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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 22, 1999
REGISTRATION NO. 333-69245
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FIRST FEDERAL BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 6712 (TO BE APPLIED FOR)
(State or other jurisdiction of (Primary standard (I.R.S. Employer
incorporation or organization) industrial classification) identification number)
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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
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. / /
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM OFFERING AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PRICE PER SHARE OFFERING PRICE (1) FEE
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Common Stock, $.01 par value per share 7,489,496 shares $10.00 $74,894,960 $20,900(2)
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(1) Estimated solely for the purpose of calculating the registration fee.
(2) Registration fee previously paid.
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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PROSPECTUS SUPPLEMENT
FIRST FEDERAL BANKSHARES, INC.
FIRST FEDERAL BANK
EMPLOYEES' SAVINGS & PROFIT SHARING PLAN AND TRUST
This prospectus supplement is being provided to members in First Federal
Bank Employees' Savings & Profit Sharing Plan and Trust. First Federal
Bankshares, M.H.C., the Mutual Holding Company of First Federal Savings Bank of
Siouxland is converting from a federally chartered mutual holding company to a
Delaware stock corporation and shares of common stock of First Federal
Bankshares, Inc. will be issued to certain depositors and the public. As a
member, you may direct the trustee of the plan to purchase First Federal
Bankshares 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. 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 First Federal
Bankshares, Inc. 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 First Federal Bankshares, Inc. Stock Fund
after the offering is completed.
The prospectus of First Federal Bankshares dated February ___, 1999 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.
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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
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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 FIRST
FEDERAL BANKSHARES, INC OR FIRST FEDERAL BANK. THE PLAN'S ENTIRE INVESTMENT IN
COMMON STOCK IS SUBJECT TO LOSS.
The date of this Prospectus Supplement is February ___, 1999.
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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 of First Federal Bankshares, Inc. ("First
Federal Bankshares").
First Federal Savings Bank of Siouxland ("First Federal") 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 First Federal Bankshares, M.H.C. (the
"Mutual Holding Company") from a federally chartered mutual holding company to a
Delaware stock corporation, in order to establish the First Federal Bankshares,
Inc. Stock Fund ("Employer Stock Fund") as an additional investment option under
the Plan. The prospectus supplement has been prepared and distributed to you so
that members (the "Members") in the Plan 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 First Federal, 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.
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TABLE OF CONTENTS
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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
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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. First Federal
Bankshares is the issuer of the common stock. Only employees of First Federal
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 First Federal is
contained in the attached prospectus. The address of the principal executive
office of First Federal is 329 Pierce Street, Sioux City, Iowa 51101. First
Federal'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 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 First Federal with
aggregate account balances (including demand deposits) of $50 or more as of
September 30, 1997 ("Eligible Account Holders"); (ii) First Federal's
tax-qualified employee benefit plans, including the ESOP; (iii) depositors of
First Federal 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 First Federal (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
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counties 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 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 directed to and from the Employer Stock Fund by those Members who are
officers, directors and
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principal shareholders of First Federal Bankshares who are subject to the
provisions of Section 16(b) of the Securities Exchange Act of 1934, 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 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
First Federal adopted a multiple-employer defined contribution plan (the
"Financial Institutions Thrift Plan") effective September 1, 1996. First Federal
withdrew from the Financial Institutions Thrift Plan and adopted a
single-employer plan effective December 1, 1998 in order to permit the
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
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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) of the Internal Revenue Code of 1986, as amended (the "Code").
First Federal intends that the Plan, in operation, will comply with the
requirements under Section 401(a) and Section 401(k) of the Code. First Federal
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 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 First Federal 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 First Federal.
The plan year is January 1 to December 31.
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.
CONTRIBUTIONS UNDER THE PLAN
401(K) PLAN CONTRIBUTIONS. Each Member of the Plan is permitted to elect to
defer such Member's salary 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
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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 Internal Revenue Service 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. First Federal 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 First Federal 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 First Federal. To the
extent that these limitations have been exceeded with respect to a Member, the
Plan administrator shall:
(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.
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If, in addition to this Plan, the Member is covered under other defined
contribution plans maintained by First Federal 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 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: (1) the ADP of the eligible
highly compensated employees is not more than 125% of the ADP of all other
eligible employees, or (2) 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: (1)
the ACP of the eligible highly compensated employees is not more than 125% of
the ACP of all other eligible employees, or (2) 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.
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, First Federal will
be subject to a 10% excise tax on any excess contributions unless such excess
contributions, together with any income allocable
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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 First Federal 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 which is administered by the trustee appointed by First Federal'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:
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, the Pentegra Group ("Pentegra"), or by using
Pentegra's voice response unit by calling (800)433- 4422, in accordance 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.
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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 First Federal
Bankshares by 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: (1) group annuity contracts
including fixed and variable rate contracts with insurance companies or other
financial institutions, (2) bank time deposits or deposit agreements, (3) short
term investment funds, (4) U.S. Treasury Bills and (5) third party agreements
providing book value liquidity for 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.
8
<PAGE>
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 First Federal Bankshares. 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.
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 First Federal
Bankshares and First Federal and market conditions for the common stock
generally.
9
<PAGE>
INVESTMENT IN THE EMPLOYER STOCK FUND MAY INVOLVE CERTAIN RISKS IN
INVESTMENT IN COMMON STOCK OF FIRST FEDERAL BANKSHARES. 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>
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 First Federal to (1) reduce
administrative expenses, (2) offset any contribution to be made for the Plan
year, or (3) 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 FIRST
FEDERAL. 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 FIRST FEDERAL OR AFTER
TERMINATION OF EMPLOYMENT.
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,
10
<PAGE>
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.
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 First Federal to serve at its pleasure. The Bank of New York has
been appointed as trustee of the Plan. Until the offering is
11
<PAGE>
concluded, Barry E. Backhaus, President and Chief Executive Officer of First
Federal, 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. First Federal 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 Internal Revenue Service, 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 First Federal to continue the Plan indefinitely.
Nevertheless, First Federal 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. First Federal 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 First Federal
may make any amendment it determines necessary or desirable, with or without
retroactive effect, to comply with ERISA.
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
12
<PAGE>
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. First Federal 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.
LUMP SUM DISTRIBUTION. A distribution from the Plan to a Member or the
beneficiary of a Member will qualify as a lump sum distribution if it is made:
(1) within one taxable year of the Member or beneficiary; (2) on account of the
Member's death, disability or separation from service, or after the Member
attains age 59-1/2; and (3) consists of the balance to the credit of the Member
under this Plan and all other profit sharing plans, if any, maintained by First
Federal. The portion of any lump sum distribution that is required to be
included in the Member's or beneficiary's taxable
13
<PAGE>
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 First Federal 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 First Federal (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 First Federal), 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 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 Internal Revenue Service.
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
14
<PAGE>
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 First Federal) 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.
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 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 (1)
made to a
15
<PAGE>
beneficiary (or to the estate or a Member) on or after the death of the Member,
(2) attributable to the Member's being disabled within the meaning of Section
72(m)(7) of the Code, (3) 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, (4) made to the Member after separation from service
on account of early retirement under the Plan after attainment of age 55, (5)
made to pay medical expenses to the extent deductible for federal income tax
purposes, (6) made to an alternate payee pursuant to a qualified domestic
relations order, or (7) 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 Securities Exchange Act of 1934 imposes reporting and
liability requirements on officers, directors, and persons beneficially owning
more than 10% of public companies such as First Federal Bankshares. Section
16(a) of the Securities Exchange Act of 1934 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. 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 First Federal Bankshares' 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 First Federal Bankshares must be
reported to the Securities and Exchange Commission by such individuals.
In addition to the reporting requirements described above, Section 16(b) of
the Securities Exchange Act of 1934 provides for the recovery by First Federal
Bankshares of profits realized by an officer, director or any person
beneficially owning more than 10% of First Federal Bankshares' common stock
resulting from non-exempt purchases and sales of First Federal Bankshares'
common stock within any six-month period.
The Securities and Exchange Commission has adopted rules that provide
exemption from the profit recovery provisions of Section 16(b) for all
transactions in employer securities within an
16
<PAGE>
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, 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 First Federal in connection with
First Federal Bankshares' 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 INCOME GROWTH &
500 VALUE MIDCAP MARKET BOND PLUS INCOME
STOCK FUND FUND STOCK FUND FUND FUND FUND FUND
---------- ---- ---------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
- ------
Investments $ 251,996.09 42,617.02 93,286.67 26,711.97 39,888.16 1,418.01 2,306.22
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>
INTERNATIONAL
GROWTH STOCK
FUND FUND
---- ----
<S> <C> <C>
ASSETS
- ------
Investments 10,797.97 10,241.34
Total Value of Accounts
Outstanding Loans Receivable
Total Assets
LIABILITIES
Net Assets Available for Plan Benefits
</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. First Federal Bankshares, M.H.C., a mutual holding company and
First Federal's majority owner, will cease to exist and First Federal, under its
new name "First Federal Bank,"will become a wholly-owned subsidiary of First
Federal Bankshares, a new corporation.
First Federal Bankshares is offering common stock to the public in a
subscription and community offering. The shares being offered represent First
Federal Bankshares, M.H.C.'s 53.6% ownership interest in First Federal.
The 46.4% of shares in First Federal owned by the public will be
exchanged for new shares in First Federal Bankshares based on an exchange ratio.
The conversion, the offering of new stock, and the exchange of
existing shares are outlined in a plan of conversion. The plan must be approved
by the members of First Federal Bankshares, M.H.C., by the stockholders of First
Federal, and by the Office of Thrift Supervision. The transactions also will not
occur unless the minimum number of shares in the table below are sold in this
offering.
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 offering expenses: $ 1,326,000 $ 1,375,000 $ 1,423,000 $ 1,479,000
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 SUBSCRIPTION OFFERING WILL TERMINATE AT 12:00 NOON, CENTRAL
TIME, ON [ ], 1999, unless extended for up to __ days. For additional
information about the conversion, refer to the more detailed information in this
prospectus. For assistance, contact the conversion center at [ ].
First Federal Bankshares, M.H.C. and First Federal have agreed to
acquire Mid-Iowa Financial Corp. and its wholly-owned subsidiary, Mid-Iowa
Savings, FSB. This acquisition and the conversion and stock offering are
inter-dependent transactions; neither transaction will occur unless both of them
do.
Sandler O'Neill & Partners, L.P. and Investment Bank Services, Inc.
will use their best efforts to assist us in selling at least the minimum number
of shares but do not guarantee that this number will be sold. We will hold all
funds received from subscribers in an interest-bearing savings account at First
Federal until the completion or termination of the conversion. The National
Association of Securities Dealers, Inc. has given us preliminary approval to
list our common stock on the NASDAQ National Market under the symbol FFSX.
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.
SANDLER O'NEILL & PARTNERS, L.P. INVESTMENT BANK SERVICES, INC.
The date of this prospectus is February __, 1999
<PAGE>
[INSERT MAP SHOWING FIRST FEDERAL'S MARKET AREA IN IOWA AND
PORTIONS OF NEBRASKA AND SOUTH DAKOTA]
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary......................................................................................4
Risk Factors................................................................................11
Selected Consolidated Financial and Other Data
of First Federal and Subsidiaries...........................................................14
Selected Consolidated Financial And Other Data of Mid-Iowa Financial........................17
Selected Unaudited Pro Forma Consolidated
Financial Data of First Federal Bankshares, Inc.............................................19
First Federal Bankshares....................................................................21
First Federal...............................................................................21
Historical and Pro Forma Capital Compliance.................................................23
Use of Proceeds.............................................................................25
Dividend Policy.............................................................................26
Market for the Common Stock.................................................................27
Capitalization..............................................................................28
Pro Forma Data..............................................................................30
First Federal Savings Bank of Siouxland And Subsidiaries
Consolidated Statements of Operation........................................................39
Management's Discussion and Analysis of
Financial Condition and Results of Operations...............................................40
Business of First Federal...................................................................54
Regulation..................................................................................76
Taxation....................................................................................84
Management of First Federal Bankshares......................................................85
Management of First Federal.................................................................87
Beneficial Ownership of Common Stock........................................................99
Subscriptions by Executive Officers and Directors..........................................100
The Conversion.............................................................................101
Restrictions on The Acquisition of First Federal Bankshares
And First Federal..........................................................................123
Description of Capital Stock of First Federal Bankshares...................................128
Description of Capital Stock of First Federal..............................................130
Transfer Agent And Registrar...............................................................130
Experts....................................................................................130
Legal Opinions.............................................................................131
Additional Information.....................................................................131
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
</TABLE>
3
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY EXPLAINS THE SIGNIFICANT ASPECTS OF THE
CONVERSION. FOR ADDITIONAL INFORMATION, REFER TO THE MORE DETAILED INFORMATION
IN THIS PROSPECTUS. THROUGHOUT THIS PROSPECTUS, FIRST FEDERAL SAVINGS BANK OF
SIOUXLAND IS SOMETIMES REFERRED TO AS "FIRST FEDERAL," FIRST FEDERAL BANKSHARES,
M.H.C. IS SOMETIMES REFERRED TO AS THE "MUTUAL HOLDING COMPANY" AND FIRST
FEDERAL BANKSHARES, INC. IS SOMETIMES REFERRED TO AS "FIRST FEDERAL BANKSHARES."
THE COMPANIES
FIRST FEDERAL BANKSHARES, INC.
First Federal formed First Federal Bankshares under Delaware law in
December 1998 to own all of its capital stock following the conversion. First
Federal Bankshares has received conditional approval from the Office of Thrift
Supervision to become a savings and loan holding company. First Federal
Bankshares intends to retain $5.0 million of the net proceeds from the sale of
its common stock in the conversion, including the loan that First Federal
Bankshares intends to make to First Federal's Employee Stock Ownership Plan. The
remaining net proceeds will be contributed to First Federal.
FIRST FEDERAL BANKSHARES, M.H.C.
First Federal Bankshares, M.H.C.'s sole business activity is holding
1,524,600 shares of First Federal's common stock, which represents 53.6% of its
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,
First Federal Bankshares, M.H.C. will merge into First Federal, with First
Federal as the surviving entity.
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
First Federal is a federally-chartered savings bank headquartered in
Sioux City, Iowa. At September 30, 1998, we had total assets of $569.6 million,
total deposits of $392.7 million, and total stockholders' equity of $43.2
million.
We are a community-oriented financial institution offering
traditional financial services to our local community. We conduct operations
through our main office in Sioux City, Iowa, and our 12 branch offices.
A full description of our products and services begins on page _____
of this prospectus. Our primary lending area includes northwest Iowa, contiguous
portions of Nebraska and South Dakota and central Iowa.
The principal executive offices of First Federal Bankshares and
First Federal are located at 329 Pierce Street, Sioux City, Iowa 51101. Our
telephone number at that address is (712) 277-0200.
THE CONVERSION
THE SUBSCRIPTION OFFERING AND THE COMMUNITY OFFERING
We are selling in this offering the 53.6% interest in First Federal
now owned by First Federal Bankshares, M.H.C. Current and former depositors and
borrower customers of First Federal and First Federal's Employee Stock Ownership
Plan have priority rights to subscribe for shares in First Federal Bankshares
representing this interest. The priorities are as follows:
(1) Depositors with $50 or more on deposit as of September
30, 1997 get first priority.
4
<PAGE>
(2) First Federal's employee stock benefit plans, including
the employee stock ownership plan, get second priority.
The employee stock ownership plan will own from ____ to
___ shares of common stock.
(3) Depositors with $50 or more on deposit as of December
31, 1998 get third priority.
(4) Depositors as of _________, 1999, and borrowers as of
February 11, 1992 whose loans continue to be outstanding
on _________, 1999, get fourth priority.
We are selling between 2,635,000 and 3,565,000 shares of common
stock, all at a price of $10.00 per share. The number of shares to be sold may
be increased to 4,099,750. The actual amount of shares we sell will depend on an
independent appraisal of First Federal Bankshares, M.H.C. and First Federal. The
factors that went into the appraisal are discussed below under "Stock Pricing,
Exchange Ratio and Number of Shares to Be Issued in the Conversion."
The subscription offering expires at 12:00 noon, Central Time, on
__________, 1999, unless extended by First Federal. You cannot transfer your
subscription rights. If you attempt to transfer your rights, you may lose the
right to purchase shares and may be subject to criminal prosecution and/or other
sanctions.
While the subscription offering is occurring, we will also offer
shares of common stock to the general public in a community offering. In the
community offering, current stockholders of First Federal will have first
preference, depositors of Mid-Iowa Savings Bank, FSB as of __________, 1998 will
have second preference, and natural persons and trusts of natural persons who
reside in our community will have third preference. The community offering will
end on ___________, 1999, unless extended with the approval of the Office of
Thrift Supervision, if necessary.
You will not need to pay a commission to buy any shares in the
conversion.
Sandler O'Neill & Partners, L.L.P. and Investment Bank Services,
Inc. are managing both the subscription offering and the community offering.
They are registered broker dealers and members of the National Association of
Securities Dealers, Inc. They are not obligated to purchase any shares of common
stock in our 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 O'Neill.
We have described the subscription offering, the community offering
and the syndicated community offering in greater detail beginning at page ______
of this prospectus.
THE EXCHANGE OF FIRST FEDERAL COMMON STOCK
If you are now a stockholder of First Federal, your shares will be
cancelled and exchanged for new shares in First Federal Bankshares. The number
of shares you will get will be based on an exchange ratio. The actual number of
shares you receive will depend upon the number of shares we sell in our
offering, which in turn will depend upon the final appraised value of First
Federal and First Federal Bankshares, M.H.C. The following table shows how the
exchange ratio will adjust based on the number of shares sold in our offering.
5
<PAGE>
<TABLE>
<CAPTION>
SHARES TO BE SOLD IN THIS SHARES TO BE EXCHANGED FOR TOTAL SHARES
OFFERING BANK COMMON STOCK OF COMMON
------------------------- -------------------------- STOCK TO BE EXCHANGE
AMOUNT PERCENT AMOUNT PERCENT OUTSTANDING RATIO(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>
If you own your shares of First Federal in "street name," the
exchange will occur automatically and you need take no action. If you hold
certificated shares, you will receive a transmittal form with instructions to
surrender your stock certificates. You will receive new certificates of First
Federal Bankshares' common stock within five business days after we receive
properly executed transmittal forms. We will pay cash instead of issuing
fractional shares of common stock in the exchange.
Under federal regulations, current stockholders of First Federal do
not have dissenters' rights or appraisal rights.
REASONS FOR THE CONVERSION
We are pursuing the conversion for the following reasons:
- First Federal Bankshares, M.H.C. and First Federal have
agreed to acquire Mid-Iowa Financial Corp. and its
wholly-owned subsidiary, Mid-Iowa Savings Bank, FSB. The
acquisition is described immediately below. The net cash
proceeds raised in the conversion will help finance the
acquisition.
- After the conversion, our common stock will qualify for
listing on the Nasdaq National Market because of the
larger number of shares that will be outstanding. We
believe this listing and the larger number of
outstanding shares will make it easier for you to buy
and sell our common stock.
- After the conversion, we can repurchase shares of our
common stock without adverse tax consequences.
Repurchasing common stock is commonly used by financial
institutions to deploy excess capital.
- After the conversion, we will have greater flexibility
under current law and regulations to acquire other
financial institutions and to diversify operations.
CONDITIONS TO COMPLETION OF CONVERSION
We cannot complete our conversion and our offering unless:
(1) It is approved by at least a majority of votes eligible
to be cast by members of First Federal Bankshares,
M.H.C.
6
<PAGE>
(2) It is approved by at least two-thirds of the outstanding
shares of First Federal common stock.
(3) It is approved by at least a majority of the outstanding
shares of First Federal common stock, not including
those shares held by First Federal Bankshares, M.H.C.
First Federal Bankshares, M.H.C. intends to vote its 53.6% ownership
interest in favor of the conversion. In addition, as of September 30, 1998,
directors and executive officers of First Federal and their associates
beneficially own 134,788 shares of First Federal, or 4.7% of the outstanding
shares. They intend to vote those shares in favor of the conversion.
STOCK PRICING, EXCHANGE RATIO AND NUMBER OF SHARES TO BE ISSUED IN THE
CONVERSION
The amount of common stock we are offering in the conversion is
based on an independent appraisal of the estimated market value of First Federal
Bankshares, M.H.C. and First Federal after giving effect to the conversion. RP
Financial, L.C., the independent appraiser, has estimated that, in its opinion,
as of November 27, 1998, this market value was between $48.1 million and $65.1
million (with a midpoint of $56.6 million). The appraisal was based in part on
First Federal'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 First Federal Bankshares and First Federal
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 market value 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. See "The Conversion--Stock Pricing, Exchange Ratio and
Number of Shares to be Issued" for additional details.
PURCHASE LIMITATIONS
The minimum number of shares that may be purchased is 25. We have
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 First Federal common stock, exceeds 85,000
shares.
Persons owning shares of First Federal common stock may be limited
in their ability to subscribe for and purchase shares in this offering because
Office of Thrift Supervision policy requires that the maximum purchase
limitation include shares to be received in exchange for shares of First Federal
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" on 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 us in the postage-paid
envelope provided so that we receive the stock order form before the end of the
subscription offering. The certification that is part of the stock order form
7
<PAGE>
must also be signed. Payment for shares may be made in cash (if made in person)
or by check or money order. First Federal 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 us 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 First Federal 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 we receive an order,
the order cannot be withdrawn or changed, except with our consent.
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.
We 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 First
Federal. If you want to use funds in a self-directed IRA maintained by First
Federal 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
We will use the proceeds of this offering as follows:
1. First Federal Bankshares 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 First Federal Bankshares 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 and $29.2 million will be contributed to
First Federal 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 First Federal, including interest bearing deposits
with the FHLB, or FHLB advances.
For further discussion, see "Use of Proceeds."
PURCHASES BY OFFICERS AND DIRECTORS
We expect our 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 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."
8
<PAGE>
BENEFITS OF THE CONVERSION TO MANAGEMENT
We intend to establish an Employee Stock Ownership Plan that will
purchase up to 7% of the shares we sell in this offering, or 249,550 shares
assuming we sell the maximum of the shares proposed to be sold. If we sell more
than the maximum number of shares, this plan will have first priority to
purchase shares over this maximum, up to the total of 7%. This plan is a
tax-qualified retirement plan for all eligible employees. Assuming the plan
purchases 249,550 shares, First Federal Bankshares will recognize additional
compensation expense of $2,495,500.
We also intend to implement two stock-based incentive plans, though
neither plan will be implemented earlier than six months after the conversion.
One plan, the 1999 recognition plan, would reserve 3% of the shares sold in the
offering, or 106,950 shares at the maximum of the offering range, for award to
key employees and directors, at no cost to the recipients. The second plan, the
1999 option plan, will reserve 10% of the shares sold in this offering, or
356,500 shares at the maximum of the offering range, for award after the
exercise of options to be granted to key employees and directors. Awards made
under these plans would be subject to a vesting schedule.
The following table summarizes these plans. The value of shares
shown in the table assumes a value of $10.00 per share, the price at which
shares in the offering will be sold. No value is given for options because their
exercise price will be equal to the fair market value of the common stock on the
day the options are granted. As a result, value can be received under an option
only if the market price of common stock increases after the option grant.
<TABLE>
<CAPTION>
VALUE OF GRANT
----------------------------------
AT MINIMUM OF AT MAXIMUM OF PERCENTAGE OF
OFFERING RANGE OFFERING RANGE COMMON STOCK
<S> <C> <C> <C>
EMPLOYEE STOCK OWNERSHIP PLAN
1999 RECOGNITION PLAN
1999 OPTION PLAN
TOTAL
</TABLE>
In connection with the conversion, First Federal 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, First Federal intends to
replace its current agreement with Steven L. Opsal, Executive Vice President,
with a new employment agreement. The employment agreements will provide cash
payments to the executives if their employment is terminated following a change
in control of First Federal Bankshares or First Federal. 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.
Finally, outstanding stock options and shares of common stock that
were awarded in First Federal's previously implemented benefit plans will be
converted into options and common stock of First Federal Bankshares, with the
number to be based on the exchange ratio.
9
<PAGE>
MARKET FOR COMMON STOCK
The National Association of Securities Dealers, Inc. has given us
preliminary approval to list the common stock on the NASDAQ National Market
under the symbol FFSX. The common stock of First Federal is currently listed on
the Nasdaq "SmallCap" Market under the symbol FFSX. While it is expected that
First Federal Bankshares' common stock will be more easily tradeable because
there will be significantly more outstanding shares than for First Federal's
common stock, there can be no assurance of this.
Sandler O'Neill has advised us that it intends to be a market maker
in the common stock and will assist us in obtaining additional market makers.
DIVIDEND POLICY
First Federal now pays a cash dividend of $0.12 per share per
quarter, or $0.48 per share per year. After the conversion, First Federal
Bankshares expects to maintain this dividend rate. After adjustment for the
exchange ratio, First Federal Bankshares 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
First Federal Bankshares is a Delaware corporation subject to the
provisions of the Delaware Business Corporation Code and First Federal is a
federally-chartered savings bank subject to federal laws and regulations. After
the conversion, the stockholders of First Federal will become stockholders of
First Federal Bankshares and their rights as stockholders will be governed by
First Federal Bankshares' Certificate of Incorporation and Bylaws and Delaware
law, rather than First Federal's Federal Stock Charter and Bylaws and federal
law and regulations. For a discussion of certain material differences in the
rights of stockholders of First Federal Bankshares and the bank and an
explanation of possible antitakeover effects of certain provisions of First
Federal Bankshares' Certificate of Incorporation and Bylaws, see "Comparison of
Stockholders' Rights" and "Restrictions on Acquisition of First Federal
Bankshares" on page _____.
ACQUISITION OF MID-IOWA FINANCIAL CORP.
On August 17, 1998, First Federal Bankshares, M.H.C. and First
Federal agreed to acquire Mid-Iowa Financial Corp. and its wholly-owned
subsidiary, Mid-Iowa Savings Bank, FSB in a cash acquisition. The conversion and
the stock offering will assist in financing this acquisition. The acquisition
and the conversion are interdependent transactions. Neither transaction will
occur unless both of them do.
In the merger, each share of Mid-Iowa Financial common stock will be
converted into the right to receive $15.00 in cash, subject to adjustment, 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 of the
option. If the merger is not completed by April 15, 1999, the merger
consideration will increase by $3,700 per day until the merger is completed.
First Federal 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), if the merger is completed prior to April 15, 1999.
The merger must be approved by stockholders of Mid-Iowa Financial
Corp. and by the Office of Thrift Supervision. 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.
10
<PAGE>
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.
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 at pages _____.
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.
INCREASING INTEREST RATES MAY DECREASE OUR PROFITS AND THE VALUE OF OUR
INVESTMENT PORTFOLIO
To be profitable, we must earn more money in interest and fees than
we pay to our depositors in interest. More than ____% of our interest earning
assets, such as our loans, are long-term investments with fixed-interest rates.
In contrast, the interest we owe to our depositors generally is for short-term
deposits and may be changed more frequently. When interest rates rise, we must
pay more in interest but, because of our long-term, fixed-rate assets, we may
not be paid as much interest income. This causes profits to decrease.
In addition, we have a portfolio of investment securities.
Generally, the value of this portfolio decreases when interest rates rise.
Finally, lower interest rates may cause borrowers to refinance their
loans to reduce their borrowing costs. After such refinancings, we may be unable
to reinvest these prepayments at rates that are comparable to the rates on the
prepaid loans.
For further discussion of how changes in interest rates affect us,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Management of Interest Rate Risk."
OUR RETURN ON EQUITY MAY BE LOWER THAN OUR PEERS FOLLOWING THE CONVERSION
Many investors consider return on equity to be a useful benchmark
for valuing financial institutions. At September 30, 1998, First Federal's
return on equity ratio was __%. However, the net proceeds from the conversion
will cause our return on equity ratio to decrease to __%, assuming we sell the
maximum number of shares in the offering range. In addition, our expenses will
increase because of the costs associated with the employee stock ownership plan,
increased expenses of our new stock holding company, the integration of Grinnell
Federal Savings Bank which we acquired in March 1998, and the integration of
Mid-Iowa Financial. Also, the stock-based benefit plans we expect to implement
after our conversion will increase expenses.
The increases in both equity and expenses outlined above will
decrease our return on equity as compared to prior years as well as compared to
our peer institutions. We will attempt to invest our new capital in higher
interest earning assets as quickly as possible, thereby increasing our return on
equity ratio. But there can be no assurance that we will succeed at this.
OUR $10.00 PER SHARE OFFERING PRICE DOES NOT ASSURE IMMEDIATE POST-CONVERSION
PRICE APPRECIATION
The $10.00 per share offering price as a percentage of our projected
post-conversion tangible book value per share is higher than that same ratio for
typical mutual-to-stock conversions of financial institutions. The pricing for
common stock of typical converting financial institutions is designed to assure
immediate post-
11
<PAGE>
conversion price appreciation. Because our common stock has not been priced to
assure immediate post-conversion price appreciation, purchasers of our common
stock should have a longer term investment horizon.
CERTAIN LOANS WE MAKE HAVE HIGHER DEFAULT RISKS THAN RESIDENTIAL MORTGAGE LOANS
We, like most savings banks, primarily originate residential
mortgage loans. This type of loan typically has the lowest default rate of loans
made by savings banks. Like many savings banks, however, we also originate other
loans including consumer loans, multi-family loans and commercial real estate
loans. These loans typically carry higher default rates, but also can be more
profitable.
At September 30, 1998, our consumer loan portfolio, which included a
small number of commercial business loans, amounted to $50.4 million, or 12.4%
of total net loans. We intend to expand our consumer lending activities within
our primary market area. 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.
At September 30, 1998, our multi-family and commercial real estate
loan portfolio amounted to $60.7 million, or 14.9% of total loans. 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.
IMPLEMENTING OUR STOCK-BASED BENEFIT PLANS WILL INCREASE OUR FUTURE COMPENSATION
EXPENSE AND MAY DILUTE THE VOTING INTERESTS OF OUR STOCKHOLDERS
Our 1999 recognition plan and our 1999 stock option plan have
available for award 3% and 10%, respectively, of the shares of common stock to
be sold in the conversion. The cost of these shares, at $10.00 per share, would
be $1.1 million and $3.6 million, respectively, at the maximum of the offering
range. If, on the other hand, First Federal Bankshares issues new common stock
for these plans, the voting interests of existing stockholders will be diluted.
As of September 30, 1998, there were 37,574 options outstanding on
First Federal common stock. These options will be converted into options to
purchase First Federal Bankshares common stock, based upon the exchange ratio.
The exercise of these options will also dilute the voting interests of existing
stockholders.
IF THE NUMBER OF SHARES OF COMMON STOCK TO SOLD IN THIS OFFERING IS INCREASED,
THE FUTURE NET INCOME ATTRIBUTABLE TO EACH SHARE WILL BE DECREASED
An increase in the number of shares sold will mean that each share
will own a smaller part of whatever earnings and equity we may have in the
future. For further information regarding pro forma information, see "Pro Forma
Data."
COMPENSATION EXPENSE FOR OUR EMPLOYEE STOCK OWNERSHIP PLAN
We are required to record compensation expense in an amount equal to
the fair value of shares committed to be released to employees from our employee
stock ownership plan. Therefore, future increases in fair value of the common
stock committed to be released will increase compensation expense. The annual
pre-tax compensation expense of the plan 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 plan shares differs from the cost of
such shares, the differential will be charged or credited to equity.
12
<PAGE>
OUR AGREEMENT TO MAKE PAYMENTS AFTER A CHANGE IN CONTROL IN VARIOUS EMPLOYEE
CONTRACTS AND PLANS MAY DISCOURAGE TAKEOVER ATTEMPTS
The proposed stock-based benefit plans may contain provisions
calling for the acceleration of benefits or payments in the event of a change in
control. We also intend to enter into employment and change in control
agreements with certain employees. These agreements and plans are expected to
provide benefits and cash payments to employees if there is a change in control
and a subsequent termination of their employment. These benefits that would come
into effect upon a change in control would increase the cost of acquiring us.
This additional cost could discourage future attempts to take us over that you
might like to see happen.
ANTI-TAKEOVER PROVISIONS IN OUR GOVERNING INSTRUMENTS AND VOTING CONTROL OF
MANAGEMENT MAY DISCOURAGE TAKEOVER ATTEMPTS
PROVISIONS IN FIRST FEDERAL'S AND FIRST FEDERAL BANKSHARES'
GOVERNING INSTRUMENTS. Provisions in our governing instruments may discourage
potential proxy contests and other potential takeover attempts, particularly
those that have not been negotiated with our Board of Directors. As a result,
these provisions generally may serve to perpetuate existing management. Examples
of these provisions include a limitation on the voting of shares held by a
single beneficial owner in excess of 10% of our outstanding shares and the
election of directors for three-year terms so that only approximately one-third
of our directors are elected annually. For a more detailed discussion of these
provisions, see "Restrictions on Acquisitions of the Company and the Bank."
VOTING CONTROL OF OFFICERS AND DIRECTORS. The prospective possible
total ownership or voting influence over our shares that our employees and
directors might obtain over time through the shares they purchase in the
conversion, their interests in the employee stock ownership plan, and their
possible acquisition of shares upon the vesting of awards or the exercise of
options that they might receive if we adopt the proposed stock-based benefit
plans would give our employees and directors a significant vote on matters
important to you. Further, this possible ownership level could discourage
takeover attempts that you might like to see happen. In addition, the total
ownership or voting level by employees and directors from these sources could
reach in excess of 20% of our outstanding stock. That level would enable our
employees and directors as a group to defeat any stockholder matter that
required an 80% vote. For a detailed discussion of these provisions, see
"Restrictions on Acquisition of the Company and the Bank -- Restrictions in the
Company's Certificate of Incorporation and Bylaws."
IF OUR COMPUTER SYSTEMS OR THOSE OF OUR VENDORS AND CUSTOMERS DO NOT WORK
PROPERLY IN THE YEAR 2000, OUR OPERATIONS WILL BE SIGNIFICANTLY DISRUPTED
If our computer systems and the computer systems operated by our
third-party vendors are not able to handle problems created by the Year 2000, we
could experience significant disruption to our business and, as a result, a
significant adverse impact on our financial condition and results of operations.
In addition, if borrowers of First Federal or large employers in our market area
have Year 2000 problems, some of our loans could become delinquent and cause
losses. We have taken significant steps to address Year 2000 problems within our
control, but we cannot assure that our efforts will be successful. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Compliance."
RISKS RELATED TO THE ACQUISITION OF MID-IOWA FINANCIAL
The future growth of the bank and First Federal Bankshares will
depend, in part, on the success of the merger which will, in turn, depend, on a
number of factors, including the bank's ability to integrate the Mid-Iowa
Savings branches into the current operations of the bank; the bank's ability to
limit the outflow of deposits held by customers in the Mid-Iowa Savings
branches; 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 the bank's ability to retain and integrate the appropriate personnel of
Mid-Iowa Savings into the operations of the bank. No assurance
13
<PAGE>
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.
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
OF FIRST FEDERAL AND SUBSIDIARIES
The following tables set forth selected consolidated historical
financial and other data of First Federal (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 First Federal 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 First
Federal, 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 First Federal 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)
14
<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)
- -------------------
15
<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 special Savings Association Insurance Fund ("SAIF")
assessment, First Federal'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 First Federal's acquisition of GFS Bancorp,
Inc. for periods subsequent to March 31, 1998.
(9) Annualized where appropriate.
16
<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>
17
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- -------
OTHER DATA:
<S> <C> <C> <C> <C> <C>
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.
18
<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 First Federal Bankshares and its
subsidiaries. For each period presented below, the "Pro Forma for Acquisition"
information reflects the acquisition of Mid-Iowa Financial, but not the
conversion. The "Pro Forma for Acquisition and Conversion" information reflects
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 1999 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 Offering
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, the
acquisition of Mid-Iowa Financial 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>
19
<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
of Mid-Iowa Financial.
(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.
20
<PAGE>
FIRST FEDERAL BANKSHARES
First Federal Bankshares was organized in December 1998 for the
purpose of acquiring all of the outstanding shares of capital stock of First
Federal. First Federal Bankshares 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, First Federal Bankshares will conduct business
initially as a unitary savings and loan holding company. See
"Regulation--Holding Company Regulation." Upon consummation of the conversion,
First Federal Bankshares' assets will be primarily the shares of First Federal'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 First Federal Bankshares
and the ESOP loan. First Federal Bankshares anticipates retaining $5.0 million
of the net proceeds of the offering. First Federal Bankshares initially will
have no significant liabilities. See "Use of Proceeds." The management of First
Federal Bankshares is set forth under "Management of First Federal Bankshares."
Initially, First Federal Bankshares will neither own nor lease any property, but
instead will use the premises, equipment and furniture of First Federal. At the
present time, First Federal Bankshares does not intend to employ any persons
other than officers but will utilize the support staff of First Federal from
time to time. Additional employees will be hired as appropriate to the extent
First Federal Bankshares expands its business.
The conversion will provide First Federal with additional capital to
support future growth, including the acquisition of Mid-Iowa Financial, and
enhance results of operations. Management believes that the holding company
structure will provide First Federal Bankshares 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, First Federal Bankshares will be in a
position after the conversion, subject to regulatory limitations and First
Federal Bankshares' financial position, to take advantage of any such
acquisition and expansion opportunities that may arise. The initial activities
of First Federal Bankshares are anticipated to be funded by the proceeds
permitted to be retained by First Federal Bankshares and earnings thereon or,
alternatively, through dividends received from First Federal.
First Federal Bankshares' executive office is located at 329 Pierce
Street, Sioux City, Iowa, and its telephone number is (712) 277-0200.
FIRST FEDERAL
First Federal 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. First
Federal has been a member of the Federal Home Loan Bank ("FHLB") of Des Moines
since 1935. On July 13, 1992, First Federal's mutual predecessor reorganized
from a federally chartered mutual savings bank into the Mutual Holding Company
and concurrently formed First Federal, which succeeded to the name and
operations of First Federal's mutual predecessor (the "MHC Reorganization"). At
the time of the MHC Reorganization, First Federal conducted a stock offering
(the "Minority Stock Offering") in which it raised approximately $5.6 million of
net proceeds. At September 30, 1998, First Federal had total assets of $569.6
million, total deposits of $392.7 million, and stockholders' equity of $43.2
million.
First Federal is a community-oriented financial institution offering
traditional financial services to its local community. First Federal's primary
lending area includes northwest Iowa, contiguous portions of Nebraska and South
Dakota and central Iowa. First Federal's primary lending activity involves the
origination of fixed rate and adjustable rate mortgage 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 adjustable rate mortgage loans are
retained in First Federal's portfolio. To a lesser extent,
21
<PAGE>
First Federal 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, First Federal makes commercial and multi-family
loans and First Federal anticipates an increase in its commercial and
multi-family loan portfolios in the future. In addition, First Federal invests
in mortgage-backed securities issued or guaranteed by Fannie Mae ("FNMA"), the
Freddie Mac ("FHLMC"), or the Government National Mortgage Association ("GNMA")
and in securities issued by the United States Government and agencies thereof.
First Federal 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, First Federal 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, First
Federal closed its branch offices located in Hartley and Sanborn, Iowa, and sold
the deposits relating to those branches. First Federal 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.
First Federal'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.
22
<PAGE>
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
At September 30, 1998, First Federal 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 First Federal
and Mid-Iowa Savings at September 30, 1998 and the pro forma regulatory capital
of First Federal after giving effect to the conversion and the acquisition of
Mid-Iowa Financial, 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 First Federal of all of the net conversion proceeds, less the $5.0
million of proceeds which will be retained by First Federal Bankshares 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 First
Federal 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.
23
<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)
-------- -------- -------- -------- -------- -------- -------- -----------
(DOLLARS IN THOUSANDS)
<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 First Federal Bankshares 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.
24
<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. First Federal Bankshares will be unable to utilize any of the net
proceeds of the offering until the consummation of the conversion.
First Federal Bankshares 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 First Federal to be issued upon
conversion. First Federal Bankshares will retain net proceeds in the amount of
$5.0 million, including the ESOP loan. The balance of funds retained by First
Federal Bankshares 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.
First Federal Bankshares 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 First Federal Bankshares common stock issued in the offering. First
Federal Bankshares and First Federal may alternatively choose to fund the ESOP's
stock purchases through a loan by a third party financial institution. See
"Management of First Federal--Benefits for Employees and Officers." The net
proceeds retained by First Federal Bankshares 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. First Federal Bankshares
and First Federal intend to actively explore additional acquisitions, although
with the exception of the Mid-Iowa Financial acquisition neither First Federal
Bankshares nor First Federal 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 First
Federal Bankshares will have the authority to repurchase stock, subject to
statutory and regulatory requirements. Unless approved by the OTS, First Federal
Bankshares, pursuant to OTS policy, generally will be prohibited from
repurchasing any shares of its common stock for three years except for an offer
to all stockholders on a pro rata basis, or 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, First Federal
Bankshares may repurchase its common stock so long as:
(1) 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;
(2) the repurchases do not cause First Federal to become
"undercapitalized" within the meaning of the OTS prompt corrective action
regulation; and
(3) First Federal Bankshares 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:
(1) 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
25
<PAGE>
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 First Federal Bankshares' return on equity;
(2) 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
(3) any other circumstances in which repurchases would be in the
best interests of First Federal Bankshares and its shareholders.
In the event First Federal Bankshares 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 First Federal Bankshares
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 First Federal
Bankshares, estimated to be $29.2 million at the maximum of the Valuation Range,
will be contributed to First Federal. Such proceeds received by First Federal
will serve to increase First Federal's capital to support the Mid-Iowa Financial
acquisition. The total cash cost of the acquisition to First Federal, which
includes cash 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 First Federal 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
First Federal'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 First Federal--Benefits." First Federal 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 First Federal nor First Federal Bankshares has yet determined the
approximate amount of net proceeds to be used for each of the purposes mentioned
above.
DIVIDEND POLICY
First Federal Bankshares currently expects to maintain First
Federal's 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 First
Federal Bankshares' Board of Directors will depend upon a number of factors,
including the amount of the net proceeds from the offering retained by First
Federal Bankshares, investment opportunities available to First Federal
Bankshares or First Federal, capital requirements, regulatory limitations, First
Federal Bankshares' and First Federal'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 First Federal
Bankshares common stock or that, if paid, such dividends will not be reduced or
eliminated in future periods.
First Federal will not be permitted to pay dividends to First
Federal Bankshares 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 First Federal in determining the amount of
proceeds which may be retained by First Federal Bankshares and regarding a
savings institution's ability to make capital distributions including payment of
dividends to its holding
26
<PAGE>
company, see "Taxation--Federal Taxation--Distributions" and
"Regulation--Federal Regulation of Savings Institutions--Limitation on Capital
Distributions."
Unlike First Federal, First Federal Bankshares 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 First Federal Bankshares and earnings thereon and may be dependent,
in part, upon dividends from First Federal. First Federal Bankshares 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 First Federal Bankshares (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 First Federal Bankshares'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, First Federal
Bankshares and First Federal have committed to the OTS that during the one-year
period following the consummation of the conversion, First Federal Bankshares
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.
First Federal has paid cash dividends on First Federal common stock
since the completion of the first full fiscal quarter following the initial sale
by First Federal of First Federal common stock in July 1992. First Federal's
current quarterly cash dividend is $0.12 per share, and First Federal intends to
continue to pay regular quarterly cash dividends through the fiscal quarter
ending _______, 1998.
MARKET FOR THE COMMON STOCK
There is an established market for First Federal common stock which
is currently listed on the Nasdaq "SmallCap" Market under the symbol, "FFSX,"
and First Federal had three market makers, including Sandler O'Neill, at
September 30, 1998. As a newly formed company, however, First Federal Bankshares
has never issued capital stock and consequently there is no established market
for its common stock. It is expected that the First Federal Bankshares common
stock will be more liquid than First Federal 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 First Federal Bankshares
common stock that is determined pursuant to the Exchange Ratio.
See "The Conversion--Share Exchange Ratio."
First Federal Bankshares 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. First Federal Bankshares 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 First Federal Bankshares 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 First Federal Bankshares 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 First Federal Bankshares's application for
listing on the Nasdaq National Market will be approved. If such application is
not approved, management anticipates that First Federal Bankshares common stock
will be listed on the Nasdaq "SmallCap" market.
27
<PAGE>
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 First Federal Bankshares, First Federal 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.
<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,
First Federal had 792 stockholders of record. All Minority Shares, including
shares held by First Federal's officers and directors, will on the effective
date of the conversion be automatically converted into and become the right to
receive a number of shares of First Federal Bankshares common stock determined
pursuant to the Exchange Ratio, and options to purchase Minority Shares will be
converted into options to purchase a number of shares of First Federal
Bankshares 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 First Federal and Mid-Iowa Financial at September 30, 1998,
and the pro forma consolidated capitalization of First Federal Bankshares after
giving effect to the Mid-Iowa Financial acquisition and the conversion, based
upon the assumptions set forth in the "Pro Forma Data" section.
28
<PAGE>
<TABLE>
<CAPTION>
FIRST FEDERAL MID-IOWA FINANCIAL PURCHASE PRO FORMA
HISTORICAL AT HISTORICAL AT ACCOUNTING CONSOLIDATED
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 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) ....... 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) First Federal has 10,000,000 authorized shares of preferred stock.
First Federal has 20,000,000 authorized shares of First Federal 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 First Federal Bankshares common stock.
(4) No effect has been given to the issuance of additional shares of First
Federal Bankshares common stock pursuant to the 1999 Stock Option Plan
and 1999 Recognition Plan expected to be adopted by First Federal
Bankshares. If such plans are approved by stockholders, an amount equal
to 10% of the shares of First Federal Bankshares 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 First
Federal--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 First
Federal will be substantially restricted after the conversion, see "The
Conversion--Liquidation Rights" and "Regulation --Federal Regulation of
Savings Institutions--Limitation on Capital Distributions."
29
<PAGE>
(6) Assumes that 7% of the shares issued in the offering will be acquired
by the ESOP financed by a loan from First Federal Bankshares. The loan
will be repaid principally from First Federal's contributions to the
ESOP. Since First Federal Bankshares will finance the ESOP debt, the
ESOP debt will be eliminated through consolidation and no liability
will be reflected on First Federal Bankshares'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. Such amount does not reflect
possible increases or decreases in the value of such stock relative to
the Subscription Price in the offering. As First Federal 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 First Federal Bankshares 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 First Federal Bankshares, stockholders' ownership
in First Federal Bankshares would be diluted by approximately 1.6%.
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 Operations for the three months ended September 30,
1998 and for the year ended June 30, 1998, give effect to the conversion and the
Mid-Iowa Financial 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 Mid-Iowa Financial
acquisition using the purchase method of accounting under generally accepted
accounting principles.
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:
(1) all Subscription Shares will be sold in the Subscription and
Community Offerings;
(2) 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;
(3) 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
(4) 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 Mid-Iowa Financial acquisition are reflected in
the tables. The Unaudited Pro Forma Condensed Consolidated Statements of
Operations do not reflect investment income from
30
<PAGE>
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
generally accepted accounting principles. 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 FIRST
FEDERAL BANKSHARES 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."
31
<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)
32
<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
First Federal Bankshares 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 First Federal Bankshares 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 First Federal Bankshares, and (iii) the purchase of
$1.1 million of conversion shares by the 1999 Retention Plan with funds
provided by First Federal Bankshares.
33
<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 First Federal Bankshares' 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:
(1) all Subscription Shares will be sold in the Subscription and
Community Offerings;
34
<PAGE>
(2) 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
(3) 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.
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 First Federal
Bankshares common stock less ESOP shares which have not been committed to be
released.
Pro forma unaudited stockholders' equity of First Federal Bankshares
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 First Federal Bankshares 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 Mid-Iowa Financial 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 First Federal Bankshares
computed in accordance with generally accepted accounting principles.
The pro forma stockholders' equity is not intended to represent the
fair market value of First Federal Bankshares common stock and may be different
than amounts that would be available for distribution to stockholders in the
event of liquidation of First Federal Bankshares.
35
<PAGE>
The following table summarizes historical data of First Federal and
pro forma data of First Federal Bankshares 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 First Federal--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>
36
<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 First Federal Bankshares.
First Federal intends to make annual contributions to the ESOP in an
amount at least equal to the principal of the debt. First Federal'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 allocated in equal
annual installments based on the number of loan repayment installments
assumed to be paid by First Federal, 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
37
<PAGE>
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 First
Federal--Benefits for Employees and Officers--401(k) Savings and
Employee Stock Ownership Plan."
(3) Subject to the approval of First Federal Bankshares' 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 First Federal Bankshares, or
through open market purchases. The funds to be used by the 1999
Recognition Plan to purchase the shares will be provided by First
Federal or First Federal Bankshares. See "Management of First
Federal--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
First Federal, 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 1999 Stock Option Plan, which is expected to be
adopted by First Federal Bankshares following the offering and
presented to stockholders for approval. If the 1999 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 1999 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 1999
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 First Federal 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.
38
<PAGE>
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATION
The following Consolidated Statements of Operations of First Federal
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 First Federal 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
39
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
First Federal is a federally-chartered savings bank headquartered in
Sioux City, Iowa. First Federal is the successor to First Federal Savings and
Loan Association of Sioux City, which was founded in 1923. First Federal'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. First Federal'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 First Federal 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
First Federal'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. First Federal 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, First Federal acquired GFS Bancorp, the parent
company of Grinnell Federal, Grinnell, Iowa, with assets of approximately $96.1
million. Total assets of First Federal 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 Bancorp. 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
40
<PAGE>
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 Bancorp 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.
AVERAGE BALANCE SHEET
The following table sets forth certain information relating to First
Federal'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
RATE AT -------------------------------------------
SEPTEMBER 30, AVERAGE AVERAGE
1998 BALANCE INTEREST YIELD/COST
------------- ----------- ---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable(1) .................... 8.00% $407,714 $ 8,079 7.93%
Mortgage-backed securities ............. 6.75 36,442 614 6.74
Investment securities .................. 6.78 79,671 1,322 6.64
Short-term investments and other
interest-earning assets(2) ........... 5.45 2,974 41 5.52
------------- ----------- ---------- -------------
Total interest-earning assets ....... 7.67 526,801 10,056 7.64
------------- ---------- -------------
Noninterest-earning assets 34,155
-----------
Total assets $560,956
-----------
-----------
INTEREST-BEARING LIABILITIES:
Deposits ............................... 4.72 $383,613 4,574 4.77
Borrowings ............................. 5.88 113,028 1,708 6.04
------------- ----------- ---------- -------------
Total interest-bearing liabilities .. 5.00 496,641 6,282 5.06
------------- ---------- -------------
Noninterest-bearing:
Deposits ............................... 10,962
Liabilities ............................ 10,793
-----------
Total liabilities ......................... 518,396
Stockholders' equity ...................... 42,560
-----------
Total liabilities and stock-holders' equity $560,956
-----------
-----------
Net interest income ....................... $ 3,774
----------
----------
Interest rate spread(3) ................... 2.67% 2.58%
------------ ------------
------------ ------------
Net yield on interest-earning assets(4) ... 2.86% 2.87%
------------ ------------
------------ ------------
Ratio of average interest-earning assets to
average interest-bearing liabilities ... 106.07%
------------
------------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------
1997
------------------------------------------------
AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST
----------- ------------ ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable(1) .................... $345,105 $ 6,921 8.02%
Mortgage-backed securities ............. 42,950 720 6.71
Investment securities .................. 49,273 864 7.01
Short-term investments and other
interest-earning assets(2) ........... 412 5 4.86
----------- ------------ ----------------
Total interest-earning assets ....... 437,740 8,510 7.78
------------ ----------------
Noninterest-earning assets ................ 21,213
-----------
Total assets ........................ $ 458,953
-----------
-----------
INTEREST-BEARING LIABILITIES:
Deposits ............................... $318,100 3,829 4.81
Borrowings ............................. 87,060 1,343 6.17
----------- ----------- ---------------
Total interest-bearing liabilities .. 405,160 5,172 5.11
----------- ---------------
Noninterest-bearing :
Deposits............................... 7,442
Liabilities............................ 6,815
-----------
Total liabilities......................... 419,417
Stockholders' equity...................... 39,536
-----------
Total liabilities and stockholders'
equity.................................. $ 458,953
-----------
-----------
Net interest income....................... $ 3,338
-----------
-----------
Interest rate spread(3) ................... 2.67%
--------------
--------------
Net yield on interest-earning assets(4) ... 3.05%
--------------
--------------
Ratio of average interest-earning assets to
average interest-bearing liabilities ... 108.04%
--------------
--------------
</TABLE>
41
<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 Stockholders'
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
---------- ---------- --------------
(DOLLARS IN THOUSANDS)
<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.
42
<PAGE>
RATE/VOLUME ANALYSIS
The table below sets forth certain information regarding changes in
interest income and interest expense of First Federal 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) DUE TO INCREASE (DECREASE) DUE TO
--------------------------- TOTAL ------------------------------ 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>
43
<PAGE>
COMPARISON OF OPERATING RESULTS
The acquisition of GFS Bancorp effective on March 31, 1998 was
accounted for as a purchase; therefore, GFS Bancorp's results of operations are
included in First Federal'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 Bancorp 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 First Federal'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 First Federal 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
44
<PAGE>
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.
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 Bancorp 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
45
<PAGE>
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 balances was due to First
Federal using 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. First Federal'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 First Federal's interest rate spread as the yield on
interest-earning assets increased to 7.77% from 7.73% in fiscal 1997. First
Federal'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
First Federal 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, First Federal 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
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<PAGE>
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
First Federal'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
Bancorp deposit accounts. The increase in other income was primarily due to
increased activity in First Federal'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 more service charge income than fixed maturity
deposits. The increase in other income was primarily due to increased activity
in First Federal'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 First Federal'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 Bancorp
acquisition, GFS Bancorp stock options were exchanged for First Federal SARs. At
September 30, 1998 First Federal'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. First Federal'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 Federal 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 Bancorp
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 First Federal'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, First Federal recognized the liability for an
early retirement incentive program that
47
<PAGE>
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. Deposits totaling
approximately $62.3 million were added to First Federal's assessment base with
the GFS Bancorp 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 Bancorp 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 First Federal'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.
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. First Federal'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.
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First Federal'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. First Federal seeks to lengthen the maturities of its
deposits by promoting longer-term certificates. First Federal 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%. First Federal has established an Asset-Liability
Management Committee which is responsible for reviewing First Federal'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. First Federal'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 First Federal'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 First Federal'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 First Federal's tolerance for risk.
First Federal 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.
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 First Federal 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, First Federal's
NPV is more sensitive in a rising rate scenario than in a falling rate scenario.
As market rates increase, the market value of First Federal'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.
49
<PAGE>
<TABLE>
<CAPTION>
PRESENT VALUE ESTIMATES BY INTEREST RATE SCENARIO
CALCULATED AT SEPTEMBER 30, 1998
-------------------------------------------------
-300 bp -200 bp -100 bp
---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Financial Instrument:
Mortgage loans and securities $ 444,761 $ 438,800 $ 433,581
Non-mortgage loans .......... 28,507 28,103 27,711
Cash, deposits and securities 98,373 97,492 96,637
Other assets ................ 20,418 20,958 21,922
---------- ---------- ----------
Total assets ................ 592,059 585,353 579,851
Deposits .................... 406,178 402,672 399,258
Borrowings .................. 134,736 132,041 129,446
Other liabilities ........... 9,049 9,045 9,041
---------- ---------- ----------
Total liabilities ........... 549,963 543,758 537,745
---------- ---------- ----------
Commitments ................. 1,164 884 619
---------- ---------- ----------
Net portfolio value ......... $ 43,260 42,479 42,725
---------- ---------- ----------
---------- ---------- ----------
$ Change from base .......... $ 22 $ 803 $ 557
---------- ---------- ----------
---------- ---------- ----------
% Change from base .......... 0% -2% -1%
---------- ---------- ----------
---------- ---------- ----------
% Change: board limit ....... -20% -15% -10%
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
PRESENT VALUE ESTIMATES BY INTEREST RATE SCENARIO
CALCULATED AT SEPTEMBER 30, 1998
-------------------------------------------------
Base
0 bp +100 bp +200 bp +300 bp
---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Financial Instrument:
Mortgage loans and securities $ 428,000 $ 420,112 $ 410,478 $ 399,868
Non-mortgage loans .......... 27,330 26,959 26,598 26,247
Cash, deposits and securities 95,806 95,001 94,219 93,461
Other assets ................ 23,707 26,154 29,092 31,855
---------- ---------- ---------- ----------
Total assets ................ 574,843 568,226 560,387 551,431
Deposits .................... 395,912 392,660 389,480 386,364
Borrowings .................. 126,947 124,538 122,217 119,978
Other liabilities ........... 9,038 9,035 9,031 9,028
---------- ---------- ---------- ----------
Total liabilities ........... 531,897 526,233 520,728 515,370
---------- ---------- ---------- ----------
Commitments ................. 336 10 (324) (650)
---------- ---------- ---------- ----------
Net portfolio value ......... 43,282 42,003 39,335 35,411
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
$ Change from base .......... -- ($ 1,279) ($ 3,947) ($ 7,871)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
% Change from base .......... -- -3% -9% -18%
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
% Change: board limit ....... -- -20% -40% -55%
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
First Federal 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.
First Federal historically has maintained a level of liquid assets in excess of
regulatory requirements, and First Federal'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. First Federal
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. First Federal also adjusts liquidity as appropriate to meet
its asset/liability objectives.
First Federal'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. First Federal manages the pricing of its deposits to
maintain a steady deposit balance. In addition, First Federal 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.
50
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Deposits are First Federal'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. First Federal'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
Bancorp 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 First Federal 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, First Federal had
$124.9 million in outstanding advances from the FHLB.
At September 30, 1998, First Federal 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
First Federal.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements of First Federal 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
First Federal's operations. Unlike most industrial companies, nearly all the
assets and liabilities of First Federal are monetary. As a result, interest
rates have a greater impact on First Federal'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. First Federal adopted SFAS 130 on July 1,
1998.
SFAS 131, DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION, establishes disclosure requirements for segment operations. First
Federal 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. First Federal adopted SFAS 132 on July 1,
1998.
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SFAS 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, will be effective for First Federal for years beginning after July
1, 1999. First Federal has no activity covered by SFAS 133. First Federal
expects to adopt SFAS 133 when required.
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 First Federal's programs that recognize a date using "00" as the year
1900 rather than the year 2000 could cause miscalculations or system failures.
First Federal has identified the systems that will be affected by
the Y2K problem. First Federal'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 First Federal '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,
First Federal's disaster recovery/contingency plan will encompass Y2K elements
and address potential Y2K issues in the year 2000.
First Federal 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 First Federal'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, First
Federal 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 First Federal resulting from failures by these parties to adequately
address the Year 2000 problem. First Federal could incur losses if loan payments
are delayed due to Year 2000 problems affecting borrowers or impairing the
payroll systems of large employers in First Federal's market area. To date,
First Federal 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 First
Federal) 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 First Federal
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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.
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BUSINESS OF FIRST FEDERAL
GENERAL
First Federal operates, and intends to continue to operate, as a
community-oriented financial institution. First Federal'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
First Federal 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. First Federal
gained access to the central Iowa market area after its acquisition in March
1998 of GFS Bancorp. 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 First Federal's primary market area is approximately 250,000. Most
employment in First Federal'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.
First Federal's business and operating results are significantly
affected by the general economic conditions prevalent in its primary market
area. First Federal'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 First
Federal has been the origination or purchase of mortgage loans secured by one-
to four-family residential properties. First Federal 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, First Federal has increased its consumer lending
activities to broaden services offered to customers and to improve First
Federal's interest rate risk exposure.
First Federal 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 loans secured by single family
residential real estate, adjustable rate second mortgage loans and medium-term
consumer loans. First Federal also purchases mortgage-backed securities with
adjustable rates. At September 30, 1998, approximately $193.0 million or 43.2%
of First Federal's total loan and mortgage-backed securities portfolio consisted
of loans with variable interest rates.
First Federal 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. First
Federal also actively originates loans insured or guaranteed by the United
States Government or agencies thereof, such as VA and FHA loans. First Federal
also originates interim construction loans on one- to four-family residential
properties.
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ANALYSIS OF LOAN PORTFOLIO. Set forth below are selected data
relating to the composition of First Federal'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
------------ ------------ ------------ ------------ ------------ -------------
(DOLLARS IN THOUSANDS)
<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.
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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 First
Federal'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 TEN BEYOND
WITHIN THROUGH THROUGH THROUGH THROUGH TWENTY
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS TWENTY YEARS YEARS TOTAL
-------- ----------- ----------- --------- ----------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
First mortgage loans:
One- to four-family residences:
Adjustable ...................................... $ 54,783 $ 40,302 $ 19,688 $ 9,614 $ -- $ -- $124,387
Fixed ........................................... 3,816 1,900 6,033 49,297 92,402 22,631 176,079
-------- -------- -------- -------- -------- -------- --------
Total one- to four-family ....................... 58,599 42,202 25,721 58,911 92,402 22,631 300,466
Multi-family and commercial real estate:
Adjustable ...................................... 22,569 20,935 757 -- -- -- 44,261
Fixed .............................................. 7,395 3,228 3,096 776 734 1,241 16,470
Total multi-family and commercial ............... 29,964 24,163 3,853 776 734 1,241 60,731
-------- -------- -------- -------- -------- -------- --------
Consumer and other non- mortgage loans:
Adjustable ...................................... 5,330 -- -- -- -- -- 5,330
Fixed ........................................... 3,068 13,698 18,400 8,482 1,413 -- 45,061
-------- -------- -------- -------- -------- -------- --------
Total consumer and other non- mortgage loans .... 8,398 13,698 18,400 8,482 1,413 -- 50,391
-------- -------- -------- -------- -------- -------- --------
Total loans receivable ............................... $ 96,961 $ 80,063 $ 47,974 $ 68,169 $ 94,549 $ 23,872 $411,588
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
Mortgage-backed securities:
Fixed-rate mortgage-backed securities -
held to maturity ................................... $ 396 $ 1,952 $ 650 $ 6,212 $ 5,487 $ 1,411 $ 16,108
Adjustable-rate mortgage-backed securities - available
for sale .......................................... 14,700 2,116 2,215 -- -- -- 19,031
-------- -------- -------- -------- -------- -------- --------
Total mortgage-backed securities ..................... $ 15,096 $ 4,068 $ 2,865 $ 6,212 $ 5,487 $ 1,411 $ 35,139
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
</TABLE>
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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. First Federal's primary lending
activity consists of the origination of one- to four-family, owner-occupied,
residential mortgage loans secured by property located in First Federal's
primary market area. The majority of First Federal's residential mortgage loans
consists of loans secured by owner-occupied, single-family residences. First
Federal generally has limited its real estate loan originations to properties
within its primary market area. However, First Federal also purchases whole
loans originated by others, with an emphasis on single-family adjustable rate
mortgage 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, First Federal purchased approximately $84.8 million
of one- to four-family residential loans. Loans purchased outside of First
Federal'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
First Federal 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. First
Federal purchases loans from other institutions as market conditions permit in
order to reduce First Federal's overall credit risk by increasing geographical
diversity and to supplement its loan portfolio in periods of weaker local
demand.
At September 30, 1998, First Federal had $300.5 million, or 73.7% of
its total loan portfolio invested in first mortgage loans secured by one-to
four-family residences.
First Federal 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 adjustable rate mortgage loans
is monitored on an ongoing basis and is affected significantly by the level of
market interest rates, customer preference, First Federal's interest rate GAP
position and loan products offered by First Federal's competitors. During the
three months ended September 30, 1998, one- to four-family residential
adjustable rate mortgage 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 adjustable rate mortgage loans decreased by $10.5 million, or
7.3%, to $133.6 million from $144.1 million at June 30, 1997. During these
periods adjustable rate mortgage borrowers refinanced in the generally lower
interest rate environment, most frequently choosing fixed rate mortgages.
First Federal's long-term fixed rate loans generally are originated
and underwritten for resale in the secondary mortgage market. Whether First
Federal 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
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<PAGE>
conditions and First Federal's current interest rate gap position. For example,
15-year fixed rate loans are likely to be retained by First Federal. Moreover,
First Federal is more likely to retain fixed rate loan originations if its one
year gap is positive. First Federal 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. First Federal's
fixed rate mortgage loans are amortized on a monthly basis with principal and
interest due each month. Residential real estate loans often remain outstanding
for significantly shorter periods than their contractual terms because borrowers
may refinance or prepay loans at their option.
First Federal's adjustable rate mortgage 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. First Federal has used different interest indexes for adjustable
rate mortgage 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. First Federal
also has purchased adjustable rate mortgage loans with various interest rate
indexes. Consequently, the interest rate adjustments on First Federal's
portfolio of adjustable rate mortgage loans do not reflect changes in a
particular interest rate index.
First Federal's residential first mortgage loans customarily include
due-on-sale clauses, which are provisions giving First Federal the right to
declare a loan immediately due and payable in the event, 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 First Federal's fixed rate mortgage loan portfolio, and
First Federal 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. First Federal's lending policies, however, generally limit the
maximum loan-to-value ratio on both fixed rate and adjustable rate mortgage
loans to 80% of the lesser of the appraised value or the purchase price of the
property to serve as security for the loan.
First Federal 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%, First Federal 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%, First Federal requires private
mortgage insurance to cover the first 25% to 30% of the loan amount. First
Federal 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 First Federal.
CONSTRUCTION LOANS. First Federal originates loans to finance the
construction of single family residential property. However, construction
lending is not a significant part of First Federal's overall lending activities
because of the low level of new home construction in First Federal's primary
market area. At September 30, 1998, First Federal had $5.8 million, or 1.4%, of
its total loan portfolio invested in interim construction loans. First Federal
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 First Federal 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 First
Federal 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 First Federal's total
loan
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<PAGE>
portfolio at September 30, 1998, compared to $43.1 million or 10.7% of First
Federal'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 Bancorp
acquisition in March 1998. See "--Loan Originations, Purchases and Sales." First
Federal's multi-family real estate loans are secured by multi-family residences,
such as apartment buildings. At September 30, 1998, approximately 30.0% of First
Federal's multi-family loans were secured by properties located within First
Federal's market area. At September 30, 1998, First Federal'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.
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 First Federal'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. First Federal'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 First Federal's primary market area. Commercial real estate loans
are offered with fixed and adjustable interest rates. At September 30, 1998,
First Federal's largest commercial real estate borrower had an aggregate
principal outstanding balance of $5.7 million, which balance was within First
Federal'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, First Federal 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 First Federal's total loan portfolio. The principal types of consumer
loans offered by First Federal 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. First Federal's
home equity loans, second mortgage loans, and home improvement loans, are
generally secured by the borrower's principal residence. At September 30, 1998,
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<PAGE>
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 First Federal 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%.
First Federal'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 First Federal'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 First Federal's loan loss experience and reserve policy.
MORTGAGE-BACKED SECURITIES. First Federal 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
liquidity. These securities, which consist primarily of mortgage-backed
securities issued or guaranteed by Fannie Mae ("FNMA"), Freddie Mac ("FHLMC")
and Ginnie Mae ("GNMA"), totaled $35.1 million at September 30, 1998. First
Federal's objective in investing in mortgage-backed securities varies from time
to time depending upon market interest rates, local mortgage loan demand, and
First Federal's level of liquidity. First Federal'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 First Federal. A loan
application file is first reviewed by an underwriter in First Federal'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.
60
<PAGE>
LOAN ORIGINATIONS, PURCHASES AND SALES. Approximately 80.5% of all
loans in First Federal's portfolio at September 30, 1998 were originated by
First Federal. First Federal also purchases loans originated by others with an
emphasis on single-family residential adjustable rate mortgage loans. At
September 30, 1998, First Federal had $80.4 million of loans purchased from
others. Included in the total of loans purchased outside of First Federal's
primary lending area are loans purchased from a mortgage banking firm
headquartered in Madison, Wisconsin. First Federal has an exclusive agreement
with this firm, which gives First Federal 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 First Federal'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. First Federal
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.
The following table sets forth First Federal'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. First Federal 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. First Federal generally charges a loan fee based on
a percentage of the loan amount. First Federal also charges a commitment fee of
$225 if the borrower receives the loan from First Federal. At September 30,
1998, First Federal had commitments to originate and purchase $32.1 million of
mortgage loans. First Federal's experience has been that very few commitments
expire without being funded by First Federal.
LOAN ORIGINATION AND OTHER FEES. In addition to interest earned on
loans, First Federal generally receives loan origination fees. To the extent
that loans are originated or acquired for First Federal's portfolio, First
Federal 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, First Federal had $2.2
million of deferred loan fees.
61
<PAGE>
In addition to loan origination fees, First Federal also receives
other fees and service charges that consist primarily of late charges and loan
servicing fees on loans sold. First Federal 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).
First Federal's largest aggregate loans to any one borrower, including
outstanding balances and unfunded commitments, was $5.7 million at September 30,
1998. First Federal currently is in compliance with its loans-to-one borrower
limitations.
DELINQUENCIES AND CLASSIFIED ASSETS
DELINQUENCIES. First Federal'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, First Federal 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 First Federal 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 First Federal 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 real estate owned 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 real estate owned is charged to the allowance for real
estate losses.
At September 30, 1998, First Federal'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 real estate owned was
adjusted to the estimated market value prior to the GFS Bancorp acquisition on
March 31, 1998. At September 30, 1998, the real estate owned 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 First Federal took possession of the property. The loan had
been written down to its estimated market value of $200,000 prior to the GFS
Bancorp 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. First Federal had no allowance for
losses on real estate owned as of September 30, 1998, or June 30, 1998, 1997 and
1996.
62
<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 First Federal
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.
63
<PAGE>
The following table sets forth information with respect to First
Federal's delinquent loans and other problem assets at September 30, 1998.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1998
BALANCE NUMBER
------------ ----------
(IN THOUSANDS)
<S> <C> <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. First Federal regularly reviews
the problem loans in its portfolio to determine whether any loans require
classification in accordance with applicable regulations.
64
<PAGE>
At September 30, 1998 the aggregate amount of First Federal's
classified assets, and of First Federal'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>
A summary of First Federal's principal classified assets is as
follows:
First Federal 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, First Federal 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. First Federal's classified assets
also include two real estate owned properties acquired by First Federal in
connection with the GFS Bancorp 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 First Federal 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 First Federal'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 generally accepted accounting principles capital in
computing risk-based capital under OTS regulations. The financial statements of
First Federal are prepared in accordance with generally accepted accounting
principles and, accordingly, provisions for loan losses are based on
management's estimate of net realizable value or fair value of the collateral,
as applicable. First Federal regularly reviews its loan portfolio, including
problem loans, to determine whether any loans require classification or the
establishment of appropriate reserves.
65
<PAGE>
During fiscal 1998, 1997 and 1996, First Federal credited $345,000,
$258,000 and $233,000, respectively, to the allowance for loan losses. During
the three months ended September 30, 1998, First Federal 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.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES. The following table sets
forth information regarding First Federal'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.
66
<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 JUNE 30,
AT 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
------------ -------------- ------------------------- -----------------------------
(DOLLARS IN THOUSANDS)
<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>
AT JUNE 30,
----------------------------------------------------------------------------
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
----------------------- ----------------------- ----------------------
(DOLLARS IN THOUSANDS)
<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.
67
<PAGE>
INVESTMENT ACTIVITIES
First Federal'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 First Federal's investment portfolio is
to (1) improve First Federal's interest rate sensitivity gap by reducing the
average term to maturity of First Federal's assets, (2) improve liquidity, and
(3) effectively reinvest funds generated from amortization and prepayment on
First Federal's traditional loan portfolio.
First Federal 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." First Federal 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 First Federal's loan origination and
other activities.
INVESTMENT PORTFOLIO. The following table sets forth the carrying
value of First Federal's investment securities portfolio, short-term investments
and FHLB stock, at the dates indicated. At September 30, 1998, First Federal's
FHLB stock yielded 6.75%. At September 30, 1998, the market value of First
Federal'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>
68
<PAGE>
INVESTMENT PORTFOLIO MATURITIES
The table below sets forth the scheduled maturities, carrying
values, and average yields for First Federal's investment securities at
September 30, 1998.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1998
----------------------------------------------------------------------------------------
TOTAL
INVESTMENT
ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO TEN YEARS MORE THAN 10 YEARS SECURITIES
------------------- ---------------- ------------------ -------------------- ----------
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
---------- ------- ------- -------- ------ ------ ------- ------ ----- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities - held to maturity . $ 5,154 6.06% $ 5,739 5.65% $ 4,416 6.21% $ 691 6.92% $16,000 6.11%
Investment securities - available for sale 15,062 7.07 2,513 6.09% 38,953 6.65% 11,898 6.85% 68,426 6.76%
------- ---- ------- ---- ------- ---- ------- ---- --------- ----
Total investment securities .............. $20,216 6.81% $ 8,252 5.78% $43,369 6.61% $12,589 6.85%$ 84,426 6.61%
------- ---- ------- ---- ------- ---- ------- ---- --------- ----
------- ---- ------- ---- ------- ---- ------- ---- --------- ----
</TABLE>
SUBSIDIARY ACTIVITIES
First Federal 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.
First Federal 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 First Federal'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 constitutes a serious risk to the safety, soundness or stability of
the savings institution, or is inconsistent with the purposes of federal law.
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 First Federal's funds for
lending and other investment purposes. In addition to deposits, First Federal
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 First Federal'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 First Federal 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
69
<PAGE>
required, the time periods the funds must remain on deposit and the interest
rate, among other factors. First Federal regularly evaluates the internal cost
of funds, surveys rates offered by competing institutions, reviews First
Federal's cash flow requirements for lending, evaluating deposit withdrawal
trends and liquidity and executes rate changes when deemed appropriate. First
Federal does not obtain funds through brokers, nor does it actively solicit
funds outside its primary market area. Historically, First Federal has rarely
used premiums to attract savings deposits.
DEPOSIT PORTFOLIO. Savings and other deposits in First Federal as of
September 30, 1998, are composed of the following:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
INTEREST RATE(1) MINIMUM TERM CATEGORY
------------------ ------------- ---------
<S> <C> <C> <C>
0.00% None Noninterest bearing checking accounts
1.67% None Interest bearing checking accounts
2.03% None Money Market Plus accounts
4.70% None Money Market Select accounts
1.78% None Savings accounts/Club accounts
1.75% None Unredeemed certificates
3.72% 3 months Fixed term, fixed rate
5.53% 5 months Fixed term, fixed rate
3.95% 6 months Fixed term, fixed rate (2)
5.08% 8 months Fixed term, fixed rate
5.38% 1 year Fixed term, fixed rate (2)
5.48% 14 months Fixed term, fixed rate
5.76% 16 months Fixed term, fixed rate
5.83% 17 months Fixed term, fixed rate
5.71% 1.5 year Fixed term, fixed rate
5.73% 19 months Fixed term, fixed rate
5.42% 2 year Fixed term, fixed rate (2)
5.10% 2 year Fixed term, variable rate IRA
5.89% 26 months Fixed term, fixed rate
5.01% 2.5 year Fixed term, fixed rate
4.94% 2.5 year Fixed term, option rate (3)
6.22% 32 months Fixed term, fixed rate
5.95% 35 months Change up term and rate (4)
5.31% 3 year Fixed term, fixed rate (2)
6.47% 45 months Fixed term, fixed rate
5.42% 4 year Fixed term, fixed rate
6.74% 58 months Fixed term, fixed rate
5.67% 5 year Fixed term, fixed rate
6.11% 6 year Fixed term, fixed rate
6.64% 8 year Fixed term, fixed rate
8.61% 10 year Fixed term, fixed rate-education CD
-----
4.69%
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE
MINIMUM OF TOTAL
AMOUNT BALANCES DEPOSITS
- ---------- --------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
None $ 10,902 2.78%
$ 200 36,639 9.33%
200 6,968 1.77%
10,000 56,744 14.44%
10/5 25,385 6.46%
1,000 825 0.21%
1,000 650 0.17%
1,000 746 0.19%
100/1,000 7,843 2.00%
5,000 4,647 1.18%
100/1,000 28,580 7.28%
5,000 6,644 1.69%
5,000 1,447 0.37%
5,000 19,104 4.87%
1,000 7,527 1.92%
5,000 2,377 0.61%
100/1,000 16,185 4.12%
100 1,227 0.31%
5,000 25,682 6.54%
1,000 4,834 1.23%
1,000 2,471 0.63%
5,000 16,694 4.25%
1,000 34,506 8.78%
100/1,000 30,519 7.77%
5,000 5,401 1.38%
1,000 6,275 1.60%
5,000 7,768 1.98%
1,000 6,146 1.57%
1,000 11,706 2.98%
1,000 5,330 1.36%
5,000 905 0.23%
------------ ------
$ 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.
70
<PAGE>
The following table sets forth the change in dollar amount of
deposits in the various types of deposit accounts offered by First Federal
between the dates indicated.
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT BALANCE AT
SEPTEMBER 30, % INCREASE JUNE 30, % INCREASE JUNE 30,
1998 DEPOSITS (DECREASE) 1998 DEPOSITS (DECREASE) 1997
------------ --------- --------- ---------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Checking accounts .............. $ 47,541 12.11 (827) $ 48,368 12.33 $ 10,297 $ 38,071
Savings accounts ............... 25,385 6.46 (846) 26,231 6.68 3,148 23,083
Money market accounts .......... 63,712 16.24 1,918 61,794 15.75 15,373 46,421
Option rate certificates(1) .... 2,471 0.63 (433) 2,904 0.74 (2,593) 5,497
Change up certificates(2) ...... 9,586 2.44 548 9,038 2.30 3,314 5,724
3 to 11 month certificates ..... 13,757 3.50 2,693 11,064 2.82 (3,684) 14,748
12 thru 18 month certificates .. 57,681 14.69 170 57,511 14.66 18,445 39,066
19 thru 30 month certificates .. 43,730 11.14 1,233 42,497 10.83 14,617 27,880
32 and 36 month certificates ... 24,265 6.18 (828) 25,093 6.39 1,899 23,194
45 and 48 month certificates ... 11,676 2.97 (435) 12,111 3.09 175 11,936
58 through 96 month certificates 30,950 7.88 (2,826) 33,776 8.61 2,102 31,674
IRA certificates ............... 60,193 15.32 (464) 60,657 15.45 3,599 57,058
Other certificates ............. 1,730 0.44 349 1,381 0.35 (1,001) 2,382
--------- ------- --------- --------- ------ --------- ---------
$ 392,677 100.00 $ 252 $ 392,425 100.00 $ 65,691 $ 326,734
--------- ------- --------- --------- ------ --------- ---------
--------- ------- --------- --------- ------ --------- ---------
</TABLE>
<TABLE>
<CAPTION>
BALANCE AT
% INCREASE JUNE 30, %
DEPOSITS (DECREASE) 1996 DEPOSITS
----------- --------- ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Checking accounts .............. 11.65% $ 3,200 $ 34,871 10.40%
Savings accounts ............... 7.06 (1,568) 24,651 7.35
Money market accounts .......... 14.22 5,190 41,231 12.30
Option rate certificates(1) .... 1.68 (3,518) 9,015 2.69
Change up certificates(2) ...... 1.75 5,724 -- --
3 to 11 month certificates ..... 4.51 (16,462) 31,210 9.31
12 thru 18 month certificates .. 11.96 (1,483) 40,549 12.10
19 thru 30 month certificates .. 8.53 10,263 17,617 5.26
32 and 36 month certificates ... 7.11 8,020 15,174 4.53
45 and 48 month certificates ... 3.65 (8,032) 19,968 5.96
58 through 96 month certificates 9.69 (7,115) 38,789 11.57
IRA certificates ............... 17.46 (3,383) 60,441 18.03
Other certificates ............. 0.73 675 1,707 0.50
------ --------- --------- ------
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.
71
<PAGE>
TIME DEPOSITS BY RATES
The following table sets forth the time deposits in First Federal
classified by rates as of the dates indicated.
<TABLE>
<CAPTION>
AT
SEPTEMBER 30, AT JUNE 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
ONE YEAR YEARS YEARS 3 YEARS TOTAL
WEIGHTED AVERAGE ---------- ------------ --------- ---------- ------------
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 First Federal's certificates of deposit and other time
deposits of $100,000 or more by time remaining until maturity as of September
30, 1998.
<TABLE>
<CAPTION>
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>
72
<PAGE>
DEPOSIT ACTIVITY. The following table sets forth the savings
activities of First Federal 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 Bancorp 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 First Federal, depositors
will be entitled to full payment of their deposit accounts prior to any payment
being made to the stockholders of First Federal. The majority of First Federal's
depositors are residents of Iowa, Nebraska and South Dakota.
BORROWINGS. Savings deposits are the primary source of funds of
First Federal's lending and investment activities and for its general business
purposes. First Federal, 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 First Federal's stock in the FHLB and a portion of First
Federal's first mortgage loans and investment securities. At September 30, 1998,
First Federal had $124.9 million of advances outstanding from the FHLB.
The FHLB functions as a central reserve bank providing credit for
First Federal and other member savings associations and financial institutions.
As a member, First Federal 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 First Federal at the dates indicated. First Federal 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.
73
<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
First Federal 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
First Federal expects continued strong competition from such financial
institutions in the foreseeable future. First Federal's market area includes
branches of several commercial banks that are substantially larger than First
Federal in terms of state-wide deposits. First Federal 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
First Federal's market area.
First Federal 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 First Federal as a family financial center.
74
<PAGE>
PROPERTIES
First Federal 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 First Federal at September 30, 1998. The aggregate net
book value of First Federal's premises and equipment was $11.1 million at
September 30, 1998.
<TABLE>
<CAPTION>
YEAR OPENED OR ACQUIRED OWNED OR LEASED LEASE EXPIRATION 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, First Federal 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, First Federal consummated the sale of the
deposit accounts relating to its office in Hawarden, Iowa, and closed that
branch.
75
<PAGE>
First Federal's accounting and record keeping activities are
maintained on an in-house data processing system. First Federal 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 First Federal is
periodically involved incident to First Federal'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, First
Federal is subject to examination, supervision and extensive regulation by the
OTS and the FDIC. First Federal 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. First Federal 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 First Federal and prepares reports
for the consideration of First Federal's Board of Directors on any deficiencies
that they may find in First Federal's operations. The FDIC also examines First
Federal in its role as the administrator of the SAIF. First Federal'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 First Federal'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 First
Federal 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 First Federal.
76
<PAGE>
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 First Federal'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. First Federal's maximum
loans to one borrower limit was $10.5 million at September 30, 1998. As of
September 30, 1998, First Federal 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 (1) specified liquid assets up to 20% of total assets, (2)
intangibles, including goodwill, and (3) 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, First Federal
maintained 92.1% of its portfolio assets in qualified thrift investments and,
therefore, met the QTL test.
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
First Federal, 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:
(1) 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
(2) 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 First Federal's capital fell below its fully-phased in requirement or
the OTS notified it that it was in need of more than normal supervision, First
Federal'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 mutual holding company which owns the majority of First Federal'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:
(1) 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;
(2) 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
77
<PAGE>
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;
(3) 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;
(4) 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
(5) 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. First Federal 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. First Federal'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. First Federal
received a satisfactory CRA rating under the current CRA regulations in its most
recent federal examination by the OTS.
TRANSACTIONS WITH RELATED PARTIES. First Federal'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 First
Federal Bankshares 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 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.
First Federal'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
78
<PAGE>
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 First Federal
may make to such persons based, in part, on First Federal's capital position,
and requires certain approval procedures to be followed. At September 30, 1998,
First Federal 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. Tangible capital is defined as core capital less all
intangible assets (including supervisory goodwill) plus a specified amount of
mortgage servicing rights. 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%,
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
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<PAGE>
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, First Federal exceeded each of the three OTS
capital requirements. Set forth below is a summary of First Federal'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, First Federal'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 First Federal Bankshares.
PROMPT CORRECTIVE REGULATORY ACTION
Under the OTS Prompt Corrective Action regulations, the OTS is
required to take certain supervisory actions against undercapitalized
institutions, the severity of which depends upon the institution's degree of
capitalization. Generally, a savings institution that has 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
80
<PAGE>
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 First Federal.
FEDERAL HOME LOAN BANK SYSTEM
First Federal, 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. First Federal, 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, First Federal 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, First
Federal 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 First Federal, to convert their charters
to national or state bank charters. First Federal 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 First
Federal and First Federal Bankshares.
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<PAGE>
HOLDING COMPANY REGULATION
FIRST FEDERAL BANKSHARES. First Federal Bankshares will be a
non-diversified unitary savings and loan holding company within the meaning of
the HOLA. As such, First Federal Bankshares 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
First Federal Bankshares 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.
First Federal must notify the OTS 30 days before declaring any dividend to First
Federal Bankshares.
As a unitary savings and loan holding company, First Federal
Bankshares generally will not be restricted under existing laws as to the types
of business activities in which it may engage, provided that First Federal
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 First Federal Bankshares
of another savings association, First Federal Bankshares 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 First Federal 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: (1) the approval
of interstate supervisory acquisitions by savings and loan holding companies;
and (2) 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.
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<PAGE>
Pursuant to Section 10(o) of the HOLA and OTS regulations and
policy, a mutual holding company may engage in the following activities:
(1) investing in the stock of a savings association;
(2) 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;
(3) merging with or acquiring another holding company, one of whose
subsidiaries is a savings association;
(4) 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;
(5) furnishing or performing management services for a savings
association subsidiary of such company;
(6) holding, managing or liquidating assets owned or acquired from a
savings association subsidiary of such company;
(7) holding or managing properties used or occupied by a savings
association subsidiary of such company;
(8) acting as trustee under deeds of trust;
(9) 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
(10) 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 (1)
through (10) 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:
(1) 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;
(2) 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;
83
<PAGE>
(3) 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;
(4) 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
(5) 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
First Federal Bankshares 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, First Federal Bankshares common
stock will be registered with the SEC under the Exchange Act. First Federal
Bankshares 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 First
Federal Bankshares may be resold without registration. Shares purchased by an
affiliate of First Federal Bankshares will be subject to the resale restrictions
of Rule 144 under the Securities Act. If First Federal Bankshares meets the
current public information requirements of Rule 144 under the Securities Act,
each affiliate of First Federal Bankshares 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 (1) 1% of the outstanding shares of First
Federal Bankshares or (2) the average weekly volume of trading in such shares
during the preceding four calendar weeks. Provision may be made in the future by
First Federal Bankshares to permit affiliates to have their shares registered
for sale under the Securities Act under certain circumstances.
TAXATION
FEDERAL TAXATION
For federal income tax purposes, First Federal 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, First Federal had a balance of approximately $515,000 of bad debt
reserves in retained income that would be recaptured under this legislation.
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<PAGE>
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.
First Federal 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.
First Federal is subject to the corporate alternative minimum tax
which is imposed to the extent it exceeds First Federal'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.
First Federal 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
First Federal 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.
First Federal Bankshares 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, First
Federal Bankshares 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.
MANAGEMENT OF FIRST FEDERAL BANKSHARES
The Board of Directors of First Federal Bankshares consists of those
persons who currently serve as Directors of First Federal. 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
First Federal Bankshares 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 First Federal--Directors."
The following individuals hold positions as executive officers of
First Federal Bankshares as is set forth below opposite their names.
85
<PAGE>
<TABLE>
<CAPTION>
NAME POSITION WITH FIRST FEDERAL
BANKSHARES ---------------------------
- ----------
<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 First Federal Bankshares 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 First Federal Bankshares, none of the
executive officers, directors or other personnel has received remuneration from
First Federal Bankshares. Information concerning the principal occupations,
employment and compensation of the directors and officers of First Federal
Bankshares during the past five years is set forth under "Management of First
Federal."
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<PAGE>
MANAGEMENT OF FIRST FEDERAL
DIRECTORS
First Federal's Board of Directors is composed of eleven members.
Directors of First Federal 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 First Federal's Board of Directors at September 30, 1998,
including the terms of office of Board members.
<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 First Federal
or its mutual predecessor, First Federal Savings and Loan Association
of Sioux City, as the case may be. First Federal was chartered as a
result of the mutual holding company reorganization of First Federal
Savings and Loan Association of Sioux City in July 1992.
(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 1992 Stock
Option 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 1992 Recognition
Plan that have vested to date and been distributed to Mr. Backhaus.
Also includes 8,979 shares (adjusted) subject to options under the 1992
Stock Option Plan that may be exercised within 60 days of September 30,
1998.
(7) Including 500 shares awarded under the 1992 Recognition Plan that have
vested to date and been distributed to Mr. Opsal. Also includes 1,000
shares subject to options under the 1992 Stock Option Plan that may be
exercised within 60 days of September 30, 1998.
(8) Includes 8,047 shares (adjusted) awarded under the 1992 Recognition
Plan that have vested to date and been distributed to Mr. Cleghorn.
Also includes 5,293 shares (adjusted) subject to options under the 1992
Stock Option Plan that may be exercised within 60 days of the September
30, 1998.
(9) In connection with First Federal's acquisition of Grinnell Federal in
March 1998, Messrs. Opsal and Clay were appointed to the Board of
Directors for terms expiring at the 1998 Annual Meeting of
Stockholders.
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<PAGE>
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.
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 and GFS Bancorp 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 First Federal 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>
88
<PAGE>
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
First Federal to the Chief Executive Officer of First Federal and the only other
executive officer of First Federal 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> <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) First Federal does not maintain a deferred compensation plan for
employees. Does not include benefits pursuant to First Federal's
Pension Plan. See "Benefits."
(2) First Federal 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
1992 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 First Federal's
Incentive Pay Plan. See "Benefits--Incentive Pay Plan."
EMPLOYMENT AND SEVERANCE AGREEMENTS
The continued success of First Federal depends to a significant
degree on the skills and competence of its officers. First Federal 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 First Federal in maintaining a stable and competent
management base by enabling First Federal 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 First Federal, if the officer's employment with First
Federal 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 First Federal 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.
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<PAGE>
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 Bancorp and Grinnell
Federal, First Federal 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 (1)
participate in all employee benefit plans generally available to employees of
First Federal, (2) the award of 4,000 options and 2,000 shares of restricted
stock under First Federal's 1992 Stock Option Plan and 1992 Recognition Plan,
(3) the use of a bank-owned automobile, (4) maintenance of Mr. Opsal's country
club membership and (5) 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 First Federal or First Federal Bankshares. 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, First Federal intends to enter
into employment agreements with Messrs. Backhaus and Cleghorn and Ms. Sabel, and
to replace the employment agreement between First Federal 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. 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 First Federal for cause at any time. In the event
First Federal terminates the executive's employment for reasons other than
disability, retirement or for cause, or in the event of the executive's
resignation from First Federal upon (1) failure to re-elect the executive to his
or her current offices, (2) a material change in the executive's functions,
duties or responsibilities, (3) liquidation or dissolution of First Federal or
First Federal Bankshares, (4) a breach of the agreement by First Federal or, (5)
a change in control of First Federal or First Federal Bankshares, 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. First Federal 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.
An executive's employment may be terminated by the executive's
retirement in accordance with First Federal's retirement policy, or in
accordance with any retirement arrangement established by First Federal 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 First Federal. In the event of the executive's disability for a
period of six months, First Federal may terminate the agreement provided that
First Federal 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 First Federal. In the event of the executive's
death, First Federal 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.
90
<PAGE>
The employment agreements provides that, following termination of
employment other than in connection with a change in control, the executive will
not compete with First Federal for a period of one year in any city, town, or
county in which First Federal and/or First Federal Bankshares 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, First Federal Bankshares intends to adopt
the 1999 Stock Option Plan and 1999 Recognition Plan pursuant to which awards
will be made to Directors of First Federal. 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, First
Federal 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, First Federal 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 First Federal Bankshares 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%. First Federal may make a matching contribution equal to 25%
of a member's contributions on up to 4% of a member's compensation. In addition,
First Federal 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.
91
<PAGE>
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 First Federal'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 First Federal contributions) to
the Prior Plan for the Prior Plan year ended December 31, 1997, was
approximately $198,898.
DEFINED BENEFIT PENSION PLAN. First Federal 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 First
Federal 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 First Federal during
the year in order to accrue benefits under the Retirement Plan. First Federal
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.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST. First Federal established
the Employee Stock Ownership Plan (the "ESOP") for eligible employees in
connection with First Federal's initial stock offering. The ESOP is a
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<PAGE>
tax-qualified plan which invests primarily in First Federal common stock (or
following the conversion, First Federal Bankshares 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 First Federal
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 First
Federal Bankshares or from a third party lender and to use those funds to
purchase a number of shares equal to up to 7% of the First Federal Bankshares
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 First Federal 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 First Federal 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. First Federal'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, First Federal adopted the First Federal
Savings Bank of Siouxland 1992 Incentive Stock Option Plan (the "1992 Stock
Option Plan") for officers and employees of First Federal and its affiliates and
such plan was subsequently approved by First Federal's shareholders. The 1992
Stock Option Plan is administered by the non-employee directors of First
Federal's Compensation and Benefits Committee ("Benefits Committee"). The 1992
Stock Option Plan has granted stock options and limited rights for 94,813 shares
of First Federal common stock, as adjusted for stock distributions. The 1992
Stock Option Plan, authorizes the grant of (i) options to purchase First Federal
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 First Federal.
Options (with limited rights) for 89,813 (as adjusted) shares of
First Federal common stock were granted contemporaneously with the completion of
First Federal'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 First Federal employees exercised options for 11,674 shares (as
adjusted, in the aggregate).
At June 30, 1998, the number of shares of First Federal common stock
underlying unexercised options granted to all executive officers as a group
(four persons) was 19,372 (as adjusted) and the unrealized value of such stock
options was $485,763. The number of shares of First Federal 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
93
<PAGE>
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 First Federal
common stock as quoted on the Nasdaq Small-Cap-SM- System was at $36.00.
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 First Federal. To the extent not exercised by
the effective date of the conversion, the options to purchase First Federal
common stock will be converted into and become options to purchase First Federal
Bankshares common stock. The number of shares of First Federal Bankshares 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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
- --------------------------------------------------------------------------------------------------------------------------
NUMBER OF UNEXERCISED
SHARES OPTIONS AT VALUE OF UNEXERCISED IN-THE-MONEY
ACQUIRED VALUE FISCAL YEAR-END OPTIONS AT FISCAL YEAR-END
NAME UPON REALIZED ----------------------------------------------------------------
EXERCISE 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, First Federal
adopted the First Federal Savings Bank of Siouxland 1992 Stock Option Plan for
Outside Directors (the "Directors' 1992 Stock Option Plan") for non-employee
Directors of First Federal, and such Director's 1992 Stock Option Plan was
ratified by the stockholders of First Federal at the 1992 Annual Meeting. The
Directors' 1992 Stock Option Plan reserved non-statutory stock options for
24,948 shares (adjusted) of First Federal common stock for non-employee
directors of First Federal. Each director of First Federal at the time of the
completion of the MHC Reorganization was granted non-statutory options to
purchase 2,369 shares (adjusted) of First Federal 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 First Federal common stock. The
Directors' 1992 Stock Option 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' 1992 Stock Option 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' 1992 Stock
Option 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' 1992 Stock Option Plan. As of June 30, 1998, the sales price of
First Federal 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 First Federal common stock will be converted into
options to purchase First Federal Bankshares 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.
94
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
- ---------------------------------------------------------------------------------------------------------------------------
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-
NAME SHARES ACQUIRED VALUE OPTIONS AT THE-MONEY OPTIONS AT
UPON EXERCISE REALIZED FISCAL YEAR-END FISCAL YEAR-END
---------------------------------------------------------
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, First Federal established
the First Federal Bank of Siouxland Recognition and Retention Plan and Trust
(the "1992 Recognition Plan") as a method of providing officers and key
employees of First Federal with a proprietary interest in First Federal in a
manner designed to encourage such persons to remain with First Federal. The
First Federal contributed funds to the 1992 Recognition Plan to enable the 1992
Recognition Plan to acquire in the aggregate 37,422 shares (adjusted) of First
Federal common stock. At the time of implementation of this plan, 17,073 shares
of First Federal common stock were awarded to officers and key employees.
The 1992 Recognition Plan is administered by the non-employee
directors of First Federal's Compensation and Benefits Committee ("Benefits
Committee"). Awards have been granted in the form of shares of First Federal
common stock that were restricted by the terms of the 1992 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 1992 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 First
Federal. In the event that before reaching normal retirement an officer
terminates employment with First Federal, the officer's nonvested awards will be
forfeited. When shares become vested in accordance with the 1992 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 First Federal. When
shares become vested and are actually distributed in accordance with the 1992
Recognition Plan, participants receive amounts equal to any accrued dividends
(and interest thereon) with respect thereto. Prior to vesting, recipients of
awards under the 1992 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 1992 Recognition Plan.
On the effective date of the conversion, unvested shares of
Restricted Stock will be converted into shares of First Federal Bankshares
common stock pursuant to the Exchange Ratio and will be restricted on the same
terms as the Restricted Stock
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<PAGE>
DEFERRED COMPENSATION PLAN FOR DIRECTORS. In March 1995, the Board
of Directors of First Federal adopted a Deferred Compensation Plan for Directors
(the "Deferred Plan"), which became effective on January 1, 1995. Pursuant to
the Deferred Plan, directors of First Federal 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. First Federal credits the deferred fees 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 First Federal for the previous month. Deferred fees
will be paid out upon the death, disability or termination of a director as a
director of First Federal. 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, First Federal intends to adopt a non-qualified
supplemental executive retirement and deferred compensation plan ("SERP") for
certain executives of First Federal to compensate those executive participants
in First Federal'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 Internal Revenue
Code. The SERP provides participants with supplemental pension benefits
generally equal to the difference between the annual benefit the participant
would have received under First Federal'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
First Federal'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 First Federal'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
First Federal, however, First Federal 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
First Federal established First Federal'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 First Federal'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 First Federal'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 First
Federal'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.
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<PAGE>
CASH ONLY SAR PLAN. In connection with the acquisition of GFS
Bancorp and Grinnell Federal, First Federal succeeded to the Cash Only SAR Plan
("SAR Plan") for former officers of GFS Bancorp and Grinnell Federal. The SAR
Plan replaced the option plans previously adopted by GFS Bancorp and Grinnell
Federal, and provided replacement cash-only SARs to officers of GFS Bancorp and
Grinnell Federal in exchange for and upon surrender of options awarded to such
persons under the GFS Bancorp 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
First Federal's President. Upon receipt of an election, First Federal 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 First
Federal common stock over the exercise price of the SAR. In December 1998, First
Federal'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 Bancorp 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 Bancorp 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 First Federal Bankshares'
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 First Federal and of First
Federal Bankshares. 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 First Federal Bankshares 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 First Federal 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 First Federal or First Federal Bankshares. 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 First Federal Bankshares' 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 First Federal Bankshares. 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.
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<PAGE>
1999 RECOGNITION PLAN. At a meeting of the First Federal Bankshares'
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 First Federal's Directors and officers an
ownership interest in the First Federal Bankshares in a manner designed to
encourage them to continue their service with First Federal. First Federal 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 First Federal
Bankshares 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 First Federal
Bankshares' 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 First Federal 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 upon normal retirement or a change in control of First Federal or
First Federal Bankshares. 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 ss. 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 First Federal Bankshares. 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 First Federal's
capital and surplus (up to a
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<PAGE>
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.
BENEFICIAL OWNERSHIP OF COMMON STOCK
BENEFICIAL OWNERSHIP OF FIRST FEDERAL COMMON STOCK
The following table includes, as of September 30, 1998, certain
information as to First Federal common stock beneficially owned by (1) 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 First Federal to be the
beneficial owner of more than 5% of the issued and outstanding First Federal
common stock, and (2) all Directors and executive officer of First Federal 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 152,930 (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) First Federal'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
1992 Director's Stock Option Plan and 15,272 shares (as adjusted)
subject to options under the 1992 Stock Option Plan that may be
exercised within 60 days of September 30, 1998; and 25,656 shares (as
adjusted) awarded under the 1992 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 First Federal
Bankshares'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 First
Federal 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 First Federal Bankshares 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 First
Federal common stock."
(3) Does not include stock options and awards that may be granted under
First Federal Bankshares'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 First Federal--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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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 FIRST
FEDERAL 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 First Federal will be held
by First Federal Bankshares 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 First
Federal. 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 First Federal Bankshares
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 First Federal Bankshares common stock
as they owned of First Federal'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 (1) each of the following steps in the
conversion will be completed contemporaneously on the effective date:
(1) First Federal will organize First Federal Bankshares (which will
become the stock holding company of First Federal) as a direct subsidiary of
First Federal;
(2) First Federal Bankshares will organize an interim savings bank
(the "Interim Savings Bank") as a wholly owned federal stock savings bank
subsidiary of First Federal Bankshares;
(3) The Mutual Holding Company will convert into an interim federal
stock savings association and simultaneously merge with and into First Federal
(the "MHC Merger") pursuant to the Agreement of Merger between the Mutual
Holding Company and First Federal, whereby each Eligible Account Holder and
Supplemental Eligible Account Holder will receive an interest in the liquidation
account established in First Federal pursuant to regulations of the OTS in
exchange for such member's ownership interest in the Mutual Holding Company, and
First Federal's common stock held by the Mutual Holding Company will be
canceled;
(4) The Interim Savings Bank will merge with and into First Federal
with First Federal as the resulting institution (the "Bank Merger") pursuant to
the Agreement of Merger among First Federal, First Federal Bankshares and the
Interim Savings Bank, First Federal Bankshares stock held by First Federal will
be canceled, the Interim Savings Bank stock held by First Federal Bankshares
will become First Federal common stock by operation of law and Minority
Stockholders will receive common stock in the Share Exchange; and
(5) Contemporaneously with Bank Merger, First Federal Bankshares
will offer for sale in the offering Subscription Shares representing the pro
forma market value of First Federal Bankshares, immediately prior to the
conversion.
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<PAGE>
First Federal Bankshares 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 First Federal. First Federal Bankshares 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 First Federal. The conversion will be effected only upon
completion of the sale of all of the shares of common stock of First Federal
Bankshares to be issued pursuant to the Plan of Conversion. In connection with
the conversion, First Federal will change its name to "First Federal Bank."
The Plan of Conversion provides generally that (1) the Mutual
Holding Company will convert from a federal mutual holding company to a federal
stock savings association and simultaneously merge with and into First Federal
and (2) First Federal Bankshares will offer shares of common stock for sale in
the Subscription Offering to Eligible Account Holders, First Federal's
tax-qualified plans including the ESOP, Supplemental Eligible Account Holders
and Other Members. Subject to the prior rights of these holders of subscription
rights, First Federal Bankshares 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. First Federal 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 First Federal Bankshares. 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 First Federal 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 First Federal
had undertaken a full conversion to public ownership in 1992, a much greater
amount of First Federal 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 First Federal'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, First Federal Bankshares will become the
stock holding company of First Federal, which will complete the transition to
full public ownership. The stock holding company form of organization will
provide First Federal Bankshares with the ability to diversify First Federal
Bankshares and First Federal'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 First
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<PAGE>
Federal conducts its operations, and although there are no current arrangements,
understanding or agreements regarding any such opportunities (other than the
Mid-Iowa Financial acquisition), First Federal Bankshares will be in a position
(subject to regulatory limitations and First Federal Bankshares's financial
position) to take advantage of any such opportunities that may arise.
The proceeds of the conversion received by First Federal will serve
to increase First Federal's capital to support the Mid-Iowa Financial
acquisition and to fund a substantial portion of the Merger Consideration to be
paid to the shareholders of Mid-Iowa Financial to consummate the Mid-Iowa
Financial acquisition. The potential impact of the conversion upon First
Federal's capital base is significant. First Federal had equity in accordance
with generally accepted accounting principles of $43.2 million, or 7.6% of
assets at September 30, 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 First Federal Bankshares to purchase the capital stock
of First Federal, First Federal's ratio of generally accepted accounting
principles capital to adjusted assets, on a pro forma basis, will increase to
9.1% after the conversion and taking into account the Mid-Iowa Financial
acquisition and the consolidation of the Mutual Holding Company into First
Federal. The investment of the net proceeds from the sale of the common stock
will provide First Federal with additional income to further increase its
capital position. The additional capital may also assist First Federal in
offering new programs and expanded services to its customers.
After completion of the conversion, the unissued common and
preferred stock authorized by First Federal Bankshares's certificate of
incorporation will permit First Federal Bankshares, 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, First Federal Bankshares 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 First Federal Bankshares' stock benefit program. Following
the conversion, First Federal Bankshares 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 First Federal--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 Bank Merger. The affirmative vote of the holders of
(1) at least two-thirds of the outstanding common stock of First Federal and (2)
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 First Federal and of First
Federal Bankshares have determined that each Minority Share will on the
effective date of the conversion 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 (1) 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 (2) approximately $0.8 million of assets
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<PAGE>
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 First Federal Bankshares common stock as they owned of First Federal 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 First
Federal common stock outstanding, 1,320,460, or 46.4%, of which were Minority
Shares. Based on the percentage of First Federal 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 First Federal 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 First Federal 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: (1) the total number of Subscription Shares and Exchange Shares
to be issued in the conversion; (2) the percentage of common stock outstanding
after the conversion that will be sold in the offering and issued in the Share
Exchange; and (3) 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 First Federal Bankshares 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 First Federal 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 First Federal do not intend
to exercise options prior to the effective date. First Federal 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 First Federal
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.
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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 First Federal 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. First Federal Bankshares' 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 First Federal Bankshares' consolidated
financial condition and results of operations, tax considerations, industry
standards, economic conditions, regulatory restrictions on dividend payments by
First Federal to First Federal Bankshares, general business practices and other
factors. See "Dividend Policy." First Federal 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." First Federal intends to continue to pay a quarterly cash
dividend 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 First Federal
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 First Federal
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 First Federal
Bankshares.
EFFECTS OF CONVERSION ON DEPOSITORS, BORROWERS AND MEMBERS
GENERAL. Each depositor in First Federal has both a deposit account
in First Federal 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 First Federal. 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 First Federal) 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 First Federal 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.
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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 First Federal.
CONTINUITY. While the conversion is being accomplished, the normal
business of First Federal of accepting deposits and making loans will continue
without interruption. First Federal will continue to be subject to regulation by
the OTS and the FDIC. After the conversion, First Federal will continue to
provide services for depositors and borrowers under current policies by its
present management and staff. The Directors serving First Federal at the time of
the conversion will serve as Directors of First Federal after the conversion.
The Directors of First Federal Bankshares will consist of individuals currently
serving on the Board of Directors of First Federal.
EFFECT ON DEPOSIT ACCOUNTS. Under the Plan of Conversion, each
depositor in First Federal 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 First Federal will be
affected by the conversion, and the amount, interest rate, maturity and security
for each loan will remain as they were contractually fixed prior to the
conversion.
EFFECT ON VOTING RIGHTS OF MEMBERS. At present, all depositors and
certain borrowers of First Federal 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 First Federal will be vested in First Federal Bankshares as the sole
shareholder of First Federal. Exclusive voting rights with respect to First
Federal Bankshares will be vested in the holders of common stock. Depositors and
borrowers of First Federal will not have voting rights after the conversion
except to the extent that they become stockholders of First Federal Bankshares
through the purchase of common stock.
TAX EFFECTS. First Federal 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 First Federal, the Mutual Holding
Company, the Minority Stockholders, the Interim Savings Bank, members of the
Mutual Holding Company, eligible account holders or First Federal Bankshares.
See "--Tax Aspects."
EFFECT ON LIQUIDATION RIGHTS. Were First Federal to liquidate prior
to the conversion, all claims of creditors of First Federal, including those of
depositors to the extent of their deposit balances, would be paid first.
Thereafter, if there were any assets of First Federal remaining, such assets
would be distributed to the Mutual Holding Company, to the extent of its stock
ownership interest in First Federal. 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 First Federal immediately prior to
liquidation. In the unlikely event that First Federal 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
First Federal Bankshares as the holder of First Federal's capital stock.
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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. First Federal and First Federal Bankshares 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). First Federal and First Federal Bankshares 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
First Federal Bankshares and First Federal and the economic and demographic
conditions in First Federal's existing marketing area; certain historical,
financial and other information relating to First Federal; a comparative
evaluation of the operating and financial statistics of First Federal with those
of other publicly traded savings institutions located in First Federal's region
and on a national basis; the aggregate size of the offering of the common stock;
the impact of the conversion on First Federal's stockholders' equity and
earnings potential; the pro forma impact of the Mid-Iowa Financial acquisition;
the proposed dividend policy of First Federal Bankshares and First Federal; 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 First Federal Bankshares multiplied by the
Majority Ownership Percentage. The Independent Valuation states that as of
November 27, 1998, the estimated pro forma market value of First Federal
Bankshares ranged from a minimum of $48,136,650 to a maximum of $65,126,050 with
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 (1) First Federal's financial condition and results of
operations, (2) financial comparisons of First Federal in relation to financial
institutions of similar size and asset quality, (3) stock market conditions
generally and in particular for financial institutions, and (4) 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 First
Federal Bankshares or First Federal or market conditions generally. In the event
the Independent Valuation is updated to amend the pro forma market value of
First Federal Bankshares 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.
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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 FIRST FEDERAL, NOR DID RP
FINANCIAL VALUE INDEPENDENTLY THE ASSETS OR LIABILITIES OF FIRST FEDERAL. THE
INDEPENDENT VALUATION CONSIDERS FIRST FEDERAL AS A GOING CONCERN AND SHOULD NOT
BE CONSIDERED AS AN INDICATION OF THE LIQUIDATION VALUE OF FIRST FEDERAL.
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 First Federal Bankshares, after consulting with the
OTS, may terminate the Plan of Conversion and return all funds promptly with
interest at First Federal'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 First Federal
Bankshares' 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 First Federal Bankshares'
pro forma 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 First Federal 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 First Federal common stock into First Federal Bankshares common
stock will occur automatically on the effective date of the conversion. After
the effective date of the conversion, former holders of First Federal common
stock will have no further equity interest in First
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Federal (other than as stockholders of First Federal Bankshares) and there will
be no further transfers of First Federal common stock on the stock transfer
records of First Federal.
As soon as practicable after the effective date of the conversion,
First Federal Bankshares, or a bank or trust company designated by First Federal
Bankshares, in the capacity of 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
First Federal common stock to be exchanged into First Federal Bankshares common
stock. It is expected that certificates for shares of First Federal Bankshares
common stock will be distributed within five business days after the receipt of
properly executed transmittal forms and other required documents.
FIRST FEDERAL'S STOCKHOLDERS SHOULD NOT FORWARD FIRST FEDERAL
SAVINGS BANK OF SIOUXLAND STOCK CERTIFICATES TO FIRST FEDERAL OR THE EXCHANGE
AGENT UNTIL THEY HAVE RECEIVED TRANSMITTAL FORMS.
Until the certificates representing First Federal 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 First Federal Bankshares common stock and will not be paid
dividends on First Federal Bankshares 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 First Federal common stock outstanding at the
effective date of the conversion will be deemed to evidence ownership of the
shares of First Federal Bankshares common stock into which those shares have
been converted by virtue of the conversion.
All shares of First Federal Bankshares common stock issued upon
exchange of shares of First Federal common stock shall be deemed to have been
issued in full satisfaction of all rights pertaining to such shares of First
Federal common stock, subject, however, to First Federal Bankshares' 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 First Federal on such
shares of First Federal common stock on or prior to the effective date and which
remain unpaid at the effective date. First Federal intends to continue to pay a
quarterly cash dividend of $0.12 per share through the earlier of (1) the
effective date (on a pro rata basis), or (2) the fiscal quarter ending ________,
1998. The Mutual Holding Company intends to waive the receipt of such dividend.
No fractional shares of First Federal Bankshares common stock will
be issued to any Minority Stockholder upon consummation of the conversion. For
each fractional share that would otherwise be issued, First Federal Bankshares
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 First Federal 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.
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
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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 First Federal 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 First Federal
Bankshares and First Federal, 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 Valuation 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 permit each subscribing
Supplemental Eligible Account
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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 First Federal with the approval
of the OTS, if necessary. First Federal and First Federal Bankshares 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.
First Federal Bankshares 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 First Federal 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, First Federal 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. First Federal
Bankshares 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, First Federal Bankshares 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: (1) a small number of persons otherwise eligible to subscribe for shares
of common stock reside; or (2) First Federal Bankshares 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 First
Federal Bankshares 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, First Federal Bankshares 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 First Federal
Bankshares, its officers, directors or employees as brokers, dealers or
salesmen.
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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, First Federal Bankshares has determined to offer
shares pursuant to the Plan of Conversion to certain members of 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 natural 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 FIRST FEDERAL BANKSHARES, 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
First Federal with the approval of the OTS increases the maximum purchase
limitation, First Federal Bankshares is only required to resolicit persons who
subscribed for the maximum purchase amount and may, in the sole discretion of
First Federal Bankshares, 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 First Federal Bankshares 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. Similar allocation procedures will be
used for orders of Minority Stockholders and depositors of Mid-Iowa Savings. 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. First Federal 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 First Federal.
The Community Offering will terminate no more than 45 days following
the Expiration Date, unless extended by First Federal and First Federal
Bankshares with the approval of the OTS, if necessary. First Federal and First
Federal Bankshares 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. First
Federal Bankshares will not execute orders until all shares of common stock have
been subscribed for or
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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 First Federal 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, First Federal 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.
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 First Federal Bankshares, in a manner
that will achieve the widest distribution of the common stock subject to the
right of First Federal 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, First Federal Bankshares
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, First
Federal 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 First
Federal, 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 First Federal, if possible. Such
other purchase arrangements will be subject to the approval of the OTS.
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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 First
Federal'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 First Federal, 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, First Federal 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 First Federal in
the offering as follows: (1) in training and educating First Federal's employees
regarding the mechanics and regulatory requirements of the conversion; (2) in
conducting any informational meetings for employees, customers and the general
public; (3) in coordinating the selling efforts in First Federal's local
communities; and (4) 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 First Federal
in connection with the sale of common stock to the ESOP or to First Federal's or
First Federal Bankshares' 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 First
Federal in the offering and will receive a fee for these services of $35,000
plus up to $5,000 for out-of-pocket expenses. First Federal 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 First Federal
in connection with the Mid-Iowa Financial acquisition.
First Federal 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. First Federal has made an advance payment to Sandler O'Neill and
Investment Bank Services in the amount of $25,000. First Federal 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 First Federal Bankshares
and First Federal may participate in the solicitation of offers to purchase
common stock. Such persons will be reimbursed by the Mutual Holding Company
and/or First Federal 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 First
Federal 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 First Federal'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. First Federal Bankshares 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
First Federal Bankshares or First Federal 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.
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PROCEDURE FOR PURCHASING SHARES
EXPIRATION DATE. The offering will terminate at noon, Central time,
on __________, 1999, unless extended by First Federal and First Federal
Bankshares, with the approval of the OTS, if required. Such extension may be
approved by First Federal and First Federal Bankshares, 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, First Federal Bankshares 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 First Federal'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.
First Federal Bankshares reserves the right in its sole discretion
to terminate the offering at any time and for any reason, in which case First
Federal Bankshares 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. First Federal 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 First Federal Bankshares 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 First Federal Bankshares. First Federal Bankshares reserves the
absolute right, in its sole discretion, to reject orders received in the
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 First Federal Bankshares 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 (1) cash (if delivered in person), (2) check, money order,
certified or teller's check or bank draft made payable to First Federal
Bankshares, Inc., or (3) authorization of withdrawal from savings accounts
(including certificates of deposit) maintained with First Federal. 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 First Federal at the current passbook rate per annum from the date payment is
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received until the offering is completed or terminated. An executed order form,
once received by First Federal, may not be modified, amended or rescinded
without the consent of First Federal, 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 First Federal 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 First Federal Bankshares
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 First Federal 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 First Federal IRA to purchase
common stock should contact the stock center at First Federal 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
First Federal Bankshares 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 First Federal checks representing interest paid
on subscriptions made by cash, check, or money order will be mailed by First
Federal 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 First Federal 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
First Federal 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.
First Federal 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.
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
FIRST FEDERAL, 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.
FIRST FEDERAL AND FIRST FEDERAL BANKSHARES 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.
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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 First Federal, 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 First
Federal 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 First Federal Bankshares, 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 First Federal Bankshares, 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 First Federal
Bankshares and First Federal. If such amount is increased, subscribers for the
maximum amount 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 First Federal 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 First Federal Bankshares and First Federal 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
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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:
(1) TO FILL THE ESOP'S SUBSCRIPTION FOR 7% OF THE TOTAL NUMBER OF
SHARES SOLD;
(2) 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
(3) TO FILL UNFULFILLED SUBSCRIPTIONS IN 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.
The term "associate" of a person is defined to mean: (1) any
corporation or organization (other than First Federal or a majority-owned
subsidiary of First Federal) of which such person is an officer, partner or 10%
stockholder; (2) 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 (3) 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 First Federal. 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
First Federal--Subscriptions by Executive Officers and Directors," and "The
Conversion--Certain Restrictions on Purchase or Transfer of Shares after
Conversion" and "Restrictions on Acquisition of First Federal Bankshares and
First Federal."
LIQUIDATION RIGHTS
In the unlikely event of a complete liquidation of First Federal
prior to the conversion, all claims of creditors of First Federal, including
those of depositors to the extent of their deposit balances, would be paid
first. Thereafter, if there were any assets of First Federal remaining, such
assets would be distributed to stockholders, including the Mutual Holding
Company. Were the Mutual Holding Company and First Federal 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 First Federal immediately prior
to liquidation. In the unlikely event that First Federal 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 First Federal Bankshares as the holder of
First Federal'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: (1) the sum of (a) the Mutual Holding Company's
ownership interest in the surplus and reserves of First Federal as of the date
of its latest balance sheet contained in this prospectus, and (b) the restricted
retained income account that reflects certain dividends waived by the Mutual
Holding Company; or (2) the retained earnings of First Federal at the time that
First Federal reorganized into the Mutual Holding Company in 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 First Federal after the conversion with a distribution upon complete
liquidation of First Federal after the conversion. Each Eligible
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Account Holder and Supplemental Eligible Account Holder, if he were to continue
to maintain his deposit account at First Federal, would be entitled, on a
complete liquidation of First Federal after the conversion to an interest in the
liquidation account prior to any payment to the stockholders of First Federal.
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 First Federal 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 First Federal on
such dates.
If, however, on any June 30 annual closing date of First Federal,
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 First Federal Bankshares as the
sole shareholder of First Federal.
TAX ASPECTS
The conversion will be effected as (1) an exchange of the Mutual
Holding Company's charter for an interim stock savings association charter and
simultaneous merger into First Federal in a tax-free reorganization under
Section 368(a)(1)(A) of the Code and (2) a merger of the Interim Savings Bank
into First Federal with First Federal's stockholders exchanging their First
Federal common stock for common stock of First Federal Bankshares 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, First Federal, First Federal
Bankshares, 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: (1) 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; (2) 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 (3) 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.
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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 First Federal, 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 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 First
Federal Bankshares 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, First Federal Bankshares holds 100% of the shares of First
Federal and the untaxed appreciation of First Federal 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. First Federal Bankshares 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 First Federal 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 First Federal 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:
(1) 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;
(2) the merger of the Mutual Holding Company with and into First
Federal will qualify as a reorganization within the meaning of Section
368(a)(1)(A) of the Code;
(3) the exchange of the members' equity interests in the Mutual
Holding Company for interests in a liquidation account established at First
Federal will satisfy the continuity of interest requirement with respect to the
merger of the Mutual Holding Company into First Federal;
(4) the Mutual Holding Company will not recognize any gain or loss
on the transfer of its assets to First Federal in exchange for a liquidation
account in First Federal;
(5) no gain or loss will be recognized by First Federal upon the
receipt of the assets of the Mutual Holding Company in exchange for a
liquidation account in First Federal;
(6) the basis of the assets of the Mutual Holding Company (other
than First Federal common stock) to be received by First Federal 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 First Federal common stock will
be -0-);
(7) the holding period of the assets of the Mutual Holding Company
to be received by First Federal will include the holding period of those assets
in the hands of the Mutual Holding Company immediately prior to the transfer;
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(8) the Mutual Holding Company members will recognize no gain or
loss upon the receipt of an interest in the liquidation account in First Federal
in exchange for their membership interest in the Mutual Holding Company;
(9) the merger of the Interim Savings Bank into First Federal with
First Federal 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;
(10) the Interim Savings Bank will not recognize any gain or loss on
the transfer of its assets to First Federal in exchange for First Federal stock
and the assumption by First Federal of the liabilities, if any, of the Interim
Savings Bank;
(11) First Federal will not recognize any gain or loss on the
receipt of the assets of the Interim Savings Bank in exchange for First Federal
stock;
(12) First Federal'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;
(13) First Federal Bankshares will not recognize any gain or loss
upon its receipt of First Federal stock solely in exchange for stock;
(14) First Federal'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;
(15) First Federal stockholders will not recognize any gain or loss
upon their exchange of First Federal stock solely for shares of First Federal
Bankshares common stock;
(16) cash received in the Bank Merger by a First Federal stockholder
in lieu of a fractional share interest of First Federal Bankshares common stock
will be treated as having been received as a distribution in full payment in
exchange for a fractional share interest of First Federal common stock which
such stockholders would otherwise be entitled to receive, and will qualify as
capital gain or loss (assuming First Federal common stock surrendered in
exchange therefor was held as a capital asset by such stockholder);
(17) each First Federal stockholders' basis in his or her First
Federal Bankshares common stock received in the exchange (including fractional
shares which First Federal stockholder's otherwise would be entitled to receive)
will be the same as the basis of First Federal common stock surrendered in
exchange therefor;
(18) each First Federal stockholder's holding period in his or her
First Federal Bankshares common stock received in the exchange (including
fractional shares which First Federal stockholder's otherwise would be entitled
to receive) will include the period during which First Federal common stock
surrendered was held, provided that First Federal common stock surrendered is a
capital asset in the hands of First Federal stockholder on the date of the
exchange;
(19) First Federal Bankshares's basis in First Federal common stock
which it receives would be the same as the basis of the property exchanged
therefor;
(20) no gain or loss will be recognized by First Federal Bankshares
on the receipt of money in exchange for First Federal Bankshares common stock in
the offering; and
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(21) 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 First Federal Bankshares common
stock, provided that the amount paid for First Federal Bankshares common stock
equals its fair market value.
The form of such opinion has been filed with the SEC as an exhibit to First
Federal Bankshares'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 First Federal 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 First Federal 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, First Federal,
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 First Federal 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 First Federal will also be subject to
the insider trading rules promulgated pursuant to the Exchange Act.
Purchases of outstanding shares of common stock of First Federal
Bankshares by Directors, executive officers (or any person who was an executive
officer or Director of First Federal 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 First Federal Bankshares'
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 First Federal or First Federal Bankshares
(including any employee plans, recognition plans or restricted stock plans).
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OTS regulations applicable to First Federal Bankshares as a result
of the conversion prohibit First Federal Bankshares from repurchasing shares of
its common stock for three years, except for an offer to all stockholders on a
pro rata basis, or the repurchase of qualifying shares of a Director.
Notwithstanding the foregoing and except as provided below, beginning one year
following completion of the conversion, First Federal Bankshares may repurchase
its common stock so long as:
(1) 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;
(2) the repurchases do not cause First Federal to become
"undercapitalized" within the meaning of the OTS prompt corrective action
regulation; and
(3) First Federal Bankshares 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 FIRST FEDERAL BANKSHARES
AND FIRST FEDERAL
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, First Federal Bankshares, as a new Delaware stock
corporation, has been organized to become the sole stockholder of First Federal
following the conversion. Provisions in First Federal Bankshares' certificate of
incorporation and bylaws together with provisions of Delaware corporate law, may
have anti-takeover effects. In addition, certain provisions of First Federal
Bankshares' and First Federal's compensation plans contain provisions that may
discourage or make more difficult persons or companies acquiring control of
either First Federal Bankshares or First Federal. Also, First Federal'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 First Federal Bankshares or First Federal.
RESTRICTIONS IN FIRST FEDERAL BANKSHARES' CERTIFICATE OF INCORPORATION AND
BYLAWS
A number of provisions of First Federal Bankshares' 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 First Federal Bankshares' 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 First
Federal Bankshares 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 First
Federal Bankshares more difficult. The following description of certain of the
provisions of the certificate of incorporation and bylaws of First Federal
Bankshares is necessarily general and reference should be made in each case to
such certificate of incorporation and bylaws.
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LIMITATION ON VOTING RIGHTS. The certificate of incorporation of
First Federal Bankshares 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
First Federal or First Federal Bankshares or shares that are subject to a
revocable proxy and that are not otherwise beneficially owned, or deemed by
First Federal Bankshares to be beneficially owned, by such person and his
affiliates. The certificate of incorporation of First Federal Bankshares 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 First Federal
Bankshares 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. First Federal Bankshares'
certificate of incorporation and bylaws provide that the size of the Board shall
be determined by a majority of the Directors. The certificate of incorporation
and the bylaws provide that any vacancy occurring in the Board, including a
vacancy created by an increase in the number of Directors or resulting from
death, resignation, retirement, disqualification, removal from office or other
cause, shall be filled for the remainder of the unexpired term exclusively by a
majority vote of the Directors then in office. The classified Board is intended
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 First Federal Bankshares. The certificate of
incorporation of First Federal Bankshares 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.
First Federal Bankshares 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 First Federal Bankshares' 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 First Federal Bankshares'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 First Federal Bankshares
may be called only by the Board of Directors of First Federal Bankshares. The
certificate of incorporation also provides that any action required or permitted
to be taken by the stockholders of First Federal Bankshares 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 First Federal
Bankshares' 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 First Federal Bankshares. The Board of
Directors also has sole authority to determine the terms of
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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. First Federal Bankshares' 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 First Federal Bankshares' 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 First Federal Bankshares 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 (1) in cases where the
proposed transaction has been approved in advance by a majority of those members
of First Federal Bankshares' 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 (2) 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 First Federal Bankshares or its
subsidiary) which owns beneficially or controls, directly or indirectly, 10% or
more of the outstanding shares of voting stock of First Federal Bankshares. This
provision of the certificate of incorporation applies to any "Business
Combination," which is defined to include: (1) any merger or consolidation of
First Federal Bankshares or any of its subsidiaries with or into any Interested
Stockholder or Affiliate (as defined in the certificate of incorporation) of an
Interested Stockholder; (2) 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 First Federal
Bankshares or combined assets of First Federal Bankshares and its subsidiary;
(3) the issuance or transfer to any Interested Stockholder or its Affiliate by
First Federal Bankshares (or any subsidiary) of any securities of First Federal
Bankshares 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 First
Federal Bankshares; (4) the adoption of any plan for the liquidation or
dissolution of First Federal Bankshares proposed by or on behalf of any
Interested Stockholder or Affiliate thereof; and (5) any reclassification of
securities, recapitalization, merger or consolidation of First Federal
Bankshares that has the effect of increasing the proportionate share of common
stock or any class of equity or convertible securities of First Federal
Bankshares owned directly or indirectly, by an Interested Stockholder or
Affiliate thereof.
EVALUATION OF OFFERS. The certificate of incorporation of First
Federal Bankshares further provides that the Board of Directors of First Federal
Bankshares, when evaluating any offer of another "Person" (as defined therein)
to (1) make a tender or exchange offer for any equity security of First Federal
Bankshares, (2) merge or consolidate First Federal Bankshares with another
corporation or entity or (3) purchase or otherwise acquire all or substantially
all of the properties and assets of First Federal Bankshares, may, in connection
with the exercise of its judgment in determining what is in the best interest of
First Federal Bankshares, First Federal and the stockholders of First Federal
Bankshares, give due consideration to all relevant factors, including, without
limitation, the social and economic effects of acceptance of such offer on First
Federal Bankshares' customers and First Federal's present and future account
holders, borrowers and employees, on the communities in which First Federal
Bankshares and First Federal operate or are located, and on the ability of First
Federal Bankshares to fulfill its corporate objectives as a savings and loan
holding company and on the ability of First Federal 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
First Federal Bankshares, the Board of Directors may
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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 First Federal
Bankshares, even if the price offered is significantly greater than the then
market price of any equity security of First Federal Bankshares.
AMENDMENT OF CERTIFICATE OF INCORPORATION AND BYLAWS. Amendments to
First Federal Bankshares' 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 First Federal Bankshares
and amendment of First Federal Bankshares' bylaws and certificate of
incorporation. First Federal Bankshares' 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 First Federal Bankshares
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 First Federal
Bankshares. The notice provision requires a stockholder who desires to raise new
business to provide certain information to First Federal Bankshares 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 First Federal Bankshares with certain
information concerning the nominee and the proposing stockholder.
The provisions described above are intended to reduce First Federal
Bankshares' 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 First Federal's current and proposed employment
agreements and stock benefit plans may also discourage takeover attempts by
increasing the costs to be incurred by First Federal and First Federal
Bankshares in the event of a takeover. See "Management of First
Federal--Benefits for Employees and Officers."
The foregoing provisions and limitations may make it more difficult
for companies or persons to acquire control of First Federal. Additionally, the
provisions could deter offers to the stockholders that might be viewed by such
stockholders to be in their best interests.
First Federal Bankshares' Board of Directors believes that the
provisions of the certificate of incorporation, bylaws and compensation plans
are in the best interests of First Federal Bankshares and its stockholders. An
unsolicited non-negotiated proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Accordingly, the Board
of Directors believes it is in the best interests of First Federal Bankshares
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 First Federal
Bankshares 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.
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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: (1) 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; (2) 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; (3) 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 (4) 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 First Federal Bankshares does not intend to propose any such amendment.
RESTRICTIONS IN FIRST FEDERAL'S FEDERAL STOCK CHARTER AND BYLAWS
First Federal'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 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 First Federal by any
person.
Although First Federal 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 First Federal 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 First Federal 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 First
Federal does not intend to issue any preferred stock except on terms that the
Board deems to be in the best interests of First Federal and its then existing
stockholders.
REGULATORY RESTRICTIONS
The Plan of Conversion prohibits any person, prior to the completion
of the conversion, from transferring, or from entering into any agreement or
understanding to transfer, to the account of another, legal or beneficial
ownership of the subscription rights issued under the Plan 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 (1) 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,
127
<PAGE>
(2) offers in the aggregate for up to 24.99% by the ESOP of First Federal
Bankshares or First Federal, and (3) offers that are not opposed by the Board of
Directors of First Federal and which receive prior OTS approval. Such
prohibition is also applicable to the acquisition of the common stock of First
Federal Bankshares. 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
First Federal Bankshares' 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 First Federal Bankshares 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
First Federal Bankshares or First Federal that have not received prior
regulatory approval.
ADDITIONAL ANTITAKEOVER EFFECTS
Assuming executive officers and directors (1) purchase 76,500
Subscription Shares in the offering, (2) receive Exchange Shares in the Share
Exchange as described above, (3) 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 (4) 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 First
Federal Bankshares common stock at the minimum and adjusted maximum of the
Offering Range, respectively. Such amount does not include the 6.5% of First
Federal Bankshares 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.
DESCRIPTION OF CAPITAL STOCK OF FIRST FEDERAL BANKSHARES
GENERAL
At the effective date, First Federal Bankshares 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. First Federal Bankshares 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. First Federal Bankshares does not intend
to issue shares of preferred stock in the conversion. Each share of First
Federal Bankshares common stock will have the same relative rights as, and will
be identical in all respects with, each
128
<PAGE>
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 FIRST FEDERAL BANKSHARES 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. First Federal Bankshares 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 First Federal Bankshares is
subject to limitations that are imposed by law and applicable regulation. See
"Dividend Policy." The holders of common stock of First Federal Bankshares will
be entitled to receive and share equally in such dividends as may be declared by
the Board of Directors of First Federal Bankshares out of funds legally
available therefor. If First Federal Bankshares 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
First Federal Bankshares will possess exclusive voting rights in First Federal
Bankshares. They will elect First Federal Bankshares' 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 First Federal Bankshares and First
Federal," 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 First
Federal Bankshares 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 First Federal Bankshares and First Federal."
As a federal stock savings association, corporate powers and control
of First Federal are vested in its Board of Directors, who elect the officers of
First Federal and who fill any vacancies on the Board of Directors as it exists
upon the conversion. Voting rights of First Federal are vested exclusively in
the owners of the shares of capital stock of First Federal, which will be First
Federal Bankshares, and voted at the direction of First Federal Bankshares'
Board of Directors. Consequently, the holders of the common stock will not have
direct control of First Federal.
LIQUIDATION. In the event of any liquidation, dissolution or winding
up of First Federal, First Federal Bankshares, as holder of First Federal's
capital stock would be entitled to receive, after payment or provision for
payment of all debts and liabilities of First Federal (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 First Federal available for distribution. In the event of liquidation,
dissolution or winding up of First Federal Bankshares, 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 First Federal Bankshares
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 First Federal
Bankshares will not be entitled to preemptive rights with respect to any shares
which may be issued. The common stock is not subject to redemption.
PREFERRED STOCK
None of the shares of First Federal Bankshares' 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
129
<PAGE>
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 FIRST FEDERAL
GENERAL. The charter of First Federal 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 First Federal has the same relative rights as, and is identical in all
respects with, each other share of common stock. The Board of Directors of First
Federal is authorized to approve the issuance of common stock up to the amount
authorized by the charter without the approval of First Federal's stockholders.
All of the issued and outstanding common stock of First Federal will be held by
First Federal Bankshares as First Federal's sole stockholder.
DIVIDENDS. The holders of First Federal's common stock are entitled
to receive and to share equally in such dividends as may be declared by the
Board of Directors of First Federal out of funds legally available therefor. See
"Dividend Policy" for certain restrictions on the payment of dividends.
VOTING RIGHTS. The holders of First Federal common stock possess
exclusive voting rights in First Federal. 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 MHC Reorganization to July 1997, the holders
of First Federal's common stock were not permitted to cumulate their votes for
the election of directors. See "Restrictions on the Acquisition of First Federal
Bankshares and First Federal--Restrictions in First Federal's Federal Stock
Charter and Bylaws," and "--Additional Antitakeover Effects."
LIQUIDATION. In the event of any liquidation, dissolution, or
winding up of First Federal, the holders of First Federal common stock will be
entitled to receive, after payment of all debts and liabilities of First Federal
(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 First Federal 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 First
Federal will not be entitled to preemptive rights with respect to any shares of
First Federal that may be issued. The common stock will not be subject to
redemption. Upon receipt by First Federal 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 First Federal 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.
130
<PAGE>
RP Financial has consented to the publication herein of the summary
of its report to First Federal and First Federal Bankshares 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 First Federal and First
Federal Bankshares by Luse Lehman Gorman Pomerenk & Schick, A Professional
Corporation, Washington, D.C., special counsel to First Federal and First
Federal Bankshares. Certain legal matters will be passed upon for Sandler
O'Neill and Investment Bank Services by Muldoon Murphy & Faucette, Washington,
D.C.
ADDITIONAL INFORMATION
First Federal Bankshares 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.
First Federal 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, First Federal Bankshares will
register its common stock with the SEC under Section 12(g) of the Exchange Act,
and, upon such registration, First Federal Bankshares 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, First Federal Bankshares has undertaken that it will not terminate
such registration for a period of at least three years following the conversion.
In the event that First Federal amends the Plan of Conversion to eliminate the
concurrent formation of First Federal Bankshares as part of the conversion,
First Federal will register its stock with the OTS under Section 12(g) of the
Exchange Act and, upon such registration, First Federal 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 First
Federal Bankshares and the federal stock charter and bylaws of First Federal are
available without charge from First Federal.
131
<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................................................................................................. 39
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. are not presented herein
because First Federal Bankshares 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>
<S> <C> <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...............................................
Part II, Item 6. Management's Discussion and Analysis of Plan of Operation................................
Part I, Item 1. Description of Business..................................................................
</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.
G-69
<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.
G-70
<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>
- --------------------------------------------------------------------------------
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>
* 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
<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.
<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.
<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
<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.
*** Previously filed.
(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.
<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.
<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
January 21, 1999.
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 January 21, 1999
- ------------------------------- Officer and Chairman of the Board
Barry E. Backhaus (Principal Executive Officer)
/S/ JON G. CLEGHORN Executive Vice President and January 21, 1999
- ------------------------------- Director
Jon G. Cleghorn
/S/ KATHERINE A. BOUSQUET Vice President and Treasurer January 21, 1999
- ------------------------------- (Principal Financial and
Katherine A. Bousquet Accounting Officer)
/S/ DR. NANCY A. BOYSEN Director January 21, 1999
- -------------------------------
Dr. Nancy A. Boysen
/S/ HARLAND D. JOHNSON Director January 21, 1999
- -------------------------------
Harland D. Johnson
/S/ ALLEN J. JOHNSON Director January 21, 1999
- -------------------------------
Allen J. Johnson
<PAGE>
/S/ DENNIS B. SWANSTROM Director January 21, 1999
- -------------------------------
Dennis B. Swanstrom
/S/ GARY L. EVANS Director January 21, 1999
- -------------------------------
Gary L. Evans
/S/ PAUL W. OLSON Director January 21, 1999
- -------------------------------
Paul W. Olson
/S/ DAVID VAN ENGELENHOVEN Director January 21, 1999
- -------------------------------
David Van Engelenhoven
/S/ DAVID S. CLAY Director January 21, 1999
- -------------------------------
David S. Clay
/S/ STEVEN L. OPSAL Executive Vice President January 21, 1999
- ------------------------------- and Director
Steven L. Opsal
</TABLE>
<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>
<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
January 21, 1999
<PAGE>
Exhibit 23.4
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
January 21, 1999
<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>
