directly or indirectly, by the Corporation;
provided, however, that for the purposes of the definition of Interested
Stockholder set forth in paragraph 2 of this section, the term "Subsidiary"
shall mean only a corporation of which a majority of each class of equity
security is owned, directly or indirectly, by the Corporation.
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6. "Disinterested Director" means any member of the Board of Directors
who is unaffiliated with the Interested Stockholder and was a member of the
Board of Directors prior to the time that the Interested Stockholder became
an Interested Stockholder, and any Director who is thereafter chosen to
fill any vacancy of the Board of Directors or who is elected and who, in
either event, is unaffiliated with the Interested Stockholder and in
connection with his or her initial assumption of office is recommended for
appointment or election by a majority of Disinterested Directors then on
the Board of Directors.
7. "Fair Market Value" means: (a) in the case of stock, the highest
closing sales price of the stock during the 30-day period immediately
preceding the date in question of a share of such stock on the National
Association of Securities Dealers Automated Quotation System or any system
then in use, or, if such stock is admitted to trading on a principal United
States securities exchange registered under the Securities Exchange Act of
1934, Fair Market Value shall be the highest sales price reported during
the 30-day period preceding the date in question, or, if no such quotations
are available, the Fair Market Value on the date in question of a share of
such stock as determined by the Board of Directors in good faith, in each
case with respect to any class of stock, appropriately adjusted for any
dividend or distribution in shares of such stock or any stock split or
reclassification of outstanding shares of such stock into a greater number
of shares of such stock or any combination or reclassification of
outstanding shares of such stock into a smaller number of shares of such
stock, and (b) in the case of property other than cash or stock, the Fair
Market Value of such property on the date in question as determined by the
Board of Directors in good faith.
8. Reference to "Highest Per Share Price" shall in each case with
respect to any class of stock reflect an appropriate adjustment for any
dividend or distribution in shares of such stock or any stock split or
reclassification of outstanding shares of such stock into a greater number
of shares of such stock or any combination or reclassification of
outstanding shares of such stock into a smaller number of shares of such
stock.
9. In the event of any Business Combination in which the Corporation
survives, the phrase "consideration other than cash to be received" as used
in subparagraphs (a) and (b) of paragraph 2 of Section B of this Article
EIGHTH shall include the shares of Common Stock and/or the shares of any
other class of outstanding Voting Stock retained by the holders of such
shares.
D. A majority of the Directors of the Corporation shall have the power and
duty to determine for the purposes of this Article EIGHTH, on the basis of
information known to them after reasonable inquiry (a) whether a person is an
Interested Stockholder; (b) the number of shares of Voting Stock beneficially
owned by any person; (c) whether a person is an Affiliate or Associate of
another; and (d) whether the assets which are the subject of any Business
Combination have, or the consideration to be received for the issuance or
transfer of securities by the Corporation or any Subsidiary in any Business
Combination has an aggregate Fair Market Value equaling or exceeding 25% of the
combined Fair Market Value of the common stock of the Corporation and its
Subsidiaries. A majority of the Directors shall have the further power to
interpret all of the terms and provisions of this Article EIGHTH.
E. Nothing contained in this Article EIGHTH shall be construed to relieve
any Interested Stockholder from any fiduciary obligation imposed by law.
F. Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the Voting Stock required by law, this Certificate
of Incorporation or any Preferred Stock Designation, the affirmative vote of the
holders of at least 80 percent of the voting power of all of the
then-outstanding shares of the Voting Stock, voting together as a single class,
shall be required to alter, amend or repeal this Article EIGHTH.
NINTH: The Board of Directors of the Corporation, when evaluating any offer
of another Person (as defined in Article EIGHTH hereof) to (A) make a tender or
exchange offer for any equity security of the
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Corporation, (B) merge or consolidate the Corporation with another corporation
or entity or (C) purchase or otherwise acquire all or substantially all of the
properties and assets of the Corporation, may, in connection with the exercise
of its judgment in determining what is in the best interest of the Corporation
and its stockholders, give due consideration to all relevant factors, including,
without limitation, the social and economic effect of acceptance of such offer
on the Corporation's present and future customers and employees and those of its
Subsidiaries (as defined in Article EIGHTH hereof); on the communities in which
the Corporation and its Subsidiaries operate or are located; on the ability of
the Corporation to fulfill its corporate objectives as a savings bank holding
company and on the ability of its subsidiary savings bank to fulfill the
objectives of a stock savings bank under applicable statutes and regulations.
TENTH:
A. Each person who was or is made a party or is threatened to be made a
party to or is otherwise involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (hereinafter a "proceeding"),
by reason of the fact that he or she is or was a Director or an Officer of the
Corporation or is or was serving at the request of the Corporation as a
Director, Officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to an
employee benefit plan (hereinafter an "indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as a Director, Officer,
employee or agent or in any other capacity while serving as a Director, Officer,
employee or agent, shall be indemnified and held harmless by the Corporation to
the fullest extent authorized by the Delaware General Corporation Law, as the
same exists or may hereafter be amended (but, in the case of any such amendment,
only to the extent that such amendment permits the Corporation to provide
broader indemnification rights than such law permitted the Corporation to
provide prior to such amendment), against all expense, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties
and amounts paid in settlement) reasonably incurred or suffered by such
indemnitee in connection therewith; provided, however, that, except as provided
in Section C hereof with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee only
if such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation.
B. The right to indemnification conferred in Section A of this Article
TENTH shall include the right to be paid by the Corporation the expenses
incurred in defending any such proceeding in advance of its final disposition
(hereinafter an "advancement of expenses"); provided, however, that, if the
Delaware General Corporation Law requires, an advancement of expenses incurred
by an indemnitee in his or her capacity as a Director or Officer (and not in any
other capacity in which service was or is rendered by such indemnitee,
including, without limitation, service to an employee benefit plan) shall be
made only upon delivery to the Corporation of an undertaking (hereinafter an
"undertaking"), by or on behalf of such indemnitee, to repay all amounts so
advanced if it shall ultimately be determined by final judicial decision from
which there is no further right to appeal (hereinafter a "final adjudication")
that such indemnitee is not entitled to be indemnified for such expenses under
this Section or otherwise. The rights to indemnification and to the advancement
of expenses conferred in Sections A and B of this Article TENTH shall be
contract rights and such rights shall continue as to an indemnitee who has
ceased to be a Director, Officer, employee or agent and shall inure to the
benefit of the indemnitee's heirs, executors and administrators.
C. If a claim under Section A or B of this Article TENTH is not paid in
full by the Corporation within sixty days after a written claim has been
received by the Corporation, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be twenty days, the
indemnitee may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim. If successful in whole or in part in any
such suit, or in a suit brought by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, the indemnitee shall be
entitled to be paid also the expense of prosecuting or defending such suit. In
(i) any suit brought by the indemnitee to enforce a right to indemnification
hereunder (but not in a suit brought by the indemnitee to enforce a right to an
advancement of expenses) it shall be a defense that, and (ii) in any suit by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking the Corporation shall be entitled to recover such expenses upon a
final adjudication that, the indemnitee has not met any applicable standard for
indemnification set forth in the Delaware General Corporation Law. Neither the
failure of
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the Corporation (including its Board of Directors, independent legal counsel, or
its stockholders) to have made a determination prior to the commencement of such
suit that indemnification of the indemnitee is proper in the circumstances
because the indemnitee has met the applicable standard of conduct set forth in
the Delaware General Corporation Law, nor an actual determination by the
Corporation (including its Board of Directors, independent legal counsel, or its
stockholders) that the indemnitee has not met such applicable standard of
conduct, shall create a presumption that the indemnitee has not met the
applicable standard of conduct or, in the case of such a suit brought by the
indemnitee, be a defense to such suit. In any suit brought by the indemnitee to
enforce a right to indemnification or to an advancement of expenses hereunder,
or by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the burden of proving that the indemnitee is not
entitled to be indemnified, or to such advancement of expenses, under this
Article TENTH or otherwise shall be on the Corporation.
D. The rights to indemnification and to the advancement of expenses
conferred in this Article TENTH shall not be exclusive of any other right which
any person may have or hereafter acquire under any statute, the Corporation's
Certificate of Incorporation, Bylaws, agreement, vote of stockholders or
disinterested Directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to protect
itself and any Director, Officer, employee or agent of the Corporation or
another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the Corporation would
have the power to indemnify such person against such expense, liability or loss
under the Delaware General Corporation Law.
F. The Corporation may, to the extent authorized from time to time by the
Board of Directors, grant rights to indemnification and to the advancement of
expenses to any employee or agent of the Corporation to the fullest extent of
the provisions of this Article TENTH with respect to the indemnification and
advancement of expenses of Directors and Officers of the Corporation.
ELEVENTH: A Director of this Corporation shall not be personally liable to
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a Director, except for liability (i) for any breach of the Director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the Director derived an improper
personal benefit. If the Delaware General Corporation Law is amended to
authorize corporate action further eliminating or limiting the personal
liability of Directors, then the liability of a Director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the Delaware
General Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders
of the Corporation shall not adversely affect any right or protection of a
Director of the Corporation existing at the time of such repeal or modification.
TWELFTH: The Corporation reserves the right to amend or repeal any
provision contained in this Certificate of Incorporation in the manner
prescribed by the laws of the State of Delaware and all rights conferred upon
stockholders are granted subject to this reservation; provided, however, that,
notwithstanding any other provision of this Certificate of Incorporation or any
provision of law which might otherwise permit a lesser vote or no vote, but in
addition to any vote of the holders of any class or series of the stock of the
Corporation required by law or by this Certificate of Incorporation, the
affirmative vote of the holders of at least 80 percent of the voting power of
all of the then-outstanding shares of the capital stock of the Corporation
entitled to vote generally in the election of Directors (after giving effect to
the provisions of Article FOURTH), voting together as a single class, shall be
required to amend or repeal this Article TWELFTH, Section C of Article FOURTH,
Sections C or D of Article FIFTH, Article SIXTH, Article SEVENTH, or Article
EIGHTH.
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THIRTEENTH: The name and mailing address of the sole incorporator are as
follows:
Name Mailing Address
---- ---------------
Robert I. Lipsher 5335 Wisconsin Avenue, N.W.
Suite 400
Washington, D.C. 20015
I, THE UNDERSIGNED, being the incorporator, for the purpose of forming a
corporation under the laws of the State of Delaware, do make, file and record
this Certificate of Incorporation, do certify that the facts herein stated are
true, and accordingly, have hereto set my hand this ___ day of _________, 1998.
-----------------
Robert I. Lipsher
Incorporator
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EXHIBIT E
BYLAWS OF HOLDING COMPANY
<PAGE>
FIRST FEDERAL BANKSHARES, INC.
BYLAWS
ARTICLE I - STOCKHOLDERS
Section 1. Annual Meeting.
An annual meeting of the stockholders, for the election of Directors to
succeed those whose terms expire and for the transaction of such other business
as may properly come before the meeting, shall be held at such place, on such
date, and at such time as the Board of Directors shall each year fix, which date
shall be within thirteen (13) months subsequent to the later of the date of
incorporation or the last annual meeting of stockholders.
Section 2. Special Meetings.
Subject to the rights of the holders of any class or series of preferred
stock of the Corporation, special meetings of stockholders of the Corporation
may be called by the Board of Directors pursuant to a resolution adopted by a
majority of the total number of Directors which the Corporation would have if
there were no vacancies on the Board of Directors (hereinafter the "Whole
Board").
Section 3. Notice of Meetings.
Written notice of the place, date, and time of all meetings of the
stockholders shall be given, not less than ten (10) nor more than sixty (60)
days before the date on which the meeting is to be held, to each stockholder
entitled to vote at such meeting, except as otherwise provided herein or
required by law (meaning, here and hereinafter, as required from time to time by
the Delaware General Corporation Law or the Certificate of Incorporation of the
Corporation).
When a meeting is adjourned to another place, date or time, written notice
need not be given of the adjourned meeting if the place, date and time thereof
are announced at the meeting at which the adjournment is taken; provided,
however, that if the date of any adjourned meeting is more than thirty (30) days
after the date for which the meeting was originally noticed, or if a new record
date is fixed for the adjourned meeting, written notice of the place, date, and
time of the adjourned meeting shall be given in conformity herewith. At any
adjourned meeting, any business may be transacted which might have been
transacted at the original meeting.
Section 4. Quorum.
At any meeting of the stockholders, the holders of a majority of all of the
shares of the stock entitled to vote at the meeting, present in person or by
proxy (after giving effect to the Article FOURTH of the Corporation's
Certificate of Incorporation), shall constitute a quorum for all purposes,
unless or except to the extent that the presence of a larger number may be
required by law. Where a separate vote by a class or classes is required, a
majority of the shares of such class or classes present in person or represented
by proxy shall constitute a quorum entitled to take action with respect to that
vote on that matter.
If a quorum shall fail to attend any meeting, the chairman of the meeting
or the holders of a majority of the shares of stock entitled to vote who are
present, in person or by proxy, may adjourn the meeting to another place, date,
or time.
If a notice of any adjourned special meeting of stockholders is sent to all
stockholders entitled to vote thereat, stating that it will be held with those
present constituting a quorum, then except as otherwise required by law, those
present at such adjourned meeting shall constitute a quorum, and all matters
shall be determined by a majority of the votes cast at such meeting.
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Section 5. Organization.
Such person as the Board of Directors may have designated or, in the
absence of such a person, the Chairman of the Board of the Corporation or, in
his or her absence, the Chief Executive Officer or, in his or her absence, such
person as may be chosen by the holders of a majority of the shares entitled to
vote who are present, in person or by proxy, shall call to order any meeting of
the stockholders and act as chairman of the meeting. In the absence of the
Secretary of the Corporation, the secretary of the meeting shall be such person
as the chairman appoints.
Section 6. Conduct of Business.
(a) The chairman of any meeting of stockholders shall determine the
order of business and the procedure at the meeting, including such regulation of
the manner of voting and the conduct of discussion as seem to him or her in
order. The date and time of the opening and closing of the polls for each matter
upon which the stockholders will vote at the meeting shall be announced at the
meeting.
(b) At any annual meeting of the stockholders, only such business
shall be conducted as shall have been brought before the meeting: (i) by or at
the direction of the Board of Directors or: (ii) by any stockholder of the
Corporation who is entitled to vote with respect thereto and who complies with
the notice procedures set forth in this Section 6(b). For business to be
properly brought before an annual meeting by a stockholder, the business must
relate to a proper subject matter for stockholder action and the stockholder
must have given timely notice thereof in writing to the Secretary of the
Corporation. To be timely, a stockholder's notice must be delivered or mailed to
and received at the principal executive offices of the Corporation not less than
ninety (90) days prior to the date of the annual meeting; provided, however,
that in the event that less than one hundred (100) days' notice or prior public
disclosure of the date of the meeting is given or made to stockholders, notice
by the stockholder to be timely must be received not later than the close of
business on the 10th day following the day on which such notice of the date of
the annual meeting was mailed or such public disclosure was made. A
stockholder's notice to the Secretary shall set forth as to each matter such
stockholder proposes to bring before the annual meeting: (i) a brief description
of the business desired to be brought before the annual meeting and the reasons
for conducting such business at the annual meeting; (ii) the name and address,
as they appear on the Corporation's books, of the stockholder proposing such
business; (iii) the class and number of shares of the Corporation's capital
stock that are beneficially owned by such stockholder; and (iv) any material
interest of such stockholder in such business. Notwithstanding anything in these
Bylaws to the contrary, no business shall be brought before or conducted at an
annual meeting except in accordance with the provisions of this Section 6(b).
The Officer of the Corporation or other person presiding over the annual meeting
shall, if the facts so warrant, determine and declare to the meeting that
business was not properly brought before the meeting in accordance with the
provisions of this Section 6(b) and, if he or she should so determine, he or she
shall so declare to the meeting and any such business so determined to be not
properly brought before the meeting shall not be transacted.
At any special meeting of the stockholders, only such business shall be
conducted as shall have been brought before the meeting by or at the direction
of the Board of Directors.
(c) Only persons who are nominated in accordance with the procedures
set forth in these Bylaws shall be eligible for election as Directors.
Nominations of persons for election to the Board of Directors of the Corporation
may be made at a meeting of stockholders at which Directors are to be elected
only: (i) by or at the direction of the Board of Directors or; (ii) by any
stockholder of the Corporation entitled to vote for the election of Directors at
the meeting who complies with the notice procedures set forth in this Section
6(c). Such nominations, other than those made by or at the direction of the
Board of Directors, shall be made by timely notice in writing to the Secretary
of the Corporation. To be timely, a stockholder's notice shall be delivered or
mailed to and received at the principal executive offices of the Corporation not
less than ninety (90) days prior to the date of the meeting; provided, however,
that in the event that less than one hundred (100) days' notice or prior
disclosure of the date of the meeting is given or made to stockholders, notice
by the stockholder to be timely must be so received not later than the close of
business on the 10th day following the day on which such notice of the date of
the meeting was mailed or such public disclosure was made. Such stockholder's
notice shall set forth: (i) as to each person whom such stockholder proposes to
nominate for election or re-election as a Director, all information relating to
such
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person that is required to be disclosed in solicitations of proxies for the
election of Directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934 (including such
person's written consent to being named in the proxy statement as a nominee and
to serving as a Director if elected); and (ii) as to the stockholder giving
notice (x) the name and address, as they appear on the Corporation's books, of
such stockholder and (y) the class and number of shares of the Corporation's
capital stock that are beneficially owned by such stockholder. At the request of
the Board of Directors any person nominated by the Board of Directors for
election as a Director shall furnish to the Secretary of the Corporation that
information required to be set forth in a stockholder's notice of nomination
which pertains to the nominee. No person shall be eligible for election as a
Director of the Corporation unless nominated in accordance with the provisions
of this Section 6(c). The Officer of the Corporation or other person presiding
at the meeting shall, if the facts so warrant, determine that a nomination was
not made in accordance with such provisions and, if he or she should so
determine, he or she shall declare to the meeting and the defective nomination
shall be disregarded.
Section 7. Proxies and Voting.
At any meeting of the stockholders, every stockholder entitled to vote may
vote in person or by proxy authorized by an instrument in writing or by a
transmission permitted by law filed in accordance with the procedure established
for the meeting. Any copy, facsimile telecommunication or other reliable
reproduction of the writing or transmission created pursuant to this paragraph
may be substituted or used in lieu of the original writing or transmission for
any and all purposes for which the original writing or transmission could be
used, provided that such copy, facsimile telecommunication or other reproduction
shall be a complete reproduction of the entire original writing or transmission.
All voting, including on the election of Directors but excepting where
otherwise required by law or by the governing documents of the Corporation, may
be by a voice vote; provided, however, that upon demand therefor by a
stockholder entitled to vote or by his or her proxy, a stock vote shall be
taken. Every stock vote shall be taken by ballots, each of which shall state the
name of the stockholder or proxy voting and such other information as may be
required under the procedure established for the meeting. The Corporation shall,
in advance of any meeting of stockholders, appoint one or more inspectors to act
at the meeting and make a written report thereof. The Corporation may designate
one or more persons as alternate inspectors to replace any inspector who fails
to act. If no inspector or alternate is able to act at a meeting of
stockholders, the person presiding at the meeting shall appoint one or more
inspectors to act at the meeting. Each inspector, before entering upon the
discharge of his or her duties, shall take and sign an oath faithfully to
execute the duties of inspector with strict impartiality and according to the
best of his or her ability.
All elections shall be determined by a plurality of the votes cast, and
except as otherwise required by the Certificate of Incorporation or by law, all
other matters shall be determined by a majority of the votes present and cast at
a properly called meeting of stockholders.
Section 8. Stock List.
A complete list of stockholders entitled to vote at any meeting of
stockholders, arranged in alphabetical order for each class of stock and showing
the address of each such stockholder and the number of shares registered in his
or her name, shall be open to the examination of any such stockholder, for any
purpose germane to the meeting, during ordinary business hours for a period of
at least ten (10) days prior to the meeting, either at a place within the city
where the meeting is to be held, which place shall be specified in the notice of
the meeting, or if not so specified, at the place where the meeting is to be
held.
The stock list shall also be kept at the place of the meeting during the
whole time thereof and shall be open to the examination of any such stockholder
who is present. This list shall presumptively determine the identity of the
stockholders entitled to vote at the meeting and the number of shares held by
each of them.
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Section 9. Consent of Stockholders in Lieu of Meeting.
Subject to the rights of the holders of any class or series of preferred
stock of the Corporation, any action required or permitted to be taken by the
stockholders of the Corporation must be effected at an annual or special meeting
of stockholders of the Corporation and may not be effected by any consent in
writing by such stockholders.
ARTICLE II - BOARD OF DIRECTORS
Section 1. General Powers, Number and Term of Office.
The business and affairs of the Corporation shall be under the direction of
its Board of Directors. The number of Directors who shall constitute the Whole
Board shall be such number as the Board of Directors shall from time to time
have designated by resolution. The Board of Directors shall annually elect a
Chairman of the Board from among its members who shall, when present, preside at
its meetings.
The Directors, other than those who may be elected by the holders of any
class or series of Preferred Stock, shall be divided, with respect to the time
for which they severally hold office, into three classes, with the term of
office of the first class to expire at the first annual meeting of stockholders,
the term of office of the second class to expire at the annual meeting of
stockholders one year thereafter and the term of office of the third class to
expire at the annual meeting of stockholders two years thereafter, with each
Director to hold office until his or her successor shall have been duly elected
and qualified. At each annual meeting of stockholders, commencing with the first
annual meeting, Directors elected to succeed those Directors whose terms then
expire shall be elected for a term of office to expire at the third succeeding
annual meeting of stockholders after their election, with each Director to hold
office until his or her successor shall have been duly elected and qualified.
Section 2. Vacancies and Newly Created Directorships.
Subject to the rights of the holders of any class or series of preferred
stock, and unless the Board of Directors otherwise determines, newly created
Directorships resulting from any increase in the authorized number of Directors
or any vacancies in the Board of Directors resulting from death, resignation,
retirement, disqualification, removal from office or other cause may be filled
only by a majority vote of the Directors then in office, though less than a
quorum, and Directors so chosen shall hold office for a term expiring at the
annual meeting of stockholders at which the term of office of the class to which
they have been elected expires and until such Director's successor shall have
been duly elected and qualified. No decrease in the number of authorized
Directors constituting the Board shall shorten the term of any incumbent
Director.
Section 3. Regular Meetings.
Regular meetings of the Board of Directors shall be held at such place or
places, on such date or dates, and at such time or times as shall have been
established by the Board of Directors and publicized among all Directors. A
notice of each regular meeting shall not be required.
Section 4. Special Meetings.
Special meetings of the Board of Directors may be called by a majority of
the Directors then in office (rounded up to the nearest whole number) or by the
Chairman of the Board or by the President and Chief Executive Officer and shall
be held at such place, on such date, and at such time as they or he or she shall
fix. Notice of the place, date, and time of each such special meeting shall be
given to each Director by whom it is not waived by mailing written notice not
less than five (5) days before the meeting or be telegraphing or telexing or by
facsimile transmission of the same not less than twenty-four (24) hours before
the meeting. Unless otherwise indicated in the notice thereof, any and all
business may be transacted at a special meeting.
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Section 5. Quorum.
At any meeting of the Board of Directors, a majority of the Whole Board
shall constitute a quorum for all purposes. If a quorum shall fail to attend any
meeting, a majority of those present may adjourn the meeting to another place,
date, or time, without further notice or waiver thereof.
Section 6. Participation in Meetings By Conference Telephone
Members of the Board of Directors, or of any committee thereof, may
participate in a meeting of such Board or committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other and such participation shall
constitute presence in person at such meeting.
Section 7. Conduct of Business.
At any meeting of the Board of Directors, business shall be transacted in
such order and manner as the Board may from time to time determine, and all
matters shall be determined by the vote of a majority of the Directors present,
except as otherwise provided herein or required by law. Action may be taken by
the Board of Directors without a meeting if all members thereof consent thereto
in writing, and the writing or writings are filed with the minutes of
proceedings of the Board of Directors.
Section 8. Powers.
The Board of Directors may, except as otherwise required by law, exercise
all such powers and do all such acts and things as may be exercised or done by
the Corporation, including, without limiting the generality of the foregoing,
the unqualified power:
(1) To declare dividends from time to time in accordance with law;
(2) To purchase or otherwise acquire any property, rights or
privileges on such terms as it shall determine;
(3) To authorize the creation, making and issuance, in such form as it
may determine, of written obligations of every kind, negotiable or
non-negotiable, secured or unsecured, and to do all things necessary in
connection therewith;
(4) To remove any Officer of the Corporation with or without cause,
and from time to time to devolve the powers and duties of any Officer upon any
other person for the time being;
(5) To confer upon any Officer of the Corporation the power to
appoint, remove and suspend subordinate Officers, employees and agents;
(6) To adopt from time to time such stock, option, stock purchase,
bonus or other compensation plans for Directors, Officers, employees and agents
of the Corporation and its subsidiaries as it may determine;
(7) To adopt from time to time such insurance, retirement, and other
benefit plans for Directors, Officers, employees and agents of the Corporation
and its subsidiaries as it may determine; and
(8) To adopt from time to time regulations, not inconsistent with
these Bylaws, for the management of the Corporation's business and affairs.
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<PAGE>
Section 9. Compensation of Directors.
Directors, as such, may receive, pursuant to resolution of the Board of
Directors, fixed fees and other compensation for their services as Directors,
including, without limitation, their services as members of committees of the
Board of Directors.
ARTICLE III - COMMITTEES
Section 1. Committee of the Board of Directors.
The Board of Directors, by a vote of a majority of the Whole Board, may
from time to time designate committees of the Board, with such lawfully
delegable powers and duties as it thereby confers, to serve at the pleasure of
the Board and shall, for those committees and any others provided for herein,
elect a Director or Directors to serve as the member or members, designating, if
it desires, other Directors as alternate members who may replace any absent or
disqualified member at any meeting of the committee. Any committee so designated
may exercise the power and authority of the Board of Directors to declare a
dividend, to authorize the issuance of stock or to adopt a certificate of
ownership and merger pursuant to Section 253 of the Delaware General Corporation
Law if the resolution which designates the committee or a supplemental
resolution of the Board of Directors shall so provide. In the absence or
disqualification of any member of any committee and any alternate member in his
or her place, the member or members of the committee present at the meeting and
not disqualified from voting, whether or not he or she or they constitute a
quorum, may by unanimous vote appoint another member of the Board of Directors
to act at the meeting in the place of the absent or disqualified member.
Section 2. Conduct of Business.
Each committee may determine the procedural rules for meeting and
conducting its business and shall act in accordance therewith, except as
otherwise provided herein or required by law. Adequate provision shall be made
for notice to members of all meetings; a majority of the members shall
constitute a quorum, and all matters shall be determined by a majority vote of
the members present, subject to a quorum being present. Action may be taken by
any committee without a meeting if all members thereof consent thereto in
writing, and the writing or writings are filled with the minutes of the
proceedings of such committee.
Section 3. Nominating Committee.
The Board of Directors shall appoint a Nominating Committee of the Board,
consisting of not less than three (3) members, one of which shall be the
Chairman of the Board. The Nominating Committee shall have authority (a) to
review any nominations for election to the Board of Directors made by a
stockholder of the Corporation pursuant to Section 6(c) (ii) of Article I of
these Bylaws in order to determine compliance with such By-law provision and (b)
to recommend to the Whole Board nominees for election to the Board of Directors
to replace those Directors whose terms expire at the annual meeting of
stockholders next ensuing.
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<PAGE>
ARTICLE IV - OFFICERS
Section 1. Generally.
(a) The Board of Directors as soon as may be practicable after the
annual meeting of stockholders shall choose a Chairman of the Board, a President
and Chief Executive Officer, one or more Vice Presidents, and a Secretary and
from time to time may choose such other Officers as it may deem proper. The
Chairman of the Board shall be chosen from among the Directors. Any number of
offices may be held by the same person.
(b) The term of office of all Officers shall be until the next annual
election of Officers and until their respective successors are chosen, but any
Officer may be removed from office at any time by the affirmative vote of
two-thirds of the authorized number of Directors then constituting the Board of
Directors, or removed by an Officer pursuant to authority delegated by the Board
to such Officer in accordance with Section 8(5) of Article II.
(c) All Officers chosen by the Board of Directors shall each have such
powers and duties as generally pertain to their respective offices, subject to
the specific provisions of this Article IV. Such Officers shall also have such
powers and duties as from time to time may be conferred by the Board of
Directors or by any committee thereof.
Section 2. Chairman of the Board.
The Chairman of the Board shall, subject to the provisions of these Bylaws
and to the direction of the Board of Directors, serve in a general executive
capacity and, when present, shall preside at all meetings of the Board of
Directors. The Chairman of the Board shall perform all duties and have all
powers which are commonly incident to the office of Chairman of the Board or
which are delegated to him or her by the Board of Directors. He or she shall
have power to sign all stock certificates, contracts and other instruments of
the Corporation which are authorized.
Section 3. President and Chief Executive Officer.
The President and Chief Executive Officer (the "President") shall have
general responsibility for the management and control of the business and
affairs of the Corporation and shall perform all duties and have all powers
which are commonly incident to the offices of President and Chief Executive
Officer or which are delegated to him or her by the Board of Directors. Subject
to the direction of the Board of Directors, the President shall have power to
sign all stock certificates, contracts and other instruments of the Corporation
which are authorized and shall have general supervision of all of the other
Officers (other than the Chairman of the Board), employees and agents of the
Corporation.
Section 4. Vice President.
The Vice President or Vice Presidents shall perform the duties of the
President in his or her absence or during his disability to act. In addition,
the Vice Presidents shall perform the duties and exercise the powers usually
incident to their respective offices and/or such other duties and powers as may
be properly assigned to them by the Board of Directors, the Chairman of the
Board or the President. A Vice President or Vice Presidents may be designated as
Executive Vice President or Senior Vice President or any such designation as the
Board of Directors, Chairman of the Board or President deems appropriate.
Section 5. Secretary.
The Secretary or an Assistant Secretary shall issue notices of meetings,
shall keep their minutes, shall have charge of the seal and the corporate books,
shall perform such other duties and exercise such other powers as are usually
incident to such offices and/or such other duties and powers as are properly
assigned thereto by the Board of Directors, the Chairman of the Board or the
President.
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<PAGE>
Section 6. Assistant Secretaries and Other Officers.
The Board of Directors may appoint one or more Assistant Secretaries and
such other Officers who shall have such powers and shall perform such duties as
are provided in these Bylaws or as may be assigned to them by the Board of
Directors, the Chairman of the Board or the President.
Section 7. Action with Respect to Securities of Other Corporations.
Unless otherwise directed by the Board of Directors, the President or any
Officer of the Corporation authorized by the President shall have power to vote
and otherwise act on behalf of the Corporation, in person or by proxy, at any
meeting of stockholders of or with respect to any action of stockholders of any
other corporation in which the Corporation may hold securities and otherwise to
exercise any and all rights and powers which the Corporation may possess by
reason of its ownership of securities in such other corporation.
ARTICLE V - STOCK
Section 1. Certificates of Stock.
Each stockholder shall be entitled to a certificate signed by, or in the
name of the Corporation by, the Chairman of the Board or the President, and by
the Secretary or an Assistant Secretary, or any Treasurer or Assistant
Treasurer, certifying the number of shares owned by him or her. Any or all of
the signatures on the certificate may be by facsimile.
Section 2. Transfers of Stock.
Transfers of stock shall be made only upon the transfer books of the
Corporation kept at an office of the Corporation or by transfer agents
designated to transfer shares of the stock of the Corporation. Except where a
certificate is issued in accordance with Section 4 of Article V of these Bylaws,
an outstanding certificate for the number of shares involved shall be
surrendered for cancellation before a new certificate is issued therefor.
Section 3. Record Date.
In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders, or to receive payment of
any dividend or other distribution or allotment of any rights or to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board of Directors may fix a record
date, which record date shall not precede the date on which the resolution
fixing the record date is adopted and which record date shall not be more than
sixty (60) nor less than ten (10) days before the date of any meeting of
stockholders, nor more than sixty (60) days prior to the time for such other
action as hereinbefore described; provided, however, that if no record date is
fixed by the Board of Directors, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day on which notice is given or,
if notice is waived, at the close of business on the day next preceding the day
on which the meeting is held, and, for determining stockholders entitled to
receive payment of any dividend or other distribution or allotment of rights or
to exercise any rights of change, conversion or exchange of stock or for any
other purpose, the record date shall be at the close of business on the day on
which the Board of Directors adopts a resolution relating thereto.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
E-8
<PAGE>
Section 4. Lost, Stolen or Destroyed Certificates.
In the event of the loss, theft or destruction of any certificate of stock,
another may be issued in its place pursuant to such regulations as the Board of
Directors may establish concerning proof of such loss, theft or destruction and
concerning the giving of a satisfactory bond or bonds of indemnity.
Section 5. Regulations.
The issue, transfer, conversion and registration of certificates of stock
shall be governed by such other regulations as the Board of Directors may
establish.
ARTICLE VI - NOTICES
Section 1. Notices.
Except as otherwise specifically provided herein or required by law, all
notices required to be given to any stockholder, Director, Officer, employee or
agent shall be in writing and may in every instance be effectively given by hand
delivery to the recipient thereof, by depositing such notice in the mails,
postage paid, or by sending such notice by prepaid telegram or mailgram or other
courier. Any such notice shall be addressed to such stockholder, Director,
Officer, employee or agent at his or her last known address as the same appears
on the books of the Corporation. The time when such notice is received, if hand
delivered, or dispatched, if delivered through the mails or by telegram or
mailgram or other courier, shall be the time of the giving of the notice.
Section 2. Waivers.
A written waiver of any notice, signed by a stockholder, Director, Officer,
employee or agent, whether before or after the time of the event for which
notice is to be given, shall be deemed equivalent to the notice required to be
given to such stockholder, Director, Officer, employee or agent. Neither the
business nor the purpose of any meeting need be specified in such a waiver.
ARTICLE VII - MISCELLANEOUS
Section 1. Facsimile Signatures.
In addition to the provisions for use of facsimile signatures elsewhere
specifically authorized in these Bylaws, facsimile signatures of any Officer or
Officers of the Corporation may be used whenever and as authorized by the Board
of Directors or a committee thereof.
Section 2. Corporate Seal.
The Board of Directors may provide a suitable seal, containing the name of
the Corporation, which seal shall be in the charge of the Secretary. If and when
so directed by the Board of Directors or a committee thereof, duplicates of the
seal may be kept and used by the Comptroller or by an Assistant Secretary or an
assistant to the Comptroller.
Section 3. Reliance upon Books, Reports and Records.
Each Director, each member of any committee designated by the Board of
Directors, and each Officer of the Corporation shall, in the performance of his
or her duties, be fully protected in relying in good faith upon the books of
account or other records of the Corporation and upon such information, opinions,
reports or statements presented to the Corporation by any of its Officers or
employees, or committees of the Board of Directors so designated, or by any
other person as to matters which such Director or committee member reasonably
believes are within such
E-9
<PAGE>
other person's professional or expert competence and who has been selected with
reasonable care by or on behalf of the Corporation.
Section 4. Fiscal Year.
The fiscal year of the Corporation shall be as fixed by the Board of
Directors.
Section 5. Time Periods.
In applying any provision of these Bylaws which requires that an act be
done or not be done a specified number of days prior to an event or that an act
be done during a period of a specified number of days prior to an event,
calendar days shall be used, the day of the doing of the act shall be excluded,
and the day of the event shall be included.
ARTICLE VIII - AMENDMENT
The Board of Directors may by a two-thirds vote amend, alter or repeal
these Bylaws at any meeting of the Board, provided notice of the proposed change
is given not less than two days prior to the meeting. The stockholders shall
also have power to amend, alter or repeal these Bylaws at any meeting of
stockholders, provided notice of the proposed change was given in the Notice of
the Meeting; provided, however, that, notwithstanding any other provisions of
these Bylaws or any provision of law which might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the Voting Stock Designation or these Bylaws, the
affirmative votes of the holders of at least 80% of the voting power of all the
then-outstanding shares of the Voting Stock, voting together as a single class,
shall be required to alter, amend or repeal any provisions of these Bylaws.
E-10
<PAGE>
Exhibit 4
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
FIRST FEDERAL BANKSHARES, INC.
SIOUX CITY, IOWA
$.01 par value common stock--fully paid and non-assessable
This certifies that _____________________________ is the owner of __________
shares of the common stock of FIRST FEDERAL BANKSHARES, INC. (the
"Corporation"), a Delaware corporation.
The shares evidenced by this certificate are transferable only on the stock
transfer books of the Corporation by the holder of record hereof, in person or
by his duly authorized attorney or legal representative, upon surrender of this
certificate properly endorsed. This Certificate is not valid until countersigned
and registered by the Corporation's transfer agent and registrar. This security
is not a deposit or account and is not federally insured or guaranteed.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be executed
by the facsimile signatures of its duly authorized officers and has caused its
seal to be affixed hereto.
DATED:
--------------------
- -------------------------------- -------------------------------
Secretary (SEAL) President
<PAGE>
The shares evidenced by this Certificate are subject to a limitation
contained in the Certificate of Incorporation to the effect 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 outstanding shares of Common Stock (the "Limit") be entitled or
permitted to any vote in respect of shares held in excess of the Limit.
The Board of Directors of the Corporation is authorized by resolution or
resolutions, from time to time adopted, to provide for the issuance of serial
preferred stock in series and to fix and state the voting powers, designations,
preferences, limitations and restrictions thereof. The Corporation will furnish
to any shareholder upon request and without charge a full description of each
class of stock and any series thereof.
The shares represented by this Certificate may not be cumulatively voted
on any matter. The Certificate of Incorporation requires the affirmative vote of
the holders of at least 80% of the voting stock of the Corporation, voting
together as a single class, to approve certain business combinations and other
transactions and to amend certain provisions of the Certificate of
Incorporation.
The following abbreviations when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - Custodian
------------------ --------------------
(Cust) (Minor)
TEN ENT - as tenants by the entireties
Under Uniform Transfers to Minors Act
JT TEN - as joint tenants with right
of survivorship and not as ----------------------------------------
tenants in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list
For value received, _____________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY NUMBER OR OTHER IDENTIFYING NUMBER
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(please print or typewrite name and address including postal
zip code of assignee)
- --------------------------------------------------------------------------------
______________________________________________________________________ Shares of
the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint__________________________________ Attorney to
transfer the said shares on the books of the within named corporation with full
power of substitution in the premises.
Dated, _____________________________
In the presence of Signature:
- ------------------------------------- ---------------------------
NOTE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME OF THE
STOCKHOLDER(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER.
<PAGE>
Exhibit 5
(202) 274-2020
December 18, 1998
The Board of Directors
First Federal Savings Bank of Siouxland
329 Pierce Street
Sioux City, Iowa 51101
Re: First Federal Bankshares, Inc.
Common Stock Par Value $.01 Per Share
Gentlemen:
You have requested the opinion of this firm as to certain matters in
connection with the offer and sale (the "Offering") of First Federal Bankshares,
Inc. (the "Company") Common Stock, par value $.01 per share ("Common Stock"). We
have reviewed the Company's Certificate of Incorporation, Registration Statement
on Form S-1 ("Form S-1"), as well as applicable statutes and regulations
governing the Company and the offer and sale of the Common Stock.
We are of the opinion that upon the declaration of effectiveness of the
Form S-1, the Common Stock, when sold, will be legally issued, fully paid and
non-assessable.
This Opinion has been prepared for the use of the Company in connection
with its Registration Statement on Form S-1, and we hereby consent to the filing
of this Opinion as an exhibit to such registration statement and to our firm
being referenced under the caption "Legal Opinions."
Very truly yours,
LUSE LEHMAN GORMAN POMERENK & SCHICK
A PROFESSIONAL CORPORATION
/s/ Robert I. Lipsher
--------------------------
By: Robert I. Lipsher
<PAGE>
Exhibit 8.1
FORM OF FEDERAL TAX OPINION
__________, 1998
Boards of Directors
First Federal Bankshares, Inc.
First Federal Savings Bank of Siouxland
First Federal Bankshares, MHC
329 Pierce Street
Sioux City, Iowa 51102
Ladies and Gentlemen:
You have requested this firm's opinion regarding certain federal income
tax consequences which will result from the conversion of First Federal
Bankshares, MHC (the "Mutual Holding Company"), to stock holding company form as
First Federal Bankshares, Inc. (the "Company"), as effectuated pursuant to the
two integrated transactions described below. Our opinion is based upon the
existing provisions of the Internal Revenue Code of 1986, as amended (the "Code)
and regulations thereunder, both final and proposed (the "Treasury
Regulations"), and upon current Internal Revenue Service ("IRS") published
rulings and existing court decisions, any of which could be changed at any time.
Any such changes may be retroactive and could significantly modify the
statements and opinions expressed herein. Similarly, any change in the facts and
assumptions stated below, upon which this opinion is based, could modify the
conclusions. This opinion is as of the date hereof, and we disclaim any
obligation to advise you of any change in any matter considered herein after the
date hereof.
We, of course, opine only as to the matters we expressly set forth, and
no opinions should be inferred as to any other matters or as to the tax
treatment of the transactions that we do not specifically address. We express no
opinion as to other federal laws and regulations, or as to laws and regulations
of other jurisdictions, or as to factual or legal matters other than as set
forth herein.
We have made such other investigations as we have deemed relevant or
necessary for the purpose of this opinion. We have further assumed the absence
of adverse facts not apparent from the face of the instruments and documents we
examined and have relied upon the accuracy of the factual matters set forth in
the Plan of Conversion and Reorganization (the "Plan") and the Registration
Statement on Form S-1 filed by First Federal Bankshares, Inc. (the "Company")
with the Securities and Exchange Commission ("SEC") under the Securities Act of
1933, as amended,
<PAGE>
Boards of Directors
First Federal Bankshares, Inc.
First Federal Savings Bank of Siouxland
First Federal Bankshares, MHC
__________, 1998
Page 2
and the Application for Conversion on Form AC filed with the Office of Thrift
Supervision (the "OTS").
We specifically express no opinion concerning tax matters relating to
the Plan under state and local tax laws and under Federal income tax laws except
on the basis of the documents and assumptions described above. We note that in
December 1994, the IRS published Revenue Procedure 94-76 which states that the
IRS will not issue private letter rulings with respect to the downstream merger
of a corporation into a less than "80 percent distributee", i.e, a corporation
in which the merging corporation possesses less than 80 percent of the total
voting power and less than 80 percent of the total value of such corporation's
stock. The IRS assumed this "no-rule" position to study whether such downstream
mergers circumvent the purpose behind the repeal of General Utilities &
Operating Co. v. Helvering, 296 U.S. 200 (1935). In January 1996, the IRS
published Notice 96-6 and Revenue Procedure 96-22 indicating in the former, that
it intended to close its study project on this issue and, in the latter, that
its determination not to issue advance rulings on such downstream mergers would
be made permanent. If the IRS were ultimately to conclude that such mergers
circumvent the repeal of General Utilities, the IRS could issue regulations
which could have the effect of taxing to the merging corporation, as of the
effective time of the merger, the fair market value of the assets of such
corporation over its basis in such assets. Accordingly, the issuance of such
regulations prior to the consummation of the transactions contemplated herein
could significantly modify the opinions expressed herein.
For purposes of this opinion, we are relying on the representations
provided to us by the Mutual Holding Company and First Federal Savings Bank of
Siouxland (the "Bank") as described in the Affidavits of the President of the
Mutual Holding Company and the Bank, incorporated herein by reference.
The Proposed Transactions
Based solely upon our review of the documents described above, and in
reliance upon such documents, we understand that the relevant facts are as
follows. In July 1992, the Bank, a Federally- chartered mutual savings bank,
reorganized into the mutual holding company form of organization.
At that time, the Bank sold _______ shares of common stock ("Bank
Common Stock") at $10.00 per share to the public (the "Minority Stockholders").
After the conclusion of the sale to Minority Stockholders, the Mutual Holding
Company held ____% of the Bank's Common Stock outstanding. The shares of Bank
Common Stock that were sold to the Minority Stockholders constituted
approximately ____% of the issued and outstanding shares of Bank Common Stock.
<PAGE>
Boards of Directors
First Federal Bankshares, Inc.
First Federal Savings Bank of Siouxland
First Federal Bankshares, MHC
__________, 1998
Page 3
At the present time, two transactions referred to as the "MHC Merger"
and the "Bank Merger" are being undertaken. The MHC Merger and the Bank Merger
are being accomplished pursuant to a Plan of Conversion and Reorganization
(hereafter referred to as the "Plan"). Pursuant to the Plan, the conversion
("Conversion") will be effected in the following steps, each of which will be
completed contemporaneously.
(i) The Bank will organize the Company (which will become the
stock holding company of the Bank) as a first tier
wholly-owned subsidiary of the Bank;
(ii) The Company will organize an interim savings bank ("Interim")
as a wholly-owned stock savings bank subsidiary of the
Company;
(iii) Mutual Holding Company will exchange its charter for an
interim federal stock savings association charter and will
simultaneously merge in a statutory merger with and into the
Bank (the "MHC Merger") with the Bank as the resulting entity,
pursuant to the Agreement of Merger between Mutual Holding
Company and the Bank, whereby each member of the Mutual
Holding Company who is an Eligible Account Holder or
Supplemental Eligible Account Holder will receive an interest
in a liquidation account established in the Bank pursuant to
regulations of the Commissioner (the "Liquidation Account") in
exchange for such member's ownership interest in the Mutual
Holding Company. In conjunction with the MHC Merger, the
Bank's stock held by the Mutual Holding Company will be
canceled.
(iv) Interim will merge in a statutory merger with and into the
Bank with the Bank as the resulting institution (the "Bank
Merger") pursuant to the Agreement of Merger between the Bank,
the Company and Interim, whereby each Minority Stockholder
will receive common stock of the Company ("Company Common
Stock") in exchange for minority Shares, based on an exchange
ratio (the "Exchange Ratio"), with cash paid in lieu of
fractional shares.
(v) As a result of the Bank Merger, the Company will own all of
the common stock of the Bank, and the Company will offer for
sale Company Common Stock in an offering (the "Offering") that
will occur contemporaneously with the Conversion (discussed
below).
The Plan complies with the provisions of Subpart A of 12 C.F.R. Part
563b, which sets forth the OTS regulations for conversions of mutual
institutions to stock form. The Plan also complies
<PAGE>
Boards of Directors
First Federal Bankshares, Inc.
First Federal Savings Bank of Siouxland
First Federal Bankshares, MHC
__________, 1998
Page 4
with the provisions of 12 C.F.R. Section 575.12(a), which is the OTS regulation
governing the conversion of mutual holding companies to stock form.
In the MHC Merger, a liquidation account is being established by the
Bank for the benefit of Eligible Account Holders and Supplemental Account
Holders. Pursuant to Section 19 of the Plan, the initial balance of the
liquidation account will be equal to the sum of (i) approximately 51% (the
Mutual Holding Company stock ownership interest in the Bank) of the Bank's total
stockholders' equity as reflected in its latest statement of financial condition
contained in the final Prospectus utilized in the Conversion, or (ii) the
retained earnings of the Bank at the time the Bank underwent its initial mutual
holding company reorganization.
Upon the date of consummation of the Bank Merger ("the Effective
Date"), Interim will be merged with and into the Bank and Interim will cease to
exist as a legal entity. All of the then outstanding shares of Bank Common Stock
will be converted into and become shares of Company Common Stock pursuant to the
Exchange Ratio that ensures that after the Conversion and before giving effect
to Minority Stockholders' purchases in the Offering and receipt of cash in lieu
of fractional shares, Minority Stockholders will own the same aggregate
percentage of the Company's Common Stock as they currently own of the Bank
Common Stock. The common stock of Interim owned by the Company prior to the Bank
Merger will be converted into and become shares of common stock of the Bank on
the Effective Date. The Company Common Stock held by the Bank immediately prior
to the Effective Date will be canceled on the Effective Date. Immediately
following the Bank Merger, additional shares of the Company Common Stock will be
sold to depositors and former shareholders of the Bank and to members of the
public in the Offering.
As a result of the MHC Merger and the Bank Merger, the Company will be
a publicly held corporation, will register the Company Common Stock under
Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and will become subject to the rules and regulations thereunder and file
periodic reports and proxy statements with the SEC. The Bank will become a
wholly owned subsidiary of the Company and will continue to carry on its
business and activities as conducted immediately prior to the Conversion.
The stockholders of the Company will be the former Minority
Stockholders of the Bank immediately prior to the Bank Merger (i.e., all
stockholders of the Bank, excluding the Mutual Holding Company), plus those
persons who purchase shares of Company Common Stock in the Offering.
Nontransferable rights to subscribe for the Company Common Stock have been
granted, in order of priority, to depositors of the Bank who have account
balances of $50.00 or more as of the close of business on September 30, 1997
("Eligible Account Holders"), the Bank's tax-qualified
<PAGE>
Boards of Directors
First Federal Bankshares, Inc.
First Federal Savings Bank of Siouxland
First Federal Bankshares, MHC
__________, 1998
Page 5
employee plans ("Employee Plans"), depositors of the Bank who have account
balances of $50.00 or more as of the close of business on ___________, _____
("Supplemental Eligible Account Holders"), other members of the Bank (other than
Eligible Account Holders and Supplemental Eligible Account Holders) ("Other
Members"), and owners of shares of Bank Common Stock other than the Mutual
Holding Company ("Minority Stockholders"). Subscription rights are
nontransferable. The Company will also offer shares of Company Common Stock not
subscribed for in the Subscription Offering, if any, for sale in a community
offering to certain members of the general public (the "Community Offering").
Opinions
Based on the foregoing description of the MHC Merger and the Bank
Merger, and subject to the qualifications and limitations set forth in this
letter, we are of the opinion that:
1. The conversion of the Mutual Holding Company from a Federally
chartered mutual holding company to a Federally chartered interim stock savings
association will constitute a mere change in identity, form or place of
organization within the meaning of Section 368(a)(1)(F) of the Code.
2. The MHC Merger qualifies as a tax-free reorganization within the
meaning of Section 368(a)(1)(A) of the Code. (Section 368(a)(1)(A) of the Code.)
3. The Mutual Holding Company will not recognize any gain or loss on
the transfer of its assets to the Bank in exchange for an interest in a
liquidation account established in the Bank.
(Section 361 of the Code.)
4. The exchange of the members' equity interests in the Mutual Holding
Company for interests in a liquidation account established at the Bank in the
MHC Merger will satisfy the continuity of interest requirement of Section
1.368-1(b) of the Income Tax Regulations (cf. Rev. Rul.
69-3, 1969-1 C.B. 103, and Rev. Rul. 69-646, 1969-2 C.B. 54).
5. No gain or loss will be recognized by the Bank upon the receipt of
the assets of the Mutual Holding Company in exchange for the transfer to the
members of the Mutual Holding Company of an interest in the liquidation account
in the Bank. (Section 1032(a) of the Code.)
6. The basis of the assets of Mutual Holding Company (other than Bank
Common Stock) to be received by Bank will be the same as the basis of such
assets in the hands of the Mutual
<PAGE>
Boards of Directors
First Federal Bankshares, Inc.
First Federal Savings Bank of Siouxland
First Federal Bankshares, MHC
__________, 1998
Page 6
Holding Company immediately prior to the transfer. The basis of the Bank stock
will be zero. See Revised Rule 74-503. (Section 362(b) of the Code.)
7. The holding period of the assets of the Mutual Holding Company
(other than Bank Common Stock) to be received by Bank will include the holding
period of those assets in the hands of the Mutual Holding Company immediately
prior to the transfer. (Section 1223(2) of the Code.)
8. Mutual Holding Company members will recognize no gain or loss upon
the receipt of an interest in the liquidation account in Bank in exchange for
their membership interest in Mutual Holding Company. (Section 354(a) of the
Code.)
In addition, with respect to the Bank Merger, we are of the opinion
that:
9. The Bank Merger qualifies as a reorganization within the meaning of
Section 368(a)(1)(A) of the Code, pursuant to Section 368(a)(2)(E) of the Code.
The Bank Merger is not disqualified as a tax-free reorganization by reason of
the fact that because Company Common Stock will be conveyed to the Bank's
stockholders in exchange for their Bank Common Stock. (Section 368(a)(2)(E) of
the Code.) The Bank, the Company and Interim will each be a party to the
reorganization within the meaning of Section 368(b).
10. Interim will not recognize any gain or loss on the transfer of its
assets to Bank in exchange for Bank Common Stock and the assumption by Bank of
the liabilities, if any, of Interim.
(Section 361(a) and 357(a) of the Code.)
11. Bank will not recognize any gain or loss on the receipt of the
assets of Interim in exchange for Bank Common Stock. (Section 1032(a) of the
Code.)
12. Bank's basis in the assets received from Interim in the proposed
transaction will, in each case, be the same as the basis of such assets in the
hands of Interim immediately prior to the transaction. (Section 362(b) of the
Code.)
13. Bank's holding period for the assets received from Interim in the
proposed transaction will, in each instance, include the period during which
such assets were held by Interim.
(Section 1223(2) of the Code.)
14. The Company will not recognize any gain or loss upon its receipt of
Bank Common Stock in exchange for Interim stock. (Section 354(a) of the Code.)
<PAGE>
Boards of Directors
First Federal Bankshares, Inc.
First Federal Savings Bank of Siouxland
First Federal Bankshares, MHC
__________, 1998
Page 7
15. Bank shareholders will not recognize any gain or loss upon their
exchange of Bank Common Stock solely for shares of Company Common Stock
(including fractional shares which the Bank shareholders otherwise would be
entitled to receive). (Section 354(a) of the Code.)
16. Cash received in the Bank Merger by a Bank stockholder in lieu of a
fractional share interest of Company Common Stock will be treated as having been
received as a distribution in full payment in exchange for the fractional share
interest of Bank Common Stock which such stockholder would otherwise be entitled
to receive, and will qualify as capital gain or loss (assuming the Bank Common
Stock surrendered in exchange therefor was held as a capital asset by such
stockholder).
17. Each Bank shareholder's basis in his or her Company Common Stock
received in the exchange (including fractional shares which the Bank
shareholders otherwise would be entitled to receive) will be the same as the
basis of the Bank Common Stock surrendered in exchange therefor.
(Section 358(a) of the Code.)
18. The Company's basis in the Bank Common Stock received in the Bank
Merger will be the same as the basis of the property exchanged therefor.
(Section 362(b) of the Code.)
19. Each Bank shareholder's holding period in his or her Company Common
Stock received in the exchange (including fractional shares which the Bank
shareholders otherwise would be entitled to receive) will include the period
during which the Bank stock surrendered was held, provided that the Bank Common
Stock surrendered is a capital asset in the hands of the Bank shareholder on the
date of the exchange. (Section 1223(1) of the Code.)
20. No gain or loss will be recognized by the Company on the receipt of
money in exchange for Company Common Stock in the Offering. (Section 1032(a) of
the Code.)
21. No gain or loss will be recognized by Eligible Holders upon
distribution to them of non-transferable subscription rights to purchase shares
of Company Common Stock, provided that the amount paid for the Company Common
Stock is equal to the fair market value of such stock.
See Revised Rule 90-11.
Analysis
Section 368(a)(1)(A) of the Code defines the term "reorganization" to
include a "statutory merger or consolidation" of corporations such as the MHC
Merger and the Bank Merger. Section
<PAGE>
Boards of Directors
First Federal Bankshares, Inc.
First Federal Savings Bank of Siouxland
First Federal Bankshares, MHC
__________, 1998
Page 8
368(a)(2)(E) of the Code provides that a transaction otherwise qualifying as a
merger under Section 368(a)(1)(A), such as the Bank Merger, shall not be
disqualified by reason of the fact that common stock of a corporation (referred
to in the Code as the "controlling corporation") (i.e., the Company) which
before the merger was in control of the merged corporation is used in the
transaction if:
(i) after the transaction, the corporation surviving the merger
(the Bank) holds substantially all of its properties and the
properties of the merged corporation (Interim) (other than
common stock of the controlling corporation (the Company)
distributed in the transaction); and
(ii) in the transaction, former stockholders of the surviving
corporation (the Bank stockholders) exchanged, for an amount
of voting common stock of the controlling corporation, an
amount of common stock in the surviving corporation which
constitutes control of such corporation.
Section 1.368-2(b)(1) of the Treasury Regulations provides that, in
order to qualify as a reorganization under Section 368(a)(1)(A), a transaction
must be a merger or consolidation effected pursuant to the corporation laws of
the United States or a state. The Plan provides that the MHC Merger and the Bank
Merger will be accomplished in accordance with applicable state and federal law.
Treasury Regulations and case law require that, in addition to the
existence of statutory authority for a merger, certain other conditions must be
satisfied in order to qualify a proposed transaction as a reorganization within
the meaning of Section 368(a)(1)(A) of the Code. The "business purpose test,"
which requires a proposed merger to have a bona fide business purpose, must be
satisfied. See 26 C.F.R. Section 1.368-1(c). We believe that the MHC Merger and
Bank Merger satisfy the business purpose test for the reasons set forth in the
Prospectus under the caption "The Conversion--Purposes of Conversion." The
"continuity of business enterprise test" requires an acquiring corporation
either to continue an acquired corporation's historic business or use a
significant portion of its historic assets in a business. See 26 C.F.R. Section
1.368-1(d). We believe that the business conducted by the Bank prior to the MHC
Merger and the Bank Merger will be unaffected by the transactions.
The "continuity of interest doctrine" requires that the continuing
common stock interest of the former owners of an acquired corporation,
considered in the aggregate, represent a "substantial part" of the value of
their former interest, and provide them with a "definite and substantial
interest" in the affairs of the acquiring corporation or a corporation in
control of the acquiring corporation.
<PAGE>
Boards of Directors
First Federal Bankshares, Inc.
First Federal Savings Bank of Siouxland
First Federal Bankshares, MHC
__________, 1998
Page 9
Paulsen v. Comm'r., 469 U.S. 131 (1985); Helvering v. Minnesota Tea Co., 296
U.S. 378 (1935); John A. Nelson Co. v. Helvering, 296 U.S. 374 (1935); Southwest
Natural Gas Co. v. Comm'r., 189 F.2d 332 (5th Cir. 1951), cert. denied, 342 U.S.
860 (1951). We believe that the MHC Merger satisfies the continuity of interest
doctrine based on the information set forth in the Company's Registration
Statement and based on Revenue Rulings 69-646, 1969-2 C.B. 54 and 69-3, 1965-1
C.B. 103. We believe that the Bank Merger satisfies the continuity of interest
doctrine based on representations received from the Bank in connection with the
preparation of this opinion to the effect that, to the best knowledge of the
management of the Bank, former shareholders of the Bank owning 50% or more of
all of the outstanding stock of the Bank immediately prior to the Conversion,
disregarding shares held by the Mutual Holding Company that were canceled in the
MHC Merger, would continue to own shares of the Company immediately after the
Bank Merger. In addition, we believe other applicable requirements of the
Treasury Regulations and case law which are preconditions to qualification of
the MHC Merger and the Bank Merger as a reorganization, within the meaning of
Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code, are satisfied on the basis
of the information contained in the Plan and the Prospectus.
Section 354 of the Code provides that no gain or loss shall be
recognized by stockholders who exchange common stock in a corporation, such as
the Bank, which is a party to a reorganization, solely for common stock in
another corporation which is a party to the reorganization, such as the Company.
Section 356 of the Code provides that stockholders shall recognize gain to the
extent they receive money as part of a reorganization, such as cash received in
lieu of fractional shares. Section 358 of the Code provides that, with certain
adjustments for money received in a reorganization, such as cash received in
lieu of fractional shares, a stockholder's basis in the common stock he or she
receives in a reorganization shall equal the basis of the common stock which he
or she surrendered in the transaction. Section 1223(1) states that, where a
stockholder receives property in an exchange which has the same basis as the
property surrendered, he or she shall be deemed to have held the property
received for the same period as the property exchanged, provided that the
property exchanged had been held as a capital asset.
Section 361 of the Code provides that no gain or loss shall be
recognized to a corporation such as the Interim which is a party to a
reorganization on any transfer of property pursuant to a plan of reorganization
such as the Plan of Conversion. Section 362 of the Code provides that if
property is acquired by a corporation such as the Bank in connection with a
reorganization, then the basis of such property shall be the same as it would be
in the hands of the transferor immediately prior to the transfer. Section
1223(2) of the Code states that where a corporation such as the Savings Bank
will have a carryover basis in property received from another corporation which
is a party to a reorganization, the holding period of such assets in the hands
of the acquiring corporation shall
<PAGE>
Boards of Directors
First Federal Bankshares, Inc.
First Federal Savings Bank of Siouxland
First Federal Bankshares, MHC
__________, 1998
Page 10
include the period for which such assets were held by the transferor, provided
that the property transferred had been held as a capital asset. Section 1032 of
the Code states that no gain or loss shall be recognizes to a corporation, such
as the Company, on the receipt of property in exchange for common stock.
We hereby consent to the filing of the opinion as an exhibit to the
MHC's Application for Conversion on Form AC as filed with the OTS and to the
Company's Registration Statement on Form S-1 as filed with the SEC. We also
consent to the references to our firm in the Prospectus contained in the Forms
AC and S-1 under the captions "The Conversion--Tax Aspects" and "Legal
Opinions."
Very truly yours,
DRAFT
LUSE LEHMAN GORMAN POMERENK
& SCHICK, A PROFESSIONAL CORPORATION
<PAGE>
Exhibit 8.3
[letterhead]
December 18, 1998
Board of Directors
First Federal Bankshares, Inc.
First Federal Bankshares, M.H.C.
First Federal Savings Bank of Siouxland
329 Pierce Street
Sioux City, IA 51101
Gentlemen:
Re: Plan of Conversion: Subscription Rights
First Federal Bankshares, M.H.C.
Gentlemen:
All capitalized terms not otherwise defined in this letter have the meanings
given such terms in the Plan of Conversion and Reorganization (the "Plan")
adopted by the Board of Directors of First Federal Bankshares, M.H.C. (the
"Mutual Holding Company"). Pursuant to the Plan, First Federal Bankshares, Inc.
(the "Company") will offer and sell the Common Stock.
We understand that subscription rights to purchase shares of the Common Stock
are to be issued to (i) Eligible Account Holders; (ii) Tax-Qualified Employee
Benefit Plans; (ii) Supplemental Eligible Account Holders; and (iii) Other
Members, collectively referred to as the "Recipients". Based solely upon our
observation that the subscription rights will be available to such Recipients
without cost, will be legally non-transferable and of short duration, and
will afford the Recipients the right only to purchase shares of Common Stock
at the same price as the Subscription Price for the unsubscribed shares of
Common Stock, but without undertaking any independent investigation of state
or federal law or the position of the Internal Revenue Service with respect
to this issue, we are of the belief that:
(1) the subscription rights will have no ascertainable market value; and,
(2) the price at which the subscription rights are exercisable will not be
more or less than the pro forma market value of the shares upon
issuance.
Changes in the local and national economy, the legislative and regulatory
environment, the stock market, interest rates, and other external forces (such
as natural disasters or significant world events) may occur from time to time,
often with great unpredictability and may materially impact the value of thrift
stocks as a whole or the Company's value alone. Accordingly, no assurance can be
given that persons who subscribe to shares of Common Stock in the conversion
will thereafter be able to buy or sell such shares at the same price paid in the
Subscription Offering.
Sincerely,
/s/ James J. Oren
---------------------
James J. Oren
Senior Vice President
<PAGE>
Exhibit 10.5
FORM OF
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
EMPLOYMENT AGREEMENT
This Agreement is made effective as of the ____ day of _____________,
1998 by and between First Federal Savings Bank of Siouxland (the "Bank"), a
federally-chartered stock savings bank, with its principal administrative office
at 329 Pierce Street, Sioux City, Iowa 51102 and ___________________ (the
"Executive"). Any reference to "Company" herein shall mean _______________
Bancorp, Inc., a Delaware stock corporation or any successor thereto.
WHEREAS, the Bank wishes to assure itself of the continued services of
Executive for the period provided in this Agreement; and
WHEREAS, Executive is willing to continue to serve in the employ of the
Bank on a full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and upon the other terms and conditions hereinafter provided, the
parties hereby agree as follows:
1. POSITION AND RESPONSIBILITIES
During the period of his employment hereunder, Executive agrees to
serve as _______________________________ of the Bank and the Company. During
said period, Executive also agrees to serve, if elected, as an officer and
director of any subsidiary or affiliate of the Bank. Failure to reelect
Executive as ___________________________________ without the consent of the
Executive during the term of this Agreement shall constitute a breach of this
Agreement.
2. TERMS AND DUTIES
(a) The period of Executive's employment under this Agreement shall
begin as of the date first above written and shall continue for a period of
thirty-six (36) full calendar months thereafter ("Employment Period"). The
Employment Period shall be for a term commencing on the date of this Agreement
and ending on the [third] anniversary of the date of this Agreement; provided,
however, that on each day after the date of this Agreement, the Agreement shall
automatically renew so that the remaining term shall be [thirty-six (36)]
months, and provided, further that commencing on each annual anniversary of the
date of this Agreement (the date of each annual anniversary hereof shall be
hereinafter referred to as the "Anniversary Date"), unless the Employment Period
has been previously terminated, the Board shall, at least 60 days prior to each
such Anniversary Date, conduct a comprehensive performance evaluation and review
of the Executive for purposes of determining whether to extend the Agreement and
the results thereof shall be included in the minutes of the Board meeting. The
Board shall give the Executive notice of its decision whether or not to extend
the Employment Period at least 60 days prior to the Anniversary Date, and if
such notice is that the Employment Period shall not be extended (a "Non-Renewal
Notice"), the Employment Period shall not be extended. In such case, the
Executive's employment shall cease at the end of [thirty-six (36)] months
following such Anniversary Date.
<PAGE>
(b) During the Employment Period, except for periods of absence
occasioned by illness, reasonable vacation periods, and reasonable leaves of
absence, Executive shall faithfully perform his duties hereunder including
activities and services related to the organization, operation and management of
the Bank.
3. COMPENSATION AND REIMBURSEMENT
(a) The compensation specified under this Agreement shall constitute
the salary and benefits paid for the duties described in Section 2(b). The Bank
shall pay Executive as compensation a salary of not less than $______________
per year ("Base Salary"). Such Base Salary shall be payable in accordance with
the normal payroll practices of the Bank. During the Employment Period,
Executive's Base Salary shall be reviewed at least annually; the first such
review will be made no later than ______________, 1999. Such review shall be
conducted by a Committee designated by the Board, and the Board may increase,
but not decrease, Executive's Base Salary (any increase in Base Salary shall
become the "Base Salary" for purposes of this Agreement). In addition to the
Base Salary provided in this Section 3(a), the Bank shall provide Executive at
no cost to Executive with all such other benefits as are provided uniformly to
permanent full-time employees of the Bank.
(b) The Bank will provide Executive with employee benefit plans,
arrangements and perquisites substantially equivalent to those in which
Executive was participating or otherwise deriving benefit from immediately prior
to the beginning of the term of this Agreement, and the Bank will not, without
Executive's prior written consent, make any changes in such plans, arrangements
or perquisites which would adversely affect Executive's rights or benefits
thereunder. Without limiting the generality of the foregoing provisions of this
Subsection (b), Executive will be entitled to participate in or receive benefits
under any employee benefit plans including but not limited to, retirement plans,
supplemental retirement plans, pension plans, profit-sharing plans, stock option
plans, stock award plans, health-and-accident plans, medical coverage or any
other employee benefit plan or arrangement made available by the Bank in the
future to its senior executives and key management employees, subject to and on
a basis consistent with the terms, conditions and overall administration of such
plans and arrangements. Executive will be entitled to incentive compensation and
bonuses as provided in any plan of the Bank in which Executive is eligible to
participate (and he shall be entitled to a pro rata distribution under any
incentive compensation or bonus plan as to any year in which a termination of
employment occurs, other than termination for Cause). Nothing paid to the
Executive under any such plan or arrangement will be deemed to be in lieu of
other compensation to which the Executive is entitled under this Agreement.
(c) In addition to the Base Salary provided for by paragraph (a) of
this Section 3, the Bank shall pay or reimburse Executive for all reasonable
travel and other reasonable expenses incurred by Executive performing his
obligations under this Agreement and may provide such additional compensation in
such form and such amounts as the Board may from time to time determine. [The
Bank shall provide the Executive with an automobile, and such automobile may be
used by the Executive in carrying out his duties under this Agreement, including
commuting between
2
<PAGE>
his residence and his principal place of employment, and other personal use. The
Bank shall reimburse the executive for the cost of maintenance and servicing
such automobile and for instance, gasoline and oil for such automobile.
- - bracketed language not in Sabel employment agreement]
[(d) The Bank shall pay for or reimburse Executive for the costs of
fees associated with membership in a country club in the Bank's market area.
- - bracketed language not in Sabel agreement]
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION
The provisions of this Section shall in all respects be subject to the
terms and conditions stated in Sections 7 and 14.
(a) The provisions of this Section shall apply upon the occurrence of
an Event of Termination (as herein defined) during the Employment Period. As
used in this Agreement, an "Event of Termination" shall mean and include any one
or more of the following:
(i) the termination by the Bank or the Company of Executive's full-time
employment hereunder for any reason other than (A) Disability or Retirement, as
defined in Section 5 below, or (B) Termination for Cause as defined in Section 6
hereof; or
(ii) Executive's resignation from the Bank's employ, upon any
(A) failure to elect or reelect or to appoint or reappoint
Executive as [title] or failure to nominate Executive as a
Director of the Bank,
(B) material change in Executive's function, duties, or
responsibilities, which change would cause Executive's
position to become one of lesser responsibility, importance,
or scope from the position and attributes thereof described in
Section 1, above,
(C) a relocation of Executive's principal place of employment
by more than 30 miles from its location at the effective date
of this Agreement, or a material reduction in the benefits and
perquisites to the Executive from those being provided as of
the effective date of this Agreement,
[Opsal contract - (C) prior to September 1, 2001, a relocation
of Executive's principal place of employment by more than 30
miles from its location at the effective date of this
Agreement, or a material reduction in the benefits and
perquisites to the Executive from those being provided as of
the effective date of this Agreement,]
3
<PAGE>
(D) liquidation or dissolution of the Bank or Company other
than liquidations or dissolutions that are caused by
reorganizations that do not affect the status of Executive, or
(E) breach of this Agreement by the Bank.
Upon the occurrence of any event described in clauses (ii) (A), (B), (C), (D) or
(E), above, Executive shall have the right to elect to terminate his employment
under this Agreement by resignation upon sixty (60) days prior written notice
given within a reasonable period of time not to exceed four calendar months
after the initial event giving rise to said right to elect. Notwithstanding the
preceding sentence, in the event of a continuing breach of this Agreement by the
Bank, the Executive, after giving due notice within the prescribed time frame of
an initial event specified above, shall not waive any of his rights solely under
this Agreement and this Section 4 by virtue of the fact that Executive has
submitted his resignation but has remained in the employment of the Bank and is
engaged in good faith discussions to resolve any occurrence of an event
described in clauses (A), (B), (C), (D) and (E) above.
(iii) Executive's voluntary resignation from the Bank's employ on the
effective date of, or at any time following a Change in Control during the term
of this Agreement. For these purposes, a Change in Control of the Bank or the
Company shall mean a change in control of a nature that: (i) would be required
to be reported in response to Item 1(a) of the current report on Form 8-K, as in
effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a Change in
Control of the Bank or the Company within the meaning of the Home Owners' Loan
Act and the Rules and Regulations promulgated by the Office of Thrift
Supervision (or its predecessor agency), as in effect on the date hereof; or
(iii) without limitation such a Change in Control shall be deemed to have
occurred at such time as (a) any "Person" (as the term is used in Sections 13(d)
and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of
the Bank or the Company representing 25% or more of the Bank's or the Company's
outstanding securities, except for any securities of the Bank purchased by the
Company in connection with the second step conversion of the mutual holding
company parent of the Bank to the stock form and any securities purchased by the
Bank's employee stock ownership plan and trust; or (b) individuals who
constitute the Board on the date hereof (the "Incumbent Board") cease for any
reason to constitute at least a majority thereof, provided, however, that this
sub-section (b) shall not apply if the Incumbent Board is replaced by the
appointment by a Federal banking agency of a conservator or receiver for the
Bank and, provided further that any person becoming a director subsequent to the
date hereof whose election was approved by a vote of at least two-thirds of the
directors comprising the Incumbent Board or whose nomination for election by the
Company's stockholders was approved by the same Nominating Committee serving
under an Incumbent Board, shall be, for purposes of this clause (b), considered
as though he were a member of the Incumbent Board; or (c) a proxy statement
soliciting proxies from stockholders of the Company, by someone other than the
current management of the Company, seeking stockholder approval of a plan of
reorganization, merger or consolidation of the Company or Bank or similar
transaction with one or
4
<PAGE>
more corporations as a result of which the outstanding shares of the class of
securities then subject to such plan or transaction are exchanged for or
converted into cash or property or securities not issued by the Bank or the
Company shall be distributed and the requisite number of proxies approving such
plan of reorganization, merger or consolidation of the Company or Bank are
received and voted in favor of such transactions; or (d) a tender offer is made
for 25% or more of the outstanding securities of the Bank or Company and
shareholders owning beneficially or of record 25% or more of the outstanding
securities of the Bank or Company have tendered or offered to sell their shares
pursuant to such tender offer and such tendered shares have been accepted by the
tender offeror.
(b) Upon the occurrence of an Event of Termination, on the Date of
Termination, as defined in Section 7, the Bank shall pay Executive, or, in the
event of his subsequent death, his beneficiary or beneficiaries, or his estate,
as the case may be, as severance pay or liquidated damages, or both, a sum equal
to three (3) times the sum of (i) Base Salary and (ii) the highest rate of bonus
awarded to the Executive during the prior three years. At the election of the
Executive, which election is to be made on an annual basis during the month of
January, and which election is irrevocable for the year in which made and upon
the occurrence of an Event of Termination, any payments shall be made in a lump
sum or paid monthly during the remaining term of this Agreement following the
Executive's termination. In the event that no election is made, payment to the
Executive will be made on a monthly basis during the remaining term of this
Agreement. Such payments shall not be reduced in the event the Executive obtains
other employment following termination of employment.
(c) Upon the occurrence of an Event of Termination, the Bank will cause
to be continued life, medical, dental and disability coverage substantially
identical to the coverage maintained by the Bank for Executive prior to his
termination. Such coverage shall continue for 36 months from the Date of
Termination.
(d) Notwithstanding the preceding paragraphs of this Section 4, in the
event that:
(i) the aggregate payments or benefits to be made or
afforded to Executive under said paragraphs (the
"Termination Benefits") would be deemed to include an
"excess parachute payment" under Section 280G of the
Code or any successor thereto, and
(ii) if such Termination Benefits were reduced to an
amount (the "Non-Triggering Amount"), the value of
which is one dollar ($1.00) less than an amount equal
to the total amount of payments permissible under
Section 280G of the Code or any successor thereto,
then the Termination Benefits to be paid to Executive shall be
so reduced so as to be a Non-Triggering Amount.
5
<PAGE>
5. TERMINATION UPON RETIREMENT, DISABILITY OR DEATH
Termination by the Bank of the Executive based on "Retirement" shall
mean termination in accordance with the Bank's retirement policy or in
accordance with any retirement arrangement established with Executive's consent
with respect to him. Upon termination of Executive upon Retirement, Executive
shall be entitled to all benefits under any retirement plan of the Bank and
other plans to which Executive is a party.
In the event Executive is unable to perform his duties under this
Agreement on a full-time basis for a period of six (6) consecutive months by
reason of illness or other physical or mental disability, the Employer may
terminate this Agreement, provided that the Employer shall continue to be
obligated to pay the Executive his Base Salary for the remaining term of the
Agreement, or one year, whichever is the longer period of time, and provided
further that any amounts actually paid to Executive pursuant to any disability
insurance or other similar such program which the Employer has provided or may
provide on behalf of its employees or pursuant to any workman's or social
security disability program shall reduce the compensation to be paid to the
Executive pursuant to this paragraph.
In the event of Executive's death during the term of the Agreement, his
estate, legal representatives or named beneficiaries (as directed by Executive
in writing) shall be paid Executive's Base Salary as defined in Paragraph 3(a)
at the rate in effect at the time Executive's death for a period of one (1) year
from the date of the Executive's death, and the Employers will continue to
provide medical, dental, family and other benefits normally provided for an
Executive's family for one (1) year after the Executive's death.
6. TERMINATION FOR CAUSE
The term "Termination for Cause" shall mean termination because of the
Executive's personal dishonesty, willful misconduct, any breach of fiduciary
duty involving personal profit, intentional failure to perform stated duties,
willful violation of any law, rule, or regulation (other than traffic violations
or similar offenses) or final cease-and-desist order, or material breach of any
provision of this Agreement. In determining incompetence, the acts or omissions
shall be measured against standards generally prevailing in the savings
institutions industry. For purposes of this para graph, no act or failure to act
on the part of Executive shall be considered "willful" unless done, or omitted
to be done, by the Executive not in good faith and without reasonable belief
that the Execu tive's action or omission was in the best interest of the Bank.
Notwithstanding the foregoing, Executive shall not be deemed to have been
Terminated for Cause unless and until there shall have been delivered to him a
copy of a resolution duly adopted by the affirmative vote of not less than
three-fourths of the members of the Board at a meeting of the Board called and
held for that purpose (after reasonable notice to Executive and an opportunity
for him, together with counsel, to be heard before the Board), finding that in
the good faith opinion of the Board, Executive was guilty of conduct justifying
Termination for Cause and specifying the particulars thereof in detail. The
Executive shall not have the right to receive compensation or other benefits for
any period after
6
<PAGE>
Termination for Cause. Any stock options granted to Executive under any stock
option plan of the Bank, the Company or any subsidiary or affiliate thereof,
shall become null and void effective upon Executive's receipt of Notice of
Termination for Cause pursuant to Section 7 hereof, and shall not be exercisable
by Executive at any time subsequent to such Termination for Cause.
7. NOTICE
(a) Any purported termination by the Bank or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes of
this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean (A) if Executive's employment is
terminated for Disability, thirty (30) days after a Notice of Termination is
given (provided that he shall not have returned to the performance of his duties
on a full-time basis during such thirty (30) day period), and (B) if his
employment is terminated for any other reason, the date specified in the Notice
of Termination (which, in the case of a Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is
given, the party receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, except upon the voluntary
termination by the Executive in which case the Date of Termination shall be the
date specified in the Notice, the Date of Termination shall be the date on which
the dispute is finally determined, either by mutual written agreement of the
parties, by a binding arbitration award, or by a final judgment, order or decree
of a court of competent jurisdiction (the time for appeal having expired and no
appeal having been perfected) and provided further that the Date of Termination
shall be extended by a notice of dispute only if such notice is given in good
faith and the party giving such notice pursues the resolution of such dispute
with reasonable diligence. Notwithstanding the pendency of any such dispute, the
Bank will continue to pay Executive his full compensation in effect when the
notice giving rise to the dispute was given (including, but not limited to, Base
Salary) and continue Executive as a participant in all compensation, benefit and
insurance plans in which he was participating when the notice of dispute was
given, until the dispute is finally resolved in accordance with this Agreement,
provided such dispute is resolved within the term of this Agreement. If such
dispute is not resolved within the term of the Agreement, the Bank shall not be
obligated, upon final resolution of such dispute, to pay Executive compensation
and other payments accruing beyond the term of the Agreement. Amounts paid under
this Section shall be offset against or reduce any other amounts due under this
Agreement.
7
<PAGE>
8. POST-TERMINATION OBLIGATIONS
(a) All payments and benefits to Executive under this Agreement shall
be subject to Executive's compliance with paragraph (b) of this Section 8 during
the term of this Agreement and for one (1) full year after the expiration or
termination hereof.
(b) Executive shall, upon reasonable notice, furnish such information
and assistance to the Bank as may reasonably be required by the Bank in
connection with any litigation in which it or any of its subsidiaries or
affiliates is, or may become, a party.
9. NON-COMPETITION
(a) Upon any termination of Executive's employment hereunder as a
result of which the Bank is paying Executive benefits under Section 4 of this
Agreement, other than a termination coincident to or following a Change in
Control, Executive agrees not to compete with the Bank and/or the Company for a
period of one (1) year following such termination in any city, town or county in
which the Bank and/or the Company has an office or has filed an application for
regulatory approval to establish an office, determined as of the effective date
of such termination, except as agreed to pursuant to a resolution duly adopted
by the Board. Executive agrees that during such period and within said cities,
towns and counties, Executive shall not work for or advise, consult or otherwise
serve with, directly or indirectly, any entity whose business materially
competes with the depository, lending or other business activities of the Bank
and/or the Company. The parties hereto, recognizing that irreparable injury will
result to the Bank and/or the Company, its business and property in the event of
Executive's breach of this Subsection 9(a) agree that in the event of any such
breach by Executive, the Bank and/or the Company will be entitled, in addition
to any other remedies and damages available, to an injunction to restrain the
violation hereof by Executive, Executive's partners, agents, servants,
employers, employees and all persons acting for or with Executive. Executive
represents and admits that Executive's experience and capabilities are such that
Executive can obtain employment in a business engaged in other lines and/or of a
different nature than the Bank and/or the Company, and that the enforcement of a
remedy by way of injunction will not prevent Executive from earning a
livelihood. Nothing herein will be construed as prohibiting the Bank and/or the
Company from pursuing any other remedies available to the Bank and/or the
Company for such breach or threatened breach, including the recovery of damages
from Executive.
(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Bank and affiliates
thereof, as it may exist from time to time, is a valuable, special and unique
asset of the business of the Bank. Executive will not, during or after the term
of his employment, disclose any knowledge of the past, present, planned or
considered business activities of the Bank or affiliates thereof to any person,
firm, corporation, or other entity for any reason or purpose whatsoever (except
for such disclosure as may be required to be provided to any federal banking
agency with jurisdiction over the Bank or Executive). Notwithstanding the
foregoing, Executive may disclose any knowledge of banking, financial and/or
economic principles,
8
<PAGE>
concepts or ideas which are not solely and exclusively derived from the business
plans and activities of the Bank, and Executive may disclose any information
regarding the Bank or the Company which is otherwise publicly available. In the
event of a breach or threatened breach by the Executive of the provisions of
this Section 9, the Bank will be entitled to an injunction restraining Executive
from disclosing, in whole or in part, the knowledge of the past, present,
planned or considered business activities of the Bank or affiliates thereof, or
from rendering any services to any person, firm, corporation, other entity to
whom such knowledge, in whole or in part, has been disclosed or is threatened to
be disclosed. Nothing herein will be construed as prohibiting the Bank from
pursuing any other remedies available to the Bank for such breach or threatened
breach, including the recovery of damages from Executive.
10. SOURCE OF PAYMENTS
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Bank. The Company, however, guarantees
payment and provision of all amounts and benefits due hereunder to Executive
and, if such amounts and benefits due from the Bank are not timely paid or
provided by the Bank, such amounts and benefits shall be paid or provided by the
Company.
11. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior employment agreement between the Bank or any
predecessor of the Bank and Executive, except that this Agreement shall not
affect or operate to reduce any benefit or compensation inuring to the Executive
of a kind elsewhere provided. No provision of this Agreement shall be
interpreted to mean that Executive is subject to receiving fewer benefits than
those available to him without reference to this Agreement.
12. NO ATTACHMENT
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Bank and their respective successors and assigns.
13. MODIFICATION AND WAIVER
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
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(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
14. SEVERABILITY
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
15. HEADINGS FOR REFERENCE ONLY
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
16. GOVERNING LAW
This Agreement shall be governed by the laws of the State of Iowa but
only to the extent not superseded by federal law.
17. ARBITRATION
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the employee within fifty
(50) miles from the location of the Bank, in accordance with the rules of the
American Arbitration Bank then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
Executive shall be entitled to seek specific performance of his right to be paid
until the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
18. PAYMENT OF LEGAL FEES
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Bank, provided that the dispute or interpretation has been
settled by Executive and the Bank or resolved in the Executive's favor.
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19. INDEMNIFICATION
The Bank shall provide Executive (including his heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense, and shall indemnify Executive (and
his heirs, executors and administrators) to the fullest extent permitted under
federal law against all expenses and liabilities reasonably incurred by him in
connection with or arising out of any action, suit or proceeding in which he may
be involved by reason of his having been a trustee, director or officer of the
Bank (whether or not he continues to be a trustee, director or officer at the
time of incurring such expenses or liabilities), such expenses and liabilities
to include, but not be limited to, judgments, court costs and attorneys' fees
and the cost of reasonable settlements (such settlements must be approved by the
Bank's Board). If such action, suit or proceeding is brought against Executive
in his capacity as an officer, trustee, or director of the Bank, however, such
indemnification shall not extend to matters as to which Executive is finally
adjudged to be liable for willful misconduct in the performance of his duties.
20. SUCCESSOR TO THE BANK
The Bank shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank or the Company, expressly
and unconditionally to assume and agree to perform the Bank's obligations under
this Agreement, in the same manner and to the same extent that the Bank would be
required to perform if no such succession or assignment had taken place.
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<PAGE>
SIGNATURES
IN WITNESS WHEREOF, the Bank and the Company have caused this Agreement
to be executed and their seals to be affixed hereunto by their duly authorized
officers, and Executives have signed this Agreement, on the day and date first
above written.
ATTEST: FIRST FEDERAL SAVINGS BANK
OF SIOUXLAND
By:
- ------------------------- --------------------------------
Secretary Name:
Title:
ATTEST: FIRST FEDERAL BANCORP, INC.
By:
- ------------------------- --------------------------------
Secretary Name:
Title:
WITNESS: EXECUTIVE:
By:
- ------------------------- --------------------------------
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<PAGE>
Exhibit 10.10
SUPPLEMENTAL EXECUTIVE RETIREMENT AND
DEFERRED COMPENSATION PLAN
FOR
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
1. Purpose
This Supplemental Executive Retirement Plan ("Plan") is
intended to provide Participants (as defined herein), their Surviving Spouses,
or Beneficiaries with the full dollar amount of Employer-provided pension
benefits obtainable under the Financial Institution Retirement Fund as adopted
by First Federal Savings Bank of Siouxland ("Retirement Plan"), the Financial
Institutions Thrift Plan as adopted by First Federal Savings Bank of Siouxland
("Thrift Plan") and the First Federal Savings Bank of Siouxland Employee Stock
Ownership Plan ("ESOP") (collectively, the "Benefit Plans") and any other
tax-qualified employee benefit plans under Section 401(a) of the Internal
Revenue Code (the "Code") that First Federal Savings Bank of Siouxland (the
"Bank") may adopt but which may not be accrued under the limitations imposed by
Section 415 of the Internal Revenue Code (the "Code") and the limitation on
includible compensation imposed by Section 401(a)(17) of the Code. In addition,
this Plan is intended to provide a vehicle for certain eligible employees to
defer compensation in excess of the amount that such employees would be eligible
to defer under the Thrift Plan due to the limitations imposed by Sections
401(k), 401(m) or 402(g) of the Code. The benefits provided under the Plan (as
described below) are intended to constitute a deferred compensation plan for "a
select group of management or highly compensated employees" for purposes of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA").
2. Definitions
Where the following words and phrases appear in the Plan, they
shall have the respective meaning as set forth below unless the context clearly
indicates the contrary. Except to the extent otherwise indicated herein, and to
the extent inconsistent with the definitions provided below, the definitions
contained in the Retirement Plan, the Thrift Plan and the ESOP are applicable
under the Plan.
"Applicable Limitation" means any one of the following: (a)
the maximum limitation on annual benefits payable by the Retirement Plan (or a
qualified defined benefit plan under section 415(b) of the Code); (b) the
maximum limitation on annual additions to a qualified defined contribution plan
under section 415(c) of the Code; (c) the maximum limitation on the aggregate
projected annual benefits payable by qualified defined benefit plans and the
annual additions to qualified defined contribution plans under section 415(e) of
the Code, (d) the maximum limitation on the annual amount of compensation that
may, under section 401(a)(17) of the Code,
<PAGE>
be taken into account in determining contributions and benefits under qualified
plans, and (e) with respect to the Thrift Plan (or successor plan), the
limitations on salary deferrals and matching contributions under
section 401(k), 401(m), and 402(g) of the Code.
"Beneficiary" means the person or persons designated by the
Participant under the Benefit Plans of the Bank to receive benefits in the event
of the Participant's death. In the event no Beneficiary is designated or
required by law under one or more of the Benefit Plans, the Participant's
Beneficiary shall be his or her Surviving Spouse, or if there is none, then his
or her children, who shall take in equal shares per stirpes. If the Participant
has no surviving children, then the Beneficiary shall be the Participant's
estate.
"Board of Directors" means the Board of Directors of First
Federal Savings Bank of Siouxland.
"Change in Control" shall mean a change in control of the Bank
or Company of a nature that; (i) would be required to be reported in response to
Item 1 of the current report on Form 8-K, as in effect on the date hereof,
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the
"Exchange Act"); or (ii) results in a change in control of the Bank or the
Company within the meaning of the Home Owners' Loan Act of 1933 and applicable
rules and regulations promulgated thereunder as in effect on the date hereof; or
(iii) without limitation such a Change in Control shall be deemed to have
occurred at such time as (a) any "Person" (as the term is used in Sections 13(d)
and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of
the Bank or the Company representing 20% or more of the Bank's or the Company's
outstanding securities except for any securities of the Bank issued to the
Company in connection with the conversion and reorganization of First Federal
Bankshares, M.H.C. and any securities purchased by the Bank's employee stock
ownership plan and trust; or (b) the Incumbent Board ceases for any reason to
constitute at least a majority of the board of directors of the Bank or Company;
or (c) a reorganization, merger, consolidation, sale of all or substantially all
the assets of the Bank or the Company or similar transaction in which the Bank
or Company is not the resulting entity and which the Incumbent Board does not
approve of or consent to; or (d) a proxy statement is distributed that solicits
proxies from stockholders of the Company, by someone other than the current
management of the Company, seeking stockholder approval of a plan of
reorganization, merger or consolidation of the Company or Bank or similar
transaction with one or more corporations as a result of which the outstanding
shares of the class of securities then subject to such plan or transaction are
exchanged for or converted into cash or property or securities not issued by the
Bank or the Company; or (e) a tender offer is made for 20% or more of the
outstanding securities of the Bank or Company.
"Code" means the Internal Revenue Code of 1986, as amended
from time to time. Reference to a specific provision of the Code shall include
such provision, any valid regulation or ruling promulgated thereunder and any
comparable provision of future law that amends, supplements or supersedes such
provision.
2
<PAGE>
"Committee" means the Supplemental Executive Retirement Plan
Committee of the Board of Directors.
"Compensation" means salary payable to a Participant during
the calendar year, before reduction in amounts deferred under this Plan or any
other salary reduction program. Compensation does not include bonuses, expense
reimbursements, or any other payments or benefits.
"Company" means First Federal Bankshares, Inc., the stock
holding company of the Bank.
"Deferral Account" means the account maintained by the Bank in
accordance with Section 5 of the Plan with respect to any Elective Deferrals of
Compensation of a Participant.
"Deferral Period" means the period over which a Participant
has elected to defer a portion of his Compensation.
"Determination Date" means the last day of each calendar
month.
"Effective Date" means _________, 1998.
"Elective Deferrals" means the amounts deferred by a
Participant from his Compensation in accordance with his or her Deferral
Election.
"Eligible Employee" means an employee of the Employer on whose
behalf benefits are payable under the Retirement Plan.
"ESOP" means the First Federal Savings Bank of Siouxland
Employee Stock Ownership Plan, and any successor thereto.
"Employer" means First Federal Savings Bank of Siouxland with
respect to its employees, and any successors by merger, purchase, reorganization
or otherwise. If a subsidiary or affiliate of the Employer adopts the Plan, it
shall be deemed the Employer with respect to its employees.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time. Reference to a specific provision of ERISA
shall include such provision, any valid regulation or ruling promulgated
thereunder and any comparable provision of future law that amends, supplements
or supersedes such provision.
"Interest Rate" means for the designated measurement period,
the average interest rate on certificates of deposit maturing in twelve (12)
months.
3
<PAGE>
"Participant" means an Eligible Employee who has been
designated for participation in this Plan pursuant to Section 3.1.
"Plan" means the First Federal Savings Bank of Siouxland
Supplemental Executive Retirement Plan, as set forth herein and as may be
amended from time to time.
"Plan Year" means the period from _________, 1998 through
____________, 1999, and each _________ to ____________ thereafter.
"Retirement Plan" means the Financial Institution Retirement
Fund as adopted by First Federal Savings Bank of Siouxland, as amended from time
to time, and any successor thereto.
"Stock" means the common stock of First Federal Bankshares,
Inc., par value $.01.
"Surviving Spouse" means the legal spouse of a Participant,
living at the time of the death of the Participant.
"Thrift Plan" means the Financial Institutions Thrift Plan as
adopted by the First Federal Savings Bank of Siouxland, as amended from time to
time, and any successor thereto.
3. Participation
3.1 Designation to Participate. Upon the designation of the
Committee, and subject to the approval of the Board of Directors, Employees may
become Participants at any time during the Plan Year. Each Employee initially
selected by the Committee to participate in the plan shall be set forth on
Exhibit A attached hereto and made a part hereof.
3.2 Continuation of Participation. An Employee who has become
a Participant shall remain a Participant so long as benefits are payable to or
with respect to such Participant under the Plan.
4. Benefit Requirements and Payments
4.1 Supplemental Employer-Provided Retirement Plan Benefits. A
Participant shall be entitled to receive as a benefit from this Plan, the
supplemental retirement plan benefit set forth in 4.1-1, below, the supplemental
thrift plan benefit set forth in 4.1-2, below and the supplemental ESOP benefit
set forth in 4.1-3, below. In the event of the death of a Participant prior to
the commencement of payment of benefits hereunder, the Beneficiary or
Beneficiaries of the Participant shall be entitled to receive as a benefit from
this Plan a benefit equal to 100% of the supplemental retirement benefit, 100%
of the supplemental thrift benefit and 100% of the supplemental ESOP benefit
that would have been payable to the Participant at the time of his death.
3
<PAGE>
4.1-1 A Participant shall be entitled to a
supplemental retirement benefit or supplemental survivor benefit under this Plan
in an amount equal to the excess of:
(i) the retirement or survivor benefit to which he would
be entitled under the Retirement Plan in the absence
of the Applicable Limitations, determined on the
basis of the benefit form elected under the
Retirement Plan; over
(ii) the actual retirement or survivor benefit to which he
is entitled under the Retirement Plan, computed at
termination of employment, determined on the basis of
the benefit form elected under the Retirement Plan;
provided, however, that if the Plan is terminated with respect to a Participant
prior to the occurrence of his termination of employment, such supplemental
retirement or survivor benefit that would have been payable to him under this
section 4.1-1, on the basis of the benefit form elected by the Participant under
the Retirement Plan, if his termination of employment had occurred as of the
date of the termination of the Plan. In the event of the Participant's death,
benefits will be paid to his Beneficiary, if applicable.
4.1-2 A Participant shall be entitled to a
supplemental thrift benefit under this Plan which, on the first Determination
Date to occur following his termination of employment equals: (A) the product of
(i) the Bank contributions (i.e., other than Elective Deferrals) that could not
be credited to the Participant's account in the Thrift Plan as a result of the
Applicable Limitations, together with the interest deemed to accrue each year at
the Interest Rate, multiplied by (ii) his vested percentage under the Bank's
Thrift Plan; provided, however, that the amount determined under this Section
shall in no event be less than zero, plus (B) the Participant's Elective
Deferrals made under Section 5 of thus Plan, together with interest deemed to
accrue each year at the Interest Rate. From the first Determination Date to
occur following the Participant's termination of employment until the
Participant's supplemental thrift plan benefits are entirely distributed, the
amount not yet distributed shall continue to accrue interest at the Interest
Rate.
4.1-3 The supplemental ESOP benefit is a dollar
amount equal to (a) less (b), where:
(a) is the aggregate of the fair market values
(determined annually as of the last day of
the relevant ESOP plan year) of the number
of shares of Stock that would have been
allocated to the account of the Participant,
and the earnings thereon, but for the
Applicable Limitations; and
(b) is the aggregate of the fair market values
(determined annually as of the last day of
the relevant ESOP plan year) of the number
of shares of Stock actually allocated to the
account of the Participant for the relevant
ESOP plan year, and the earnings thereon.
5
<PAGE>
4.2 Incidents of Supplemental Retirement Payments. Benefits
under this Section 4 shall include all attributes in which payment is made from
the Retirement Plan, the Thrift Plan and the ESOP, including but not limited to:
(a) Retirement whether normal, early, or late;
(b) Disability;
(c) Death; or
(d) Termination of employment.
Except to the extent otherwise indicated, and to the extent
otherwise inconsistent with the terms of this Plan, the provisions of the
Retirement Plan, the Thrift Plan and ESOP are hereby incorporated by reference.
4.3 Form of Supplemental Retirement Payments.
4.3-1 A Participant's supplemental retirement plan
benefit under Section 4.1- 1 of this Plan generally shall be paid to or with
respect to the Participant in the same form and at the same time as the
Participant's retirement income under the Retirement Plan. Benefits under
Section 4.1-1 of this Plan shall cease with the cessation of benefits to the
Participant or Beneficiary under the Retirement Plan.
4.3-2 A Participant's supplemental thrift plan
benefit under Section 4.1-2 of this Plan and under Section 5 generally shall be
paid to or with respect to the Participant in the same form and at the same time
as the Participant's benefit is distributed under the Thrift Plan. Benefits
under Section 4.1-2 of this Plan shall cease with the cessation of benefits to
the Participant or Beneficiary under the Thrift Plan.
4.3-3 A Participant's supplemental ESOP benefits
under Section 4.1-3 of this Plan shall be a benefit paid in cash or, if elected
by the Participant, in the form set forth in 4.3-4 below. Such benefit shall be
paid to or with respect to the Participant at the same time as the Participant's
benefit is distributed under the ESOP. Benefits under Section 4.1-3 of this Plan
shall cease with the cessation of benefits to the Participant, or his or her
Surviving Spouse or his or her Beneficiary under the ESOP.
4.3-4 (A) If a trust is established and is permitted
to hold Stock of the Company, a Participant's Supplemental ESOP benefit shall be
distributed in shares of Stock of the Company, if elected by the Participant and
consented to by the Committee. Any fractional shares of Stock of the Company
attributable to the Participant will be distributed in cash.
(B) If no trust is established or if
established, such trust is not permitted by applicable law to invest in Stock of
the Company, a Participant may elect upon receiving a distribution from the
Plan, that the Committee convert the cash benefit attributed to his
supplemental ESOP benefit into shares of Stock of the Company. The value of a
Participant's
6
<PAGE>
supplemental ESOP benefit at the time of distribution shall be converted to
shares of the Company's common stock by dividing the cash credited to the
Participant's supplemental ESOP benefit by the last price quoted for the shares
of Stock of the Company on the National Association of Securities Dealers
Automated Quotation ("NASDAQ") System. Such shares of Stock will be issued in
the name of the Participant. No shares will be issued in the name of the
Administrator of the Plan. The delivery of the shares to the Participant will
act as a discharge of the Administrator's obligation of payment on the
supplemental ESOP benefit. Any funds that cannot be converted to shares of Stock
of the Company will be distributed in cash.
4.3-5 Notwithstanding subsections 4.3-1, 4.3-2 and
4.3-3, if any of the Retirement Plan, the Thrift Plan or the ESOP are terminated
and the assets distributed, the Committee shall determine if a Participant's
supplemental account balance or accrued benefit under this Plan attributable to
such terminated plan shall be similarly distributed, or, if the Participant has
not terminated employment, if such balance shall be held by the Plan and
distributed in a lump sum within thirty (30) days of the Participant's
termination of employment. With respect to the supplemental thrifts plan
benefit, if a Participant has received a hardship distribution or other
in-service distribution of the entire balance of his or her Thrift Plan account,
and such distribution is not due to the termination of the Thrift Plan, the
Participant's supplemental thrift plan benefit shall be held by the Plan and
shall be distributed to the Participant within thirty (30) days of his or her
termination of employment.
5. Elective Deferrals and Deferral Commitment.
5.1 Accounts. For record keeping purposes only, a Deferral
Account shall be maintained for each Participant who makes Elective Deferrals
hereunder. Separate subaccounts shall be maintained to the extent necessary to
properly reflect each Participant's total vested Account balance.
5.2 Elective Deferrals of Compensation. In accordance with
rules established by the Committee, a Participant may elect to defer
Compensation which is due to be earned and which would otherwise be paid to the
Participant. The amount so deferred will be considered a Participants "Elective
Deferrals". A Participant's Elective Deferrals shall be withheld from each
payment of Compensation and credited to the Participant's Account as the
nondeferred portion of the Compensation becomes or would have become payable.
The Participant shall be entitled to defer Compensation under the Plan that the
Participant is prohibited from deferring under the Thrift Plan due to the
Applicable Limitations, but not in excess of $ ___________ dollars. Ordinarily,
a Participant shall make such an election with respect to the next calendar year
by submitting a Deferral Compensation Agreement (attached hereto as Exhibit B)
during the period beginning on December 1 and ending on December 15 of the
immediately preceding calendar year or during such other period as established
by the Committee. In the event a participant initially becomes eligible to
participate during the course of the calendar year, the Participant must submit
the Deferred Compensation Agreement within thirty (30) days of notification of
the Participant's eligibility. Such Deferred Compensation Agreement shall be
applicable only to Compensation attributable to services
7
<PAGE>
not yet performed. A Participant's Elective Deferral shall remain in effect for
each subsequent year unless modified by filing a subsequent Deferred
Compensation Agreement with the Committee in the manner set forth herein. Any
withholding of taxes or other amounts with respect to deferred Compensation
which is required by state, federal or local law shall be withheld from the
Participant's nondeferred Compensation to the maximum extent possible with any
excess being withheld from the Participant's Account.
5.3 Interest. The Accounts shall be credited monthly with
Interest earned based on the Interest Rate specified in Section 2. Interest
earned shall be calculated as of each Determination Date based upon the average
daily balance of the account since the preceding Determination Date and shall be
credited to the Participant's Account at that time.
5.4 Determination of Accounts. Each Participant's Account as
of each Determination Date shall consist of the balance of the Participant's
Account as of the immediately preceding Determination Date, plus the
Participant's Elective Deferrals credited, any Bank Contributions credited under
Section 4.1-2 plus interest earned, minus the amount of any distributions made
since the immediately preceding Determination Date.
5.5 Vesting of Accounts. Each Participant shall be 100% vested
in the amounts credited to his Deferral Account and earnings thereon.
6. Administration of the Plan
6.1 Committee; Duties. This Plan shall be administered by the
Committee which shall consist of not less than three (3) persons appointed by
the Board of Directors. The Committee shall have the authority to make, amend,
interpret and enforce all appropriate rules and regulations for the
administration of the Plan and decide or resolve any and all questions including
interpretations of this Plan, that may arise in connection with the
administration of the Plan. A majority vote of the Committee members shall
control any decision. Members of the Committee may be Participants under the
Plan.
6.2 Agents. The Committee may, from time to time, employ other
agents and delegate to them such administrative duties as it sees fit and may
from time to time consult with counsel who may be counsel to the Employer.
6.3 Binding Effect of Decisions.. The decision or action of
the Committee regarding any question arising out of, or in connection with, the
administration, interpretation and application of the Plan and the rules and
regulations promulgated hereunder shall be final and conclusive and binding upon
all persons having any interest in the Plan.
6.4 Indemnity of Committee. The Bank shall indemnify and hold
harmless the members of the Committee against any and all claims, loss, damage,
expense or liability arising from
8
<PAGE>
any action or failure to act with respect to this Plan, except in the case of
gross negligence or willful misconduct.
6.5 Statement of Accounts. The Committee shall submit to each
Participant, within one hundred twenty (120) days after the close of each
calendar year and at such other time as determined by the Committee, a statement
setting forth the balance to the credit of the Account maintained for a
Participant.
7. Claims Procedure
7.1 Claim. Any person claiming a benefit, requesting an
interpretation or ruling under the Plan, or requesting information under the
Plan shall present the request in writing to the Committee which shall respond
in writing within thirty (30) days.
7.2 Denial of Claim. If the claim or request is denied, the
written notice of denial shall state:
(a) The reason for denial, with specific reference to
the Plan provisions on which the denial is based.
(b) A description of any additional material or
information required and an explanation of why it is necessary.
(c) An explanation of the Plan's claim review
procedure.
7.3 Review of Claim. Any person whose claim or request is
denied or who has not received a response within thirty (30) days may request
review by notice given in writing to the Committee. The claim or request shall
be reviewed by the Committee who may, but shall not be required to, grant the
claimant a hearing. On review, the claimant may have representation, examine
pertinent documents, and submit issues and comments in writing.
7.4 Final Decision. The decision on review shall normally be
made within sixty (60) days. If an extension of time is required for a hearing
or other special circumstances, the claimant shall be notified and the time
limit shall be one hundred twenty (120) days. The decision shall be in writing
and shall state the reason and the relevant plan provisions. All decisions on
review shall be final and bind all parties concerned.
8. Amendment or Termination
8.1 Amendment of Plan. A majority of the Board of Directors
may amend this Plan at any time or from time to time. Any amendment may provide
different benefits or amounts of benefits from those herein set forth. However,
no such amendment shall adversely affect the benefits of the Participant which
have accrued prior to such action.
9
<PAGE>
8.2 Termination of Plan. The Plan shall not be terminated
until all accrued benefits payable under the terms of the Plan are either paid
or forfeited.
9. Miscellaneous
9.1 Unfunded Plan. This Plan is intended to be an unfunded
plan maintained primarily to provide deferred compensation benefits for a select
group of management or highly compensated employees. However, the Bank may elect
to establish a fund for the benefit of Participants as described in Section 8.3
below. This Plan will continue to be unfunded for tax purposes and Title I of
ERISA even if benefits are funded by the Bank under Section 9.3 below.
9.2 Unsecured General Creditor. The Participant and his
Beneficiaries, heirs, successors and assigns shall have no legal or equitable
rights, interest or claims in any property or assets of Employer, nor shall they
be beneficiaries of, or have any rights, claims or interests in any life
insurance policies, annuity contracts or the proceeds therefrom owned or which
may be acquired by Employer. Such policies or other assets of Employer shall not
be held under any trust for the benefit of Participants, their Beneficiaries,
heirs, successors or assigns, or held in any way as collateral security for the
fulfilling of the obligations of Employer under this Plan. Any and all of
Employer's assets shall be, and remain, the general, unpledged, unrestricted
assets of Employer. Employer's obligation under the Plan shall be that of an
unfunded and unsecured promise of Employer to pay money in the future.
9.3 Trust Fund. The Employer shall be responsible for the
payment of all benefits provided under the Plan. At its discretion, the Employer
may establish one (1) or more trusts, with such trustees as the Board may
approve, for the purpose of providing for payment of such benefits. Such trust
or trusts may be irrevocable, but the assets thereof shall be subject to the
claims of the Employer's creditors. To the extent any benefits provided under
the Plan are actually paid from any such trust, the Employer shall have no
further obligation with respect thereto, but to the extent not so paid, such
benefits shall remain the obligation of, and shall be paid by, the Employer.
9.4 Nonassignability. Neither the Participant nor any other
person shall have any right to commute, sell, assign, transfer, pledge,
anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in
advance of actual receipt the amounts, if any, payable hereunder, or any part
thereof, which are, and all rights to which are, expressly declared to be
unassignable and nontransferable. No part of the amounts payable shall, prior to
actual payment, be subject to seizure or sequestration for the payment of any
debts, judgments, alimony or separate maintenance owed by a Participant or any
other person, nor be transferable by operation of law in the event of a
Participant's or any other person's bankruptcy or insolvency.
9.5 Expenses of Plan. All expenses of the Plan will be paid by
the Employer.
9.6 Limitation on Benefits and Payments. Subject to the
provisions of Section 9.7, a person entitled to retirement benefits pursuant to
Section 4.1 shall have a claim upon
10
<PAGE>
the Employer only to the extent of the monthly payments, if any, due up to and
including the then current month and shall not have a claim against the Employer
for any subsequent monthly payment unless and until such payment shall become
due and payable.
9.7 Change of Control of the Bank or Company. Notwithstanding
any other provision herein, there shall become immediately due and payable upon
a Change in Control of the Bank or Company, a Participant's supplemental
retirement plan benefit, supplemental thrift plan benefit and supplemental ESOP
benefit in a lump sum amount equal to the sum of (i) the present actuarial value
of the supplemental retirement plan benefit, (ii) the account balance
attributable to the supplemental thrift plan benefit, and (iii) the account
balance attributable to the supplemental ESOP benefit.
9.8 Withholding; Payroll Taxes. The Employer shall withhold
from payments made hereunder any taxes required to be withheld from the
Participant's wages for the federal or any state or local government.
9.9 Participation by Subsidiaries and Affiliates. If any
employer is now or hereafter becomes a subsidiary or affiliated company of the
Employer and its employees participate in the Retirement Plan, the Thrift Plan
and/or the ESOP, the Board of Directors may authorize such subsidiary or
affiliated company to participate in this Plan upon appropriate action by such
employer necessary to adopt the Plan.
9.10 Delivery of Elections to Committee. All elections,
designation, requests, notices, instructions and other communications required
or permitted under the Plan from the Employer, a Participant, Beneficiary or
other person to the Committee shall be on the appropriate form, shall be mailed
by first-class mail or delivered to such address as shall be specified by such
Committee, and shall be deemed to have been given or delivered only upon actual
receipt thereof by such Committee at such location.
9.11 Delivery of Notice to Participants. All notices,
statements, reports and other communications required or permitted under the
Plan from the Employer or the Committee to any officer, Participant, Beneficiary
or other person, shall be deemed to have been duly given when delivered to, or
when mailed by first-class mail, postage prepaid, and addressed to such person
at this address last appearing on the records of the Committee.
10. Construction of the Plan
10.1 Construction of the Plan. The provisions of this Plan
shall be construed, regulated and administered according to the laws of the
State of Delaware, to the extent not superseded by Federal law.
10.2 Counterparts. This Plan has been established by the
Employer in accordance with the resolutions adopted by the Board of Directors
and may be executed in any number of counterparts, each of which shall be deemed
to be an original. All the counterparts shall constitute one instrument, which
may be sufficiently evidenced by any one counterpart.
11
<PAGE>
10.3 Validity. In case any provision of this Plan shall be
held illegal or invalid for any reason, said illegality or invalidity shall not
affect the remaining parts hereof, but this Plan shall be construed and enforced
as if such illegal or invalid provision had never been inserted herein
[Remainder of Page Intentionally Left Blank]
12
<PAGE>
IN WITNESS WHEREOF, and as evidence of the adoption of the Plan by the
Employer, it has caused the same to be signed by its officer duly authorized,
and its corporate seal to be affixed this ___ day of ______________, 199__.
ATTEST: FIRST FEDERAL SAVINGS BANK
OF SIOUXLAND
By:
- ------------------------ -------------------------
13
<PAGE>
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Participant Date of Participation
----------- ---------------------
Exhibit A
<PAGE>
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
SUPPLEMENTAL RETIREMENT AND DEFERRED COMPENSATION PLAN
DEFERRED COMPENSATION AGREEMENT
I, __________________________________, hereby elect to defer
$__________ (or _______%) of my Compensation. Such deferrals shall commence on
January 1, 199_, and shall renew annually unless otherwise changed at least
fifteen (15) days prior to January 1 of any year in the Deferral Period. I
understand that this election to defer applies only to Compensation attributable
to services not yet performed.
I understand that my election to defer shall continue in accordance
with this Deferred Compensation Agreement until such time as I submit a New
Deferred Compensation Agreement to the Administrator, at least fifteen (15) days
prior to any January 1st of my Deferral Period.
I understand that any amounts deferred hereunder shall be distributed
at the same time and in the same manner as my benefits under the Bank's Thrift
Plan, subject to Section 4.3-5 of the Plans and, provided, that if amounts I
have deferred under the Thrift Plan are distributed to me during my employment
for reasons other than the termination of the Thrift Plan, the amounts deferred
hereunder shall be held by the Plan and distributed to me in a lump sum within
thirty (30) days of my termination of employment.
I understand that I am entitled to review or obtain a copy of the Plan,
at any time, and may do so by contacting a member of the Committee.
This Agreement shall become effective upon execution (below) by both
the person whose name appears above and a member of the Committee
Dated this ___ day of _______, 1998.
- -----------------------------
(Executive)
- -----------------------------
(Bank's duly authorized Officer)
Exhibit B
<PAGE>
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
SUPPLEMENTAL RETIREMENT AND DEFERRED COMPENSATION PLAN
BENEFICIARY DESIGNATION FORM
____________________, a Participant under the terms of the Supplemental
Retirement and Deferred Compensation Plan executed by First Federal Savings Bank
of Siouxland (the "Bank"), effective January 1, 1999, hereby designates the
following Beneficiary to receive any benefits under such Plan, following his
death:
PRIMARY BENEFICIARY:
-------------------------------------
SECONDARY BENEFICIARY:
-------------------------------------
This Beneficiary Designation hereby revokes any prior Beneficiary
Designation which may have been in effect.
Such Beneficiary Designation is revocable upon the submission of a
subsequent properly executed Beneficiary Designation to the Committee.
DATE: ______________________, 19___
- ----------------------------------- ------------------------------
(WITNESS) PARTICIPANT SIGNATURE
- -----------------------------------
(WITNESS)
Exhibit C
<PAGE>
Exhibit 10.14
Agreement and Plan of Reorganization
By and Among
First Federal Bankshares, M.H.C.
First Federal Savings Bank of Siouxland
Mid-Iowa Financial Corp.
and
Mid-Iowa Savings Bank, FSB
Dated: August 17, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
<S> <C> <C> <C>
ARTICLE I................................................................ 2
THE REORGANIZATION.................................................... 2
1.1. The Reorganization....................................... 2
1.2 Adoption and Execution and Delivery of Documents
providing for the Reorganization......................... 3
1.3. Effective Time and Closing of the Reorganization.......... 3
1.4 Modification of Structure................................. 3
ARTICLE II............................................................... 4
EFFECT OF THE REORGANIZATION; CERTAIN ACTIONS IN
CONNECTION THEREWITH................................................. 4
2.1. Effect of the Reorganization.............................. 4
2.2. Effect on Common Stock of the Company and First Federal... 4
2.3. First Federal to Make Cash Available...................... 5
2.4. Payment of Cash........................................... 5
2.5. Recapitalization or Stock Dividends....................... 6
2.6. Company Stock Options..................................... 6
ARTICLE III.............................................................. 7
REPRESENTATIONS AND WARRANTIES OF MID-IOWA
AND THE COMPANY..................................................... 7
3.1. Corporate Organization.................................... 7
3.2. Capitalization............................................ 8
3.3. Authorization............................................. 9
3.4. No Violation.............................................. 9
3.5. Reports and Consolidated Financial Statements............. 10
3.6. Consents and Approvals.................................... 11
3.7. Absence of Certain Changes................................ 11
3.8. Employee and Employee Benefits Matters.................... 12
3.9. Litigation................................................ 14
3.10. Tax Matters............................................... 14
3.11. Information in the Company Proxy Statement................ 15
3.12. Environmental Matters..................................... 16
3.13. Insurance................................................. 17
3.14. Compliance with Laws and Orders........................... 18
3.15. Governmental Regulation................................... 18
3.16. Contracts and Commitments................................. 18
3.17. Agreements with Directors, Officers and Stockholders...... 19
3.18. Accuracy of Information................................... 19
3.19 Allowances for Losses and Real Estate Owned............... 19
3.20 Title to Assets; Leases................................... 20
3.21. Business of Mid-Iowa...................................... 20
3.22. Tax Matters............................................... 21
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page No.
<S> <C> <C> <C>
3.23 Certain Information....................................... 21
ARTICLE IV............................................................... 21
REPRESENTATIONS AND WARRANTIES OF FIRST FEDERAL....................... 21
4.1. Corporate Organization.................................... 21
4.2. Authorization............................................. 21
4.3. No Violation.............................................. 22
4.4. Consents and Approvals.................................... 22
4.5. Information Supplied for Inclusion in the Company
Proxy Statement........................................... 22
4.6. Accuracy of Information................................... 22
4.7. Regulatory Approvals and No Adverse Change................ 22
ARTICLE V................................................................ 23
COVENANTS OF FIRST FEDERAL............................................ 23
5.1. Affirmative Covenants..................................... 23
5.2. Negative Covenants........................................ 23
5.3. Breaches.................................................. 23
5.4. Filing of Applications.................................... 23
5.5. Supplement to First Federal Disclosure Schedule........... 24
5.6. Expenses.................................................. 24
ARTICLE VI............................................................... 24
COVENANTS OF THE COMPANY AND MID-IOWA................................. 24
6.1. Affirmative Covenants..................................... 24
6.2. Negative Covenants........................................ 25
6.3. Report to First Federal................................... 28
6.4. Breaches.................................................. 28
6.5. Supplement to Disclosure Schedule......................... 28
6.6. Consents and Approvals.................................... 28
6.7. Expenses.................................................. 28
ARTICLE VII.............................................................. 29
ADDITIONAL AGREEMENTS................................................. 29
7.1. Company Shareholders' Meeting............................. 29
7.2. Proxy Statement for Company Shareholders' Meeting......... 29
7.3. Cooperation; Regulatory Approvals......................... 29
7.4. Reports................................................... 30
7.5. Brokers or Finders........................................ 30
7.6. Additional Agreements; Reasonable Efforts................. 30
7.7. Release of Information.................................... 30
7.8. Advisory Directors........................................ 31
7.9. Access to Properties and Records; Confidentiality......... 31
7.10. Certain Policies.......................................... 32
7.11. Employee Benefit Plans; Employment Arrangements. ........ 32
7.12. D&O Indemnification and Insurance......................... 33
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page No.
<S> <C> <C> <C>
7.13 Conversion And Offering................................... 34
ARTICLE VIII............................................................. 35
CONDITIONS TO THE OBLIGATIONS OF FIRST FEDERAL........................ 35
8.1. No Material Adverse Change................................ 35
8.2. Representations and Warranties............................ 35
8.3. Performance and Compliance................................ 35
8.4. No Proceeding or Litigation............................... 35
8.5. Consents Under Agreements................................. 36
8.6. No Amendments to Resolutions.............................. 36
8.7. Certificate of Mid-Iowa Officers.......................... 36
8.8. Corporate Proceedings..................................... 36
8.9. Legal Opinion............................................. 36
8.10. Closing Book Value........................................ 36
8.11. Conversion................................................ 36
8.12 Non-Competition Agreements................................ 37
ARTICLE IX............................................................... 37
CONDITIONS TO THE OBLIGATIONS OF THE COMPANY AND MID-IOWA............. 37
9.1. Representations and Warranties............................ 37
9.2. Performance and Compliance................................ 37
9.3 Corporate Proceedings..................................... 37
9.4. Certificate of First Federal Officers..................... 37
9.5. Legal Opinion............................................. 37
9.6. Opinion of Financial Advisor.............................. 37
ARTICLE X................................................................ 38
CONDITIONS TO THE OBLIGATIONS OF ALL PARTIES.......................... 38
10.1. Governmental Approvals.................................... 38
10.2. No Injunctions or Restraints.............................. 38
10.3. Stockholder Approval...................................... 38
10.4 Corporate Proceedings..................................... 38
ARTICLE XI............................................................... 39
TERMINATION........................................................... 39
11.1. Reasons for Termination................................... 39
11.2. Effect of Termination..................................... 41
ARTICLE XII.............................................................. 41
MISCELLANEOUS......................................................... 41
12.1. Nonsurvival of Representations, Warranties
and Agreements........................................... 41
12.2. Expenses and Termination Fee.............................. 41
12.3. Waivers; Amendments....................................... 42
12.4. Assignment; Parties in Interest........................... 42
12.5. Entire Agreement.......................................... 42
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page No.
<S> <C> <C> <C>
12.6. Captions and Counterparts................................... 43
12.7. Certain Definitions......................................... 43
12.8. Enforcement of this Agreement............................... 43
12.9. Governing Law............................................... 44
12.10. Notices..................................................... 44
</TABLE>
SCHEDULES
Schedule 2.6
Schedule 3.1(a)
Schedule 3.2(c)
Schedule 3.2(d)
Schedule 3.4
Schedule 3.5
Schedule 3.6
Schedule 3.7
Schedule 3.8(a)
Schedule 3.8(b)
Schedule 3.8(c)
Schedule 3.8(e)
Schedule 3.9
Schedule 3.10
Schedule 3.12(f)
Schedule 3.13
Schedule 3.14
Schedule 3.15
Schedule 3.16
Schedule 3.17
Schedule 3.20(b)
Schedule 3.21(b)
Schedule 6.2(b)
Schedule 7.5
Schedule 7.11(c)
Schedule 7.11(f)
Schedule 7.12
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization, dated as of August 17, 1998 (the
"Agreement"), is entered into by and among First Federal Bankshares, M.H.C.
("Bancorp"), First Federal Savings Bank of Siouxland ("First Federal"), Mid-Iowa
Financial Corp. (the "Company") and Mid-Iowa Savings Bank, FSB ("Mid-Iowa").
R E C I T A L S:
WHEREAS, First Federal is a federally-chartered stock savings bank
headquartered in Sioux City, Iowa, 53.8% of the issued and outstanding capital
stock of which is owned by Bancorp, a federally-chartered mutual holding
company;
WHEREAS, the Company is a company organized under the laws of the State of
Delaware, is registered with the Office of Thrift Supervision as a unitary
savings and loan holding company, and owns 100% of the issued and outstanding
common stock of Mid-Iowa;
WHEREAS, Mid-Iowa is a federally-chartered savings bank headquartered in
Newton, Iowa;
WHEREAS, the parties desire to provide for First Federal's acquisition of
Mid-Iowa pursuant to the transactions set forth in this Agreement on or after
the Effective Time (as defined in Section 1.3 hereof);
WHEREAS, in connection with the Reorganization, as defined herein, the
outstanding capital stock of the Company will be converted into the right to
receive cash;
WHEREAS, it is intended that First Federal and Mid-Iowa will be merged such
that First Federal will be the surviving bank and that the resulting savings
institution will expand its market area and achieve certain economies of scale
and efficiencies as a result of the Reorganization, as defined herein;
WHEREAS, in connection with the Reorganization, it is intended that Bancorp
will convert from a mutual holding company to a stock holding company (the
"Conversion") and conduct an offering of shares of its common stock in a
subscription and community offering, and in an exchange offering to the existing
public shareholders of First Federal (the "Offering").
NOW, THEREFORE, in consideration of the premises and the mutual covenants,
representations, warranties, and agreements herein contained, and in order to
set forth the conditions upon which the foregoing Reorganization, as defined
herein, will be carried out, the parties, intending to be legally bound, hereby
agree as follows:
<PAGE>
ARTICLE I.
THE REORGANIZATION
1.1. The Reorganization. Subject to the terms and conditions of this
Agreement, and in accordance with the provisions of Section 18(c) of the Federal
Deposit Insurance Act (12 U.S.C. 1828(c)), as amended (the "Bank Merger Act"),
the Home Owners' Loan Act (the "HOLA"), and the rules and regulations
promulgated thereunder including 12 C.F.R. 563.22 and 574.3(a) (the "Thrift
Regulations"), at the Effective Time, the parties hereby agree that the
following corporate transactions (collectively referred to herein as the
"Reorganization") shall occur substantially concurrently in the order set forth
below in accordance with applicable laws and regulations and the provisions of
this Agreement:
(a) Pursuant to the Agreement of Merger, attached hereto as Exhibit A,
among First Federal, the Company, and a to-be-formed Delaware corporation
which is to be wholly owned by First Federal, such to-be-formed corporation
shall be merged with and into the Company (the "Company Merger") and, in
connection therewith, and subject to the rights of dissenting stockholders
which have been asserted and duly perfected in accordance with the
provisions of Section 262 of the Delaware General Corporation Law, each
share of common stock, $.01 par value per share, of the Company ("Company
Common Stock") and each option to purchase such stock granted pursuant to
the Company's stock option plans, as identified herein, outstanding
immediately prior to the effective time of the Company Merger shall be
canceled in exchange for the right to receive the cash payments specified
in such Agreement of Merger, with the result that the Company will become a
wholly owned subsidiary of First Federal.
(b) Pursuant to the Plan of Complete Liquidation and Dissolution (the
"Plan"), attached hereto as Exhibit B, the Company shall be liquidated into
First Federal, immediately following consummation of the transactions
referred to in Section 1.1(a) hereof, with the result that First Federal
will acquire all of the assets and liabilities of the Company and the
Company shall cease to exist.
(c) Pursuant to the Agreement of Merger, attached hereto as Exhibit C,
between Mid-Iowa and First Federal, Mid-Iowa shall merge with and into
First Federal (the "Bank Merger") immediately following consummation of the
transactions referred to in Section 1.1(b) hereof, with the result that
First Federal will acquire all of the assets and liabilities of Mid-Iowa
and Mid-Iowa shall cease to exist.
(d) Upon the consummation of the Reorganization, the separate
existence of the Company and Mid-Iowa shall cease, and First Federal shall
continue as the surviving institution in the Bank Merger.
2
<PAGE>
1.2 Adoption and Execution and Delivery of Documents providing for the
Reorganization. Promptly following the formation of the to-be-formed corporation
referred to in Section 1.1(a) hereof, the Company shall execute and deliver the
Agreement of Merger included as Exhibit A hereto and First Federal and such
to-be-formed corporation shall execute and deliver such Agreement of Merger, as
applicable. Promptly upon consummation of the transactions contemplated in
Section 1.1(a) hereof, First Federal shall adopt the Plan included as Exhibit B
hereto in its capacity as sole stockholder of the Company. Promptly upon
consummation of the transactions contemplated by Sections 1.1(a) and (b) hereof,
First Federal and Mid-Iowa shall execute and deliver the Agreement of Merger
included as Exhibit C hereto and First Federal shall adopt such agreement in its
capacity as the sole stockholder of Mid-Iowa.
1.3. Effective Time and Closing of the Reorganization. As soon as
practicable after each of the conditions set forth in Articles VIII, IX and X
hereof have been satisfied or waived, First Federal and Mid-Iowa will file, or
cause to be filed, articles of combination with the Office of Thrift Supervision
(the "OTS"), which articles of combination shall be in the form required by and
executed in accordance with the Thrift Regulations. The Bank Merger shall become
effective at the time the articles of combination for such merger are endorsed
by the OTS pursuant to Section 552.13(k) of the Thrift Regulations (the
"Effective Time"). If (a) this Agreement and the transactions contemplated
hereby have been duly approved as required by the stockholders of the Company,
and (b) all relevant conditions of this Agreement have been satisfied or waived
and all applicable waiting periods have expired, the closing (the "Closing")
shall take place within thirty (30) business days thereafter, on such date as
First Federal and Mid-Iowa shall agree, at the executive offices of First
Federal or at such other time and at such other location mutually acceptable to
First Federal and Mid-Iowa. At the Closing, the parties hereto will exchange
certificates, letters and other documents as required hereby and will cause the
filing described in this Section 1.3 with respect to the Bank Merger to be made.
The date on which the Closing occurs is hereinafter referred to as the "Closing
Date."
1.4 Modification of Structure. Notwithstanding any provision of this
Agreement to the contrary, First Federal may elect, subject to the filing of all
necessary applications and the receipt of all required regulatory approvals, to
modify the structure of the transactions contemplated hereby so long as (i)
there are no material adverse federal income tax consequences to the
stockholders of the Company as a result of such modification, (ii) the
consideration to be paid to holders of Company Common Stock under this Agreement
is not thereby changed in kind or reduced in amount because of such
modification, and (iii) such modification will not be likely to materially delay
or jeopardize receipt of any required regulatory approvals required hereunder,
or otherwise impede the consummation of the transactions contemplated hereby.
3
<PAGE>
ARTICLE II.
EFFECT OF THE REORGANIZATION; CERTAIN ACTIONS IN CONNECTION
THEREWITH
2.1. Effect of the Reorganization.
(a) First Federal, as the surviving institution in the Bank Merger,
shall possess all of the properties and rights and be subject to all of the
liabilities and obligations of Mid-Iowa, all as more fully described in the
Merger Agreement and the Thrift Regulations. The name of First Federal, as the
surviving institution in the Bank Merger, will be "First Federal Savings Bank of
Siouxland" or such other name as determined by the Board of Directors of First
Federal, subject to any required regulatory approval.
(b) At the Effective Time, each share of capital stock of the Company
issued and outstanding immediately prior thereto (except shares as to which the
holders have perfected dissenters' rights in accordance with Section 262 of the
Delaware General Corporation Law) shall, by virtue of the Reorganization, be
canceled. No new shares of the capital stock or other securities or obligations
of First Federal shall be issued or be deemed issued with respect to or in
exchange for such canceled shares, and such canceled shares of capital stock
shall not be converted into any shares or other securities or obligations of
First Federal.
(c) The Charter and Bylaws of First Federal, as in effect immediately
prior to the Effective Time, shall be the Charter and Bylaws of First Federal,
as the surviving institution of the Bank Merger.
(d) Except as otherwise contemplated hereby, the directors and
officers of First Federal immediately prior to the Effective Time shall be the
directors and officers of First Federal, as the surviving institution of the
Bank Merger, and shall continue in office until their successors are duly
elected or otherwise duly selected.
(e) All deposit accounts of Mid-Iowa existing immediately prior to the
Bank Merger shall, upon consummation of the Bank Merger, remain insured by the
Federal Deposit Insurance Corporation ("FDIC") to the fullest extent permitted
by law and regulation.
2.2. Effect on Common Stock of the Company and First Federal.
(a) As of the Effective Time, by virtue of the Reorganization and
without any action except as specified herein on the part of the holders of
shares of common stock, $.01 par value, of the Company, each issued and
outstanding share of Company Common Stock (except with respect to the rights of
dissenting shareholders of the Company) shall be converted into the right to
receive $15.00 in cash (the "Purchase Price"), and all outstanding certificates
representing Company Common Stock shall thereafter represent solely the right to
receive the Purchase Price. Any holders of dissenting shares
4
<PAGE>
shall be entitled to payment for such shares only to the extent permitted by and
in accordance with the provisions of Section 262 of the Delaware General
Corporation Law, with funds provided by First Federal. The Company shall give
First Federal prompt notice of any written demand for the payment of the fair
value of any shares of Company Common Stock, withdrawals of such demands, and
any other instruments served pursuant to the Delaware General Corporation Law
and received by the Company. The Company shall give First Federal the
opportunity to participate in all negotiations and proceedings with respect to
such demands, and shall not voluntarily make any payment with respect to any
demands for payment of fair value or settle or offer to settle any such demands.
All shares of Company Common Stock which are held in the treasury of the Company
or Mid-Iowa or by any direct or indirect wholly-owned subsidiary of the Company
and any shares of Company Common Stock owned by First Federal or any direct or
indirect wholly-owned subsidiary or parent of First Federal shall be canceled
and no consideration shall be paid or delivered in exchange therefor. At the
Effective Time, the stock transfer books of the Company shall be closed and no
transfer of Company Common Stock by any holder thereof shall thereafter be made
or recognized.
(b) In the event the Closing has not occurred by April 15, 1999, then
the aggregate Purchase Price payable under Section 2.2(a) shall be increased by
$3,700 per day for each day from April 16, 1999 to the date immediately
preceding the Closing (the "Purchase Price Adjustment"). The per share Purchase
Price shall be increased by an amount equal to the Purchase Price adjustment
divided by the number of shares of Company Common Stock outstanding immediately
prior to the Effective Time, rounded to the nearest $.01.
2.3. First Federal to Make Cash Available. At the Effective Time,
First Federal shall make available to the Exchange Agent (as defined in Section
2.4(a) hereof) hereof, the aggregate amount of cash payable pursuant to Section
2.2 hereof.
2.4. Payment of Cash.
(a) At least twenty (20) days before the Effective Time, First Federal
shall designate an exchange agent (the "Exchange Agent") in connection with the
Reorganization. As soon as practicable after the Effective Time, but in no event
later than ten (10) days thereafter, the Exchange Agent shall send a notice and
form of letter of transmittal to each holder of record of Company Common Stock
at the Effective Time advising such stockholder of the effectiveness of the
Reorganization and the procedures for surrendering to the Exchange Agent
outstanding certificates formerly evidencing shares of Company Common Stock.
Each holder of shares of Company Common Stock who thereafter delivers his or her
certificate or certificates representing such shares to the Exchange Agent shall
be mailed a check for an amount, without interest, equal to the number of shares
represented by the certificate or certificates so surrendered to the Exchange
Agent multiplied by the Purchase Price. Upon surrender, each certificate
evidencing Company Common Stock shall be canceled. Until so surrendered, each
outstanding certificate which prior to the Effective Time evidenced shares of
Company Common Stock will be deemed for all purposes (except as otherwise
provided in Section 2.2 hereof) to evidence the right to receive cash, without
interest, equal to number of shares represented by the certificate or
certificates multiplied by the Purchase Price. After the
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Effective Time, there shall be no further registration of transfers on the
records of the Company of shares of Company Common Stock and, if a certificate
evidencing such shares is presented for transfer, it shall be canceled in
exchange for a check (except as otherwise provided in Section 2.2 hereof) in the
appropriate amount as calculated above. Notwithstanding any provision of this
Agreement, neither the Exchange Agent nor any person, firm or entity shall be
liable or obligated to any former holder of any share of Company Common Stock
(or to anyone claiming through any such former holder) with respect to amounts
to which any such holder would have been entitled as a consequence of the
Reorganization, if such amounts have been paid, or are payable, to any public
official pursuant to any abandoned property, escheat or similar laws.
(b) If delivery of all or any part of the cash to be paid in
connection with the Reorganization is to be paid to a person other than the
person in whose name the certificate surrendered in exchange therefor is
registered, it shall be a condition to such delivery that the certificate
surrendered in exchange shall be properly endorsed and otherwise in proper form
for transfer and that the person requesting such a delivery pay to the Exchange
Agent any transfer or other taxes required by reason of such delivery in any
name other than that of the registered holder of the certificate surrendered or
establish to the satisfaction of the Exchange Agent that such tax has been paid
or is not payable.
(c) In the event any certificate for Company Common Stock shall have
been lost, stolen or destroyed, the Exchange Agent shall deliver (except as
otherwise provided in Section 2.2 hereof) in exchange for such lost, stolen or
destroyed certificate, upon the making of an affidavit of that fact by the
holder thereof, the cash to be paid in the Reorganization as provided for
herein; provided, however, that First Federal may, in its sole discretion and as
a condition precedent to the delivery thereof, require the owner of such lost,
stolen or destroyed certificate to deliver a bond in such reasonable sum as
First Federal may direct as indemnity against any claim that may be made against
First Federal, the Company, the Exchange Agent or any other party with respect
to the certificate alleged to have been lost, stolen or destroyed.
2.5. Recapitalization or Stock Dividends. If between the date of this
Agreement and the Effective Time, a share of Company Common Stock shall be
changed into a different number of shares of Company Common Stock or a different
class of shares by reason of reclassification, recapitalization, split-up,
exchange of shares or readjustment, or if a stock dividend shall be declared
with a record date within such period, then the Purchase Price shall be
appropriately and proportionately adjusted.
2.6. Company Stock Options. Effective as of the Effective Time, the
Company shall terminate its 1992 and 1997 Stock Option Plans (the "Company
Option Plans") and each of the 200,296 outstanding options (individually, an
"Option") granted under the Company Option Plan shall be converted to the right
to receive the amount by which the Purchase Price exceeds the exercise price per
share of Company Common Stock under such Option. The amount received by each
option holder will be reduced by any applicable taxes that First Federal is
required to withhold. The Company shall use its best efforts to receive, by no
later than the Effective Time, a cancellation agreement from each holder (the
"Cancellation Agreements") acknowledging such cancellation and termination of
the Option
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as of the Effective Time. In consideration of the foregoing, First Federal or
the Company shall make such cash payment to the holder of each Option at the
later of: (i) the receipt from such holder of a Cancellation Agreement, or (ii)
the Effective Time. The number of shares of Company Common Stock which are
issuable upon exercise of Options and the holders thereof as of the date hereof
are set forth in Schedule 2.6 of the Company Disclosure Schedules which are
attached hereto and incorporated herein (the "Company Disclosure Schedule"). The
terms of each Option shall, in accordance with its terms, be subject to further
adjustment as appropriate to reflect any stock split, stock dividend,
recapitalization or other similar transaction with respect to Company Common
Stock subsequent to the date hereof.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF MID-IOWA AND THE COMPANY
Mid-Iowa and the Company hereby represent and warrant to First Federal
as follows:
3.1. Corporate Organization.
(a) The Company is duly organized, validly existing and in good standing
under the laws of the State of Delaware. The Company has the full corporate
power and authority to own or lease all of its properties and assets and to
carry on its business as it is now being conducted, and is duly licensed or
qualified to do business and is in good standing in each jurisdiction in which
the nature of the business conducted by it or the character or location of the
properties and assets owned or leased by it makes such licensing or
qualification necessary, except where the failure to be so licensed, qualified
or in good standing would not have a material adverse effect on the operations,
assets, or financial condition of the Company and its subsidiaries taken as a
whole. The Company is duly registered with the OTS under the HOLA as a unitary
savings and loan holding company. Other than as set forth in Company Disclosure
Schedule 3.1(a) and shares of capital stock in Mid-Iowa and its subsidiaries, as
identified below (collectively, the "Company Subsidiaries") the Company does not
own or control or have the right to acquire, directly or indirectly, an equity
interest in any corporation, company, association, partnership, joint venture or
other entity.
(b) Mid-Iowa is a stock savings bank organized, validly existing and in
good standing under the laws of the United States, has the full corporate power
and authority to own or lease all of its properties and assets and to carry on
its business as it is now being conducted, and is duly licensed or qualified to
do business and is in good standing in each jurisdiction in which the nature of
the business conducted by it or the character or location of the properties and
assets owned or leased by it makes such licensing or qualification necessary,
except where the failure to be so licensed, qualified or in good standing would
not have a material adverse effect on the operations, assets, or financial
condition of the Company and the Company Subsidiaries taken as a whole. All
eligible accounts of depositors in Mid-Iowa are insured by the Savings
Association Insurance Fund ("SAIF") administered by the FDIC
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to the fullest extent permitted by law. Mid-Iowa is a member of the Federal Home
Loan Bank of Des Moines.
(c) The Company has heretofore delivered to First Federal true and complete
copies of the certificate of incorporation, charter, organization certificate or
other chartering instrument and bylaws of the Company, Mid-Iowa, and each
Company Subsidiary in effect on the date hereof. The minute books of the Company
and each Company Subsidiary contain accurate minutes of all meetings and
accurate consents in lieu of meetings of the board of directors (and any
committee thereof) and of the stockholder(s) of the Company and each Company
Subsidiary recorded therein, and as of the Effective Time such minute books will
contain accurate minutes of all such meetings and such consents in lieu of
meetings respectively held or executed prior thereto. These minute books
accurately reflect all transactions referred to in such minutes and consents in
lieu of meetings and disclose all material corporate actions of the
stockholder(s) and boards of directors of the Company and the Company
Subsidiaries and all committees thereof. Except as reflected in such minute
books, there are no minutes of meetings or consents in lieu of meetings of the
boards of directors (or any committee thereof) or of the stockholder(s) of the
Company or any Company Subsidiary.
3.2. Capitalization.
(a) The authorized capital stock of the Company consists of 2,000,000
shares of Company Common Stock, par value $.01 per share and 500,000 shares of
preferred stock, par value $.01 per share. As of the date of this Agreement,
there were issued and outstanding 1,734,548 shares of Company Common Stock and
no shares of preferred stock. On such date, there were no shares of Company
Common Stock held by the Company as treasury stock. All of such issued and
outstanding shares of Company Common Stock are validly issued, fully paid and
nonassessable and not issued in violation of any preemptive rights. As of the
date hereof, no shares of serial preferred stock were issued and outstanding.
Except pursuant to its stock option plans, the Company does not have any
arrangements or commitments obligating it to issue or sell or otherwise dispose
of, or to purchase or redeem, shares of its capital stock or any securities
convertible into or having the right to purchase shares of its capital stock.
There are no agreements, understandings or commitments relating to the right of
the Company to vote or to dispose of shares of the capital stock or other
ownership interests of any subsidiary of the Company.
(b) All of the outstanding shares of capital stock or other ownership
interests of each Company Subsidiary have been duly authorized and validly
issued, are fully paid and nonassessable and are owned, directly or indirectly,
by the Company or Mid-Iowa, as the case may be, free and clear of any liens,
encumbrances, charges, restrictions or rights of third parties of any kind
whatsoever. Mid-Iowa does not have any arrangements or commitments obligating it
to issue or sell or otherwise dispose of, or to purchase or redeem, shares of
its capital stock or any securities convertible into or having the right to
purchase shares of its capital stock. There are no agreements, understandings or
commitments relating to the right or obligation of Mid-Iowa to issue, to vote or
to dispose of shares of its capital stock or the shares of capital stock of any
Company Subsidiary.
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(c) Schedule 3.2(c) of the Company Disclosure Schedule sets forth a
complete and accurate list of all options to purchase Company Common Stock that
have been granted and which remain unexercised, including the dates of grant,
exercise prices, dates of vesting, dates of termination and shares subject to
option for each grant.
(d) To the best of the Company's knowledge, no person or group (as
that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934
(the "Exchange Act"), other than as set forth at Schedule 3.2(d) of the Company
Disclosure Schedule, is the beneficial owner of more than 5% of the outstanding
Company Common Stock.
3.3. Authorization.
(a) The Company has full corporate power and authority to execute and
deliver this Agreement and the Agreement of Merger included as Exhibit A hereto
and, subject to the consents and approvals of federal and state regulatory
authorities referred to in Section 3.6 hereof and the approval of the
stockholders of the Company, to consummate the Company Merger and to carry out
its obligations hereunder and thereunder. The execution and delivery of this
Agreement and the Agreement of Merger included as Exhibit A hereto and the
consummation of the Reorganization by the Company have been duly authorized by
the board of directors of the Company and, except for the approval of the
stockholders of the Company, no other corporate proceedings on the part of the
Company are necessary to consummate the transactions so contemplated. This
Agreement has been duly and validly executed and delivered by the Company and
constitutes a valid and legally binding obligation of the Company enforceable in
accordance with its terms, except as may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting
creditors' rights generally, and except that the availability of equitable
remedies (including, without limitation, specific performance) is within the
discretion of the appropriate court.
(b) Promptly following formation of the to-be-formed corporation referred
to in Section 1.1(a) hereof, the Agreement of Merger included as Exhibit A
hereto will be duly and validly executed by the Company and, upon such execution
and delivery and the execution and delivery thereof by the other parties
thereto, will constitute a valid and legally binding obligation of the Company
enforceable in accordance with its terms, except as may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally, and except that the availability of
equitable remedies (including, without limitation, specific performance) is
within the discretion of the appropriate court.
3.4. No Violation. None of the execution and delivery of this
Agreement and the agreements included as Exhibits A and B hereto by the Company
and Mid-Iowa, as applicable, nor the consummation by the Company and Mid-Iowa of
the transactions contemplated hereby and thereby and the Plan in accordance with
their respective terms, as applicable, nor compliance by the Company or Mid-Iowa
with any of their respective terms, as applicable, will (i) violate any
provision of the Company's or Mid-Iowa's certificate of incorporation, charter
or other chartering instrument or bylaws, (ii) violate any statute, code,
ordinance, rule, regulation, judgment, order, writ, decree or injunction
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applicable to the Company, Mid-Iowa, or any Company Subsidiary or any of their
properties or assets, or (iii) except as set forth at Schedule 3.4, violate,
conflict with, result in a breach of any provisions of, constitute a default (or
an event which, with notice or lapse of time, or both, would constitute a
default), under, result in the termination or cancellation of, accelerate the
performance required by, or result in the creation of any lien, security
interest, charge or other encumbrance upon any of the respective properties or
assets of the Company, Mid-Iowa, or any Company Subsidiary under the terms,
conditions or provisions of any note, bond, mortgage, indenture, deed of trust,
license, lease, agreement or other instrument or obligation to which the
Company, Mid-Iowa, or any Company Subsidiary is a party, or by which they or any
of their respective properties or assets may be bound or affected, except, with
respect to clause (iii) above, such as individually or in the aggregate will not
have a material adverse effect on the operations, assets, or financial condition
of the Company and the Company Subsidiaries taken as a whole and which will not
prevent or delay the consummation of the transactions contemplated by this
Agreement.
3.5. Reports and Consolidated Financial Statements. (a) The Company
and Mid-Iowa have previously furnished First Federal with true and complete
copies of (a) all annual reports, quarterly reports, proxy statements, financial
statements, or any other documents or material provided by the Company to its
stockholders since January 1, 1994, (b) all call reports and other reports filed
by Mid-Iowa with the OTS since January 1, 1994, and (c) the audited financial
statements of the Company for the fiscal years ended September 30, 1995, 1996
and 1997. As of their respective dates, such reports and statements did not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. The
audited consolidated financial statements and unaudited interim financial
statements of the Company, including any financial statements included in such
reports or otherwise delivered to First Federal (collectively referred to herein
as the "Company Financial Statements") have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis (except
as may be indicated therein or in the notes thereto) and fairly present the
financial position of the Company or Mid-Iowa, as the case may be, as of the
dates thereof and the results of their operations and changes in financial
position for the periods then ended, subject, in the case of the unaudited
interim financial statements, to normal year-end audit adjustments, any other
adjustments described therein, and the absence of certain footnotes. Except as
set forth in Schedule 3.5 to the Company Disclosure Schedule, since September
30, 1997 neither the Company or Mid-Iowa, or any Company Subsidiary, has
suffered a Material Adverse Effect (as that term is defined in Section 12.7
hereof) and the Company is not aware of any event or circumstance, or series of
events and circumstances, which is reasonably likely to result in a Material
Adverse Effect to the Company or Mid-Iowa. The books and records of the Company
and Mid-Iowa have been, and are being, maintained in accordance with applicable
legal and accounting requirements and reflect only actual transactions. Except
and to the extent reflected, disclosed or provided for in the Company Financial
Statements, neither the Company, nor Mid-Iowa nor any Company Subsidiary had, as
of the date of the Company Financial Statements, any liabilities, whether
absolute, accrued, contingent or otherwise, material to the business,
operations, assets or financial condition of the Company.
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(b) Mid-Iowa has filed all reports, together with any amendments required
to be made with respect thereto, that were required to be filed since January 1,
1994 to the date of this Agreement with (i) the OTS; (ii) the FDIC; and (iii)
any state banking commission or other banking authority, and has paid all fees
and assessments due and payable in connection therewith.
3.6. Consents and Approvals. Other than as set forth in Schedule 3.6
to the Company Disclosure Schedule and other than the receipt of approvals
required by the HOLA, the Bank Merger Act, the Thrift Regulations, and
applicable federal securities and state laws, and the approval of the holders of
Company Common Stock as described in Section 7.1 hereof, no filing or
registration with, no notice to and no permit, authorization, consent or
approval of any third party or any public or governmental body or authority is
necessary for the consummation by the Company or Mid-Iowa of the transactions
contemplated by this Agreement, except where the failure to make such filing or
obtain such permit, authorization, consent or approval will not in the aggregate
have a Material Adverse Effect. The Company knows of no reason (including those
relating to fair lending laws or other laws relating to discrimination,
including, without limitation, the Equal Credit Opportunity Act, the Fair
Housing Act, the Community Reinvestment Act and the Home Mortgage Disclosure
Act, and anti-trust or consumer disclosure laws and regulations) why the
regulatory approvals should not be obtained, and is aware of no reason to
believe that such approvals would include any term, condition or requirement
that, individually or in the aggregate, would have a Material Adverse Effect on
the results, business, operations, assets, or financial condition of the
Company.
3.7. Absence of Certain Changes. Since September 30, 1997, and except
as otherwise permitted by this Agreement, neither the Company, Mid-Iowa or any
Company Subsidiary has, except as set forth in Schedule 3.7 to the Company
Disclosure Schedule, (a) issued or sold any corporate debt securities; (b)
granted any option for the purchase of its capital stock; (c) declared or set
aside or paid any dividend or other distribution in respect of its capital
stock; (d) incurred any material obligation or liability (absolute or
contingent), except obligations or liabilities incurred in the ordinary course
of business consistent with past practices; (e) mortgaged, pledged or subjected
to lien or encumbrance (other than statutory liens for taxes not yet delinquent
and landlord liens) any of its material assets or properties except pledges to
secure government or other deposits and in connection with repurchase or reverse
repurchase agreements; (f) discharged or satisfied any material lien or
encumbrance or paid any obligation or liability (absolute or contingent), other
than current liabilities included in the Company's consolidated balance sheet as
of September 30, 1997, and current liabilities incurred since the date thereof
in the ordinary course of business consistent with past practices; (g) sold,
exchanged or otherwise disposed of any of its material capital assets other than
in the ordinary course of business consistent with past practices; (h) made any
wage or salary increase or entered into or modified any employment contract with
any officer or salaried employee or instituted any employee welfare, bonus,
stock option, profit sharing, retirement or similar plan or arrangement, whether
tax-qualified or non tax-qualified (other than salary increases reflected in the
salary schedule set forth at Schedule 3.7); (i) suffered any damage, destruction
or loss, whether or not covered by insurance, materially and adversely affecting
its business, property or assets or waived any rights of value that are material
in the aggregate, considering its business taken as a whole; (j) except in the
ordinary course of business consistent with past practices, entered, or agreed
to enter, into any agreement or
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arrangement granting any preferential right to purchase any of its assets,
properties or rights or requiring the consent of any party to the transfer or
assignment of any such assets, properties or rights; (k) entered into any
material transaction outside the ordinary course of its business consistent with
past practices, except as expressly contemplated by this Agreement; or (1)
except in the ordinary course of business consistent with past practices or as
reflected in the Company Financial Statements, sold or otherwise disposed of any
of its material investment securities.
3.8. Employee and Employee Benefits Matters. (a) Schedule 3.8(a) to
the Company Disclosure Schedule lists (i) each pension, profit sharing, stock
bonus, thrift, savings, employee stock ownership or other plan, program or
arrangement, which constitutes an "employee pension plan" within the meaning of
Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), which is maintained by the Company, Mid-Iowa or any Company
Subsidiary or to which the Company, Mid-Iowa or any Company Subsidiary
contributes or is maintained for the benefit of any current or former employee,
officer, director, consultant or agent; (ii) each plan, program or arrangement
for the provision of medical, surgical, or hospital care or benefits, benefits
in the event of sickness, accident, disability, death, unemployment, severance,
vacation, apprenticeship, day care, scholarship, prepaid legal services or other
benefits which constitute an "employee welfare benefit plan" within the meaning
of Section 3(1) of ERISA, which is maintained by the Company, Mid-Iowa or any
Company Subsidiary or to which the Company or any Company Subsidiary contributes
for the benefit of any current or former employee, officer, director, consultant
or agent or dependent of any such person; and (iii) every other retirement or
deferred compensation plan, bonus or incentive compensation plan or arrangement,
stock option plan, stock purchase plan, stock bonus plan or stock grant plan,
severance or vacation pay arrangement, or other fringe benefit plan, program or
arrangement through which the Company, Mid-Iowa or any Company Subsidiary
provides benefits for or on behalf of any current or former employee, officer,
director, consultant or agent. The plans, programs or arrangements described in
this Section 3.8 or listed in Schedule 3.8(a) of the Company Disclosure Schedule
are hereinafter referred to as the "Mid-Iowa Benefit Plans." Mid-Iowa has
delivered or made available to First Federal a true and correct copy of (a) each
Mid-Iowa Benefit Plan, including amendments thereto, (b) the most recent annual
report (Form 5500) filed with the Internal Revenue Service ("IRS") with respect
to each Mid-Iowa Benefit Plan, if applicable, (c) each trust agreement and group
annuity contract, if any, relating to such Mid-Iowa Benefit Plan, (d) the most
recent actuarial report or valuation relating to a Mid-Iowa Benefit Plan subject
to Title IV of ERISA and (e) all rulings and determination letters and any open
requests for rulings or letters that pertain to any Mid-Iowa Benefit Plan.
(b) All of the Mid-Iowa Benefit Plans that are subject to ERISA and
the Internal Revenue Code (the "Code") are in compliance with all applicable
requirements of ERISA and the Code and all other applicable federal and state
laws, including, without limitation, the reporting and disclosure requirements
of Part I of Title I of ERISA. Each of the Mid-Iowa Benefit Plans that is
intended to be a pension, profit sharing, stock bonus, thrift, savings or
employee stock ownership plan that is qualified under Section 401(a) of the Code
satisfies the applicable requirements of such provision and there exist no
circumstances that would adversely affect the qualified status of any such plan
under that section, except with respect to any required retroactive amendment
for which the remedial
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amendment period has not yet expired. Except as set forth in Schedule 3.8(b) to
the Company Disclosure Schedule, there is no pending or, to the best knowledge
of Mid-Iowa, threatened litigation, claim, action, governmental proceeding or
investigation against or relating to any Mid-Iowa Benefit Plan which could give
rise to any material liability, and there is no reasonable basis for any
material litigation, claims, actions or proceedings against any such Mid-Iowa
Benefit Plan, and there are not any facts that could give rise to any material
liability in the event of such litigation, claim, action, investigation, or
proceeding. No Mid-Iowa Benefit Plan (or Mid-Iowa Benefit Plan fiduciary) has
engaged in a non-exempt "Prohibited Transaction" (as defined in Section 406 of
ERISA and Section 4975(c) of the Code) since the date on which said sections
became applicable to such plan. There have been no acts or omissions by the
Company, Mid-Iowa or any Company Subsidiary that have given rise to any fines,
penalties, taxes or related charges under Sections 502(c), 502(i) or 4071 of
ERISA or Chapter 43 of the Code, or that may give rise to any material fines,
penalties, taxes or related damages under such laws for which the Company,
Mid-Iowa or any Company Subsidiary may be liable. No liability under Title IV of
ERISA has been incurred by the Company, Mid-Iowa, any Company Subsidiary, any
former Affiliate (as such term is defined in Section 12.7 hereof) of the
Company, Mid-Iowa or the Mid-Iowa Benefit Plans since the effective date of
ERISA that has not been satisfied in full, and no condition exists that presents
a material risk of incurring a liability under such Title, other than liability
for premiums due the Pension Benefit Guaranty Corporation ("PBGC"), which
payments have been made or will be made when due. With respect to each of the
Mid-Iowa Benefit Plans which is subject to Title IV of ERISA, the present value
of accrued benefits under such plan or plans, based upon the actuarial
assumptions used for funding purposes in the most recent actuarial report
prepared by such plan's actuary with respect to such plan, did not, as of its
latest valuation date, exceed the then current value of the assets of such plan
allocable to such accrued benefits and Mid-Iowa is not aware of any facts or
circumstances that would materially change the funded status of any such ERISA
plan. None of the Mid-Iowa Benefit Plans is a "multiemployer pension plan" as
such term is defined in section 3(37) of ERISA. None of the Company, Mid-Iowa or
any Company Subsidiary has participated in or agreed to participate in a
multiemployer plan as defined in Section 3(37) of ERISA. Except as listed on
Schedule 3.8(b) to the Company Disclosure Schedule, no employee of the Company,
Mid-Iowa or any Company Subsidiary will be entitled to any additional benefits
or any acceleration of the time of payment or vesting of any benefits under any
Mid-Iowa Benefit Plan as a result of the transactions contemplated by this
Agreement. Other than current or contingent liabilities previously disclosed on
Schedule 3.8(b) to the Company Disclosure Schedule, neither the Company,
Mid-Iowa or any Company Subsidiary or any Mid-Iowa Benefit Plan will have any
material current or contingent liability with respect to any plan. The funding
under each Mid-Iowa Benefit Plan which is an "employee welfare benefit plan" as
defined in Section 3(1) of ERISA does not exceed the limitations under Section
419A(b) or 419A(c) of the Code. All group health plans of the Company, Mid-Iowa
and any Company Subsidiary, including any plans of current and former Affiliates
of the Company, Mid-Iowa or any Company Subsidiary that must be taken into
account under Section 4980B of the Code or Section 601 of ERISA or the
requirements of any similar state law regarding insurance continuation, have
been operated in material compliance with the group health plan continuation
coverage requirements of Section 4980B of the Code and Section 601 of ERISA to
the extent such requirements are applicable. All payments due from any Mid-Iowa
Benefit Plan (or from the Company, Mid-Iowa or any Company Subsidiary with
respect to any Mid-Iowa Benefit Plan) have been made, and all amounts properly
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accrued to date as liabilities of the Company, Mid-Iowa or any Company
Subsidiary that have not yet been paid have been properly recorded on the books
of the Company, Mid-Iowa or any Company Subsidiary.
(c) Except in all cases as set forth on Schedule 3.8(c), none of
Company, Mid-Iowa or any Company Subsidiary is a party to any employment
contract, management or consulting agreement not terminable at the option of
Company, Mid- Iowa or said Company Subsidiary without liability.
(d) No amounts payable under the Mid-Iowa Benefit Plans, or any
employment, severance or termination agreement between or among the Company,
Mid-Iowa, any Company Subsidiary and any employee, officer or shareholder will
fail to be deductible for federal income tax purposes by virtue of section 280G
of the Code. No compensation payable by the Company, Mid-Iowa or any Company
Subsidiary to any of their employees under any existing contract, plan or other
employment arrangement (including by reason of the transactions contemplated
hereby) will be subject to disallowance under section 162(m) of the Code.
(e) Schedule 3.8(e) identifies each corporate owned life insurance
policy, including any key man insurance policy and policy insuring the life of
any director or employee of the Company, Mid-Iowa, or any Company Subsidiary,
and indicates for each such policy, the face amount of coverage, cash surrender
value, if any, and annual premiums.
3.9. Litigation. Except as set forth in Schedule 3.9 to the Company
Disclosure Schedule, no claims have been asserted and no relief has been sought
against the Company, Mid-Iowa or any Company Subsidiary in any pending
litigation or governmental proceedings or otherwise that would be reasonably
expected to result in damages or other relief which would have a Material
Adverse Effect on the Company and Mid-Iowa, taken as a whole. To the best
knowledge of the Company and Mid-Iowa, there are no circumstances, conditions,
events or arrangements, contractual or otherwise, which may hereafter give rise
to any proceedings, claims, actions or government investigations involving the
Company, Mid-Iowa or any Company Subsidiary that would reasonably be expected to
result in damages or other relief that would have a Material Adverse Effect,
nor, to the knowledge of the Company and Mid-Iowa, are any such proceedings,
claims, actions or government investigations threatened. Except as set forth in
Schedule 3.9 to the Company Disclosure Schedule, neither the Company, Mid-Iowa
or any Company Subsidiary is a party to any order, judgment or decree that would
reasonably be expected to have a Material Adverse Effect on the Company and
Mid-Iowa, taken as a whole, and neither the Company, Mid-Iowa or any Company
Subsidiary (a) is the subject of any cease and desist order, or other formal or
informal enforcement action by any regulatory authority or (b) has made any
commitment to or entered into any agreement with any regulatory authority that
restricts or adversely affects its operations or financial condition.
3.10. Tax Matters. The Company, Mid-Iowa and the Company Subsidiaries
have timely filed (inclusive of applicable extension periods) with the
appropriate governmental agencies all
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material federal, state and local income, employment, franchise, excise, sales,
use, real and personal property and other tax returns and reports (including
information returns and reports) that are required to be filed, and neither the
Company, Mid-Iowa or any Company Subsidiary is materially delinquent in the
payment of any taxes shown on such returns or reports or on any assessments for
any such taxes received by the Company, Mid-Iowa or any Company Subsidiary.
There are included in the Company Financial Statements adequate reserves for the
payment of all accrued but unpaid federal, state and local taxes of the Company,
Mid-Iowa and each Company Subsidiary, including interest and penalties, whether
or not disputed for such fiscal years as reflected therein and all fiscal years
prior thereto. Neither the Company, Mid-Iowa or any Company Subsidiary has
executed or filed with the Internal Revenue Service ("IRS") or any state tax
authority any agreement extending the period for assessment and collection of
any federal or state tax, nor is the Company, Mid-Iowa or any Company Subsidiary
a party to any action or proceeding by any governmental authority for assessment
or collection of taxes, except tax liens or levies against customers of any
Company Subsidiary. There is no outstanding material assessment or claim for
collection of taxes against the Company, Mid-Iowa or any Company Subsidiary.
Except as set forth in Schedule 3.10 to the Company Disclosure Schedule, the
federal income tax returns of the Company, Mid-Iowa and each Company Subsidiary
have been examined by the IRS (or are closed to examination due to the
expiration of the applicable statute of limitations) and no deficiencies were
asserted as a result of such examinations that have not been resolved and paid
in full or for which adequate reserves or accruals established in accordance
with generally accepted accounting principles have been taken with respect
thereto.
Neither the Company, Mid-Iowa or any Company Subsidiary has, during
the past five (5) years, except as disclosed in Schedule 3.10 to the Company
Disclosure Schedule, received any notice of deficiency, proposed deficiency or
assessment from the IRS or any other governmental agency, with respect to any
federal, state, county or local taxes. No federal or state tax return of the
Company, Mid-Iowa or any Company Subsidiary is currently the subject of any
audit by the IRS or any other governmental agency. During the past five (5)
years, no material deficiencies have been asserted in connection with the
federal and state income tax returns of each of the Company, Mid-Iowa and the
Company Subsidiaries and the Company has no reason to believe that any material
deficiency would be asserted relating thereto. Except as disclosed in Schedule
3.10 to the Company Disclosure Schedule, neither the Company, Mid-Iowa or any
Company Subsidiary is a party to any agreement providing for allocation or
sharing of taxes. Neither the Company, Mid-Iowa or any Company Subsidiary has
ever been a member of an "affiliated group of corporations" (within the meaning
of Section 1504(a) of the Code) filing consolidated returns, other than the
affiliated group of which the Company is or was the common parent.
3.11. Information in the Company Proxy Statement. The Company
represents and warrants that the Company Proxy Statement (as defined in Section
7.2 hereof) will not, either at the time it is mailed to the stockholders of the
Company in connection with the Company Shareholders' Meeting (as defined in
Section 7.1 hereof) or at the time of the Company Shareholders' Meeting, contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading; provided,
however, that none of the representations and warranties in this Section
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3.11 shall apply to statements in or omissions from the Company Proxy
Statement made in reliance upon and in conformity with information about or
furnished by Bancorp or First Federal for use in the Company Proxy Statement.
3.12. Environmental Matters. For purposes of this Section 3.12, the
following terms shall have the indicated meaning:
"Environmental Law" means any federal, state or local law, statute,
ordinance, rule, regulation, code, license, permit, authorization,
approval, consent, order, judgment, decree, injunction or agreement with
any governmental entity relating to (1) the protection, preservation or
restoration of the environment (including, without limitation, air,
water vapor, surface water, groundwater, drinking water supply, surface
soil, subsurface soil, plant and animal life or any other natural
resource), and/or (2) the use, storage, recycling, treatment,
generation, transportation, processing, handling, labeling, production,
release or disposal of Materials of Environmental Concern. The term
Environmental Law includes without limitation (1) the Comprehensive
Environmental Response, Compensation and Liability Act, as amended, 42
U.S.C. Section 9601, et seq; the Resource Conservation and Recovery Act,
as amended, 42 U.S.C. Section 6901, et seq; the Clean Air Act, as
amended, 42 U.S.C. Section 7401, et seq; the Federal Water Pollution
Control Act, as amended, 33 U.S.C. Section 1251, et seq; the Toxic
Substances Control Act, as amended, 15 U.S.C. Section 9601, et seq; the
Emergency Planning and Community Right to Know Act, 42 U.S.C. Section
11001, et seq; the Safe Drinking Water Act, 42 U.S.C. Section 300f, et
seq; and all comparable state and local laws, and (2) any common law
(including without limitation common law that may impose strict
liability) that may impose liability or obligations for injuries or
damages due to, or threatened as a result of, the presence of or
exposure to any Materials of Environmental Concern.
"Environmental Claim" means any written notice from any governmental
authority or third party alleging potential liability (including, without
limitation, potential liability for investigatory costs, cleanup costs,
governmental response costs, natural resources damages, property damages,
personal injuries or penalties) arising out of, based on, or resulting from
the presence, or release into the environment, of any Materials of
Environmental Concern.
"Materials of Environmental Concern" means pollutants, contaminants,
wastes, toxic substances, petroleum and petroleum products and any other
materials regulated under Environmental Laws.
"Loan Portfolio Properties and Other Properties Owned" means those
properties owned, leased or operated by the Company, Mid-Iowa or any
Company Subsidiary, including those properties serving as collateral for
any loans made and retained by Mid-Iowa or any Company Subsidiary or for
which Mid-Iowa or any Company Subsidiary serves in a trust relationship for
the loans retained in portfolio.
(a) To the knowledge of the Company and Mid-Iowa and each Company
Subsidiary, the Company, Mid-Iowa and each Company Subsidiary is in compliance
with all Environmental Laws, except for any violations of any Environmental Law
which would not, singly or in the aggregate, have a material adverse effect on
the operations, assets, or financial condition of the Company and the
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Company Subsidiaries taken as a whole. Neither the Company, Mid-Iowa or any
Company Subsidiary has received any communication alleging that the Company,
Mid-Iowa or any Company Subsidiary is not in such compliance and, to the
knowledge of the Company and Mid-Iowa, there are no present circumstances that
would prevent or interfere with the continuation of such compliance.
(b) To the knowledge of the Company and Mid-Iowa and each Company
Subsidiary, neither the Company, Mid-Iowa or any Company Subsidiary has been or
is in violation of or liable under any Environmental Law, except any such
violations or liabilities that would not singly or in the aggregate have a
material adverse effect on the business, operations, assets or financial
condition of the Company and the Company Subsidiaries taken as a whole.
(c) To the knowledge of the Company, Mid-Iowa and each Company
Subsidiary, none of the Loan Portfolio Properties and Other Properties Owned by
them has been or is in violation of or liable under any Environmental Law,
except any such violations or liabilities that singly or in the aggregate would
not have a material adverse effect on the business, operations, assets or
financial condition of the Company and the Company Subsidiaries taken as a
whole.
(d) To the knowledge of the Company, Mid-Iowa and each Company
Subsidiary, there are no actions, suits, demands, notices, claims,
investigations or proceedings pending or threatened relating to the liability of
the Loan Portfolio Properties and Other Properties Owned under any Environmental
Law, including without limitation any notices, demand letters or requests for
information from any federal or state environmental agency relating to any such
liabilities under or violations of Environmental Law, except such which would
not have or result in a material adverse effect on the business, operations,
assets or financial condition of the Company and the Company Subsidiaries taken
as a whole.
(e) To the knowledge of the Company, Mid-Iowa and each Company
Subsidiary, there are no past or present actions, activities, circumstances,
conditions, events or incidents that could reasonably form the basis of any
Environmental Claim or other claim or action or governmental investigation that
could result in the imposition of any liability arising under any Environmental
Law against the Company, Mid-Iowa or any Company Subsidiary or against any
person or entity whose liability for any Environmental Claim the Company,
Mid-Iowa or any Company Subsidiary has or may have retained or assumed either
contractually or by operation of law, except such which would not have a
material adverse effect on the operations, assets, or financial condition of the
Company and the Company Subsidiaries taken as a whole.
(f) The Company has set forth on Schedule 3.12(f) any environmental
studies conducted by it, Mid-Iowa or any Company Subsidiary during the past five
years with respect to any properties owned by it as of the date hereof.
3.13. Insurance. Mid-Iowa or the Company has delivered to First
Federal as part of Schedule 3.13 to the Company Disclosure Schedule true,
accurate and complete copies of all insurance policies and fidelity bonds of the
Company, Mid-Iowa and the Company Subsidiaries. Each such
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policy is in full force and effect, with all premiums due thereon on or prior to
the Closing Date having been paid as and when due. The Company, Mid-Iowa and the
Company Subsidiaries have not been notified that their fidelity or insurance
coverage will not be renewed by their carrier(s) on substantially the same terms
as their existing coverage. All such policies (i) are sufficient for compliance
by the Company, Mid-Iowa and each Company Subsidiary with all requirements of
law and all agreements to which the Company, Mid-Iowa or any Company Subsidiary
is a party, and (ii) will not, due to action or inaction by the Company or
Mid-Iowa, terminate or lapse prior to the Effective Time without similar
policies being obtained that would continue until the Effective Time.
3.14. Compliance with Laws and Orders. Except as set forth in Schedule
3.14 to the Company Disclosure Schedule, neither the Company, Mid-Iowa or any
Company Subsidiary has received notice of any violation or alleged material
violation of, or, to the knowledge of the Company or Mid-Iowa, is subject to any
liability (whether accrued, absolute, contingent, direct or indirect) for past
or continuing material violations of, any law, statute or regulation. Neither
the Company, Mid-Iowa or any Company Subsidiary is in default under, and no
event has occurred that, with the lapse of time or the giving of notice by a
third party or both, could result in a default under the terms of any judgment,
decree, order, writ, rule or regulation of any governmental authority or court,
whether federal, state or local and whether at law or in equity, where the
failure to be in full compliance would reasonably be expected to result alone or
in the aggregate in damages, which would be reasonably likely to have a Material
Adverse Effect.
3.15. Governmental Regulation. Each of the Company, Mid-Iowa and the
Company Subsidiaries holds all material licenses, certificates, permits,
franchises and rights from all appropriate federal, state and other public
authorities necessary for the conduct of its business; and, between the date
hereof and the Closing Date, the Company and Mid-Iowa will, and the Company will
cause each Company Subsidiary to maintain all such licenses, certificates,
permits, franchises and rights in effect. Except as set forth in Schedule 3.15
to the Company Disclosure Schedule, neither the Company, Mid-Iowa or any Company
Subsidiary is a party or subject to any agreements, directives, orders or
similar arrangements between or involving the Company, Mid-Iowa or any Company
Subsidiary and any federal savings institution regulatory authority.
3.16. Contracts and Commitments. Except as set forth in Schedule 3.16
to the Company Disclosure Schedule, neither the Company, Mid-Iowa or any Company
Subsidiary is a party to or bound by any (a) material lease or license with
respect to any property, real or personal; (b) material contract or commitment
for capital expenditures; (c) material contract or commitment for total expenses
for the purchase of materials, supplies or for the performance of services by
third parties for a period of more than 60 days from the date of this Agreement;
(d) material contract or option for the purchase or sale of any real or personal
property other than in the ordinary course of business; (e) agreement,
arrangement or understanding relating to the employment, election, retention in
office or severance of any present or former director or officer of the Company,
Mid-Iowa or any Company Subsidiary; or (f) interest-rate swaps, caps, floors,
and option agreements, or other similar interest rate risk management
agreements. To their knowledge, the Company, Mid-Iowa and the Company
Subsidiaries have performed in all material respects all obligations required to
be performed by them
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to date and are not in default under, and no event has occurred which, with the
lapse of time or action by a third party or both, could result in a default
resulting in material damages or other material default under any outstanding
mortgage, lease, contract, commitment or agreement to which the Company,
Mid-Iowa or any Company Subsidiary is a party or by which the Company, Mid-Iowa
or any Company Subsidiary is bound or under any provision of their respective
charters or bylaws. Each such outstanding material mortgage, lease, contract,
commitment or agreement is a valid and legally binding obligation of the
Company, Mid-Iowa or the Company Subsidiary subject to (x) all applicable
bankruptcy, insolvency, moratorium or other similar laws affecting the
enforcement of creditors rights generally or the rights of creditors of savings
institutions the accounts of which are insured by the FDIC, and (y) the
application of equitable principles if equitable remedies are sought.
3.17. Agreements with Directors, Officers and Stockholders. Except as
set forth in Schedule 3.17 to the Company Disclosure Schedule, no director,
executive officer, or beneficial owner of five percent (5.0%) or more of the
outstanding capital stock of the Company or any associate of any such person
(hereinafter sometimes referred to as a "Company Principal") (a) is or has
during the period subsequent to September 30, 1997, been a party (other than as
a depositor) to any transaction with the Company or Mid-Iowa, whether as a
borrower or otherwise, that (i) was made other than in the ordinary course of
business, (ii) was made on other than substantially the same terms, including
interest rate and collateral, as those prevailing at the time for comparable
transactions with other persons, or (iii) involves more than the normal risk of
collectability or presents other unfavorable features; or (b) is a party to any
material loan or loan commitment, whether written or oral. Except as disclosed
in Schedule 3.17 to the Company Disclosure Schedule, no director, executive
officer (or any associate of such person) and, to the knowledge of the Company,
no beneficial owner of five percent (5.0%) or more of the outstanding capital
stock of the Company or any associate of such person holds any position with or
owns more than five percent (5.0%) of the outstanding shares of any class of
voting stock of any depository organization, or holding company therefor, other
than the Company. For the purposes of this Section 3.17, the term "depository
organization" means a commercial bank (including a private bank), a savings
bank, a trust company, a savings and loan association, a homestead association,
a cooperative bank, an industrial bank, a credit union, or a depository holding
company.
3.18. Accuracy of Information. The statements made by the Company and
Mid-Iowa in this Agreement and in any other written documents executed and/or
delivered by or on behalf of the Company or Mid-Iowa pursuant to the terms of
this Agreement are true and correct in all material respects. The statements
contained in such other documents specifically referred to in this Agreement
will be deemed to constitute representations and warranties of the Company and
Mid-Iowa under this Agreement to the same extent as if set forth herein in full.
3.19 Allowances for Losses and Real Estate Owned. Each of the
allowance for loan losses, and the reserve for losses on Real Estate Owned
reflected on the consolidated balance sheets included in the Company's Financial
Statements referred to in Section 3.5 hereof is, or will be in the case of
subsequently delivered Company Financial Statements, as the case may be,
adequate in all material respects as of their respective dates under the
requirements of generally accepted accounting
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principles to provide for reasonably anticipated losses on outstanding loans net
of recoveries and foreclosed real estate, respectively.
3.20 Title to Assets; Leases
(a) Except for (i) liens and encumbrances specifically disclosed in
any of the Company Financial Statements referred to in Section 3.5 hereof, (ii)
landlords' or statutory liens or other liens incurred in the ordinary course of
business and not securing indebtedness for borrowed money and not yet
delinquent, and (iii) liens and encumbrances which are not material in amount
and do not materially impair the value of any property subject thereto or the
use of such property for the purposes for which it is presently used or intended
to be used, the Company, Mid-Iowa and each Company Subsidiary has good and
marketable title, free and clear of all security interests, encumbrances, trust
agreements, liens or other adverse claims, to all its assets and property, real
and personal, reflected in the Company Financial Statements referred to in
Section 3.5 hereof or acquired thereafter, which includes all property and
assets used by the Company, Mid-Iowa and each Company Subsidiary that are
material to the conduct of their respective businesses, except for assets and
property disposed of in the ordinary course of business after September 30,
1997.
(b) The Company, Mid-Iowa and each Company Subsidiary as lessee has
the right under valid and existing leases to occupy, use, and possess all
property leased by it in all material respects as presently occupied, used, and
possessed by the Company, Mid-Iowa or any Company Subsidiary and such leases
will not terminate or lapse prior to the Effective Time or be affected in any
material respect by consummation of the transactions contemplated hereby.
Schedule 3.20(b) contains an accurate listing of each lease pursuant to which
the Company, Mid-Iowa or any Company Subsidiary acts as lessor or lessee,
including the expiration date and the terms of any renewal options which relate
to the same, as well as a listing of each material real property owned by the
Company, Mid-Iowa or any Company Subsidiary and used in the conduct of its
respective business.
(c) All material real and personal property owned by the Company,
Mid-Iowa or any Company Subsidiary or presently used by any of them are in an
adequate condition (ordinary wear and tear excepted) and are in all material
respects sufficient to carry on the business of the Company, Mid-Iowa and each
Company Subsidiary in the manner conducted currently by them.
3.21. Business of Mid-Iowa. Since September 30, 1997, Mid-Iowa has
conducted its business in the ordinary course. For purposes of the foregoing,
Mid-Iowa has not, since September 30, 1997, controlled expenses through the (i)
elimination of employee benefits; (ii) deferral of routine maintenance of real
property or leased premises; (iii) elimination of reserves where the liability
related to such reserve has remained; (iv) reduction of capital improvements
from previous levels; (v) failure to depreciate capital assets in accordance
with past practice or to eliminate capital assets no longer used in Mid-Iowa's
business; (vi) capitalization of loan production expenses other than in
accordance with SFAS No. 91, or (vii) extraordinary reduction or deferral of
ordinary or necessary expenses.
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3.22. Tax Matters. Neither the Company or any Company Subsidiary has
taken or agreed to take any action or has any knowledge of any fact or
circumstance that would (i) prevent the transactions contemplated hereby from
qualifying as a reorganization within the meaning of Section 368 of the Code, or
(ii) materially impede or delay receipt of any approval from any regulatory
authority or the consummation of the transactions contemplated by this
Agreement.
3.23 Certain Information. None of the information relating to the
Company, Mid-Iowa or any Company Subsidiary supplied or to be supplied for
inclusion or incorporation by reference in the Prospectus to be prepared by
Bancorp and First Federal as described in Section 7.13 hereof, will, at the time
the Prospectus is mailed to subscribers (and at the time the related
Registration Statement on Form S-1 or, other applicable form, and any amendment
thereto becomes effective under the Securities Act) up to and including the date
of the closing of the offering, contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF FIRST FEDERAL
First Federal hereby represents and warrants to the Company and
Mid-Iowa as follows:
4.1. Corporate Organization. First Federal is a stock savings bank
duly organized, validly existing and in good standing under the laws of the
United States. As of the date hereof, Bancorp is a mutual holding company duly
organized, validly existing and in good standing under the laws of the United
States. Upon consummation of the Conversion, Bancorp will become a stock holding
company, duly organized, validly existing and in good standing under the laws of
the state of its incorporation. All eligible accounts issued by First Federal
are insured by the FDIC to the maximum extent permitted under applicable law.
Each of First Federal and Bancorp has all requisite corporate power and
authority to own, operate and lease its properties as presently owned, operated
and leased and to engage in the activities and business now being conducted by
it.
4.2. Authorization. The Board of Directors of First Federal has
approved this Agreement and the transactions contemplated hereby and has
authorized the execution, delivery and performance by First Federal of this
Agreement. No corporate proceeding on the part of First Federal is necessary to
authorize this Agreement or to consummate the transactions contemplated hereby,
and First Federal has full corporate power and authority to enter into this
Agreement and to consummate the transactions contemplated hereby subject to the
consents and approvals of federal and state regulatory authorities referred to
in Section 4.4 hereof and the approval of the Conversion by the members of
Bancorp and the stockholders of First Federal. This Agreement has been duly and
validly executed and delivered by First Federal and constitutes the valid and
binding obligation of First Federal, enforceable against it in accordance with
its terms, subject to (a) all applicable bankruptcy, insolvency, moratorium or
other similar laws affecting the enforcement of creditors' rights generally, and
(b) the application of equitable principles if equitable remedies are sought.
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4.3. No Violation. Neither the execution and delivery of this
Agreement or, subject to the receipt of the consents and approvals contemplated
by Section 4.4 hereof and the member and shareholder approvals contemplated
hereby, the consummation of the transactions contemplated herein will, (a)
conflict with, result in the breach of, constitute a violation of, constitute a
default under or accelerate the performance of the terms of any government
regulation, judgment, order or decree of any court or other governmental agency
to which First Federal or Bancorp may be subject, or any contract, agreement or
instrument to which First Federal or Bancorp is a party or by which First
Federal or Bancorp are bound or committed, or the Charter or Bylaws of First
Federal or Bancorp, or any law, or any rule or regulation of any governmental
agency or authority, or (b) constitute an event that with the lapse of time or
action by a third party could result in a default under any of the foregoing, or
(c) result in the creation of any lien, charge or encumbrance upon any of the
assets or properties of First Federal or Bancorp.
4.4. Consents and Approvals. Other than the receipt of approvals
required by the HOLA, the Thrift Regulations, and the Bank Merger Act, in
connection with the Reorganization, and other than the approvals required to
accomplish the Conversion and the Offering from the OTS, the Securities and
Exchange Commission and state securities authorities, no filing or registration
with, no notice to and no permit, authorization, consent or approval of any
public or governmental body or authority is necessary for the consummation by
First Federal of the transactions contemplated by this Agreement. First Federal
knows of no reason (including those relating to fair lending laws or other laws
relating to discrimination, including, without limitation, the Equal Credit
Opportunity Act, the Fair Housing Act, the Community Reinvestment Act and the
Home Mortgage Disclosure Act, and anti-trust or consumer disclosure laws and
regulations) why the regulatory approvals should not be obtained in a reasonably
timely manner.
4.5. Information Supplied for Inclusion in the Company Proxy
Statement. Any information regarding First Federal, Bancorp or any subsidiary of
First Federal supplied by First Federal or Bancorp to the Company specifically
for inclusion in the Company Proxy Statement (as defined in Section 7.2 hereof)
will not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading.
4.6. Accuracy of Information. The statements made by First Federal and
with respect to Bancorp in this Agreement and in any other written documents
executed and/or delivered by or on behalf of Bancorp and First Federal pursuant
to the terms of this Agreement are true and correct in all material respects.
The statements contained in such other documents specifically referred to in
this Agreement will be deemed to constitute representations and warranties of
First Federal under this Agreement to the same extent as if set forth herein in
full.
4.7. Regulatory Approvals and No Adverse Change. First Federal is
aware of no reason that it cannot obtain any of the approvals of regulatory
authorities necessary to consummate the Merger or the Conversion and First
Federal has received no advice or information from any regulatory authority
indicating that such approvals will be denied or are doubtful. There has not
been any adverse
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change in the business or financial condition, operations, properties or
capitalization of First Federal since the end of its most recently completed
fiscal year that is reasonably likely to have a material adverse effect upon its
ability to consummate the transactions contemplated by this Agreement and as of
the date of this Agreement, no event, occurrence or development of any nature is
existing or, to the knowledge of First Federal, threatened, which would
reasonably be expected to have such an effect on First Federal's ability to
consummate such transactions.
ARTICLE V.
COVENANTS OF FIRST FEDERAL
First Federal hereby agree that from the date of this Agreement until
the Effective Time:
5.1. Affirmative Covenants. As soon as reasonably practicable, First
Federal shall furnish Mid-Iowa with copies of all of First Federal's periodic
reports on Forms 10-K, 10-Q and 8-K, all proxy statements and all call reports
filed with the OTS, or provided to the stockholders of First Federal, subsequent
to the date hereof.
5.2. Negative Covenants. Except as specifically contemplated by this
Agreement, First Federal shall not do, or agree or commit to do, without the
prior written consent of Mid-Iowa any of the following:
(a) take action which would or is reasonably likely to (i) adversely
affect the ability of either First Federal or the Company and Mid-Iowa to
obtain any necessary approvals of governmental authorities required for the
transactions contemplated hereby; (ii) adversely affect First Federal's
ability to perform its covenants and agreements under this Agreement; or
(iii) result in any of the conditions to the Reorganization set forth in
Articles IX and X not being satisfied; or
(b) agree in writing or otherwise to do any of the foregoing.
5.3. Breaches. First Federal shall, in the event it becomes aware of
the impending or threatened occurrence of any event or condition which would
cause or constitute a material breach (or would have caused or constituted a
breach had such event occurred or been known prior to the date hereof) of any of
its representations or agreements contained or referred to herein, give prompt
written notice thereof to the Company and use its best efforts to prevent or
promptly remedy the same.
5.4. Filing of Applications. First Federal shall use its best efforts
promptly to and, in any event, no later than December 31, 1998, shall, prepare,
submit, publish and file (a) an application to the OTS pursuant to 12 C.F.R.
Part 574; and (b) any other applications, notices or statements required to be
filed in connection with the transactions contemplated hereby.
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5.5. Supplement to First Federal Disclosure Schedule. First Federal
will promptly supplement or amend the First Federal Disclosure Schedule with
respect to any matter hereafter arising that, if existing or occurring at the
date of this Agreement, would have been required to be set forth or described in
the First Federal Disclosure Schedule. No supplement or amendment to the First
Federal Disclosure Schedule will have any effect for the purpose of determining
satisfaction of the condition set forth in Section 9.1 hereof as to the accuracy
of representations made as of the date of this Agreement.
5.6. Expenses. First Federal hereby agrees that if this Agreement or
the transactions contemplated hereby are terminated pursuant to Sections 11.1
(c)(iii) or 11.1 (c)(iv) as a result of a willful breach by First Federal, First
Federal shall promptly (and in any event within ten (10) business days after
such termination) pay all reasonable Expenses of Mid-Iowa in an amount not to
exceed $250,000. For purposes of this Section 5.6, the "Expenses of Mid-Iowa"
shall include all reasonable out-of-pocket expenses of Mid-Iowa (including all
fees and expenses of counsel, accountants, financial advisors, experts and
consultants to Mid-Iowa and its Affiliates) incurred by it or on its behalf in
connection with the consummation of the transactions contemplated by this
Agreement.
ARTICLE VI.
COVENANTS OF THE COMPANY AND MID-IOWA
The Company and Mid-Iowa hereby agree that from the date of this
Agreement until the Effective Time:
6.1. Affirmative Covenants. Unless the prior written consent of First
Federal shall have been obtained (which shall not be unreasonably withheld) and
except as otherwise contemplated herein, the Company and Mid-Iowa will:
(a) operate their business in the ordinary course in accordance with
past business practices;
(b) use their best efforts to (i) preserve intact their business
organization and assets, maintain their rights and franchises, retain the
services of their officers and key employees (except that they shall have
the right to terminate the employment of any officer or key employee in
accordance with established employment procedures) and (ii) maintain their
relationships with customers:
(c) maintain their corporate existence in good standing and file all
required Mid-Iowa Reports (as defined in such Section 12.7(c) hereof);
(d) use their best efforts to maintain and keep their properties in as
good repair and condition as at present, except for ordinary wear and tear;
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(e) use their best efforts to keep in full force and effect insurance
and bonds comparable in amount and scope of coverage to that now maintained
by them and, in the event that Mid-Iowa is unable to keep such insurance
and bonds in full force and effect, to provide prompt notice of such
failure to First Federal;
(f) perform all obligations required to be performed by them under all
material contracts, leases, and documents relating to or materially
affecting their assets, properties, and business;
(g) use their best efforts to comply with and perform in all material
respects all obligations and duties imposed upon them by all applicable
laws and regulations; and
(h) as soon as reasonably practicable, furnish First Federal copies of
all of Mid-Iowa's reports and documents provided to Company stockholders or
filed with the OTS subsequent to the date hereof.
6.2. Negative Covenants. Except as specifically contemplated by this
Agreement, from the date hereof until the Effective Time, neither the Company
nor Mid-Iowa shall, or shall any Company Subsidiary be permitted to, without the
prior written consent of First Federal (which shall not be unreasonably
withheld), do any of the following:
(a) incur any material liabilities or material obligations, whether
directly or by way of guaranty, including any obligation for borrowed money
whether or not evidenced by a note, bond, debenture or similar instrument
or enter into or extend any material agreement or lease, except in the
ordinary course of business consistent with past business practices or in
connection with the transactions contemplated and permitted by this
Agreement;
(b) (i) Except as set forth on Schedule 6.2(b) of the Company
Disclosure Schedule, grant any bonus or increase in compensation to its
directors or grant any bonus or any increase in compensation to its
officers and employees, (ii) effect any change in retirement benefits to
any class of employees or officers (unless any such change shall be
required by applicable law) that would increase its retirement benefit
liabilities, (iii) adopt, enter into, amend or modify any Mid-Iowa Benefit
Plan except as required by law, (iv) enter into or amend any employment,
severance or similar agreements or arrangements with any directors or
officers (exclusive of renewals in the ordinary course of business), (v)
make any additional awards under any Mid-Iowa stock bonus plan or Mid-Iowa
stock option plan, or (vi) except as set forth at Schedule 6.2(b) make any
additional contributions to any Mid-Iowa Benefit Plans;
(c) declare or pay any dividend on, or make any other distribution in
respect of, its outstanding shares of capital stock, except for regular,
quarterly cash dividends, paid on normal dividend payment dates, in an
amount no greater than the dividend rate as of the date hereof.
(d) (i) redeem, purchase or otherwise acquire any shares of its
capital stock or any securities or obligations convertible into or
exchangeable for any shares of its capital stock, or any
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options, warrants, conversion or other rights to acquire any shares of its
capital stock or any such securities or obligations; (ii) merge with or
into any other corporation, savings institution or bank, permit any other
corporation, savings institution or bank to merge into it or consolidate
with any other corporation or bank, or effect any reorganization or
recapitalization; (iii) purchase or otherwise acquire any assets, or shares
of any class of stock, of any corporation, savings institution, bank or
other business; (iv) liquidate, sell, dispose of, or encumber any assets or
acquire any assets, other than in the ordinary course of its business
consistent with past practices; or (v) split, combine or reclassify any of
its capital stock or issue or authorize or propose the issuance of any
other securities in respect of, in lieu of or in substitution for, shares
of its capital stock;
(e) except pursuant to the exercise of outstanding stock options,
issue, deliver, award, grant or sell, or authorize or propose the issuance,
delivery, award, grant or sale of, any shares of its capital stock of any
class (including shares held in treasury), any debt instrument having a
right to vote or any securities convertible into, or any rights, warrants
or options to acquire, any such shares, voting debt or convertible
securities;
(f) initiate, solicit or encourage, or take any other action to
facilitate, any inquiries or the making of any proposal which constitutes a
Superior Proposal (as defined in Section 7.1 hereof), take any action in
furtherance of such inquiries or to obtain a Superior Proposal, or
negotiate with any person in, or agree to or endorse any Superior Proposal,
or authorize or permit any of its officers, directors or employees or any
investment banker, financial advisor, accountant or other representative
retained by it or any Company Subsidiary to take any such action, except
with respect to negotiations regarding, and the endorsement of a Superior
Proposal, as legally required by the fiduciary duties of the Company's
Board of Directors under applicable law and as advised by counsel to the
Company's Board of Directors, and the Company shall promptly notify First
Federal orally and in writing of all of the relevant details relating to
all inquiries and proposals which it may receive relating to any of such
matters;
(g) propose or adopt any amendments to its charter or by-laws, except
such amendments as may be required to consummate the transactions
contemplated by this Agreement;
(h) enter into an agreement in principle with respect to any
acquisition of a material amount of assets or securities or any release or
relinquishment of any material contract rights not in the ordinary course
of business;
(i) except in its fiduciary capacity, purchase any shares of capital
stock of First Federal;
(j) subject to the provisions of Section 7.1 hereof (and provisions of
this Agreement related thereto) regarding a Superior Proposal, willfully
take action which would or is reasonably likely to (i) adversely affect the
ability of either of First Federal, the Company or Mid-Iowa to obtain any
necessary approvals of governmental authorities required for the
transactions contemplated hereby; (ii) adversely affect Mid-Iowa's or the
Company's ability to perform its covenants and agreements under
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this Agreement; or (iii) result in any of the conditions to the
Reorganization set forth in Articles VIII and X not being satisfied;
(k) change in any material respect the lending, investment, deposit,
asset and liability management and other material policies concerning the
business of Mid-Iowa or the Company, unless required by law or regulation
or, with respect to lending or depository activities;
(l) file any applications or make any contract with respect to
branching by Mid-Iowa (whether de novo or by purchase, sale or relocation);
(m) form any new subsidiary or cause or permit a material change in
the activities presently conducted by any Company Subsidiary or make
additional material investments in subsidiaries or enter into or invest in
any partnership, joint venture or other business enterprise;
(n) purchase any derivative securities including CMO or REMIC
products;
(o) purchase any equity securities other than Federal Home Loan Bank
Stock;
(p) discharge or satisfy any lien or encumbrance or pay any material
obligation or liability (absolute or contingent) other than at scheduled
maturity or in the ordinary course of business;
(q) sell or otherwise dispose of any loan, mortgage-backed security or
investment security except in the ordinary course of business consistent
with past practices and policies;
(r) modify or restructure the terms of any loan except in the ordinary
course of business consistent with prudent banking practices and policies;
(s) make any capital expenditures in excess of $25,000 individually or
$50,000 in the aggregate, other than pursuant to binding commitments
existing on the date hereof and other than expenditures necessary to
maintain existing assets in good repair;
(t) change its method of accounting in effect prior to the Effective
Time, except as required by changes in laws or regulations or generally
accepted accounting principles concurred in by its and the Company's
independent certified public accountants, or change any of its methods of
reporting income and deductions for federal income tax purposes from those
employed in the preparation of its federal income tax returns for the
Company's last full taxable year, except as required by changes in laws or
regulations;
(u) acquire in any manner whatsoever (other than to realize upon
collateral for a defaulted loan) any business or entity; or
(v) make, renew, increase, extend or purchase any loan secured by
commercial real estate or multifamily real estate, any land acquisition or
development loan, any commercial business
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loan, or any residential loan in an amount in excess of $300,000, except to
the extent that Mid-Iowa is contractually obligated to do so as of the date
hereof;
(w) fail to keep in full force and effect its insurance and bonds as
now carried;
(x) fail to notify First Federal promptly of its receipt of any
letter, notice or other communication, whether written or oral, from any
regulatory authority advising that it is contemplating issuing, requiring
or requesting any agreement, memoranda, understanding or similar
undertaking, or order, directive, or extraordinary supervisory letter;
(y) agree in writing or otherwise to do any of the foregoing.
6.3. Report to First Federal. The Company and Mid-Iowa will use its
best efforts to keep First Federal fully informed concerning all developments of
which it becomes aware that may have a material effect upon the business, any
properties or condition (either financial or otherwise) of the Company (other
than developments affecting financial institutions generally).
6.4. Breaches. The Company and Mid-Iowa shall, in the event they
become aware of the impending or threatened occurrence of any event or condition
which would cause or constitute a material breach (or would have caused or
constituted a breach had such event occurred or been known prior to the date
hereof) of any of their representations or agreements contained or referred to
herein, give prompt written notice thereof to First Federal and use their best
efforts to prevent or promptly remedy the same.
6.5. Supplement to Disclosure Schedule. The Company will promptly
supplement or amend the Company Disclosure Schedule with respect to any matter
hereafter arising that, if existing or occurring at the date of this Agreement,
would have been required to be set forth or described in the Company Disclosure
Schedule. No supplement or amendment to the Company Disclosure Schedule will
have any effect for the purpose of determining satisfaction of the condition set
forth in Section 8.2 hereof as to the accuracy of representations made as of the
date of this Agreement.
6.6. Consents and Approvals. The Company and Mid-Iowa shall use their
best efforts to assist First Federal in obtaining the consents and approvals
referenced in Section 8.5 hereof.
6.7. Expenses. Mid-Iowa hereby agrees that if this Agreement or the
transactions contemplated hereby are terminated pursuant to Sections 11.1
(b)(iii) or 11.1 (b)(iv) as a result of a willful breach by Mid-Iowa or the
Company, Mid-Iowa shall promptly (and in any event within ten (10) business days
after such termination) pay all reasonable Expenses of First Federal in an
amount not to exceed $250,000. For purposes of this Section 6.7, the "Expenses
of First Federal" shall include all reasonable out-of-pocket expenses of First
Federal (including all fees and expenses of counsel, accountants, financial
advisors, experts and consultants to First Federal and its Affiliates) incurred
by it or on its behalf in connection with the consummation of the transactions
contemplated by this Agreement.
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ARTICLE VII.
ADDITIONAL AGREEMENTS
7.1. Company Shareholders' Meeting. The Company shall, as soon as is
reasonably practicable, call and hold a meeting of its stockholders (the
"Company Shareholders' Meeting") to submit for stockholder approval this
Agreement. Subject to receipt of a fairness opinion from Prairie Capital
Services, Inc. updated as of a date within five days of mailing of the Company
Proxy Statement, the Board of Directors of the Company will recommend that
holders of Company Common Stock vote in favor of and approve this Agreement at
the Company Shareholders' Meeting; provided, however, that nothing contained in
this Section 7.1 shall prohibit the Board of Directors of the Company from
failing to recommend approval of the transactions contemplated hereby, if
necessary to comply with its fiduciary duties as determined in consultation with
legal counsel in the context of a Superior Proposal (as hereinafter defined).
For purposes of this Agreement, "Superior Proposal" means a bona fide proposal
to acquire the entire equity interest in the Company or Mid-Iowa or
substantially all of the assets of the Company or Mid-Iowa, which is expressly
conditioned upon the termination of this Agreement and is made by a third party
on terms which a majority of the Board of Directors of the Company determines
pursuant to the exercise of its fiduciary duty after consultation with legal
counsel, to be more favorable (from a financial point of view) to the holders of
Company Common Stock than the Reorganization and for which financing is either
then committed or not a condition precedent to the consummation thereof.
7.2. Proxy Statement for Company Shareholders' Meeting. For the
purposes of holding the Company Shareholders' Meeting, the Company shall prepare
a proxy statement satisfying all requirements under applicable securities laws
(said proxy statement, together with any and all amendments or supplements
thereto, being herein referred to as the "Company Proxy Statement"). First
Federal shall review and comment on the Company Proxy Statement prior to its
distribution to the Company's stockholders.
7.3. Cooperation; Regulatory Approvals. The parties shall cooperate,
and shall cause each of their affiliates and subsidiaries to cooperate, in the
preparation and submission by them, as promptly as reasonably practicable, of
such applications, petitions, and other documents and materials as any of them
may reasonably deem necessary or desirable to the OTS, the FDIC, the Department
of Justice, other regulatory authorities, and any other persons for the purpose
of obtaining any approvals or consents necessary to consummate the transactions
contemplated by this Agreement. Each party will have the right to review and
comment on such applications, petitions and other documents and materials and
shall furnish to the other copies thereof promptly after filing or submission
thereof. At the date hereof, none of the parties is aware of any reason that the
regulatory approvals required to be obtained by it would not be obtained. The
obligation to take action as provided in this Section 7.3 shall not be construed
as including an obligation to accept any terms of or conditions to a consent,
authorization, order or approval of, or any exemption by, any party that are
unduly burdensome as reasonably determined by the Boards of Directors of First
Federal or Mid-Iowa.
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In the event of a restraining order or injunction which prevents the Closing by
reason of the operation of Section 10.2 hereof, each of the parties hereto shall
use its respective best efforts to cause such order or injunction to be lifted
and the Closing to be consummated as soon as reasonably practicable.
7.4. Reports. Prior to the Effective Time, the Company and Mid-Iowa
shall prepare and file as and when required all Mid-Iowa Reports. Mid-Iowa shall
prepare such Mid-Iowa Reports so that (a) they comply in all material respects
with all of the statutes, rules and regulations enforced or promulgated by the
regulatory authority with which they are filed and do not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading, and (b) with
respect to any Mid-Iowa Reports containing Company Financial Statements, the
financial information (i) is prepared in accordance with generally accepted
accounting principles and practices as utilized in the Company Financial
Statements applied on a consistent basis, (ii) presents fairly the consolidated
financial condition of Mid-Iowa at the dates, and the consolidated results of
operations and cash flows for the periods, stated therein and (iii) in the case
of interim fiscal periods, reflects all adjustments, consisting only of normal
recurring items, subject to year-end audit adjustments. All Mid-Iowa Reports
shall be provided to First Federal promptly following the filing of such reports
with the respective regulatory authority.
7.5. Brokers or Finders. Except as set forth on Schedule 7.5, each of
First Federal, the Company and Mid-Iowa represents that no agent, broker,
investment banker, financial advisor or other firm or person is or will be
entitled to any broker's or finder's fee or any other commission or similar fee
in connection with any of the transactions contemplated by this Agreement.
7.6. Additional Agreements; Reasonable Efforts. Subject to the terms
and conditions of this Agreement, each of the parties hereto agrees to use all
reasonable efforts to take, or cause to be taken, all action and to do, or cause
to be done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated by
this Agreement, subject to the appropriate vote of the stockholders of the
Company described in Section 7.1 hereof, including cooperating fully with the
other party. In case at any time after the Effective Time any further action is
necessary or desirable to carry out the purposes of this Agreement or to vest
First Federal with full title to all properties, assets, rights, approvals,
immunities and franchises of the Company, Mid-Iowa or the Company Subsidiaries,
the proper officers and directors of each party to this Agreement shall take all
such necessary action.
7.7. Release of Information. The Company, Mid-Iowa and First Federal
agree that prior to making any public announcement with respect to the
transactions contemplated by this Agreement, each party will consult with the
other and will use its best efforts either to agree upon the text of the
proposed joint announcement to be made by both parties or to obtain the other's
approval (which approval shall not be unreasonably withheld) of the text of an
announcement to be made solely on behalf of such party. In the event that the
parties do not ultimately agree on the text of any proposed public announcement,
no such disclosure shall be made unless the party seeking to make an
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announcement is advised by counsel that its failure to do so would be reasonably
likely to constitute a violation of law.
7.8. Advisory Directors. Messrs. David E. Sandeen, John E. Carl and
Carney D. Loucks, each a current director of the Company, shall be entitled to
serve on the Central Iowa Advisory Board to the Board of Directors of First
Federal (the other members of which shall be the current members of the Grinnell
Advisory Board), for a period of one year following the Effective Time, subject
to reappointment at the sole discretion of First Federal and such Advisory Board
members shall meet monthly during the first year following the Effective Time.
Thereafter, to the extent such Advisory Board is continued, such Advisory Board
members will meet as frequently as requested by the Board of Directors of First
Federal, but no less frequently than quarterly. Such Advisory Board members
shall receive an annual fee of at least $2,000 plus $200 per meeting attended.
7.9. Access to Properties and Records; Confidentiality. (a) Each of
the Company, Mid-Iowa and each Company Subsidiary shall permit First Federal and
its representatives, including financial advisors, reasonable access to its
properties, and shall disclose and make available to them all books, papers and
records relating to the assets, stock ownership, properties, operations,
obligations and liabilities of the Company, Mid-Iowa and each Company
Subsidiary, including, but not limited to, all books of account (including the
general ledger), tax records, minute books of meetings of boards of directors
(and any committees thereof) (except portions thereof relating to this
Agreement, the Reorganization and matters relating thereto, including competing
transactions) and stockholders, organizational documents, bylaws, material
contracts and agreements, filings with any regulatory authority, accountants'
work papers, litigation files (other than attorney work product or materials
protected by any attorney-client privilege), plans affecting employees, and any
other business activities or prospects in which the Company or Mid-Iowa may have
a reasonable interest. The Company and Mid-Iowa and each Company Subsidiary
shall make their respective officers, employees and agents and authorized
representatives (including counsel and independent public accountants) available
to confer with First Federal and its representatives.
(b) All information furnished previously in connection with the
transactions contemplated by this Agreement or pursuant hereto shall be treated
as the sole property of the party furnishing the information until consummation
of the transactions contemplated hereby and, if such transactions shall not
occur, the party receiving the information shall, upon request, return to the
party which furnished such information all documents or other materials
containing, reflecting or referring to such information, shall use its best
efforts to keep confidential all such information, and shall not directly or
indirectly use such information for any competitive or other commercial
purposes. The obligation to keep such information confidential shall continue
for one year from the date the proposed transactions are abandoned but shall not
apply to (i) any information which (x) the party receiving the information can
establish by convincing evidence was already in its possession prior to the
disclosure thereof by the party furnishing the information; (y) was then
generally known to the public; or (z) became known to the public through no
fault of the party receiving the information; or (ii) disclosures pursuant to a
legal requirement or in accordance with an order of a court of competent
jurisdiction,
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provided that the party which is the subject of any such legal requirement or
order shall use its best efforts to give the other party at least ten business
days prior notice thereof.
7.10. Certain Policies. At the request of First Federal, the Company
shall, prior to the Effective Time, (i) establish and take such reserves and
accruals as First Federal shall reasonably request to conform, on a mutually
satisfactory basis, the Company's loan, real estate, accrual and reserve
policies to First Federal's policies and (ii) establish and take such accruals,
reserves and charges in order to implement such policies in respect of severance
costs, write-off or write-down of various assets and other appropriate
accounting adjustments, and to recognize for financial accounting purposes such
expenses incurred in connection with the Reorganization, provided, however, that
Mid-Iowa shall not be obligated to take any such action pursuant to this Section
7.10 unless and until (x) First Federal specifies its request in a writing
delivered to the Company, and acknowledges that all conditions to the
obligations of First Federal to consummate the Reorganization set forth in
Articles VIII and X have been waived (if available) or satisfied and (y) the
Company and Mid-Iowa acknowledge that the conditions to its obligation to
consummate the Reorganization set forth in Articles IX and X have been waived
(if available) or satisfied. The Company and Mid-Iowa shall not be required to
take any such action that is not consistent with generally accepted accounting
principles or any requirement applicable to either of them by any bank
regulatory agency. The representations, warranties and covenants of the Company
and Mid-Iowa contained in this Agreement shall not be deemed to be untrue or
breached in any respect for any purpose as a consequence of any action
undertaken on account of this Section 7.10 and shall not constitute grounds for
termination of this Agreement by First Federal.
7.11. Employee Benefit Plans; Employment Arrangements.
(a) To the extent practicable, First Federal will give consideration
to the retention after the Closing Date of employees of Mid-Iowa in their
current or comparable positions within First Federal as the surviving
institution, subject to the provisions in this Section 7.11 and provided that
this Agreement shall not, except as otherwise provided herein, provide any
contractual right to such employees of such employment. Employees of Mid-Iowa
who continue employment with First Federal on or after the Effective Time (all
such persons are referred to herein as "Continuing Employees") shall be eligible
to participate in such employee benefit plans as may be in effect generally for
employees of First Federal from time to time (the "First Federal Plans"), if
such Continuing Employee shall be eligible or selected for participation
therein. Except as specifically set forth in this Section 7.11 and as otherwise
prohibited by law, Continuing Employees shall be entitled to participate on the
same basis as similarly situated employees of First Federal, except that
Continuing Employees shall be entitled to full credit for each year of prior
service (in which 1,000 hours of service are performed) with Mid-Iowa for
purposes of determining eligibility for participation and vesting, but not for
benefit accruals, in the First Federal Plans, subject to applicable break in
service rules. Notwithstanding the foregoing, First Federal may determine to
continue any of the Mid-Iowa Benefit Plans for Continuing Employees in lieu of
offering participation in one or more First Federal Plans providing similar
benefits (e.g., medical and hospitalization benefits or 401(k) or defined
contribution plan benefits) to terminate any of the Mid-Iowa Benefit Plans or to
merge any such benefit plans with similar First Federal Plans, provided,
however, Mid-Iowa shall have the right on or before the Effective Time (i) to
terminate both its Defined
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Contribution Plan and Trust and its 401(k) Profit Sharing Plan and Trust
(together, the "Plans and Trusts") as of any date before the Effective Time,
(ii) to apply to the Internal Revenue Service for a determination letter on the
tax-qualified status of the Plans and Trusts on termination and on any
amendments made to them in connection with the termination (provided that any
amendments so made, other than amendments required by law, shall first be
approved by First Federal), and (iii) to distribute the assets of the Plans and
Trusts only after receipt of the aforementioned determination letter.
Notwithstanding anything in this Section 7.11(a) to the contrary, participation
by Continuing Employees in employee benefit plans of First Federal with respect
to which eligibility and participation is at the discretion of the employer,
such as non-qualified deferred compensation plans, stock option plans, stock
bonus plans, restricted stock plans, and other such similar plans, (but not
including employee benefit plans generally available to all full-time employees
of First Federal) shall be discretionary with First Federal. The Company,
Mid-Iowa and any Company Subsidiary agrees to cooperate with First Federal in
implementing any decision made by First Federal with respect to employee benefit
plans and to provide First Federal on or before the Effective Time a schedule of
service credit for prospective Continuing Employees.
(b) With respect to Continuing Employees and dependents covered under
the Iowa Bankers' Group Health Plan maintained by Mid-Iowa, which plan is
concurrently maintained by First Federal, there shall be no waiting period or
preexisting condition exclusions applicable to such persons, amounts previously
paid by such persons towards satisfaction of the required deductible will count
towards satisfaction of the deductible under the plan maintained by First
Federal and the benefits previously received by such persons will count toward
the maximum benefit coverages provided by First Federal.
(c) Following the Effective Time, First Federal shall honor in
accordance with their terms the employment, severance and other compensation
contracts set forth on Schedule 7.11(c) between the Company, any of the Company
Subsidiaries, and any current or former director, officer or employee thereof,
and all provisions for vested benefits or other vested amounts earned or accrued
through the Effective Time under the Company employee benefit plans.
Notwithstanding the foregoing, First Federal or the Company shall be obligated
at the Effective Time to make payments with respect to the separation from
employment in connection with a change of control of the Company under
employment and severance contracts between the Company and its subsidiaries and
Kevin Ulmer and Gary Hill in the respective amounts of $390,350 and $270,758,
subject to the limitations set forth in Section 3.8(d) hereof.
7.12. D&O Indemnification and Insurance. For a period of four (4)
years following the Effective Time, First Federal shall indemnify the employees,
agents, directors or officers of the Company and Mid-Iowa to the extent they are
indemnified under the Company's Certificate of Incorporation and Bylaws in the
form in effect at the date of this Agreement or arising by operation of law.
First Federal shall use its best efforts to cause the directors and officers
listed in Schedule 7.12 of the Company Disclosure Schedule to be covered under
individual directors' and officers' liability insurance policies, which coverage
is available in the form of tail coverage under the Company's existing
directors' and officers' liability policy for the duration of any applicable
statute of limitations.
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7.13 Conversion And Offering. Commencing promptly after the date of
this Agreement, Bancorp and First Federal will take all reasonable steps
necessary to effect the Conversion and Offering and Bancorp and First Federal
shall use their best efforts to satisfy the conditions to closing set forth in
Section 8.11. Without limiting the generality of the foregoing, Bancorp shall
cause the following to be done:
(a) Bancorp shall duly call, give notice of, convene and hold a
special meeting of its Board of Directors as soon as practicable for the
purpose of approving the Conversion and Offering.
(b) Bancorp and First Federal will use all reasonable efforts to
prepare and file all required regulatory applications required in
connection with the Conversion and Offering, including, without limitation,
filing applications with the OTS.
(c) Bancorp shall prepare as promptly as practicable, and the Company
shall co-operate in the preparation of, a prospectus (the "Prospectus")
meeting all requirements of applicable federal and state securities and
banking laws and regulations. Bancorp shall incorporate such Prospectus
into a Registration Statement on Form S-1, or other applicable form, ("Form
S-1") satisfying all applicable requirements of the Securities Act of 1933,
and the rules and regulations thereunder. Bancorp shall file the Form S-1
(or other applicable form) with the SEC, and shall use its reasonable best
efforts to have the Form S-1 declared effective under the Securities Act of
1933 as promptly as practicable after such filing.
(d) The Company shall provide Bancorp with any information concerning
it that Bancorp may reasonably request in connection with the Prospectus,
and the Company shall promptly notify Bancorp if at any time it becomes
aware that the Prospectus or the Form S-1 contains any untrue statement of
a material fact or omits to state a material fact required to be stated
therein or necessary to make the statements contained therein, in light of
the circumstances under which they were made, not misleading. In such
event, the Company and Bancorp shall cooperate in the preparation of a
supplement or amendment to such Prospectus, which corrects such
misstatement or omission, and shall cause an amended Form S-1 to be filed
with the SEC (if applicable). The Company shall provide to Bancorp a
"comfort" letter from the independent certified public accountants for the
Company, dated as of the date of the Prospectus and updated as of the date
of consummation of the Offering, with respect to certain financial
information regarding the Company, each in form and substance which is
customary in transactions such as the Offering, and shall cause its counsel
to deliver to the placement agent for the Offering such opinions as Bancorp
may reasonably request.
(e) Bancorp shall give the Company and its counsel the opportunity to
review the Prospectus prior to its being filed with the OTS and the SEC,
and shall give the Company and its counsel the opportunity to review all
amendments and supplements to the Prospectus and all responses to requests
for additional information and replies to comments prior to their being
filed with, or sent to, the OTS, and the SEC. Each of Bancorp and the
Company agrees to use all reasonable efforts, after consultation with the
other party hereto, to respond promptly to all such comments of and
requests by the OTS, and the SEC and to cause the Prospectus and all
required amendments and supplements
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thereto to be mailed to the qualified depositors and other qualified
subsidiaries of First Federal at the earliest practicable time.
ARTICLE VIII.
CONDITIONS TO THE OBLIGATIONS OF FIRST FEDERAL
The obligations of First Federal under this Agreement to cause the
transactions contemplated herein to be consummated shall be subject to the
satisfaction or written waiver by First Federal of the following conditions:
8.1. No Material Adverse Change. Except as disclosed in Schedule 3.5
to the Company Disclosure Schedule and except for general changes in generally
accepted accounting principles, changes in economic, financial or market
conditions, changes in market interest rates, payments due under any employment
agreements or benefit plans and the transactions contemplated hereby, costs and
expenses relating to this Agreement (including those resulting from actions or
inactions pursuant to the covenants of the Company and Mid-Iowa under this
Agreement) and the transactions contemplated hereby, there shall not have been
any material adverse change in the financial condition, results of operations or
business of the Company, Mid-Iowa, and the Company's Subsidiaries, taken as a
whole, from September 30, 1997 to the Closing Date.
8.2. Representations and Warranties. Each of the representations and
warranties by the Company and Mid-Iowa contained in this Agreement shall be true
and correct in all material respects (or where any statement in a representation
or warranty expressly contains a standard of materiality, such statement shall
be true and correct in all respects taking into consideration the standard of
materiality contained therein) at, or as of, the date of this Agreement and
(except to the extent such representation speaks as of an earlier date) and as
of any date subsequent, until and including the Closing Date (except as
otherwise contemplated or permitted by this Agreement) as though such
representations and warranties were made on and as of said date. Any information
provided by the Company and Mid-Iowa pursuant to Section 6.5 hereof as a
supplement to the Company Disclosure Schedule shall be true and correct in all
material respects as of the date such information is supplied to First Federal.
8.3. Performance and Compliance. The Company and Mid-Iowa shall have
performed or complied in all material respects with all covenants and agreements
required by this Agreement to be performed and satisfied by it on or prior to
the Closing Date.
8.4. No Proceeding or Litigation. On the Closing Date, no suit, action
or proceeding shall be pending or overtly threatened, and no liability or claim
shall have been asserted against the Company, Mid-Iowa or any Company Subsidiary
involving any of the assets, properties, business or operations of the Company,
Mid-Iowa or any Company Subsidiary that would reasonably be expected to have a
Material Adverse Effect.
35
<PAGE>
8.5. Consents Under Agreements. First Federal shall have received the
consent or approval of each person or entity whose consent or approval shall be
required in order to permit consummation of the Reorganization and the
Conversion under any loan or credit agreement, note, mortgage, indenture, lease
or other agreement or instrument to which the Company, Mid-Iowa or any Company
Subsidiary is a party or to which its respective property is subject, except
those for which failure to obtain such consents and approvals would not,
individually or in the aggregate, have a Material Adverse Effect on First
Federal, whether prior to (if applicable) or following the consummation of the
transactions contemplated hereby.
8.6. No Amendments to Resolutions. Neither the Board of Directors of
the Company or Mid-Iowa nor any committee thereof shall have amended, modified,
rescinded or repealed the resolutions adopted by such Board of Directors with
respect to this Agreement or shall have adopted any other resolutions in
connection with this Agreement and the transactions contemplated hereby which
are inconsistent with such resolutions, except resolutions adopted consistent
with the express rights of Mid-Iowa under this Agreement.
8.7. Certificate of Mid-Iowa Officers. The Company shall have
furnished First Federal a certificate, signed by its Chief Executive Officer and
its Chief Financial Officer, dated the Closing Date, to the effect, based on his
knowledge, that the conditions described in Sections 8.1 through 8.6, and
Section 8.8, of this Agreement have been fully satisfied.
8.8. Corporate Proceedings. All action required to be taken by, or on
the part of the Company and Mid-Iowa to authorize the execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated by this Agreement shall have been duly and validly taken by the
Company and Mid-Iowa.
8.9. Legal Opinion. First Federal shall have received an opinion,
dated the Closing Date, from legal counsel to Mid-Iowa, in the form specified on
Exhibit E.
8.10. Closing Book Value. Immediately prior to the Closing, the total
stockholders' equity account determined in accordance with generally accepted
accounting principles on a basis consistent with the Company Financial
Statements, of the Company shall not be less than $13.5 million, as reasonably
determined by First Federal's independent public accountant, in consultation
with the Company's independent public accountant; provided, however, that for
purposes of calculating total stockholders' equity, the Company's expense
associated with the severance payments due under the employment agreements
between Mid-Iowa and Kevin D. Ulmer and Gary Hill dated as of October 19, 1992,
will not be counted.
8.11. Conversion. Bancorp and First Federal shall have consummated the
Conversion and the Offering.
36
<PAGE>
8.12 Non-Competition Agreement. First Federal shall have received a
duly executed non-competition agreement, in substantially the form heretofore
agreed to between First Federal and the Company, from Kevin D. Ulmer.
ARTICLE IX.
CONDITIONS TO THE OBLIGATIONS OF THE COMPANY AND MID-IOWA
The obligations of the Company and Mid-Iowa under this Agreement to
cause the transactions contemplated herein to be consummated shall be subject to
the satisfaction or written wavier by the Company or Mid-Iowa of the following
conditions:
9.1. Representations and Warranties. Each of the representations and
warranties of First Federal contained in this Agreement shall be true and
correct in all material respects (or where any statement in a representation or
warranty expressly contains a standard of materiality, such statement shall be
true and correct in all respects taking into consideration the standard of
materiality contained therein) at, or as of, the date of this Agreement and
(except to the extent such representation speaks as of an earlier date) and as
of any date subsequent, until and including the Closing Date (except as
otherwise contemplated or permitted by this Agreement) as though such
representations were made on and as of said date. Any information provided by
First Federal pursuant to Section 5.5 hereof as a supplement to the First
Federal Disclosure Schedule shall be true and correct in all material respects
as of the date such information is supplied to the Company or Mid-Iowa.
9.2. Performance and Compliance. First Federal shall have performed or
complied in all material respects with all covenants and agreements required by
this Agreement to be performed and satisfied by it on or prior to the Closing
Date.
9.3 Corporate Proceedings. All action required to be taken by, or on
the part of Bancorp and First Federal to authorize the execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated by this Agreement shall have been duly and validly taken by Bancorp
and First Federal.
9.4. Certificate of First Federal Officers. First Federal shall have
furnished to Mid-Iowa a certificate, signed by its Chief Executive Officer and
its Chief Financial Officer and dated the Closing Date, to the effect, based on
their best knowledge, that the conditions described in Sections 9.1, 9.2 and 9.3
of this Agreement have been satisfied.
9.5. Legal Opinion. Mid-Iowa shall have received an opinion, dated as
of the Closing Date, from Luse Lehman Gorman Pomerenk & Schick, P.C., counsel
for First Federal, in the form specified on Exhibit F.
9.6. Opinion of Financial Advisor. The Company shall have received on
or before the date on which the Company Proxy Statement or other similar
document is to be mailed to holders
37
<PAGE>
of Company Common Stock the written opinion of its investment or financial
advisor to the effect that the merger consideration payable to the Company's
stockholders pursuant to the Reorganization is fair from a financial point of
view to the stockholders of the Company.
ARTICLE X.
CONDITIONS TO THE OBLIGATIONS OF ALL PARTIES
In addition to the provisions of Articles VIII and IX hereof, the
obligations of First Federal, the Company and Mid-Iowa to cause the transactions
contemplated herein to be consummated, shall be subject to the satisfaction or
written waiver by both First Federal and the Company of the following
conditions:
10.1. Governmental Approvals. The parties hereto shall have received
all necessary approvals of the transactions contemplated by this Agreement from
governmental agencies and authorities, including, without limitation, those of
the OTS and the FDIC, and each of such approvals shall remain in full force and
effect and all statutory waiting periods in connection therewith shall have
expired at the Closing Date and such approvals and the transactions contemplated
thereby shall not have been contested by any federal or state governmental
authority nor by any other third party by formal proceeding. Provided, however,
that no approval or consent referred to in this Section 10.1 shall be deemed to
have been received by First Federal if it shall include any non-standard term,
condition or requirement that, individually or in the aggregate (i) would have a
Material Adverse Effect on the business, results of operations, assets, or
financial condition of First Federal on a consolidated basis, or (ii) would
reduce the economic or business benefits of the transactions contemplated by
this Agreement to First Federal in so significant a manner that First Federal,
in its reasonable judgment, would not have entered into this Agreement.
10.2. No Injunctions or Restraints. No suit, action or proceeding
shall be pending or overtly threatened before any court or other governmental
agency by the federal or any state government in which it is sought to restrain
or prohibit the consummation of the Reorganization and no temporary restraining
order, preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Reorganization shall be in effect.
10.3. Stockholder Approval. This Agreement shall have been duly
approved by the requisite affirmative vote of the stockholders of the Company as
contemplated by Section 7.1 hereof.
10.4 Corporate Proceedings. The obligations of the parties to this
Agreement required to be performed at or prior to the Closing Date shall have
been duly performed and complied with in all material respects. All action
required to be taken by, or on the part of, the parties to this Agreement to
authorize the execution, delivery and performance of this Agreement, and the
38
<PAGE>
consummation of the transactions contemplated hereby, shall have been duly and
validly taken by the parties hereto.
ARTICLE XI.
TERMINATION
11.1. Reasons for Termination. This Agreement may be terminated and
the Reorganization abandoned at any time before the Closing Date, whether before
or after the approval or adoption of this Agreement by the stockholders of the
Company:
(a) By mutual written consent of the Board of Directors of First
Federal and the Board of Directors of the Company;
(b) By written notice from First Federal to the Company if:
(i) any condition set forth in Article VIII of this Agreement
shall have become impossible to substantially satisfy at any time or
has not been substantially satisfied or waived in writing; or
(ii) any condition set forth in Article X of this Agreement shall
have become impossible to substantially satisfy at any time or has not
been substantially satisfied or waived in writing, provided, however,
First Federal shall not have the right to terminate this Agreement
pursuant to this Section 11.1(b)(ii) if any condition imposed by
Section 10.1 hereof was not met due to the failure of First Federal to
perform or observe the covenants and agreements set forth in this
Agreement; or
(iii) any warranty or representation as set forth in Article III
hereof made by the Company or Mid-Iowa shall be discovered to be or to
have become untrue or incorrect in any material respect, or where any
statement in a representation or warranty expressly includes a
standard of materiality, such statement shall be discovered to be or
to have become untrue or incorrect in any respect taking into
consideration the standard of materiality contained therein, in either
case where any such breach has not been cured within thirty (30) days
following receipt by the Company or Mid-Iowa of notice of such
discovery; or
(iv) The Company or Mid-Iowa shall have breached one or more
provisions of this Agreement in any material respect considering all
such breaches in the aggregate, where such breach has not been cured
within thirty (30) days following receipt by the Company or Mid-Iowa
of notice of such breach; or
(v) The Board of Directors of Bancorp and First Federal shall
have determined in their sole discretion, exercised in good faith,
that the Conversion has become inadvisable
39
<PAGE>
or impractical by reason of (A) the issuance of any order, decree or
letter of a regulatory authority containing conditions or requirements
reasonably deemed objectionable to Bancorp of First Federal or (B)
unfavorable market conditions. In the event of termination of this
Agreement pursuant to this Section 11.1(b)(v), then the Company shall
be reimbursed pursuant to and in accordance with the provisions of
Section 12.2(c) hereof.
(c) By written notice from the Company to First Federal, if
(i) any condition set forth in Article IX of this Agreement
shall have become impossible to substantially satisfy at any time
or has not been substantially satisfied or waived in writing; or
(ii) any condition set forth in Article X of this Agreement
shall have become impossible to substantially satisfy at any time
or has not been substantially satisfied or waived in writing;
provided, however, the Company shall not have the right to
terminate this Agreement pursuant to this Section 11.1(c)(ii) if
any condition imposed by Section 10.1 hereof was not met due to
the failure of the Company or Mid-Iowa to perform or observe the
covenants and agreements set forth in this Agreement; or
(iii) any warranty or representation as set forth in Article
IV hereof made by First Federal shall be discovered to be or to
have become untrue or incorrect in any material respect, or where
any statement in a representation or warranty expressly includes a
standard of materiality, such statement shall be discovered to be
or to have become untrue or incorrect in any respect taking into
consideration the standard of materiality contained therein, in
either case where any such breach has not been cured within thirty
(30) days following receipt by First Federal of notice of such
discovery; or
(iv) First Federal shall have breached one or more provisions
of this Agreement in any material respect considering all such
breaches in the aggregate, where such breach has not been cured
within thirty (30) days following receipt by First Federal of
notice of such breach.
(d) By the Board of Directors of First Federal if the Board of
Directors of the Company shall not recommend, or shall withdraw or modify
in a manner adverse to First Federal, its recommendation to the holders of
Company Common Stock to approve this Agreement.
(e) By the Board of Directors of First Federal or the Company at any
time after the Company Shareholders' Meeting as contemplated in Section 7.1
if the stockholders of the Company have not approved this Agreement by the
requisite affirmative vote.
(f) By the Board of Directors of First Federal or the Company if the
Reorganization has not been consummated on or before August 31, 1999.
40
<PAGE>
11.2. Effect of Termination. In the event of termination of this
Agreement by either the Company or First Federal as provided in Section 11.1
hereof, this Agreement shall forthwith become void, and there shall be no
liability or obligation on the part of First Federal or the Company or their
respective officers or directors except with respect to Sections 6.7, 7.9 and
12.2 hereof.
ARTICLE XII.
MISCELLANEOUS
12.1. Nonsurvival of Representations, Warranties and Agreements. None
of the representations, warranties, covenants and agreements in this Agreement
or in any instrument delivered pursuant to this Agreement shall survive the
Effective Time, except for the covenants and agreements which by their terms are
contemplated to be performed after the Effective Time.
12.2. Expenses and Termination Fee. (a) Except as otherwise provided
herein, all expenses incurred by First Federal and the Company in connection
with or related to the authorization, preparation and execution of this
Agreement, the solicitation of stockholder approvals and all other matters
related to the closing of the transactions contemplated thereby, including,
without limitation of the generality of the foregoing, all fees and expenses of
agents, financial advisors, representatives, counsel and accountants employed by
either such party or its Affiliates, shall be borne solely and entirely by the
party that has incurred the same.
(b) Mid-Iowa also hereby agrees to pay First Federal, and First
Federal shall be entitled to payment of, a fee (the "Fee") of $1.4 million, upon
the occurrence of any of the following events on or before the earlier of the
date this Agreement is terminated or August 31, 1999:
(i) if the Board of Directors of the Company recommends a
Superior Proposal and thereafter (A) the Company Shareholders'
Meeting shall not have been held or shall have been postponed,
delayed or enjoined prior to termination of this Agreement or (B)
the Company's shareholders do not approve this Agreement;
(ii) if the Board of Directors of the Company withdraws or
modifies its recommendation of approval of this Agreement, and
thereafter (A) the Company Shareholders' Meeting shall not have
been held or shall have been postponed, delayed or enjoined prior
to termination of this Agreement or (B) the Company's shareholders
do not approve this Agreement;
(iii) if the Company's shareholders do not approve this
Agreement after a Superior Proposal is made and within twelve (12)
months thereafter the Company enters into a definitive agreement
to be merged into or acquired by another entity (provided,
however, that Mid-Iowa shall pay all Expenses of First Federal, as
defined in Section 6.7. hereof, in an amount not to exceed
$250,000, within five business days following rejection of this
Agreement by Company shareholders);
41
<PAGE>
(iv) if the Company or Mid-Iowa enters into an agreement to be
acquired by any other party; or
(v) if the Company both (1) fails to receive the opinion of
its financial advisor that the Merger is fair to the Company's
shareholders from a financial point of view, and such failure
occurs after a Superior Proposal is made, and (2) the
Reorganization is not consummated.
With the exception of the payment under subparagraph (iii) above,
which shall be paid within five business days following the Company's execution
of a definitive agreement of merger or acquisition (except that the Expenses of
First Federal shall be paid as provided in (iii) above), such payment shall be
made to First Federal in immediately available funds within five business days
after the occurrence of an event set forth above.
(c) First Federal agrees to reimburse the Company for all of the
reasonable Expenses of Mid-Iowa, as defined in Section 5.6 hereof, in an amount
not to exceed $250,000, incurred by the Company and Mid-Iowa in connection with
the transactions contemplated hereby in the event First Federal terminates this
Agreement pursuant to Section 11.1(b)(v).
12.3. Waivers; Amendments. At any time prior to the Closing Date,
either First Federal, by action taken by its Board of Directors, or any
committee or officers thereunto authorized, or the Company or Mid-Iowa, by
action taken by its Board of Directors, or any committee or officers thereunto
authorized, may waive the performance of any of the obligations of the other or
waive compliance by the other with any of the covenants or conditions contained
in this Agreement or agree to the amendment or modification of this Agreement by
an agreement in writing executed in the same manner as this Agreement; provided,
however, that after the favorable vote by the stockholders of the Company
pursuant to Section 7.1 of this Agreement any such action shall be taken only
if, in the opinion of the Company's Board of Directors, such waiver, amendment
or modification will not have a material adverse effect on the benefits intended
under this Agreement for the shareholders of the Company and will not require
resolicitation of any proxies from such shareholders.
12.4. Assignment; Parties in Interest. This Agreement shall be binding
upon and inure solely to the benefit of the parties hereto and their respective
successors and assigns, but shall not be assigned by the parties hereto, by
operation of law or otherwise, without the prior written consent of the other
parties. Except with respect to the payment of benefits pursuant to Section 7.12
and the obligation of First Federal contained in Section 7.8, nothing in this
Agreement, express or implied, is intended to confer upon any third party any
rights or remedies of any nature whatsoever under or by reason of this
Agreement.
12.5. Entire Agreement. This Agreement supersedes any other agreement,
whether written or oral, that may have been made or entered into by the Company,
Mid-Iowa or First Federal or by any officer or officers of such parties relating
to the acquisition of the business or the capital stock of the Company or
Mid-Iowa by First Federal, except for the Confidentiality Agreement dated July
3, 1998, which shall remain in full force and affect. This Agreement and such
Confidentiality Agreement
42
<PAGE>
constitute the entire agreement by the respective parties, and there are no
agreements or commitments except as set forth herein and therein.
12.6. Captions and Counterparts. The captions in this Agreement are
for convenience only and shall not be considered a part of or affect the
construction or interpretation of any provision of this Agreement. This
Agreement may be executed in several counterparts, each of which shall
constitute one and the same instrument.
12.7. Certain Definitions. For purposes of this Agreement, the term:
(a) "Affiliate" means a person that directly or indirectly, through
one or more intermediaries, controls, is controlled by, or is under common
control with, another person;
(b) "Material Adverse Effect" shall mean a material adverse effect on
the operations, assets, or financial condition of the parties to this
Agreement other than the effects of any such change attributable to or
resulting from any change in law, regulation or generally accepted
accounting principles or regulatory accounting principles and other than
the effects of any change attributable to or resulting from changes in
economic conditions applicable to depository institutions generally or in
general levels of interest rates.
(c) "Mid-Iowa Reports" shall mean all reports, registrations and
statements, together with any amendments required to be made with respect
thereto, that were and are required by applicable law to be filed with the
OTS, the FDIC, and any other applicable state securities or bank regulatory
authorities by either Mid-Iowa or the Company; and
(d) "to the knowledge of First Federal" or "to the best knowledge of
First Federal" shall mean the actual knowledge of any member of the Board
of Directors or of any senior officer of First Federal.
(e) "to the knowledge of the Company or Mid-Iowa" or "to the best
knowledge of the Company or Mid-Iowa" shall mean the actual knowledge of
any member of the Board of Directors or of any senior officer of the
Company or Mid-Iowa.
12.8. Enforcement of this Agreement. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties hereto will be
entitled to an injunction or injunctions to prevent breaches of this Agreement
and to enforce specifically the terms and provisions hereof in any court of the
United States or any state having jurisdiction, this being in addition to any
other remedy to which they are entitled at law or in equity.
43
<PAGE>
12.9. Governing Law. This Agreement shall be construed and interpreted
in accordance with the laws of the State of Iowa, except to the effect that
Federal Law applies, without regard to the conflicts of laws rules.
12.10. Notices. All notices given hereunder shall be in writing and
shall be hand delivered, sent by facsimile transmission or sent by a nationally
recognized overnight delivery service, addressed as follows:
(a) If to First Federal to:
First Federal Savings Bank of Siouxland
329 Pierce Street
Sioux City, Iowa 51102
Attention: Barry E. Backhaus, President
and Chief Executive Officer
With A Copy To:
Luse Lehman Gorman Pomerenk & Schick
5335 Wisconsin Avenue, N.W.
Suite 400
Washington, D.C. 20015
Attention: Robert B. Pomerenk, Esq.
(b) If to Mid-Iowa to:
Mid-Iowa Financial Corp.
123 West Second Street North
Newton, Iowa 50208
Attention: Kevin D. Ulmer, President and
Chief Executive Officer
with a copy to:
Housley Kantarian & Bronstein, P.C.
Suite 700
1220 19th Street, N.W.
Washington, D.C. 20036
Attention: Gary R. Bronstein, Esq.
Any notice provided hereunder shall be effective upon receipt thereof.
44
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the date first above written.
<TABLE>
<S> <C>
ATTEST: FIRST FEDERAL BANKSHARES, M.H.C.
By:/s/ Suzette Hoevet By:/s/Barry E. Backhaus
--------------------- -------------------------------
Suzette Hoevet Barry E. Backhaus, President
ATTEST: FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
By:/s/ Suzette Hoevet By:/s/Barry E. Backhaus
--------------------- -------------------------------
Suzette Hoevet Barry E. Backhaus, President
ATTEST: MID-IOWA SAVINGS BANK, FSB
By:/s/ Gary R. Hill By:/s/Kevin D. Ulmer
--------------------- -------------------------------
Gary R. Hill Kevin D. Ulmer, President
ATTEST: MID-IOWA FINANCIAL CORP.
By:/s/ Gary R. Hill By:/s/Kevin D. Ulmer
--------------------- -------------------------------
Gary R. Hill Kevin D. Ulmer, President
</TABLE>
45
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
The following are subsidiaries of First Federal Bankshares, Inc. following the
Conversion.
<TABLE>
<CAPTION>
Name State of Incorporation
- ---- ----------------------
<S> <C>
First Federal Savings Bank of Siouxland Federal
First Financial Corporation of Sioux City Iowa
Equity Services, Inc. Iowa
United Escrow Iowa
Sioux Financial Co. Iowa
</TABLE>
<PAGE>
Exhibit 23.2
Consent of Independent Auditors
The Board of Directors
First Federal Savings Bank of Siouxland:
We consent to the use of our reports included in the Registration Statement on
Form S-1 to be filed with the Securities and Exchange Commission and in the
Application for Conversion on Form AC to be filed with the Office of Thrift
Supervision and to the reference to our firm under the headings "Consolidated
Statements of Operations," "Taxation - Tax Aspects," and "Experts" in the
Prospectus.
/s/ KPMG Peat Marwick LLP
- -------------------------
Des Moines, Iowa
December 17, 1998
<PAGE>
Exhibit 23.3
[letterhead]
December 18, 1998
Board of Directors
First Federal Bankshares, Inc.
First Federal Bankshares, M.H.C.
First Federal Savings Bank of Siouxland
329 Pierce Street
Sioux City, IA 51101
Gentlemen:
We hereby consent to the use of our firm's name in the Application for
Conversion of First Federal Bankshares, M.H.C., the mutual holding company for
First Federal Savings Bank of Siouxland, Sioux City, Iowa, and any amendments
thereto, in the Form S-1 Registration Statement and any amendments thereto and
in the Form H-(e)3 for First Federal Bankshares, Inc. We also hereby consent to
the inclusion of, summary of and references to our Appraisal Report and our
statement concerning subscription rights in such filings including the
Prospectus of First Federal Bankshares, Inc.
Sincerely,
RP FINANCIAL, LC.
/s/ James J. Oren
---------------------
James J. Oren
Senior Vice President
<PAGE>
Consent of Independent Auditors
The Board of Directors
Mid-Iowa Financial Corp.:
We consent to inclusion in the Registration Statement on Form S-1 of First
Federal Bankshares, Inc. to be filed with the Securities and Exchange Commission
and in the Application for Conversion on Form AC to be filed with the Office of
Thrift Supervision of our report date November 6, 1998 with respect to the
consolidated balance sheets of Mid-Iowa Financial Corp. as of September 30, 1998
and 1997 and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
September 30, 1998, and to the reference to our firm under the heading "Experts"
in the Prospectus.
/s/ KPMG Peat Marwick LLP
- ---------------------------
Des Moines, Iowa
December 17, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> JUN-30-1999 JUN-30-1998
<PERIOD-END> SEP-30-1998 JUN-30-1998
<CASH> 8,919,400 8,725,007
<INT-BEARING-DEPOSITS> 1,000,000 7,500,000
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 87,457,398 65,194,875
<INVESTMENTS-CARRYING> 32,107,702 32,023,240
<INVESTMENTS-MARKET> 32,917,438 32,371,990
<LOANS> 410,132,117 407,407,592
<ALLOWANCE> 2,676,748 2,607,167
<TOTAL-ASSETS> 569,611,989 551,450,100
<DEPOSITS> 392,677,194 392,425,285
<SHORT-TERM> 26,000,000 18,000,000
<LIABILITIES-OTHER> 8,882,623 9,103,854
<LONG-TERM> 98,885,063 89,800,878
0 0
0 0
<COMMON> 11,136,079 11,106,739
<OTHER-SE> 32,031,030 30,913,344
<TOTAL-LIABILITIES-AND-EQUITY> 569,611,989 551,450,100
<INTEREST-LOAN> 8,079,259 28,796,484
<INTEREST-INVEST> 1,935,996 6,407,350
<INTEREST-OTHER> 40,957 160,432
<INTEREST-TOTAL> 10,056,212 35,364,288
<INTEREST-DEPOSIT> 4,574,293 15,826,758
<INTEREST-EXPENSE> 1,708,410 5,550,478
<INTEREST-INCOME-NET> 3,773,509 13,987,030
<LOAN-LOSSES> 75,000 345,000
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 2,962,240 11,527,595
<INCOME-PRETAX> 1,637,926 5,291,913
<INCOME-PRE-EXTRAORDINARY> 1,018,002 3,417,913
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,018,002 3,417,913
<EPS-PRIMARY> 0.36 1.21
<EPS-DILUTED> 0.35 1.19
<YIELD-ACTUAL> 2.87 3.07
<LOANS-NON> 888,000 1,120,000
<LOANS-PAST> 320,000 215,000
<LOANS-TROUBLED> 1,168,000 941,000
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 2,607,167 1,795,791
<CHARGE-OFFS> 34,411 422,140
<RECOVERIES> 28,992 87,030
<ALLOWANCE-CLOSE> 2,676,748 2,607,167<F1>
<ALLOWANCE-DOMESTIC> 2,676,748 2,607,167
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
<FN>
<F1>Includes $801,486 added due to acquisition of GFS Bancorp, Inc.
</FN>
</TABLE>
