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PROSPECTUS SUPPLEMENT
FIRST FEDERAL BANKSHARES, INC.
FIRST FEDERAL BANK
EMPLOYEES' SAVINGS & PROFIT SHARING PLAN AND TRUST
First Federal Bankshares, Inc. is providing this prospectus supplement
to members in First Federal Bank Employees' Savings & Profit Sharing Plan and
Trust (the "401(k) plan"). As a member of the 401(k) plan, you may direct the
trustee of the plan to purchase common stock of First Federal Bankshares, Inc.
in its offering with amounts allocated to your account under the plan. First
Federal Savings Bank of Siouxland has formed First Federal Bankshares as part of
the conversion of First Federal Savings Bank of Siouxland mutual holding company
to stock form.
This prospectus supplement relates to your initial election to direct
that all or a portion of your account be invested in a fund made up of First
Federal Bankshares common stock. The trustee will reinvest your account in the
other funds available under the 401(k) plan if the offering is oversubscribed
and the trustee cannot use the total amount of your funds to purchase First
Federal Bankshares common stock. If you cannot acquire all the common stock you
want in the offering you may direct the investment of your account in the First
Federal Bankshares fund after the offering is completed.
The prospectus of First Federal Bankshares dated February 12, 1999
attached to this prospectus supplement includes detailed information with
respect to the offering, and the financial condition, results of operations and
business of First Federal Savings Bank of Siouxland. You should read this
prospectus supplement, which provides information with respect to the 401(k)
plan, only in conjunction with the prospectus.
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FOR A DISCUSSION OF RISKS THAT YOU SHOULD CONSIDER, SEE "RISK FACTORS"
BEGINNING ON PAGE 12 OF THE PROSPECTUS.
The interests in the 401(k) 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. Any
representation to the contrary is a criminal offense.
The securities offered in this prospectus supplement are not deposits
or accounts and are not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
The 401(k) plan's investment in common stock is subject to loss.
The date of this prospectus supplement is February 12, 1999.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
THE
OFFERING.....................................................................................................1
Securities Offered..................................................................................1
Election to Purchase Common Stock in the Offering; Priorities.......................................1
Value of 401(k) Plan Assets.........................................................................2
Method of Directing Transfer........................................................................2
Time for Directing Transfer.........................................................................2
Irrevocability of Transfer Direction................................................................3
Direction to Purchase Common Stock After the Offering...............................................3
Purchase Price of Common Stock......................................................................3
Nature of a Member's Interest in the Common Stock...................................................3
Voting Rights of Common Stock.......................................................................3
DESCRIPTION OF THE 401(k) PLAN...............................................................................4
Introduction........................................................................................4
Eligibility and Membership..........................................................................4
Contributions Under the 401(k) Plan.................................................................6
Limitations on 401(k) Plan Contributions............................................................6
Investment of Contributions and Account Balances....................................................8
Benefits Under the 401(k) Plan.....................................................................12
Withdrawals and Distributions From the 401(k) Plan.................................................12
Trustee ..........................................................................................13
Plan Administrator.................................................................................14
Reports to 401(k) Plan Members.....................................................................14
Amendment and Termination..........................................................................14
Merger, Consolidation or Transfer..................................................................14
Federal Income Tax Consequences....................................................................15
Additional Employee Retirement Income and Security Act Considerations..............................20
Securities and Exchange Commission Reporting and Short-Swing Profit Liability......................20
Financial Information Regarding 401(k) Plan Assets.................................................21
LEGAL OPINION...............................................................................................21
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THE OFFERING
SECURITIES OFFERED
First Federal Bankshares is offering participation interests in the
First Federal Bank Employees Profit Sharing Plan and Trust (the "401(k) plan")
plan. The participation interests represent indirect ownership of First Federal
Bankshare's common stock through the 401(k) plan. The 401(k) plan may acquire up
to 46,000 shares of common stock to be held by the trustee in a fund of First
Federal Bankshares common stock. First Federal Bankshares is the issuer of the
common stock. Only employees of First Federal Savings Bank of Siouxland may
become members in the plan. First Federal Bankshares will not offer these
interests unless First Federal Savings Bank of Siouxland's mutual holding
company converts to stock form. Your investment in the First Federal Bankshares
stock fund is subject to priorities listed below. Information with regard to the
401(k) 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 Savings Bank of Siouxland is contained in the attached
prospectus. The address of the principal executive office of First Federal
Savings Bank of Siouxland is 329 Pierce Street, Sioux City, Iowa 51101. First
Federal Savings Bank of Siouxland's telephone number is (712) 277-0200.
ELECTION TO PURCHASE COMMON STOCK IN THE OFFERING; PRIORITIES
In connection with the conversion of First Federal Savings Bank of
Siouxland's mutual holding company, First Federal Savings Bank of Siouxland has
withdrawn from the Financial Institutions Thrift Plan and adopted the to permit
you to direct that all or part of your account balances under the 401(k) plan be
transferred to the First Federal Bankshares stock fund, and be used to purchase
common stock issued in connection with the offering. The trustee of the First
Federal Bankshares stock fund will purchase common stock in accordance with your
directions. You 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
you to purchase common stock in the offering, the amount that cannot be invested
in common stock will be reinvested in the other investment funds of the 401(k)
plan in accordance with your current investment election. If you fail to direct
the investment of your account balances, your account balances will remain in
the other investment funds of the 401(k) plan as previously directed by you. If
you have never made an investment election, your 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 the following priorities:
(1) depositors of First Federal with aggregate account balances of $50
or more as of September 30, 1997;
(2) First Federal's tax-qualified employee benefit plans, including the
employee stock ownership plan;
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(3) depositors of First Federal with aggregate account balances of $50
or more as of December 31, 1998;
(4) depositors of First Federal Savings Bank of Siouxland as of
February 2, 1999 and borrowers as of February 11, 1992 whose loans
continue to be outstanding on February 2, 1999; and
(5) members of the general public with preference given first to
persons who hold shares of common stock of First Federal Savings
Bank of Siouxland and then to individuals residing in the
"community", consisting of the State of Iowa, the Nebraska
counties of Dakota, Dixon, Thurston, Cedar and Wayne, and the
South Dakota counties of Union, Clay, Yankton, Lincoln and Turner.
To the extent you fall into one of these categories, you may use funds
in your plan account to subscribe or pay for the common stock being acquired.
Common stock so purchased will be placed in the First Federal Bankshares stock
fund and allocated to your 401(k) plan account.
VALUE OF 401(k) PLAN ASSETS
As of September 30, 1998, the market value of the assets of the
Financial Institutions Thrift Plan (the predecessor plan) equaled approximately
$408,343. The plan administrator informed each member of the value of his or her
account balance under the predecessor plan as of September 30, 1998.
METHOD OF DIRECTING TRANSFER
You will receive a form on which you can elect to direct that all or a
portion of your account balance in the 401(k) plan be transferred to the First
Federal Bankshares stock fund or to the other investment options established
under the 401(k) plan. If you wish to use all or part of your account balance in
the 401(k) plan to purchase common stock issued in the offering, you should
indicate that decision on the investment allocation form.
TIME FOR DIRECTING TRANSFER
If you wish to purchase common stock with your 401(k) account balances,
you must return your election form to Peggy Smith, Vice President, First Federal
Savings Bank of Siouxland, 329 Pierce Street, Sioux City, Iowa 51101 no later
than 12:00 noon on March 10, 1999.
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IRREVOCABILITY OF TRANSFER DIRECTION
You may not revoke your election to transfer amounts credited to your
account in the 401(k) plan to the First Federal Bankshares stock fund. After the
offering, however, you will be able to change the investment of your accounts
under the plan as explained below.
DIRECTION TO PURCHASE COMMON STOCK AFTER THE OFFERING
Whether you choose to purchase stock in the offering, or attempt to
purchase stock in the offering but are unable to do so because the offering is
oversubscribed, you will also be able to purchase stock after the offering. You
may direct that a certain percentage of your account balance in the 401(k) plan
be transferred to the First Federal Bankshares stock fund and invested in common
stock, or to the other investment funds available under the 401(k) plan. You may
change your investment allocation on a daily basis. Special restrictions may
apply to transfers directed to and from the First Federal Bankshares stock fund
by those members who are subject to the provisions of section 16(b) of the
Securities Exchange Act of 1934, as amended, relating to the purchase and sale
of securities by officers, directors and principal shareholders of First Federal
Bankshares.
PURCHASE PRICE OF COMMON STOCK
The trustee will use the funds transferred to the First Federal
Bankshares stock fund for the purchase of common stock in the offering, except
in the event of an oversubscription, as discussed above. The trustee will pay
$10.00 per share, which will be the same price paid by all other persons in the
offering.
After the offering, the trustee will acquire common stock in open
market transactions at the prevailing price. The trustee will pay transaction
fees associated with the purchase, sale or transfer of the common stock after
the offering.
NATURE OF A MEMBER'S INTEREST IN THE COMMON STOCK
The trustee holds the common stock, in trust, for the members of the
401(k) plan. Shares of common stock acquired by the trustee at your direction
will be allocated to your account. Therefore, investment decision of other
members should not affect the earnings allocated to your account.
VOTING RIGHTS OF COMMON STOCK
The trustee generally will exercise voting rights attributable to all
common stock held by the First Federal Bankshares stock fund as directed by
members with accounts invested in the fund. When stockholders have a right to
vote on a matter, you will be allocated voting
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instruction rights reflecting your proportionate interest in the fund. The
trustee will vote the common stock affirmatively and negatively on each matter,
in proportion to the voting instructions the trustee receives from the members.
DESCRIPTION OF THE 401(k) PLAN
INTRODUCTION
First Federal Savings Bank of Siouxland adopted the Financial
Institutions Thrift Plan, a multiple-employer defined contribution plan,
effective September 1, 1996. First Federal Savings Bank of Siouxland withdrew
from that plan and adopted the 401(k) plan, a single-employer plan effective
December 1, 1998, in order to permit the investment of plan assets in common
stock of First Federal Bankshares. First Federal Savings Bank of Siouxland gave
all members of the Financial Institutions Thrift Plan, other than members who
had terminated employment, the opportunity to transfer their accounts to the
401(k) plan. The 401(k) plan is a tax-qualified plan that permits members to
defer current compensation to their account balances.
First Federal Savings Bank of Siouxland intends that the 401(k) plan,
in operation, will comply with the requirements of the Internal Revenue Code and
the Employee Retirement Income Security Act. First Federal Savings Bank of
Siouxland may amend the 401(k) plan from time to time in the future, as it sees
fit or to maintain compliance with federal law. Since the 401(k) plan is
governed by the Employee Retirement Income Securities Act, federal law provides
you with various rights and protections as a member of the 401(k) plan. Although
the 401(k) plan is subject to many of the provisions of the Employee Retirement
Income Security Act, your benefits under the 401(k) plan are not governed by the
Pension Benefit Guaranty Corporation.
REFERENCE TO FULL TEXT OF PLAN. The following statements are summaries
of certain provisions of the 401(k) plan. They are not complete and are
qualified in their entirety by the full text of the 401(k) plan. You may obtain
a copy of the 401(k) plan by filing a request with First Federal Savings Bank of
Siouxland, c/o First Federal Savings Bank of Siouxland, Attention: Barry E.
Backhaus, President, 329 Pierce Street, Sioux City, Iowa 51101. We urge each
employee to read carefully the full text of the 401(k) plan.
ELIGIBILITY AND MEMBERSHIP
Any employee of First Federal Savings Bank of Siouxland is eligible to
become a member in the 401(k) plan on the first day of the month following
completion of one "year of service" during which an employee completes at least
1000 hours of service with First Federal Savings Bank of Siouxland. The 401(k)
plan year is January 1 to December 31.
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As of September 30, 1998, there were approximately 158 employees
eligible to participate in the 401(k) plan, and 129 employees participating by
making elective deferral contributions.
CONTRIBUTIONS UNDER THE 401(k) PLAN
401(k) PLAN CONTRIBUTIONS. As a member of the 401(k) plan, you are
permitted to defer on a pre-tax basis, up to 15% of your annual salary, and to
have that amount contributed to the 401(k) plan on your behalf. For purposes of
the 401(k) plan, "salary" means your 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 this 401(k) plan or a section 125
cafeteria plan. In 1998, the maximum amount of your annual salary that could be
taken into account under the 401(k) plan was limited to $160,000. Limits
established by the Internal Revenue Service are subject to increase pursuant to
an annual cost of living adjustment. You may elect to modify the amount
contributed to the 401(k) plan by filing a new elective deferral agreement with
the 401(k) plan administrator which will be effective the first day of any
contribution reporting period.
EMPLOYER CONTRIBUTIONS. If you make elective deferral contributions,
First Federal Savings Bank of Siouxland will make matching contributions to the
401(k) plan equal to 25% of your elective deferral contributions, up to a
maximum of 4% of your salary. The matching contributions are subject to revision
by First Federal Savings Bank of Siouxland at any time. The matching
contributions vest according to the vesting schedule set forth below.
LIMITATIONS ON 401(k) PLAN CONTRIBUTIONS
LIMITATION ON EMPLOYEE SALARY DEFERRALS. The amount of your elective
deferral contributions may not currently exceed $10,000 per calendar year. The
Internal Revenue Service will periodically increase this annual limitation. If
you defer salary in excess of this limitation, your gross income for federal
income tax purposes will include the excess in the year of the deferral. In
addition, unless the excess deferral is distributed before April 15 of the
following year it will be taxed again in the year distributed. Income on the
excess deferral distributed by April 15 of the immediately succeeding year will
be treated, for federal income tax purposes, as earned and received by the
member in the tax year in which the distribution is made.
LIMITATIONS ON ANNUAL ADDITIONS AND BENEFITS. The contributions and
forfeitures you receive under the 401(k) plan and employee stock ownership plan,
in the aggregate, cannot exceed the lesser of $30,000 or 25% of your
compensation, as defined in the 401(k) plan. To the extent contributions and
forfeitures exceed these limitations, the plan administrator will:
(1) return any elective deferral contributions, including earnings, to
reduce the excess amount in your accounts; and
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(2) reduce employer contributions which match your returned elective
deferral contributions.
If, you are also covered under First Federal Savings Bank of
Siouxland's employee stock ownership plan and annual additions exceed the
maximum permissible amount after the above reductions are taken, the plan
administrator will reduce your employee stock ownership plan contributions so
the total annual additions do not exceed the maximum permissible amount.
LIMITATION ON PLAN CONTRIBUTIONS FOR HIGHLY COMPENSATED EMPLOYEES. The
Internal Revenue Code limits the amount of elective deferral contributions and
matching contributions that may be made to the 401(k) 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 401(k) plan. Specifically, the actual deferral percentage,
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, must meet either of the following tests:
(1) the average deferral percentage of the eligible highly compensated
employees is not more than 125% of the average deferral percentage of all other
eligible employees; or
(2) the average deferral percentage of the eligible highly compensated
employees is not more than 200% of the average deferral percentage of all other
eligible employees, and the excess of the average deferral percentage for the
eligible highly compensated employees over the average deferral percentage of
all other eligible employees is not more than two percentage points.
Similarly, the actual contribution percentage, 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, must meet either of the following tests:
(1) the actual contribution percentage of the eligible highly
compensated employees is not more than 125% of the actual contribution
percentage of all other eligible employees; or
(2) the actual contribution percentage of the eligible highly
compensated employees is not more than 200% of the actual contribution
percentage of all other eligible employees, and the excess of the actual
contribution percentage for the eligible highly compensated employees over the
actual contribution percentage of all other employees is not more than two
percentage points.
Example: If the average deferral percentage of non-highly compensated employees
is 4%, the average deferral percentage of highly compensated employees
cannot exceed 6%. Alternatively, if the average deferral percentage of
non-highly compensated employees is 10%, the maximum deferral
percentage of highly compensated employees cannot exceed 12.5%.
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Effective January 1, 1997, the average deferral percentage and actual
contribution percentage 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 401(k) plan year that is being tested.
In general, for plan years beginning in 1998, a highly compensated
employee includes:
(1) an employee who, during the plan year or the preceding plan year,
was at any time a 5% owner of the stock of First Federal Savings Bank of
Siouxland, or stock possessing more than 5% of the total combined voting power
of all stock of First Federal Savings Bank of Siouxland; or
(2) an employee who, for the preceding plan year, received salary from
First Federal Savings Bank of Siouxland in excess of $80,000, and, if First
Federal Savings Bank of Siouxland 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.
The trustee will distribute amounts contributed by highly compensated
employees that exceed the average deferral percentage limitation in any plan
year, together with any income allocable. These contributions must be
distributed before the close of the following plan year first to highly
compensated employees with the greatest dollar amount of deferrals, until the
plan satisfies the average deferral percentage test. Moreover, First Federal
Savings Bank of Siouxland will be subject to a 10% excise tax on these
contributions unless, together with any income allocable thereto, they either
are re-characterized or are distributed before the close of the first 2-1/2
months following the plan year to which the contributions relate. In addition,
the trustee will distribute, any contributions by highly compensated employees
that exceed the average contribution percentage limitation in any plan year,
together with any income allocable thereto, must also be distributed before the
close of the following plan year. A 10% excise tax will also be imposed on First
Federal Savings Bank of Siouxland with respect to these contributions, unless
such contributions, 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 your accounts under the 401(k) plan are held in
the plan trust which is administered by the trustee appointed by First Federal
Savings Bank of Siouxland's board of directors.
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Prior to the effective date of the offering, you and the other members
provided the opportunity to direct the investment of your 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 401(k) plan now provides that in addition to the funds specified
above, you may direct the trustee to invest all or a portion of your account in
the First Federal Bankshares stock fund.
You may elect to have both past contributions and earnings, as well as
future contributions to your account invested either in the First Federal
Bankshares 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. If you make an election to direct investment of assets
into the First Federal Bankshares stock fund, you may change your investment at
a future date. This may be done by filing a change of investment allocation form
with the 401(k) plan's third-party administrator, the Pentegra Group, or by
using Pentegra Group's voice response unit by calling (800)433-4422, in
accordance with established procedures to dispose of a 401(k) plan investment
and reinvest the net proceeds in an alternative investment under the 401(k)
plan. The proceeds of the sale, net of expenses, will be allocated to your
account and reinvested in accordance with the 401(k) plan. Until an initial
effective direction is made by a member, the member's account will be invested
in the Money Market Fund.
A. PREVIOUS FUNDS.
Prior to the effective date of the offering, the trustee invested
contributions under the 401(k) plan in the nine funds specified above. The
trustee added the Income Plus, Growth & Income, Growth and International Stock
Funds on July 2, 1997. The following table provides performance data with
respect to the investment funds available under the 401(k) plan, based on
information provided to First Federal Bankshares by the Pentegra Group:
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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
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<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 401(k) 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 U.S. Government of
Agency collateral.
S&P MIDCAP STOCK FUND A diversified equity portfolio with the objective
of simulation the performance of the Standard & Poor's MidCap Index of 400
stocks. Preservation of the value of the principal investment is not guaranteed.
MONEY MARKET FUND A government instrument fund with the objective of
maximizing income at minimum risk of capital with underlying investments in
obligations issued or guaranteed by the United States government or agencies or
instrumentalities thereof.
GOVERNMENT BOND FUND A fund designed to maximize income at minimum risk
with underlying investments in U.S. Treasury bonds with a maturity of 20 years
or more.
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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 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 First Federal Bankshares 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 First Federal Bankshares stock fund, including cash dividends paid on
common stock held in the First Federal Bankshares 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 First Federal Bankshares stock
fund will be placed in a short-term interest fund. Any earnings that result
therefrom will remain in the First Federal Bankshares 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 First Federal Bankshares 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.
FOR A DISCUSSION OF RISKS THAT YOU SHOULD CONSIDER, SEE "RISK FACTORS"
BEGINNING ON PAGE 13 OF THE PROSPECTUS.
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BENEFITS UNDER THE 401(k) PLAN
VESTING. At all times, you have a fully vested, nonforfeitable interest
in your elective contributions and earnings under the 401(k) plan. You are
vested in any employer contributions, matching and supplemental, in accordance
with the following schedule:
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<CAPTION>
Years of Service Vesting Percentage
---------------- ------------------
<S> <C>
Less than 1 0%
1 25%
2 50%
3 75%
4 or more 100%
</TABLE>
You are also 100% vested in employer contributions made to your
account, regardless of your years of employment, upon attainment of normal
retirement age under the 401(k) plan, death or approved disability. Any
non-vested employer 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 401(k) PLAN
FEDERAL LAW REQUIRES THE 401(k) PLAN TO IMPOSE SUBSTANTIAL RESTRICTIONS
ON YOUR RIGHT TO WITHDRAW AMOUNTS HELD FOR YOUR BENEFIT UNDER THE 401(k) PLAN
PRIOR TO YOUR TERMINATION OF EMPLOYMENT WITH FIRST FEDERAL SAVINGS BANK OF
SIOUXLAND. A FEDERAL TAX PENALTY EQUAL TO 10% OF THE WITHDRAWAL, OVER AND ABOVE
THE NORMAL FEDERAL AND STATE INCOME TAX, MAY ALSO BE IMPOSED ON WITHDRAWALS MADE
PRIOR TO YOUR ATTAINMENT OF AGE 59-1/2, REGARDLESS OF WHETHER THE WITHDRAWALS
OCCUR DURING YOUR EMPLOYMENT WITH FIRST FEDERAL SAVINGS BANK OF SIOUXLAND OR
AFTER TERMINATION OF EMPLOYMENT.
WITHDRAWALS PRIOR TO TERMINATION OF EMPLOYMENT OR AGE 59-1/2. You may
withdraw your employee contributions in your 401(k) account 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
you have a true financial need before you make a withdrawal. You may withdraw
employer matching contributions credited to your regular account if you have
completed 60 months of participation in the 401(k) plan, the employer
contributions have been in the 401(k) plan for at least 24 months, or you have
attained age 59-1/2. You may make a withdrawal from your regular account and
rollover account once per calendar year.
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You are entitled to borrow between $1,000 and $50,000 from the 401(k)
plan, but not in excess of 50% of the combined vested balance of your regular
account, 401(k) account and rollover account, but excluding any amounts to the
extent invested in the First Federal Bankshares stock fund.
DISTRIBUTION UPON TERMINATION OF EMPLOYMENT OR DISABILITY. Payment of
your benefits upon your retirement, disability, or other termination of
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 your life expectancy.
Alternatively, your benefit may be transferred to another qualified employee
benefit plan or individual retirement account. Benefit payments may be deferred
until April 1 following the calendar year in which you attain age 70-1/2 or,
alternatively, you may make one withdrawal per account each calendar year.
DISTRIBUTION UPON DEATH. If you die prior to the benefit commencement
date for retirement, disability or termination of employment, your benefit will
be paid to your surviving spouse or beneficiary in a lump sum, unless the
payment would exceed $500 and you elected prior to death that the payment be
made in annual installments over a period not to exceed 5 years, or 10 years if
your spouse is your beneficiary. If no election is in effect at the time of your
death, your beneficiary may elect to receive the benefit in the form of annual
installments over a period not to exceed 5 years, or 10 years if your 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 of your death, or
tenth anniversary if your spouse is the beneficiary. If you die after
distribution of your 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 your death.
NONALIENATION OF BENEFITS. Except for federal income tax withholding or
a qualified domestic relations order, your benefits payable under the 401(k)
plan cannot be alienated. Examples of alienation include transferring your
benefits voluntarily and a creditor placing a lien on your benefits. Any attempt
to alienate your benefits, whether voluntary or involuntary, shall be void.
TRUSTEE
The trustee with respect to the 401(k) plan is the named fiduciary of
the 401(k) plan. The trustee is appointed by the board of directors of First
Federal Savings Bank of Siouxland to serve at its pleasure. The Bank of New York
has been appointed as trustee of the 401(k) plan. Until the offering is
concluded, Barry E. Backhaus, President and Chief Executive Officer of First
Federal Savings Bank of Siouxland, will serve as trustee of the First Federal
Bankshares stock fund. The trustees are referred to collectively herein as the
trustee.
The trustee receives, holds and invests the contributions to the 401(k)
plan in trust and distributes them to you and your beneficiaries in accordance
with the terms of the 401(k) plan
12
<PAGE>
and the directions of the plan administrator. The trustee is responsible for
investment of the assets of the trust.
PLAN ADMINISTRATOR
The 401(k) plan is administered by the plan administrator. First
Federal Savings Bank of Siouxland is the 401(k) plan administrator and has
designated the Compensation and Benefits Committee of the board of directors to
supervise its responsibilities as the plan administrator. The address of the
401(k) plan administrator is 329 Pierce Street, Sioux City, Iowa 51101,
telephone number (712) 277-0200. The 401(k) plan administrator is responsible
for the administration of the 401(k) plan, interpretation of the provisions of
the 401(k) plan, prescribing procedures for filing applications for benefits,
preparation and distribution of information explaining the 401(k) plan,
maintenance of 401(k) plan records, books of account and all other data
necessary for the proper administration of the 401(k) plan, and preparation and
filing of all returns and reports relating to the 401(k) plan which are required
to be filed, and for all disclosures required to be made to members,
beneficiaries, and others.
REPORTS TO 401(k) PLAN MEMBERS
The plan administrator will furnish you with a quarterly statement
showing:
(1) the number of units in each of the funds;
(2) the unit value of each fund as of the end of the quarter; and
(3) the amount of contributions allocated to your account for that
period.
AMENDMENT AND TERMINATION
It is the intention of First Federal to continue the 401(k) plan
indefinitely. Nevertheless, First Federal may terminate the 401(k) plan at any
time. If the 401(k) plan is terminated in whole or in part, then regardless of
other provisions in the 401(k) plan, you will have a fully vested interest in
your accounts. First Federal reserves the right to make, from time to time, any
amendment or amendments to the 401(k) 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 the Employee Retirement Income Security Act.
MERGER, CONSOLIDATION OR TRANSFER
In the event of the merger or consolidation of the 401(k) plan with
another 401(k) plan, or the transfer of the trust assets to another plan, the
401(k) plan requires that you would, if either
13
<PAGE>
the 401(k) plan or the other plan then terminated, receive a benefit
immediately after the merger, consolidation or transfer which is equal to or
greater than the benefit you 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 a summary of the material federal income tax aspects
of the 401(k) plan. However, statutory provisions are subject to change, as are
their interpretations, and their application may vary in individual
circumstances. The consequences under state and local income tax laws may not be
the same as under the federal income tax laws. You are urged to consult your tax
advisors with respect to any distribution from the 401(k) plan and transactions
involving the 401(k) plan.
The 401(k) plan is tax-qualified and the related trust is exempt from
tax under the Internal Revenue Code. As a result, the 401(k) plan is afforded
special tax treatment which include the following:
(1) First Federal is allowed an immediate tax deduction for the amount
contributed to the 401(k) plan each year;
(2) participants pay no current income tax on amounts contributed by
First Federal on your behalf; and
(3) earnings of the 401(k) plan are tax-exempt thereby permitting the
tax-free accumulation of income and gains on investments.
The 401(k) plan will be administered to comply in operation with the
requirements of the Internal Revenue Code as of the effective date of any change
in the law. First Federal expects to timely adopt any amendments to the 401(k)
plan that may be necessary to maintain the qualified status of the 401(k) plan
under the Internal Revenue Code.
Assuming that the 401(k) plan is administered in accordance with the
requirements of the Internal Revenue Code, membership in the 401(k) plan under
existing federal income tax laws will have the following effects:
(1) The contributions to your account and the investment earnings on
the account are not includable in your federal taxable income until the
contributions or earnings are actually distributed or withdrawn from the 401(k)
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; and
(2) Income earned on assets held by the trust will not be taxable to
the trust.
14
<PAGE>
LUMP SUM DISTRIBUTION. A distribution from the 401(k) plan to you or
your beneficiary will qualify as a lump sum distribution if it is made:
(1) within one calendar year;
(2) on account of your death, disability or separation from service, or
after you attain age 59-1/2; and
(3) consists of your balance under this 401(k) plan and all other
profit sharing plans, if any, maintained by First Federal Savings Bank of
Siouxland. The portion of any lump sum distribution that is required to be
included in your taxable income for federal income tax purposes, consists of the
entire amount of the lump sum distribution less the amount of after-tax
contributions, if any, made by you to this or any other profit sharing plan
maintained by First Federal Savings Bank of Siouxland which is included as part
of the lump sum distribution.
AVERAGING RULES. The portion of the total taxable amount of a lump sum
distribution that is attributable to participation after 1973 in the 401(k) plan
or in any other profit-sharing plan maintained by First Federal Savings Bank of
Siouxland, referred to as the ordinary income portion, will be taxable generally
as ordinary income for federal income tax purposes. However, if you have
completed at least five years of membership in the 401(k) plan, including
membership in the Financial Institutions Thrift Plan, before the year in which
the distribution is made you may elect to have the ordinary income portion of
the lump sum distribution taxed according to a special five-year averaging rule.
In general, five-year income averaging allows you to pay a separate tax on the
lump-sum distribution that approximates the tax that would have been due if the
distribution hd been received in five equal annual installments. The election of
the special averaging rules will apply only to one lump sum distribution
received by you provided such amount is received on or after you turn age 59-1/2
and you elect to have any other lump sum distribution from a qualified plan
received in the same year taxed under the special averaging rule. If your
beneficiary receives a lump sum distribution as the result of your death, your
beneficiary may elect five-year averaging without regard to whether you were a
member in the plan for five years prior to your death.
Example: Brown, age 60 and married filing a joint return, receives a
lump-sum distribution of $150,000 from his corporation's
qualified plan and elects 5-year averaging. The tax is
computed as follows:
<TABLE>
<S> <C>
Amount of total distribution subject to tax $150,000.00
Tax at single rates on $30,000 (1/5 of $150,000) $ 5,988.50
Multiplied by 5 $ 29,942.50
</TABLE>
Under a special grandfather rule, if you turned 50 by 1985, you may
elect to have your lump sum distribution taxed under either the five-year
averaging rule or under the prior law ten-
15
<PAGE>
year averaging rule; you also may elect to have that portion of the lump sum
distribution attributable to your pre-1974 participation in the 401(k) plan
taxed at a flat 20% rate as gain from the sale of a capital asset.
For years beginning after December 31, 1999, five year income averaging
is repealed. The special grandfather rule is modified so that, if you qualify,
you can elect 10-year but not five year averaging.
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 under lump sum distributions, 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 net unrealized appreciation is the
excess of the value of such common stock at the time of the distribution over
the cost or other basis to the trust.
Example: Assume the 401(k) plan purchases 100 shares of common stock in
the offering at $10 per share. Ten dollars would be the cost
basis of the stock to the 401(k) plan. If the 401(k) plan
distributes the common stock to you in a lump sum distribution
when the stock is trading at $18 per share, you will be taxed
in the year of distribution on the $10 cost basis of the stock
to the 401(k) plan. The additional $8 per share, or the net
unrealized appreciation, will not be taxed until you sale the
stock.
The tax basis of such common stock 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.
Example: Assuming the same facts as above, your cost basis in the stock
is $10, which is the $18 value of the stock at the time of
distribution MINUS the $8 of net unrealized appreciation.
Any gain on a 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 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.
Example: Assume you sale 50 shares of the stock in January, seven
months after you receive the distribution for $20 per share.
You will be taxed as follows: You will not be taxed again
16
<PAGE>
on the $10 cost basis you recognized as income at the time
of distribution. The $8 in net unrealized appreciation will be
taxed at long term capital gains rates. However, the $2
appreciation in the value of the stock that occurred since the
distribution will be taxed at short term capital gains rates
since you have only held the stock for seven months following
its distribution to you.
As a recipient of a distribution you 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 INDIVIDUAL RETIREMENT
ACCOUNT. You 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 you, to another qualified plan or to an individual
retirement account. If less than the total taxable amount of a lump sum
distribution is contributed to another qualified plan or to an individual
retirement account within the applicable 60-day period, the amount not so
contributed must be included in your income for federal income tax purposes and
will not be eligible for the special averaging rules or for capital gains
treatment.
Example: You receive a distribution of 500 shares of stock and $3,000
cash from the 401(k) plan on June 30. If you intend to roll
your distribution over to another tax qualified plan or
individual retirement account, you must do so no later than
August 29, which is 60 days after you received the
distribution. If you roll over all the stock but none of the
cash, you must include the $3,000 cash in your income for the
calendar year in which the distribution is made to you.
You generally may defer the federal income taxation of any portion of
any other distribution made on account of your disability or separation from
service, if the amount is distributed within one taxable year, and is
contributed, within 60 days after the date of its receipt by you, to an
individual retirement account.
Effective January 1, 1993, you have the right to elect to have the
trustee transfer all or any portion of an "eligible rollover distribution"
directly to another qualified plan or to an individual retirement account. If
you do not elect to have an eligible rollover distribution transferred directly
to another qualified plan or to an individual retirement account, 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 401(k) plan except:
17
<PAGE>
(1) a distribution that is (a) one of a series of substantially equal
periodic payments made, not less frequently than annually, over your life or the
joint lives of you and your 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.
If your beneficiary is your surviving spouse, he or she also may defer
federal income taxation of all or any portion of a distribution from the 401(k)
plan to the extent that such amount, or a portion thereof, is contributed within
60 days after the date of its receipt by your surviving spouse, to an individual
retirement account. If all or any portion of the total taxable amount of a lump
sum distribution is contributed by your surviving spouse to an individual
retirement account within the applicable 60-day period, any subsequent
distribution from the individual retirement account will not be eligible for the
special averaging rules or for capital gains treatment. Any amount received by
your surviving spouse that is not contributed to another qualified plan or to an
individual retirement account 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. If you receive a distribution
from the 401(k) plan prior to attaining age 59-1/2 it 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 beneficiary, or to your estate, on or after your death;
(2) attributable to your disability;
(3) part of a series of substantially equal periodic payments not less
frequently than annually made for your life or life expectancy or the joint
lives or joint life expectancies of you and your beneficiary;
(4) made to you after separation from service on account of early
retirement under the 401(k) 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
18
<PAGE>
(7) made to effect the distribution of excess contributions or excess
deferrals.
ADDITIONAL EMPLOYEE RETIREMENT INCOME AND SECURITY ACT CONSIDERATIONS
As noted above, the plan is subject to certain provisions of the
Employee Retirement Income Security Act, including special provisions relating
to control over the plan's assets by participant's and beneficiaries. The 401(k)
plan's feature that allows you to direct the investment of your account balances
is intended to satisfy the requirements of section 404(c) of the Employee
Retirement Income Security Act of 1974 relating to control over plan assets by a
participant or beneficiary. The effect of this is two-fold. First, you will not
be deemed a 'fiduciary' because of your exercise of investment discretion.
Second, no person who otherwise is a fiduciary, such as your employer, the plan
administrator, or the plan's trustee is liable under the fiduciary
responsibility provision of the Employee Retirement Income Security Act 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 401(k) plan in First Federal Bankshares common stock,
the regulations under section 404(c) of the Employee Retirement Income
Security Act require that the 401(k) 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 the Employee
Retirement Income Security Act. These regulations also require that your
exercise of voting and similar rights with respect to the common stock be
conducted in a way that ensures the confidentiality of your exercise of these
rights. Accordingly, the plan committee designates Peggy Smith, Vice
President of First Federal Savings Bank of Siouxland, 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 such as a tender offer, you will be instructed to return
your instructions directly to Pentegra Group.
SECURITIES AND EXCHANGE COMMISSION 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 an officer, director or person
beneficially owning more than 10% of the shares of First Federal Bankshares, a
Form 3 reporting initial beneficial ownership must be filed with the Securities
and Exchange Commission. Changes in beneficial ownership, such as purchases,
sales and gifts generally 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. Discretionary transactions in and beneficial ownership of the common stock
through the First Federal Bankshares stock fund of the 401(k) plan by officers,
directors and persons beneficially owning more than 10% of the common stock of
First Federal
19
<PAGE>
Bankshares generally 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
exemptions from the profit recovery provisions of section 16(b) for all
transactions in employer securities within an employee benefit 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, persons affected by section 16(b) are required to hold shares of common
stock distributed from the 401(k) plan for six months following such
distribution and are prohibited from directing additional purchases of units
within the First Federal Bankshares stock fund for six months after receiving
such a distribution.
FINANCIAL INFORMATION REGARDING 401(k) PLAN ASSETS
Unaudited financial statements representing the net assets available
for 401(k) plan benefits at September 30, 1998, 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 Bankshares in
connection with First Federal Savings Bank of Siouxland's conversion from a
mutual holding company structure to a stock holding company structure.
20
<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 & International
500 Value MidCap Market Bond Plus Income Growth Stock
Stock Fund Fund Stock Fund Fund Fund Fund Fund Fund Fund
---------- ---- ---------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <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 10,797.97 10,241.34
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>
21
<PAGE>
PROSPECTUS
FIRST FEDERAL BANKSHARES, INC.
First Federal Bankshares, Inc. is offering common stock. The shares
being offered represent the 53.6% ownership interest in First Federal Savings
Bank of Siouxland now owned by First Federal Bankshares, M.H.C., the mutual
holding company of First Federal. The remaining 46.4% interest in First Federal
is owned by the public, and will be exchanged for new shares in First Federal
Bankshares, Inc.
We have agreed to acquire Mid-Iowa Financial Corp. and its wholly-owned
subsidiary, Mid-Iowa Savings Bank, FSB. The primary purpose of the offering is
to fund this acquisition. This acquisition and the conversion and stock offering
are inter-dependent transactions; neither transaction will occur unless both of
them do.
- --------------------------------------------------------------------------------
IF YOU ARE A CURRENT OR FORMER DEPOSITOR OR BORROWER CUSTOMER OF FIRST FEDERAL--
- - You may have priority rights to purchase shares at $10.00 per share.
- - You may purchase up to 85,000 shares but may purchase no fewer than 25 shares.
- - You will not need to pay a commission to buy any shares.
- - Our offering will end at 4:00 p.m., Central Time on March 22, 1999. You may
call (712) 277-0307 for additional information on our offering.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
IF YOU ARE CURRENTLY A SHAREHOLDER OF FIRST FEDERAL--
- - Your shares will be exchanged automatically for new shares of First Federal
Bankshares.
- - After the exchange of shares, your percentage ownership interest in First
Federal Bankshares will be equivalent to your current percentage ownership
interest in First Federal.
- - You may also purchase additional shares at $10.00 per share if shares are left
after the sale to the current and former depositors and borrowers of First
Federal, provided any new shares you buy, when added to the shares you will
get in the exchange, do not exceed 85,000 shares.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
IF YOU ARE A PARTICIPANT IN FIRST FEDERAL'S EMPLOYEES' SAVINGS & PROFIT SHARING
PLAN AND TRUST--
- - You may direct that all or part of your current account balances in this plan
be invested in common stock at $10.00 per share.
- - You will be receiving separately a supplement to this prospectus that
describes your rights under the plan.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
IF YOU FIT NONE OF THE ABOVE CATEGORIES, BUT ARE INTERESTED IN PURCHASING SHARES
OF OUR COMMON STOCK--
- - You may purchase shares at $10.00 per share after priority orders are filled.
- - You may purchase up to 85,000 shares but may purchase no fewer than 25 shares.
- - You will not need to pay a commission to buy any shares.
- --------------------------------------------------------------------------------
OFFERING SUMMARY
<TABLE>
<CAPTION>
MINIMUM MAXIMUM
------- -------
<S> <C> <C>
Number of Shares 2,635,000 3,565,000
Gross offering proceeds: $26,350,000 $35,650,000
Estimated offering expenses: $ 1,326,000 $ 1,423,000
Estimated net proceeds: $25,024,000 $34,227,000
Estimated net proceeds per share: $ 9.50 $ 9.60
</TABLE>
We may increase the maximum of the offering by up to 15%. We will
terminate the conversion, the offering of new stock, and the exchange of
existing shares if we do not sell the minimum number of shares.
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. We have applied to the Nasdaq Stock Market for approval to list our
common stock on the National Market under the symbol FFSX.
FOR A DISCUSSION OF RISKS THAT YOU SHOULD CONSIDER, SEE "RISK FACTORS"
BEGINNING ON PAGE 13.
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY.
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 ACCURATE 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 12, 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......................................................................................... 13
Selected Consolidated Financial and Other Data of First Federal and Subsidiaries..................... 17
Selected Consolidated Financial and Other Data of Mid-Iowa Financial................................. 20
Recent Developments.................................................................................. 22
Management's Discussion and Analysis of Recent Developments.......................................... 24
Selected Unaudited Pro Forma Consolidated Financial Data of First Federal Bankshares, Inc............ 27
First Federal Bankshares............................................................................. 28
First Federal........................................................................................ 29
Historical and Pro Forma Capital Compliance.......................................................... 30
Use of Proceeds...................................................................................... 32
Dividend Policy...................................................................................... 34
Market for the Common Stock.......................................................................... 35
Capitalization....................................................................................... 36
Pro Forma Data....................................................................................... 38
First Federal Savings Bank of Siouxland and Subsidiaries Consolidated Statements of Operation........ 48
Management's Discussion and Analysis of Financial Condition and Results of Operations................ 49
Business of First Federal............................................................................ 64
Regulation........................................................................................... 87
Taxation............................................................................................. 94
Management of First Federal Bankshares............................................................... 95
Management of First Federal.......................................................................... 96
Beneficial Ownership of Common Stock................................................................. 110
Subscriptions by Executive Officers and Directors.................................................... 111
The Conversion....................................................................................... 112
Comparison of Stockholders' Rights................................................................... 137
Acquisition of Mid-Iowa Financial.................................................................... 143
Restrictions on Acquisition of First Federal Bankshares.............................................. 155
Description of Capital Stock of First Federal Bankshares............................................. 157
Description of Capital Stock of First Federal........................................................ 158
Transfer Agent and Registrar......................................................................... 159
Experts.............................................................................................. 159
Legal Opinions....................................................................................... 159
Additional Information............................................................................... 159
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 AND THE EXCHANGE OFFERING. FOR ADDITIONAL INFORMATION, REFER TO THE
MORE DETAILED INFORMATION IN THIS PROSPECTUS.
THE COMPANIES
FIRST FEDERAL BANKSHARES, INC.
First Federal formed First Federal Bankshares to own all of its capital
stock following the conversion. First Federal Bankshares has applied to the
Office of Thrift Supervision for approval to become a savings and loan holding
company.
FIRST FEDERAL BANKSHARES, M.H.C.
First Federal Bankshares, M.H.C. is currently the mutual holding
company of First Federal. As of September 30, 1998, 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. Since a
mutual holding company can have no stockholders, we are forming First Federal
Bankshares as First Federal's new stock holding company.
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
First Federal is a federally-chartered savings bank headquartered in
Sioux City, Iowa. At September 30, 1998, it had total assets of $569.6 million,
total deposits of $392.7 million, and total stockholders' equity of $43.2
million.
First Federal is a community-oriented financial institution offering
traditional financial services to its local community. It conducts operations
through its main office in Sioux City, Iowa, and its 12 branch offices. A full
description of its products and services begins on page 64 of this prospectus.
First Federal's 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 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.
(2) First Federal's employee stock benefit plans, including the
employee stock ownership plan, get second priority. The
employee stock ownership plan expects to purchase from 184,450
to 249,550 shares of common stock.
(3) Depositors with $50 or more on deposit as of December 31, 1998
get third priority.
4
<PAGE>
(4) Depositors as of February 2, 1999, and borrowers as of
February 11, 1992 whose loans continue to be outstanding on
February 2, 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
performed by RP Financial, L.C., an independent appraisal firm. The factors that
went into the appraisal are discussed below under "$10.00 Per Share Stock
Pricing, Exchange Ratio and Number of Shares to Be Issued in the Conversion."
The priority offering expires at 4:00 p.m., Central Time, on March 22,
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.
During the priority offering, we will also offer shares of common stock
to the general public. In this part of the offering, current stockholders of
First Federal will have first preference and people who reside in our community
will have second preference. This part of the offering will end on March 22,
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.P. and Investment Bank Services, Inc. are
managing the 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 offering may be offered for sale in a syndicated
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 offering in greater detail beginning at page 122
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.
The table also shows how many shares a hypothetical owner of First Federal
common stock would receive in the exchange, adjusted for the number of shares
sold in the offering.
5
<PAGE>
<TABLE>
<CAPTION>
Shares to be sold Shares to be exchanged for 100 shares of
in this offering First Federal Common Stock Total shares of First Federal
----------------- -------------------------- common stock to be Exchange would be
Amount Percent Amount Percent outstanding ratio exchanged for
------ ------- ------ ------- ------------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Minimum 2,635,000 53.6% 2,178,665 46.4% 4,813,665 1.6499 165 shares
Midpoint 3,100,000 53.6 2,563,135 46.4 5,663,135 1.9411 194 shares
Maximum 3,565,000 53.6 2,947,605 46.4 6,512,605 2.2323 223 shares
15% above 4,099,750 53.6 3,389,746 46.4 7,489,496 2.5671 257 shares
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 are necessary to finance the acquisition.
- After the conversion, we expect 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 will have the flexibility to
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.
6
<PAGE>
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.
(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.
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 primary purpose of the
conversion and the stock offering is to finance this acquisition. We will be
unable to finance this acquisition without a successful offering. Therefore, 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, with adjustments, 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 aggregate merger
consideration will increase by $3,700 per day until the merger is completed. If
the merger is completed prior to April 15, 1999, 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.
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. The merger will not
proceed unless the conversion is approved by the requisite votes of stockholders
of First Federal and members of First Federal Bankshares, M.H.C., since the cash
proceeds of the conversion will be necessary to finance the merger. Since
neither the conversion nor the merger will occur unless both of them do,
subscription funds for the shares to be sold in this offering, with interest,
will be returned to subscribers if the merger does not occur.
The merger will expand the bank's presence in communities located in
the Des Moines area and will increase its deposit base, loan portfolio and
number of full-service offices.
For further information about Mid-Iowa Financial Corp. and Mid-Iowa
Savings Bank, FSB, see "Excerpts from Mid-Iowa Financial's Annual Report on Form
10-KSB for the year ended September 30, 1998" attached to this prospectus at
page G-1.
7
<PAGE>
$10.00 PER SHARE STOCK PRICING, EXCHANGE RATIO AND NUMBER OF SHARES TO BE ISSUED
IN THE CONVERSION
We are offering each share of stock at $10.00 per share. 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 assuming First Federal Bankshares, M.H.C. has already completed
the conversion. RP Financial, LC., 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. This offering range means the $10.00 per share purchase price for our
shares will range from 71.5% to 86.2% of our estimated post-conversion
stockholders' equity per share, using September 30, 1998 financial data,
compared to an average of 123.1% for a peer group of similar thrift institutions
used by the independent appraiser. The $10.00 per share purchase price for our
shares will range from 105.0% to 120.4% of our estimated post-conversion
tangible stockholders' equity per share using September 30, 1998 financial data,
compared to an average of 138.5% for a peer group of similar institutions. See
"The Conversion--Stock Pricing and Number of Shares to be Issued" on page 119.
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, subscribers will be notified and provided with the
opportunity to modify or cancel their orders. See "The Conversion--Stock Pricing
and Number of Shares to be Issued" for additional details.
PURCHASE LIMITATIONS
The minimum number of shares that may be purchased is 25.
IF YOU ARE NOT NOW A FIRST FEDERAL STOCKHOLDER -
You may not purchase more than 85,000 shares, either alone or together
with associates or persons acting in concert with you.
IF YOU ARE NOW A FIRST FEDERAL STOCKHOLDER -
You may not either alone or together with associates or persons acting
in concert purchase shares in an amount that, when combined with shares you
receive in the exchange, exceeds 85,000 shares. For example, if you receive
50,000 shares in the exchange, you may only purchase up to an additional 35,000
shares in the offering.
For further discussion of the purchase limits and definitions of
"associate" and "acting in concert," see "The Conversion--Limitations on Common
Stock Purchases" on page 130.
PROCEDURE FOR PURCHASING COMMON STOCK
To subscribe for shares of common stock in the offering, send or
deliver an original, signed stock order form together with full payment to us in
the postage-paid envelope provided so that we receive the stock order form
before the end of the offering. The certification that is part of the stock
order form also must 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 3.0% from the date funds are received until completion or termination of
the conversion. Subscribers who have deposit accounts with First Federal may
include instructions on the stock order form
8
<PAGE>
requesting withdrawal from those 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 those 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.
Except for those with priority rights to purchase shares, we have the
discretion to accept or reject orders received in the offering. If an order is
rejected in part, there is no right to cancel the remainder of the order.
Owners of self-directed individual retirement accounts who are eligible
to purchase common stock may use the assets of their individual retirement
accounts to purchase shares of common stock in the conversion, provided that
their accounts are not maintained on deposit with First Federal. If you want to
use funds in a self-directed individual retirement account 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."
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 may include a loan to the employee stock ownership plan
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, although we do not have plans to do so
now.
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 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 Federal Home Loan Bank, or Federal Home Loan
Bank advances.
For further discussion, see "Use of Proceeds."
PURCHASES BY OFFICERS AND DIRECTORS
We expect our directors and executive officers, together with their
families, 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."
9
<PAGE>
BENEFITS OF THE CONVERSION TO MANAGEMENT
First Federal's employee stock ownership plan expects to purchase 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 shares than the
maximum of the offering range, 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 over a period of 15 years from the consummation of the conversion,
assuming the shares have a fair market value of $10.00 per share. If, in the
future, the shares have a fair market value greater than $10.00, the
compensation expenses will increase.
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, to be issued when options
to be granted to key employees and directors are exercised. Awards made under
these plans would be subject to a vesting schedule.
We also will convert options previously awarded in First Federal's 1992
stock option plans into options to purchase our common stock, with the number to
be based on the exchange ratio.
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 $1,520,000.
10
<PAGE>
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>
NUMBER OF SHARES TO BE GRANTED VALUE OF GRANT OR AGREEMENTS PERCENTAGE OF
------------------------------ ---------------------------- COMMON STOCK
AT MINIMUM AT MAXIMUM AT MINIMUM AT MAXIMUM TO BE SOLD
OF OFFERING OF OFFERING OF OFFERING OF OFFERING IN THE OFFERING
RANGE RANGE RANGE RANGE
----------- ------------ ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
EMPLOYEE STOCK .................... 184,450 249,550 $1,844,500 $2,495,500 7%
OWNERSHIP PLAN
1999 RECOGNITION PLAN
79,050 106,950 790,500 1,069,500 3%
1999 OPTION PLAN
263,500 356,500 -- -- 10%
AGGREGATE VALUE OF ................ -- -- 1,520,000 1,520,000 --
SEVERANCE BENEFITS
UNDER EMPLOYMENT
AGREEMENTS
----------- ------------ ---------- ---------- ----
TOTAL ............................. 527,000 713,000 $4,155,000 $5,085,050 20%
</TABLE>
As of the date of this prospectus, management of First Federal owned,
or had the right to acquire, 152,930 shares of First Federal. After the exchange
and assuming the grant of the additional shares shown in the above table,
management and the employee stock ownership plan would own 779,319 and 1,054,386
shares of First Federal Bankshares at the minimum and maximum, respectively, of
the offering range. That would amount to 16.2% and 14.1%, respectively, of the
shares of our common stock outstanding after the offering at the minimum and
maximum of the offering range.
MARKET FOR COMMON STOCK
We have applied to the Nasdaq Stock Market 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 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.
11
<PAGE>
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. This means that First Federal's
stockholders will initially continue to receive the same dollar amount of
dividends after the conversion. After adjustment for the exchange ratio, First
Federal Bankshares would pay $0.2909, $0.2473, $0.2150 and $0.1870 per share per
year at the minimum, midpoint, maximum and adjusted maximum of the offering
range, respectively. Assuming the offering is completed by mid-April 1999, the
first dividend is expected to be declared for the quarter ending June 30, 1999.
COMPARISON OF STOCKHOLDERS' RIGHTS
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 material differences in the
rights of stockholders of First Federal Bankshares and First Federal and an
explanation of possible antitakeover effects of provisions in First Federal
Bankshares' certificate of incorporation and bylaws, see "Comparison of
Stockholders' Rights" on page 137.
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<PAGE>
RISK FACTORS
BEFORE INVESTING IN THE COMMON STOCK, YOU SHOULD CAREFULLY CONSIDER THE
MATTERS DISCUSSED BELOW. THE COMMON STOCK IS NOT A SAVINGS ACCOUNT OR DEPOSIT
AND IS NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION 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 60% 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 these 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--Asset and Liability Management--Market Risk Analysis."
OUR RETURN ON EQUITY MAY BE LOWER THAN OUR PEERS FOLLOWING THE CONVERSION, AND
OUR COMPENSATION EXPENSES WILL INCREASE. THIS COULD DECREASE THE TRADING PRICE
OF OUR COMMON STOCK.
Many investors consider return on equity to be a useful benchmark for
valuing financial institutions. For the three months ended September 30, 1998,
First Federal's return on equity ratio was 9.57%. However, the net proceeds from
the conversion may cause our return on equity ratio to decrease to 6.01%,
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, and could negatively affect our stock price. We will attempt to
invest our new capital that is not used in the acquisition 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.
YOU SHOULD NOT EXPECT THE VALUE OF YOUR INVESTMENT TO INCREASE DRAMATICALLY IN
THE DAYS IMMEDIATELY FOLLOWING THE CONVERSION.
In recent years, investors in mutual-to-stock conversions of financial
institutions have sometimes experienced dramatic short-term gains in the days
immediately following those conversions. You should not expect dramatic
increases in our stock price immediately following our conversion. Instead, you
should have a longer-term investment horizon in evaluating an investment in our
common stock, because 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
13
<PAGE>
typical converting financial institutions often results in immediate
post-conversion price appreciation, but our pricing is not as likely to do so.
SOME LOANS WE MAKE HAVE HIGHER DEFAULT RISKS THAN RESIDENTIAL MORTGAGE LOANS.
HIGHER DEFAULTED LOANS WILL REDUCE OUR PROFITS.
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 and other non-mortgage 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 these loans
may be affected by adverse conditions in the real estate market or the economy,
among other things.
IMPLEMENTING OUR STOCK-BASED BENEFIT PLANS AND OUR EMPLOYEE STOCK OWNERSHIP PLAN
WILL REDUCE OUR PROFITS BY INCREASING FUTURE COMPENSATION EXPENSE BY $3.6
MILLION OVER THE LIFE OF THESE PLANS AT THE MAXIMUM OF THE OFFERING RANGE,
ASSUMING A TRADING PRICE OF $10.00 PER SHARE, 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.
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 $166,367 at the maximum of the
offering range, assuming the fair value of the common stock is $10.00 per share
and assuming a 15-year amortization period. 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.
IF THE NUMBER OF SHARES OF COMMON STOCK TO BE 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."
14
<PAGE>
OUR AGREEMENT IN VARIOUS EMPLOYEE CONTRACTS AND PLANS TO MAKE PAYMENTS AFTER A
CHANGE IN CONTROL WOULD INCREASE THE COST OF ACQUIRING US BY APPROXIMATELY
$1,520,000 AND SO MAY DISCOURAGE TAKEOVER PROPOSALS THAT MAY OFFER A PREMIUM
ABOVE THE TRADING PRICE OF OUR COMMON STOCK.
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 some of our 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 by approximately $1,520,000. This additional cost could discourage
future attempts to take us over that you might like to see happen.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER AND BYLAWS AND VOTING CONTROL OF
MANAGEMENT MAY DISCOURAGE TAKEOVER PROPOSALS THAT MAY OFFER A PREMIUM ABOVE THE
TRADING PRICE OF OUR COMMON STOCK.
PROVISIONS IN FIRST FEDERAL'S AND FIRST FEDERAL BANKSHARES' CHARTERS
AND BYLAWS. Provisions in our charters and bylaws 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 "Comparison of Stockholders' Rights" and "Restrictions on
Acquisitions of First Federal Bankshares."
VOTING CONTROL OF OFFICERS AND DIRECTORS. Our employees and directors
over time may obtain a large number of shares through their purchases in the
conversion, their interests in the employee stock ownership plan, and the
proposed stock-based benefit plans. This share ownership will 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.
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.
In the year 2000, there is a risk that the programming code in existing
computer systems will recognize a date using "00" as the year 1900 rather than
the year 2000. This could cause miscalculations or system failures in these
systems. 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."
15
<PAGE>
IF WE ARE NOT ABLE TO EFFECTIVELY INTEGRATE THE OPERATIONS OF MID-IOWA
FINANCIAL, OUR EXPENSES MAY INCREASE AND WE MAY LOSE VALUABLE CUSTOMER
RELATIONSHIPS.
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 enables 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 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.
16
<PAGE>
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 and its subsidiaries for the periods
and at the dates indicated. The information is derived in part from, and should
be read together with, the Consolidated Financial Statements and Notes thereto
of First Federal contained elsewhere in this prospectus. 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 available for sale................... 87,457 65,195 64,098 74,498 -- --
Securities held to maturity..................... 32,108 32,023 29,758 22,459 96,802 101,322
Federal Home Loan Bank 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
Federal Home Loan Bank 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)
17
<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)
SELECTED OPERATING DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
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(*)
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>
- ------------------------
(*)Adjusted for stock distributions.
(additional footnotes on next page)
18
<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
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) .............. 124.85 123.83 118.34 103.25 121.50 123.90 132.00
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 ........... 7.59 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(10) 13 15 13 13 12 12
</TABLE>
- ------------------------
(1) Excluding the special Savings Association Insurance Fund 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.
(10) Subsequent to September 30, 1998, First Federal closed three of its branch
offices. As of the date of this prospectus, First Federal operates 12 full
service offices.
19
<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 and its subsidiaries for the
periods and at the dates indicated. The information is derived in part from and
should be read together with the Consolidated Financial Statements and Notes
thereto of Mid-Iowa Financial contained elsewhere in this prospectus.
<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
Stockholders' 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>
20
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Average interest rate spread ............................................. 2.38% 2.63% 2.54% 2.32% 2.72%
Net interest margin(2) ................................................... 2.77 3.04 2.97 2.74 3.07
Ratio of operating expense to average total assets(3) .................... 1.62 1.57 2.16 1.79 1.97
Average interest-earning assets to average interest-bearing liabilities .. 108.51 108.95 109.55 109.61 109.81
Non-performing assets to total assets at end of period ................... .15 .01 .13 .13 .03
Stockholders' 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 stockholders' equity (net income to average
stockholders' equity) ................................................. 10.26 13.70 7.79 9.25 11.38
Stockholders' equity-to-assets ratio (average
stockholders' 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. Including these expenses, these ratios 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.
21
<PAGE>
RECENT DEVELOPMENTS
The following tables set forth selected consolidated historical
financial and other data of First Federal and its subsidiaries for the periods
and at the dates indicated. The selected consolidated financial condition and
operating data at December 31, 1998, and for the three and six month periods
ended December 31, 1998 and 1997 are unaudited, but, 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 and six months ended December 31, 1998, are not necessarily indicative of
the results of First Federal that may be expected for the entire year.
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
1998 1998
--------------- -----------
(IN THOUSANDS)
<S> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets ........................ $547,863 $551,450
Loans receivable, net ............... 400,258 404,800
Securities held to maturity ......... 30,735 32,023
Securities, available for sale ...... 68,876 65,195
Federal Home Loan Bank stock, at cost 6,294 5,671
Office property and equipment, net .. 11,526 10,845
Excess of cost over fair value of
assets acquired ................... 7,994 8,158
Deposits ............................ 383,271 392,425
Federal Home Loan Bank advances ..... 113,619 107,901
Stockholders' equity ................ 44,058 42,020
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------ ----------------
1998 1997 1998 1997
---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Total interest income ................................ $10,073 $ 8,402 $20,130 $16,912
Total interest expense ............................... 6,112 5,089 12,395 10,261
------- ------- ------- -------
Net interest income ............................... 3,961 3,313 7,735 6,651
Provision for loan losses ............................ 75 75 150 145
------- ------- ------- -------
Net interest income after provision for loan losses 3,886 3,238 7,585 6,506
------- ------- ------- -------
Noninterest income:
Fees and service charges .......................... 511 298 959 585
Gain on sale of branch deposits ................... 1,088 -- 1,088 --
Gain on sale of loans held for sale ............... 87 40 174 90
Other income ...................................... 437 334 804 672
------- ------- ------- -------
Total noninterest income .......................... 2,123 672 3,025 1,347
------- ------- ------- -------
Noninterest expense:
Compensation and benefits ......................... 2,208 1,507 3,660 2,973
Office property and equipment ..................... 431 357 879 691
Other noninterest expense ......................... 1,119 762 2,182 1,601
------- ------- ------- -------
Total noninterest expense ......................... 3,758 2,626 6,721 5,265
------- ------- ------- -------
Earnings before income taxes ...................... 2,251 1,284 3,889 2,588
Income taxes ......................................... 799 467 1,419 930
------- ------- ------- -------
Net earnings ...................................... $ 1,452 $ 817 $ 2,470 $ 1,658
------- ------- ------- -------
------- ------- ------- -------
Earnings per share:
Basic earnings per share .......................... $ 0.51 $ 0.29 $ 0.87 $ 0.59
------- ------- ------- -------
------- ------- ------- -------
Diluted earnings per share ........................ $ 0.51 $ 0.28 $ 0.86 $ 0.58
------- ------- ------- -------
------- ------- ------- -------
Cash dividends declared per common share ............. $ 0.12 $ 0.12 $ 0.24 $ 0.24
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE AT OR FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31,(6) DECEMBER 31,(6)
------------------ ----------------
1998(5) 1997 1998(5) 1997
------- ---- ------- ----
<S> <C> <C> <C> <C>
SELECTED OPERATING RATIOS AND OTHER DATA:
PERFORMANCE RATIOS:
Return on assets (net income divided by average total assets) 1.04% 0.72% 0.88% 0.73%
Return on equity (net income divided by average equity) ..... 13.13 8.08 11.38 8.30
Average net interest rate spread(1) ......................... 2.75 2.68 2.66 2.68
Net yield on average interest-earning assets(2) ............. 3.03 3.07 2.95 3.06
Net interest income after provision for loan
losses to total other expenses ............................ 103.41 123.31 112.86 123.57
ASSET QUALITY RATIOS:
Nonperforming loans to total loans(4) ....................... 0.45 0.25 0.45 0.25
Nonperforming loans to total assets(4) ...................... 0.33 0.19 0.33 0.19
Nonperforming assets as a percentage
of total assets(3)(4) .................................... 0.38 0.19 0.38 0.19
Nonperforming loans and real estate owned
to total loans and real estate owned(4) .................. 0.52 0.25 0.52 0.25
Average interest-earning assets to average
interest-bearing liabilities ............................. 106.15 108.27 106.11 108.15
CAPITAL, EQUITY AND DIVIDEND RATIOS:
Tangible capital(4) ......................................... 6.67 8.73 6.67 8.73
Core capital(4) ............................................. 6.67 8.73 6.67 8.73
Risk-based capital(4) ....................................... 13.23 17.24 13.23 17.24
Average equity to average assets ratio ...................... 7.94 8.91 7.76 8.76
Dividend payout ratio ....................................... 23.53 41.38 27.59 40.68
PER SHARE DATA:
Book value per share(4) ..................................... $ 15.48 $ 14.34 $ 15.48 $ 14.34
Earnings per share (basic) .................................. 0.51 0.29 0.87 0.59
OTHER DATA:
Full-service offices ........................................ 12 13 12 13
</TABLE>
- ------------------------
(1) Represents the difference between the average yield on interest-earning
assets and the average cost of interest- bearing liabilities.
(2) Represents net interest income as a percentage of average interest-earning
assets.
(3) Nonperforming assets include nonaccruing loans, accruing loans delinquent 90
days or more, and foreclosed assets but do not include restructured loans.
(4) End of period ratio.
(5) Data includes the effect of First Federal's acquisition of GFS Bancorp, Inc.
for periods subsequent to March 31, 1998.
(6) Annualized where appropriate.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT DEVELOPMENTS
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1998 AND JUNE 30, 1998
Total assets decreased by $3.6 million, or 0.7%, to $547.9 million at
December 31, 1998 from $551.5 million at June 30, 1998. Cash and
interest-bearing deposits decreased by $1.7 million, or 9.9%, and securities
held to maturity decreased by $1.3 million, or 4.0%, from June 30, 1998 to
December 31, 1998. Additionally, loans receivable decreased by $4.5 million, or
1.1%, to $400.3 million at December 31, 1998 from $404.8 million at June 30,
1998 due to amortization and prepayments. Securities available for sale
increased by $3.7 million, or 5.7%, to $68.9 million at December 31, 1998 from
$65.2 million at June 30, 1998. Deposits decreased by $9.2 million, or 2.3%, to
$383.3 million at December 31, 1998 from $392.4 million at June 30, 1998,
primarily due to the sale of $19.4 million of deposits in three branch offices
to local financial institutions in November and December 1998. Federal Home Loan
Bank advances increased by $5.7 million, or 5.3%, to $113.6 million at December
31, 1998 from $107.9 million at June 30, 1998. The increase in Federal Home Loan
Bank advances and receipts from prepayment and amortization of loans partially
funded the deposit sales. Total stockholders' equity increased by $2.0 million,
or 4.9%, to $44.0 million at December 31, 1998 from $42.0 million at June 30,
1998, primarily due to earnings totaling $2.5 million for the first half of the
fiscal year, less dividends declared totaling $316,000.
NONPERFORMING ASSETS AND DELINQUENCIES
Loans accounted for on a non-accrual basis increased by $556,000 from
$1.1 million at June 30, 1998 to $1.7 million at December 31, 1998. Five
commercial real estate loans totaling $453,000 and several loans secured by
single-family, owner-occupied properties make up the increase. The balance of
real estate owned decreased by $209,000, or 42.7%, to $280,000 at December 31,
1998 from $489,000 at June 30, 1998, primarily due to the sale of three
multi-family properties in Madison, Wisconsin, with a carrying value totaling
$457,000. No losses were realized on this sale. A foreclosure on a commercial
real estate property located in Grinnell, Iowa with a carrying value totaling
$205,000 partially offset the decrease in real estate owned due to the real
estate owned sale. In January 1999, settlement payments totaling $75,000 were
received and applied to lower the balance of the Grinnell commercial property to
$132,000. First Federal's non-performing assets are primarily secured by real
estate. At December 31, 1998, non-performing assets totaling approximately
$700,000 had been referred for foreclosure.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31,
1998 AND 1997
GENERAL. Net earnings increased by $811,000, or 48.9%, to $2.5 million
for the six months ended December 31, 1998 from $1.7 million for the six months
ended December 31, 1997. Diluted earnings per share totaled $.86 and $.58,
respectively, for the six months ended December 31, 1998 and 1997. The
acquisition of GFS Bancorp, effective March 31, 1998, was accounted for using
the purchase method of accounting. Therefore, the results of operations for the
six months ended December 31, 1997 are not restated to include GFS Bancorp
activity.
INTEREST INCOME. Interest income increased by $3.2 million, or 19.0%,
to $20.1 million for the six months ended December 31, 1998 from $16.9 million
for the six months ended December 31, 1997, largely due to an increase in the
average balance of interest-earning assets. The average balance of
interest-earning assets increased by $89.9 million, or 20.7%, to $524.6 million
for the six months ended December 31, 1998 from $434.7 million for the six
months ended December 31, 1997, primarily due to growth related to the GFS
Bancorp acquisition. The average yield on interest-earning assets decreased to
7.67% for the six months ended December 31, 1998 from 7.78% for the six months
ended December 31, 1997, primarily due to the generally lower interest-rate
environment in the current year period. This decrease in yield partially offset
the increases in interest income related to larger average balances. Interest
income on loans increased by $2.4 million, or 17.3%, to $16.2
24
<PAGE>
million for the six months ended December 31, 1998 from $13.8 million for the
six months ended December 31, 1997, primarily due to an increase in the average
balance of loans. The average balance of loans receivable increased by $61.8
million, or 17.9%, to $406.5 million for the six months ended December 31, 1998
from $344.7 million for the six months ended December 31, 1997, primarily due to
growth related to the GFS Bancorp acquisition. The yield on loans receivable was
7.98% and 8.03%, respectively, for the six months ended December 31, 1998 and
1997. Interest income on investment and mortgage-backed securities increased by
$779,000, or 25.4%, to $3.8 million for the six months ended December 31, 1998
from $3.1 million for the six months ended December 31, 1997. The average
balance of investment and mortgage-backed securities increased by $26.1 million,
or 29.1%, to $115.9 million for the six months ended December 31, 1998 from
$89.8 million for the six months ended December 31, 1997, as First Federal
leveraged investment purchases with Federal Home Loan Bank advances. The average
yield on investment and mortgage-backed securities decreased to 6.63% for the
six months ended December 31, 1998 from 6.84% for the six months ended December
31, 1997 in the generally lower interest-rate environment.
INTEREST EXPENSE. Interest expense increased by $2.1 million, or 20.8%,
to $12.4 million for the six months ended December 31, 1998 from $10.3 million
for the six months ended December 31, 1997. The increase in interest expense was
primarily due to an increase of $92.4 million, or 23.0%, in the average balance
of interest-bearing liabilities to $494.4 million for the six months ended
December 31, 1998 from $402.0 million for the six months ended December 31,
1997. Interest on deposits increased by $1.4 million, or 17.5%, to $9.0 million
for the six months ended December 31, 1998 from $7.6 million for the six months
ended December 31, 1997, primarily due to an increase in the average balance of
deposits. The average balance of deposits increased by $63.7 million, or 20.1%,
to $380.3 million for the six months ended December 31, 1998 from $316.6 million
for the six months ended December 31, 1997, primarily due to the acquisition of
GFS Bancorp deposit accounts. The average cost of deposits decreased to 4.72%
for the six months ended December 31, 1998 from 4.82% for the six months ended
December 31, 1997, as rates paid on deposit accounts were lowered in response to
generally lower market rates. The average balance of Federal Home Loan Bank
advances increased by $28.8 million, or 33.7%, to $114.1 million for the six
months ended December 31, 1998 from $85.3 million for the six months ended
December 31, 1997, as Federal Home Loan Bank advances were used to fund
investment securities purchases. The average interest rate paid on Federal Home
Loan Bank advances decreased to 6.01% for the six months ended December 31, 1998
from 6.16% for the six months ended December 31, 1997, as Federal Home Loan Bank
advances with generally lower rates were added in the current six-month period.
NET INTEREST INCOME. Net interest income increased by $1.l million, or
16.3%, to $7.7 million for the six months ended December 31, 1998 from $6.6
million for the six months ended December 31, 1997.
PROVISION FOR LOAN LOSSES. First Federal provided $150,000 and
$145,000, respectively, for loan losses for the six months ended December 31,
1998 and 1997. GFS Bancorp's general loan loss allowance totaling $801,000 was
combined with First Federal's loan loss allowance on the effective date of the
GFS Bancorp acquisition. In addition, problem assets acquired from GFS Bancorp
were recorded at fair value. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Comparison of Operating
Results--Provision for Loan Losses."
NONINTEREST INCOME. Noninterest income increased by $1.7 million to
$3.0 million for the six months ended December 31, 1998 from $1.3 million for
the six months ended December 31, 1997. The increase in noninterest income was
primarily due to recognition of a $1.1 million gain on the sale of the deposits
of three branch offices of First Federal in November and December 1998. Deposits
totaling $19.4 million were sold to local financial institutions. Over 80% of
the deposits sold were fixed-rate, fixed-maturity certificates of deposits with
average interest rates higher than First Federal's average weighted interest
rate paid on total deposits. Income from service charges and other fees and gain
on sale of loans held for sale increased by $374,000, or 64.0%, and $85,000, or
94.4%, respectively, for the six months ended December 31, 1998 when compared to
the six months ended December 31, 1997. Service charge income increased due to
an increase in transaction account
25
<PAGE>
balances in 1998 and also due to the addition of a new checking product. Gain on
sale of loans held for sale increased due to increased mortgage activity as
borrowers took advantage of generally low fixed-rate financing opportunities for
both refinancing and purchases.
NONINTEREST EXPENSE. Noninterest expense increased by $1.4 million, or
27.6%, to $6.7 million for the six months ended December 31, 1998 from $5.3
million for the six months ended December 31, 1997. Compensation and benefit
expense increased by $687,000, or 23.1%, to $3.7 million for the six months
ended December 31, 1998 from $3.0 million for the six months ended December 31,
1997. This increase was largely due to the addition of GFS Bancorp staff and
staff for a new full-service office opened in May 1998.
During the six months ended December 31, 1998, compensation and benefit
expense was reduced by $82,000 due to adjustments related to stock appreciation
rights issued in March 1998 in connection with the acquisition of GFS Bancorp.
At September 30, 1998, the liability for cash payments to holders of stock
appreciation rights decreased to $478,000 from $946,000 at June 30, 1998 due to
a decrease in the fair market value of First Federal stock to $24.00 at
September 30, 1998 from $34.50 at June 30, 1998. This adjustment of the
liability for stock appreciation rights reduced compensation and benefit expense
by $468,000 for the three months ended September 30, 1998. In December 1998,
First Federal offered holders of stock appreciation rights a window of
opportunity to elect to receive a cash payment in excess of the computed value
of the stock appreciation rights. The computed value of the right was the amount
by which the current fair market value of First Federal stock exceeded the
exercise price of the right. During the three months ended December 31, 1998 a
charge to compensation and benefit expense totaling $386,000 adjusted the
liability for stock appreciation rights to $864,000 due to receipt of an
election from all holders of stock appreciation rights to exercise the right at
a premium price offered during the window of opportunity. First Federal offered
this option to holders of stock appreciation rights in order to encourage the
retirement of the stock appreciation rights and eliminate future earnings
volatility due to changes in the market value of First Federal stock.
The increase in noninterest expense was also due to an increase of
$188,000, or 27.2%, in office property and equipment expense and to an increase
of $120,000, or 72.1%, in advertising expense, partially due to the promotion of
a new checking product. Other administrative expenses increased by $242,000 over
the prior year period. In addition, amortization of intangibles increased to
$172,000 for the six months ended December 31, 1998 from $13,000 for the six
months ended December 31, 1997, due to amortization of the goodwill recorded in
conjunction with the GFS Bancorp acquisition.
NET EARNINGS AND INCOME TAX EXPENSE. Net earnings before income taxes
increased by $1.3 million, or 50.2%, to $3.9 million for the six months ended
December 31, 1998 from $2.6 million for the six months ended December 31, 1997.
Income tax expense increased by $489,000, or 52.5%, to $1.4 million for the six
months ended December 31, 1998 from $930,000 for the six months ended December
31, 1997. The combined federal and state tax rate on earnings was 36.5% and
35.9%, respectively, for the six months ended December 31, 1998 and 1997.
LIQUIDITY AND CAPITAL RESOURCES
First Federal's average liquidity position at December 31, 1998 was
$108.9 million, or 26.1%, of its liquidity base for the preceding quarter, which
exceeded the minimum regulatory requirement of 4%. At December 31, 1998, First
Federal had tangible, core and risk-based capital ratios of 6.67%, 6.67% and
13.24%, respectively, which exceeded the Office of Thrift Supervision's minimum
requirements of 1.50%, 3.00% and 8.00%, respectively.
26
<PAGE>
SELECTED UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL DATA OF FIRST FEDERAL BANKSHARES, INC.
The following tables present selected 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 Employee Stock Ownership Plan 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>
27
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,(1) 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% 0.58%
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
Employee Stock Ownership Plan shares were assumed to have been issued,
but are not treated as outstanding until committed to be released.
FIRST FEDERAL BANKSHARES
First Federal Bankshares was organized under Delaware law 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 Office of Thrift
Supervision to become a savings and loan holding company and will be regulated
by that agency. After completion of the conversion, First Federal Bankshares
will conduct business initially as a unitary savings and loan holding company.
Upon consummation of the conversion, First Federal Bankshares' assets will
consist primarily of 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 Office of Thrift Supervision to be retained by First Federal Bankshares and
the loan to the Employee Stock Ownership Plan. First Federal Bankshares expects
to retain $5.0 million of the net proceeds of the offering. First Federal
Bankshares initially will have no significant liabilities. 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 use 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 management of First Federal Bankshares is
set forth under "Management of First Federal Bankshares."
28
<PAGE>
The conversion will provide First Federal with additional capital to
support future growth, including the acquisition of Mid-Iowa Financial.
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 Office of
Thrift Supervision. 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 to take advantage of any
such acquisition and expansion opportunities that may arise, as restricted by
regulatory limitations and First Federal Bankshares' financial position. The
initial activities of First Federal Bankshares are anticipated to be funded
primarily by the conversion proceeds 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 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. At the time of the 1992 mutual holding
company reorganization, First Federal conducted a stock offering in which it
sold a minority of its common stock to the public and 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, 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, Freddie Mac, or the Government
National Mortgage Association and in securities issued by the United States
Government and agencies thereof.
First Federal currently conducts operations through its main office in
Sioux City, Iowa, and its 11 full service branch offices and one drive-up
facility in northwest and central Iowa and northeast Nebraska.
On March 31, 1998, First Federal consummated the acquisition of GFS
Bancorp, Inc. and its subsidiary, Grinnell Federal Savings Bank. 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 November and December 1998, First Federal closed its branch
offices located in Hartley, Sanborn and Hawarden, Iowa, and sold the deposits
relating to those branches.
29
<PAGE>
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.
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 Employee Stock Ownership Plan 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 the 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 Employee Stock Ownership Plan and the cost
of the shares expected to be acquired by the 1999 Recognition Plan are deducted
from pro forma regulatory capital.
30
<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)
------ --------- ------ --------- ------ --------- ------ ---------
(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 Employee
Stock Ownership Plan'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 Office of Thrift Supervision core capital requirement for
savings banks is 3% of total adjusted assets. The Office of Thrift
Supervision 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.
31
<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 these
amounts. First Federal Bankshares will be unable to use 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, a portion of which is expected to be used to fund the loan to the
Employee Stock Ownership Plan. 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.
The loan to the Employee Stock Ownership Plan will enable it to
purchase 7% of the shares of First Federal Bankshares common stock issued in the
offering. First Federal Bankshares and First Federal may also elect to fund the
Employee Stock Ownership Plan's stock purchases through a loan by a third party
financial institution. See "Management of First Federal--Benefits." 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.
A tabular presentation of First Federal Bankshares expected use of
proceeds is set forth below:
<TABLE>
<CAPTION>
MINIUM MAXIMUM
2,635,000 SHARES 3,565,000 SHARES
---------------- ----------------
<S> <C> <C>
Net proceeds ................................ $25,024,000 $34,227,000
----------- -----------
----------- -----------
Purchase of First Federal common stock ...... $20,024,000 $29,227,000
Funds loaned to ESOP ........................ 1,844,500 2,495,500
Funds retained for general corporate purposes 3,155,500 2,504,500
----------- -----------
$25,024,000 $34,227,000
----------- -----------
----------- -----------
</TABLE>
Upon completion of the conversion, the Board of Directors of First
Federal Bankshares will have the authority to repurchase stock, as permitted by
statutory and regulatory authority. Office of Thrift Supervision regulations
generally do not permit First Federal Bankshares to repurchase any shares of its
common stock without regulatory approval for three years except that 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 Office of Thrift Supervision
prompt corrective action regulation; and
32
<PAGE>
(3) First Federal Bankshares provides to the Regional Director of
the Office of Thrift Supervision 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 the program is not
disapproved by the Regional Director.
Under current Office of Thrift Supervision 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 the repurchases and the Office of Thrift
Supervision does not object to the repurchases.
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. These facts and circumstances may include but
are 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 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,
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,
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 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. The net proceeds infused into First
Federal may be used to fund all or a portion of the merger consideration for the
Mid-Iowa Financial acquisition. 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,"
First Federal and First Federal Bankshares have not determined the approximate
amount of net proceeds to be used for each of the purposes mentioned above.
33
<PAGE>
DIVIDEND POLICY
First Federal's current policy is to pay quarterly cash dividends of $0.12
per share, or $0.48 on an annualized basis. First Federal Bankshares intends
initially to pay dividends in an annual amount equal to $0.48 divided by the
exchange ratio. This dividend policy will insure that First Federal's
stockholders will initially receive the same aggregate amount of dividends after
their First Federal common stock has been exchanged for shares of First Federal
Bankshares common stock. For example, if a stockholder currently owns 10,000
shares of First Federal's common stock, he or she currently receives annual
dividends of $4,800. If the final exchange ratio is 1.6499 at the minimum of the
offering range, then this stockholder would receive 16,499 shares of First
Federal Bankshares common stock, and would initially receive dividends of
$4,800. Based on this methodology, First Federal Bankshares initially intends to
pay dividends equal 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.
Assuming the conversion in completed by mid-April 1999, the first
dividend is expected to be declared for the fiscal quarter ending June 30, 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, dividends
will not be reduced or eliminated in future periods.
First Federal will not be permitted to pay dividends on its capital
stock to First Federal Bankshares if First Federal's 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 company, see "Taxation--Federal Taxation" and
"Regulation--Federal Regulation of Savings Institutions--Limitation on Capital
Distributions."
Unlike First Federal, First Federal Bankshares is not restricted by
Office of Thrift Supervision regulations on the payment of dividends to its
stockholders, although the source of dividends will depend on the net proceeds
retained by First Federal Bankshares and earnings thereon and may depend, 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 over
its statutory capital or, if there is no excess, to its net profits for the
current and/or immediately preceding fiscal year. For these purposes, net assets
means the amount by which total assets exceed total liabilities, and statutory
capital generally means the aggregate par value of the outstanding shares of
First Federal Bankshare's capital stock.
Additionally, in connection with the conversion, First Federal
Bankshares and First Federal have committed to the Office of Thrift Supervision
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 Office of Thrift Supervision.
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 March 31, 1999.
34
<PAGE>
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. The shares of First Federal common stock owned
by the public will automatically, without further action by those holders, 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 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
encourage 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. Market makers are restricted by 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 compliance with applicable laws and
regulatory requirements. While First Federal Bankshares is attempting 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 two 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 the application is
not approved, management expects that First Federal Bankshares common stock will
be listed on the Nasdaq SmallCap Market.
Additionally, the development of a public market having the desirable
characteristics of depth, liquidity and orderliness depends on the existence of
willing buyers and sellers, the presence of which is not within the control of
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 OF
$10.00 PER SHARE. THEREFORE, PURCHASERS OF THE COMMON STOCK SHOULD HAVE A
LONG-TERM INVESTMENT INTENT AND SHOULD RECOGNIZE THAT THERE MAY BE A LIMITED
TRADING MARKET IN THE COMMON STOCK. THIS 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 First
Federal common stock 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 publicly-held shares of First Federal common stock outstanding.
In connection with the conversion, each share of First Federal's common stock
will be converted into shares of First Federal Bankshares common stock, based
upon the exchange ratio that is described in other parts of this prospectus.
Accordingly, the information in this table should be reviewed in conjunction
with the exchange ratio at various levels of the offering range.
35
<PAGE>
<TABLE>
<CAPTION>
HIGH LOW CASH DIVIDEND
BID BID DECLARED
----- ----- -------------
<S> <C> <C> <C>
FISCAL 1999
Quarter Ended March 31, 1999 ... $ 24.25 $ 17.50 $ 0.12
(through February 12, 1999)
Quarter Ended December 31, 1998 $ 25.25 $ 20.00 $ 0.12
Quarter Ended September 30, 1998 $ 33.50 $ 21.50 $ 0.12
FISCAL 1998
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 February 12, 1999, the last sale of First
Federal common stock as reported on the Nasdaq SmallCap Market was at a price of
$30.00 per share and $17.50 per share, respectively. At September 30, 1998,
First Federal had 792 stockholders of record. All publicly-held shares of First
Federal common stock, 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 shares of First Federal common stock 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.
36
<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,
1,000,000 shares authorized;
none to be issued(3) ......................... -- -- -- --
Common Stock, $.01 par value (post-conversion),
12,000,000 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 Employee
Stock Ownership Plan(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
---------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<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,
1,000,000 shares authorized;
none to be issued(3) ......................... -- -- -- --
Common Stock, $.01 par value (post-conversion),
12,000,000 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 Employee
Stock Ownership Plan(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. These withdrawals would reduce pro
forma deposits by the amount of the 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.
(footnotes continued on following page)
37
<PAGE>
(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 these 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."
(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."
(6) Assumes that 7% of the shares issued in the offering will be acquired by the
Employee Stock Ownership Plan financed by a loan from First Federal
Bankshares. The loan will be repaid principally from First Federal's
contributions to the Employee Stock Ownership Plan. Since First Federal
Bankshares will finance the Employee Stock Ownership Plan debt, this
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 Employee
Stock Ownership Plan 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. This amount does not reflect possible increases
or decreases in the value of stock relative to the subscription price
in the offering. As First Federal accrues compensation expense to
reflect the vesting of 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.
38
<PAGE>
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 Employee Stock Ownership Plan 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
Employee Stock Ownership Plan and to officers, directors, employees and their
immediate families; and
(4) total expenses of the conversion, including the marketing fees
of $400,000 paid to Sandler O'Neill and Investment Bank Services, will be
$1.4 million.
The actual amount of subscription shares sold may be more or less than the
maximum of the estimated valuation range. For the effects of these 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 investment of conversion
proceeds or anticipated Employee Stock Ownership Plan 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. THE 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."
39
<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(6) 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 - Employee
Stock Ownership Plan .............. -- (2,496)(5) (2,496) -- -- (2,496)
Unearned compensation -1999
Recognition Plan .................. -- (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)
40
<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(6) 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
Federal Home Loan Bank 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 - Employee
Stock Ownership Plan .............. -- (2,496)(5) (2,496) -- -- (2,496)
Unearned compensation - 1999
Recognition Plan .................. -- (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 (a)
estimated expenses of the conversion of $1.4 million, (b) the purchase of
$2.5 million of subscription shares by the Employee Stock Ownership Plan
with a loan from First Federal Bankshares, and (c) the purchase of $1.1
million of conversion shares by the 1999 Recognition Plan with funds
provided by First Federal Bankshares. The 1999 Recognition Plan may not
purchase shares in the offering, and under Office of Thrift Supervision
regulations may not be implemented earlier than six months after the
completion of the conversion.
(6) Reflects purchase entries for Mid-Iowa Financial acquisition.
41
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
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>
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
42
<PAGE>
currently estimated to be between $25.0 million and $34.2 million, or $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;
(2) no fees will be paid to Sandler O'Neill or Investment Bank Services
on shares purchased by the Employee Stock Ownership Plan 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 offerings, excluding the sale of shares to the Employee Stock
Ownership Plan and to officers, directors, employees and members of their
immediate families; and
(4) 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, or $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. The 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 Employee Stock Ownership Plan 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 Employee Stock Ownership Plan 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 these
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.
43
<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 effect to the
liquidation account to be established in the conversion, the bad debt reserve on
liquidation or to intangibles in the event of 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 Employee Stock Ownership
Plan(2) .............................................. (1,845) (2,170) (2,496) (2,870)
Common stock purchased by 1999 Recognition Plan(3) ....... (791) (930) (1,069) (1,230)
----------- ----------- ----------- -----------
Estimated net proceeds, as adjusted ............. $ 22,388 $ 26,525 $ 30,662 $ 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
Employee Stock Ownership Plan(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
Employee Stock Ownership Plan(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 Employee Stock
Ownership Plan(2) ................................... (1,845) (2,170) (2,496) (2,870)
Common Stock acquired by 1999 Recognition Plan(3) (791) (930) (1,069) (1,230)
----------- ----------- ----------- -----------
Pro forma stockholders' equity(6) ........................... 67,291 71,428 75,565 80,322
Intangible assets ........................................ (21,451) (21,451) (21,451) (21,451)
----------- ----------- ----------- -----------
Pro forma tangible stockholders' equity .................. $ 45,840 $ 49,977 $ 54,114 $ 58,881
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
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 Employee Stock
Ownership Plan(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
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Pro forma tangible stockholders' equity per share ........ $ 9.52 $ 8.82 $ 8.31 $ 7.86
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Offering price as a percentage of pro forma stockholders'
equity per share ......................................... 71.53% 79.30% 86.21% 93.28%
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Offering price as a percentage of pro forma tangible
stockholders' equity per share ........................... 105.01% 113.31% 120.35% 127.20%
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Number of shares used in book value per share calculations .. 4,813,665 5,663,135 6,512,605 7,489,496
</TABLE>
- -----------
(footnotes on next succeeding page)
44
<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 Employee Stock
Ownership Plan(2) ........................................ (1,845) (2,170) (2,496) (2,870)
Common stock purchased by 1999 Recognition Plan(3) ........... (791) (930) (1,069) (1,230)
----------- ----------- ----------- -----------
Estimated net proceeds, as adjusted ................. $ 22,388 $ 26,525 $ 30,662 $ 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
Employee Stock Ownership Plan(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
Employee Stock Ownership Plan(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 Employee Stock
Ownership Plan(2) ........................................ (1,845) (2,170) (2,496) (2,870)
Common Stock acquired by 1999 Recognition Plan(3) (791) (930) (1,069) (1,230)
----------- ----------- ----------- -----------
Pro forma stockholders' equity(6) ............................... 66,056 70,193 74,330 79,087
Intangible assets ............................................ (21,529) (21,529) (21,529) (21,529)
----------- ----------- ----------- -----------
Pro forma tangible stockholders' equity ...................... $ 44,527 $ 48,664 $ 52,801 $ 57,558
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
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 Employee Stock
Ownership Plan(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
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Pro forma tangible stockholders' equity per share ............ $ 9.25 $ 8.59 $ 8.11 $ 7.69
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Offering price as a percentage of pro forma stockholders'
equity per share.............................................. 72.89% 80.71% 87.64% 94.70%
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Offering price as a percentage of pro forma tangible
stockholders' equity per share................................ 108.11% 116.37% 123.34% 130.12%
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Number of shares used in book value per share calculations 4,813,665 5,663,135 6,512,605 7,489,496
</TABLE>
- --------------------------------
(footnotes on next page)
45
<PAGE>
(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 Employee Stock Ownership Plan. For purposes of this table,
the funds used to acquire these shares are assumed to have been borrowed by
the Employee Stock Ownership Plan from the net proceeds of the offering
retained by First Federal Bankshares. First Federal intends to make annual
contributions to the Employee Stock Ownership Plan in an amount at least
equal to the principal of the debt. First Federal's total annual payments
on the Employee Stock Ownership Plan debt are 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 Employee Stock Ownership Plan 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 Employee
Stock Ownership Plan expense reflects an effective combined federal and
state tax rate of 37.0%. The unallocated Employee Stock Ownership Plan
shares are reflected as a reduction of stockholders' equity. No
reinvestment is assumed on proceeds contributed to fund the Employee Stock
Ownership Plan. 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 Statement of Position 93-6, only the Employee Stock
Ownership Plan 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--Defined
Contribution Plan."
(3) If approved by 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. Stockholder
approval of the 1999 Recognition Plan and purchases by the plan may not
occur earlier than six months after the completion of the conversion. 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--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 First Federal Bankshares common stock
that will be exchanged for the publicly-held shares of First Federal common
stock 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 Statement of Position 93-6,
subtracting the Employee Stock Ownership Plan 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 not earlier than six months after the completion
of the conversion. 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
46
<PAGE>
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 First Federal Bankshares common stock
that will be exchanged for publicly- held shares of First Federal common
stock 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.
47
<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
ENDED SEPTEMBER 30, YEARS ENDED 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 Federal Home Loan Bank 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 6,561 108,244 26,244 20,072
Other expense, net........................................... 701,780 606,244 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
48
<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 Federal Home Loan
Bank 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. Federal Home Loan Bank 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 Federal Home Loan Bank 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 Savings Bank, 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
49
<PAGE>
million in single-family owner-occupied loans. Deposits increased by $65.7
million, or 20.1%, to $392.4 million at June 30, 1998 from $326.7 million at
June 30, 1997 and Federal Home Loan Bank 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 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. These yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods
presented. Average balances are daily averages.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------
1998 1997
RATE AT ------------------------------- -------------------------------
SEPTEMBER 30, AVERAGE AVERAGE AVERAGE AVERAGE
1998 BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
-------- --------- --------- ----------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable(1).................. 8.00% $407,714 $ 8,079 7.93% $345,105 $ 6,921 8.02%
Mortgage-backed securities........... 6.75 36,442 614 6.74 42,950 720 6.71
Investment securities................ 6.78 79,671 1,322 6.64 49,273 864 7.01
Short-term investments and other
interest-earning assets(2)......... 5.45 2,974 41 5.52 412 5 4.86
------ ------- ------- ----- ------- ------- -----
Total interest-earning assets...... 7.67 526,801 10,056 7.64 437,740 8,510 7.78
------ ------- ----- ------- -----
Noninterest-earning assets.............. 34,155 21,213
------- -------
Total assets....................... $560,956 $458,953
------- -------
------- -------
INTEREST-BEARING LIABILITIES:
Deposits............................. 4.72 $383,613 4,574 4.77 $318,100 3,829 4.81
Borrowings........................... 5.88 113,028 1,708 6.04 87,060 1,343 6.17
------ ------- ------- ----- ------- ------- -----
Total interest-bearing liabilities. 5.00 496,641 6,282 5.06 405,160 5,172 5.11
------ ------- ----- ------- -----
Noninterest-bearing :
Deposits............................. 10,962 7,442
Liabilities.......................... 10,793 6,815
------- -------
Total liabilities....................... 518,396 419,417
Stockholders' equity.................... 42,560 39,536
------- -------
Total liabilities and stock-holders' equity $560,956 $458,953
------- -------
------- -------
Net interest income..................... $ 3,774 $ 3,338
------- -------
------- -------
Interest rate spread(3)................. 2.67% 2.58% 2.67%
------ ------ ------
------ ------ ------
Net yield on interest-earning assets(4). 2.86% 2.87% 3.05%
------ ------ ------
------ ------ ------
Ratio of average interest-earning assets to
average interest-bearing liabilities. 106.07% 108.04%
------ -------
------ -------
</TABLE>
50
<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>
----------------------------------
1996
---------------------------------
AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST
------- -------- ----------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable(1)..... $317,037 $ 25,437 8.02%
Mortgage-backed securities 42,989 2,784 6.48
Investment securities... 56,969 3,433 6.03
Short-term investments and
other interest-earning
assets(2)............. 572 32 5.59
------- ------- -------
Total interest-earning assets 417,567 31,686 7.59
------- ------- -------
Noninterest-earning assets 17,098
--------
Total assets.............. $434,665
--------
--------
INTEREST-BEARING LIABILITIES:
Deposits................ $331,875 16,242 4.89
Borrowings.............. 55,680 3,403 6.11
------- -------- -------
Total interest-bearing liabilities 387,555 19,645 5.07
------- -------- -------
Noninterest-bearing:
Deposits................ 4,658
Liabilities............. 6,270
--------
Total liabilities......... 398,483
Stockholders' equity...... 36,182
--------
Total liabilities and
Stockholders' 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.
51
<PAGE>
RATE/VOLUME ANALYSIS
The table below sets forth 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 (1) changes in average volume
(changes in average volume multiplied by old rate); (2) changes in rates (change
in rate multiplied by old average volume); (3) changes in rate-volume (changes
in rate multiplied by the change in average volume); and (4) 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)
------ ---- ------ ---------- ------ ---- ------ ----------
(IN THOUSANDS)
<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>
52
<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
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
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. This increase in interest income was primarily due to
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. 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 partially offsetting the
increases in interest income due to higher average balances.
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. The decrease in the average
yield on loans resulted from declining market interest rates, as First Federal
originated new loans with yields lower than the average yield on the existing
loan portfolio.
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 Federal Home Loan Bank advances. The yield on
investments purchased during the quarter ended September 30, 1998 was
approximately 6.50% while the cost of Federal Home Loan Bank advances 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.
53
<PAGE>
YEARS ENDED JUNE 30, 1998 AND 1997
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
decreased by $275,000, or 9.2%, to $2.7 million in fiscal 1998 from $3.0 million
in fiscal 1997. During the same period, interest income on investment securities
decreased by $431,000, or 10.5%, to $3.7 million from $4.1 million.
The increase in interest income on loans resulted from an increase of $27.1
million, or 8.2%, in the average balance of loans receivable to $358.2 million
at June 30, 1998, from $331.1 million at June 30, 1997. The average yield on
loans receivable was 8.04% and 8.02%, respectively, for fiscal 1998 and 1997.
The decrease in interest income on mortgage-backed securities was primarily
due to a decrease of $5.2 million in the average balance of mortgage-backed
securities to $40.5 million in fiscal 1998 from $45.7 million in fiscal 1997.
Partially offsetting the decrease in mortgage-backed securities balances was an
increase of 16 basis points in the average yield on mortgage-backed securities
to 6.70% in fiscal 1998 from 6.54% in fiscal 1997.
The decrease in interest income on investment securities was primarily due
to a decrease of $5.0 million in the average balance of investment securities to
$53.7 million in fiscal 1998 from $58.7 million in fiscal 1997. In addition, the
yield on investment securities decreased to 6.88% in fiscal 1998 from 7.03% in
fiscal 1997. The generally lower interest rate environment during fiscal 1998
resulted in declining yields on investment securities.
YEARS ENDED JUNE 30, 1997 AND 1996
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
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.
54
<PAGE>
INTEREST EXPENSE
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Interest expense increased by $1.1 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 Federal Home Loan Bank advances.
Average Federal Home Loan Bank 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.
YEARS ENDED JUNE 30, 1998 AND 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 $9.7 million increase in the average balance of
borrowings to $91.9 million in fiscal 1998 from $82.2 million in fiscal 1997. In
addition, the average rate paid on borrowings increased slightly to 6.04% in
fiscal 1998 from 6.02% in fiscal 1997.
YEARS ENDED JUNE 30, 1997 AND 1996
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 Federal Home Loan Bank advances to fund loan growth and investment
purchases.
55
<PAGE>
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 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
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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 6.81%, in the other non-interest income
amounts 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
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
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
reduced expense for the three months ended September 30, 1998 by approximately
$468,000. In connection with the GFS Bancorp acquisition, GFS Bancorp stock
options were exchanged for First Federal stock appreciation rights. At September
30, 1998 First Federal's liability for stock appreciation rights was
approximately $478,000 as compared to a liability of approximately $946,000 at
June 30, 1998.
Excluding the stock appreciation rights 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 Savings Bank 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 Savings Bank 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 $79,000 to $86,000 for the three
months ended September 30, 1998 from $7,000 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. Increases in general and administrative
expenses such as postage, training, stationary and supplies and write-offs of
deficient checking account balances contributed to the increase in other
noninterest expense over the prior year period.
YEARS ENDED JUNE 30, 1998 AND 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 totaled approximately $277,000.
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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 Savings Association
Insurance Fund 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.
YEARS ENDED JUNE 30, 1997 AND 1996
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 totaled $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 Savings Association Insurance Fund 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. The increase in other
general and administrative expenses was primarily due to increases in recruiting
expense, professional fee expense, stationary and supply expense, expenses
related to automated teller machine activity charges due to increased customer
usage and loan expense. Increases in these components of other noninterest
income totaled $299,000 for fiscal 1997 over 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 Savings Association Insurance Fund 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 - MARKET RISK ANALYSIS
QUALITATIVE 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
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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.
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.
QUANTITATIVE ANALYSIS. Market risk is the risk of loss arising from adverse
changes in market prices and rates. First Federal's market risk consists
primarily of the interest rate risk associated with its core banking activities
of lending and deposit taking. Interest rate risk is the risk that changes in
market interest rates may affect adversely 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 relies primarily on the Office of Thrift Supervision Net
Portfolio Value Model to measure its exposure to changes in market interest
rates. Net portfolio value 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 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 Office of Thrift Supervision model. The table shows the
present value of the instruments under rate shock scenarios of -300 basis points
to +300 basis points in
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increments of 100 basis points. As illustrated in the table, First Federal's net
portfolio value 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
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.
<TABLE>
<CAPTION>
PRESENT VALUE ESTIMATES BY INTEREST RATE SCENARIO
CALCULATED AT SEPTEMBER 30, 1998
-------------------------------------------------------------------------------------
Base
-300 bp -200 bp -100 bp 0 bp +100 bp
------------- ------------ ------------ ------------ -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Financial Instrument:
Mortgage loans and securities $444,761 $438,800 $433,581 $428,000 $420,112
Non-mortgage loans........... 28,507 28,103 27,711 27,330 26,959
Cash, deposits and securities 98,373 97,492 96,637 95,806 95,001
Other assets................. 20,418 20,958 21,922 23,707 26,154
------------- ------------ ------------ ------------ -------------
Total assets................. 592,059 585,353 579,851 574,843 568,226
Deposits..................... 406,178 402,672 399,258 395,912 392,660
Borrowings................... 134,736 132,041 129,446 126,947 124,538
Other liabilities............ 9,049 9,045 9,041 9,038 9,035
------------- ------------ ------------ ------------ -------------
Total liabilities............ 549,963 543,758 537,745 531,897 526,233
-------------
Commitments.................. 1,164 884 619 336 10
------------- ------------ ------------ ------------ -------------
Net portfolio value.......... $43,260 42,479 42,725 43,282 42,003
------------- ------------ ------------ ------------ -------------
------------- ------------ ------------ ------------ -------------
$ Change from base........... ($22) ($803) ($557) - ($1,279)
------------- ------------ ------------ ------------ -------------
------------- ------------ ------------ ------------ -------------
% Change from base........... 0% -2% -1% - -3%
------------- ------------ ------------ ------------ -------------
------------- ------------ ------------ ------------ -------------
% Change: board limit........ -20% -15% -10% - -20%
------------- ------------ ------------ ------------ -------------
------------- ------------ ------------ ------------ -------------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------
+200 bp +300 bp
------------- -------------
<S> <C> <C>
Financial Instrument:
Mortgage loans and securities $410,478 $399,868
Non-mortgage loans........... 26,598 26,247
Cash, deposits and securities 94,219 93,461
Other assets................. 29,092 31,855
------------- -------------
Total assets................. 560,387 551,431
Deposits..................... 389,480 386,364
Borrowings................... 122,217 119,978
Other liabilities............ 9,031 9,028
------------- -------------
Total liabilities............ 520,728 515,370
Commitments.................. 324 650
------------- -------------
Net portfolio value.......... 39,335 35,411
------------- -------------
------------- -------------
$ Change from base........... ($3,947) ($7,871)
------------- -------------
------------- -------------
% Change from base........... -9% -18%
------------- -------------
------------- -------------
% Change: board limit........ -40% -55%
------------- -------------
------------- -------------
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
First Federal is required to maintain minimum levels of liquid assets as
defined by Office of Thrift Supervision 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 Office of Thrift Supervision revised its liquidity rule to lower the
required ratio to 4% from 5% of deposits and short-term borrowings. The Office
of Thrift Supervision 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 Office of Thrift Supervision 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, Federal Home Loan Bank
advances, maturities of investment securities and other
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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, at September
30, 1998 and June 30, 1998, 1997, and 1996, totaled $119.1 million, $96.4
million, $28.4 million, and $42.7 million, respectively.
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 Federal Home Loan Bank which
provides an additional source of funds. At September 30, 1998, First Federal had
$124.9 million in outstanding advances from the Federal Home Loan Bank.
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
Statement of Financial Accounting Standards No. 130, REPORTING
COMPREHENSIVE INCOME, establishes the standards for the reporting and display of
comprehensive income in the financial statements. Comprehensive
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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 Statement of Financial
Accounting Standards No. 130 on June 30, 1998.
Statement of Financial Accounting Standards No. 131, DISCLOSURE ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, establishes disclosure
requirements for segment operations. First Federal adopted Statement of
Financial Accounting Standards No. 131 on July 1, 1998.
Statement of Financial Accounting Standards No. 132, EMPLOYERS' DISCLOSURES
ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS, revises the disclosure
requirements for pension and other postretirement benefit plans. First Federal
adopted Statement of Financial Accounting Standards No. 132 on July 1, 1998.
Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, will be effective for First
Federal for years beginning July 1, 1999. First Federal has no activity covered
by Statement of Financial Accounting Standards No. 133. First Federal expects to
adopt Statement of Financial Accounting Standards No. 133 when required.
YEAR 2000
The Year 2000 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 Year
2000 problem. First Federal's Year 2000 action team has completed the awareness
and inventory phases of Year 2000 in which potential Year 2000 risk areas and
systems have been identified; and, assessment of First Federal's Year 2000
exposures is complete. Programming changes, system upgrades and replacements and
other actions necessary to prepare for Year 2000 continue and are expected to
extend into the first quarter of calendar 1999. In addition, testing and
assessing the validity of Year 2000 changes was begun during the quarter ended
September 30, 1998 and will continue through the first calendar quarter of 1999
during which quarter Year 2000-ready systems are expected to be implemented.
First Federal has identified its mission-critical systems including its
"core" data processing system for loans, deposits and the general ledger.
Management anticipates that the enhancements necessary to prepare its
mission-critical systems for the year 2000 will be completed in early 1999.
Contingency plans are being developed for these systems on a
department-by-department basis in anticipation of the possibility of unplanned
system difficulties or failure of third parties to successfully prepare for Year
2000. It is expected that most of these plans will provide for some types of
manual record keeping and reporting procedures, and will be completed by June
30, 1999 as part of the Bank's overall contingency planning process.
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 Year 2000 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
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2000 problem. First Federal has contacted all mission-critical vendors and
service providers regarding their Year 2000 readiness. The potential risks posed
by these entities have been analyzed and periodic updates on the Year 2000
progress of currently non-compliant vendors are being performed. 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 risk exists that some of First Federal's commercial borrowers may not
be prepared for Year 2000 issues and may suffer financial harm as a result.
This, in turn, represents risk to First Federal regarding the repayment of loans
from those commercial customers. First Federal has surveyed its existing
commercial customers with aggregate outstanding loan balances of $250,000 or
more regarding their Year 2000 preparedness. The results of this survey process
were not conclusive as to the overall level of Year 2000 risk in First Federal's
commercial loan portfolio. However, repayment sources for the majority of loans
in First Federal's commercial loan portfolio are from multi-family real estate
projects that tend to be less computer-dependent than, for example, a
manufacturing business. Accordingly, First Federal considers its commercial loan
portfolio to contain a relatively low level of Year 2000 risk. Nevertheless,
First Federal has established a $75,000 reserve for loan losses related to
unforseen Year 2000 problems of its commercial customers. First Federal analyzes
Year 2000 risk posed by prospective commercial loan customers prior to approving
their loan requests. Commercial loan customers are asked to sign an
acknowledgment demonstrating their commitment to address Year 2000 problems
inherent in their operations and agreeing to provide First Federal with specific
information regarding their Year 2000 status.
First Federal is also analyzing the Year 2000 risk posed by its 50 largest
commercial depositors. This analysis is not complete, but on preliminary review
First Federal considers its commercial deposit portfolio to contain a relatively
low level of Year 2000 risk since the majority of these depositors are small
business customers with limited computer technology dependence in their core
business function. First Federal analyzes potential Year 2000 risk of
prospective commercial deposit customers prior to accepting their deposits.
First Federal has assigned responsibility to a committee of staff members
to provide information to customers and employees about First Federal's progress
in addressing the Year 2000 problem. The mission of the committee is to maintain
customer confidence in First Federal's ability to operate in Year 2000 and to
educate employees about its Year 2000 efforts in order to allow them to
adequately address customer concerns.
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.
SAVINGS ASSOCIATION INSURANCE FUND 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 Savings Association Insurance Fund. The required payment
resulted in a non-recurring expense for First Federal 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 Savings Association Insurance Fund and reduce future deposit
insurance premium costs to a level at which Savings Association Insurance
Fund-insured institutions can compete with Bank Insurance Fund 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 11 full
service branch offices and one drive-up facility 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, which was headquartered
in Grinnell, Iowa. 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 attempts 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 were
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 Veterans Administration and
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Federal Housing Administration 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>
AT 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>
AT 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 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
-------- -------- --------
(IN THOUSANDS)
<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 $49.4 million at September 30, 1998
and include approximately $37.9 million of loans that are geographically
distributed in the midwestern United States. The remaining loans are scattered
throughout the United States; the largest geographic concentrations include
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 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,
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however, depends on a number of factors including the yield on the loan and the
term of the loan, market 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
released premiums are 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 uses 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
purchases 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. These 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 multi-family and commercial loans. Loans secured
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by multi-family real estate constituted approximately $41.1 million or 10.1% of
First Federal's total loan 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 these 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
totaled $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 these 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 specific 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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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, Freddie Mac and the Government
National Mortgage Association, 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 these 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.
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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. These 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's commitments to originate and purchase mortgage loans
totaled $32.1 million. First Federal's experience has been that very few
commitments expire without being funded.
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 these 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's
deferred loan fees totaled $2.2 million.
72
<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.
These 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
restricted by the same limits as 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.
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 the time 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 of these, which was acquired through the acquisition of Grinnell Federal
Savings Bank, 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 Savings Bank 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 on these three properties. The second largest
property, which was also acquired through the acquisition of Grinnell Federal
Savings Bank, 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 buildings 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.
73
<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):
Residential .......................................... 138 144 173 21 58 110
Commercial ........................................... 51 -- -- -- -- --
Consumer(2) .......................................... 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(3) ......................... 718 489 -- 45 48 82
------ ------ ------ ------ ------ ------
Total non-performing assets ............................ $1,926 $1,824 $ 525 $ 755 $ 727 $1,002
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
Restructured loans(4) .................................. $ 450 $ 452 $ 460 $1,287 $1,984 $2,283
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
Non-performing loans as a percentage of total loans0.30% 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) Delinquent Federal Housing Administration/Veterans Administration
guaranteed loans are not placed on non-accrual status.
(2) Delinquent consumer loans are not placed on non-accrual status.
(3) 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.
(4) 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.
74
<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>
Residential real estate:
Loans past due 60-89 days ........................................... $1,196 30
Loans past due 90 days or more ...................................... 849 23
Commercial real estate:
Loans past due 60-89 days ........................................... 130 3
Loans past due 90 days or more ...................................... 228 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
Office of Thrift Supervision 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 this amount. A savings institution's determination
as to the classification of its assets and the amount of its valuation
allowances may be reviewed by the Office of Thrift Supervision 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.
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>
75
<PAGE>
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 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. This 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 Office of Thrift Supervision 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.
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.
76
<PAGE>
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) .................. 407,714 358,209 331,144 317,037 293,102 261,318
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%
- -----------------------------
(1) Includes loans held for sale.
77
<PAGE>
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES. The following table sets forth
the allocation for loan losses by loan category at the dates indicated.
AT SEPTEMBER 30, AT JUNE 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.
78
<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 other investments. See "Regulation--Federal Regulation of Savings
Institutions--Liquidity" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources." First
Federal maintains 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
Federal Home Loan Bank stock, at the dates indicated. At September 30, 1998,
First Federal's Federal Home Loan Bank 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
Federal Home Loan Bank stock ..................... 6,270 5,671 5,000 4,769
------- ------- ------- -------
Total investments ............................ $91,696 $72,418 $58,325 $59,881
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
79
<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
-------------------------------------------------------------------------------------
ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO TEN YEARS
---------------------- ------------------------ ------------------------
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD
------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Investment securities - held to maturity .. $ 5,154 5.99% $ 5,739 5.65% $ 4,416 6.21%
Investment securities - available for sale 15,062 7.07% 2,513 6.09% 38,953 6.65%
------- ---- ------- ---- ------- ----
Total investment securities .............. $20,216 6.79% $ 8,252 5.78% $43,369 6.61%
------- ---- ------- ---- ------- ----
------- ---- ------- ---- ------- ----
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1998
-----------------------------------------------------
TOTAL INVESTMENT
MORE THAN 10 YEARS SECURITIES
---------------------- -----------------------
CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD
------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Investment securities - held to maturiy .. $ 691 6.92% $16,000 5.96%
Investment securities - available for sale 11,898 6.85% 68,426 6.76%
------- ---- ------- ----
Total investment securities .............. $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, Savings Association Insurance Fund-insured
institutions are required to provide 30 days' advance notice to the Office of
Thrift Supervision and Federal Deposit Insurance Corporation before establishing
or acquiring a subsidiary or conducting a new activity in a subsidiary. The
insured institution must also provide the Federal Deposit Insurance Corporation
and the Office of Thrift Supervision such information as may be required by
applicable regulations and must conduct the activity in accordance with the
rules and orders of the Office of Thrift Supervision. In addition to other
enforcement and supervision powers, the Office of Thrift Supervision 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 Office of Thrift Supervision 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 Federal Home Loan Bank 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
80
<PAGE>
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 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, consist of the following:
<TABLE>
<CAPTION>
WEIGHTED PERCENTAGE
AVERAGE MINIMUM OF TOTAL
INTEREST RATE(1) MINIMUM TERM CATEGORY AMOUNT BALANCES DEPOSITS
- ---------------- ------------ ------------------------------------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
0.00% None Noninterest bearing checking accounts None $ 10,945 2.79%
1.67% None Interest bearing checking account $ 200 37,092 9.45%
2.03% None Money Market Plus accounts 200 6,968 1.77%
4.70% None Money Market Select accounts 10,000 56,424 14.36%
1.78% None Savings accounts/Club accounts 10/5 25,385 6.46%
1.75% None Unredeemed certificates 1,000 649 0.17%
3.72% 3 months Fixed term, fixed rate 1,000 650 0.17%
5.53% 5 months Fixed term, fixed rate 1,000 746 0.19%
3.95% 6 months Fixed term, fixed rate (2) 100/1,000 7,843 2.00%
5.08% 8 months Fixed term, fixed rate 5,000 4,647 1.18%
5.38% 1 year Fixed term, fixed rate (2) 100/1,000 28,580 7.28%
5.48% 14 months Fixed term, fixed rate 5,000 6,644 1.69%
5.76% 16 months Fixed term, fixed rate 5,000 1,447 0.37%
5.83% 17 months Fixed term, fixed rate 5,000 19,104 4.87%
5.71% 1.5 year Fixed term, fixed rate 1,000 7,527 1.92%
5.73% 19 months Fixed term, fixed rate 5,000 2,377 0.61%
5.42% 2 year Fixed term, fixed rate (2) 100/1,000 16,185 4.12%
5.10% 2 year Fixed term, variable rate IRA 100 1,227 0.31%
5.89% 26 months Fixed term, fixed rate 5,000 25,682 6.54%
5.01% 2.5 year Fixed term, fixed rate 1,000 4,834 1.23%
4.94% 2.5 year Fixed term, option rate (3) 1,000 2,471 0.63%
6.22% 32 months Fixed term, fixed rate 5,000 16,694 4.25%
5.95% 35 months Change up term and rate (4) 1,000 34,506 8.78%
5.31% 3 year Fixed term, fixed rate (2) 100/1,000 30,519 7.76%
6.47% 45 months Fixed term, fixed rate 5,000 5,401 1.38%
5.42% 4 year Fixed term, fixed rate 1,000 6,275 1.60%
6.74% 58 months Fixed term, fixed rate 5,000 7,768 1.98%
5.67% 5 year Fixed term, fixed rate 1,000 6,146 1.57%
6.11% 6 year Fixed term, fixed rate 1,000 11,706 2.98%
6.64% 8 year Fixed term, fixed rate 1,000 5,330 1.36%
8.61% 10 year Fixed term, fixed rate-education CD 5,000 905 0.23%
----- --------- -----
4.69% $ 392,677 100.00%
--------- ------
--------- ------
</TABLE>
- -------------------------------------------------------
(1) Yield rates for fixed term, fixed rate certificates.
(2) Individual retirement accounts (IRAs) are offered for this term. The
minimum for IRAs is $100 and the minimum for other certificates is $1,000.
The minimum for additions to IRAs is $25, while the minimum for additions
to other certificates is $1,000.
(3) The rate on the option rate certificate may be changed once during the term
to the currently offered rate at the certificate holder's option.
(4) The certificate holder may change to another certificate product on the
first or second anniversary.
81
<PAGE>
CHANGES IN DEPOSITS. 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 3, % INCREASE JUNE 30, % INCREASE JUNE 30,
1998 DEPOSITS (DECREASE) 1998 DEPOSITS (DECREASE) 1997
--------- --------- ----------- ---------- -------- ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Checking accounts.............. $ 48,037 12.23% (331) $ 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.......... 63,392 16.14 1,598 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)...... 9,516 2.42 548 9,038 2.30 3,314 5,724
3 to 11 month certificates..... 13,886 3.54 2,822 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............... 60,131 15.32 (526) 60,657 15.45 3,599 57,058
Other certificates............. 1,554 0.40 173 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
--------- --------- --------- ---------
<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.
82
<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 AT JUNE 30,
SEPTEMBER 30, ----------------------------------
1998 1998 1997 1996
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
4% or less.................................. $12,554 $ 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....................................... $255,863 $256,032 $219,159 $234,470
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
TIME DEPOSIT MATURITY SCHEDULE. The following table sets forth the amount
and maturities of certificates of deposit at September 30, 1998.
<TABLE>
<CAPTION>
AMOUNT DUE
---------------------------------------------------
LESS THAN 1-2 2-3 AFTER
WEIGHTED AVERAGE ONE YEAR YEARS YEARS 3 YEARS TOTAL
-------- -------- ------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
4% or less........................................... $12,283 $ 271 $ -- $ -- $ 12,554
4.01-6.00%........................................... 92,638 70,301 23,527 6,247 192,712
6.01-8.00%........................................... 15,391 16,619 9,120 8,454 49,584
8.01-9.00%........................................... 1,010 -- -- 2 1,013
------- ------- ------- -------- --------
Total........................................... $121,322 $87,191 $32,647 $ 14,703 $255,863
------- ------- ------- -------- --------
------- ------- ------- -------- --------
</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>
83
<PAGE>
DEPOSIT ACTIVITY. The following table sets forth the savings activities of
First Federal for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEARS 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
Federal Home Loan Bank and the Federal Reserve Bank discount window to
supplement its supply of lendable funds and to meet deposit withdrawal
requirements. Advances from the Federal Home Loan Bank are secured by First
Federal's stock in the Federal Home Loan Bank 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 Federal Home Loan
Bank.
The Federal Home Loan Bank 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
Federal Home Loan Bank and is authorized to apply for advances on the security
of such stock and certain of its home mortgages and other assets 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 Federal Home Loan Bank's assessment of the
institution's creditworthiness.
The following table sets forth information regarding borrowings by First
Federal at the dates indicated. First Federal had no borrowings outstanding
other than advances from the Federal Home Loan Bank as of September 30, 1998.
<TABLE>
<CAPTION>
AT
SEPTEMBER 30, AT JUNE 30,
------------------------------------
1998 1998 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted average rate paid on Federal Home Loan Bank advances 5.90% 5.94% 6.01% 6.00%
Rate paid on Employee Stock Ownership Plan borrowing(1)... N/A N/A N/A 8.50
</TABLE>
- ---------------
(1) The final payment on the Employee Stock Ownership Plan borrowing was made
on December 30, 1996.
84
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEARS ENDED JUNE 30,
SEPTEMBER 30, ------------------------------------
1998 1997 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Maximum amount of Federal Home Loan Bank advances
outstanding at any month end................................ $124,900 $86,500 $113,400 $100,000 $ 69,000
Approximate average Federal Home Loan Bank advances outstanding. $113,028 $87,060 $ 91,863 $ 82,200 $ 55,596
Approximate weighted average rate paid on Federal Home
Loan Bank advances........................................... 6.04% 6.17% 6.04% 6.02% 6.12%
Approximate average Employee Stock Ownership Plan borrowing
outstanding(1)............................................... N/A N/A N/A $ 9 $ 84
Average rate paid on Employee Stock Ownership Plan borrowing(1). N/A N/A N/A 9.03% 8.76%
</TABLE>
- --------------
(1) The final payment on the Employee Stock Ownership Plan 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 these 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.
85
<PAGE>
PROPERTIES
First Federal currently conducts its business through its main office
located in Sioux City, Iowa, and 12 branch offices located in its market area.
First Federal recently closed its branch offices located in Hartley, Hawarden
and Sanborn, Iowa. The following table sets forth 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 (2) 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>
- -----------------------------
(footnotes on following page)
86
<PAGE>
(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.
(2) Drive-up facility.
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 savings association insured by the Savings
Association Insurance Fund, First Federal is examined and supervised extensively
by the Office of Thrift Supervision and the Federal Deposit Insurance
Corporation. First Federal is a member of and owns stock in the Federal Home
Loan Bank 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 regulated by the Board of Governors of the Federal Reserve
System, governing reserves to be maintained against deposits and other matters.
The Office of Thrift Supervision 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 Federal Deposit Insurance
Corporation also examines First Federal in its role as the administrator of the
Savings Association Insurance Fund. First Federal's relationship with its
depositors and borrowers also is regulated to a great extent by both federal and
state laws especially in matters concerning the ownership of savings accounts
and the form and content of First Federal's mortgage documents. Any change in
this regulation, whether by the Federal Deposit Insurance Corporation, Office of
Thrift Supervision, or Congress, could have a material adverse impact on First
Federal Bankshares and First Federal and their operations.
FEDERAL REGULATION OF SAVINGS INSTITUTIONS
BUSINESS ACTIVITIES. The activities of federal savings associations are
subject to extensive regulation including restrictions or requirements with
respect to loans to one borrower, the percentage of non-mortgage loans or
investments to total assets, capital distributions, permissible investments and
lending activities, liquidity, transactions with affiliates and community
reinvestment. The description of statutory provisions and regulations applicable
to savings associations set forth herein does not purport to be a complete
description of these statutes and regulations and their effect on First Federal.
LOANS TO ONE BORROWER. Federal savings associations generally may not make
a loan or extend credit to a single or related group of borrowers in excess of
15% of unimpaired capital and surplus on an unsecured basis. An additional
amount may be lent, equal to 10% of unimpaired capital and surplus, if the 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.
87
<PAGE>
QUALIFIED THRIFT LENDER TEST. As a federal savings association, First
Federal is required to satisfy a qualified thrift lender test whereby it must
maintain at least 65% of its "portfolio assets" in "qualified thrift
investments" consisting primarily of residential mortgages and related
investments, including mortgage-backed and related securities. "Portfolio
assets" generally means total assets less specified liquid assets up to 20% of
total assets, goodwill and other intangible assets, and the value of property
used to conduct business. A savings association that fails the qualified thrift
lender test must either convert to a bank charter or operate under specified
restrictions. As of September 30, 1998, First Federal maintained 92.1% of its
portfolio assets in qualified thrift investments and, therefore, met the
qualified thrift lender test.
LIMITATION ON CAPITAL DISTRIBUTIONS. Office of Thrift Supervision
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 and has not been advised by the Office of Thrift Supervision that
it is in need of more than normal supervision, could, after prior notice but
without the approval of the Office of Thrift Supervision, 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 Office
of Thrift Supervision 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 Office of Thrift Supervision 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 Office of Thrift Supervision could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the Office of Thrift Supervision determines that
the distribution would constitute an unsafe or unsound practice.
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 of its net withdrawable deposit accounts plus borrowings
payable in one year or less. The current requirement is 4%. 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 associations have
a responsibility under the Community Reinvestment Act and related regulations of
the Office of Thrift Supervision 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 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 the Community Reinvestment Act could, at a minimum, result in
regulatory restrictions on its activities, and failure to comply with the Equal
Credit Opportunity Act and the Fair Housing Act could result in enforcement
actions by the Office of Thrift Supervision, as well as other federal regulatory
agencies and the Department of Justice. First Federal received a satisfactory
Community Reinvestment Act rating under the current Community Reinvestment Act
regulations in its most recent federal examination by the Office of Thrift
Supervision.
88
<PAGE>
TRANSACTIONS WITH RELATED PARTIES. First Federal's authority to engage in
transactions with related parties or "affiliates" or to make loans to specified
insiders, is limited by Sections 23A and 23B of the Federal Reserve Act. The
term "affiliates" for these purposes generally means any company that controls
or is under common control with an institution, including First Federal
Bankshares and its non-savings institution subsidiaries. Section 23A limits the
aggregate amount of certain "covered" transactions with any individual affiliate
to 10% of the capital and surplus of the savings institution and also limits the
aggregate amount of covered transactions with all affiliates to 20% of the
savings institution's capital and surplus. Covered 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 covered 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 these persons, is
currently governed by Sections 22(g) and 22(h) of the Federal Reserve Act, and
also by Regulation O. Among other things, these regulations generally require
these loans to be made on terms substantially the same as those offered to
unaffiliated individuals and do not involve more than the normal risk of
repayment. However, recent regulations now permit executive officers and
directors to receive the same terms through benefit or compensation plans, that
are widely available to other employees, as long as the director or executive
officer is not given preferential treatment compared to other participating
employees. Regulation O also places individual and aggregate limits on the
amount of loans First Federal may make to these persons based, in part, on First
Federal's capital position, and requires approval procedures to be followed. At
September 30, 1998, First Federal was in compliance with these regulations.
ENFORCEMENT. The Office of Thrift Supervision 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. The
Federal Deposit Insurance Corporation also has the authority to recommend to the
Director of the Office of Thrift Supervision that enforcement action be taken
with respect to a particular savings institution. If action is not taken by the
Director, the Federal Deposit Insurance Corporation has authority to take such
action under specified circumstances.
STANDARDS FOR SAFETY AND SOUNDNESS. Federal law 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 to
implement the safety and soundness standards required under the Federal law. 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
89
<PAGE>
submit to the agency an acceptable plan to achieve compliance with the standard.
If an institution fails to meet these standards, the appropriate federal banking
agency may require the institution to submit a compliance plan.
CAPITAL REQUIREMENTS. Office of Thrift Supervision capital regulations
require savings institutions to meet three capital standards: a 1.5% tangible
capital standard, a 3.0% leverage 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. Office of Thrift Supervision
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 or 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 Office of Thrift Supervision capital regulation
based on the risks the Office of Thrift Supervision believes are inherent in the
type of asset. The components of Tier 1 core capital are equivalent to those
discussed earlier under the 3.0% leverage ratio standard. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock and allowance for loan and lease losses.
Allowance for loan and lease losses includable in supplementary capital is
limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of
supplementary capital included as part of total capital cannot exceed 100% of
core capital.
Office of Thrift Supervision 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
with a measured interest rate risk exposure exceeding 2%, must deduct an
interest rate component equal to one-half of the excess change. The Office of
Thrift Supervision 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 Office of Thrift Supervision may waive or
defer an institution's interest rate risk component on a case-by-case basis.
90
<PAGE>
At September 30, 1998, First Federal exceeded each of the three Office of
Thrift Supervision capital requirements. Set forth below is a summary of First
Federal's compliance with these 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....................................................... $ 34,649 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 Office of Thrift Supervision
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 Office of Thrift Supervision Prompt Corrective Action
regulations, the Office of Thrift Supervision is required to take supervisory
actions against undercapitalized institutions, the severity of which depends
upon the institution's level of capital. Generally, a savings institution that
has total risk-based capital of less than 8.0% or a leverage ratio or a Tier 1
core capital ratio that is less than 4.0% is considered to be undercapitalized.
A savings institution that has the total risk-based capital less than 6.0%, a
Tier 1 core risk-based capital ratio of less than 3.0% or a leverage ratio that
is less than 3.0% is considered to be "significantly undercapitalized" and a
savings institution that has a tangible capital to assets ratio equal to or less
than 2.0% is deemed to be "critically undercapitalized." Generally, 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 Office of Thrift Supervision
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 Office of Thrift Supervision could also take any one
of a number of discretionary supervisory actions against undercapitalized
institutions, including the issuance of a capital directive and the replacement
of senior executive officers and directors.
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INSURANCE OF DEPOSIT ACCOUNTS
The Federal Deposit Insurance Corporation has adopted a risk-based deposit
insurance assessment system. The Federal Deposit Insurance Corporation 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, and one of three supervisory subcategories within each
capital group. The three capital categories are well capitalized, adequately
capitalized and undercapitalized. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation provided to the
Federal Deposit Insurance Corporation by the institution's primary federal
regulator and information which the Federal Deposit Insurance Corporation
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
Federal Deposit Insurance Corporation is authorized to raise the assessment
rates. The Federal Deposit Insurance Corporation has exercised this authority
several times in the past and may raise insurance premiums in the future. If
this type of action is taken by the Federal Deposit Insurance Corporation, 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
Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan
Banks. The Federal Home Loan Bank System provides a central credit facility
primarily for member institutions. First Federal, as a member of the Federal
Home Loan Bank of Des Moines, is required to acquire and hold shares of capital
stock in that Federal Home Loan Bank 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 borrowings from the
Federal Home Loan Bank, whichever is greater. As of September 30, 1998, First
Federal was in compliance with this requirement. The Federal Home Loan Banks 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 Federal Home Loan Banks pay to their
members and could also result in the Federal Home Loan Banks 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, such
as negotiable order of withdrawal 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 Federal
Reserve Board may be used to satisfy liquidity requirements imposed by the
Office of Thrift Supervision.
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, 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.
HOLDING COMPANY REGULATION
First Federal Bankshares will be a non-diversified unitary savings and loan
holding company, as those terms are defined under federal law, subject to
regulation and supervision by that agency. In addition, the Office of Thrift
Supervision has enforcement authority over First Federal Bankshares and its
non-savings institution subsidiaries. Among other things, this authority permits
the Office of Thrift Supervision to restrict or prohibit
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<PAGE>
activities that are determined to be a risk to the subsidiary savings
institution. First Federal must notify the Office of Thrift Supervision 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
qualified thrift lender. See "--Federal Regulation of Savings
Institutions--Qualified Thrift Lender Test" for a discussion of the qualified
thrift lender 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.
Federal law 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 the Bank Holding Company Act of 1956. Recently
proposed legislation would treat all savings and loan holding companies as bank
holding companies and limit the activities of these companies to those
permissible for bank holding companies.
Federal law prohibits a savings and loan 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
Office of Thrift Supervision. It also prohibits the acquisition or retention of,
with specified 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 Federal law; or acquiring or retaining
control of an institution that is not federally insured. In evaluating
applications by holding companies to acquire savings institutions, the Office of
Thrift Supervision 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.
FEDERAL SECURITIES LAWS
First Federal Bankshares has filed with the Securities and Exchange
Commission a registration statement under the Securities Act of 1933, as
amended, 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 Securities and Exchange Commission under the
Securities Exchange Act of 1934. First Federal Bankshares will then be subject
to the information, proxy solicitation, insider trading restrictions and other
requirements under the Securities Exchange Act of 1934.
The registration under the Securities Act of 1933 of shares of the common
stock to be issued in the conversion does not cover the resale of the 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 of 1933. If First Federal Bankshares meets
the current public information requirements of Rule 144 under the Securities Act
of 1933, 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 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% of the outstanding shares of First Federal
Bankshares, or the average weekly volume of trading in the 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 of 1933.
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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 may be recaptured, 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 included in the federal
legislation, 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.
Deferred income taxes arise from the recognition of 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 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 interest on certain tax-exempt bonds issued after August 7, 1986, and
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, with adjustments such as the addition of interest
income on state and municipal obligations.
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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.
<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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MANAGEMENT OF FIRST FEDERAL
DIRECTORS
First Federal's Board of Directors consists 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. Share ownership information in the table and elsewhere
in the prospectus has been adjusted, where appropriate, for stock distributions
made by First Federal.
<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) 1.37%
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 and 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, 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. In connection with
First Federal's acquisition of Grinnell Federal Savings Bank in March 1998,
Messrs. Opsal and Clay were appointed to the Board of Directors.
(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 underlying 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.
(6) Includes 11,195 shares awarded under the 1992 Recognition Plan that have
vested to date and been distributed to Mr. Backhaus. Also includes 8,979
shares underlying 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 underlying options under the 1992 Stock Option Plan that may be
exercised within 60 days of September 30, 1998.
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<PAGE>
(8) Includes 8,047 shares awarded under the 1992 Recognition Plan that have
vested to date and been distributed to Mr. Cleghorn. Also includes 5,293
shares underlying options under the 1992 Stock Option Plan that may be
exercised within 60 days of the September 30, 1998.
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
Savings Bank 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>
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth for the fiscal years ended June 30, 1998,
1997, and 1996, 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. The table does not include benefits
pursuant to First Federal's Pension Plan. First Federal also provides some
members of senior management with the use of an automobile, membership dues and
other personal benefits, which benefits are not reflected in the table. The
aggregate amount of these other benefits provided to each of the named executive
officers did not exceed the lesser of $50,000 or 10% of his cash compensation.
On July 13, 1992, Mr. Backhaus and Mr. Cleghorn were awarded 10,726 and 8,107
shares, 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. Backhaus and Mr.
Cleghorn.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------
YEAR
ENDED OTHER
NAME AND JUNE BONUS ANNUAL
PRINCIPAL POSITION 30, SALARY (1) COMPENSATION
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Barry E. Backhaus, 1998 $180,000 $11,100 $ ----
President and Chief 1997 163,500 5,250 ----
Executive Officer 1996 139,250 4,560 ----
- -----------------------------------------------------------------------------------
Jon G. Cleghorn, 1998 $113,250 $3,540 $ ----
Executive Vice 1997 105,250 3,255 ----
President and Chief 1996 93,167 1,530 ----
Operating Officer
<CAPTION>
LONG-TERM COMPENSATION
------------------------------------------
AWARDS PAYOUTS
OPTIONS/ ALL
NAME AND STOCK OTHER
PRINCIPAL POSITION RESTRICTED APPRECIA LTIP COMPENSATION
STOCK TION PAYOUTS
AWARDS RIGHTS
(#)
- -------------------------- ---------------------------------------------------------------
- -------------------------- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
Barry E. Backhaus, $15,712 ---- $ ---- $ ----
President and Chief ---- ---- ---- ----
Executive Officer ---- ---- ---- ----
- -------------------------- ---------------------------------------------------------------
Jon G. Cleghorn, $10,117 ---- $ ---- $ ----
Executive Vice ---- ---- ---- ----
President and Chief ---- ---- ---- ----
Operating Officer
</TABLE>
(1) 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 protections to designated
employees in the event of termination without cause in connection with 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 some 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
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<PAGE>
notice of change of control pursuant to Office of Thrift Supervision
regulations, and that had at any time been opposed by the Board of Directors.
Under the terms of the severance agreements, officers Backhaus, Cleghorn
and Sabel would receive approximately $555,000, $354,000 and $228,000,
respectively, in severance compensation if the 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
Savings Bank, First Federal entered into employment agreements with five
officers of Grinnell Federal Savings Bank, 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 participate in all employee benefit plans generally
available to employees of First Federal, 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, the use of a bank-owned automobile, maintenance of Mr. Opsal's
country club membership, and 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, 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 299% of the executive's "base
amount" of compensation as defined in Section 280G(b)(3) of the Internal Revenue
Code.
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 Internal Revenue 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.
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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.
The employment agreements provide 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. These 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.
No sooner than six months 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 the first day of the month following hire. A portion of the
premium is paid by First Federal. Two different plans with different deductibles
are offered. 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. In connection with the conversion, effective December
1, 1998, First Federal withdrew from the Financial Institutions Thrift 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
100
<PAGE>
which 1,000 hours are completed. The first year eligibility period runs from the
date of hire to the anniversary of this 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.
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 some 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 Financial Institutions Thrift Plan trust fund equaled approximately
$408,343. The total contribution, including both the employee and First Federal
contributions, to the Financial Institutions Thrift Plan for the 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. 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 defined benefit 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 defined benefit plan.
First Federal annually contributes an amount to the defined benefit plan
necessary to satisfy the actuarially determined minimum funding requirements in
accordance with the Employee Retirement Income Security Act.
The regular form of all retirement benefits 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.
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The following table indicates the annual retirement benefit that would
be payable under the defined benefit 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 defined benefit plan.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST. First Federal established the
Employee Stock Ownership Plan for eligible employees in connection with First
Federal's initial stock offering. The Employee Stock Ownership Plan is a
tax-qualified plan which invests primarily in First Federal common stock, or
following the conversion, First Federal Bankshares common stock, and must comply
with the requirements of the Employment Retirement Income Security Act and the
Internal Revenue Code of 1986, as amended. 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
Employee Stock Ownership Plan are held in a suspense account for allocation
among participants.
As part of the offering, the Employee Stock Ownership Plan 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 Employee Stock Ownership Plan.
Shares purchased with the Employee Stock Ownership Plan loan will be held in a
suspense account for allocation among participants as the loan is repaid. As
this loan is repaid from contributions First Federal makes to the Employee Stock
Ownership Plan, shares will be released from the suspense account in an amount
proportional to the repayment of the 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 Employee
Stock Ownership Plan. 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 Employee Stock Ownership Plan are not
fixed, so benefits payable under this plan cannot be estimated.
In connection with the establishment of the Employee Stock Ownership
Plan, a committee of the Board of Directors was appointed to administer the
plan. This Compensation and Benefits Committee may instruct the trustee
regarding investment of funds contributed to the plan. The trustee must vote all
allocated shares held in the Employee Stock Ownership Plan in accordance with
the instructions of the participating employees. No directed shares and shares
held in the suspense account will be voted in a manner calculated to most
accurately reflect the instructions the trustee has received from participants
regarding allocated stock, in accordance with the fiduciary duties under the
Employment Retirement Income Security Act owed by the trustee to the Employee
Stock Ownership Plan participants.
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STOCK OPTION PLAN. In 1992, First Federal adopted the First Federal
Savings Bank of Siouxland 1992 Incentive Stock Option Plan for officers and
employees of First Federal and its affiliates and this 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. 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:
(1) options to purchase First Federal common stock intended to
qualify as incentive stock options under Section 422 of the
Internal Revenue Code;
(2) non-statutory options that do not so qualify; and
(3) limited rights exercisable only upon a change in control of
First Federal.
Options with limited rights for 89,813 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 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,
consisting of four persons, was 19,372 and the unrealized value of these 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 stock options was
$573,837. All of these options granted are exercisable at $5.05 per share, as
adjusted for stock dividends and stock splits, except for Mr. Opsal's options
and the options for 1,000 shares granted to another former insider of Grinnell
Federal Savings Bank which are exercisable at $33.50 per share. The unrealized
value of stock options equals the difference between the aggregate price of
these options and the aggregate fair market value of such stock options assuming
they were all eligible to be exercised and further assuming the exercise
occurred on June 30, 1998. On that date the last sale of First Federal common
stock as quoted on the Nasdaq SmallCap System was at $36.00.
The following table sets forth information regarding the shares
acquired and the value realized during fiscal year ended June 30, 1998, by the
executive officers of First Federal listed in the table. 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 these options will be
determined pursuant to the exchange ratio. The aggregate exercise price,
duration and vesting schedule of these options will not be affected.
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<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
ACQUIRED VALUE NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
NAME UPON REALIZED OPTIONS AT OPTIONS AT FISCAL YEAR-END
EXERCISE FISCAL YEAR-END
------------------------- ---------------------------------
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. The Directors' 1992 Stock Option Plan was ratified by the
stockholders of First Federal at the 1992 Annual Meeting of Stockholders. The
Directors' 1992 Stock Option Plan reserved non-statutory stock options for
24,948 shares 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
1992 mutual holding company reorganization was granted non-statutory options to
purchase 2,369 shares of First Federal common stock at an exercise price of
$5.05 per share. The Chairman of the Board received options for an additional
2,370 shares 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 the 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 SmallCap 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 these options will be determined
pursuant to the exchange ratio. The aggregate exercise price, duration and
vesting schedule of these options will not be affected.
104
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
SHARES NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
NAME ACQUIRED VALUE OPTIONS AT IN-THE-MONEY OPTIONS
UPON EXERCISE REALIZED FISCAL YEAR-END AT 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 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. First Federal contributed funds to the
1992 Recognition Plan to enable it to acquire in the aggregate 37,422 shares 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. Awards have been granted
in the form of restricted shares of First Federal common stock under the terms
of the 1992 Recognition Plan. Restricted stock is nontransferable and
nonassignable and the shares awarded become vested at a rate of 20% per year
commencing one year from the date of the award. The Compensation and Benefits
Committee may provide for a less or more rapid earnings 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 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
plus interest. 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. Backhaus, Cleghorn
and 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. First Federal Bankshares restricted stock will
be restricted on the same terms as applied to the First Federal 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,
which became effective on January 1, 1995. Pursuant to the Deferred Compensation
Plan for Directors, 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 a shorter period as 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, referred to as
the supplemental executive retirement plan, for the benefit of Messrs. Backhaus,
Cleghorn and Opsal to compensate those individuals whose First Federal
tax-qualified benefit plan benefits are limited by federal tax laws. Current tax
laws provide for the following limitations:
(1) the maximum amount of an individual's compensation that can be
taken into consideration cannot exceed $160,000;
(2) the maximum benefit that can be received under a defined benefit
pension plan is limited to the lesser of $130,000 or 100% of the individual's
highest 3 year average compensation;
(3) the maximum contribution to a defined contribution plan, such as
the employee stock ownership plan and 401(k) Plan, is limited to the lesser of
25% of the individual's compensation or $30,000;
(4) the maximum salary deferral to the 401(k) Plan is limited to the
lesser of $10,000 or 15% of the individual's compensation; and
(5) highly compensated employees, who are generally persons earning
over $80,000, cannot obtain significantly higher salary deferrals or matching
contributions than non-highly compensated employees.
If an individual's contributions or benefits would be limited by any of
these limitations, the individual is entitled to receive a contribution to or
benefit under the supplemental executive retirement plan. The supplemental
executive retirement plan provides individuals with supplemental pension
benefits generally equal to the difference between the annual benefit the
individual would have received under First Federal's pension plan if such
benefits were computed without giving effect to the above limitations and the
amounts actually payable to the individual under the terms of the pension plan.
In addition, the individual is entitled to a supplemental employee stock
ownership plan 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 individual's account without giving effect to the above
limitations and the fair market value of the number of shares of common stock
actually allocated to the individual's account. Finally, the supplemental
executive retirement plan provides individuals 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 individual's 401(k)
Plan account due to the limitations, together with the interest deemed earned on
such contributions, multiplied by the individual's vested percentage interest at
termination of employment. The individual can also make salary deferrals to the
supplemental 401(k) portion of the supplemental executive retirement plan of
amounts that cannot be contributed to First Federal's 401(k) Plan due to the
above limitations. The individual's account attributable to the 401(k) portion
of the supplemental executive retirement plan will earn interest at the 10 year
fixed rate advance offered by the Federal Home Loan Bank of Des Moines, adjusted
semiannually. Benefits are generally payable in the same form as benefits in the
tax-qualified pension plan, the 401(k) Plan and the Employee Stock Ownership
Plan. At present, only Mr.
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<PAGE>
Backhaus is eligible for a contribution to either the pension or Employee Stock
Ownership Plan portion of the supplemental executive retirement plan. If the
supplemental executive retirement plan had been in effect in 1998, a
contribution would have been accrued to the pension and employee stock ownership
portion of the supplemental executive retirement plan for Mr. Backhaus' benefit
equal to approximately $1,200. Whether a contribution must be made to the
supplemental executive retirement plan due to lost contributions under the
401(k) Plan cannot be determined prior to the end of each year.
The supplemental executive retirement plan is considered an unfunded
plan for tax and Employee Retirement Income Security Act purposes. All
obligations arising under the supplemental executive retirement plan are payable
from the general assets of First Federal, however, First Federal intends to
establish a trust into which it will make contributions to ensure that
sufficient assets will be available to pay the benefits under the supplemental
executive retirement plan.
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 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. First Federal terminated the Incentive Pay Plan
in December 1998.
PROFIT SHARING PLAN. In January, 1999, the Board of Directors of First
Federal replaced the Incentive Pay Plan with the Profit Sharing Plan which pays
a current profit sharing cash bonus equal to a percent of First Federal's net
income, if return on asset goals are met or exceeded. Under the Profit Sharing
Plan, all payments will be made on an annual basis, after the end of First
Federal's fiscal year. The Profit Sharing Plan bases each employee's percentage
of the overall profit sharing bonus on a formula which takes into consideration
the employee's tenure with the Bank and overall individual performance.
Employees in direct sales positions are not eligible to be included in the
profit sharing plan.
CASH ONLY SAR PLAN. In connection with the acquisition of GFS Bancorp
and Grinnell Federal Savings Bank, First Federal succeeded to the Cash Only SAR
Plan for former officers of GFS Bancorp and Grinnell Federal Savings Bank. The
SAR Plan replaced the option plans previously adopted by GFS Bancorp and
Grinnell Federal Savings Bank, and provided replacement cash-only stock
appreciation rights to officers of GFS Bancorp and Grinnell Federal Savings Bank
in exchange for and upon surrender of options awarded to such persons under the
GFS Bancorp and Grinnell Federal Savings Bank option plans. The exchange of
stock appreciation rights for options occurred pursuant to an exchange ratio to
ensure that the value of the GFS Bancorp 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 Savings Bank. Under the SAR Plan, a participant, or the beneficiary of a
deceased participant, may elect to exercise his or her stock appreciation rights
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 stock
appreciation rights exercised multiplied by the excess of the fair market value
of First Federal common stock over the exercise price of the stock appreciation
rights. In December 1998, First Federal's Board adopted a resolution giving
stock appreciation rights holders a window of opportunity during December 1998
and January 1999 to exercise their stock appreciation rights at a premium.
During this window period, persons who exercised stock appreciation rights that
replaced options under the GFS Bancorp 1993 stock option plan were able to
receive
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<PAGE>
a cash payment with respect to each stock appreciation rights exercised equal to
the difference between $32 and the exercise price of the stock appreciation
rights and persons who exercised stock appreciation rights that replace options
under the GFS Bancorp 1997 stock option plan were able to receive a cash payment
with respect to each stock appreciation rights exercised equal to the difference
between $34 and the exercise price of the stock appreciation rights. Following
adoption of this amendment, all stock appreciation rights holders elected to
exercise their stock appreciation rights. Mr. Opsal, who held the greatest
number of stock appreciation rights, received $246,282 upon exercise of his
stock appreciation rights.
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,
with 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 Office of Thrift Supervision 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 non-employee Director can receive more than 5% of the awards under
the plan, and all non-employee 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 may 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.
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 for stockholder approval. The 1999 Recognition Plan will
provide First Federal's Directors and officers an ownership interest in 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 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
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<PAGE>
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 that may be awarded 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, shares not already delivered under the 1999
Recognition Plan would be forfeited. Under Office of Thrift Supervision 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 non-employee Director can receive more than 5% of the awards under
the plan, and all non-employee Directors as a group can receive no more than 30%
of the awards under the plan, and the 1999 Recognition Plan may award no more
than 3% of the shares issued in the offering. If the 1999 Recognition Plan is
adopted more than one year after the offering, it would not be subject to Office
of Thrift Supervision limitations as to the number of shares covered by the 1999
Recognition 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 Internal Revenue 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 may be distributed to the participant when paid, and the
participant could be entitled to vote the unvested shares.
TRANSACTIONS WITH 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 maximum of $500,000, must be approved in advance by
a majority of the disinterested members of the Board of Directors. All loans
made by First Federal to its officers, directors, and executive officers were
made in the ordinary course of business, were made on the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with other persons and did not involve more than the normal risk of
collectibility or present other unfavorable features.
As of September 30, 1998, the aggregate principal balance of loans
outstanding for all executive officers and directors, and family members was
$2.2 million.
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<PAGE>
BENEFICIAL OWNERSHIP OF COMMON STOCK
BENEFICIAL OWNERSHIP OF FIRST FEDERAL COMMON STOCK
The following table includes, as of September 30, 1998, information as
to First Federal common stock beneficially owned by the only persons or
entities, including any "group" as that term issued in Section 13(d)(3) of the
Securities Exchange Act of 1934, 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 by all Directors and executive officers of First Federal as a
group. The table 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. The table also includes 12,947 shares of common
stock underlying options granted pursuant to the 1992 Director's Stock Option
Plan and 15,272 shares underlying options under the 1992 Stock Option Plan, and
25,656 shares awarded under the 1992 Recognition Plan that have vested or been
distributed to participants. For information concerning proposed subscriptions
by Directors and executive officers and the anticipated ownership of common
stock by these 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 OUTSTANDING
----------------- --------- -----------
<S> <C> <C>
First Federal Bankshares, M.H.C. 1,524,600 53.60%
329 Pierce Street
Sioux City, Iowa 51102
All Directors and Executive Officers 152,930 5.38%
as a Group (12 persons)
</TABLE>
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<PAGE>
SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND DIRECTORS
The table below 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, the following information:
(1) 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;
(2) the proposed purchases of subscription shares, assuming sufficient
shares are available to satisfy their subscriptions; and
(3) the total amount of First Federal Bankshares common stock to be
held upon consummation of the conversion.
In each case, it is assumed that subscription shares are sold at the midpoint of
the offering range. Because of limitations on the purchase of subscription
shares, 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 1.52%
Dr. Nancy A. Boysen............ 21,499 2,000 20,000 23,499 0.42
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 6.59%
</TABLE>
- -----------------------
(1) Includes proposed subscriptions, if any, by associates. Does not include
the subscription order by the Employee Stock Ownership Plan. Purchases by
the Employee Stock Ownership Plan 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 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
these 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."
(4) If necessary to achieve compliance with the overall 85,000 share
purchase limitation, Mr. Backhaus may reduce slightly his proposed
purchase of conversion stock.
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<PAGE>
THE CONVERSION
THE BOARD OF DIRECTORS OF THE MUTUAL HOLDING COMPANY AND THE OFFICE OF
THRIFT SUPERVISION 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 OTHER CONDITIONS. OFFICE OF THRIFT SUPERVISION APPROVAL,
HOWEVER, DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE PLAN BY THAT
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 Office of Thrift Supervision, 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 their holders, 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, the public shareholders of First
Federal common stock 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, with 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
pursuant to the Agreement of Merger between the Mutual Holding Company and First
Federal. 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 Office of Thrift Supervision 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 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 the public shareholders of First
Federal common stock will receive common stock in the share exchange; and
(5) Contemporaneously with the merger of the Interim Savings Bank into
First Federal, 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 Office
of Thrift Supervision 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 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
Employee Stock Ownership Plan, 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 members of the general public, with a preference given to
the public shareholders of First Federal common stock, and then to persons
residing in First Federal's 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 Office of Thrift Supervision. 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 appraisal was prepared pursuant to written guidelines promulgated
by the Office of Thrift Supervision. The Office of Thrift Supervision appraisal
guidelines specify the market value approach, including:
(1) selection of a peer group of publicly traded institutions that
share characteristics with the company;
(2) analysis of the company's financial condition, operating results
and other financial and nonfinancial characteristics in comparison to the peer
group; and
(3) application of certain market value ratios of the peer group to the
company.
The appraisal considered the pro forma impacts of the Mid-Iowa Financial
acquisition and the offering. Consistent with the Office of Thrift Supervision
appraisal guideline, the appraisal applied three primary methodologies: the pro
forma price-to-book value approach applied to both reported book value and
tangible book value; the pro forma price-to-earnings approach applied to
reported and core earnings; and the pro forma price-to-asset approach. The
market value ratios applied in the three methodologies were based upon the
current market valuations of the peer group companies, subject to valuation
adjustments applied by RP Financial to account for differences between First
Federal Bankshares and the peer group. RP Financial applied a slight downward
adjustment in the valuation for financial condition based primarily on the
expected lower post-conversion capital-to-assets ratio for First Federal
Bankshares as compared to the peer group. RP Financial applied a moderate
downward adjustment in the valuation for profitability, growth and viability of
earnings, citing among other things First Federal Bankshares' lower
return-on-assets and estimated lower return-on-equity as compared to the peer
group. Further, RP Financial applied a slight downward adjustment in the
valuation for asset growth, citing First Federal Bankshares' lower
post-conversion capital ratios and more limited future leverage potential. RP
Financial applied no valuation adjustments relative to the peer group for the
other factors considered in the appraisal including primary market area,
dividends, liquidity of the shares, marketing of the issue, management and the
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<PAGE>
effect of government regulations and regulatory reform. At the midpoint, based
on the valuation adjustments applied in the appraisal, the pro forma value of
First Federal Bankshares was at a discount to the peer group averages as
measured by price-to-book ratios, price-to-earnings multiples and price-to-asset
ratios.
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 Office of Thrift Supervision. 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 Office of Thrift
Supervision. 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 1992 mutual holding company 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 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
to take advantage of opportunities that may arise.
The proceeds of the conversion received by First Federal will be used
to fund a substantial portion of the purchase price of Mid-Iowa Financial common
stock. 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 $26.4 million to $35.7 million
offering range established by the Board of Directors based on the estimated pro
forma market value of the common stock, of gross proceeds are realized from the
sale of common stock, and assuming that all except $5.0 million of the net
proceeds are contributed to First Federal as additional capital, in connection
with the conversion and acquisition of Mid-Iowa Financial, First Federal's ratio
of capital to adjusted assets, calculated under generally accepted accounting
principles, will increase to 9.1%. 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 and depending on market conditions,
the unissued common and preferred stock authorized by First Federal Bankshares'
certificate of incorporation will permit First Federal Bankshares to raise
additional equity capital through further sales of securities, and to issue
securities in
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<PAGE>
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 programs.
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 merger of the Mutual Holding Company into First Federal and the
merger of the Interim Savings Bank into First Federal. The affirmative vote of
the holders of at least two-thirds of the outstanding common stock of First
Federal and a majority of the publicly-held shares of First Federal common stock
at the Special Meeting of Stockholders is required to approve the Plan of
Conversion. The conversion must also be approved by the Office of Thrift
Supervision.
SHARE EXCHANGE RATIO
Office of Thrift Supervision 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 Office of Thrift
Supervision 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 publicly-held share of First Federal common stock 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. The exchange ratio will take into account an adjustment required by the
Office of Thrift Supervision to reflect the Mutual Holding Company's waiver of
dividends in the amount of $500,000 out of the aggregate waived dividends of
$2.7 million, and approximately $800,000 of assets out of $1.8 million held by
the Mutual Holding Company solely for the benefit of members. Based upon the
exchange ratio, the public shareholders of First Federal common stock will own a
slightly lower aggregate percentage of First Federal Bankshares common stock
after the conversion than they owned of First Federal common stock immediately
prior to the conversion. The total number of shares held by the public
shareholders of First Federal common stock after the conversion also would be
affected by any purchases by these 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 publicly held. Based on the percentage of First Federal common stock held
by the public and the offering range, the exchange ratio is expected to range
from approximately 1.64993 exchange shares for each publicly-held share of First
Federal at the minimum of the offering range to 2.56709 exchange shares for each
publicly-held share of First Federal 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 public shareholders' 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: (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.
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<PAGE>
<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 shares of First Federal common stock also will 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
shares of First Federal common stock. The number of shares of common stock to be
received upon exercise of these options will be determined pursuant to the
exchange ratio. The aggregate exercise price, duration, and vesting schedule of
these options will not be affected. At September 30, 1998, options to purchase
34,574 shares were vested. If all of these options to purchase shares of First
Federal common stock are exercised prior to the effective date, then there will
be:
(1) an increase in the percentage of First Federal common stock held by
the public shareholders of First Federal common stock to 47.1%;
(2) an increase in the number of shares of common stock issued to the
public shareholders of First Federal common stock in the share exchange; and
(3) 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 the public shareholders of
First Federal common stock. 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 that date for the exchange ratio,
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, respectively, of the offering range.
EFFECT ON EARNINGS PER SHARE OF THE SHARES EXCHANGED. The conversion
will also affect the public shareholders of First Federal common stock 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 these 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,
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<PAGE>
respectively, of the offering range. Dividends, when and if paid, will be
determined and declared 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 the
public shareholders of First Federal common stock for each of the full fiscal
quarters since its initial public offering in July, 1992. First Federal intends
to continue to pay a quarterly cash dividend of $0.12 per share through the
fiscal quarter ending March 31, 1998. The Mutual Holding Company intends to
waive the receipt of such dividends. See "Market for Common Stock" and
"Regulation--Federal Regulation of Savings Institutions--Limitation on Capital
Distributions."
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 publicly-held shares of First Federal common stock 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 February 12, 1999, was $17.50 per
share.
DISSENTERS' AND APPRAISAL RIGHTS. Under Office of Thrift Supervision
regulations, the public shareholders of First Federal common stock will not have
dissenters' rights or appraisal rights in connection with the exchange of
publicly-held shares of First Federal common stock 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. This 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 the deposit account. Any
depositor who opens a deposit account obtains a pro rata ownership interest in
the Mutual Holding Company 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. If this occurs, the depositors of
record at that time, as owners, would share pro rata in any residual surplus and
reserves of the Mutual Holding Company after other claims, including claims of
depositors to the amounts of their deposits, are paid.
When a mutual holding company converts to stock form, permanent
nonwithdrawable capital stock is created in the stock holding company to
represent the ownership of the subsidiary institution's net worth. THE COMMON
STOCK IS SEPARATE AND APART FROM DEPOSIT ACCOUNTS AND CANNOT BE AND IS NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION 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 regulated by the Office
of Thrift Supervision and the Federal Deposit Insurance Corporation. After the
conversion, First
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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 of the deposit accounts
will remain the same with respect to deposit balance, interest rate and other
terms. Each such account will be insured by the Federal Deposit Insurance
Corporation 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, these 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 the 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, would
also be paid first, followed by distribution of the "liquidation account" to
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 Office of Thrift Supervision, 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 the
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valuation. For its services in making the valuation, RP Financial will receive a
fee of $35,000. This 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 specified 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; 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 the securities.
The following table presents a summary of selected pricing ratios for
comparable public thrift institutions used by RP Financial to help establish the
market value of First Federal Bankshares and the resulting pricing ratios for
First Federal Bankshares.
<TABLE>
<CAPTION>
Pro forma Pro forma Pro forma Pro forma
price to earnings price to book price to tangible price to assets
multiple value ratio book value ratio
----------------- ------------- ----------------- ---------------
FIRST FEDERAL BANKSHARES:
<S> <C> <C> <C> <C>
15% above maximum....................... 18.0x 93.2% 127.2% 10.1%
Maximum................................. 16.1x 86.2% 120.4% 8.8%
Midpoint................................ 14.4x 79.3% 113.3% 7.7%
Minimum................................. 12.6x 71.5% 105.0% 6.6%
ALL SAVINGS ASSOCIATION INSURANCE FUND-
INSURED PUBLIC INSTITUTIONS AS OF
NOVEMBER 27, 1998:
Averages................................ 17.5x 126.9% 133.2% 16.0%
Medians................................. 16.6x 117.8% 122.0% 14.7%
VALUATION PEER GROUP INSTITUTIONS AS OF
NOVEMBER 27, 1998:
Averages................................ 14.5x 123.1% 138.5% 11.7%
Medians................................. 13.7x 119.2% 128.0% 11.2%
</TABLE>
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
percentage of First Federal common stock owned by the Mutual Holding Company as
adjusted to reflect certain waived dividends and assets held by the Mutual
Holding Company. The independent valuation
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states that as of November 27, 1998, the estimated pro forma market value, or
valuation range, 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
Board of Directors determined to offer the subscription shares for a $10.00 per
share subscription price. The aggregate offering price of the subscription
shares offered in the offering will be equal to the valuation range multiplied
by the percentage of First Federal common stock owned by the Mutual Holding
Company, as adjusted. 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 percentage of First
Federal common stock owned by the Mutual Holding Company, as adjusted, 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 the following:
(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 publicly-held shares of First
Federal common stock.
All of these factors 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 Office of Thrift Supervision, 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, the appraisal will be filed with
the Securities and Exchange Commission by post-effective amendment.
THE INDEPENDENT VALUATION, HOWEVER, IS NOT INTENDED, AND MUST NOT BE
CONSTRUED, AS A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING
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 THE VALUATION IS NECESSARILY BASED UPON ESTIMATES AND PROJECTIONS OF A
NUMBER OF MATTERS, ALL OF WHICH MAY CHANGE FROM TIME TO TIME, NO ASSURANCE CAN
BE GIVEN THAT PERSONS PURCHASING SHARES IN THE OFFERING WILL THEREAFTER BE ABLE
TO SELL THEIR 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.
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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
Office of Thrift Supervision, 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
other actions as permitted by the Office of Thrift Supervision 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
Office of Thrift Supervision for periods of up to 90 days not to extend beyond
March 25, 2001, which is 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 earnings and stockholders' equity on an aggregate basis. For a
presentation of the effects of these 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 the
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, PUBLICLY-HELD SHARES OF
FIRST FEDERAL COMMON STOCK 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
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 public shareholder of First Federal. 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 these shares have
been converted. When certificates are
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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 these 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
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 fiscal quarter ending
March 31, 1999. Subject to the receipt of any required regulatory approval, the
Mutual Holding Company may decide to waive the receipt of any dividend.
No fractional shares of First Federal Bankshares common stock will be
issued to any public shareholder of First Federal 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 the 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 the loss, theft or destruction,
appropriate evidence as to the ownership of the 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 depend on the availability of common stock after
satisfaction of all subscriptions of all persons having prior rights in the
subscription offering and to the maximum, minimum, and overall purchase
limitations set forth in the Plan of Conversion and as described below under
"--Limitations on Common Stock Purchases."
PRIORITY 1: ELIGIBLE ACCOUNT HOLDERS. Each depositor with aggregate
deposit account balances, including demand deposit accounts, of $50 or more (a
"Qualifying Deposit") at September 30, 1997 ("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, .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 September 30, 1997,
subject to the overall purchase limitations and exclusive of shares purchased by
the Employee Stock Ownership Plan from any increase in the shares offered
pursuant to an increase in the maximum of the offering range. At the midpoint of
the offering range, 85,000 shares is equal to approximately 2.74% of the shares
offered. 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 Employee Stock
Ownership Plan upon an increase in the maximum of the offering range, will be
allocated to each subscribing Eligible Account Holder
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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 September 30, 1997. 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 September 30,
1997.
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 Employee Stock Ownership Plan, 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 December 31, 1998 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, .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 December 31, 1998,
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 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 December 31, 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, 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
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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 March 22, 1999, unless extended for up to 45 days or
such additional periods by First Federal with the approval of the Office of
Thrift Supervision, 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 the period is extended with the consent of the Office of Thrift
Supervision, 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 granted, First Federal will notify
subscribers of the extension of time and of any rights of subscribers to modify
or rescind their subscriptions. Extensions may not go beyond March 25, 2001,
which is 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 a 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 a state, register as
a broker, dealer, salesman or selling agent or register or otherwise qualify the
subscription rights or common stock for sale in a 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 a 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.
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, with preference given first to the public
shareholders of First Federal common stock and then to natural persons residing
in First Federal's community. First Federal's community means the State of Iowa,
the Nebraska counties of Dakota, Dixon, Thurston, Cedar and Wayne, and the South
Dakota counties of Union, Clay, Yankton, Lincoln and Turner. These persons,
together with associates of and persons acting in concert with such persons, may
subscribe for up to 85,000 subscription shares, 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
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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 Office of Thrift Supervision 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%, the 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.
If the amount of stock remaining is insufficient to fill the orders of
natural persons residing in First Federal's community, the remaining stock will
be allocated among those persons in the manner that permits each of these
persons, 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 or
the number of shares subscribed for by each such person. However, if there are
insufficient shares available for this allocation, then shares will be allocated
among natural persons residing in the community whose orders remain unsatisfied
in the proportion that the unfilled subscription of each bears to the total
unfilled subscriptions of all those persons whose subscriptions remain
unsatisfied. Similar allocation procedures will be used for orders of the public
shareholders of First Federal common stock. If all orders of natural persons
residing in First Federal's community are filled, any shares remaining will be
allocated to other persons who purchase in the community offering applying the
same allocation described above for natural persons residing in the community.
The term "resided" or "residing" as used herein shall mean any person
who occupies a dwelling within First Federal's 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 this presence within First
Federal's 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 First Federal's 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 other evidence provided to
it to make a determination as to whether a person is a resident. In all cases,
however, the 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 Office of Thrift Supervision, 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 otherwise sold. If
2,635,000 shares have not been subscribed for or sold within 45 days after the
expiration date, unless this period is extended with the consent of the Office
of Thrift Supervision, 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. These extensions may not go beyond March
25, 2001, which is two years after the Special Meeting of Members of the Mutual
Holding Company to approve the conversion.
The Board of Directors has the right to reject any order submitted in
the offering by a person whose representations the Board of Directors believes
to be false or who it otherwise believes, either alone or acting in concert with
others, is violating, evading, circumventing, or intends to violate, evade or
circumvent the terms and conditions of the Plan of Conversion.
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SYNDICATED COMMUNITY OFFERING
If feasible, the Board of Directors may determine to offer all
subscription shares not subscribed for in the subscription and community
offerings in a syndicated community offering, subject to such terms, conditions
and procedures as may be determined by First Federal Bankshares, in a manner
that will achieve the widest distribution of the common stock. However, First
Federal retains the right 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 the 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. 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. 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 the underwriters and First
Federal, which will in no event exceed an amount deemed to be acceptable by the
Office of Thrift Supervision.
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. The
Office of Thrift Supervision must approve these other purchase arrangements.
PLAN OF DISTRIBUTION AND SELLING COMMISSIONS
Offering materials for the offering initially have been distributed 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 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. 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;
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(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 Employee Stock
Ownership Plan or to First Federal's or First Federal Bankshares' Directors,
officers, or employees, and these 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.
Some Directors and executive officers of First Federal Bankshares and
First Federal may participate in the solicitation of offers to purchase common
stock. These 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 the 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. These 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
Securities Exchange Act of 1934, 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.
PROCEDURE FOR PURCHASING SHARES
EXPIRATION DATE. The offering will terminate at 4:00 p.m., Central
time, on March 22, 1999, unless extended by First Federal and First Federal
Bankshares, with the approval of the Office of Thrift Supervision, if required.
This 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 of the offering would require Office of Thrift Supervision
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
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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 of the offering in accordance with Rule 15c2-8 of the
Securities Exchange Act of 1934, no prospectus will be mailed any later than
five days prior to this date or hand delivered any later than two days prior to
this 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 4:00 p.m., Central time, on March 22, 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 shares for his own account and that he has no
agreement or understanding with any person for the sale or transfer of the
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.
The order form includes a certification in which subscribers
acknowledge that the common stock is not a deposit or savings account that is
federally insured or otherwise guaranteed by First Federal or the federal
government and that the subscribers received a copy of this prospectus
describing the nature of the common stock and the risks involved in an
investment in the common stock, including the "Risk Factors" described in this
prospectus. The certification is required by federal regulation and is intended
to ensure that subscribers are aware of the Risk Factors before making an
investment decision. HOWEVER, SIGNING THE ORDER FORM AND CERTIFICATION WILL NOT
RESULT IN INVESTORS WAIVING THEIR RIGHTS UNDER THE SECURITIES ACT OF 1933.
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 withdrawals may be authorized are provided in the
order forms. Once a withdrawal amount has been authorized, a hold will be placed
on these funds, making them unavailable to the depositor until
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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, these 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 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 individual retirement
account funds to purchase common stock must do so through a self-directed
individual retirement account. Since First Federal does not offer these
accounts, it will allow a depositor to make a trustee-to-trustee transfer of the
individual retirement account funds to a trustee offering a self-directed
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 Internal Revenue Service interest penalties for these 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 individual retirement
account funds. An annual administrative fee may be payable to the new trustee.
Depositors interested in using funds in a First Federal individual retirement
account 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 Employee Stock Ownership Plan 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 Employee Stock
Ownership Plan 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 the
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 National Association of Securities Dealers, Inc. 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
their purchase and may refuse to honor any purchase order if an opinion is not
timely furnished.
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RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
PRIOR TO THE COMPLETION OF THE CONVERSION, OFFICE OF THRIFT SUPERVISION
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. THESE RIGHTS MAY BE EXERCISED ONLY BY THE PERSON TO
WHOM THEY ARE GRANTED AND ONLY FOR HIS ACCOUNT. EACH PERSON EXERCISING
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 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 SUBSCRIPTION RIGHTS.
LIMITATIONS ON COMMON STOCK PURCHASES
The Plan of Conversion includes the following limitations on the number
of shares of common stock which may be purchased during the conversion:
(1) No person may purchase less than 25 shares of common stock;
(2) The tax-qualified employee stock benefit plans, including the
Employee Stock Ownership Plan, 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%. The Employee Stock Ownership
Plan expects to subscribe for 7% of the shares sold, or 184,450 shares at the
minimum of the offering range and 249,550 shares at the maximum of the offering
range;
(3) Except for the Employee Stock Ownership Plan, as described above,
no other individual or entity and their associates, and groups of persons acting
in concert, may purchase more than 85,000 shares of common stock in the
offering. First Federal's stockholders will be subject to an additional
limitation upon the number of shares he or she may purchase in the offering. As
previously described, First Federal's stockholders will receive shares of First
Federal Bankshares common stock in exchange for their shares of First Federal.
The number of shares purchased by a First Federal stockholder in the offering,
when combined with the shares that he or she receives in exchange for First
Federal common stock, may not exceed 85,000 shares. This limitation also applies
to associates and groups of persons acting in concert. This limitation only
limits the amount of stock that First Federal's stockholders may purchase. If a
First Federal stockholder receives more than 85,000 shares of First Federal
Bankshares common stock in exchange for First Federal common stock, he or she
will not be able to purchase any shares in the offering, but will not be
required to divest any shares unless the Office of Thrift Supervision requires
the stockholder to do so; and
(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 Office of Thrift
Supervision and without further approval of members of the Mutual Holding
Company, may decrease or further increase the purchase limitations. 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
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discretion of First Federal Bankshares and First Federal without further
approval of the members of the Mutual Holding Company or the shareholders of
First Federal. First Federal may need regulatory approval to increase the
purchase limitations. If this amount is increased, subscribers for the maximum
amount will be, and some 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 this type of
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 THE PURCHASE LIMITATIONS
SHALL NOT BE INCREASED PROPORTIONATELY, EXCEPT FOR THE EMPLOYEE STOCK OWNERSHIP
PLAN, 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 EMPLOYEE STOCK OWNERSHIP PLAN'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 OR OTHER MEMBER LEVELS, TO
FILL UNFULFILLED SUBSCRIPTIONS OF THESE SUBSCRIBERS ACCORDING TO THEIR
RESPECTIVE PRIORITIES; AND
(3) TO FILL UNFULFILLED SUBSCRIPTIONS IN THE COMMUNITY OFFERING WITH
PREFERENCE GIVEN FIRST TO FIRST FEDERAL STOCKHOLDERS AND THEN TO NATURAL PERSONS
RESIDING IN FIRST FEDERAL'S 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 the person is an officer,
partner or 10% stockholder;
(2) any trust or other estate in which the person has a substantial
beneficial interest or serves as a director or in a similar fiduciary capacity;
provided, however, this term shall not include any employee stock benefit plan
in which the person has a substantial beneficial interest or serves as director
or in a similar fiduciary capacity; and
(3) any relative or spouse of the persons, or any relative of the
spouse, who either has the same home as the person or who is a Director or
officer of First Federal.
Directors are not treated as associates of each other solely because of their
Board membership. For a further discussion of limitations on purchases of a
converting institution's stock at the time of conversion and subsequent to
conversion, see "Certain Restrictions on Purchase or Transfer of Shares after
Conversion" and "Restrictions on Acquisition of First Federal Bankshares."
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, these assets
would be distributed to stockholders,
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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. Then, if there were any assets of the Mutual Holding Company
remaining, members of the Mutual Holding Company would receive these 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, 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 Office of
Thrift Supervision, 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 these types of transactions, 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 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
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 the liquidation account for each deposit account,
including regular accounts, transaction accounts such as negotiable order of
withdrawal accounts, money market deposit accounts, and certificates of deposit,
with a balance of $50 or more held in First Federal on September 30, 1997, or
December 31, 1998, respectively. Each Eligible Account Holder and Supplemental
Eligible Account Holder will have a pro rata interest in the total liquidation
account for each such deposit account based on the proportion that the balance
of each such deposit account on September 30, 1997, or December 31, 1998,
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 such deposit account is less
than the amount in the deposit account on September 30, 1997, or December 31,
1998, 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.
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TAX ASPECTS
The conversion will be effected as follows:
(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 Internal Revenue
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 Internal
Revenue Code Section 368(a)(1)(A) by reason of Internal Revenue 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 Internal Revenue Service has
stated that it will not rule on whether a transaction qualifies as a tax-free
reorganization under Internal Revenue Code Section 368(a)(1)(A), including a
transaction that qualifies under Internal Revenue Code Section 368(a)(1)(A) by
reason of Internal Revenue Code Section 368(a)(2)(E), or whether the taxpayer
qualifies under those sections for nonrecognition of income treatment 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 Internal Revenue Service 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 these cases, the Internal Revenue Service 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 Internal Revenue 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.
In December 1994, the Internal Revenue Service issued Revenue Procedure
94-76 which states that the Internal Revenue Service 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 the corporation and
less than 80 percent of the total value of the stock of the corporation. The
Internal Revenue Service assumed this "no-rule" position to study whether these
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 Internal
Revenue Service indicated that it intended to close its study project on this
issue, however, Rev. Proc. 96-22 made permanent the Internal Revenue Service
decision not to issue advance rulings on these downstream mergers. Counsel to
First Federal Bankshares is of a view that the downstream merger to effect the
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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 Internal Revenue
Service were to conclude that these mergers circumvent the repeal of GENERAL
UTILITIES, the Internal Revenue Service 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 a corporation over
its basis in these assets. If 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 Internal Revenue Code Section 368(a)(1)(A), as more fully
discussed below.
Prior to 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 will constitute a mere change in identity, form or place of reorganization
within the meaning of Internal Revenue Code Section 368(a)(1)(F);
(2) the merger of the Mutual Holding Company with and into First
Federal will qualify as a reorganization within the meaning of Internal Revenue
Code Section 368(a)(1)(A);
(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 those assets in the hands of the Mutual Holding Company immediately
prior to the transfer, the basis of First Federal common stock will be zero;
(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;
(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 Internal Revenue Code Section 368(a)(1)(A), pursuant to Internal
Revenue Code Section 368(a)(2)(E);
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(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 those 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 those 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 merger of the Interim Savings Bank into First
Federal 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 the 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 the
stockholder;
(17) each First Federal stockholder's 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 for
the First Federal common stock;
(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
(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 this opinion has been filed with the Securities and Exchange
Commission as an exhibit to First Federal Bankshares's registration statement.
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An opinion on the Iowa state income tax consequences which will be
consistent with the federal tax opinion will be issued prior to the conversion
by KPMG Peat Marwick LLP, tax advisors to the Mutual Holding Company and First
Federal.
In the view of RP Financial, which view is not binding on the Internal
Revenue Service, the subscription rights do not have any value, based on the
fact that these 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 these 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 the value and First
Federal could recognize gain on a 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 subscription rights
are deemed to have an ascertainable value.
Unlike private rulings, an opinion of counsel is not binding on the
Internal Revenue Service and the Internal Revenue Service could disagree with
the conclusions reached therein. Depending on the conclusion or conclusions with
which the Internal Revenue Service disagrees, the Internal Revenue Service 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 public stockholders of First Federal, and/or the Eligible Account
Holders and Supplemental Eligible Account Holders who exercise their
subscription rights. In the event of a disagreement, there can be no assurance
that the Internal Revenue Service 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 generally may not be sold for a period of one
year following the conversion, except in the event of the death of the 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 this time period of any certificate or
record ownership of the 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 the restricted stock will
be similarly restricted. The Directors and executive officers of First Federal
will also be restricted by the insider trading rules promulgated pursuant to the
Securities Exchange Act of 1934.
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 Securities and
Exchange Commission, except with the prior written approval of the Office of
Thrift Supervision. 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.
Office of Thrift Supervision 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:
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(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 Office of Thrift Supervision prompt
corrective action regulation; and
(3) First Federal Bankshares provides to the Regional Director of the
Office of Thrift Supervision 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 Office of Thrift Supervision 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 Office of
Thrift Supervision does not object to such repurchases.
COMPARISON OF STOCKHOLDERS' RIGHTS
GENERAL. As a result of the conversion, holders of First Federal common
stock will become stockholders of First Federal Bankshares, a Delaware
corporation. There are certain differences in stockholder rights arising from
distinctions between First Federal's federal stock charter and bylaws and First
Federal Bankshares' certificate of incorporation and bylaws and from
distinctions between laws applicable to federally-chartered savings institutions
and laws applicable to Delaware corporations.
The discussion herein is not intended to be a complete statement of the
differences affecting the rights of stockholders, but rather summarizes the
material differences and similarities affecting the rights of stockholders. The
discussion herein is qualified in its entirety by reference to the certificate
of incorporation and bylaws of First Federal Bankshares and the Delaware General
Corporate Law. See "Additional Information" for procedures for obtaining a copy
of First Federal Bankshares' certificate of incorporation and bylaws.
AUTHORIZED CAPITAL STOCK. First Federal Bankshares' authorized capital
stock consists of 12,000,000 shares of common stock, par value $.01 per share,
and 1,000,000 shares of preferred stock, par value $.01 per share. First
Federal's authorized capital stock consists of 20,000,000 shares of First
Federal common stock and 10,000,000 shares of preferred stock, par value $1.00
per share. The shares of First Federal Bankshares 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
flexibility to effect, among other transactions, financing, 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 of First Federal Bankshares also has sole
authority to determine the terms of any one or more series of preferred stock,
including voting rights, conversion rates, and liquidation preferences. As a
result of the ability to fix voting rights for a series of Preferred Stock, the
Board has the power, to the extent consistent with its fiduciary duty, to issue
a series of preferred stock to persons friendly to management in order to
attempt to block a post tender offer merger or other transaction by which a
third party seeks control, and thereby assist management to retain its position.
First Federal Bankshares' Board currently has no plans for the issuance of
additional shares, other than the issuance of additional shares pursuant to
stock benefit plans.
ISSUANCE OF CAPITAL STOCK. Pursuant to applicable laws and regulations,
the Mutual Holding Company is required to own not less than a majority of the
outstanding First Federal common stock. There will be no such restriction
applicable to First Federal Bankshares following consummation of the conversion.
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First Federal Bankshares' certificate of incorporation does not contain
restrictions on the issuance of shares of capital stock to directors, officers
or controlling persons of First Federal Bankshares, whereas First Federal's
federal stock charter restricts such issuance to general public offerings, or if
qualifying shares, to directors, unless the share issuance or the plan under
which they would be issued has been approved by a majority of the total votes
eligible to be cast at a legal stockholders' meeting. Thus, stock-related
compensation plans, such as stock option plans, could be adopted by First
Federal Bankshares without stockholder approval and shares of First Federal
Bankshares capital stock could be issued directly to directors or officers
without stockholder approval. The bylaws of the National Association of
Securities Dealers, Inc., however, generally require corporations with
securities which are quoted on the Nasdaq National Market System to obtain
stockholder approval of most stock compensation plans for directors, officers
and key employees of the corporation. Moreover, although generally not required,
stockholder approval of stock related compensation plans may be sought in
certain instances in order to qualify such plans for favorable federal income
tax and securities law treatment under current laws and regulations.
VOTING RIGHTS. First Federal's federal stock charter and bylaws
provided for, but First Federal Bankshares' certificate of incorporation and
bylaws do not provide for cumulative voting in elections of directors. For
additional information regarding voting rights, see "--Limitations on
Acquisitions of Voting Stock and Voting Rights" below.
PAYMENT OF DIVIDENDS. The ability of First Federal to pay dividends on
its capital stock is restricted by Office of Thrift Supervision regulations and
by federal income tax considerations related to savings institutions such as
First Federal. See "Regulation--Limitation on Capital Distributions." Although
First Federal Bankshares is not subject to these restrictions as a Delaware
corporation, such restrictions will indirectly affect First Federal Bankshares
because dividends from First Federal will be a primary source of funds of First
Federal Bankshares for the payment of dividends to stockholders of First Federal
Bankshares.
Certain restrictions generally imposed on Delaware corporations may
also have an impact on First Federal Bankshares' ability to pay dividends.
Delaware law generally provides that First Federal Bankshares is limited to
paying dividends in an amount equal to the excess of its net assets (total
assets minus total liabilities) over its statutory capital or, if no such excess
exists, equal to its net profits for the current year and/or the immediately
preceding fiscal year.
BOARD OF DIRECTORS. First Federal's federal stock charter and bylaws
and First Federal Bankshares' certificate of incorporation and bylaws each
require the Board of Directors of First Federal and First Federal Bankshares to
be divided into three classes as nearly equal in number as possible and that the
members of each class shall be elected for a term of three years and until their
successors are elected and qualified, with one class being elected annually.
Under First Federal's bylaws, any vacancies in the Board of Directors
of First Federal may be filled by the affirmative vote of a majority of the
remaining directors although less than a quorum of the Board of Directors.
Persons elected by the directors of First Federal to fill vacancies may only
serve until the next annual meeting of stockholders. Under First Federal
Bankshares' certificate of incorporation, any vacancy occurring in the Board of
Directors of First Federal Bankshares, including any vacancy created by reason
of an increase in the number of directors, may be filled by the remaining
directors, and any director so chosen shall hold office for the remainder of the
term to which the director has been elected and until his or her successor is
elected and qualified.
Under First Federal's bylaws, any director may be removed for cause by
the holders of a majority of the outstanding voting shares. First Federal
Bankshares certificate of incorporation provides that any director may be
removed for cause by the holders of at least 80% of the outstanding voting
shares of First Federal Bankshares.
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LIMITATIONS ON LIABILITY. First Federal Bankshares' certificate of
incorporation provides that the directors of First Federal Bankshares shall not
be personally liable for monetary damages to First Federal Bankshares for
certain actions as directors, except for liabilities that involve intentional
misconduct or a knowing violation of law by the director, the authorization or
illegal distributions or receipt of an improper personal benefit from their
positions as directors. This provision might, in certain instances, discourage
or deter shareholders or management from bringing a lawsuit against directors
for a breach of their duties even though such an action, if successful, might
have benefitted First Federal Bankshares.
Currently, federal law does not permit federally-chartered savings
institutions such as First Federal to limit the personal liability of directors
in the manner provided by the Delaware law and the laws of many other states.
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS. First
Federal's federal stock charter and bylaws do not contain any provision relating
to indemnification of directors and officers of First Federal. Under current
Office of Thrift Supervision regulations, however, First Federal shall indemnify
its directors, officers and employees for any costs incurred in connection with
any litigation involving any such person's activities as a director, officer or
employee if such person obtains a final judgment on the merits in his or her
favor. In addition, indemnification is permitted in the case of a settlement, a
final judgment against such person or final judgment other than on the merits,
if a majority of disinterested directors determine that such person was acting
in good faith within the scope of his or her employment as he or she could
reasonably have perceived it under the circumstances and for a purpose he or she
could reasonably have believed under the circumstances was in the best interest
of First Federal or its stockholders. First Federal also is permitted to pay
ongoing expenses incurred by a director, officer or employee if a majority of
disinterested directors concludes that such person may ultimately be entitled to
indemnification. Before making any indemnification payment, First Federal is
required to notify the Office of Thrift Supervision of its intention and such
payment cannot be made if the Office of Thrift Supervision objects thereto.
The officers, directors, agents and employees of First Federal
Bankshares are indemnified with respect to certain actions pursuant to First
Federal Bankshares' certificate of incorporation, which complies with Delaware
law regarding indemnification. Delaware law allows First Federal Bankshares to
indemnify the aforementioned persons for expenses, settlements, judgments and
fines in suits in which such person has been made a party by reason of the fact
that he or she is or was an agent of First Federal Bankshares. No such
indemnification may be given if the acts or omissions of the person are adjudged
to be in violation of law, if such person is liable to the corporation for an
unlawful distribution, or if such person personally received a benefit to which
he or she was not entitled.
SPECIAL MEETINGS OF STOCKHOLDERS. First Federal Bankshares'
certificate of incorporation provides that special meetings of the
stockholders of First Federal Bankshares may be called only by the board of
directors. First Federal's bylaws provide that special meetings of First
Federal's stockholders may be called by the Chairman, President, a majority
of the Board of Directors or the holders of not less one tenth than of the
outstanding capital stock of First Federal entitled to vote at the meeting.
STOCKHOLDER NOMINATIONS AND PROPOSALS. First Federal's bylaws generally
provide that stockholders may submit nominations for election as director at an
annual meeting of stockholders and any new business to be taken up at such a
meeting by filing such in writing with First Federal at least five days before
the date of any such meeting.
First Federal Bankshares' bylaws generally provide that any stockholder
desiring to make a nomination for the election of directors or a proposal for
new business at a meeting of stockholders must submit written notice to First
Federal Bankshares at least 90 days in advance of the meeting, together with
certain information relating to the nomination or new business. However, if less
than 100 days notice or prior disclosure of the date of the
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meeting is given, stockholders must submit such written notice no later than the
tenth day following the date on which notice of the meeting is mailed to
stockholders or such public disclosure was made. Failure to comply with these
advance notice requirements will preclude such nominations or new business from
being considered at the meeting. Management believes that it is in the best
interests of First Federal Bankshares and its stockholders to provide sufficient
time to enable management to disclose to stockholders information about a
dissident slate of nominations for directors. This advance notice requirement
may also give management time to solicit its own proxies in an attempt to defeat
any dissident slate of nominations, should management determine that doing so is
in the best interest of stockholders generally. Similarly, adequate advance
notice of stockholder proposals will give management time to study such
proposals and to determine whether to recommend to the stockholders that such
proposals be adopted. In certain instances, such provisions could make it more
difficult to oppose management's nominees or proposals, even if stockholders
believe such nominees or proposals are in their best interests.
STOCKHOLDER ACTION WITHOUT A MEETING. The bylaws of First Federal
provide that any action to be taken or which may be taken at any annual or
special meeting of stockholders may be taken if a consent in writing, setting
forth the actions so taken, is given by the holders of all outstanding shares
entitled to vote. First Federal Bankshares' certificate of incorporation
specifically denies the authority of stockholders to act without a meeting.
STOCKHOLDER'S RIGHT TO EXAMINE BOOKS AND RECORDS. A federal regulation
which is applicable to First Federal provides that stockholders may inspect and
copy specified books and records of a federally-chartered savings institution
after proper written notice for a proper purpose. Delaware law similarly
provides that a stockholder may inspect books and records upon written demand
stating the purpose of the inspection, if such purpose is reasonably related to
such person's interest as a stockholder.
LIMITATIONS ON ACQUISITIONS OF VOTING STOCK AND VOTING RIGHTS. First
Federal Bankshares' certificate of incorporation provides that in no event shall
any record owner of any outstanding common stock which is beneficially owned,
directly or indirectly, by a person who beneficially owns in excess of 10% of
the then outstanding shares of common stock be entitled or permitted to any vote
in respect of the shares held in excess of such limit.
First Federal's proposed stock charter provides that for a period of
five years from the effective date of the conversion no person, other than First
Federal Bankshares, shall directly or indirectly offer to acquire or acquire the
beneficial ownership of more than 10 percent of the common stock of First
Federal. This limitation shall not apply to the purchase of shares by
underwriters in connection with a public offering, or the purchase of shares by
a tax-qualified employee stock benefit plan of First Federal. In the event
shares are acquired in violation of this provision, all shares beneficially
owned by any person in excess of 10% shall be considered "excess shares" and
shall not be counted as shares entitled to vote and shall not be voted by any
person or counted as voting shares in connection with any matters submitted to
the stockholders for a vote.
MERGERS, CONSOLIDATIONS AND SALES OF ASSETS. A federal regulation
requires the approval of two-thirds of the Board of Directors of First Federal
and the holders of two-thirds of the outstanding stock of First Federal entitled
to vote thereon for mergers, consolidations and sales of all or substantially
all of First Federal's assets. Such regulation permits First Federal to merge
with another corporation without obtaining the approval of its stockholders if:
(1) it does not involve an interim savings institution;
(2) First Federal's federal stock charter is not changed;
(3) each share of First Federal's stock outstanding immediately prior
to the effective date of the transaction is to be an identical outstanding share
or a treasury share of First Federal after such effective date; and
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(4) either:
(a) no shares of voting stock of First Federal and no
securities convertible into such stock are to be issued or delivered under the
plan of combination or
(b) the authorized unissued shares or the treasury shares of
voting stock of First Federal to be issued or delivered under the plan of
combination, plus those initially issuable upon conversion of any securities to
be issued or delivered under such plan, do not exceed 15% of the total shares of
voting stock of First Federal outstanding immediately prior to the effective
date of the transaction.
First Federal Bankshares' certificate of incorporation requires the
approval of the holders of at least 80% of First Federal Bankshares's
outstanding shares of voting stock to approve certain "Business Combinations"
involving an "Interested Stockholder" except in cases where the proposed
transaction has been approved in advance by two-thirds 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 Interested Stockholder
became an Interested Stockholder. 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 or an affiliate of such person or entity. This
provision of the certificate of incorporation applies to any "Business
Combination," which is defined to include, among other things:
(1) any merger or consolidation of First Federal Bankshares with or
into any Interested Stockholder;
(2) any sale, lease, exchange, mortgage, transfer, or other disposition
of 25% or more of the assets of First Federal Bankshares and its subsidiaries to
an Interested Stockholder;
(3) the issuance or transfer of any securities of First Federal
Bankshares or a subsidiary of First Federal Bankshares to an Interested
Stockholder having a value exceeding 25% of the combined fair market value of
the outstanding sections of First Federal Bankshares; or
(4) any reclassification of common stock of First Federal Bankshares or
any recapitalization involving the common stock of First Federal Bankshares.
Under Delaware law, absent this provision, business combinations,
including mergers, consolidations and sales of substantially all of the assets
of a corporation must, subject to certain exceptions, be approved by the vote of
the holders of a majority of the outstanding shares of common stock of First
Federal Bankshares and any other affected class of stock. One exception under
Delaware law to the majority approval requirement applies to stockholders owning
15% or more of the common stock of a corporation for a period of less than three
years. Such 15% stockholder, in order to obtain approval of a business
combination, must obtain the approval of two-thirds of the outstanding stock,
excluding the stock owned by such 15% stockholder, or satisfy other requirements
under Delaware law relating to board of director approval of his or her
acquisition of the shares of First Federal Bankshares. The increased stockholder
vote required to approve a business combination may have the effect of
foreclosing mergers and other business combinations which a majority of
stockholders deem desirable and placing the power to prevent such a merger or
combination in the hands of a minority of stockholders.
First Federal Bankshares' certificate of incorporation requires the
First Federal Bankshares' Board of Directors to consider certain factors in
addition to the amount of consideration to be paid when evaluating certain
business combinations or a tender or exchange offer. These additional factors
include the social and economic effects of the transaction on its customers and
employees and the communities served by First Federal Bankshares.
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DISSENTERS' RIGHTS OF APPRAISAL. Office of Thrift Supervision
regulations generally provide that a stockholder of a federally-chartered
savings institution that engages in a merger, consolidation or sale of all or
substantially all of its assets shall have the right to demand from such
institution payment of the fair or appraised value of his or her stock in the
institution, subject to specified procedural requirements. This regulation also
provides, however, that the stockholders of a federally-chartered savings
institution with stock which is listed on a national securities exchange or
quoted on The Nasdaq Stock Market are not entitled to dissenters' rights in
connection with a merger involving such savings institution if the stockholder
is required to accept only "qualified consideration" for his or her stock, which
is defined to include cash, shares of stock of any institution or corporation
which at the effective date of the merger will be listed on a national
securities exchange or quoted on the Nasdaq National Market or any combination
of such shares of stock and cash.
Under Delaware law, shareholders of First Federal Bankshares generally
will not have dissenter's appraisal rights in connection with a plan of merger
or consolidation to which First Federal Bankshares is a party because the common
stock is expected to be listed on The Nasdaq National Market System.
AMENDMENT OF GOVERNING INSTRUMENTS. No amendment of First Federal's
federal stock charter may be made unless it is first proposed by the Board of
Directors of First Federal, then preliminarily approved by the Office of
Thrift Supervision, and thereafter approved by the holders of a majority of
the total votes eligible to be cast at a legal meeting. First Federal
Bankshares' certificate of incorporation may be amended by the vote of the
holders of a majority of the outstanding shares of First Federal Bankshares
common stock, except that the provisions of the certificate of incorporation
governing the calling of meeting of stockholders, stockholders' nominations
and proposals, the limitations on acquisition of stock, the number and
staggered terms of directors, removal of directors, approval of certain
business combinations and the manner of amending the certificate of
incorporation and bylaws, each may not be repealed, altered, amended or
rescinded except by the vote of the holders of at least 80% of the
outstanding shares of First Federal Bankshares. This provision is intended to
prevent the holders of a lesser percentage of the outstanding stock of First
Federal Bankshares from circumventing any of the foregoing provisions by
amending the certificate of incorporation to delete or modify one of such
provisions.
The bylaws of First Federal may be amended by a majority vote of the
full Board of Directors of First Federal or by a majority vote of the votes cast
by the stockholders of First Federal at any legal meeting. First Federal
Bankshares' bylaws may only be amended by a two-thirds vote of the Board of
Directors of First Federal Bankshares or by the holders of at least 80% of the
outstanding stock of First Federal Bankshares.
PURPOSE AND TAKEOVER DEFENSIVE EFFECTS OF FIRST FEDERAL BANKSHARES'
CERTIFICATE OF INCORPORATION AND BYLAWS. The Board of Directors of First Federal
believes that the provisions described above are prudent and will reduce First
Federal Bankshares vulnerability to takeover attempts and certain other
transactions that have not been negotiated with and approved by its Board of
Directors. These provisions will also assist First Federal in the orderly
deployment of the conversion proceeds into productive assets during the initial
period after the conversion. The Board of Directors believes these provisions
are in the best interest of First Federal and First Federal Bankshares and its
stockholders. In the judgment of the Board of Directors, First Federal
Bankshares' Board will be in the best position to determine the true value of
First Federal Bankshares and to negotiate more effectively for what may be in
the best interests of its stockholders. Accordingly, the Board of Directors
believes that it is in the best interest of First Federal Bankshares and its
stockholders to encourage potential acquirors to negotiate directly with the
Board of Directors of First Federal Bankshares and that these provisions will
encourage such negotiations and discourage hostile takeover attempts. It is also
the view of the Board of Directors that these provisions should not discourage
persons from proposing a merger or other transaction at a price reflective of
the true value of First Federal Bankshares and that is in the best interest of
all stockholders.
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Attempts to acquire control of financial institutions and their holding
companies have recently become increasingly common. Takeover attempts that have
not been negotiated with and approved by the Board of Directors present to
stockholders the risk of a takeover on terms that may be less favorable than
might otherwise be available. A transaction that is negotiated and approved by
the Board of Directors, on the other hand, can be carefully planned and
undertaken at an opportune time in order to obtain maximum value of First
Federal Bankshares for its stockholders, with due consideration given to matters
such as the management and business of the acquiring corporation and maximum
strategic development of First Federal Bankshares' assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Although a tender offer
or other takeover attempt may be made at a price substantially above the current
market prices, such offers are sometimes made for less than all of the
outstanding shares of a target company. As a result, stockholders may be
presented with the alternative of partially liquidating their investment at a
time that may be disadvantageous, or retaining their investment in an enterprise
that is under different management and whose objectives may not be similar to
those of the remaining stockholders. The concentration of control, which could
result from a tender offer or other takeover attempt, could also deprive First
Federal Bankshares' remaining stockholders of benefits of certain protective
provisions of the Securities Exchange Act of 1934, if the number of beneficial
owners became less than 300, thereby allowing for deregistration under the
Securities Exchange Act of 1934.
Despite the belief of First Federal and First Federal Bankshares as to
the benefits to stockholders of these provisions of First Federal Bankshares'
certificate of incorporation and bylaws, these provisions may also have the
effect of discouraging a future takeover attempt that would not be approved by
First Federal Bankshares' Board, but pursuant to which stockholders may receive
a substantial premium for their shares over then current market prices. As a
result, stockholders who might desire to participate in such a transaction may
not have any opportunity to do so. Such provisions will also render the removal
of First Federal Bankshares' Board of Directors and of management more
difficult. The Board of Directors of First Federal and First Federal Bankshares,
however, have concluded that the potential benefits outweigh the possible
disadvantages.
Following the conversion, pursuant to applicable law and, if required,
following the approval by stockholders, First Federal Bankshares may adopt
additional anti-takeover charter provisions or other devices regarding the
acquisition of its equity securities that would be permitted for a Delaware
business corporation.
The cumulative effect of the restriction on acquisition of First
Federal Bankshares contained in the certificate of incorporation and bylaws of
First Federal Bankshares and in federal and Delaware law may be to discourage
potential takeover attempts and perpetuate incumbent management, even though
certain stockholders of First Federal Bankshares may deem a potential
acquisition to be in their best interests, or deem existing management not to be
acting in their best interests.
ACQUISITION OF MID-IOWA FINANCIAL
On August 17, 1998, the Mutual Holding Company and First Federal
entered into an Agreement and Plan of Reorganization (the "Merger Agreement")
with Mid-Iowa Financial and Mid-Iowa Savings. Under the Merger Agreement, First
Federal will acquire Mid-Iowa Financial and Mid-Iowa Savings. The Merger
Agreement provides that each share of Mid-Iowa Financial's common stock, par
value $.01 per share, outstanding as of the effective time of the acquisition,
other than shares held as treasury stock and any shares as to which dissenters'
rights may be exercised under applicable law, will be converted into the right
to receive $15.00 in cash without interest (the "Merger Consideration"). In the
event the transaction is not completed on or prior to April 15, 1999, First
Federal will be required to increase the Merger Consideration by $3,700 per day
from April 16, 1999 to the day immediately preceding the completion of the
acquisition. Based on the total number of shares of Mid-Iowa Financial common
stock outstanding as of September 30, 1998 and the consideration to be paid in
respect of options on Mid-Iowa Financial's common stock outstanding, First
Federal estimates that total cash
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consideration to be paid to Mid-Iowa Financial's shareholders and option holders
in the acquisition will be approximately $27.8 million, or $29.0 million
assuming full exercise of stock options prior to the closing of the acquisition.
The acquisition is subject to:
(1) approval of the Merger Agreement by the requisite number of
stockholders of Mid-Iowa Financial;
(2) the receipt of all necessary consents, waivers, clearances,
approvals and authorizations from regulators or governmental bodies, including
the Office of Thrift Supervision;
(3) the consummation of the conversion and the offering; and
(4) the satisfaction or waiver of certain other conditions.
The Merger Agreement will be presented to Mid-Iowa Financial shareholders for
their approval at the annual meeting of Mid-Iowa Financial's stockholders to be
held on March 22, 1999. In addition, First Federal has applied for all necessary
regulatory approvals in order to consummate the acquisition. The conversion and
the acquisition are interdependent transactions and neither transaction will
occur unless both of them do. Thus, in the event the conditions to the
acquisition are not satisfied or waived, the conversion will not be consummated,
the offering will be terminated and the funds received in connection therewith
will be returned to subscribers with interest. The consummation of the
acquisition is expected to occur simultaneously with, or immediately after, the
consummation of the conversion.
The acquisition will enable First Federal Bankshares to expand its
banking services in certain communities located in the Des Moines area where it
currently lacks a presence. Completion of the acquisition will increase First
Federal's deposit base, its loan portfolio and the number of full service
banking centers.
Mid-Iowa Financial is a Delaware corporation organized in 1992 by
Mid-Iowa Savings for the purpose of becoming a savings and loan holding company.
Mid-Iowa Savings is principally engaged in the business of attracting retail
deposits from the general public and using such deposits, together with funds
generated from operations and borrowings, 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. Mid-Iowa Financial also invests in U.S. Government
and agency obligations and other permissible investments and occasionally
purchases loan participations.
Mid-Iowa Financial'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. At September 30, 1998,
Mid-Iowa Financial had assets of $147.5 million, deposits of $96.4 million and
stockholders' equity of $13.8 million.
Mid-Iowa Savings' operations are regulated by the Office of Thrift
Supervision. Mid-Iowa Savings is a member of the Federal Home Loan Bank System
and a stockholder in the Federal Home Loan Bank of Des Moines. Mid-Iowa Savings
is also a member of the Savings Association Insurance Fund and its deposit
accounts are insured up to applicable limits by the Federal Deposit Insurance
Corporation.
The executive offices of Mid-Iowa Financial and Mid-Iowa Savings are
located at 123 West Second Street North, Newton, Iowa. Their telephone number is
(515) 792-6236.
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For further information about Mid-Iowa Financial and Mid-Iowa Savings,
see "Excerpts from Mid-Iowa Financial's Annual Report on Form 10-KSB for the
Year Ended September 30, 1998" attached to this prospectus.
CLOSING
The closing of the acquisition will take place on such date and at such
time as First Federal and Mid-Iowa Financial shall agree, after the expiration
of all applicable waiting periods in connection with the approval of
governmental authorities and after all other conditions to the consummation of
the Merger Agreement are satisfied or waived. First Federal expects such closing
will occur simultaneously with, or immediately after, the closing for the
conversion. The effective time of the acquisition will be the date on which
articles of combination, in the form prescribed by the OTS and executed in
accordance with all appropriate legal requirements, are filed as required by
law.
CONDITIONS TO THE ACQUISITION
Consummation of the acquisition is subject to various conditions. While
it is anticipated that all such conditions will be satisfied, there can be no
assurance that all of such conditions will indeed be satisfied or waived.
CONDITIONS TO EACH PARTY'S OBLIGATIONS. The respective obligations of
each party to effect the acquisition are subject to the fulfillment at or prior
to the effective time of the following conditions:
(1) the Merger Agreement shall have been approved by the requisite vote
of the holders of Mid-Iowa Financial common stock in accordance with applicable
law;
(2) all necessary regulatory or governmental approvals, consents or
waivers required to consummate the acquisition shall have been obtained and
shall remain in full force and effect and all statutory waiting periods in
respect thereof shall have expired;
(3) none of the regulatory or governmental approvals, consents or
waivers required to consummate the acquisition shall contain any condition which
would have a material adverse effect on First Federal or reduce the economic or
business benefits of the acquisition to First Federal in so significant a manner
that First Federal, in its reasonable judgement, would not have entered into the
Merger Agreement;
(4) no suit, action or proceeding shall be pending or overtly
threatened before any court or other governmental agency by the federal or any
state government in which it is sought to restrain or prohibit the consummation
of the acquisition and no temporary restraining order, preliminary or permanent
injunction or other order issued by any court of competent jurisdiction or other
legal restraint or prohibition preventing the consummation of the acquisition
shall be in effect; and
(5) prior to or on the date of the closing, each party to the
acquisition shall have in all material respects performed all material
obligations and complied with all material covenants required to be performed by
it by the closing.
CONDITIONS TO THE OBLIGATIONS OF FIRST FEDERAL. The obligations of
First Federal to effect the acquisition are further subject to the satisfaction
at or prior to the effective time of the following conditions, any one or more
of which may be waived by First Federal:
(1) the representations and warranties of Mid-Iowa Financial contained
in the Merger Agreement shall be true and correct in all material respects as of
the date of the Merger Agreement and any date subsequent, until and including
the closing date, except as otherwise permitted by the Merger Agreement;
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(2) the absence of any material adverse change in the business or
operations of Mid-Iowa Financial from September 30, 1997, to the closing date of
the acquisition, except for general changes in generally accepted accounting
principles; changes in economic, financial, or market conditions; changes in
market interest rates; payments due under any employment agreements or benefit
plans; and the transactions contemplated by the Merger Agreement, costs and
expenses relating to and contemplated by the Merger Agreement;
(3) each of the obligations of Mid-Iowa Financial required to be
performed by it at or prior to the closing shall have been duly performed and
complied with in all material respects;
(4) no proceeding shall be pending or threatened, and no liability or
claim shall have been asserted against the Mid-Iowa Financial that would
reasonably be expected to have a material adverse effect;
(5) First Federal shall have received the consent or approval of each
person or entity whose consent or approval shall be required in order to permit
consummation of the acquisition under any agreement or instrument to which
Mid-Iowa Financial is a party or to which its property is subject, except those
for which failure to obtain such consents and approvals would not have a
material adverse effect on First Federal;
(6) the Board of Directors of Mid-Iowa Financial shall not have
amended, modified, rescinded or repealed the resolutions adopted by such Board
of Directors with respect to the Merger Agreement or adopted any other
inconsistent resolutions;
(7) immediately prior to the closing, Mid-Iowa Financial's total
stockholders' equity account determined in accordance with generally accepted
accounting principles on a basis consistent with Mid-Iowa Financial's audited
financial statements, shall not be less than $13.5 million, as reasonably
determined by First Federal's independent public accountant, in consultation
with Mid-Iowa Financial's independent public accountant. For purposes of
calculating total stockholders' equity, Mid-Iowa Financial's expense associated
with certain severance payments will not be counted;
(8) the conversion and the offering of shares of First Federal
Bankshares common stock related thereto shall have been completed by First
Federal Bankshares; and
(9) First Federal shall have received various certificates of Mid-Iowa
Financial's officers and opinions of counsel and other documents.
CONDITIONS TO THE OBLIGATIONS OF MID-IOWA FINANCIAL. The obligations of
Mid-Iowa Financial to effect the acquisition are further subject to the
satisfaction at or prior to the effective time of the following conditions, any
one or more of which may be waived by Mid-Iowa Financial:
(1) the representations and warranties of First Federal contained in
the Merger Agreement shall be true and correct in all material respects as of
the date of the Merger Agreement and as of any date subsequent, until and
including the closing date, except as otherwise contemplated or permitted by the
Merger Agreement;
(2) each of the obligations of First Federal required to be performed
by it at or prior to the closing shall have been duly performed and complied
with in all material respects;
(3) Mid-Iowa Financial shall have received a fairness opinion from its
financial advisor;
(4) all action required to be taken by, or on the part of First Federal
and its holding company to authorize the execution, delivery and performance of
the Merger Agreement and the consummation of the transactions contemplated by
the Merger Agreement shall have been duly and validly taken by them; and
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(5) Mid-Iowa Financial shall have received various certificates of
First Federal's officers, opinions of counsel and other documents.
REPRESENTATIONS AND WARRANTIES AND COVENANTS OF FIRST FEDERAL
First Federal has made certain representations and warranties to
Mid-Iowa Financial and Mid-Iowa Savings with respect to, among other things, its
organization and qualification, authority with respect to the Merger Agreement,
regulatory approvals, the absence of certain material adverse changes in the
financial condition, results of operations, business or capitalization of First
Federal, First Federal's possession of sufficient funds to pay the Merger
Consideration; and the truth and accuracy of its representations and warranties
and the information and documents furnished or to be furnished to Mid-Iowa
Financial by First Federal in connection with the Merger Agreement.
First Federal has also agreed that it will:
(1) from the date of the Merger Agreement until the closing of the
acquisition, furnish Mid-Iowa Savings with copies of all of First Federal's
publicly available reports filed with the Office of Thrift Supervision, or
provided to the stockholders of First Federal;
(2) give Mid-Iowa Financial prompt notice in the event it becomes aware
of the impending or threatened occurrence of any event or condition which would
cause or constitute a material breach of the Merger Agreement;
(3) use its best efforts promptly to prepare and file appropriate
regulatory applications seeking approval for the acquisition of Mid-Iowa
Financial;
(4) promptly supplement or amend its disclosure schedule with respect
to any matter arising after the date of the Merger Agreement that, if existing
or occurring at the date of the Merger Agreement, would have been required to be
set forth or described in such disclosure schedule; and
(5) pay the expenses of Mid-Iowa Financial under the circumstances
enumerated in the Merger Agreement. See "--Expenses" and "--Termination Fee".
Further, First Federal has agreed that except as specifically
contemplated by the Merger Agreement, it will not, and will not agree to,
without the prior written consent of Mid-Iowa Financial, take action which would
or is reasonably likely to:
(1) adversely affect the ability of either First Federal or Mid-Iowa
Financial to obtain any necessary approvals of governmental authorities required
for the transactions contemplated by the Merger Agreement;
(2) adversely affect First Federal's ability to perform its covenants
and agreements under the Merger Agreement; or
(3) result in any of the conditions to the acquisition not being
satisfied.
REPRESENTATIONS AND WARRANTIES OF MID-IOWA FINANCIAL AND MID-IOWA SAVINGS
Mid-Iowa Financial and Mid-Iowa Savings have made certain
representations and warranties to First Federal with respect to, among other
things, their organization and qualification, capitalization, authority with
respect to the Merger Agreement, reports and financial statements, the absence
of certain changes or events, taxes, properties and assets, environmental
hazards, litigation, pending proceedings and compliance with laws,
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regulatory compliance, employee benefit plans, insurance policies, material
agreements, breaches of agreements, allowances for loan losses and real estate
owned, agreements with insiders, affiliated persons and affiliates, full
disclosure and absence of misrepresentations and information with respect to
Mid-Iowa Financial and Mid-Iowa Savings.
CONDUCT OF BUSINESS PENDING THE MERGER
Under the Merger Agreement, Mid-Iowa Financial and Mid-Iowa Savings
have agreed that unless the prior written consent of First Federal is obtained,
which First Federal may not unreasonably withhold, and except as otherwise
contemplated by the Merger Agreement, Mid-Iowa Financial and Mid-Iowa Savings
will:
(1) operate their business in the ordinary course in accordance with
past business practices;
(2) use their best efforts to (a) preserve intact their business
organization and assets, maintain their rights and franchises, retain the
services of their officers and key employees and (b) maintain their
relationships with customers;
(3) maintain their corporate existence in good standing and file all
reports required with regulatory authorities;
(4) use their best efforts to maintain and keep their properties in
good repair and condition, except for ordinary wear and tear;
(5) use their best efforts to keep in full force and effect insurance
and bonds comparable in amount and scope of coverage to that currently
maintained by them and, in the event that Mid-Iowa Savings is unable to keep
such insurance and bonds in full force and effect, to provide prompt notice of
such failure to First Federal;
(6) perform all obligations required to be performed by them under all
material contracts, leases, and documents relating to or materially affecting
their assets, properties, and business;
(7) use their best efforts to comply with and perform in all material
respects all obligations and duties imposed upon them by all applicable laws and
regulations; and
(8) as soon as reasonably practicable, furnish First Federal copies of
all reports and documents provided to Mid-Iowa Financial stockholders or filed
with the Office of Thrift Supervision subsequent to the date of the Merger
Agreement.
The Merger Agreement also provides that except as specifically
contemplated thereby, from the date of the Merger Agreement until the effective
time, neither Mid-Iowa Financial nor Mid-Iowa Savings shall, without the prior
written consent of First Federal, which may not be unreasonably withheld, do any
of the following:
(1) incur any material liabilities or material obligations, including
any obligation for borrowed money, or enter into or extend any material
agreement or lease, except in the ordinary course of business consistent with
past business practices or in connection with the transactions contemplated and
permitted by the Merger Agreement;
(2) (a) grant any bonus, stock award or increase in compensation to its
directors, officers and employees, (b) adopt or amend any benefit plan, except
as required by law, or any employment, severance or similar agreements or
arrangements with any directors or officers, or (c) make any additional
contributions to any Mid-Iowa Financial benefit plans;
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(3) declare or pay any dividend on its outstanding shares of capital
stock, except for regular, quarterly cash dividends, paid on normal dividend
payment dates, in an amount no greater than the dividend rate as of the date of
the Merger Agreement;
(4) (a) redeem, purchase or otherwise acquire any shares of its capital
stock or any securities or obligations convertible into or exchangeable for any
shares of its capital stock; (b) merge with or into any other corporation,
savings institution or bank, or effect any reorganization or recapitalization;
(c) purchase or otherwise acquire any assets, or shares of any class of stock,
of any corporation, savings institution, bank or other business; (d) liquidate,
sell, dispose of, or encumber any assets or acquire any assets, other than in
the ordinary course of its business consistent with past practices; or (e)
split, combine or reclassify any of its capital stock or issue or authorize or
propose the issuance of any other securities;
(5) except pursuant to the exercise of outstanding stock options, issue
or sell any shares of its capital stock of any class;
(6) initiate, solicit or encourage, or take any other action to
facilitate, any inquiries or the making of any proposal which constitutes a
superior proposal, as defined in the Merger Agreement, take any action in
furtherance of such inquiries or to obtain a superior proposal, or negotiate
with any person in, or agree to or endorse any superior proposal, or authorize
or permit any of its officers, directors or employees or any investment banker,
financial advisor, accountant or other representative retained by it to take any
such action, except with respect to negotiations regarding, and the endorsement
of, a superior proposal, as legally required by the fiduciary duties of the
Mid-Iowa Financial Board of Directors under applicable law and as advised by
counsel to the Mid-Iowa Financial Board of Directors;
(7) propose or adopt any amendments to its charter or by-laws, except
such amendments as may be required to consummate the transactions contemplated
by the Merger Agreement;
(8) enter into an agreement in principle with respect to any
acquisition of a material amount of assets or securities or any release or
relinquishment of any material contract rights not in the ordinary course of
business;
(9) except in its fiduciary capacity, purchase any shares of capital
stock of First Federal;
(10) subject to the provisions of paragraph (6) above regarding a
superior proposal, willfully take action which would or is reasonably likely to:
(a) adversely affect the ability of either of First Federal, Mid-Iowa Financial
or Mid-Iowa Savings to obtain any necessary approvals of governmental
authorities required for the transactions contemplated by the Merger Agreement;
(b) adversely affect Mid-Iowa Savings' or Mid-Iowa Financial's ability to
perform its covenants and agreements under the Merger Agreement; or (c) result
in any of the conditions to the acquisition not being satisfied;
(11) change in any material respect the lending, investment, deposit,
asset and liability management and other material policies concerning the
business of Mid-Iowa Savings or Mid-Iowa Financial, unless required by law or
regulation, or with respect to lending or depository activities;
(12) file any applications or make any contract with respect to
branching by Mid-Iowa Savings;
(13) form any new subsidiary or cause or permit a material change in
the activities presently conducted by any subsidiary or make additional material
investments in subsidiaries or enter into or invest in any partnership, joint
venture or other business enterprise;
(14) purchase any derivative securities;
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(15) purchase any equity securities other than Federal Home Loan Bank
Stock;
(16) discharge or satisfy any lien or encumbrance or pay any material
obligation or liability other than at scheduled maturity or in the ordinary
course of business;
(17) sell or otherwise dispose of any loan, mortgage-backed security or
investment security except in the ordinary course of business consistent with
past practices and policies;
(18) modify or restructure the terms of any loan except in the ordinary
course of business consistent with prudent banking practices and policies;
(19) make any capital expenditures in excess of specified amounts other
than expenditures necessary to maintain existing assets in good repair;
(20) change its method of accounting except as required by changes in
laws or regulations or generally accepted accounting principles concurred in by
its independent certified public accountant and by First Federal's independent
certified public accountants;
(21) acquire in any manner whatsoever, other than to realize upon
collateral for a defaulted loan, any business or entity;
(22) make, renew, increase, extend or purchase any loan secured by
commercial real estate or multifamily real estate, any land acquisition or
development loan, any commercial business loan, or any residential loan in an
amount in excess of specified amounts;
(23) fail to keep in full force and effect its insurance and bonds as
now carried;
(24) fail to notify First Federal promptly of its receipt of any notice
from any regulatory authority advising that it is requiring or requesting any
undertaking, directive, or extraordinary supervisory letter; and
(25) agree in writing or otherwise to do any of the foregoing.
For purposes of the Merger Agreement, "superior proposal" is defined as
a bona fide proposal to acquire the entire equity interest in Mid-Iowa Financial
or substantially all of the assets of Mid-Iowa Financial, which is expressly
conditioned upon the termination of the Merger Agreement and is made by a third
party on terms which a majority of the Board of Directors of Mid-Iowa Financial
determines pursuant to the exercise of its fiduciary duty after consultation
with legal counsel, to be more favorable from a financial point of view to the
holders of Mid-Iowa Financial common stock than the acquisition and for which
financing is either then committed or not a condition precedent to the
consummation thereof.
Mid-Iowa Financial and Mid-Iowa Savings have also agreed:
(1) to use their best efforts to keep First Federal fully informed
concerning all developments of which they become aware that may have a material
effect upon the business of Mid-Iowa Financial;
(2) in the event they become aware of the impending or threatened
occurrence of any event or condition which would cause or constitute a material
breach of any of their representations or agreements contained or referred to in
the Merger Agreement, give prompt written notice thereof to First Federal and
use their best efforts to prevent or promptly remedy the same;
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(3) to promptly supplement or amend the Mid-Iowa Financial disclosure
schedule with respect to any matter arising after the date of the Merger
Agreement that, if existing or occurring at the date of the Merger Agreement,
would have been required to be set forth or described in such disclosure
schedule;
(4) use their best efforts to assist First Federal in obtaining the
consents and approvals necessary to complete the acquisition; and
(5) to pay the expenses of First Federal under the circumstances
enumerated in the Merger Agreement. See "--Expenses" and "--Termination Fee."
NO SOLICITATION OF ALTERNATIVE TRANSACTIONS
By the terms of the Merger Agreement, Mid-Iowa Financial and Mid-Iowa
Savings may not initiate, solicit or encourage, or take any other action to
facilitate, any inquiries or the making of any proposal which constitutes a
superior proposal, take any action in furtherance of such inquiries or to obtain
a superior proposal, or negotiate with any person in, or agree to or endorse any
superior proposal, or authorize or permit any of its officers, directors or
employees or any investment banker, financial advisor, accountant or other
representative retained by it to take any such action, except with respect to
negotiations regarding, and the endorsement of a superior proposal, as legally
required by the fiduciary duties of Mid-Iowa Financial's Board of Directors
under applicable law and as advised by counsel to the Mid-Iowa Financial's Board
of Directors, and Mid-Iowa Financial shall promptly notify First Federal orally
and in writing of all of the relevant details relating to all inquiries and
proposals which it may receive relating to any of such matters.
TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement will terminate on August 31, 1999 if the
acquisition has not been consummated on or before that date, and may be
terminated at any time prior to the earlier of that date or the effective time:
(1) by mutual written consent of the Board of Directors of First
Federal and the Board of Directors of Mid-Iowa Financial;
(2) by written notice from First Federal to Mid-Iowa Financial if:
(a) any condition to First Federal's obligations under the
Merger Agreement shall have become impossible to substantially satisfy at any
time or has not been substantially satisfied or waived in writing;
(b) any condition to all parties' obligations under the Merger
Agreement shall have become impossible to substantially satisfy at any time or
has not been substantially satisfied or waived in writing, provided, however,
First Federal shall not have the right to terminate the Merger Agreement on this
basis if any such condition was not met due to the failure of First Federal to
perform or observe the covenants and agreements set forth in the Merger
Agreement;
(c) any warranty or representation made by Mid-Iowa Financial
shall be discovered to be or to have become untrue or incorrect, in any material
respect, where any such breach has not been cured within 30 days following
receipt by Mid-Iowa Financial of notice of such discovery;
(d) Mid-Iowa Financial shall have breached one or more
provisions of the Merger Agreement, in any material respect, considering all
such breaches in the aggregate, where such breach has not been cured within 30
days following receipt by Mid-Iowa Financial of notice of such breach;
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(e) the Board of Directors of First Federal shall have
determined, in its sole discretion, exercised in good faith, that the conversion
has become inadvisable or impractical by reason of (A) the issuance of any
order, decree or letter of a regulatory authority containing conditions or
requirements reasonably deemed objectionable to First Federal or (B) unfavorable
market conditions. In the event of termination on this basis, then Mid-Iowa
Financial shall be reimbursed for its reasonable out-of-pocket expenses incurred
by it or on its behalf in connection with the consummation of the transactions
contemplated by the Merger Agreement, in an amount not to exceed $250,000;
(3) by written notice from Mid-Iowa Financial to First Federal, if:
(a) any condition to Mid-Iowa Financial's obligations under
the Merger Agreement shall have become impossible to substantially satisfy at
any time or has not been substantially satisfied or waived in writing;
(b) any condition to all parties' obligations under the Merger
Agreement shall have become impossible to substantially satisfy at any time or
has not been substantially satisfied or waived in writing, provided, Mid-Iowa
Financial shall not have the right to terminate the Merger Agreement on this
basis if any such condition was not met due to the failure of Mid-Iowa Financial
to perform or observe the covenants and agreements set forth in the Merger
Agreement;
(c) any warranty or representation made by First Federal shall
be discovered to be or to have become untrue or incorrect, in any material
respect, where any such breach has not been cured within 30 days following
receipt by First Federal of notice of such discovery;
(d) First Federal shall have breached one or more provisions
of the Merger Agreement, in any material respect, considering all such breaches
in the aggregate, where such breach has not been cured within 30 days following
receipt by First Federal of notice of such breach;
(4) by the Board of Directors of First Federal if the Board of
Directors of Mid-Iowa Financial shall not recommend, or shall withdraw or modify
in a manner adverse to First Federal, its recommendation to the holders of
common stock to approve the Merger Agreement;
(5) by the Board of Directors of First Federal or Mid-Iowa Financial at
any time after the Mid-Iowa Financial annual meeting if the stockholders of
Mid-Iowa Financial have not approved the Merger Agreement by the requisite
affirmative vote; or
(6) by the Board of Directors of First Federal or Mid-Iowa Financial if
the acquisition has not been consummated on or before August 31, 1999.
In the event of termination of the Merger Agreement, the Merger
Agreement will become void and have no further effect except for certain
specified sections of the Merger Agreement dealing with expenses, access to
records and confidentiality, and payment of termination fees. Upon termination,
there shall be no further liability by reason of the Merger Agreement, or the
termination thereof, on the part of any of the parties or their respective
directors, officers, employees, agents or stockholders except that the
obligation of Mid-Iowa Financial to pay to First Federal certain specified
expenses and damages under the circumstances described in "--Expenses" and
"--Termination Fee" herein will survive the termination of the Merger Agreement,
and the mutual covenants with respect to the confidentiality and use of
non-public information will survive the termination of the Merger Agreement.
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WAIVER AND AMENDMENT
Each party to the Merger Agreement may in writing waive the obligations
to it of any other party under the Merger Agreement. In addition, the Merger
Agreement may be amended by a written document signed by all parties to the
Merger Agreement. However, after Mid-Iowa Financial's shareholders have approved
the Merger Agreement, the Merger Agreement may only be amended if, in the
opinion of Mid-Iowa Financial's Board of Directors, such amendment would not
have a material adverse effect on the benefits intended to be conferred under
the Merger Agreement for the Mid-Iowa Financial shareholders and would not
require resolicitation of the proxies sought thereby.
EXPENSES
Generally, all expenses incurred by First Federal and Mid-Iowa
Financial in connection with or related to the authorization, preparation and
execution of the Merger Agreement, the solicitation of stockholder approvals and
all other matters related to the closing of the transactions contemplated
thereby will be borne by the party that has incurred them. The parties to the
Merger Agreement have agreed, however, to pay the other party's reasonable
out-of-pocket expenses, in an amount not to exceed $250,000, in the event the
Merger Agreement is terminated as a result of a willful breach in which:
(1) any warranty or representation of the breaching party becomes
untrue or incorrect in any material respect and such breach is not cured within
30 days following receipt of notice of the breach; or
(2) one or more provisions of the Merger Agreement is breached in any
material respect considering all such breaches in the aggregate, where such
breach has not been cured within 30 days following receipt of notice of the
breach.
First Federal has also agreed to reimburse Mid-Iowa Financial for its
reasonable out-of-pocket expenses, in an amount not to exceed $250,000, in the
event the Merger Agreement is terminated by First Federal based on its
determination that the conversion has become inadvisable or impracticable by
reason of the issuance of any order, decree or letter of a regulatory authority
containing conditions or requirements reasonably deemed objectionable to First
Federal or unfavorable market conditions.
TERMINATION FEE
In order to induce First Federal to enter into the Merger Agreement and
as a means of compensating First Federal for the substantial direct and indirect
monetary and other costs incurred and to be incurred in connection with the
Merger Agreement and the transactions contemplated thereby, Mid-Iowa Financial
has agreed pursuant to the Merger Agreement that Mid-Iowa Financial shall pay to
First Federal a fee of $1.4 million upon the occurrence of any of the following
events on or before the earlier of the date the Merger Agreement is terminated
or August 31, 1999:
(1) if the Board of Directors of Mid-Iowa Financial recommends a
superior proposal and thereafter (a) the Mid-Iowa Financial annual meeting shall
not have been held or shall have been postponed, delayed or enjoined prior to
termination of the Merger Agreement or (b) Mid-Iowa Financial's shareholders do
not approve the Merger Agreement;
(2) if the Board of Directors of Mid-Iowa Financial withdraws or
modifies its recommendation of approval of the Merger Agreement, and thereafter
(a) the Mid-Iowa Financial annual meeting shall not have been held or shall have
been postponed, delayed or enjoined prior to termination of the Merger Agreement
or (b) the Mid-Iowa Financial's shareholders do not approve the Merger
Agreement;
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(3) if Mid-Iowa Financial's shareholders do not approve the Merger
Agreement after a superior proposal is made and within 12 months thereafter
Mid-Iowa Financial enters into a definitive agreement to be merged into or
acquired by another entity; provided, that Mid-Iowa Financial shall pay all
reasonable out-of- pocket expenses of First Federal incurred by it in connection
with the Merger Agreement, in an amount not to exceed $250,000, within five
business days following rejection of the Merger Agreement by Mid-Iowa Financial
shareholders;
(4) if Mid-Iowa Financial enters into an agreement to be acquired by
any other party; or
(5) if Mid-Iowa Financial both (a) fails to receive the opinion of its
financial advisor that the Merger is fair to Mid-Iowa Financial's shareholders
from a financial point of view, and such failure occurs after a superior
proposal is made, and (b) the merger is not consummated.
With the exception of the payment under subparagraph (3) above, which
shall be paid within five business days following Mid-Iowa Financial's execution
of a definitive agreement of merger or acquisition (except that the expenses of
First Federal shall be paid as provided in (3) above), such payment shall be
made to First Federal in immediately available funds within five business days
after the occurrence of an event set forth above.
TAX CONSEQUENCES OF THE ACQUISITION
For federal and state income tax purposes, the acquisition will be
treated as a purchase by First Federal of the shares of Mid-Iowa Financial
directly from the Mid-Iowa Financial shareholders, followed by the liquidation
of Mid-Iowa Financial into First Federal. Subsequent to the liquidation,
Mid-Iowa Savings will merge into First Federal. The merger also will be treated
as a liquidation for tax purposes. None of First Federal, Mid-Iowa Financial or
Mid-Iowa Savings, will realize gain or loss on the acquisition, the liquidation
or merger. After the liquidation of Mid-Iowa Financial and the merger of
Mid-Iowa Savings into First Federal, First Federal will succeed to the tax
attributes of Mid-Iowa Financial and Mid-Iowa Savings.
The acquisition will cause the basis of the Mid-Iowa Financial assets
to remain unchanged in the hands of First Federal, unless First Federal makes an
election to treat the transaction as a purchase of assets rather than as a stock
purchase. In such case, the tax basis of the acquired assets would be
"stepped-up" to include any premium paid for the Mid-Iowa Financial stock over
the tax basis of the assets.
ACCOUNTING TREATMENT
First Federal will treat the acquisition as a purchase for accounting
purposes.
OPERATIONS AFTER THE ACQUISITION AND THE CONVERSION
At the effective time of the acquisition, Mid-Iowa Savings will merge
with and into First Federal, with First Federal being the resulting bank. The
resulting bank will be a wholly owned subsidiary of First Federal Bankshares.
All assets and property then owned by Mid-Iowa Savings will immediately become
the property of the resulting bank. The resulting bank will be deemed to be a
continuation of Mid-Iowa Savings, and will succeed to the rights and obligations
and the duties and liabilities of Mid-Iowa Savings. The directors and officers
of First Federal will become the directors and officers of the resulting bank.
First Federal does not currently anticipate closing any Mid-Iowa Savings
branches following the acquisition.
EFFECT ON EMPLOYEES, OFFICERS AND DIRECTORS OF MID-IOWA FINANCIAL
The Merger Agreement provides that, to the extent practicable, First
Federal will give consideration to the retention after the closing of employees
of Mid-Iowa Savings in their current or comparable positions within
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<PAGE>
First Federal, provided that the Merger Agreement will not, except as otherwise
provided therein, provide any contractual right to employees of such employment.
Employees of Mid-Iowa Savings who continue employment with First Federal on or
after the effective time will be eligible to participate in such employee
benefit plans as may be in effect generally for employees of First Federal from
time to time, if such continuing employee are eligible or selected for
participation therein. Generally, continuing employees will be entitled to
participate on the same basis as similarly situated employees of First Federal,
except that continuing employees will be entitled to full credit for each year
of prior service in which 1,000 hours of service are performed with Mid-Iowa
Savings for purposes of determining eligibility for participation and vesting,
but not for benefit accruals, in the First Federal plans, subject to applicable
break in service rules. Notwithstanding the foregoing, First Federal may
determine to continue any of Mid-Iowa Financial's benefit plans for continuing
employees in lieu of offering participation in one or more First Federal plans
providing similar benefits, to terminate any of Mid-Iowa Financial's benefit
plans or to merge any such plans with similar First Federal plans.
Participation by continuing employees in employee benefit plans of
First Federal with respect to which eligibility and participation is at the
discretion of the employer, such as non-qualified deferred compensation plans,
stock option plans, stock bonus plans, restricted stock plans, and other such
similar plans, will be discretionary with First Federal.
Certain members of the Board of Directors and management of Mid-Iowa
Financial may be deemed to have certain interests in the acquisition in addition
to their interests as stockholders of Mid-Iowa Financial generally. The
provisions of certain employment agreements, a non-competition agreement, stock
option plans, and other employee or director benefit plans are expected to
result in cash payments of approximately $1.3 million to certain of Mid-Iowa
Financial's officers and directors, including approximately $661,000 payable
under severance arrangements, $560,000 payable under stock option plans and
$50,000 payable under the non-competition agreement. Three directors of Mid-Iowa
Financial will also be entitled to serve on an advisory board to First Federal
for a period of one year following completion of the acquisition. These advisory
board members will receive an annual fee of at least $2,000 plus $200 per
meeting attended.
REGULATORY APPROVALS
The acquisition is subject to the approval of the Office of Thrift
Supervision. First Federal has filed an application with the Office of Thrift
Supervision for approval of the acquisition. First Federal has also filed an
application with the Office of Thrift Supervision for approval of the
conversion. The approvals of the Office of Thrift Supervision have not been
received. There can be no assurance as to the timing of such approvals, if
given, or as to the conditions, if any, on which the approvals will be given. In
addition, the approvals, if and when granted, may contain conditions which First
Federal may find unduly burdensome. When such approvals are received, material
changes to the Merger Agreement, material conditions, or other changes of a
material nature may be imposed by regulatory authorities in connection
therewith. Following Office of Thrift Supervision approval of the acquisition,
the U.S. Department of Justice may review the acquisition and raise objections
on antitrust grounds, though objections on such grounds are not expected. If the
required regulatory approvals are not obtained, the Merger Agreement will be
terminated, and the acquisition will not occur.
RESTRICTIONS ON ACQUISITION OF FIRST FEDERAL BANKSHARES
The following discussion is a summary of certain provisions of federal
law and regulations and Delaware corporate law relating to stock ownership and
transfers, the Board of Directors and business combinations, all of which may be
deemed to have "anti-takeover" effects. The description of these provisions is
necessarily general and reference should be made to the actual law and
regulations.
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<PAGE>
CONVERSION REGULATIONS
Office of Thrift Supervision regulations prohibit any person from
making an offer, announcing an intent to make an offer or participating in any
other arrangement to purchase stock or acquiring stock or subscription rights in
a converting institution or its holding company from another person prior to
completion of its conversion. Further, without the prior written approval of the
Office of Thrift Supervision, no person may make such an offer or announcement
of an offer to purchase shares or actually acquire shares in the converting
institution or its holding company, for a period of three years from the date of
the completion of the conversion if, upon the completion of such offer,
announcement or acquisition, that person would become the beneficial owner of
more than 10% of the outstanding stock of the institution or its holding
company. The Office of Thrift Supervision has defined "person" to include any
individual, group acting in concert, corporation, partnership, association,
joint stock company, trust, unincorporated organization or similar company, a
syndicate or any other group formed for the purpose of acquiring, holding or
disposing of securities of an insured institution. However, offers made
exclusively to an association or its holding company, or an underwriter or
member of a selling group acting on the converting institution's, or its holding
company's, behalf for resale to the general public are excepted. The regulation
also provides civil penalties for willful violation or assistance in any such
violation of the regulation by any person connected with the management of the
converting institution or its holding company or who controls more than 10% of
the outstanding shares or voting rights of a converting or converted institution
or its holding company.
As permitted by Office of Thrift Supervision regulations, First
Federal's charter contains a provision whereby the acquisition or offer to
acquire ownership of more than 10% of the issued and outstanding shares of any
class of equity securities of the First Federal by any person, either directly
or through an affiliate of such person, will be prohibited for a period of five
years following the date of consummation of the conversion. Any stock in excess
of 10% acquired in violation of the charter provision will not be counted as
outstanding for voting purposes.
CHANGE OF CONTROL REGULATIONS
Under the Change in Bank Control Act, no person may acquire control of
an insured federal savings association or its parent holding company unless the
Office of Thrift Supervision has been given 60 days' prior written notice and
has not issued a notice disapproving the proposed acquisition. In addition,
Office of Thrift Supervision regulations provide that no company may acquire
control of a savings association without the prior approval of the Office of
Thrift Supervision. Any company that acquires such control becomes a "savings
and loan holding company" subject to registration, examination and regulation by
the Office of Thrift Supervision.
Control, as defined under federal law, means ownership, control of or
holding irrevocable proxies representing more than 25% of any class of voting
stock, control in any manner of the election of a majority of the savings
association's directors, or a determination by the Office of Thrift Supervision
that the acquiror has the power to direct, or directly or indirectly to exercise
a controlling influence over, the management or policies of the institution.
Acquisition of more than 10% of any class of a savings association's voting
stock, if the acquiror also is subject to any one of eight "control factors,"
constitutes a rebuttable determination of control under the regulations. Such
control factors include the acquiror being one of the two largest stockholders.
The determination of control may be rebutted by submission to the Office of
Thrift Supervision, prior to the acquisition of stock or the occurrence of any
other circumstances giving rise to such determination, of a statement setting
forth facts and circumstances which would support a finding that no control
relationship will exist and containing certain undertakings. The regulations
provide that persons or companies which acquire beneficial ownership exceeding
10% or more of any class of a savings association's stock must file with the
Office of Thrift Supervision a certification form that the holder is not in
control of such institution, is not subject to a rebuttable determination of
control and will take no action which would result in a determination or
rebuttable determination of control without prior notice to or approval of the
Office of Thrift Supervision, as applicable. There are also rebuttable
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<PAGE>
presumptions in the regulations concerning whether a group"acting in concert"
exists, including presumed action in concert among members of an "immediate
family."
The Office of Thrift Supervision may prohibit an acquisition of control
if it finds, among other things, that:
(1) the acquisition would result in a monopoly or substantially lessen
competition;
(2) the financial condition of the acquiring person might jeopardize
the financial stability of the institution; or
(3) the competence, experience or integrity of the acquiring person
indicates that it would not be in the interest of the depositors or the public
to permit the acquisition of control by such person.
DESCRIPTION OF CAPITAL STOCK OF FIRST FEDERAL BANKSHARES
GENERAL
At the effective date, First Federal Bankshares will be authorized to
issue 12,000,000 shares of common stock having a par value of $.01 per share and
1,000,000 shares of preferred stock. First Federal Bankshares currently expects
to issue in the conversion 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 the publicly held shares of First Federal. 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 other share of
common stock. Upon payment of the Subscription Price for the common stock, in
accordance with the Plan of Conversion, all of the common 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 FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY.
COMMON STOCK
DIVIDENDS. First Federal Bankshares can pay dividends out of statutory
surplus or from 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. The holders of common stock
of First Federal Bankshares will be entitled to receive and share equally in
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 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. Generally, 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.
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
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<PAGE>
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, 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. Preferred stock may be issued with
preferences and designations as the Board of Directors may from time to time
determine. The Board of Directors can, without stockholder approval, issue
preferred stock with voting, dividend, liquidation and conversion rights that
could dilute the voting strength of the holders of the common stock and may
assist management in impeding an unfriendly takeover or attempted change in
control.
DESCRIPTION OF CAPITAL STOCK OF 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. The 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 dividends as may be declared by the Board of
Directors of First Federal out of funds legally available therefor.
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 1992 mutual holding company reorganization
to July 1997, the holders of First Federal's common stock were not permitted to
cumulate their votes for the election of directors.
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
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<PAGE>
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.
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 LLP,
Washington, D.C.
ADDITIONAL INFORMATION
First Federal Bankshares has filed with the Securities Exchange
Commission a registration statement under the Securities Act of 1933 with
respect to the First Federal Bankshares common stock. As permitted by the rules
and regulations of the Securities and Exchange Commission, this prospectus does
not contain all the information set forth in the registration statement. This
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 Securities Exchange Commission located at 450
Fifth Street, N.W., Washington, D.C. 20549, and copies of this material can be
obtained from the Securities and Exchange Commission at prescribed rates. In
addition, the Securities and Exchange Commission maintains a website; the
address of the website is "http://www.sec.gov." The statements contained in this
prospectus as to the contents of any contract or other document filed as an
exhibit to the registration statement are, of necessity, brief descriptions
thereof and are not necessarily complete.
The Mutual Holding Company has filed an application for conversion with
the Office of Thrift Supervision with respect to the conversion. Pursuant to the
rules and regulations of the Office of Thrift Supervision, this prospectus omits
certain information contained in that application. The application may be
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<PAGE>
examined at the principal office of the Office of Thrift Supervision, 1700 G
Street, N.W., Washington, D.C. 20552 and at the Office of the Regional Director
of the Office of Thrift Supervision 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 Securities Exchange Commission under Section
12(g) of the Securities Exchange Act of 1934, 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 other requirements of the Securities Exchange Act of
1934. Under the Plan of Conversion, First Federal Bankshares has undertaken that
it will not terminate the 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 Office of
Thrift Supervision under Section 12(g) of the Securities Exchange Act of 1934
and, upon the 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.
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<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................................................................................................. 48
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 tax assets (liability) (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
Commitments and 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
adopted SFAS No 130 effective June 30, 1998.
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 it 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>
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. Deposit accounts in excess of $100,000 are
not covered by federal deposit insurance.
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
------------- ------------ -------------- -------------- --------------
------------- ------------ -------------- -------------- --------------
Effective rate 37.8% 35.5% 35.4% 34.6% 33.6%
------------- ------------ -------------- -------------- --------------
------------- ------------ -------------- -------------- --------------
</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.
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.
A reconciliation of the Bank's regulatory capital using generally
accepted accounting principles (GAAP) as of September 30, 1998 (unaudited)
follows:
<TABLE>
<CAPTION>
Tangible Core Risk-based
Capital Capital Capital
----------- ---------- ----------
<S> <C> <C> <C>
GAAP capital $43,167,000 43,167,000 43,167,000
Capital adjustments:
Allowance for loan losses -- -- 2,677,000
Goodwill and other intangible assets (8,080,000) (8,080,000) (8,080,000)
Unrealized gains on securities available for sale, net of taxes (492,000) (492,000) (492,000)
Minority interest 54,000 54,000 54,000
------------ ---------- ----------
Regulatory capital $34,649,000 34,649,000 37,326,000
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
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. Upon completion of conversion, restrictions on
waived dividends will no longer exist.
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. At
September 30, 1998 (unaudited) commitments to fund fixed rate loans
approximated $14,757,000 at a weighted average interest rate of
8.24%. 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.
At September 30, 1998 costs totaling $76,000 related to the
interdependent conversion and acquisition of Mid-Iowa Financial
Corp. have been capitalized. Such costs will be charged to
operations if the conversion is not completed.
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...............................................G-8
Part II, Item 6. Management's Discussion and Analysis of Plan of Operation................................G-30
Part I, Item 1. Description of Business..................................................................G-45
</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 of taxes.................................................. 42,300 31,052
------------ -------------
Total stockholders' equity ............................ 13,760,465 12,061,128
------------ -------------
Commitments and contingencies (Note 14)
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 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 less estimated selling costs. 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
Government backed 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
Government backed 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
Government backed 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
Government backed 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.
Deposit accounts in excess of $100,000 are not covered by federal deposit
insurance.
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
-------- -------- --------
-------- -------- --------
Effective rate 31.1% 33.8% 33.3%
-------- -------- --------
-------- -------- --------
</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>
A reconciliation of the Bank's regulatory capital to capital using
generally accepted accounting principles (GAAP) as of September 30,
1998 (unaudited) follows:
<TABLE>
<CAPTION>
Tangible Core Risk-based
Capital Capital Capital
----------- ---------- ----------
<S> <C> <C> <C>
GAAP capital $11,203,705 11,203,705 11,203,705
Capital adjustments:
Allowance for loan losses -- -- 307,228
Intangible assets (5,316) (5,316) (5,316)
Unrealized gains on securities available for sale, net of taxes (40,508) (40,508) (22,280)
------------ ---------- ----------
Regulatory capital $11,157,881 11,157,881 11,483,337
</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) Commitments and 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
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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
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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
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loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
Holding Company Regulation. The Company is a unitary savings and loan
holding company subject to regulatory oversight by the OTS. As such, the Company
is required to register and file reports with the OTS and is subject to
regulation and examination by the OTS. In addition, the OTS has enforcement
authority over the Company and its non-savings association subsidiaries which
also permits the OTS to restrict or prohibit activities that are determined to
be a serious risk to the subsidiary savings association.
As a unitary savings and loan holding company, the Company generally
is not subject to activity restrictions. If the Company acquires control of
another savings association as a separate subsidiary, it would become a multiple
savings and loan holding company, and the activities of the Company and any of
its subsidiaries (other than the Bank or any other SAIF-insured savings
association) would become subject to such restrictions unless such other
associations each qualify as a QTL and were acquired in a supervisory
acquisition.
If the Bank fails the QTL test, the Company must obtain the approval
of the OTS prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure the Company must register as, and will become subject
to, the restrictions applicable to bank holding companies. The activities
authorized for a bank holding company are more limited than are the activities
authorized for a unitary or multiple savings and loan holding company. See
"--Qualified Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control
of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.
Federal Securities Law. The stock of the Company is registered with
the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The Company is subject to the information, proxy solicitation, insider
trading restrictions and other requirements of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At September 30, 1998, the Bank was in compliance with these
reserve requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve Board may be used to satisfy liquidity
requirements that may be imposed by the OTS. See "-- Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System. The Bank is a member of the FHLB of Des
Moines, which is one of 12 regional FHLBs, that administers the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the board of directors of the FHLB, which are
subject to the oversight of the Federal Housing Finance Board. All advances from
the FHLB are required to be fully secured by sufficient collateral as determined
by the FHLB. In addition, all long-term advances are required to provide funds
for residential home financing.
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Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.
As a member of the FHLB, the Bank is required to purchase and maintain
stock in the FHLB of Des Moines. At September 30, 1998, the Bank had $1.8
million in FHLB stock, which was in compliance with this requirement. For the
year ended September 30, 1998, dividends paid by the FHLB of Des Moines to the
Bank totaled $122,650.
Federal and State Taxation. Savings associations such as the Bank that
meet certain definitional tests relating to the composition of assets and other
conditions prescribed by the Internal Revenue Code of 1986, as amended (the
"Code"), are permitted to establish reserves for bad debts and to make annual
additions thereto which may, within specified formula limits, be taken as a
deduction in computing taxable income for federal income tax purposes (for
taxable years beginning before December 31, 1995) the amount of the bad debt
reserve deduction for "non-qualifying loans" is computed under the experience
method. The amount of the bad debt reserve deduction for "qualifying real
property loans" (generally loans secured by improved real estate) may be
computed under either the experience method or the percentage of taxable income
method (based on an annual election).
Under the experience method, the bad debt reserve deduction is an
amount determined under a formula based generally upon the bad debts actually
sustained by the savings association over a period of years.
The percentage of specially computed taxable income that is used to
compute a savings association's bad debt reserve deduction under the percentage
of taxable income method (the "percentage bad debt deduction") is 8%. The
percentage bad debt deduction thus computed is reduced by the amount permitted
as a deduction for non-qualifying loans under the experience method. The
availability of the percentage of taxable income method permits qualifying
savings associations to be taxed at a lower effective federal income tax rate
than that applicable to corporations generally (approximately 31.3% assuming the
maximum percentage bad debt deduction).
Under the percentage of taxable income method, the percentage bad debt
deduction cannot exceed the amount necessary to increase the balance in the
reserve for "qualifying real property loans" to an amount equal to 6% of such
loans outstanding at the end of the taxable year or the greater of (i) the
amount deductible under the experience method or (ii) the amount which when
added to the bad debt deduction for "non-qualifying loans" equals the amount by
which 12% of the amount comprising savings accounts at year-end exceeds the sum
of surplus, undivided profits and reserves at the beginning of the year. At
September 30, 1996, the 6% and 12% limitations did not restrict the percentage
bad debt deduction available to the Bank.
Legislation enacted in August 1996 repealed the percentage of taxable
income method of calculating the bad debt reserve. Savings institutions, like
the Bank, which have previously used that method are required to recapture into
taxable income post-1987 reserves in excess of the reserves calculated under the
experience method over a six-year period beginning with the first taxable year
beginning after December 31, 1995. The Bank will recapture approximately
$480,000 of its tax bad debt reserves. The recapture will not have any effect on
the Company's net income because the related tax expense has already been
accrued.
The start of such recapture may be delayed until the third taxable
year beginning after December 31, 1995 if the dollar amount of the institution's
residential loan originations in each year is not less than the average dollar
amount of residential loan originated in each of the six most recent years
disregarding the years with the highest and lowest originations during such
period. For purposes of this test, residential loan originations would not
include refinancings and home equity loans.
Beginning with the first taxable year beginning after December 31,
1995, savings institutions, such as the Bank, are being treated the same as
commercial banks. Institutions with $500 million or more in assets will be able
to take a tax deduction only when a loan is actually charged off. Institutions
with less than $500 million in assets will still be permitted to make deductible
bad debt additions to reserves, but only using the experience method.
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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.
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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
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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., First Federal
Savings Bank of Siouxland, Sandler O'Neill & Partners, L.P. or Investment
Bank Services, Inc. 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 12, 1999
---------------
These securities are not deposits or accounts and are not
federally insured or guaranteed.
---------------
Until March 19 , 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. This is in
addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
