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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 9, 1999
REGISTRATION NO. 333-69245
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 3 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FIRST FEDERAL BANKSHARES, INC.
FIRST FEDERAL BANK EMPLOYEES' SAVINGS & PROFIT SHARING
PLAN AND TRUST
(Exact name of registrant as
specified in its charter)
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DELAWARE 6712 (TO BE APPLIED FOR)
(State or other jurisdiction of (Primary standard (I.R.S. Employer
incorporation or organization) industrial classification) identification number)
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329 PIERCE STREET
SIOUX CITY, IOWA 51101
(712) 277-0200
(Address, including zip code, and telephone number,
including area code, of registrant's principal
executive offices)
BARRY E. BACKHAUS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
329 PIERCE STREET
SIOUX CITY, IOWA 51101
(712) 277-0200
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
ROBERT I. LIPSHER, ESQ.
LUSE LEHMAN GORMAN POMERENK & SCHICK
5335 WISCONSIN AVENUE, N.W.
SUITE 400
WASHINGTON, D.C. 20015
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 of the Securities Act of 1933,
check the following box: /X/
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. / /
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CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM OFFERING AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PRICE PER SHARE OFFERING PRICE (1) REGISTRATION FEE
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Common Stock, $.01 par value per share 7,489,496 shares $10.00 $74,894,960 $20,900 (2)
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Participation Interests $460,000 (3) -- -- (4)
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(1) Estimated solely for the purpose of calculating the registration fee.
(2) Registration fee previously paid.
(3) Pursuant to Rule 416(c) under the Securities Act, this registration
statement also covers an indeterminate amount of interests to be
offered or sold pursuant to the employee benefit plan described herein.
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(4) The securities of First Federal Bankshares, Inc. to be purchased by the
First Federal Bank Employees' Savings & Profit Sharing Plan and Trust
as adopted by First Federal Bank are included in the amount shown for
common stock. However, pursuant to Rule 457(h) of the Securities Act of
1933, as amended, no separate fee is required for the participation
interests. Pursuant to such rule, the amount being registered has been
calculated on the basis of the number of shares of common stock that
may be purchased with the current assets of such plan.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION SHALL
THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES
ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH
DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(a), MAY DETERMINE.
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PROSPECTUS SUPPLEMENT
FIRST FEDERAL BANKSHARES, INC.
FIRST FEDERAL BANK
EMPLOYEES' SAVINGS & PROFIT SHARING PLAN AND TRUST
This prospectus supplement is being provided to members in First
Federal Bank Employees' Savings & Profit Sharing Plan and Trust. As a member of
the 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 Bankshares, Inc. is a company being formed
by First Federal Savings Bank of Siouxland as part of the conversion of First
Federal's mutual holding company.
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. Your account will be reinvested in the other
funds available under the plan if the offering is oversubscribed and the total
amount you allocated to the purchase of First Federal Bankshares common stock
cannot be used by the trustee to purchase common stock. You may direct the
investment of your account in the First Federal Bankshares, Inc. fund after the
offering is completed.
The prospectus of First Federal Bankshares dated February ___, 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. This prospectus supplement,
which provides information with respect to the plan, should be read only in
conjunction with the prospectus.
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FOR A DISCUSSION OF CERTAIN FACTORS THAT YOU SHOULD CONSIDER AS TO AN
INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" BEGINNING ON PAGE 12 OF THE
PROSPECTUS.
The interests in the plan and the offering of the common stock have not
been approved or disapproved by the Office of Thrift Supervision, the Securities
and Exchange Commission or any other federal or state agency. Any representation
to the contrary is a criminal offense.
The participation interests 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 plan's entire investment in common stock is subject to loss.
The date of this prospectus supplement is February ___, 1999.
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NOTICE TO MEMBERS IN
FIRST FEDERAL BANK
EMPLOYEES' SAVINGS & PROFIT SHARING PLAN AND TRUST
Attached to this notice is a copy of the prospectus and prospectus
supplement relating to the offer and sale of membership interests and shares of
common stock of First Federal Bankshares.
First Federal Savings Bank of Siouxland withdrew from the Financial
Institutions Thrift Plan and adopted the First Federal Bank Employees' Savings &
Profit Sharing Plan and Trust effective December 1, 1998. Adopting the new plan
means that you will have the option of investing in First Federal Bankshares
common stock through the plan. The prospectus supplement has been prepared and
distributed to you so that members in the plan like you can make an informed
decision regarding your opportunity to invest all or a portion of your account
balance in the First Federal Bankshares common stock. Your account will be
reinvested in the other funds available under the plan in the event the offering
is oversubscribed and the total amount you allocate to the purchase of First
Federal Bankshares common stock cannot be used by the trustee to purchase common
stock. The other funds selected by the trustee of the plan in which you may
invest are:
(A) S&P 500 Stock Fund;
(B) Stable Value Fund;
(C) S&P MidCap Stock Fund;
(D) Money Market Fund;
(E) Government Bond Fund;
(F) Income Plus Fund;
(G) Growth & Income Fund;
(H) Growth Fund; and
(I) International Stock Fund.
The plan's feature 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. 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 Account for any loss which results from your exercise of control over
the assets in your plan account.
Because you will be entitled to invest all or a portion of your account
balance in the plan in First Federal Bankshares common stock, the regulations
under section 404(c) of the Employee Retirement Income Security Act require that
the plan establish procedures that ensure the confidentiality of your decision
to purchase, hold, or sell employer securities, except to the extent that
disclosure of such information is necessary to comply with federal or state laws
not preempted by 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, as the person to whom your investment
instructions should
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be returned. Ms. Smith will transfer your investment instructions directly to
Pentegra Group, the plan's third-party administrator. In the case of an event
that involves a potential for undue employer influence, you will be instructed
to return your instructions directly to Pentegra Group.
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TABLE OF CONTENTS
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THE OFFERING..............................................................................................1
Securities Offered...............................................................................1
Election to Purchase Common Stock in the Offering; Priorities....................................1
Value of Membership Interests....................................................................2
Method of Director Transfer......................................................................2
Time for Directing Transfer......................................................................2
Irrevocability of Transfer Direction.............................................................2
Direction to Purchase Common Stock After the Offering............................................2
Purchase Price of Common Stock...................................................................3
Nature of a Member's Interest in Common Stock....................................................3
Voting Rights of Common Stock....................................................................3
DESCRIPTION OF THE PLAN...................................................................................3
Introduction.....................................................................................3
Eligibility and Membership.......................................................................4
Contributions Under the Plan.....................................................................5
Limitations on Contributions.....................................................................5
Investment of Contributions and Account Balances.................................................7
Benefits Under the Plan.........................................................................10
Withdrawals and Distributions From the Plan.....................................................10
Trustee.........................................................................................12
Plan Administrator..............................................................................12
Reports to Plan Members.........................................................................12
Amendment and Termination.......................................................................12
Merger, Consolidation or Transfer...............................................................13
Federal Income Tax Consequences.................................................................13
ERISA and Other Qualifications..................................................................16
SEC Reporting and Short-Swing Profit Liability..................................................16
Financial Information Regarding Plan Assets.....................................................17
LEGAL OPINION............................................................................................17
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THE OFFERING
SECURITIES OFFERED
The securities being offered are participation interests in the plan.
Up to 46,000 shares of common stock may be acquired by the plan to be held in a
fund of First Federal Bankshares common stock. First Federal Bankshares is the
issuer of the common stock. Only employees of First Federal may become members
in the plan. The issuance of the common stock is conditioned on the consummation
of the conversion of First Federal's mutual holding company. A member's
investment in the First Federal Bankshares stock fund is subject to the priority
set forth in the plan of conversion. Information with regard to the plan is
contained in this prospectus supplement and information with regard to the
conversion and the financial condition, results of operation and business of
First Federal is contained in the attached prospectus. The address of the
principal executive office of First Federal is 329 Pierce Street, Sioux City,
Iowa 51101. First Federal's telephone number is (712) 277-0200.
ELECTION TO PURCHASE COMMON STOCK IN THE OFFERING; PRIORITIES
The plan permits you to direct that all or part of the funds which
represent your beneficial interest in the assets of the plan be transferred to
the First Federal Bankshares stock fund, an investment fund in the plan, that
will invest in common stock and will be used to purchase common stock issued in
connection with the offering. The trustee of the 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 plan in accordance with your
current investment election. If you fail to direct the investment of your
account balance, your account balance will remain in the other investment funds
of the 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;
(3) depositors of First Federal with aggregate account balances of $50
or more as of December 31, 1998;
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(4) members of First Federal's mutual holding company as of
________________, 1999, who are not depositors as of September 30, 1997; and
(5) members of the general public with preference given first to
persons who hold shares of common stock of First Federal 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 within your plan account.
VALUE OF MEMBERSHIP INTERESTS
The members' accounts in the Financial Institutions Thrift Plan as
adopted by First Federal were valued at approximately $408,343 as of September
30, 1998. Each member was informed of the value of his or her beneficial
interest in the Financial Institutions Thrift Plan as of September 30, 1998.
METHOD OF DIRECTING TRANSFER
You will receive a form to direct that all or a portion of your
beneficial interest in the plan be transferred to the First Federal Bankshares
stock fund or to the other investment options established under the plan. If you
wish to invest all or part of your beneficial interest in the assets of the plan
in the purchase of common stock issued in the offering, you should indicate that
decision on the investment allocation form.
TIME FOR DIRECTING TRANSFER
Directions to transfer amounts to the First Federal Bankshares stock
fund to purchase common stock must be returned to Peggy Smith, Vice President,
First Federal Savings Bank of Siouxland, 329 Pierce Street, Sioux City, Iowa
51101 no later than _____ p.m. on February __, 1999.
IRREVOCABILITY OF TRANSFER DIRECTION
Your direction to transfer amounts credited to your account in the plan
to the First Federal Bankshares stock fund to purchase shares of common stock is
irrevocable. You, however, will be able to direct the investment of your account
under the plan as explained below.
DIRECTION TO PURCHASE COMMON STOCK AFTER THE OFFERING
After the offering, you will continue to be able to direct that a
certain percentage of your interest in the plan be transferred to the First
Federal Bankshares stock fund and invested in common
2
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stock, or to the other investment funds available under the plan. The allocation
of your interest in a plan fund may be changed 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 officers, directors and principal
shareholders of First Federal Bankshares who are subject to the provisions of
section 16(b) of the Securities Exchange Act of 1934, as amended.
PURCHASE PRICE OF COMMON STOCK
The funds transferred to the First Federal Bankshares stock fund for
the purchase of common stock in the offering will be used by the trustee to
purchase shares of common stock, except in the event of an oversubscription, as
discussed above. The price paid for such shares of common stock will be the same
price as is paid by all other persons who purchase shares of common stock in the
offering.
Subsequent to the offering, common stock purchased by the trustee will
be acquired in open market transactions. The prices paid by the trustee for
shares of common stock will not exceed "adequate consideration" as defined in
section 3(18) of ERISA.
NATURE OF A MEMBER'S INTEREST IN THE COMMON STOCK
The common stock will be held in the name of the trustee for the plan.
Shares of common stock acquired at the direction of a member will be allocated
to the member's account under the plan. Therefore, earnings with respect to a
member's account should not be affected by the investment designations of other
members. The trustee as record holder will vote such allocated shares, if any,
as directed by members.
VOTING RIGHTS OF COMMON STOCK
The trustee generally will exercise voting rights attributable to all
common stock held by the First Federal Bankshares stock fund as directed by
members with interests in the fund. With respect to each matter as to which
holders of common stock have a right to vote, you will be allocated voting
instruction rights reflecting your proportionate interest in the fund. The
number of shares of common stock held in the fund that are voted in the
affirmative and negative on each matter shall be proportionate to the number of
voting instruction rights exercised by members in the affirmative and negative,
respectively.
DESCRIPTION OF THE PLAN
INTRODUCTION
First Federal adopted the Financial Institutions Thrift Plan, a
multiple-employer defined contribution plan, effective September 1, 1996. First
Federal withdrew from that plan and adopted a single-employer plan effective
December 1, 1998, in order to permit the investment of plan assets
3
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in common stock. All members of the Financial Institutions Thrift Plan, other
than members who had terminated employment, were given the opportunity to
transfer their accounts to the First Federal Bank Employees' Savings & Profit
Sharing Plan and Trust. The plan is a tax-qualified plan with a cash or deferred
compensation feature established in accordance with the requirements under
section 401(a) and section 401(k) of the Internal Revenue Code.
First Federal intends that the plan, in operation, will comply with the
requirements under section 401(a) and section 401(k) of the Internal Revenue
Code. First Federal will adopt any amendments to the plan that may be necessary
to ensure the qualified status of the plan under the Internal Revenue Code and
applicable Treasury regulations.
EMPLOYEE RETIREMENT INCOME SECURITY ACT. The plan is an "individual
account plan" other than a "money purchase pension plan" within the meaning of
the Employee Retirement Income Security Act. As such, the plan is governed by
all of the provisions of the Employee Retirement Income Security Act contained
in Title I, pertaining to protection of employee benefit rights, and, Title II,
pertaining to amendments to the Internal Revenue Code relating to retirement
plans, except the funding requirements contained in Part 3 of Title I, which by
their terms do not apply to an individual account plan other than a money
purchase plan. The plan is not subject to Title IV, pertaining to plan
termination insurance, of the Employee Retirement Income Security Act. The
funding requirements contained in Title IV are not applicable to members or
beneficiaries under the plan.
REFERENCE TO FULL TEXT OF PLAN. The following statements are summaries
of certain provisions of the plan. They are not complete and are qualified in
their entirety by the full text of the plan. Words capitalized but not defined
in the following discussion have the same meaning as set forth in the plan.
Copies of the plan are available to all employees by filing a request with the
Plan Administrator, c/o First Federal Savings Bank of Siouxland, Attention:
Barry E. Backhaus, President, 329 Pierce Street, Sioux City, Iowa 51101. Each
employee is urged to read carefully the full text of the plan.
ELIGIBILITY AND MEMBERSHIP
Any employee of First Federal is eligible to become a member in the
plan on the first day of the month following completion of one year of
employment during which an employee completes at least 1000 hours of service
with First Federal. The plan year is January 1 to December 31.
As of September 30, 1998, there were approximately 158 employees
eligible to participate in the plan, and 129 employees participating by making
elective deferral contributions.
CONTRIBUTIONS UNDER THE PLAN
401(K) PLAN CONTRIBUTIONS. Each member of the plan is permitted to
elect to defer his or her salary on a pre-tax basis, up to 15% of annual salary,
and to have that amount contributed to the plan
4
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on his or her behalf. For purposes of the plan, "salary" means a member's total
compensation reported on Internal Revenue Service Form W-2 exclusive of any
compensation deferred from a prior year, plus pre-tax contributions made to a
section 401(k) plan or section 125 cafeteria plan. In 1998, the annual salary of
each member taken into account under the 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, as permitted by the Internal Revenue Code.
A member may elect to modify the amount contributed to the plan by filing a new
elective deferral agreement with the plan administrator which will be effective
the first day of any contribution reporting period.
EMPLOYER CONTRIBUTIONS. First Federal makes matching contributions to
the plan equal to 25% of the elective deferral contributions, up to a maximum of
4% of the member's salary. Such matching contributions are subject to revision
by First Federal at any time. The matching contributions are subject to the
applicable vesting schedule noted hereinafter set forth below.
LIMITATIONS ON CONTRIBUTIONS
LIMITATION ON EMPLOYEE SALARY DEFERRALS. The annual amount of deferred
salary of a member when aggregated with any elective deferrals of the member
under a simplified employee pension plan or a tax-deferred annuity may not
exceed the limitation contained in section 402(g) of the Internal Revenue Code,
adjusted for increases in the cost of living as permitted by the Internal
Revenue Code. The limitation for 1998 is $10,000. Deferred salary that is
contributed in excess of this limitation will be included in the member's gross
income for federal income tax purposes in the year deferred. In addition, any
such excess deferral will again be subject to federal income tax when
distributed by the plan to the member, unless the excess deferral together with
any income allocable to it, is distributed to the member not later than the
first April 15th following the close of the taxable year in which the excess
deferral is made. Any income on the excess deferral that is distributed not
later than such date shall be treated, for federal income tax purposes, as
earned and received by the member in the taxable year in which the distribution
is made.
LIMITATIONS ON ANNUAL ADDITIONS AND BENEFITS. Pursuant to the
requirements of the Internal Revenue Code, the plan provides that the amount of
contributions and forfeitures allocated to each member's account during any plan
year may not exceed the lesser of $30,000 or 25% of his or her compensation, as
defined in the plan, for the plan year. In addition, annual additions are
limited to the extent necessary to prevent contributions on behalf of any
employee from exceeding the employee's combined plan limit, that limit takes
into account the contributions and benefits made on behalf of an employee to all
plans of First Federal. To the extent that these limitations have been exceeded
with respect to a member, the plan administrator will:
(1) return any elective deferral contributions, with earnings thereon,
to the extent that the return would reduce the excess amount in the member's
accounts; and
(2) reduce employer contributions made with respect to those returned
elective deferral contributions.
5
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If, in addition to this plan, the member is covered under other defined
contribution plans maintained by First Federal and annual additions exceed the
maximum permissible amount, the amount contributed or allocated under the other
defined contribution plans will be reduced so that the annual additions under
all the plans equal the maximum permissible amount.
LIMITATION ON PLAN CONTRIBUTIONS FOR HIGHLY COMPENSATED EMPLOYEES.
Sections 401(k) and 401(m) of the Internal Revenue Code limit the amount of
elective deferral contributions and matching contributions that may be made to
the plan in any plan year on behalf of highly compensated employees in relation
to the amount of elective deferral contributions made by or on behalf of all
other employees eligible to participate in the plan. Specifically, the actual
deferral percentage or ADP, i.e., the average of the actual deferral ratios,
expressed as a percentage, of each eligible employee's elective deferral
contribution if any, for the plan year over the employee's salary, must meet
either of the following tests:
(1) the ADP of the eligible highly compensated employees is not more
than 125% of the ADP of all other eligible employees; or
(2) the ADP of the eligible highly compensated employees is not more
than 200% of the ADP of all other eligible employees, and the excess of the ADP
for the eligible highly compensated employees over the ADP of all other eligible
employees is not more than two percentage points.
Similarly, the actual contribution percentage or ACP, i.e., the average
of the actual contribution ratios, expressed as a percentage, of each eligible
employee's matching contributions, if any, for the Plan year over the employee's
salary, must meet either of the following tests:
(1) the ACP of the eligible highly compensated employees is not more
than 125% of the ACP of all other eligible employees; or
(2) the ACP of the eligible highly compensated employees is not more
than 200% of the ACP of all other eligible employees, and the excess of the ACP
for the eligible highly compensated employees over the ACP of all other
employees is not more than two percentage points.
Effective January 1, 1997, the ADP and ACP tests are performed by using
the actual deferral percentage and the actual contribution percentage of
non-highly compensated employees for the plan year preceding the plan year that
is being tested.
In general, for plan years beginning in 1998, a highly compensated
employee includes:
(1) an employee who, during the plan year or the preceding Plan year,
was at any time a 5% owner of the stock of an employer, or stock possessing more
than 5% of the total combined voting power of all stock of an employer; or
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(2) an employee who, for the preceding Plan year, received salary from
an employer in excess of $80,000, and, if the employer elects for a plan year,
was in the group consisting of the top 20% of employees when ranked on the basis
of salary paid during the plan year. The dollar amounts set forth above are
adjusted annually to reflect increases in the cost of living.
In order to prevent the disqualification of the plan, any amount
contributed by highly compensated employees that exceed the ADP limitation in
any plan year, referred to as excess contributions, together with any income
allocable thereto, must be distributed first to highly compensated employees
with the greatest dollar amount deferrals, until the plan satisfies the ADP
test, before the close of the following plan year. Moreover, First Federal will
be subject to a 10% excise tax on any excess contributions unless such excess
contributions, together with any income allocable thereto, either are
re-characterized or are distributed before the close of the first 2-1/2 months
following the plan year to which such excess contributions relate. In addition,
in order to avoid disqualification of the plan, any contributions by highly
compensated employees that exceed the average contribution limitation in any
plan year , referred to as excess aggregate contributions, together with any
income allocable thereto, must be distributed to such highly compensated
employees before the close of the following plan year. However, the 10% excise
tax will be imposed on First Federal with respect to any excess aggregate
contributions, unless such amounts, plus any income allocable thereto, are
distributed within 2-1/2 months following the close of the plan year in which
they arose.
INVESTMENT OF CONTRIBUTIONS AND ACCOUNT BALANCES
All amounts credited to members' accounts under the plan are held in
the plan trust which is administered by the trustee appointed by First Federal's
board of directors.
Prior to the effective date of the offering, members have been provided
the opportunity to direct the investment of their accounts into one of the
following funds:
A. S&P 500 Stock Fund
B. Stable Value Fund
C. S&P MidCap Stock Fund
D. Money Market Fund
E. Government Bond Fund
F. Income Plus Fund
G. Growth & Income Fund
H. Growth Fund
I. International Stock Fund
The plan now provides that in addition to the funds specified above, a
member may direct the trustee to invest all or a portion of his account in the
First Federal Bankshares, Inc. stock fund.
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A member may elect to have both past contributions and earnings, as
well as future contributions to the member's account invested either in the
First Federal Bankshares, Inc. stock fund or among the funds listed above.
Transfers of past contributions and the earnings thereon do not affect the
investment mix of future contributions. Each member who makes an election to
direct investment of assets under the First Federal Bankshares, Inc. stock fund
may change such investment at a future date, in whole, or in part, by filing a
change of investment allocation form with the plan's third-party administrator,
the Pentegra Group, or by using Pentegra Group's voice response unit by calling
(800)433-4422, in accordance with established procedures to dispose of such plan
investment and reinvest the net proceeds in an alternative investment under the
plan. The proceeds of such sale, net of expenses, will be allocated to the
member's account and reinvested in accordance with the plan. Until an effective
direction is made by a member, a member's account will be invested in the Money
Market Fund.
A. PREVIOUS FUNDS.
Prior to the effective date of the offering, contributions under the
plan have been invested in the nine funds specified above. The Income Plus,
Growth & Income, Growth and International Stock funds were added July 2, 1997.
The following table provides performance data with respect to the investment
funds available under the plan, based on information provided to First Federal
Bankshares by the Pentegra Group:
NET INVESTMENT PERFORMANCE - FUND RETURNS THROUGH SEPTEMBER 30, 1998
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<CAPTION>
5 Calendar 10 Calendar
Year-to- Last 12 Years Years
Date Months Annualized Annualized
---- ------ ---------- ----------
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E. S&P 500 Stock Fund 5.6% 8.5% 19.7% 17.4%
F. Stable Value Fund 4.4 6.0 6.8 7.9
G. S&P MidCap Stock Fund -7.4 -6.8 17.2 18.8
H. Money Market Fund 4.2 5.5 5.0 6.2
I. Government Bond Fund 15.1 23.2 9.8 10.7
J. Income Plus Fund 4.6 6.1 8.5 N/A
K. Growth & Income Fund 3.0 3.8 12.1 N/A
L. Growth Fund 2.7 3.1 16.3 N/A
I. International Stock Fund -0.6 -8.1 13.0 9.3
</TABLE>
The following is a description of each of the plan's nine investment
funds:
S&P 500 STOCK FUND A fund designed to simulate the performance of the
Standard & Poor's Composite Index of 500 stocks. Preservation of the value of
the principal investment is not guaranteed.
8
<PAGE>
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.
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, Inc. 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, Inc. stock fund,
including cash dividends paid on common stock held in the First Federal
Bankshares, Inc. 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
9
<PAGE>
daily volume of shares purchased. Pending investment in common stock, assets
held in the First Federal Bankshares, Inc. stock fund will be placed in a
short-term interest fund. Any earnings that result therefrom will remain in the
First Federal Bankshares, Inc. 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, Inc. 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.
INVESTMENT IN THE FIRST FEDERAL BANKSHARES, INC. STOCK FUND MAY INVOLVE
CERTAIN RISKS IN INVESTMENT IN COMMON STOCK OF FIRST FEDERAL BANKSHARES. FOR A
DISCUSSION OF THESE RISK FACTORS, SEE THE PROSPECTUS.
BENEFITS UNDER THE PLAN
VESTING. A member, at all times, has a fully vested, nonforfeitable
interest in his or her monthly salary contribution and the earnings thereon
under the plan. A member is vested in any employer contributions, matching and
supplemental, in accordance with the following schedule:
<TABLE>
<CAPTION>
Years of Service Vesting Percentage
---------------- ------------------
<S> <C>
Less than 1 0%
1 25%
2 50%
3 75%
4 or more 100%
</TABLE>
A member will also be 100% vested in employer contributions regardless
of his or her years of employment, upon attainment of normal retirement age
under the plan, death or approved disability. Any non-vested contributions which
are forfeited shall be used at the option of First Federal to
(1) reduce administrative expenses;
(2) offset any contribution to be made for the plan year; or
(3) be allocated to all eligible members at the end of the plan year in
the same ratio as each member's salary bears to the total of the salary of all
members.
WITHDRAWALS AND DISTRIBUTIONS FROM THE PLAN
10
<PAGE>
APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL
RESTRICTIONS ON THE RIGHT OF A PLAN MEMBER TO WITHDRAW AMOUNTS HELD FOR HIS OR
HER BENEFIT UNDER THE PLAN PRIOR TO THE MEMBER'S TERMINATION OF EMPLOYMENT WITH
FIRST FEDERAL. A SUBSTANTIAL FEDERAL TAX PENALTY MAY ALSO BE IMPOSED ON
WITHDRAWALS MADE PRIOR TO THE MEMBER'S ATTAINMENT OF AGE 59-1/2, REGARDLESS OF
WHETHER SUCH A WITHDRAWAL OCCURS DURING HIS OR HER EMPLOYMENT WITH FIRST FEDERAL
OR AFTER TERMINATION OF EMPLOYMENT.
WITHDRAWALS PRIOR TO TERMINATION OF EMPLOYMENT OR AGE 59-1/2. A member
may make a withdrawal of his or her employee contributions in his or her 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 members have a true financial need before a
withdrawal may be made. A member may make a withdrawal of employer matching
contributions credited to his regular account if the member has completed 60
months of participation in the plan, the employer contributions have been in the
plan for at least 24 months, or the member has attained age 59-1/2. A member may
make a withdrawal from his or her regular account and rollover account once per
calendar year.
Members are entitled to borrow between $1,000 and $50,000 from the
plan, subject to the limitation of no more than 50% of the combined vested
balance of their regular account , 401(K) account and rollover account, but
excluding any amounts to the extent invested in the First Federal Bankshares,
Inc. stock fund.
DISTRIBUTION UPON TERMINATION OF EMPLOYMENT OR DISABILITY. Payment of
benefits to a member who retires, incurs a disability, or otherwise terminates
employment shall be made in a lump sum payment or in installments, over a period
of 2-10, 15 or 20 years, which period can not exceed the life expectancy of the
member, or may be transferred to another qualified employee benefit plan or
individual retirement account. Benefit payments may be deferred until April 1
following the calendar year in which the member attains age 70-1/2 or,
alternatively, the member may make one withdrawal per account each calendar
year.
DISTRIBUTION UPON DEATH. A Member who dies prior to the benefit
commencement date for retirement, disability or termination of employment shall
have his or her benefits paid to the surviving spouse or beneficiary in a lump
sum, unless the payment would exceed $500, and the member elected prior to death
that the payment be made in annual installments over a period not to exceed 5
years, or 10 years if the spouse is the beneficiary. If no election is in effect
at the time of the member's death, the beneficiary may elect to receive the
benefit in the form of annual installments over a period not to exceed 5 years,
or 10 years if the spouse is the beneficiary, or make withdrawals as often as
once per year, except that any balance remaining must be withdrawn by the fifth
anniversary, or tenth anniversary if the spouse is the beneficiary, of the
member's death. If a member dies after distribution of his or her interest has
begun, the remaining portion of such interests will continue to be distributed
as rapidly as under the method of distribution being used prior to the member's
death.
11
<PAGE>
NONALIENATION OF BENEFITS. Except with respect to federal income tax
withholding and as provided with respect to a qualified domestic relations
order, as defined in the Internal Revenue Code, benefits payable under the Plan
shall not be subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, charge, garnishment, execution, or levy of any
kind, either voluntary or involuntary, and any attempt to anticipate, alienate,
sell, transfer, assign, pledge, encumber, charge or otherwise dispose of any
rights to benefits payable under the plan shall be void.
TRUSTEE
The trustee with respect to the plan is the named fiduciary of the plan
for purposes of section 402 of the Employee Retirement Income Security Act. The
trustee is appointed by the board of directors of First Federal to serve at its
pleasure. The Bank of New York has been appointed as trustee of the plan. Until
the offering is concluded, Barry E. Backhaus, President and Chief Executive
Officer of First Federal, will serve as trustee of the First Federal Bankshares,
Inc. stock fund. The trustees are referred to collectively herein as the
trustee.
The trustee receives, holds and invests the contributions to the plan
in trust and distributes them to members and beneficiaries in accordance with
the terms of the plan and the directions of the plan administrator. The trustee
is responsible for investment of the assets of the trust.
PLAN ADMINISTRATOR
Pursuant to the terms of the plan, the plan is administered by the plan
administrator. First Federal is the plan administrator and has designated the
Compensation and Benefits Committee of the board of directors, to supervise its
responsibilities as such. The address of the plan administrator is 329 Pierce
Street, Sioux City, Iowa 51101, telephone number (712) 277-0200. The Plan
administrator is responsible for the administration of the plan, interpretation
of the provisions of the plan, prescribing procedures for filing applications
for benefits, preparation and distribution of information explaining the plan,
maintenance of plan records, books of account and all other data necessary for
the proper administration of the plan, and preparation and filing of all returns
and reports relating to the plan which are required to be filed with the U.S.
Department of Labor and the Internal Revenue Service, and for all disclosures
required to be made to Members, beneficiaries, and others under Sections 104 and
105 of the Employee Retirement Income Security Act.
REPORTS TO PLAN MEMBERS
The plan administrator will furnish to each member a statement
quarterly 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 such member's account for
that period.
12
<PAGE>
AMENDMENT AND TERMINATION
It is the intention of First Federal to continue the plan indefinitely.
Nevertheless, First Federal may terminate the plan at any time. If the Plan is
terminated in whole or in part, then regardless of other provisions in the plan,
each member affected by such termination shall have a fully vested interest in
his or her accounts. First Federal reserves the right to make, from time to
time, any amendment or amendments to the plan which do not cause any part of the
trust to be used for, or diverted to, any purpose other than the exclusive
benefit of members or their beneficiaries; provided, however, that First Federal
may make any amendment it determines necessary or desirable, with or without
retroactive effect, to comply with the Employee Retirement Income Security Act.
MERGER, CONSOLIDATION OR TRANSFER
In the event of the merger or consolidation of the plan with another
plan, or the transfer of the trust assets to another plan, the plan requires
that each member would, if either the plan or the other plan then terminated,
receive a benefit immediately after the merger, consolidation or transfer which
is equal to or greater than the benefit he or she would have been entitled to
receive immediately before the merger, consolidation or transfer, if the plan
had then terminated.
FEDERAL INCOME TAX CONSEQUENCES
The following is only a brief summary of certain federal income tax
aspects of the plan which are of general application under the Internal Revenue
Code and is not intended to be a complete or definitive description of the
federal income tax consequences of participating in or receiving distributions
from the plan. The summary is necessarily general in nature and does not purport
to be complete. Moreover, statutory provisions are subject to change, as are
their interpretations, and their application may vary in individual
circumstances. Finally, the consequences under applicable state and local income
tax laws may not be the same as under the federal income tax laws. Members are
urged to consult their tax advisors with respect to any distribution from the
Plan and transactions involving the plan.
The plan is qualified under section 401(a) and 401(k) of the Internal
Revenue Code and the related trust is exempt from tax under section 501(a) of
the Internal Revenue Code. A plan that is qualified under these sections of the
Internal Revenue Code is afforded special tax treatment which include the
following:
(1) the employer is allowed an immediate tax deduction for the amount
contributed to the plan each year;
(2) participants pay no current income tax on amounts contributed by
the employer on their behalf; and
(3) earnings of the plan are tax-exempt thereby permitting the tax-free
accumulation of income and gains on investments.
13
<PAGE>
The Plan will be administered to comply in operation with the
requirements of the Internal Revenue Code as of the applicable effective date of
any change in the law. First Federal expects to timely adopt any amendments to
the Plan that may be necessary to maintain the qualified status of the plan
under the Internal Revenue Code.
Assuming that the plan is administered in accordance with the
requirements of the Internal Revenue Code, membership in the plan under existing
federal income tax laws will have the following effects:
(1) Amounts contributed to a member's account and the investment
earnings on the account are not includable in a member's federal taxable income
until such contributions or earnings are actually distributed or withdrawn from
the plan. Special tax treatment may apply to the taxable portion of any
distribution that includes common stock or qualifies as a lump sum distribution,
as described below; and
(2) Income earned on assets held by the trust will not be taxable to
the trust.
LUMP SUM DISTRIBUTION. A distribution from the plan to a member or the
beneficiary of a member will qualify as a lump sum distribution if it is made:
(1) within one taxable year of the member or beneficiary;
(2) on account of the member's death, disability or separation from
service, or after the member attains age 59-1/2; and
(3) consists of the balance to the credit of the member under this plan
and all other profit sharing plans, if any, maintained by First Federal. The
portion of any lump sum distribution that is required to be included in the
member's or beneficiary's taxable income for federal income tax purposes,
referred to as the total taxable amount, consists of the entire amount of such
lump sum distribution less the amount of after-tax contributions, if any, made
by the member to any other profit sharing plan maintained by First Federal which
is included in such distribution.
AVERAGING RULES. The portion of the total taxable amount of a lump sum
distribution that is attributable to participation after 1973 in the plan or in
any other profit-sharing plan maintained by First Federal, referred to as the
ordinary income portion, will be taxable generally as ordinary income for
federal income tax purposes. However, a member who has completed at least five
years of participation in the plan, including participation in the Financial
Institutions Thrift Plan, before the taxable year in which the distribution is
made, or a beneficiary who receives a lump sum distribution on account of the
member's death, regardless of the period of the member's participation in the
plan or any other profit-sharing plan maintained by First Federal, may elect to
have the ordinary income portion of such lump sum distribution taxed according
to a special five-year averaging rule. The election of the special averaging
rules may apply only to one lump sum distribution received by the member or
beneficiary, provided such amount is received on or after the member turns
59-1/2 and the recipient elects to have any other lump sum distribution from a
qualified plan received in the same
14
<PAGE>
taxable year taxed under the special averaging rule. Under a special grandfather
rule, individuals who turned 50 by 1985 may elect to have their lump sum
distribution taxed under either the five-year averaging rule or under the prior
law ten-year averaging rule. Such individuals also may elect to have that
portion of the lump sum distribution attributable to the member's pre-1974
participation in the plan taxed at a flat 20% rate as gain from the sale of a
capital asset.
COMMON STOCK INCLUDED IN LUMP SUM DISTRIBUTION. If a lump sum
distribution includes common stock, the distribution generally will be taxed in
the manner described above, except that the total taxable amount will be reduced
by the amount of any net unrealized appreciation with respect to such common
stock, i.e., the excess of the value of such common stock at the time of the
distribution over the cost or other basis to the trust. The tax basis of such
common stock to the member or beneficiary for purposes of computing gain or loss
on its subsequent sale will be the value of the common stock at the time of
distribution less the amount of net unrealized appreciation. Any gain on a
subsequent sale or other taxable disposition of such common stock, to the extent
of the amount of net unrealized appreciation at the time of distribution, will
be considered long-term capital gain regardless of the holding period of such
common stock. Any gain on a subsequent sale or other taxable disposition of the
common stock in excess of the amount of net unrealized appreciation at the time
of distribution will be considered short-term, mid-term or long-term capital
gain depending upon the length of the holding period of the common stock. The
recipient of a distribution may elect to include the amount of any net
unrealized appreciation in the total taxable amount of such distribution to the
extent allowed by the regulations to be issued by the Internal Revenue Service.
CONTRIBUTION TO ANOTHER QUALIFIED PLAN OR TO AN INDIVIDUAL RETIREMENT
ACCOUNT. A member may defer federal income taxation of all or any portion of the
total taxable amount of a lump sum distribution, including the proceeds from the
sale of any common stock included in the lump sum distribution, to the extent
that such amount, or a portion thereof, is contributed, within 60 days after the
date of its receipt by the member, to another qualified plan or to an 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 the member's income for federal income tax
purposes and will not be eligible for the special averaging rules or for capital
gains treatment. Additionally, a member may defer the federal income taxation of
any portion of an amount distributed from the plan on account of the member's
disability or separation from service, generally, if the amount is distributed
within one taxable year of the Member, and such amount is contributed, within 60
days after the date of its receipt by the member, to an individual retirement
account. Prior to 1993, following the partial distribution of a member's
account, any remaining balance under the plan, and the balance to the credit of
the member under any other profit sharing plan sponsored by First Federal, would
not be eligible for the special averaging rules or for capital gains treatment.
For these purposes, a "partial distribution" is a distribution within one
taxable year of the member equal to at least 50% of the balance of a member's
account.
15
<PAGE>
Pursuant to a change in the law, effective January 1, 1993, virtually
all distributions from the plan may be rolled over to another qualified plan or
to an individual retirement account without regard to whether the distribution
is a lump sum distribution or a partial distribution. Effective January 1, 1993,
members have the right to elect to have the trustee transfer all or any portion
of an "eligible rollover distribution" directly to another plan qualified under
section 401(a) of the Internal Revenue Code or to an individual retirement
account. If the Member does 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 plan except:
(1) a distribution that is (a) one of a series of substantially equal
periodic payments made, not less frequently than annually, over the member's
life or the joint life of the member and the member's designated beneficiary, or
(b) for a specified period of ten years or more;
(2) any amount that is required to be distributed under the minimum
distribution rules; and
(3) any other distributions excepted under applicable federal law.
The beneficiary of a member who is the member's surviving spouse also
may defer federal income taxation of all or any portion of a distribution from
the plan to the extent that such amount, or a portion thereof, is contributed
within 60 days after the date of its receipt by the surviving spouse, to an
individual retirement account. If all or any portion of the total taxable amount
of a lump sum distribution is contributed by the surviving spouse of a member to
an 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 the member's 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. A member who receives a
distribution from the plan prior to attaining age 59-1/2 will be subject to an
additional income tax equal to 10% of the taxable amount of the distribution.
The 10% additional income tax will not apply, however, to the extent the
distribution is rolled over into an IRA or another qualified plan or the
distribution is
(1) made to a beneficiary, or to the estate of a member, on or after
the death of the member;
(2) attributable to the member's being disabled within the meaning of
section 72(m)(7) of the Internal Revenue Code;
16
<PAGE>
(3) part of a series of substantially equal periodic payments not less
frequently than annually made for the life or life expectancy of the member or
the joint lives or joint life expectancies of the member and his beneficiary;
(4) made to the member after separation from service on account of
early retirement under the plan after attainment of age 55;
(5) made to pay medical expenses to the extent deductible for federal
income tax purposes;
(6) made to an alternate payee pursuant to a qualified domestic
relations order; or
(7) made to effect the distribution of excess contributions or excess
deferrals.
THE EMPLOYEE RETIREMENT INCOME AND SECURITY ACT AND OTHER QUALIFICATIONS
As noted above, the plan is subject to certain provisions of the
Employee Retirement Income Security Act and has applied for a favorable
determination that it is qualified under section 401(a) of the Internal Revenue
Code.
The foregoing is only a brief summary of certain federal income tax
aspects of the plan which are of general application under the Internal Revenue
Code and is not intended to be a complete or definitive description of the
federal income tax consequences of participating in or receiving distributions
from the plan. Accordingly, each member is urged to consult a tax advisor
concerning the federal, state and local tax consequences of participating in and
receiving distributions from the plan.
SEC REPORTING AND SHORT-SWING PROFIT LIABILITY
Section 16 of the Securities Exchange Act of 1934 imposes reporting and
liability requirements on officers, directors, and persons beneficially owning
more than 10% of public companies such as First Federal Bankshares. Section
16(a) of the Securities Exchange Act of 1934 requires the filing of reports of
beneficial ownership. Within 10 days of becoming 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, Inc. stock fund of the plan by officers,
directors and persons beneficially owning more than 10% of the common stock of
First Federal Bankshares generally must be reported to the Securities and
Exchange Commission by such individuals.
17
<PAGE>
In addition to the reporting requirements described above, section
16(b) of the Securities Exchange Act of 1934 provides for the recovery by First
Federal Bankshares of profits realized by an officer, director or any person
beneficially owning more than 10% of First Federal Bankshares' common stock
resulting from non-exempt purchases and sales of First Federal Bankshares'
common stock within any six-month period.
The Securities and Exchange Commission has adopted rules that provide
exemption from the profit recovery provisions of section 16(b) for all
transactions in employer securities within an 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, section 16(b) persons are required to hold shares of common stock
distributed from the plan for six months following such distribution and are
prohibited from directing additional purchases of units within the First
Federal Bankshares, Inc. stock fund for six months after receiving such a
distribution.
FINANCIAL INFORMATION REGARDING PLAN ASSETS
Financial statements representing the net assets available for plan
benefits at September 30, 1998, as prepared by the Pentegra Group, are attached
to this prospectus supplement.
LEGAL OPINION
The validity of the issuance of the common stock will be passed upon by
Luse Lehman Gorman Pomerenk & Schick, A Professional Corporation, Washington,
D.C., which firm acted as special counsel to First Federal in connection with
First Federal Bankshares' conversion from a mutual holding company to a stock
form of ownership.
18
<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>
19
<PAGE>
PROSPECTUS
FIRST FEDERAL BANKSHARES, INC.
First Federal Bankshares, Inc. is offering common stock in a
subscription offering and, to the extent shares are available, in a community
offering. 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. based on an exchange ratio.
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 in our
subription offering. 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 12:00 noon, Central Time on March __, 1999. You
may call _________________ 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 in our
community offering 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 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.
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.
Also, we have agreed to acquire Mid-Iowa Financial Corp. and its
wholly-owned subsidiary, Mid-Iowa Savings Bank, FSB. This acquisition and the
conversion and stock offering are inter-dependent transactions; neither
transaction will occur unless both of them do.
We will hold all funds received from subscribers in an interest-bearing
savings account at First Federal until the completion or termination of the
conversion. The Nasdaq Stock Market has given us preliminary 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 12 .
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 __, 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.....................................................................................................12
Selected Consolidated Financial and Other Data
of First Federal and Subsidiaries................................................................................16
Selected Consolidated Financial And Other Data of Mid-Iowa Financial.............................................19
Recent Developments..............................................................................................21
Management's Discussion and Analysis of Recent Developments......................................................23
Selected Unaudited Pro Forma Consolidated Financial Data of First Federal Bankshares, Inc........................26
First Federal Bankshares.........................................................................................27
First Federal....................................................................................................28
Historical and Pro Forma Capital Compliance......................................................................29
Use of Proceeds..................................................................................................31
Dividend Policy..................................................................................................32
Market for the Common Stock......................................................................................33
Capitalization...................................................................................................35
Pro Forma Data...................................................................................................37
First Federal Savings Bank of Siouxland And Subsidiaries
Consolidated Statements of Operation.............................................................................47
Management's Discussion and Analysis of
Financial Condition and Results of Operations....................................................................48
Business of First Federal........................................................................................64
Regulation.......................................................................................................87
Taxation.........................................................................................................96
Management of First Federal Bankshares...........................................................................98
Management of First Federal......................................................................................99
Beneficial Ownership of Common Stock............................................................................113
Subscriptions by Executive Officers and Directors...............................................................114
The Conversion..................................................................................................115
Comparison of Stockholders' Rights..............................................................................139
Acquisition of Mid-Iowa Financial...............................................................................145
Restrictions on Acquisition of First Federal Bankshares.........................................................157
Description of Capital Stock of First Federal Bankshares........................................................159
Description of Capital Stock of First Federal...................................................................160
Transfer Agent And Registrar....................................................................................161
Experts.........................................................................................................161
Legal Opinions..................................................................................................161
Additional Information..........................................................................................161
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 received approval
from the Office of Thrift Supervision to become a savings and loan holding
company.
FIRST FEDERAL BANKSHARES, M.H.C.
First Federal Bankshares, M.H.C.'s sole business activity is holding
1,524,600 shares of First Federal's common stock, which represents 53.6% of its
outstanding shares, as well as $310,000 in cash or cash equivalents and other
assets of $1.5 million as of September 30, 1998. As part of the conversion,
First Federal Bankshares, M.H.C. will merge into First Federal, with First
Federal as the surviving entity.
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
First Federal is a federally-chartered savings bank headquartered in
Sioux City, Iowa. At September 30, 1998, 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 SUBSCRIPTION OFFERING AND THE COMMUNITY OFFERING
We are selling in this offering the 53.6% interest in First Federal now
owned by First Federal Bankshares, M.H.C. Current and former depositors and
borrower customers of First Federal and First Federal's employee stock ownership
plan have priority rights to subscribe for shares in First Federal Bankshares
representing this interest. The priorities are as follows:
(1) Depositors with $50 or more on deposit as of September 30,
1997 get first priority.
(2) First Federal's employee stock benefit plans, including the
employee stock ownership plan, get second priority. The
employee stock ownership plan will 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 _________, 1999, and borrowers as of February
11, 1992 whose loans continue to be outstanding on _________,
1999, get fourth priority.
We are selling between 2,635,000 and 3,565,000 shares of common stock,
all at a price of $10.00 per share. The number of shares to be sold may be
increased to 4,099,750. The actual amount of shares we sell will depend on an
independent appraisal of First Federal Bankshares, M.H.C. and First Federal
performed by RP Financial, L.C., an independent appraisal firm. The factors that
went into the appraisal are discussed below under "Stock Pricing, Exchange Ratio
and Number of Shares to Be Issued in the Conversion."
The subscription offering expires at 12:00 noon, Central Time, on
__________, 1999, unless extended by First Federal. You cannot transfer your
subscription rights. If you attempt to transfer your rights, you may lose the
right to purchase shares and may be subject to criminal prosecution and/or other
sanctions.
During the subscription offering, we will also offer shares of common
stock to the general public in a community offering. In the community offering,
current stockholders of First Federal will have first preference and people who
reside in our community will have second preference. The community offering will
end on ___________, 1999, unless extended with the approval of the Office of
Thrift Supervision, if necessary.
You will not need to pay a commission to buy any shares in the
conversion.
Sandler O'Neill & Partners, L.L.P. and Investment Bank Services, Inc.
are managing both the subscription offering and the community offering. They are
registered broker dealers and members of the National Association of Securities
Dealers, Inc. They are not obligated to purchase any shares of common stock in
our offering.
Shares not sold in the subscription offering or community offering may
be offered for sale in a syndicated community offering, which would be an
offering to the general public on a best efforts basis by a selling group of
broker-dealers managed by Sandler O'Neill.
We have described the subscription offering, the community offering and
the syndicated community offering in greater detail beginning at page 124 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.
For example, if you own 100 First Federal shares, you would receive 194 shares
of First Federal Bankshares, assuming we sell 3.1 million shares, the mid-point
of the offering range.
5
<PAGE>
<TABLE>
<CAPTION>
SHARES TO BE SOLD IN THIS SHARES TO BE EXCHANGED FOR
OFFERING FIRST FEDERAL COMMON STOCK TOTAL SHARES OF
------------------------- -------------------------- COMMON STOCK TO EXCHANGE
AMOUNT PERCENT AMOUNT PERCENT BE OUTSTANDING RATIO
------ ------- ------ ------- --------------- --------
<S> <C> <C> <C> <C> <C> <C>
Minimum 2,635,000 53.6% 2,178,665 46.4% 4,813,665 1.6499
Midpoint 3,100,000 53.6 2,563,135 46.4 5,663,135 1.9411
Maximum 3,565,000 53.6 2,947,605 46.4 6,512,605 2.2323
15% above 4,099,750 53.6 3,389,746 46.4 7,489,496 2.5671
Maximum
</TABLE>
If you own your shares of First Federal in "street name," the exchange
will occur automatically and you need take no action. If you hold certificated
shares, you will receive a transmittal form with instructions to surrender your
stock certificates. You will receive new certificates of First Federal
Bankshares' common stock within five business days after we receive properly
executed transmittal forms. We will pay cash instead of issuing fractional
shares of common stock in the exchange.
Under federal regulations, current stockholders of First Federal do not
have dissenters' rights or appraisal rights.
REASONS FOR THE CONVERSION
We are pursuing the conversion for the following reasons:
- First Federal Bankshares, M.H.C. and First Federal have agreed
to acquire Mid-Iowa Financial Corp. and its wholly-owned
subsidiary, Mid-Iowa Savings Bank, FSB. The acquisition is
described immediately below. The net cash proceeds raised in
the conversion will help finance the acquisition.
- After the conversion, our common stock will qualify for
listing on the Nasdaq National Market because of the larger
number of shares that will be outstanding. We believe this
listing and the larger number of outstanding shares will make
it easier for you to buy and sell our common stock.
- After the conversion, we can repurchase shares of our common
stock without adverse tax consequences. Repurchasing common
stock is commonly used by financial institutions to deploy
excess capital.
- After the conversion, we will have greater flexibility under
current law and regulations to acquire other financial
institutions and to diversify operations.
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.
$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 after giving effect to 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.
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, Exchange Ratio and Number of Shares to be Issued" for additional
details.
PURCHASE LIMITATIONS
The minimum number of shares that may be purchased is 25. We have
established the following additional purchase limitations:
1. No person may purchase more than 85,000 shares in this
offering.
2. No person, either alone or together with associates or persons
acting in concert, may purchase shares in an amount that, when
combined with shares received in exchange for First Federal
common stock, exceeds 85,000 shares.
Persons owning shares of First Federal common stock may be limited in
their ability to subscribe for and purchase shares in this offering because
Office of Thrift Supervision policy requires that the maximum purchase
limitation include shares to be received in exchange for shares of First Federal
common stock.
7
<PAGE>
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 132.
PROCEDURE FOR PURCHASING COMMON STOCK
To subscribe for shares of common stock in the subscription offering,
send or deliver an original, signed stock order form together with full payment
to us in the postage-paid envelope provided so that we receive the stock order
form before the end of the subscription offering. The certification that is part
of the stock order form must also be signed. Payment for shares may be made in
cash if made in person, or by check or money order. First Federal will pay
interest at the rate of __% from the date funds are received until completion or
termination of the conversion. Subscribers who have deposit accounts with First
Federal may include instructions on the stock order form 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.
We have the discretion to accept or reject orders received either
through the community offering or the syndicated community offering. If an order
is rejected in part, there is no right to cancel the remainder of the order.
Owners of self-directed 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 IRAs 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 in the Subscription and Direct
Community Offerings."
USE OF PROCEEDS
We will use the proceeds of this offering as follows:
1. First Federal Bankshares will retain $5 million of the net
proceeds, which will include a loan to the 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.
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.
8
<PAGE>
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."
BENEFITS OF THE CONVERSION TO MANAGEMENT
We intend to establish an employee stock ownership plan that will
purchase up to 7% of the shares we sell in this offering, or 249,550 shares
assuming we sell the maximum of the shares proposed to be sold. If we sell more
than the maximum number of shares, this plan will have first priority to
purchase shares over this maximum, up to the total of 7%. This plan is a
tax-qualified retirement plan for all eligible employees. Assuming the plan
purchases 249,550 shares, First Federal Bankshares will recognize additional
compensation expense of $2,495,500 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.
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.
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.
9
<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>
<CAPTION>
NUMBER OF SHARES TO BE VALUE OF GRANT OR AGREEMENTS
GRANTED PERCENTAGE OF
-------------------------------------- ---------------------------------- COMMON
AT MINIMUM AT MAXIMUM AT MINIMUM AT MAXIMUM STOCK TO BE
OF OFFERING OF OFFERING OF OFFERING OF OFFERING SOLD IN THE
RANGE RANGE RANGE RANGE OFFERING
------------------ ------------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C>
EMPLOYEE STOCK 184,450 249,550 $1,844,500 $2,495,550 7%
OWNERSHIP PLAN
1999 RECOGNITION 79,050 106,950 790,500 1,069,500 3%
PLAN
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>
Finally, outstanding stock options and shares of common stock that were
awarded in First Federal's previously implemented benefit plans will be
converted into options and common stock of First Federal Bankshares, with the
number to be based on the exchange ratio.
MARKET FOR COMMON STOCK
The Nasdaq Stock Market has given us preliminary approval to list the
common stock on the Nasdaq National Market under the symbol FFSX. The common
stock of First Federal is currently listed on the Nasdaq "SmallCap" Market under
the symbol FFSX. While it is expected that First Federal Bankshares' common
stock will be more easily tradeable because there will be significantly more
outstanding shares than First Federal's common stock, there can be no assurance
of this.
Sandler O'Neill has advised us that it intends to be a market maker in
the common stock and will assist us in obtaining additional market makers.
DIVIDEND POLICY
First Federal now pays a cash dividend of $0.12 per share per quarter,
or $0.48 per share per year. After the conversion, First Federal Bankshares
expects to maintain this dividend rate. 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
10
<PAGE>
$0.1870 per share per year at the minimum, midpoint, maximum and adjusted
maximum of the offering range, respectively. The first dividend is expected to
be declared for the quarter ending __________, 1999.
COMPARISON OF STOCKHOLDERS' RIGHTS
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 139.
ACQUISITION OF MID-IOWA FINANCIAL CORP.
On August 17, 1998, First Federal Bankshares, M.H.C. and First Federal
agreed to acquire Mid-Iowa Financial Corp. and its wholly-owned subsidiary,
Mid-Iowa Savings Bank, FSB in a cash acquisition. The conversion and the stock
offering will assist in financing this acquisition. The acquisition and the
conversion are interdependent transactions. Neither transaction will occur
unless both of them do.
In the merger, each share of Mid-Iowa Financial common stock will be
converted into the right to receive $15.00 in cash, 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 merger consideration will
increase by $3,700 per day until the merger is completed. First Federal
estimates that the merger consideration will be approximately $27.8 million (or
$29.0 million assuming full exercise of stock options prior to the closing of
the merger), if the merger is completed prior to April 15, 1999.
The merger must be approved by stockholders of Mid-Iowa Financial Corp.
and by the Office of Thrift Supervision. The merger is expected to occur
simultaneously with, or immediately after the conversion. Since neither the
conversion nor the merger will occur unless both of them do, subscription funds
for the shares to be sold in this offering, with interest, will be returned to
subscribers if the merger does not occur.
The merger will expand the bank's presence in communities located in
the Des Moines area and will increase its deposit base, loan portfolio and
number of full-service offices.
For further information about Mid-Iowa Financial Corp. and Mid-Iowa
Savings Bank, FSB, see "Excerpts from Annual Report on Form 10-KSB for the year
ended September 30, 1998" attached to this prospectus at page G-1.
11
<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 -- Management of Interest Rate Risk."
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. At September 30, 1998, First Federal's return on
equity ratio was 9.57%. However, the net proceeds from the conversion will cause
our return on equity ratio to decrease to 9.16%, 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 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 typical converting financial institutions often
results in immediate post-conversion price appreciation, but our pricing is not
as likely to do so.
12
<PAGE>
SOME LOANS WE MAKE HAVE HIGHER DEFAULT RISKS THAN RESIDENTIAL MORTGAGE LOANS.
We, like most savings banks, primarily originate residential mortgage
loans. This type of loan typically has the lowest default rate of loans made by
savings banks. Like many savings banks, however, we also originate other loans
including consumer loans, multi-family loans and commercial real estate loans.
These loans typically carry higher default rates, but also can be more
profitable.
At September 30, 1998, our consumer loan portfolio, which included a
small number of commercial business loans, amounted to $50.4 million, or 12.4%
of total net loans. We intend to expand our consumer lending activities within
our primary market area. Collateral such as automobiles, boats and other
personal property depreciate rapidly and are often an inadequate repayment
source if a borrower defaults. In addition, consumer loan repayments depend on
the borrower's continuing financial stability and are more likely to be
adversely affected by job loss, divorce, illness, personal bankruptcy and other
financial hardship.
At September 30, 1998, our multi-family and commercial real estate loan
portfolio amounted to $60.7 million, or 14.9% of total loans. Because payments
on loans secured by multi-family and commercial properties often depend upon the
successful operation and management of the properties, repayment of 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 INCREASE OUR FUTURE COMPENSATION EXPENSE BY $7.2 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."
OUR AGREEMENT TO MAKE PAYMENTS AFTER A CHANGE IN CONTROL IN VARIOUS EMPLOYEE
CONTRACTS AND PLANS WOULD INCREASE THE COST OF ACQUIRING US BY $1,520,000 AND SO
MAY DISCOURAGE TAKEOVER ATTEMPTS.
13
<PAGE>
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 $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 ATTEMPTS.
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 "Restrictions on Acquisitions of the Company and the Bank."
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. For a detailed discussion of
these provisions, see "Restrictions on Acquisition of the Company and the Bank
- -- Restrictions in the Company's Certificate of Incorporation and Bylaws."
IF OUR COMPUTER SYSTEMS OR THOSE OF OUR VENDORS AND CUSTOMERS DO NOT WORK
PROPERLY IN THE YEAR 2000, OUR OPERATIONS WILL BE SIGNIFICANTLY DISRUPTED.
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."
THERE ARE RISKS RELATED TO THE ACQUISITION OF MID-IOWA FINANCIAL.
The future growth of the bank and First Federal Bankshares will depend,
in part, on the success of the merger which will, in turn, depend, on a number
of factors, including the bank's ability to integrate the Mid-Iowa Savings
branches into the current operations of the bank; the bank's ability to limit
the outflow of deposits held by customers in the Mid-Iowa Savings branches; the
bank's ability to control the non-interest expense from the merger in a manner
that 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
14
<PAGE>
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.
15
<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 in conjunction with, the Consolidated Financial Statements and Notes
thereto of First Federal contained elsewhere herein. The selected consolidated
financial condition and operating data at, and for the three month periods
ended, September 30, 1998 and 1997 are derived from unaudited consolidated
financial statements and, in the opinion of management of First Federal, all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of the results for the unaudited periods have been made. The
results of operations data presented below for the three months ended September
30, 1998, are not necessarily indicative of the results of First Federal that
may be expected for the entire year.
<TABLE>
<CAPTION>
AT AT JUNE 30,
SEPTEMBER 30, ------------------------------------------------------------
1998 1998(8) 1997 1996 1995 1994
--------- --------- --------- --------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets..................... $569,612 $551,450 $468,568 $443,516 $434,122 $391,166
Loans receivable, net............ 407,455 404,800 341,254 320,408 311,775 264,616
Securities 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)
16
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED JUNE 30,
-------------------- --------------------------------------------
1998 1997 1998(8) 1997 1996 1995 1994
--------- --------- --------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Total interest income............... $10,056 $ 8,510 $35,364 $33,691 $31,686 $29,007 $27,460
Total interest expense.............. 6,283 5,172 21,377 20,328 19,645 17,707 15,642
------- ------- ------- ------- ------- ------- -------
Net interest income............... 3,773 3,338 13,987 13,363 12,041 11,300 11,818
Provision for loan losses........... 75 70 345 258 233 142 100
------- ------- ------- ------- ------- ------- -------
Net interest income after provision
for loan losses................ 3,698 3,268 13,642 13,105 11,808 11,158 11,718
------- ------- ------- ------- ------- ------- -------
Noninterest income:
Fees and service charges.......... 449 287 1,392 1,143 1,092 771 800
Gain on sale of real estate owned. -- -- -- -- -- 3 870
Gain on sale of loans held for sale 87 49 242 207 290 160 261
Other income...................... 366 339 1,544 1,201 1,124 689 862
------- ------- ------- ------- ------- ------- -------
Total noninterest income.......... 902 675 3,178 2,551 2,506 1,623 2,793
------- ------- ------- ------- ------- ------- -------
Noninterest expense:
Compensation and benefits......... 1,452 1,466 6,702 5,655 5,150 4,615 4,225
Office property and equipment..... 447 334 1,500 1,293 1,159 1,064 1,063
Special deposit insurance assessment -- -- -- 2,233 -- -- --
Other noninterest expense......... 1,063 839 3,326 3,512 3,410 3,327 3,590
------- ------- ------- ------- ------- ------- -------
Total noninterest expense......... 2,962 2,639 11,528 12,693 9,719 9,006 8,878
------- ------- ------- ------- ------- ------- -------
Earnings before income taxes and
cumulative effect of accounting 1,638 1,304 5,292 2,963 4,595 3,775 5,633
change
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 -- -- -- -- -- -- 732
change
------- ------- ------- ------- ------- ------- -------
Net earnings........................ $ 1,018 $ 841 $ 3,418 $ 1,939 $ 3,052 $ 2,516 $ 4,809
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
Earnings per share(1)
Net earnings before cumulative
effect of accounting change....... $ .36 $ .30 $ 1.21 $ .69 $ 1.08 $ .90 $ 1.46
Cumulative effect of accounting
change............................ $ -- $ -- -- -- -- -- .26
----- ----- ----- ----- ----- ----- -------
Basic earnings per share.......... $ .36 $ .30 $ 1.21 $ .69 $ 1.08 $ .90 $ 1.72
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
Diluted earnings per share........ $ .35 $ .29 $ 1.19 $ .67 $ 1.06 $ .88 $ 1.70
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
Cash dividends declared per common
share............................. $ .12 $ .12 $ .48 $ .47 $ .44 $ .36 $ .34
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
</TABLE>
- ------------------------
(1)Adjusted for stock distributions.
(additional footnotes on next page)
17
<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)......................... 106.07 108.04 118.34 103.25 121.50 123.90 132.00
ASSET QUALITY RATIOS:
Nonperforming loans to total loans.... .30 .28 .33 .15 .22 .22 .35
Nonperforming loans to total assets... .21 .21 .24 .11 .16 .16 .24
Nonperforming assets as a percentage
of total assets(5)................. .34 .22 .34 .11 .17 .17 .26
Nonperforming loans and real estate
owned to total loans and real
estate owned....................... . 47 .29 .47 .15 .24 .23 .38
Average interest-earning assets to
average interest-bearing
liabilities....................... 106.07 108.04 107.14 107.69 107.74 107.27 105.98
CAPITAL, EQUITY AND DIVIDEND RATIOS:
Tangible capital(6)................... 6.17 8.62 6.20 8.24 8.37 7.99 8.39
Core capital(6)....................... 6.17 8.62 6.20 8.24 8.37 7.99 8.77
Risk-based capital(6)................. 12.33 17.10 12.51 17.00 18.45 18.02 21.02
Average equity to average assets ratio 7.58 8.61 8.46 8.20 8.32 8.14 7.86
Dividend payout ratio................. 33.33 40.00 39.67 68.12 40.74 40.00 19.77
PER SHARE DATA:
Book value per share(7)............... 15.17 14.08 $14.80 $13.74 $13.08 $12.42 $11.81
Earnings per share (basic)............ .36 .30 1.21 .69 1.08 .90 1.72
OTHER DATA:
Full-service offices.................. 15 13 15 13 13 12 12
</TABLE>
- -------------------
(1) Excluding the special Savings Association Insurance Fund 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.
18
<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 in conjunction with the Consolidated Financial Statements and
Notes thereto of Mid-Iowa Financial contained elsewhere herein.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets........................................... $147,517 $128,017 $115,804 $108,221 $100,562
Loans receivable, net.................................. 71,436 66,418 62,123 57,847 54,269
Securities available for sale.......................... 4,994 4,983 4,974 837 851
Mortgage-backed and related securities held for investment 25,862 26,180 23,974 28,139 29,497
Investment securities.................................. 23,932 21,587 20,258 16,787 11,310
Deposits............................................... 96,353 89,378 82,872 78,671 78,883
Total borrowings....................................... 36,000 25,000 20,500 18,000 10,750
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>
19
<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.
20
<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 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>
21
<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).................. 0.52 0.25 0.52 0.25
Nonperforming loans to total assets(4)................. 0.38 0.19 0.38 0.19
Nonperforming assets as a percentage
of total assets(3)(4)................................ 0.43 0.19 0.43 0.19
Nonperforming loans and real estate owned
to total loans and real estate owned(4).............. 0.59 0.25 0.59 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.
22
<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.
NON-PERFORMING ASSETS AND DELINQUENCIES
Loans accounted for on a non-accrual basis increased by $845,000 from
$1.1 million at June 30, 1998 to $2.0 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
23
<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
24
<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 ant 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.
25
<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>
26
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,(1) FOR THE YEAR ENDED JUNE 30,(1)
1998 1998
------------------------------- ------------------------------
PRO FORMA PRO FORMA
PRO FORMA FOR ACQUISITION PRO FORMA FOR ACQUISITION
FOR ACQUISITION AND CONVERSION FOR ACQUISITION AND CONVERSION
--------------- --------------- --------------- ---------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
RESULTS OF OPERATIONS(2)
Net interest income....................... $4,267 $ 4,678 $16,035 $17,678
Provision for loan losses................. (90) (90) (405) (405)
------ ------- ------- -------
Net interest income after provision
for loan losses......................... $4,177 $ 4,588 $15,630 $17,273
Non-interest income....................... $1,245 $ 1,245 $ 4,525 $ 4,525
Non-interest expense...................... (3,936) (4,032) (15,300) (15,680)
------ ------- ------- -------
Income before income taxes................ $1,486 $ 1,801 $ 4,855 $ 6,118
Income taxes.............................. (586) (702) (1,782) (2,250)
------ ------- ------- -------
Net income................................ $ 900 $ 1,099 $ 3,073 $ 3,868
------ ------- ------- -------
------ ------- ------- -------
Diluted earnings per share(5)............. $ 0.31 $ 0.18 $ 1.07 $ 0.62
------ ------- ------- -------
------ ------- ------- -------
SELECTED RATIOS:
Performance ratios:
Return on average assets(3)(4).......... 0.52% 0.62% 0.48% 0.60%
Return on average equity(3)(4).......... 8.16% 6.01% 7.46% 5.58%
</TABLE>
- ----------------------
(1) Mid-Iowa Financial data included is at September 30, 1998 and for the three
months ended and the fiscal year ended September 30, 1998.
(2) Does not reflect any cost savings or other benefits of the acquisition of
Mid-Iowa Financial.
(3) These ratios are based on average daily balances.
(4) Annualized.
(5) Diluted earnings per share have been computed as follows: for "Pro Forma
for Acquisition" purposes, historical shares for diluted earnings per share
of 2,873,593 and 2,883,764 were used for the three-month period ended
September 30, 1998 and the year ended June 30, 1998, respectively; for "Pro
Forma for Acquisition and Conversion" purposes, post conversion shares,
including 69,742 and 109,512 incremental shares related to outstanding
stock options for the three month period ended September 30, 1998 and the
year ended June 30, 1998, respectively, were used and 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 be
primarily the shares of First Federal's capital stock acquired in the conversion
and that portion of the net proceeds of the conversion permitted by the Office
of Thrift Supervision to be retained by First Federal Bankshares and the loan to
the Employee Stock Ownership Plan. First Federal Bankshares anticipates
retaining $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 utilize the support staff of First Federal from time to time.
Additional employees will be hired as appropriate to the extent First Federal
Bankshares expands its business. The management of First Federal Bankshares is
set forth under "Management of First Federal Bankshares."
27
<PAGE>
The conversion will provide First Federal with additional capital to
support future growth, including the acquisition of Mid-Iowa Financial, and
enhance results of operations. Management believes that the holding company
structure will provide First Federal Bankshares with additional flexibility to
diversify its business activities through existing or newly formed subsidiaries,
or through acquisitions of or mergers with other financial institutions and
financial services related companies or for other business or investment
purposes, including the possible repurchase of common stock as permitted by the
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 by
the proceeds permitted to be retained by First Federal Bankshares and earnings
thereon or, alternatively, through dividends received from First Federal.
First Federal Bankshares' executive office is located at 329 Pierce
Street, Sioux City, Iowa, and its telephone number is (712) 277-0200.
FIRST FEDERAL
First Federal is a federally-chartered stock savings bank headquartered
in Sioux City, Iowa. Founded in 1923, First Federal's deposits have been
federally insured since 1935 by the Savings Association Insurance Fund and its
predecessor, the Federal Savings and Loan Insurance Corporation. First Federal
has been a member of the Federal Home Loan Bank 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 conducts operations through its main office in Sioux
City, Iowa, and its 12 branch offices in northwest and central Iowa and
northeast Nebraska.
On March 31, 1998, First Federal consummated the acquisition of GFS
Bancorp, Inc. 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.
28
<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.
29
<PAGE>
<TABLE>
<CAPTION>
FIRST FEDERAL MID-IOWA SAVINGS PRO FORMA CONSOLIDATED
HISTORICAL AT HISTORICAL AT HISTORICAL AT
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998 SEPTEMBER 30, 1998(5)
-------------------- -------------------- ---------------------
PERCENT PERCENT PERCENT
OF OF OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2)
--------- ---------- --------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
GAAP capital...... $ 43,167 7.58% $ 13,760 9.33% $ 44,903 6.36%
Tangible capital:
Capital level... $ 34,649 6.17% $ 11,158 7.67% $ 23,014 3.31%
Requirement..... 8,418 1.50 2,181 1.50 10,426 1.50%
-------- ------ -------- ------ -------- ------
Excess........ $ 26,231 4.67% $ 8,977 6.17% $ 12,588 1.81%
-------- ------ -------- ------ -------- ------
-------- ------ -------- ------ -------- ------
Core capital:
Capital level... $ 34,649 6.17% $ 11,158 7.67% $ 23,014 3.31%
Requirement(3).. 16,837 3.00 4,361 3.00 20,852 3.00%
-------- ------ -------- ------ -------- ------
Excess........ $ 17,812 3.17% $ 6,797 4.67% $ 2,162 0.31%
-------- ------ -------- ------ -------- ------
-------- ------ -------- ------ -------- ------
Risk-based capital:
Capital level(4) $ 37,326 12.33% $ 11,483 19.21% $ 25,998 7.41%
Requirement..... 24,221 8.00 4,782 8.00 28,054 8.00%
-------- ------ -------- ------ -------- ------
Excess........ $ 13,105 4.33% $ 6,701 11.21% $ (2,056) (0.59)%
-------- ------ -------- ------ -------- ------
-------- ------ -------- ------ -------- ------
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA AT SEPTEMBER 30, 1998, BASED UPON THE SALE OF
--------------------------------------------------------------------------------------
2,635,000 SHARES 3,100,000 SHARES 3,565,000 SHARES 4,099,750 SHARES(1)
-------------------- -------------------- -------------------- --------------------
PERCENT PERCENT PERCENT PERCENT
OF OF OF OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2)(3)
--------- --------- --------- --------- --------- --------- --------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP capital...... $ 62,292 8.61% $ 66,428 9.13% $ 70,565 9.64% $ 75,322 10.23%
Tangible capital:
Capital level... $ 40,403 5.65% $ 44,539 6.19% $ 48,676 6.72% $ 53,433 7.32%
Requirement..... 10,726 1.50% 10,795 1.50% 10,864 1.50% 10,944 1.50%
-------- ------ -------- ------ -------- ----- -------- -----
Excess........ $ 29,677 4.15% $ 33,744 4.69% $ 37,812 5.22% $ 42,489 5.82%
-------- ------ -------- ------ -------- ----- -------- -----
-------- ------ -------- ------ -------- ----- -------- -----
Core capital:
Capital level... $ 40,403 5.65% $ 44,539 6.19% $ 48,676 6.72% $ 53,433 7.32%
Requirement(3).. 21,453 3.00% 21,591 3.00% 21,729 3.00% 21,887 3.00%
-------- ------ -------- ------ -------- ----- -------- -----
Excess........ $ 18,950 2.65% $ 22,948 3.19% $ 26,947 3.72% $ 31,546 4.32%
-------- ------ -------- ------ -------- ----- -------- -----
-------- ------ -------- ------ -------- ----- -------- -----
Risk-based capital:
Capital level(4) $ 43,387 12.23% $ 47,523 13.36% $ 51,660 14.49% $ 56,417 15.78%
Requirement..... 28,375 8.00% 28,448 8.00% 28,522 8.00% 28,607 8.00%
-------- ------ -------- ------ -------- ----- -------- -----
Excess........ $ 15,012 4.23% $ 19,075 5.36% $ 23,138 6.49% $ 27,810 7.78%
-------- ------ -------- ------ -------- ----- -------- -----
-------- ------ -------- ------ -------- ----- -------- -----
</TABLE>
- ------------------------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to a 15% increase in the offering range to reflect changes
in market or general financial conditions following the commencement of the
offering.
(2) Tangible and core capital levels are shown as a percentage of total
adjusted assets. Risk-based capital levels are shown as a percentage of
risk-weighted assets. Pro forma total adjusted and risk-weighted assets
used for the capital calculations include the proceeds of the 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.
30
<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 utilize any of the net
proceeds of the offering until the consummation of the conversion.
First Federal Bankshares estimates that it will use between $20.0
million and $29.2 million, or $34.5 million if the offering range is increased
by 15%, to purchase all of the capital stock of First Federal to be issued upon
conversion. First Federal Bankshares will retain net proceeds in the amount of
$5.0 million, including the 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.
First Federal Bankshares intends to use a portion of the net proceeds
to loan funds to the Employee Stock Ownership Plan to enable that plan to
purchase 7% of the shares of First Federal Bankshares common stock issued in the
offering. First Federal Bankshares and First Federal may alternatively choose to
fund the Employee Stock Ownership Plan's stock purchases through a loan by a
third party financial institution. See "Management of First Federal--Benefits
for Employees and Officers." The net proceeds retained by First Federal
Bankshares may also be used to support the future expansion of operations
through branch acquisitions, the establishment of new branch offices, and the
acquisition of other financial institutions or diversification into other
banking related businesses. First Federal Bankshares and First Federal intend to
actively explore additional acquisitions, although with the exception of the
Mid-Iowa Financial acquisition neither First Federal Bankshares nor First
Federal has any specific plans, arrangements or understandings regarding any
additional expansions or acquisitions at this time, nor have criteria been
established to identify potential candidates for acquisition.
A tabular presentation of First Federal Bankshares expected use of
proceeds is set forth below:
<TABLE>
<CAPTION>
MINIMUM 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
31
<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.
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 serve to increase First Federal's capital to support the Mid-Iowa Financial
acquisition. The total cash cost of the acquisition to First Federal, which
includes cash compensation to Mid-Iowa Financial stockholders and the cost of
cashing out outstanding options on Mid-Iowa Financial common stock, is expected
to be $27.8 million. In the event all Mid-Iowa Financial's outstanding options
were exercised prior to the consummation of the acquisition, the aggregate cash
to be paid would equal $29.0 million. 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.
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,
32
<PAGE>
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.
The first dividend is expected to be declared for the fiscal quarter
ending ________, 1999. Declarations of dividends by First Federal Bankshares'
Board of Directors will depend upon a number of factors, including the amount of
the net proceeds from the offering retained by First Federal Bankshares,
investment opportunities available to First Federal Bankshares or First Federal,
capital requirements, regulatory limitations, First Federal Bankshares' and
First Federal's financial condition and results of operation, tax considerations
and general economic conditions. Consequently, there can be no assurance that
dividends will in fact be paid on First Federal Bankshares common stock or that,
if paid, dividends will not be reduced or eliminated in future periods.
First Federal will not be permitted to pay dividends to First Federal
Bankshares on its capital stock if its stockholders' equity would be reduced
below the amount required for the liquidation account. See "The
Conversion--Liquidation Rights." For information concerning federal and state
law and regulations which apply to First Federal in determining the amount of
proceeds which may be retained by First Federal Bankshares and regarding a
savings institution's ability to make capital distributions including payment of
dividends to its holding company, see "Taxation--Federal
Taxation--Distributions" and "Regulation--Federal Regulation of Savings
Institutions--Limitation on Capital Distributions."
Unlike First Federal, First Federal Bankshares is not 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 _______, 1999.
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
33
<PAGE>
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
seek to encourage and assist at least three market makers to make a market in
its common stock. Making a market involves maintaining bid and ask quotations
and being able, as principal, to effect transactions in reasonable quantities at
those quoted prices. 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 A POSSIBLY LIMITED TRADING
MARKET MAY MAKE IT DIFFICULT TO SELL THE COMMON STOCK AFTER THE CONVERSION AND
MAY HAVE AN ADVERSE EFFECT ON THE PRICE AT WHICH THE COMMON STOCK CAN BE SOLD.
The following table sets forth the high and low bid quotes for 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.
This table presents information regarding the trading price per share of First
Federal's common stock. 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.
34
<PAGE>
<TABLE>
<CAPTION>
HIGH LOW CASH DIVIDEND
FISCAL 1998 BID BID DECLARED
------ ------ -------------
<S> <C> <C> <C>
Quarter Ended June 30, 1998 $39.00 $34.75 $0.12
Quarter Ended March 31, 1998 $35.75 $30.25 $0.12
Quarter Ended December 31, 1997 $34.50 $29.50 $0.12
Quarter Ended September 30, 1997 $30.75 $22.00 $0.12
FISCAL 1997
Quarter Ended June 30, 1997 $24.00 $20.75 $0.12
Quarter Ended March 31, 1997 $22.33 $18.83 $0.12
Quarter Ended December 31, 1996 $20.17 $15.15 $0.12
Quarter Ended September 30, 1996 $16.06 $14.39 $0.12
</TABLE>
At August 14, 1998, the business day immediately preceding the public
announcement of the conversion, and at ___________, 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 $______ 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.
35
<PAGE>
<TABLE>
<CAPTION>
MINIMUM
2,635,000
FIRST FEDERAL MID-IOWA FINANCIAL PURCHASE PRO FORMA SHARES AT
HISTORICAL AT HISTORICAL AT ACCOUNTING CONSOLIDATED $10.00
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998 ADJUSTMENTS HISTORICAL PER SHARE
------------------ ------------------ ----------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Deposits(2)............................... $392,677 $ 96,353 $ 96 $489,126 $ 489,126
Borrowed funds............................ 124,885 36,000 (530) 160,355 160,355
-------- --------- -------- -------- ---------
Total deposits and borrowed funds......... $517,562 $ 132,353 $ (434) $649,481 $ 649,481
-------- --------- -------- -------- ---------
-------- --------- -------- -------- ---------
Stockholders' equity:
Preferred stock, $.01 par value,
2,000,000 shares authorized;
none to be issued(3).................. -- -- -- -- --
Common Stock, $.01 par value (post-conversion),
18,000,000 shares authorized; shares to be
issued as reflected(3)............... 28 17 (17) 28 48
Additional paid-in capital(3)(4)........ 11,108 3,148 (3,148) 11,108 36,112
Retained income(5)...................... 31,539 10,553 (10,553) 33,275 33,275
Unrealized gain (loss) on securities
available for sale...................... 492 42 (42) 492 492
Less:
Common Stock to be acquired by Employee
Stock Ownership Plan(6)............ -- -- -- -- (1,845)
Common Stock to be acquired by 1999
Recognition Plan(7)................. -- -- -- -- (791)
-------- --------- -------- -------- ----------
Total stockholders' equity.......... $ 43,167 $ 13,760 $(13,760) $ 44,903 $ 67,291
-------- --------- -------- -------- ---------
-------- --------- -------- -------- ---------
Total stockholders' equity as a percentage of
pro forma total assets................ 7.58% 9.33% -- 6.36% 9.25%
-------- --------- -------- -------- ---------
-------- --------- -------- -------- ---------
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA AT SEPTEMBER 30, 1998
---------------------------------------
MAXIMUM
MIDPOINT MAXIMUM AS ADJUSTED
3,100,000 3,565,000 4,099,750
SHARES AT SHARES AT SHARES AT
$10.00 $10.00 $10.00
PER SHARE PER SHARE PER SHARE
--------- --------- ---------
<S> <C> <C> <C>
Deposits(2)............................... $ 489,126 $ 489,126 $ 489,126
Borrowed funds............................ 160,355 160,355 160,355
--------- --------- ---------
Total deposits and borrowed funds......... $ 649,481 $ 649,481 $ 649,481
--------- --------- ---------
--------- --------- ---------
Stockholders' equity:
Preferred stock, $.01 par value,
2,000,000 shares authorized;
none to be issued(3).................. -- -- --
Common Stock, $.01 par value (post-conversion),
18,000,000 shares authorized; shares to be
issued as reflected(3)............... 57 65 75
Additional paid-in capital(3)(4)........ 40,704 45,299 50,580
Retained income(5)...................... 33,275 33,275 33,275
Unrealized gain (loss) on securities
available for sale...................... 492 492 492
Less:
Common Stock to be acquired by Employee
Stock Ownership Plan(6)............ (2,170) (2,496) (2,870)
Common Stock to be acquired by 1999
Recognition Plan(7)................. (930) (1,070) (1,230)
--------- --------- ---------
Total stockholders' equity.......... $ 71,428 $ 75,565 $ 80,322
--------- --------- ---------
--------- --------- ---------
Total stockholders' equity as a percentage of
pro forma total assets................ 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)
36
<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 for Employees and Officers."
(5) Pro forma retained income reflects consolidation of $1.7 million of capital
from the Mutual Holding Company. The retained income of First Federal will
be substantially restricted after the conversion, see "The
Conversion--Liquidation Rights" and "Regulation --Federal Regulation of
Savings Institutions--Limitation on Capital Distributions."
(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.
37
<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 $0.4 million 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 OF
CONVERSION."
38
<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)
39
<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(3)
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 Retention Plan with funds provided
by First Federal Bankshares.
(6) Reflects purchase entries for Mid-Iowa Financial acquisition.
40
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998(1)
------------------------------------------------
FIRST MID-IOWA PURCHASE PRO FORMA
FEDERAL FINANCIAL ADJUSTMENTS CONSOLIDATED
------- --------- ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income............................. $10,056 $ 2,451 $ (399) $ 12,108
Interest expense............................ 6,283 1,537 21 7,841
------- ------- -------- --------
Net interest income....................... 3,773 914 (420) 4,267
Provision for losses on loans............... 75 15 90
------- ------- -------- --------
Net interest income after provision for
losses on loans......................... 3,698 899 (420) 4,177
Noninterest income.......................... 902 343 1,245
Noninterest expense......................... 2,962 801 173 3,936
------- ------- -------- --------
Earnings before income taxes.............. 1,638 441 (593) 1,486
Income taxes................................ 620 139 (173) 586
------- ------- -------- --------
Net earnings.............................. $ 1,018 $ 302 $ (420) $ 900
------- ------- -------- --------
------- ------- -------- --------
Earnings per share(3):
Basic..................................... $ 0.36 $ 0.32
Diluted................................... $ 0.35 $ 0.31
------- --------
------- --------
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30, 1998(2)
-----------------------------------
FIRST MID-IOWA PURCHASE PRO FORMA
FEDERAL FINANCIAL ADJUSTMENTS CONSOLIDATED
------- --------- ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income........................... $ 35,364 $ 9,806 $ (1,595) $ 43,575
Interest expense.......................... 21,377 6,081 82 27,540
-------- --------- --------- ---------
Net interest income.................... 13,987 3,725 (1,677) 16,035
Provision for losses on loans............. 345 60 405
-------- --------- --------- ---------
Net interest income after
provision for losses on loans......... 13,642 3,665 (1,677) 15,630
Noninterest income........................ 3,178 1,348 4,526
Noninterest expense....................... 11,528 3,081 692 15,301
-------- --------- --------- ---------
Earnings before income taxes........... 5,292 1,932 (2,369) 4,855
Income taxes.............................. 1,874 600 (692) 1,782
-------- --------- --------- ---------
Net earnings........................... $ 3,418 $ 1,332 $ (1,677) $ 3,073
-------- --------- --------- ---------
-------- --------- --------- ---------
Earnings per share(3):
Basic.................................. $ 1.21 $ 1.08
Diluted................................ $ 1.19 $ 1.07
-------- ---------
-------- ---------
</TABLE>
- ------------------
(1) Reflects the statements of operations of First Federal and Mid-Iowa
Financial for the three months ended September 30, 1998.
(2) Reflects the statements of operations of First Federal for the year ended
June 30, 1998 and Mid-Iowa Financial for the year ended September 30, 1998.
(3) Earnings per share have been calculated using First Federal's historical
shares--see note 1 of notes to consolidated financial statements.
PRO FORMA CONVERSION DATA
The tables on the following pages provide unaudited pro forma data with
respect to First Federal Bankshares' stockholders' equity, net income and
related per share amounts based upon the minimum, midpoint, maximum and 15%
above the maximum of the estimated valuation range at September 30, 1998 and for
the three months then ended and at June 30, 1998 and for the year then ended.
The actual net proceeds from the sale of the subscription shares cannot be
determined until the conversion is completed. However, net proceeds are
41
<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.
42
<PAGE>
The following table summarizes historical data of First Federal and pro
forma data of First Federal Bankshares at or for the three months ended
September 30, 1998 and for the fiscal year ended June 30, 1998, based on
assumptions set forth above and in the table and should not be used as a basis
for projections of market value of the common stock following the conversion. No
effect has been given in the tables to the possible issuance of additional
shares reserved for future issuance pursuant to currently outstanding stock
options or the 1999 Stock Option Plan, nor does book value give any effect to
the liquidation account to be established in the conversion or the bad debt
reserve in liquidation. See "The Conversion--Liquidation Rights," and
"Management of First Federal--Directors' Compensation," and "--Executive
Compensation."
<TABLE>
<CAPTION>
AT OR FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
BASED UPON THE SALE FOR $10.00 OF
---------------------------------------------------------
2,635,000 3,100,000 3,565,000 4,099,750
SHARES SHARES SHARES SHARES(1)
------------ ----------- ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Gross proceeds .......................................... $ 26,350 $ 31,000 $ 35,650 $ 40,998
Expenses ................................................ 1,326 1,375 1,423 1,479
---------- ---------- ----------- -----------
Estimated net proceeds .................................. $ 25,024 $ 29,625 $ 34,227 $ 39,519
Common stock purchased by Employee Stock
Ownership Plan(2) ................................... (1,845) (2,170) (2,496) (2,870)
Common stock purchased by 1999 Recognition Plan(3) .... (791) (930) (1,070) (1,230)
---------- ---------- ----------- -----------
Estimated net proceeds, as adjusted ............... $ 22,388 $ 26,525 $ 30,661 $ 35,419
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998:
Consolidated net income:
Historical combined with acquisition .................. $ 900 $ 900 $ 900 $ 900
Pro forma adjustments:
Income on adjusted net proceeds ....................... 189 224 259 299
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) (1,070) (1,230)
---------- ---------- ----------- -----------
Pro forma stockholders' equity(6) ....................... $ 67,291 $ 71,428 $ 75,564 $ 80,322
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Stockholders' equity per share(7):
Historical combined with acquisition .................. $ 9.33 $ 7.93 $ 6.89 $ 6.00
Estimated net proceeds ................................ 5.19 5.22 5.25 5.26
Less: Common stock acquired by 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
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Offering price as a percentage of pro forma stockholders'
equity per share ...................................... 71.53% 79.30% 86.21% 93.28%
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Number of shares used in book value per share
calculations .......................................... 4,813,665 5,663,135 6,512,605 7,489,496
</TABLE>
43
<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) (1,070) (1,230)
--------- --------- --------- ---------
Estimated net proceeds, as adjusted........... $ 22,388 $ 26,525 $ 30,661 $ 35,419
--------- --------- --------- ---------
--------- --------- --------- ---------
FOR THE FISCAL YEAR ENDED JUNE 30, 1998:
Consolidated net income:
Historical combined with acquisition.............. $ 3,073 $ 3,073 $ 3,073 $ 3,073
Pro forma adjustments:
Income on adjusted net proceeds................... 756 896 1,035 1,196
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) (1,070) (1,230)
--------- --------- --------- ---------
Pro forma stockholders' equity(6)................... $ 66,056 $ 70,193 $ 74,329 $ 79,087
--------- --------- --------- ---------
--------- --------- --------- ---------
Stockholders' equity per share(7):
Historical combined with acquisition.............. $ 9.07 $ 7.71 $ 6.71 $ 5.83
Estimated net proceeds............................ 5.19 5.22 5.24 5.27
Less: Common stock acquired by 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
--------- --------- --------- ---------
--------- --------- --------- ---------
Offering price as a percentage of pro forma
stockholders' equity per share....................... 72.89% 80.71% 87.64% 94.70%
--------- --------- --------- ---------
--------- --------- --------- ---------
Number of shares used in book value per share
calculations 4,813,665 5,663,135 6,512,605 7,489,496
</TABLE>
- --------------------------------
44
<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 for Employees and
Officers--401(k) Savings and Employee Stock Ownership 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. The shares may be
acquired directly from First Federal Bankshares, or through open market
purchases. The funds to be used by the 1999 Recognition Plan to purchase
the shares will be provided by First Federal or First Federal Bankshares.
See "Management of First Federal--Benefits for Employees and Officers--1999
Recognition Plan." Assumes that the 1999 Recognition Plan acquires the
shares through open market purchases at the subscription price with funds
contributed by First Federal, and that 5% and 20% of the amount contributed
to the 1999 Recognition Plan is amortized as an expense during the three
months ended September 30, 1998 and the fiscal year ended June 30, 1998,
and the 1999 Recognition Plan expense reflects an effective combined
federal and state tax rate of 37.0%. Assuming stockholder approval of the
plan and that the plan shares are awarded through the use of
authorized-but-unissued shares of common stock, stockholders would have
their voting interests diluted by approximately 1.6%.
(4) Per share figures include shares of 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. If the 1999 Stock Option Plan is approved by
stockholders, an amount equal to 10% of the common stock sold in the
offerings will be reserved for future issuance upon the exercise of options
to be granted under the 1999 Stock Option Plan. The issuance of authorized
but previously unissued shares of common stock pursuant to the exercise of
options under such plan would dilute existing stockholders' interests.
Assuming stockholder approval of the plan, that all the options were
exercised at the end of the period at an exercise price equal to the
subscription price, and that the 1999 Recognition Plan purchases shares
45
<PAGE>
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.
46
<PAGE>
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATION
The following Consolidated Statements of Operations of First Federal
for the fiscal years ended June 30, 1998, 1997 and 1996 have been audited by
KPMG Peat Marwick LLP, independent certified public accountants, whose report
thereon appears elsewhere herein. The Consolidated Statements of Operations for
the three months ended September 30, 1998 and 1997 are unaudited and have been
prepared in accordance with the requirements for a presentation of interim
financial statements and are in accordance with generally accepted accounting
principles. In the opinion of management, all adjustments, consisting of normal
recurring adjustments, that are necessary for a fair presentation of the interim
periods, have been reflected. The results of operations for the three months
ended September 30, 1998 are not necessarily indicative of the results of
operations that may be expected for the fiscal year ending June 30, 1999. These
Statements should be read in conjunction with the Consolidated Financial
Statements of First Federal and Notes thereto included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
THREE MONTHS YEARS ENDED
ENDED SEPTEMBER 30, JUNE 30,
---------------------------------------------------------------
1998 1997 1998 1997 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest income:
Loans receivable..................................... $ 8,079,259 $ 6,920,785 $28,796,484 $26,562,097 $25,436,908
Mortgage-backed securities........................... 613,640 719,766 2,713,326 2,988,212 2,784,133
Investment securities................................ 1,322,356 863,883 3,694,024 4,124,948 3,433,390
Other interest-earning assets........................ 40,957 5,623 160,432 15,522 31,606
----------- ----------- ----------- ----------- -----------
Total interest income.............................. 10,056,212 8,510,057 35,364,266 33,690,779 31,686,037
----------- ----------- ----------- ----------- -----------
Interest expense:
Deposits (Note 7).................................... 4,574,293 3,828,547 15,826,758 15,376,823 16,242,637
Advances from 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
47
<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
48
<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>
49
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1998 1997 1996
------------------------------ ----------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
-------- -------- ---------- -------- -------- ---------- ------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable(1)................ $358,209 $28,797 8.04% $331,144 $26,562 8.02% $317,037 $25,437 8.02%
Mortgage-backed securities......... 40,501 2,713 6.70 45,680 2,988 6.54 42,989 2,784 6.48
Investment securities.............. 53,720 3,694 6.88 58,660 4,125 7.03 56,969 3,433 6.03
Short-term investments and
other interest-earning
assets(2)........................ 2,959 160 5.41 275 16 5.82 572 32 5.59
-------- ------- ------ -------- ------- ------- -------- ------- -------
Total interest-earning assets........ 455,389 35,364 7.77 435,759 33,691 7.73 417,567 31,686 7.59
------- ------ ------- ------- ------- -------
Noninterest-earning assets........... 26,303 18,999 17,098
-------- -------- --------
Total assets......................... $481,692 $454,758 $434,665
-------- -------- --------
-------- -------- --------
INTEREST-BEARING LIABILITIES:
Deposits........................... $333,196 15,827 4.75 $322,426 15,377 4.77 $331,875 16,242 4.89
Borrowings......................... 91,863 5,550 6.04 82,206 4,951 6.02 55,680 3,403 6.11
-------- ------- ------ -------- ------- ------- -------- ------- -------
-------- ------- ------ -------- ------- ------- -------- ------- -------
Total interest-bearing liabilities... 425,059 21,377 5.03 404,632 20,328 5.02 387,555 19,645 5.07
------- ------ ------- ------- ------- -------
Noninterest-bearing:
Deposits........................... 8,527 6,346 4,658
Liabilities........................ 7,356 6,473 6,270
-------- -------- --------
Total liabilities.................... 440,942 417,451 398,483
Stockholders' equity................. 40,750 37,307 36,182
-------- -------- --------
Total liabilities and
Stockholders' equity................. $481,692 $454,758 $434,665
-------- -------- --------
-------- -------- --------
Net interest income.................. $13,987 $13,363 $12,041
------- ------- -------
------- ------- -------
Interest rate spread(3).............. 2.74% 2.71% 2.52%
------- ------ ------
------- ------ -------
Net yield on interest-earning
assets(4)........................... 3.07% 3.07% 2.88%
------- ------ -------
------- ------ -------
Ratio of average interest-earning
assets to average interest-
bearing liabilities................ 107.14% 107.69% 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.
50
<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, YEARS ENDED JUNE 30,
1998 VS. 1997 1998 VS. 1997 1997 VS. 1996
-------------------------- -------------------------- -------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
-------------------------- TOTAL --------------------------TOTAL --------------------------TOTAL
RATE/ INCREASE RATE/ INCREASE RATE/ INCREASE
VOLUME RATE VOLUME (DECREASE) VOLUME RATE VOLUME (DECREASE) VOLUME RATE VOLUME (DECREASE)
------ ---- ------ ---------- ------ ---- ------ -------- ------ ---- ------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans receivable............ $1,256 $(311) $213 $1,158 $2,171 $ 66 $ (2) $2,235 $1,132 $ -- $ (7) $1,125
Mortgage-backed securities (109) 13 (10) (106) (339) 73 (9) (275) 174 26 4 204
Investments................. 533 (182) 107 458 (347) (88) 4 (431) 102 570 20 692
Other interest-earning
assets..................... 3 3 30 36 156 (1) (11) 144 (17) 1 -- (16)
------ ----- ---- ------ ------ ---- ---- ------ ------ ------ ---- ------
Total interest-earning
assets...................... 1,683 (477) 340 1,546 1,641 50 (18) 1,673 1,391 597 17 2,005
------ ----- ---- ------ ------ ---- ---- ------ ------ ------ ---- ------
Interest expense:
Savings deposits............ $ 789 (127) 84 746 514 (64) -- 450 (462) (398) (5) (865)
Borrowings.................. 401 (113) 77 365 582 16 1 599 1,621 (50) (23) 1,548
------ ----- ---- ------ ------ ---- ---- ------ ------ ------ ---- ------
Total interest-bearing
liabilities................. $1,190 (240) 161 1,111 1,096 (48) 1 1,049 1,159 (448) (28) 683
------ ----- ---- ------ ------ ---- ---- ------ ------ ------ ---- ------
Net change in net
interest income............ $ 493 $(237) $179 $ 435 $ 545 $ 98 $(19) $ 624 $ 232 $1,045 $ 45 $1,322
------ ----- ---- ------ ------ ---- ---- ------ ------ ------ ---- ------
------ ----- ---- ------ ------ ---- ---- ------ ------ ------ ---- ------
</TABLE>
51
<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. The increase in interest income was primarily
due to 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. 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.
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.
52
<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.
53
<PAGE>
INTEREST EXPENSE
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Interest expense increased by $l.1 million, or 21.5%, to $6.3 million
for the three months ended September 30, 1998 from $5.2 million for the three
months ended September 30, 1997. Interest on deposits increased by $746,000, or
19.5%, to $4.6 million for the three months ended September 30, 1998 from $3.8
million for the three months ended September 30, 1997. The increase in interest
on deposits was primarily due to an increase in the average balance of deposits
as a result of the GFS Bancorp acquisition. The average balance of deposits
increased by $65.5 million, or 20.6%, to $383.6 million at September 30, 1998
from $318.1 million at September 30, 1997.
Interest on borrowings increased by $365,000, or 27.2%, to $1.7 million
for the three months ended September 30, 1998 from $1.3 million for the three
months ended September 30, 1997. The increase in interest on borrowings was
primarily due to an increase in the average balance of 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.
54
<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 $19,000 to $86,000 for the three
months ended September 30, 1998 from $67,000 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 totalled $2.2 million. Excluding this
one-time assessment, the principal component of First Federal's noninterest
expense has been and continues to be salaries and employee benefits.
Compensation and benefit expense increased by $505,000, or 9.8%, to $5.7 million
in fiscal 1997 from $5.2 million in fiscal 1996.
Office property and equipment expense increased by $134,000, or 11.6%,
largely due to significant improvements at branch locations. Deposit insurance
premium expense decreased by $325,000, or 41.6%, to $456,000 in fiscal 1997 from
$781,000 in fiscal 1996 due to a reduction in premium rates which was a direct
result of the recapitalization of the 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 increase 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 - INTEREST RATE SENSITIVITY ANALYSIS
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
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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.
MARKET RISK MANAGEMENT
Market risk is the risk of loss arising from adverse changes in market
prices and rates. First Federal's market risk is comprised primarily of interest
rate risk resulting from its core banking activities of lending and deposit
taking. Interest rate risk is the risk that changes in market interest rates
that might adversely affect First Federal's net interest income or the economic
value of its portfolio of assets, liabilities, and off-balance sheet contracts.
Management continually develops and applies strategies to mitigate this risk.
Management does not believe that First Federal's primary market risk exposures
and how those exposures were managed in fiscal 1998 have changed when compared
to fiscal 1997. Market risk limits have been established by the Board of
Directors based on First Federal's tolerance for risk.
First Federal primarily relies on the Office of Thrift Supervision Net
Portfolio Value Model to measure its susceptibility to interest rate changes.
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.
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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 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 large portfolio of mortgage loans and securities
declines significantly and prepayments slow. As rates decrease, the market value
of mortgage loans and securities increase only modestly due to prepayment risk,
periodic rate caps, and other embedded options.
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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 +200 bp +300 bp
------------- ------------ ------------ ------------ ------------- ------------ -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Financial Instrument:
Mortgage loans and securities $444,761 $438,800 $433,581 $428,000 $420,112 $410,478 $399,868
Non-mortgage loans........... 28507 28103 27711 27330 26959 26598 26247
Cash, deposits and securities 98373 97492 96637 95806 95001 94219 93461
Other assets................. 20418 20958 21922 23707 26154 29092 31855
------------- ------------ ------------ ------------ ------------- ------------ -----------
Total assets................. 592059 585353 579851 574843 568226 560387 551431
Deposits..................... 406178 402672 399258 395912 392660 389480 386364
Borrowings................... 134736 132041 129446 126947 124538 122217 119978
Other liabilities............ 9049 9045 9041 9038 9035 9031 9028
------------- ------------ ------------ ------------ ------------- ------------ -----------
Total liabilities............ 549963 543758 537745 531897 526233 520728 515370
------------- ------------ ------------ ------------ ------------- ------------ -----------
Commitments.................. 1164 884 619 336 10 324 650
------------- ------------ ------------ ------------ ------------- ------------ -----------
Net portfolio value.......... $43,260 42479 42725 43282 42003 39335 35411
------------- ------------ ------------ ------------ ------------- ------------ -----------
------------- ------------ ------------ ------------ ------------- ------------ -----------
$ Change from base........... $22 $803 $557 - ($1,279) ($3,947) ($7,871)
------------- ------------ ------------ ------------ ------------- ------------ -----------
------------- ------------ ------------ ------------ ------------- ------------ -----------
% Change from base........... 0% -2% -1% - -3% -9% -18%
------------- ------------ ------------ ------------ ------------- ------------ -----------
------------- ------------ ------------ ------------ ------------- ------------ -----------
% Change: board limit........ -20% -15% -10% - -20% -40% -55%
------------- ------------ ------------ ------------ ------------- ------------ -----------
------------- ------------ ------------ ------------ ------------- ------------ -----------
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
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 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.
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Federal funds sold and other assets qualifying for liquidity,
outstanding at September 30, 1998 and June 30, 1998, 1997, and 1996, amounted to
$119.1 million, $96.4 million, $28.4 million, and $42.7 million, respectively.
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 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 July 1, 1998.
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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 after 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 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
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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 15 branch
offices in northwest and central Iowa and northeast Nebraska. First Federal
gained access to the central Iowa market area after its acquisition in March
1998 of GFS Bancorp, 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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<PAGE>
Federal Housing Administration loans. First Federal also originates interim
construction loans on one- to four-family residential properties.
65
<PAGE>
ANALYSIS OF LOAN PORTFOLIO. Set forth below are selected data relating
to the composition of First Federal's loan portfolio, by type of loan on the
dates indicated.
<TABLE>
<CAPTION>
JUNE 30,
AT --------------------------------------------------------------
SEPTEMBER 30, 1998 1998 1997 1996
------------------ ------------------- ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <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% $264,304 82.49%
Multi-family dwelling units 41,056 10.07 43,146 10.66 27,618 8.09 19,619 6.12
Commercial real estate....... 19,675 4.83 15,294 3.78 7,278 2.13 3,771 1.18
Home equity and second mortgage 22,110 5.43 21,682 5.36 17,193 5.04 11,732 3.66
Home improvement loans....... 600 .15 728 0.18 1,425 0.42 2,082 0.65
Auto loans................... 15,799 3.88 16,417 4.06 15,488 4.54 12,488 3.90
Loans on deposits............ 627 .15 584 .14 484 0.14 592 0.18
Other non-mortgage loans(2).. 11,255 2.76 9,689 2.39 7,882 2.31 9,969 3.11
-------- ------- -------- ------- -------- ------- -------- -------
Total...................... 411,588 101.01 408,955 101.03 345,092 101.12 324,557 101.29
-------- ------- -------- ------- -------- ------- -------- -------
Less
Allowance for loan losses(3) (2,677) (.65) (2,607) (.64) (1,796) (.53) (1,730) (.54)
Loans in process........... (606) (.15) (875) (.22) (327) (.10) (388) (.12)
Net unearned premiums
(discounts) on loans...... 1,396 .34 1,483 .36 211 .07 (33) (.01)
Deferred loan fees(4)...... (2,246) (.55) (2,156) (.53) (1,926) (.56) (1,998) (.62)
-------- ------- -------- ------- -------- ------- -------- -------
Total loans, net.......... $407,455 100.00% $404,800 100.00% $341,254 100.00% $320,408 100.00%
-------- ------- -------- ------- -------- ------- -------- -------
-------- ------- -------- ------- -------- ------- -------- -------
</TABLE>
<TABLE>
<CAPTION>
1995 1994
------------------ -------------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
<S> <C> <C> <C> <C>
Residential real estate:
One- to four-family units(1) $270,960 86.91% $234,719 88.70%
Multi-family dwelling units 12,635 4.05 11,639 4.39
Commercial real estate....... 5,982 1.92 5,711 2.16
Home equity and second mortgage 9,667 3.10 8,497 3.21
Home improvement loans....... 2,078 0.67 1,814 0.69
Auto loans................... 8,301 2.66 2,810 1.06
Loans on deposits............ 501 0.16 616 0.23
Other non-mortgage loans(2).. 5,981 1.92 4,207 1.59
-------- ------ -------- ------
Total...................... 316,105 101.39 270,013 102.03
-------- ------ -------- ------
Less
Allowance for loan losses(3) (1,621) (.52) (1,766) (0.67)
Loans in process........... (401) (.13) (911) (0.34)
Net unearned premiums
(discounts) on loans...... (292) (.09) (612) (0.23)
Deferred loan fees(4)...... (2,016) (.65) (2,109) (0.79)
-------- ------ -------- ------
Total loans, net.......... $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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<PAGE>
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>
------------------------------------
67
<PAGE>
The following table sets forth the dollar amount of all loans maturing
or repricing after September 30, 1999 which have predetermined interest rates
and have floating or adjustable interest rates.
<TABLE>
<CAPTION>
FLOATING OR
PREDETERMINED ADJUSTABLE
RATES RATES TOTAL
----------- ------------ -----------
(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 $47.4 million at September 30, 1998
and include approximately $36.2 million of loans that are geographically
distributed in the midwestern United States. The remaining loans are scattered
throughout the United States with the largest geographic concentrations
including Connecticut with $3.4 million, Georgia with $1.2 million, Arizona with
$1.5 million and Florida with $1.1 million.
The delinquency rate on purchased loans and on loans originated by
First Federal was 1.8% and 0.3% respectively at September 30, 1998. Loans
purchased primarily consist of single-family residential loans secured by
properties located in the Midwest. Management attributes the low delinquency
rates to the current relative strength of the economy in the Midwest. First
Federal purchases loans from other institutions as market conditions permit in
order to reduce First Federal's overall credit risk by increasing geographical
diversity and to supplement its loan portfolio in periods of weaker local
demand.
At September 30, 1998, First Federal had $300.5 million, or 73.7% of
its total loan portfolio invested in first mortgage loans secured by one-to
four-family residences.
First Federal 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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<PAGE>
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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<PAGE>
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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<PAGE>
home equity loans, second mortgage loans, and home improvement loans, totaled
$22.7 million, or 46.9% of consumer loans.
The underwriting standards employed by First Federal for consumer loans
include a determination of the applicant's credit history and an assessment of
ability to meet existing obligations and payments on the proposed loan. The
stability of the applicant's monthly income may be determined by verification of
gross monthly income from primary employment, and additionally from any
verifiable secondary income. Creditworthiness of the applicant is of primary
consideration; however, the underwriting process also includes a comparison of
the value of the collateral in relation to the proposed loan amount. At
September 30, 1998, the percentage of delinquent consumer loans was 0.3%.
First Federal's consumer loan portfolio increased from $36.9 million at
June 30, 1996 to $49.1 million at June 30, 1998 and decreased slightly to $48.4
million at September 30, 1998. It is expected that First Federal's consumer loan
portfolio will continue to grow during the foreseeable future. Consumer loans
tend to have higher interest rates than residential mortgage loans, but also
tend to have a higher risk of default than residential mortgage loans. See
"Non-Performing Assets and Asset Classification" for information regarding First
Federal's loan loss experience and reserve policy.
MORTGAGE-BACKED SECURITIES. First Federal also invests in
mortgage-backed securities issued or guaranteed by the United States Government
or agencies thereof in order to reduce interest rate risk exposure and improve
liquidity. These securities, which consist primarily of mortgage-backed
securities issued or guaranteed by Fannie Mae, 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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<PAGE>
LOAN ORIGINATIONS, PURCHASES AND SALES. Approximately 80.5% of all
loans in First Federal's portfolio at September 30, 1998 were originated by
First Federal. First Federal also purchases loans originated by others with an
emphasis on single-family residential adjustable rate mortgage loans. At
September 30, 1998, First Federal had $80.4 million of loans purchased from
others. Included in the total of loans purchased outside of First Federal's
primary lending area are loans purchased from a mortgage banking firm
headquartered in Madison, Wisconsin. First Federal has an exclusive agreement
with this firm, which gives First Federal first right of refusal on any real
estate loans generated including one-to-four family, multi-family, commercial
real estate and land development loans secured by properties located primarily
in the Madison, Wisconsin metropolitan area. It is First Federal's policy to
only purchase loans that meet its underwriting standards used in originating
loans in its market area and to perform periodic site inspections. First Federal
has sold, and anticipates that it will continue to sell, participation interests
in these loans to other financial institutions located in Iowa and contiguous
states. At September 30, 1998, the outstanding principal balance of loans
purchased under the above agreement was approximately $61.2 million and partial
interests in this balance sold to other financial institutions totaled
approximately $50.1 million.
The following table sets forth First Federal's gross loan originations,
loans purchased and loans sold for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEARS ENDED JUNE 30,
SEPTEMBER 30,----------------------------------------------------
1998 1998 1997 1996 1995 1994
------------ ------- ------- ------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loans originated:
Conventional one- to four-family real
estate loans:
Construction loans.................... $ 4,114 $10,910 $ 8,546 $ 6,590 $ 4,136 $ 5,227
Loans on existing property............ 11,603 33,885 25,091 26,779 23,648 26,317
Loans refinanced/modified............. 7,168 32,980 8,612 16,971 4,303 45,305
Insured and guaranteed loans............ 1,445 6,178 6,976 8,885 7,267 9,680
Multi-family and commercial............. 8,320 12,715 3,420 3,153 2,100 221
Consumer loans.......................... 8,126 29,064 29,477 23,760 19,734 13,687
------- ------- ------- ------- -------- --------
Total loans originated.............. $40,776 $125,732 $82,122 $86,138 $ 61,188 $100,437
------- ------- ------- ------- -------- --------
------- ------- ------- ------- -------- --------
Loans purchased:
One- to four-family..................... $ 482 $ 6,466 $17,394 $ 9,537 $ 41,424 $ 9,466
Multi-family and commercial............. 1,036 7,303 16,342 7,256 5,948 6,283
------- ------- ------- ------- -------- --------
Total loans purchased............... $ 1,518 $13,769 $33,736 $16,793 $ 47,372 $ 15,749
------- ------- ------- ------- -------- --------
------- ------- ------- ------- -------- --------
Loans sold................................ $ 7,432 $24,816 $12,797 $18,191 $ 11,105 $ 28,066
------- ------- ------- ------- -------- --------
------- ------- ------- ------- -------- --------
</TABLE>
LOAN COMMITMENTS. First Federal issues standby loan origination
commitments to qualified borrowers primarily for the construction and purchase
of residential real estate. 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.
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<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. 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)(2):
Residential.................................. 138 144 173 21 58 110
Commercial................................... 51 -- -- -- -- --
Consumer(3).................................. 131 71 110 74 25 6
------- ------- ------- ------- ------- -------
Total...................................... 320 215 283 95 83 116
------- ------- ------- ------- ------- -------
Total non-performing loans..................... 1,208 1,335 525 710 679 920
Other non-performing assets(4)................. 718 489 -- 45 48 82
------- ------- ------- ------- ------- -------
Total non-performing assets.................... $ 1,926 $ 1,824 $ 525 $ 755 $ 727 $ 1,002
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
Restructured loans(5).......................... $ 450 $ 452 $ 460 $ 1,287 $ 1,984 $ 2,283
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
Non-performing loans as a percentage of total
loans........................................ 0.30% 0.33% 0.15% 0.22% 0.23% 0.35%
Non-performing loans as a percentage of total
assets....................................... 0.21% 0.24% 0.11% 0.16% 0.17% 0.24%
Non-performing loans and real estate owned
to total loans and real estate owned......... 0.47% 0.47% 0.15% 0.24% 0.23% 0.38%
Non-performing assets as a percentage of total
assets....................................... 0.34% 0.34% 0.11% 0.17% 0.17% 0.26%
</TABLE>
- ------------------------------------
(1) Includes all loans 90 days or more contractually delinquent.
(2) Delinquent Federal Housing Administration/Veterans Administration
guaranteed loans are not placed on non-accrual status.
(3) Delinquent consumer loans are not placed on non-accrual status.
(4) Represents the net book value of property acquired by First Federal
through foreclosure or deed in lieu of foreclosure. Upon acquisition,
this property is carried at the lower of cost or fair market value less
estimated costs of disposition.
(5) Restructured loans represent performing loans for which concessions,
such as reductions of interest rates to below market terms and/or
extension of repayment terms, have been granted due to a borrower's
financial condition.
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............................................... $1,384 32
Loans past due 90 days or more.......................................... 801 20
Commercial real estate:
Loans past due 60-89 days............................................... 219 5
Loans past due 90 days or more.......................................... 207 4
Consumer loans (past due 60 days or more).................................. 256 53
Foreclosed real estate and repossessions................................... 718 4
Other non-performing assets................................................ -- --
Restructured loans not included in other nonperforming categories above... 450 1
Loans to facilitate sale of real estate owned.............................. 525 3
</TABLE>
CLASSIFIED ASSETS. Federal regulations provide for the classification
of loans and other assets such as debt and equity securities considered by the
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%
</TABLE>
- -----------------------------
(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.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, ----------------------------------------------
1998 1998 1997
------------------------- ---------------------- ----------------------
% OF LOANS IN % OF LOANS IN % OF LOANS IN
EACH CATEGORY EACH CATEGORY EACH CATEGORY
AMOUNT TO TOTAL LOAN AMOUNT TO TOTAL LOAN AMOUNT TO TOTAL LOAN
------ ------------- ------ ------------- ------ -------------
(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 LOAN AMOUNT TO TOTAL LOAN AMOUNT TO TOTAL LOANS
------ ------------- ------ ------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at end of period applicable to: $ 649 81.44% $ 660 85.72% $ 570 86.93%
One- to four-family residential.... 699 6.04 271 4.00 230 4.31
Multi-family residential........... 201 1.16 557 1.89 878 2.12
Commercial real estate.............
Consumer and other non-mortgage 182 11.36 133 8.39 88 6.65
loans(1) ------- ------- ------- ------- ------- -------
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
Regulations--Liquidity Requirements" 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 6.06% $ 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 6.81% $ 8,252 5.78% $43,369 6.61%
-------- ------- -------- ------- ------- ------
-------- ------- -------- ------- ------- ------
</TABLE>
<TABLE>
<CAPTION>
TOTAL INVESTMENT
MORE THAN 10 YEARS SECURITIES
-------------------- -------------------
CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD
<S> <C> <C> <C> <C>
Investment securities - held to maturity . $ 691 6.92% $16,000 6.11%
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, are composed of the following:
<TABLE>
<CAPTION>
WEIGHTED PERCENTAGE
AVERAGE MINIMUM OF TOTAL
INTEREST RATE(1) MINIMUM TERM CATEGORY AMOUNT BALANCES DEPOSITS
- ---------------- ------------ -------- ------ -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
0.00% None Noninterest bearing checking accounts None $ 10,902 2.78%
1.67% None Interest bearing checking account $ 200 36,639 9.33%
2.03% None Money Market Plus accounts 200 6,968 1.77%
4.70% None Money Market Select accounts 10,000 56,744 14.44%
1.78% None Savings accounts/Club accounts 10/5 25,385 6.46%
1.75% None Unredeemed certificates 1,000 825 0.21%
3.72% 3 months Fixed term, fixed rate 1,000 650 0.17%
5.53% 5 months Fixed term, fixed rate 1,000 746 0.19%
3.95% 6 months Fixed term, fixed rate (2) 100/1,000 7,843 2.00%
5.08% 8 months Fixed term, fixed rate 5,000 4,647 1.18%
5.38% 1 year Fixed term, fixed rate (2) 100/1,000 28,580 7.28%
5.48% 14 months Fixed term, fixed rate 5,000 6,644 1.69%
5.76% 16 months Fixed term, fixed rate 5,000 1,447 0.37%
5.83% 17 months Fixed term, fixed rate 5,000 19,104 4.87%
5.71% 1.5 year Fixed term, fixed rate 1,000 7,527 1.92%
5.73% 19 months Fixed term, fixed rate 5,000 2,377 0.61%
5.42% 2 year Fixed term, fixed rate (2) 100/1,000 16,185 4.12%
5.10% 2 year Fixed term, variable rate IRA 100 1,227 0.31%
5.89% 26 months Fixed term, fixed rate 5,000 25,682 6.54%
5.01% 2.5 year Fixed term, fixed rate 1,000 4,834 1.23%
4.94% 2.5 year Fixed term, option rate (3) 1,000 2,471 0.63%
6.22% 32 months Fixed term, fixed rate 5,000 16,694 4.25%
5.95% 35 months Change up term and rate (4) 1,000 34,506 8.78%
5.31% 3 year Fixed term, fixed rate (2) 100/1,000 30,519 7.77%
6.47% 45 months Fixed term, fixed rate 5,000 5,401 1.38%
5.42% 4 year Fixed term, fixed rate 1,000 6,275 1.60%
6.74% 58 months Fixed term, fixed rate 5,000 7,768 1.98%
5.67% 5 year Fixed term, fixed rate 1,000 6,146 1.57%
6.11% 6 year Fixed term, fixed rate 1,000 11,706 2.98%
6.64% 8 year Fixed term, fixed rate 1,000 5,330 1.36%
8.61% 10 year Fixed term, fixed rate-education CD 5,000 905 0.23%
----- ---------- --------
4.69% $ 392,677 100.00%
---------- --------
---------- --------
</TABLE>
- -------------------------------------------------------
(1) Yield rates for fixed term, fixed rate certificates.
(2) Individual retirement accounts (IRAs) are offered for this term. The
minimum for IRAs is $100 and the minimum for other certificates is
$1,000. The minimum for additions to IRAs is $25, while the minimum for
additions to other certificates is $1,000.
(3) The rate on the option rate certificate may be changed once during the
term to the currently offered rate at the certificate holder's option.
(4) The certificate holder may change to another certificate product on the
first or second anniversary.
81
<PAGE>
The following table sets forth the change in dollar amount of deposits
in the various types of deposit accounts offered by First Federal between the
dates indicated.
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT BALANCE AT
SEPTEMBER 30, % INCREASE JUNE 30, % INCREASE JUNE 30, %
1998 DEPOSITS (DECREASE) 1998 DEPOSITS (DECREASE) 1997 DEPOSITS
--------- --------- ---------- ----------- -------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Checking accounts.............. $ 47,541 12.11% (827) $ 48,368 12.33% $ 10,297 $ 38,071 11.65%
Savings accounts............... 25,385 6.46 (846) 26,231 6.68 3,148 23,083 7.06
Money market accounts.......... 63,712 16.24 1,918 61,794 15.75 15,373 46,421 14.22
Option rate certificates(1).... 2,471 0.63 (433) 2,904 0.74 (2,593) 5,497 1.68
Change up certificates(2)...... 9,586 2.44 548 9,038 2.30 3,314 5,724 1.75
3 to 11 month certificates..... 13,757 3.50 2,693 11,064 2.82 (3,684) 14,748 4.51
12 thru 18 month certificates.. 57,681 14.69 170 57,511 14.66 18,445 39,066 11.96
19 thru 30 month certificates.. 43,730 11.14 1,233 42,497 10.83 14,617 27,880 8.53
32 and 36 month certificates... 24,265 6.18 (828) 25,093 6.39 1,899 23,194 7.11
45 and 48 month certificates... 11,676 2.97 (435) 12,111 3.09 175 11,936 3.65
58 through 96 month certificates 30,950 7.88 (2,826) 33,776 8.61 2,102 31,674 9.69
IRA certificates............... 60,193 15.32 (464) 60,657 15.45 3,599 57,058 17.46
Other certificates............. 1,730 0.44 349 1,381 0.35 (1,001) 2,382 0.73
--------- --------- --------- ---------- -------- ---------- --------- ---------
$ 392,677 100.00% $ 252 $ 392,425 100.00% $ 65,691 $326,734 100.00%
--------- --------- --------- ---------- -------- ---------- --------- ---------
--------- --------- --------- ---------- -------- ---------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
BALANCE AT
INCREASE JUNE 30, %
(DECREASE) 1996 DEPOSITS
--------- --------- ---------
<S> <C> <C> <C>
Checking accounts.............. $ 3,200 $ 34,871 10.40%
Savings accounts............... (1,568) 24,651 7.35
Money market accounts.......... 5,190 41,231 12.30
Option rate certificates(1).... (3,518) 9,015 2.69
Change up certificates(2)...... 5,724 - -
3 to 11 month certificates..... (16,462) 31,210 9.31
12 thru 18 month certificates.. (1,483) 40,549 12.10
19 thru 30 month certificates.. 10,263 17,617 5.26
32 and 36 month certificates... 8,020 15,174 4.53
45 and 48 month certificates... (8,032) 19,968 5.96
58 through 96 month certificates (7,115) 38,789 11.57
IRA certificates............... (3,383) 60,441 18.03
Other certificates............. 675 1,707 0.50
--------- --------- --------
$ (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.................................. $12,730 $ 14,684 $ 18,026 $ 24,863
4.01-6.00%.................................. 192,712 178,324 166,126 158,476
6.01-8.00%.................................. 49,585 61,348 31,702 43,880
8.01-9.00%.................................. 1,012 1,676 3,305 7,251
------- -------- -------- --------
Total....................................... $256,039 $256,032 $219,159 $234,470
------- -------- -------- --------
------- -------- -------- --------
</TABLE>
TIME DEPOSIT MATURITY SCHEDULE. The following table sets forth the
amount and maturities of certificates of deposit at September 30, 1998.
<TABLE>
<CAPTION>
AMOUNT DUE
----------------------------------------------------
LESS THAN 1-2 2-3 AFTER
ONE YEAR YEARS YEARS 3 YEARS TOTAL
WEIGHTED AVERAGE -------- -------- ------- --------- ---------
RATE (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
4% or less........................................... $12,459 $ 271 $ -- $ -- $ 12,730
4.01-6.00%........................................... 92,638 70,301 24,817 4,956 192,712
6.01-8.00%........................................... 15,391 16,619 9,120 8,454 49,584
8.01-9.00%........................................... 1,010 -- -- 3 1,013
------- ------- ------- -------- --------
Total........................................... $121,498 $87,191 $33,937 $ 13,413 $256,039
-------- ------- ------- -------- --------
-------- ------- ------- -------- --------
</TABLE>
CERTIFICATES OF DEPOSIT $100,000 AND OVER. The following table
indicates the amount of First Federal's certificates of deposit and other time
deposits of $100,000 or more by time remaining until maturity as of September
30, 1998.
<TABLE>
<CAPTION>
MATURITY PERIOD CERTIFICATES OF DEPOSITS
--------------- ------------------------
(IN THOUSANDS)
<S> <C>
Three months or less.......................................... $ 2,583
Three through six months...................................... 2,937
Six through twelve months..................................... 5,694
Over twelve months............................................ 8,720
--------
Total.................................................... $ 19,934
--------
--------
</TABLE>
83
<PAGE>
DEPOSIT ACTIVITY. The following table sets forth the savings activities
of First Federal for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED JUNE 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 AT JUNE 30,
SEPTEMBER 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>
DURING THE THREE MONTHS ENDED
SEPTEMBER 30, DURING THE YEAR ENDED JUNE 30,
------------------ -------------------------------
1998 1997 1998 1997 1996
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Maximum amount of Federal Home Loan Bank advances
outstanding at any month.................................... $125,900 $89,500 $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>
<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 Insurance Fund-insured
institution, 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 savings institutions are
governed by the Home Owners' Loan Act, as amended and, in certain respects, the
Federal Deposit Insurance Act. The federal banking statutes, as amended by the
Financial Institutions Reform, Recovery and Enforcement Act of 1989 and the
Federal Deposit Insurance Corporation Improvement Act:
(1) restrict the solicitation of brokered deposits by savings
institutions that are troubled or not well-capitalized;
(2) prohibit the acquisition of any corporate debt security that is not
rated in one of the four highest rating categories;
(3) restrict the aggregate amount of loans secured by non-residential
real estate property to 400% of capital;
87
<PAGE>
(4) permit savings and loan holding companies to acquire up to 5% of
the voting shares of non-subsidiary savings institutions or savings and loan
holding companies without prior approval; and
(5) permit bank holding companies to acquire healthy savings
institutions.
The description of statutory provisions and regulations applicable to savings
associations set forth herein does not purport to be a complete description of
these statutes and regulations and their effect on First Federal.
LOANS TO ONE BORROWER. Savings institutions are generally restricted by
national bank limits on loans to one borrower. Generally, savings institutions
may not make a loan or extend credit to a single or related group of borrowers
in excess of 15% of First Federal's unimpaired capital and surplus on an
unsecured basis. An additional amount may be lent, equal to 10% of unimpaired
capital and surplus, if 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.
QUALIFIED THRIFT LENDER TEST. Federal law requires savings institutions
to meet a qualified thrift lender test. Under the qualified thrift lender test,
a savings association is required to maintain at least 65% of its "portfolio
assets" in specific "qualified thrift investments," primarily residential
mortgages and related investments, including specific mortgage-backed and
related securities on a monthly average basis in 9 out of every 12 months.
"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.
88
<PAGE>
In addition, Office of Thrift Supervision regulations require First
Federal Bankshares, M.H.C., the mutual holding company which owns the majority
of First Federal's common stock, to notify the Office of Thrift Supervision of
any proposed waiver of its right to receive dividends. It is the Office of
Thrift Supervision's practice to review dividend waiver notices on a
case-by-case basis, and, in general, not object to any waiver if:
(1) the mutual holding company's board of directors determines that the
waiver is consistent with the directors' fiduciary duties to the mutual holding
company's members;
(2) for as long as the savings association subsidiary is controlled by
the mutual holding company, the dollar amount of dividends waived by the mutual
holding company are considered as a restriction on the retained earnings of the
savings association, which restriction, if material, is disclosed in the public
financial statements of the savings association as a note to the financial
statements;
(3) the amount of any dividend waived by the mutual holding company is
available for declaration as a dividend solely to the mutual holding company,
and, in accordance with Statement of Financial Accounting Standards No. 5, where
the savings association determines that the payment of the dividend to the
mutual holding company is probable, an appropriate dollar amount is recorded as
a liability;
(4) the amount of any waived dividend is considered as having been paid
by the savings association, and the savings association's capital ratios
adjusted accordingly, in evaluating any proposed dividend under Office of Thrift
Supervision capital distribution regulations; and
(5) in the event the mutual holding company converts to stock form, the
appraisal submitted to the Office of Thrift Supervision in connection with the
conversion application takes into account the aggregate amount of the dividends
waived by the mutual holding company, which totaled $2.4 million at September
30, 1998.
LIQUIDITY. First Federal is required to maintain an average daily
balance of specified liquid assets equal to a quarterly average of not less than
a specified percentage 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 association
share 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.
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 transactions with any individual affiliate to 10% of the
capital and surplus of the savings institution and also limits the aggregate
amount of transactions with all affiliates to 20% of the savings institution's
capital and surplus. Some 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
89
<PAGE>
from affiliates is generally prohibited. Section 23B provides that some
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 the 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 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
90
<PAGE>
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 whose measured interest rate risk exposure exceeds
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.
91
<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 degree of capitalization. Generally, a savings
institution that has total risk-based capital of less than 8.0% or a leverage
ratio or a Tier 1 core capital ratio that is less than 4.0% is considered to be
undercapitalized. A savings 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, including the issuance of a capital directive and the replacement of
senior executive officers and directors.
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
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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:
(1) well capitalized;
(2) adequately capitalized; and
(3) 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 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, the legislation may eventually be enacted and there can be no
assurance that any legislation that is enacted would not adversely affect First
Federal and First Federal Bankshares.
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HOLDING COMPANY REGULATION
FIRST FEDERAL BANKSHARES. First Federal Bankshares will be a
non-diversified unitary savings and loan holding company within the meaning of
Federal law. As such, First Federal Bankshares will be required to register with
the Office of Thrift Supervision and will report to and be supervised 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 activities that are determined to be a serious 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 Section 4(c)(8) of the Bank Holding Company Act
of 1956, with the prior approval of the Office of Thrift Supervision, and to
other activities authorized by Office of Thrift Supervision regulation. 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. See "Risk Factors--Regulatory Oversight
and Legislation."
Federal law prohibits a savings and loan holding company, including the
Mutual Holding Company, directly or indirectly, or through one or more
subsidiaries, from acquiring another savings institution or holding company
thereof, without prior written approval of the 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.
The Office of Thrift Supervision is prohibited from approving any
acquisition that would result in a multiple savings and loan holding company
controlling savings institutions in more than one state, with two exceptions:
(1) the approval of interstate supervisory acquisitions by savings and
loan holding companies; and
(2) the acquisition of a savings institution in another state if the
laws of the state of the target savings institution specifically permit such
acquisitions.
The states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.
THE MUTUAL HOLDING COMPANY. The Mutual Holding Company is a
non-diversified mutual savings and loan holding company. The Mutual Holding
Company is registered with, supervised by, and must report to the Office of
Thrift Supervision. In addition, the Office of Thrift Supervision has
enforcement authority over the Mutual Holding Company and any non-savings
institution subsidiaries. Among other things, this authority permits the Office
of Thrift Supervision to restrict or prohibit activities that are determined to
be a serious risk to the subsidiary savings institution.
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Pursuant to Federal law and Office of Thrift Supervision regulations
and policy, a mutual holding company may engage in the following activities:
(1) investing in the stock of a savings association;
(2) acquiring a mutual association through the merger of the
association into a savings association subsidiary of the holding company or an
interim savings association subsidiary of the holding company;
(3) merging with or acquiring another holding company, one of whose
subsidiaries is a savings association;
(4) investing in a corporation, the capital stock of which is available
for purchase by a savings association under federal law or under the law of any
state where the subsidiary savings association or associations share their home
offices;
(5) furnishing or performing management services for a savings
association subsidiary of such company;
(6) holding, managing or liquidating assets owned or acquired from a
savings association subsidiary of the company;
(7) holding or managing properties used or occupied by a savings
association subsidiary of the company;
(8) acting as trustee under deeds of trust;
(9) any other activity (A) that the Federal Reserve Board, by
regulation, has determined to be permissible for bank holding companies under
Section 4(c) of the Bank Holding Company Act of 1956, unless the Director, by
regulation, prohibits or limits the activity for savings and loan holding
companies; or (B) in which multiple savings and loan holding companies were
authorized by regulation to directly engage on March 5, 1987; and
(10) purchasing, holding, or disposing of stock acquired in connection
with a qualified stock issuance if the purchase of the stock by the savings and
loan holding company is approved by the Director.
If a mutual holding company acquires or merges with another holding company, the
holding company acquired or the holding company resulting from the merger or
acquisition may only invest in assets and engage in activities listed in (1)
through (10) above, and has a period of two years to cease any non-conforming
activities and divest any non-conforming investments.
In addition, Office of Thrift Supervision regulations require the
mutual holding company to notify the Office of Thrift Supervision of any
proposed waiver of its right to receive dividends. It is the Office of Thrift
Supervision's recent practice to review dividend waiver notices on a
case-by-case basis and, in general, not to object to any such waiver if:
(1) the mutual holding company's board of directors determines that the
waiver is consistent with the directors' fiduciary duties to the mutual holding
company's members;
(2) for as long as the savings association subsidiary is controlled by
the mutual holding company, the dollar amount of dividends waived by the mutual
holding company are considered as a restriction on the
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retained earnings of the savings association, which restriction, if material, is
disclosed in the public financial statements of the savings association as a
note to the financial statements;
(3) the amount of any dividend waived by the mutual holding company is
available for declaration as a dividend solely to the mutual holding company
and, in accordance with Statement of Financial Accounting Standards No. 5, where
the savings association determines that the payment of the dividend to the
mutual holding company is probable, an appropriate dollar amount is recorded as
a liability;
(4) the amount of any waived dividend is considered as having been paid
by the savings association in evaluating any proposed dividend under Office of
Thrift Supervision capital distribution regulations; and
(5) in the event the mutual holding company converts to stock form, the
appraisal submitted to the Office of Thrift Supervision in connection with the
conversion application takes into account the aggregate amount of the dividends
waived by the mutual holding company.
FEDERAL SECURITIES LAWS
First Federal Bankshares has filed with the 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) 1% of the outstanding shares of First Federal Bankshares; or
(2) 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.
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
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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 the following:
(1) interest on certain tax-exempt bonds issued after August 7, 1986;
and
(2) 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.
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.
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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 is composed of eleven members.
Directors of First Federal are generally elected to serve for a three year
period or until their respective successors shall have been elected and shall
qualify. The following table sets forth certain information regarding the
composition of First Federal's Board of Directors at September 30, 1998,
including the terms of office of Board members. 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 President, 1997 2000 24,711 (8) *
Chief Operating Officer
and Director
Gary L. Evans 59 Director 1989 1999 6,620 (5) *
Allen J. Johnson 59 Director 1993 1999 990 *
Harland D. Johnson 68 Director 1979 1999 22,169 *
Paul W. Olson 68 Director 1974 2001 13,525 *
Steven L. Opsal 44 Executive Vice President & 1998 2000 3,648 (7) *
Director
Dennis B. Swanstrom 55 Director 1993 2001 1,055 *
David Van Engelenhoven 55 Director 1993 2000 990 *
</TABLE>
- -----------------------------
(*) Less than 1%.
(1) The mailing address for each person listed is 329 Pierce Street, Sioux
City, Iowa 51101. Each of the persons listed is also a director of the
Mutual Holding Company.
(2) As of September 30, 1998.
(3) Reflects initial appointment to the Board of Directors of First Federal or
its mutual predecessor, First Federal Savings and Loan Association of Sioux
City, as the case may be. First Federal was chartered as a result of the
mutual holding company reorganization of First Federal Savings and Loan
Association of Sioux City in July 1992.
(4) Includes all shares of common stock held directly as well as by spouses and
minor children, in trust and other indirect ownership, over which shares
the executive officers and directors effectively exercise sole or shared
voting and investment power.
(5) Includes shares 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.
(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
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be exercised within 60 days of the September 30, 1998.
(9) 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 for terms expiring at the 1998 Annual Meeting of Stockholders.
The business experience of each of the above directors for at least the
past five years is as follows:
BARRY E. BACKHAUS has been President and Chief Executive Officer of
First Federal since 1990 and Chairman of the Board since 1997; he has been
affiliated with First Federal since 1969.
DR. NANCY A. BOYSEN is a homemaker.
DAVID S. CLAY is Vice President and Treasurer of Grinnell College,
Grinnell, Iowa.
JON G. CLEGHORN has been Executive Vice President of First Federal
since 1990 and has been affiliated with First Federal in various capacities
since 1974.
GARY L. EVANS is President and Chief Executive Officer of Sioux Honey
Association.
ALLEN J. JOHNSON is President and Chief Executive Officer of Great West
Casualty Company, a property and casualty company located in South Sioux City,
Nebraska.
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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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 LONG-TERM COMPENSATION
----------------------------------------------------------------------------
AWARDS PAYOUTS
----------------------------------
OPTIONS/
STOCK
APPRECIA-
YEAR OTHER RESTRICTED TION ALL
NAME AND ENDED BONUS ANNUAL STOCK RIGHTS LTIP OTHER
PRINCIPAL POSITION JUNE 30, SALARY (1) COMPENSATION AWARDS (#) PAYOUTS COMPENSATION
- -------------------- --------- ------------ --------- --------------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Barry E. Backhaus, 1998 180,000 11,100 $ -- $15,712 -- $ -- $ --
President and Chief 1997 163,500 5,250 -- -- -- -- --
Executive Officer 1996 139,250 4,560 -- -- -- -- --
- -------------------- --------- ------------ --------- --------------- ------------ ---------- ----------- -------------
Jon G. Cleghorn, 1998 113,250 3,540 $ -- $10,117 -- $ -- $ --
Executive Vice 1997 105,250 3,255 -- -- -- -- --
President and Chief 1996 93,167 1,530 -- -- -- -- --
Operating Officer
</TABLE>
- -----------------------------
1) 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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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:
(1) participate in all employee benefit plans generally available to
employees of First Federal;
(2) the award of 4,000 options and 2,000 shares of restricted stock
under First Federal's 1992 Stock Option Plan and 1992 Recognition Plan;
(3) the use of a bank-owned automobile;
(4) maintenance of Mr. Opsal's country club membership; and
(5) reimbursement of all reasonable expenses incurred in performing
services under the employment agreement.
The employment agreement protects Mr. Opsal from involuntary termination without
cause, or in the event of a change in control of First Federal or First Federal
Bankshares. Under the terms of the employment agreement, Mr. Opsal would receive
approximately $383,000 if his employment had been terminated in the fiscal year
ended June 30, 1998, in the event of a change in control.
In connection with the conversion, First Federal intends to enter into
employment agreements with Messrs. Backhaus and Cleghorn and Ms. Sabel, and to
replace the employment agreement between First Federal and Mr. Opsal with a new
employment agreement, each of which will provide for a term of up to 36 months.
On each day during the term of an agreement, the agreement automatically renews
so that the agreement shall continually be for a three-year term unless notice
of non-renewal is provided within 60 days prior to any anniversary of the date
on which the agreement was entered into. In the event that notice of non-renewal
is given, the agreement will expire at the end of its three-year term. The
agreement provides for, among other things, base salary, 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.
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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.
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 provides that, following termination of
employment other than in connection with a change in control, the executive will
not compete with First Federal for a period of one year in any city, town, or
county in which First Federal and/or First Federal Bankshares has filed for
regulatory approval to establish an office.
DIRECTORS' COMPENSATION
Outside members of the Board of Directors of First Federal received
fees of $500 for each meeting attended in fiscal 1998. Outside members of Board
committees were paid $200 for each committee meeting attended during fiscal
1998. During the fiscal year ended June 30, 1998, First Federal paid a total of
$61,200 in directors' and committee fees, which amounts include fees deferred at
the election of directors pursuant to the Deferred Compensation Plan for
Directors. See "Benefits--Deferred Compensation Plan for Directors."
In addition to the foregoing fees, First Federal pays annual retainer
fees of $4,000 for each outside director. 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.
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. The health
insurance includes vision coverage and prescription drug coverage. A portion of
the premium is paid by First Federal, with full-time employees currently paying
either $64.94 or $75.90 monthly for single coverage, and
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either $205.50 or $177.50 monthly for family coverage. Two different plans with
different deductibles are offered. Dental insurance is offered at the employee's
option and expense. Full-time employees also are covered by a term life
insurance policy equal to their annual base salary as of January 1st of each
year and a long-term disability insurance policy, all provided at no cost to the
employee, effective the first day of the month following 90 days of full-time
employment. Dependent and additional life insurance is also available.
DEFINED CONTRIBUTION PLAN. Effective September 1, 1996, First Federal
adopted the Financial Institutions Thrift Plan, which is a qualified, tax-exempt
defined contribution plan. 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 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
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of benefit service, not to exceed 30, times average compensation based on the
average of the five years providing the highest average. A reduced benefit is
payable upon retirement at age 45 at or after completion of five years of
service. A member is fully vested in his account upon completion of 5 or more
years of employment or upon attaining normal retirement age.
The following table indicates the annual retirement benefit that would
be payable under the 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
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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.
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
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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<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
- -------------------------------------------------------------------------------------------------------------
NUMBER OF UNEXERCISED
OPTIONS AT VALUE OF UNEXERCISED IN-THE-MONEY
SHARES FISCAL YEAR-END OPTIONS AT FISCAL YEAR-END
ACQUIRED ------------------------- ---------------------------------
UPON VALUE EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
NAME EXERCISE REALIZED
- --------------------- ------------- ------------ ------------------------- ---------------------------------
<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.
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<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
- ------------------------------------------------------------------------------------------------------------------------
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS AT THE-MONEY OPTIONS AT
FISCAL YEAR-END FISCAL YEAR-END
SHARES ACQUIRED VALUE ------------------------- -------------------------
NAME UPON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- --------------------------- ----------------- ----------------- -------------------------- -------------------------
<S> <C> <C> <C> <C>
Dr. Nancy A. Boysen -- $-- 0 $--
David S. Clay -- -- 500/0 1,250/0
Gary L. Evans -- -- 2,370/0 73,352/0
Allen J. Johnson -- -- 0 --
Harland D. Johnson -- -- 0 --
Paul W. Olson -- -- 0 --
Dennis B. Swanstrom -- -- 0 --
David Van Engelenhoven -- -- 990/0 27,141/0
</TABLE>
RECOGNITION AND RETENTION PLAN. In 1992, 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 earning rate with respect to
awards granted under the 1992 Recognition Plan. Awards become fully vested upon
termination of employment due to death, disability, normal retirement or
following a termination of employment in connection with a change in the control
of First Federal. In the event that before reaching normal retirement an officer
terminates employment with First Federal, the officer's nonvested awards will be
forfeited. When shares become vested in accordance with the 1992 Recognition
Plan, the participants recognize income equal to the fair market value of the
common stock at that time. The amount of income recognized by a participant is a
deductible expense for federal income tax purposes for First Federal. When
shares become vested and are actually distributed in accordance with the 1992
Recognition Plan, participants receive amounts equal to any accrued dividends
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. Barry E. Backhaus,
Jon G. Cleghorn and Steven L. Opsal were awarded 469, 302 and 2,000 shares,
respectively, under the 1992 Recognition Plan.
On the effective date of the conversion, unvested shares of restricted
stock will be converted into shares of First Federal Bankshares common stock
pursuant to the exchange ratio. First Federal Bankshares restricted stock will
be restricted on the same terms as applied to the First Federal restricted
stock.
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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 shall be approved by the
committee.
SUPPLEMENTAL EXECUTIVE RETIREMENT AND DEFERRED COMPENSATION PLAN. In
connection with the conversion, First Federal intends to adopt a non-qualified
supplemental executive retirement and deferred compensation plan, 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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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 $________. Whether a contribution must be made to the
supplemental executive retirement plan due to lost contributions under the
401(k) Plan is incapable of determination 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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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 outside Director can receive more than 5% of the awards under the
plan, and all outside Directors as a group can receive no more than 30% of the
awards under the plan.
The 1999 Stock Option Plan would be administered by a Committee of
non-employee members of First Federal Bankshares' Benefits Committee. Options
granted under the 1999 Stock Option Plan to employees could be incentive stock
options designed to result in beneficial tax treatment to the employee but no
tax deduction to First Federal Bankshares. Non-qualified stock options could
also be granted under the 1999 Stock Option Plan, and will be granted to the
non-employee Directors who receive grants of stock options. In the event an
option recipient terminated his employment or service as an employee or
Director, the options would terminate during certain specified periods.
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 the First
Federal Bankshares in a manner designed to encourage them to continue their
service with First Federal. First Federal will contribute funds to the 1999
Recognition Plan from time to time to enable it to acquire an aggregate amount
of common stock equal to up to 3% of the shares of common stock issued in the
offering, either directly from the First Federal Bankshares or in open market
purchases. Three percent of the shares issued in the offering would amount to
79,050 shares, 93,000 shares, 106,950 or 122,992 shares at the minimum,
midpoint, maximum and adjusted maximum of the offering range, respectively. In
the event that additional authorized but unissued shares would be acquired by
the 1999 Recognition Plan after the offering, the interests of existing
stockholders would be diluted. The executive officers and Directors will be
awarded common stock under the 1999 Recognition Plan without having to pay cash
for the
111
<PAGE>
shares. No awards under the 1999 Recognition Plan would be made until the date
the 1999 Recognition Plan is approved by the First Federal Bankshares'
stockholders.
Awards under the 1999 Recognition Plan would be nontransferable and
nonassignable, and during the lifetime of the recipient could only be earned by
him. If the 1999 Recognition Plan is adopted within one year following the
offering, the shares which 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 outside Director can receive more than 5% of the awards under the
plan, and all outside Directors as a group can receive no more than 30% of the
awards under the plan.
When shares become vested under the 1999 Recognition Plan, the
participant will recognize income equal to the fair market value of the common
stock earned, determined as of the date of vesting, unless the recipient makes
an election under ss. 83(b) of the 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 will be distributed to the participant when paid, and the
participant will 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. 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(1) 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 (2) 5.38%
as a Group (12 persons)
</TABLE>
(1) In accordance with Rule 13d-3 under the Securities Exchange Act of 1934, a
person is deemed to be the beneficial owner for purposes of this table, of
any shares of common stock if he has shared voting or investment power with
respect to the security, or has a right to acquire beneficial ownership at
any time within 60 days from September 30, 1998. As used herein, "voting
power" is the power to vote or direct the voting of shares and "investment
power" is the power to dispose or direct the disposition of shares.
Includes all shares held directly as well as by spouses and minor children,
in trust and other indirect ownership, over which shares the named
individuals effectively exercise sole or shared voting and investment
power.
(2) Includes all shares of common stock held directly as well as by spouses and
minor children, in trust and other indirect ownership, over which shares
the executive officers and directors effectively exercise sole or shared
voting and investment power. Also includes 12,947 shares 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
that may be exercised within 60 days of September 30, 1998; and 25,656
shares awarded under the 1992 Recognition Plan that have vested or been
distributed to participants.
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<PAGE>
SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND DIRECTORS
The 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>
PROPOSED PURCHASES OF TOTAL COMMON STOCK
NUMBER OF CONVERSION STOCK(1) TO BE HELD
EXCHANGE SHARES NUMBER NUMBER PERCENTAGE
TO BE HELD(2)(3) 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 First Federal common
stock."
(3) Does not include stock options and awards that may be granted under First
Federal Bankshares's 1999 Stock Option Plan and 1999 Recognition Plan if
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 for Employees and Officers."
(4) If necessary to achieve compliance with the overall 85,000 share purchase
limitation, Mr. Backhaus may reduce slightly his proposed purchase of
conversion stock.
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<PAGE>
THE CONVERSION
THE BOARD OF DIRECTORS OF THE MUTUAL HOLDING COMPANY AND THE 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:
(1) the Mutual Holding Company will convert from a federal mutual
holding company to a federal stock savings association and simultaneously merge
with and into First Federal; and
(2) First Federal Bankshares will offer shares of common stock for sale
in the subscription offering to Eligible Account Holders, First Federal's
tax-qualified plans including the 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. 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.
116
<PAGE>
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 serve to
increase First Federal's capital to support the Mid-Iowa Financial acquisition
and to fund a substantial portion of the merger consideration to be paid to the
shareholders of Mid-Iowa Financial to consummate the Mid-Iowa Financial
acquisition. The potential impact of the conversion upon First Federal's capital
base is significant. First Federal had equity in accordance with generally
accepted accounting principles of $43.2 million, or 7.6% of assets at September
30, 1998. Assuming that $31.0 million, the mid-point of the offering range
established by the Board of Directors based on the estimated pro forma market
value of the common stock which has been estimated by RP Financial to be from a
minimum of $26.4 million to a maximum of $35.7 million, of gross proceeds are
realized from the sale of common stock and assuming that all except $5.0 million
of the net proceeds are used by First Federal Bankshares to purchase the capital
stock of First Federal, First Federal's ratio of generally accepted accounting
principles capital to adjusted assets, on a pro forma basis, will increase to
9.1% after the conversion and taking into account the Mid-Iowa Financial
acquisition and the consolidation of the Mutual Holding Company into First
Federal. The investment of the net proceeds from the sale of the common stock
will provide First Federal with additional income to further increase its
capital position. The additional capital may also assist First Federal in
offering new programs and expanded services to its customers.
After completion of the conversion and depending on market conditions,
the unissued common and preferred stock authorized by First Federal Bankshares's
certificate of incorporation will permit First Federal Bankshares, to raise
additional equity capital through further sales of securities, and to issue
securities in connection with possible acquisitions. At the present time, First
Federal Bankshares has no plans with respect to
117
<PAGE>
additional offerings of securities, other than the issuance of additional shares
upon exercise of stock options or the possible issuance of authorized but
unissued shares to First Federal Bankshares' stock benefit program. Following
the conversion, First Federal Bankshares will also be able to use stock-related
incentive programs to attract and retain executive and other personnel for
itself and its subsidiaries. See "Management of First Federal--Executive
Compensation."
APPROVALS REQUIRED
The affirmative vote of a majority of the total eligible votes of the
members of the Mutual Holding Company at the Special Meeting of Members is
required to approve the Plan of Conversion. By their approval of the Plan of
Conversion, the members of the Mutual Holding Company will also be deemed to
approve the 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 $0.5 million out of the aggregate waived dividends of
$2.7 million, and approximately $0.8 million 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 as 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 would also 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 shares 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, the following:
(1) the total number of subscription shares and exchange shares to be issued in
the conversion; (2) the percentage of common stock outstanding after the
conversion that will be sold in the offering and issued in the share exchange;
and (3) the exchange ratio.
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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 will also be
converted into and become options to purchase First Federal Bankshares common
stock. At September 30, 1998, there were outstanding options to purchase 37,574
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, 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 of the
119
<PAGE>
offering range, respectively. 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
__________, 1998. The Mutual Holding Company intends to waive the receipt of
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 ___________, 1999, was $________ 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 appraisal, 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 and the economic and demographic
conditions in First Federal's existing marketing area; certain historical,
financial and other information relating to First Federal; a comparative
evaluation of the operating and financial statistics of First Federal with those
of other publicly traded savings institutions located in First Federal's region
and on a national basis; the aggregate size of the offering of the common stock;
the impact of the conversion on First Federal's stockholders' equity and
earnings potential; the pro forma impact of the Mid-Iowa Financial acquisition;
the proposed dividend policy of First Federal Bankshares and First Federal; and
the trading market for securities of comparable institutions and general
conditions in the market for the securities.
The independent valuation was prepared based on the assumption that the
aggregate amount of common stock sold in the offering would be equal to the
estimated pro forma market value of First Federal Bankshares multiplied by the
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 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.
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THE INDEPENDENT VALUATION, HOWEVER, IS NOT INTENDED, AND MUST NOT BE
CONSTRUED, AS A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING
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.
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
________, 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 net income 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
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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 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 earlier of the effective
date on a pro rata basis, or the fiscal quarter ending ________, 1999. The
Mutual Holding Company intends to waive the receipt of the 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
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overall purchase limitations set forth in the Plan of Conversion and as
described below under "--Limitations on Common Stock Purchases."
PRIORITY 1: ELIGIBLE ACCOUNT HOLDERS. Each depositor with aggregate
deposit account balances, including demand deposit accounts, of $50 or more (a
"Qualifying Deposit") at September 30, 1997 ("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 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
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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 subscriptions, available
shares will be allocated on a pro rata basis based on the size of the order of
each Other Member.
EXPIRATION DATE FOR THE SUBSCRIPTION OFFERING. The Subscription
Offering will expire on ______, 1999, 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 _________, 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
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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
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
offered 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.
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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
_________, 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.
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
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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;
(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
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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 noon, Central time, on
__________, 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 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 shares below the minimum of the offering range will
not require the approval of the Mutual Holding Company's members or First
Federal's stockholders, or an amendment to the independent valuation. If the
number of shares is reduced below the minimum of the offering range, purchasers
will be given an opportunity to increase, decrease, or rescind their orders.
To ensure that each purchaser receives a prospectus at least 48 hours
before the expiration date in accordance with Rule 15c2-8 of the 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 noon, Central time, on _________, 1999 by delivering, by
mail or in person, to First Federal Bankshares a properly executed and completed
order form and a certification form, together with full payment for the shares
purchased. Once tendered, an order form cannot be modified or revoked without
the consent of First Federal Bankshares. First Federal Bankshares reserves the
absolute right, in its sole discretion, to reject orders received in the
community offering, in whole or in part, at the time of receipt or at any time
prior to completion of the offering. Each person ordering shares is required to
represent that he is purchasing 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.
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:
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(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 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.
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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.
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 _____ shares at the
minimum of the offering range and _____ 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
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(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 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
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to conversion, see "Management of First Federal--Subscriptions by Executive
Officers and Directors," and "The Conversion--Certain Restrictions on Purchase
or Transfer of Shares after Conversion" and "Restrictions on Acquisition of
First Federal Bankshares and First Federal."
LIQUIDATION RIGHTS
In the unlikely event of a complete liquidation of First Federal prior
to the conversion, all claims of creditors of First Federal, including those of
depositors to the extent of their deposit balances, would be paid first.
Thereafter, if there were any assets of First Federal remaining, these assets
would be distributed to stockholders, including the Mutual Holding Company. Were
the Mutual Holding Company and First Federal to liquidate prior to the
conversion, all claims of creditors would be paid first. 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
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would ever be increased despite any subsequent increase in the related deposit
account. Payment pursuant to liquidation rights of Eligible Account Holders and
Supplemental Eligible Account Holders would be separate and apart from any
insured deposit accounts to such depositor. Any assets remaining after the above
liquidation rights of Eligible Account Holders and Supplemental Eligible Account
Holders are satisfied would be distributed to First Federal Bankshares as the
sole shareholder of First Federal.
TAX ASPECTS
The conversion will be effected as 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
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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 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 -0-;
(7) the holding period of the assets of the Mutual Holding Company to
be received by First Federal will include the holding period of those assets in
the hands of the Mutual Holding Company immediately prior to the transfer;
(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;
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(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);
(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
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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.
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, 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.
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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:
(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 18,000,000 shares of common stock, par value $.01 per share,
and 2,000,000 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
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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.
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. Neither First Federal's federal stock charter or bylaws
nor First Federal Bankshares' certificate of incorporation or bylaws currently
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--Limitations 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
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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.
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
federal stock charter provides 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 than a majority 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
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up at such a meeting by filing such in writing with First Federal at least
thirty 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 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:
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(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
(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.
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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.
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,
authorized capital stock, denial of preemptive rights, the number and staggered
terms of directors, removal of directors, approval of certain business
combinations, the evaluation of certain business combinations, elimination of
directors' liability, indemnification of officers and directors, 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
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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.
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
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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
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.
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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.
For further information about Mid-Iowa Financial and Mid-Iowa Savings,
see "Excerpts from 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:
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(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;
(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;
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(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
(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.
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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, 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;
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(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;
(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;
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(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;
(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;
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(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;
(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;
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(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;
(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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<PAGE>
(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, special termination agreements,
stock option plans, and other employee or director benefit plans will result in
cash payments of approximately $___ million to certain of Mid-Iowa Financial's
officers and directors, including approximately $__ million payable under
severance arrangements and $___ million payable under stock option plans.
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.
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.
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<PAGE>
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
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;
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<PAGE>
(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 18,000,000 shares of common stock having a par value of $.01 per share and
2,000,000 shares of preferred stock. First Federal Bankshares currently expects
to issue 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 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,
159
<PAGE>
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 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.
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<PAGE>
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
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
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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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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................................................................................................. 41
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-G-30
Part II, Item 6. Management's Discussion and Analysis of Plan of Operation................................G-30-G-44
Part I, Item 1. Description of Business..................................................................G-44-G-73
</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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<PAGE>
exposure if the decline in its net portfolio value after an immediate 200 basis
point increase or decrease in market interest rates (whichever results in the
greater decline) is less than two percent of the current estimated economic
value of its assets. A savings institution with a greater than normal interest
rate risk is required to deduct from total capital, for purposes of calculating
its risk-based capital requirement, an amount (the "interest rate risk
component") equal to one-half the difference between the institution's measured
interest rate risk and the normal level of interest rate risk, multiplied by the
economic value of its total assets.
The OTS calculates the sensitivity of a savings institution's net
portfolio value based on data submitted by the institution in a schedule to its
quarterly Thrift Financial Report and using the interest rate risk measurement
model adopted by the OTS. The amount of the interest rate risk component, if
any, to be deducted from a savings institution's total capital is based on the
institution's Thrift Financial Report filed two quarters earlier. Institutions
with less than $300 million in assets and a risk-based capital ratio above 12%,
like the Bank, generally are exempt from filing the interest rate risk schedule
with their Thrift Financial Reports. However, the OTS will require any exempt
institution that it determines may have a high level of interest rate risk
exposure to file such schedule on a quarterly basis and may be subject to an
additional capital requirement based upon its level of interest rate risk as
compared to its peers.
On September 30, 1998, the Bank had total capital of $11.5 million
(including $11.2 million in core capital and $307,000 in qualifying
supplementary capital) and risk-weighted assets of $59.8 million; or total
capital of 19.0% of risk-weighted assets. This amount was $6.6 million above the
8% requirement in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS generally is required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized associations.
Limitations on Dividends and Other Capital Distributions. OTS
regulations impose various restrictions or requirements on associations with
respect to their ability to pay dividends or make other distributions of
capital. OTS regulations prohibit an association from declaring or paying any
dividends or from repurchasing any of its stock if, as a result, the regulatory
capital of the association would be reduced below the amount required to be
maintained for the liquidation account established in connection with its mutual
to stock conversion.
The OTS utilizes a three-tiered approach to permit associations, based
on their capital level and supervisory condition, to make capital distributions
which include dividends, stock redemptions or repurchases, cash-out mergers and
other transactions charged to the capital account (see "-- Regulatory Capital
Requirements").
Generally, Tier 1 associations, which are associations that before and
after the proposed distribution meet their fully phased-in capital requirements,
may make capital distributions during any calendar year equal to the greater of
100% of net income for the year-to-date plus 50% of the amount by which the
lesser of the association's tangible, core or risk-based capital exceeds its
fully phased-in capital requirement for such capital component, as measured at
the beginning of the calendar year, or the amount authorized for a Tier 2
association. However, a Tier 1 association deemed to be in need of more than
normal supervision by the OTS may be downgraded to a Tier 2 or Tier 3
association as a result of such a determination. The Bank meets the requirements
for a Tier 1 association and has not been notified of a need for more than
normal supervision. Tier 2 associations, which are associations that before and
after the proposed distribution meet their current minimum capital requirements,
may make capital distributions of up to 75% of net income over the most recent
four quarter period.
Tier 3 associations (which are associations that do not meet current
minimum capital requirements) that propose to make any capital distribution and
Tier 2 associations that propose to make a capital distribution in excess of the
noted safe harbor level must obtain OTS approval prior to making such
distribution. Tier 2 associations proposing to make a capital distribution
within the safe harbor provisions and Tier 1 associations proposing to make any
capital distribution need only submit written notice to the OTS 30 days prior to
such distribution. As a subsidiary of the Company, the Bank also is required to
give the OTS 30 days' notice prior to declaring any dividend on its stock. The
OTS may object to
G-67
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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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<PAGE>
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
Holding Company Regulation. The Company is a unitary savings and loan
holding company subject to regulatory oversight by the OTS. As such, the Company
is required to register and file reports with the OTS and is subject to
regulation and examination by the OTS. In addition, the OTS has enforcement
authority over the Company and its non-savings association subsidiaries which
also permits the OTS to restrict or prohibit activities that are determined to
be a serious risk to the subsidiary savings association.
As a unitary savings and loan holding company, the Company generally
is not subject to activity restrictions. If the Company acquires control of
another savings association as a separate subsidiary, it would become a multiple
savings and loan holding company, and the activities of the Company and any of
its subsidiaries (other than the Bank or any other SAIF-insured savings
association) would become subject to such restrictions unless such other
associations each qualify as a QTL and were acquired in a supervisory
acquisition.
If the Bank fails the QTL test, the Company must obtain the approval
of the OTS prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure the Company must register as, and will become subject
to, the restrictions applicable to bank holding companies. The activities
authorized for a bank holding company are more limited than are the activities
authorized for a unitary or multiple savings and loan holding company. See
"--Qualified Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control
of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.
Federal Securities Law. The stock of the Company is registered with
the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The Company is subject to the information, proxy solicitation, insider
trading restrictions and other requirements of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At September 30, 1998, the Bank was in compliance with these
reserve requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve Board may be used to satisfy liquidity
requirements that may be imposed by the OTS. See "-- Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System. The Bank is a member of the FHLB of Des
Moines, which is one of 12 regional FHLBs, that administers the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the board of directors of the FHLB, which are
subject to the oversight of the Federal Housing Finance Board. All advances from
the FHLB are required to be fully secured by sufficient collateral as determined
by the FHLB. In addition, all long-term advances are required to provide funds
for residential home financing.
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<PAGE>
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.
As a member of the FHLB, the Bank is required to purchase and maintain
stock in the FHLB of Des Moines. At September 30, 1998, the Bank had $1.8
million in FHLB stock, which was in compliance with this requirement. For the
year ended September 30, 1998, dividends paid by the FHLB of Des Moines to the
Bank totaled $122,650.
Federal and State Taxation. Savings associations such as the Bank that
meet certain definitional tests relating to the composition of assets and other
conditions prescribed by the Internal Revenue Code of 1986, as amended (the
"Code"), are permitted to establish reserves for bad debts and to make annual
additions thereto which may, within specified formula limits, be taken as a
deduction in computing taxable income for federal income tax purposes (for
taxable years beginning before December 31, 1995) the amount of the bad debt
reserve deduction for "non-qualifying loans" is computed under the experience
method. The amount of the bad debt reserve deduction for "qualifying real
property loans" (generally loans secured by improved real estate) may be
computed under either the experience method or the percentage of taxable income
method (based on an annual election).
Under the experience method, the bad debt reserve deduction is an
amount determined under a formula based generally upon the bad debts actually
sustained by the savings association over a period of years.
The percentage of specially computed taxable income that is used to
compute a savings association's bad debt reserve deduction under the percentage
of taxable income method (the "percentage bad debt deduction") is 8%. The
percentage bad debt deduction thus computed is reduced by the amount permitted
as a deduction for non-qualifying loans under the experience method. The
availability of the percentage of taxable income method permits qualifying
savings associations to be taxed at a lower effective federal income tax rate
than that applicable to corporations generally (approximately 31.3% assuming the
maximum percentage bad debt deduction).
Under the percentage of taxable income method, the percentage bad debt
deduction cannot exceed the amount necessary to increase the balance in the
reserve for "qualifying real property loans" to an amount equal to 6% of such
loans outstanding at the end of the taxable year or the greater of (i) the
amount deductible under the experience method or (ii) the amount which when
added to the bad debt deduction for "non-qualifying loans" equals the amount by
which 12% of the amount comprising savings accounts at year-end exceeds the sum
of surplus, undivided profits and reserves at the beginning of the year. At
September 30, 1996, the 6% and 12% limitations did not restrict the percentage
bad debt deduction available to the Bank.
Legislation enacted in August 1996 repealed the percentage of taxable
income method of calculating the bad debt reserve. Savings institutions, like
the Bank, which have previously used that method are required to recapture into
taxable income post-1987 reserves in excess of the reserves calculated under the
experience method over a six-year period beginning with the first taxable year
beginning after December 31, 1995. The Bank will recapture approximately
$480,000 of its tax bad debt reserves. The recapture will not have any effect on
the Company's net income because the related tax expense has already been
accrued.
The start of such recapture may be delayed until the third taxable
year beginning after December 31, 1995 if the dollar amount of the institution's
residential loan originations in each year is not less than the average dollar
amount of residential loan originated in each of the six most recent years
disregarding the years with the highest and lowest originations during such
period. For purposes of this test, residential loan originations would not
include refinancings and home equity loans.
Beginning with the first taxable year beginning after December 31,
1995, savings institutions, such as the Bank, are being treated the same as
commercial banks. Institutions with $500 million or more in assets will be able
to take a tax deduction only when a loan is actually charged off. Institutions
with less than $500 million in assets will still be permitted to make deductible
bad debt additions to reserves, but only using the experience method.
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<PAGE>
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
the Bank, are also subject to an environmental tax equal to .12% of the excess
of alternative minimum taxable income for the taxable year (determined without
regard to net operating losses and the deduction for the environmental tax) over
$2 million.
To the extent earnings appropriated to a savings association's bad
debt reserves for "qualifying real property loans" and deducted for federal
income tax purposes exceed the allowable amount of such reserves computed under
the experience method and to the extent of the association's supplemental
reserves for losses on loans ("Excess"), such Excess may not, without adverse
tax consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of September 30, 1998, the Bank's excess for tax purposes totaled
approximately $1.8 million.
The Company and its subsidiaries, including the Bank, file
consolidated federal income tax returns on a fiscal year basis using the accrual
method of accounting. Savings associations, such as the Bank, that file federal
income tax returns as part of a consolidated group are required by applicable
Treasury regulations to reduce their taxable income for purposes of computing
the percentage bad debt deduction for losses attributable to activities of the
non-savings association members of the consolidated group that are functionally
related to the activities of the savings association member.
The tax returns of the Company and its subsidiaries have not been
audited by the IRS with respect to consolidated federal income tax returns
subsequent to 1988. With respect to prior years examined by the IRS, all
deficiencies have been satisfied. In the opinion of management, any examination
of still open returns (including returns of subsidiaries and predecessors of, or
entities merged into, the Company) would not result in a deficiency which could
have a material adverse effect on the financial condition of the Bank and its
consolidated subsidiaries.
Iowa Taxation. The Bank currently files an Iowa franchise tax return.
The Company, its non-bank subsidiary and the Bank's subsidiary file Iowa
corporation tax returns on a fiscal year end basis.
Iowa imposes a franchise tax on the taxable income of stock savings
banks. The tax rate is 5%, which may effectively be increased, in individual
cases, by application of a minimum tax provision. Taxable income under the
franchise tax is generally similar to taxable income under the federal corporate
income tax, except that, under the Iowa franchise tax, no deduction is allowed
for Iowa franchise tax payments and taxable income includes interest on state
and municipal obligations. Interest on U.S. obligations is taxable under the
Iowa franchise tax and under the federal corporate income tax.
Taxable income under the Iowa corporate income tax is generally
similar to taxable income under the federal corporate income tax, except that,
under the Iowa tax, no deduction is allowed for Iowa income tax payments;
interest from state and municipal obligations is included in income; interest
from U.S. obligations is excluded from income; and 50% of federal corporate
income tax is excluded from income. The Iowa corporate income tax rates range
from 6% to 12% and may be effectively increased, in individual cases, by
application of a minimum tax provision.
Delaware Taxation. As a Delaware holding company, the Company is
exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. The Company is also
subject to an annual franchise tax imposed by the State of Delaware.
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<PAGE>
Employees
At September 30, 1998, the Company and its subsidiaries had a total of
42 employees, including eight part-time employees. The Company's employees are
not represented by any collective bargaining group. Management considers its
employee relations to be satisfactory.
Executive Officers of the Company
The executive officers of the Company, each of whom is currently an
executive officer of the Bank, are identified below. The executive officers of
the Company are elected annually by the Company's Board of Directors. The Bank
has entered into employment agreements with both of its executive officers.
Name Position With Holding Company
- ----------------- -------------------------------------------------
Kevin D. Ulmer President and Chief Executive Officer
Gary R. Hill Executive Vice President, Secretary and Treasurer
G-72
<PAGE>
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representation other than as contained in this prospectus, and, if given or
made, such other information or representation must not be relied upon as having
been authorized by First Federal Bankshares, Inc., or First Federal Savings Bank
of Siouxland. This prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any of the securities offered hereby to any
person in any jurisdiction in which such offer or solicitation is not authorized
or in which the person making such offer or solicitation is not qualified to do
so, or to any person whom it is unlawful to make such offer or solicitation in
such jurisdiction. Neither the delivery of this prospectus nor any sale
hereunder shall under any circumstances create any implication that there has
been no change in the affairs of First Federal Bankshares, Inc. or First Federal
Savings Bank of Siouxland since any of the dates as of which information is
furnished herein or since the date hereof.
----------
UP TO 3,565,000 SHARES
(ANTICIPATED MAXIMUM)
First Federal Bankshares, Inc.
(Proposed Holding Company for
First Federal Savings
Bank of Siouxland,
to be named First Federal Bank)
COMMON STOCK
Par Value $.01 per share
----------
PROSPECTUS
----------
SANDLER O'NEILL & PARTNERS, L.P.
INVESTMENT BANK SERVICES, INC.
February __, 1999
----------
These securities are not deposits or accounts and are not federally insured
or guaranteed.
----------
Until _____ , 1999 or 25 days after commencement of the Syndicated Community
Offering, if any, whichever is later, all dealers effecting transactions in the
registered securities, whether or not participating in this distribution, may be
required to deliver a prospectus when acting as underwriters and with respect to
their unsold allotments of subscriptions.
- --------------------------------------------------------------------------------
<PAGE>
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<CAPTION>
AMOUNT
------
<S> <C>
* Legal Fees and Expenses................................ $ 270,000
* Printing and Mailing................................... 370,000
* Appraisal and Business Plan Fees and Expenses 52,500
* Accounting Fees and Expenses........................... 75,000
** Marketing Fees and Expenses............................ 390,731
* Filing Fees (SEC and OTS).............................. 36,500
* Data Processing........................................ 40,000
* Conversion Center...................................... 40,000
* Other Expenses......................................... 100,000
---------
** Total ................................................. $1,374,731
---------
---------
</TABLE>
- ----------
* Estimated
** The Bank and the Company have retained Sandler O'Neill & Partners, L.P.
and Investment Bank Services, Inc. (collectively, the "Agents") to
assist in the sale of common stock on a best efforts basis in the
Subscription and Community Offerings. For purposes of computing
estimated expenses, it has been assumed that the Agents will receive
fees of approximately $315,731, exclusive of expenses of $75,000.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Articles TENTH and ELEVENTH of the Certificate of Incorporation of
First Federal Bankshares, Inc. (the "Corporation") sets forth circumstances
under which directors, officers, employees and agents of the Corporation may be
insured or indemnified against liability which they incur in their capacities as
such.
TENTH:
A. Each person who was or is made a party or is threatened to be
made a party to or is otherwise involved in any action, suit or proceeding,
whether civil, criminal, administrative or investigative (hereinafter a
"proceeding"), by reason of the fact that he or she is or was a Director or an
Officer of the Corporation or is or was serving at the request of the
Corporation as a Director, Officer, employee or agent of another corporation or
of a partnership, joint venture, trust or other enterprise, including service
with respect to an employee benefit plan (hereinafter an "indemnitee"), whether
the basis of such proceeding is alleged action in an official capacity as a
Director, Officer, employee or agent or in any other capacity while serving as a
Director, Officer, employee or agent, shall be indemnified and held harmless by
the Corporation to the fullest extent authorized by the Delaware General
Corporation Law, as the same exists or may hereafter be amended (but, in the
case of any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than such law permitted
the Corporation to provide prior to such amendment), against all expense,
liability and loss (including attorneys' fees, judgments, fines, ERISA excise
taxes or penalties and amounts paid in settlement) reasonably incurred or
suffered by such indemnitee in connection therewith; provided, however, that,
except as provided in Section C hereof with respect to proceedings to enforce
rights to indemnification, the Corporation shall indemnify any such indemnitee
in connection with a proceeding (or part thereof) initiated by such indemnitee
only if such proceeding (or part thereof) was authorized by the Board of
Directors of the Corporation.
B. The right to indemnification conferred in Section A of this
Article TENTH shall include the right to be paid by the Corporation the expenses
incurred in defending any such proceeding in advance of its final disposition
(hereinafter an "advancement of expenses"); provided, however, that, if the
Delaware General Corporation Law requires, an advancement of expenses incurred
by an indemnitee in his or her capacity as a Director or Officer (and not in any
other capacity in which service was or is rendered by such indemnitee,
including, without limitation, service to an employee benefit plan) shall be
made only upon delivery to the Corporation of an undertaking
<PAGE>
(hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all
amounts so advanced if it shall ultimately be determined by final judicial
decision from which there is no further right to appeal (hereinafter a "final
adjudication") that such indemnitee is not entitled to be indemnified for such
expenses under this Section or otherwise. The rights to indemnification and to
the advancement of expenses conferred in Sections A and B of this Article TENTH
shall be contract rights and such rights shall continue as to an indemnitee who
has ceased to be a Director, Officer, employee or agent and shall inure to the
benefit of the indemnitee's heirs, executors and administrators.
C. If a claim under Section A or B of this Article TENTH is not paid
in full by the Corporation within sixty days after a written claim has been
received by the Corporation, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be twenty days, the
indemnitee may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim. If successful in whole or in part in any
such suit, or in a suit brought by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, the indemnitee shall be
entitled to be paid also the expense of prosecuting or defending such suit. In
(i) any suit brought by the indemnitee to enforce a right to indemnification
hereunder (but not in a suit brought by the indemnitee to enforce a right to an
advancement of expenses) it shall be a defense that, and (ii) in any suit by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking the Corporation shall be entitled to recover such expenses upon a
final adjudication that, the indemnitee has not met any applicable standard for
indemnification set forth in the Delaware General Corporation Law. Neither the
failure of the Corporation (including its Board of Directors, independent legal
counsel, or its stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the indemnitee is proper in
the circumstances because the indemnitee has met the applicable standard of
conduct set forth in the Delaware General Corporation Law, nor an actual
determination by the Corporation (including its Board of Directors, independent
legal counsel, or its stockholders) that the indemnitee has not met such
applicable standard of conduct, shall create a presumption that the indemnitee
has not met the applicable standard of conduct or, in the case of such a suit
brought by the indemnitee, be a defense to such suit. In any suit brought by the
indemnitee to enforce a right to indemnification or to an advancement of
expenses hereunder, or by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the burden of proving that the
indemnitee is not entitled to be indemnified, or to such advancement of
expenses, under this Article TENTH or otherwise shall be on the Corporation.
D. The rights to indemnification and to the advancement of expenses
conferred in this Article TENTH shall not be exclusive of any other right which
any person may have or hereafter acquire under any statute, the Corporation's
Certificate of Incorporation, Bylaws, agreement, vote of stockholders or
disinterested Directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to
protect itself and any Director, Officer, employee or agent of the Corporation
or another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the Corporation would
have the power to indemnify such person against such expense, liability or loss
under the Delaware General Corporation Law.
F. The Corporation may, to the extent authorized from time to time
by the Board of Directors, grant rights to indemnification and to the
advancement of expenses to any employee or agent of the Corporation to the
fullest extent of the provisions of this Article TENTH with respect to the
indemnification and advancement of expenses of Directors and Officers of the
Corporation.
ELEVENTH: A Director of this Corporation shall not be personally
liable to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a Director, except for liability (i) for any breach of the
Director's duty of loyalty to the Corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law, or (iv) for any transaction from which the Director derived an
improper personal benefit. If the Delaware General Corporation Law is amended to
authorize corporate action further eliminating or limiting the personal
liability of Directors, then the liability of a Director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the Delaware
General Corporation Law, as so amended.
<PAGE>
Any repeal or modification of the foregoing paragraph by the
stockholders of the Corporation shall not adversely affect any right or
protection of a Director of the Corporation existing at the time of such repeal
or modification.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Not Applicable.
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES:
The exhibits and financial statement schedules filed as part of
this registration statement are as follows:
(a) LIST OF EXHIBITS
1.1*** Engagement Letter between First Federal Savings Bank of Siouxland,
Sandler O'Neill & Partners, L.P. and Investment Bank Services, Inc.
1.2* Form of Agency Agreement among First Federal Bankshares, Inc., First
Federal Savings Bank of Siouxland, Sandler O'Neill & Partners, L.P.
and Investment Bank Services, Inc.
2 Plan of Conversion and Reorganization
3.1*** Certificate of Incorporation of First Federal Bankshares, Inc.
(Incorporated herein by reference to Exhibit D of the Plan of
Conversion and Reorganization)
3.2*** Bylaws of First Federal Bankshares, Inc. (Incorporated herein by
reference to Exhibit E of the Plan of Conversion and Reorganization)
4*** Form of Common Stock Certificate of First Federal Bankshares, Inc.
5*** Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C. regarding
legality of securities being registered
8.1 Federal Tax Opinion of Luse Lehman Gorman Pomerenk & Schick,
P.C.
8.2 State Tax Opinion of KPMG Peat Marwick, LLP
8.3*** Letter from RP Financial, LC with respect to Subscription Rights
10.1 Severance Agreement for Barry E. Backhaus
10.2 Severance Agreement for Jon G. Cleghorn
10.3 Severance Agreement for Sandra Sabel
10.4 Employment Agreement for Steven L. Opsal
10.5*** Form of Employment Agreement for Barry E. Backhaus, Jon G. Cleghorn,
Sandra Sabel and Steven L. Opsal
10.6 1992 Stock Option Plan for Outside Directors
10.7 1992 Incentive Stock Option Plan
10.8 1992 Recognition Plan and Trust
10.9 Deferred Compensation Plan for Directors
10.10*** Supplemental Executive Retirement and Deferred Compensation Plan
10.11 Incentive Pay Plan
10.12 Cash Only SAR Plan
10.13 Employee Stock Ownership Plan
<PAGE>
10.14*** Agreement and Plan of Reorganization By and Among First Federal
Bankshares, M.H.C., First Federal Savings Bank of Siouxland,
Mid-Iowa Financial Corp. and Mid-Iowa Savings Bank, FSB
10.15 Profit Sharing Plan
21*** Subsidiaries of the Registrant
23.1 Consent of Luse Lehman Gorman Pomerenk & Schick, P.C. (contained in
opinion filed as Exhibit 5)
23.2 Consent of KPMG Peat Marwick LLP as to First Federal Savings Bank of
Siouxland
23.3*** Consent of RP Financial, LC
23.4 Consent of KPMG Peat Marwick LLP as to Mid-Iowa Financial Corp.
24 Power of Attorney (set forth on Signature Page)
27*** EDGAR Financial Data Schedule
99.1** Appraisal Report of RP Financial, LC
99.2 Appraisal Agreement between First Federal Savings Bank of Siouxland
and RP Financial, LC
99.3 Marketing Materials
99.4 Order and Acknowledgment Form
- ----------
* To be filed supplementally or by amendment.
** Filed pursuant to Rule 202 of Regulation S-T.
*** Previously filed.
(b) FINANCIAL STATEMENT SCHEDULES
No financial statement schedules are filed because the required
information is not applicable or is included in the consolidated financial
statements or related notes.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
<PAGE>
(4) To provide to the underwriter at the closing specified in the
underwriting agreements, certificates in such denominations and registered in
such names as required by the underwriter to permit prompt delivery to each
purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the questions whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Sioux City, Iowa on
February 8, 1999.
FIRST FEDERAL BANKSHARES, INC.
By: /S/ BARRY E. BACKHAUS
----------------------------------------
Barry E. Backhaus
President and Chief Executive Officer
(Duly Authorized Representative)
POWER OF ATTORNEY
We, the undersigned directors and officers of First Federal
Bankshares, Inc. (the "Company") hereby severally constitute and appoint Barry
E. Backhaus as our true and lawful attorney and agent, to do any and all things
in our names in the capacities indicated below which said Barry E. Backhaus may
deem necessary or advisable to enable the Company to comply with the Securities
Act of 1933, and any rules, regulations and requirements of the Securities and
Exchange Commission, in connection with the registration statement on Form S-1
relating to the offering of the Company's Common Stock, including specifically,
but not limited to, power and authority to sign for us in our names in the
capacities indicated below the registration statement and any and all amendments
(including post-effective amendments) thereto; and we hereby approve, ratify and
confirm all that said Barry E. Backhaus shall do or cause to be done by virtue
thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and as of the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ----------- ----- ----
<S> <C> <C>
/S/ BARRY E. BACKHAUS President, Chief Executive February 8, 1999
- ------------------------------- Officer and Chairman of the Board
Barry E. Backhaus (Principal Executive Officer)
/S/ JON G. CLEGHORN Executive Vice President and February 8, 1999
- ------------------------------- Director
Jon G. Cleghorn
/S/ KATHERINE A. BOUSQUET Vice President and Treasurer February 8, 1999
- ------------------------------- (Principal Financial and
Katherine A. Bousquet Accounting Officer)
/S/ DR. NANCY A. BOYSEN Director February 8, 1999
- -------------------------------
Dr. Nancy A. Boysen
/S/ HARLAND D. JOHNSON Director February 8, 1999
- -------------------------------
Harland D. Johnson
/S/ ALLEN J. JOHNSON Director February 8, 1999
- -------------------------------
Allen J. Johnson
<PAGE>
/S/ DENNIS B. SWANSTROM Director February 8, 1999
- -------------------------------
Dennis B. Swanstrom
/S/ GARY L. EVANS Director February 8, 1999
- -------------------------------
Gary L. Evans
/S/ PAUL W. OLSON Director February 8, 1999
- -------------------------------
Paul W. Olson
/S/ DAVID VAN ENGELENHOVEN Director February 8, 1999
- -------------------------------
David Van Engelenhoven
/S/ DAVID S. CLAY Director February 8, 1999
- -------------------------------
David S. Clay
/S/ STEVEN L. OPSAL Executive Vice President February 8, 1999
- ------------------------------- and Director
Steven L. Opsal
</TABLE>
<PAGE>
EXHIBIT INDEX
1.1*** Engagement Letter between First Federal Savings Bank of Siouxland,
Sandler O'Neill & Partners, L.P. and Investment Bank Services, Inc.
1.2* Form of Agency Agreement among First Federal Bankshares, Inc., First
Federal Savings Bank of Siouxland, Sandler O'Neill & Partners, L.P.
and Investment Bank Services, Inc.
2 Plan of Conversion and Reorganization
3.1*** Certificate of Incorporation of First Federal Bankshares, Inc.
(Incorporated herein by reference to Exhibit D of the Plan of
Conversion and Reorganization)
3.2*** Bylaws of First Federal Bankshares, Inc. (Incorporated herein by
reference to Exhibit E of the Plan of Conversion and Reorganization)
4*** Form of Common Stock Certificate of First Federal Bankshares, Inc.
5*** Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C. regarding
legality of securities being registered
8.1 Federal Tax Opinion of Luse Lehman Gorman Pomerenk & Schick,
P.C.
8.2 State Tax Opinion of KPMG Peat Marwick, LLP
8.3*** Letter from RP Financial, LC with respect to Subscription Rights
10.1 Severance Agreement for Barry E. Backhaus
10.2 Severance Agreement for Jon G. Cleghorn
10.3 Severance Agreement for Sandra Sabel
10.4 Employment Agreement for Steven L. Opsal
10.5*** Form of Employment Agreement for Barry E. Backhaus, Jon G. Cleghorn,
Sandra Sabel and Steven L. Opsal
10.6 1992 Stock Option Plan for Outside Directors
10.7 1992 Incentive Stock Option Plan
10.8 1992 Recognition Plan and Trust
10.9 Deferred Compensation Plan for Directors
10.10*** Supplemental Executive Retirement and Deferred Compensation Plan
10.11 Incentive Pay Plan
10.12 Cash Only SAR Plan
10.13 Employee Stock Ownership Plan
<PAGE>
10.14*** Agreement and Plan of Reorganization By and Among First Federal
Bankshares, M.H.C., First Federal Savings Bank of Siouxland, Mid-Iowa
Financial Corp. and Mid-Iowa Savings Bank, FSB
10.15 Profit Sharing Plan
21*** Subsidiaries of the Registrant
23.1*** Consent of Luse Lehman Gorman Pomerenk & Schick, P.C. (contained in
opinion filed as Exhibit 5)
23.2 Consent of KPMG Peat Marwick LLP as to First Federal Savings Bank of
Siouxland
23.3*** Consent of RP Financial, LC
23.4 Consent of KPMG Peat Marwick LLP as to Mid-Iowa Financial Corp.
24 Power of Attorney (set forth on Signature Page)
27*** EDGAR Financial Data Schedule
99.1** Appraisal Report of RP Financial, LC
99.2 Appraisal Agreement between First Federal Savings Bank of Siouxland
and RP Financial, LC
99.3 Marketing Materials
99.4 Order and Acknowledgment Form
- ------------------------------------------------
* To be filed supplementally or by amendment.
** Filed pursuant to Rule 202 of Regulation S-T.
*** Previously Filed.
<PAGE>
Exhibit 1.2.
3,565,000 Shares
(subject to increase up to 4,099,750 Shares
in the event of an oversubscription)
FIRST FEDERAL BANKSHARES, INC.
(a Delaware corporation)
Common Stock
(par value $.01 per share)
AGENCY AGREEMENT
________________, 1999
SANDLER O'NEILL & PARTNERS, L.P.
Two World Trade Center, 104th Floor
New York, New York 10048
INVESTMENT BANK SERVICES, INC.
The 1000 Building
6200 Dutchman's Lane, Suite 305
Louisville, Kentucky 40205
Ladies and Gentlemen:
First Federal Bankshares, Inc., a Delaware corporation (the "Company"),
First Federal Bankshares, M.H.C., a federally chartered mutual holding company
(the "MHC") and First Federal Savings Bank of Siouxland, a federally chartered
stock savings bank (the "Bank"), hereby confirm their agreement with Sandler
O'Neill & Partners, L.P. ("Sandler O'Neill") and Investment Bank Services, Inc.
("IBS") (together the "Agents" or individually an "Agent"), with respect to the
offer and sale by the Company of 3,565,000 shares (subject to increase up to
4,099,750 shares in the event of an oversubscription) of the Company's common
stock, par value $.01 per share (the "Common Stock"), and in connection with the
conversion of the MHC (additional shares will be issued in exchange for the
Bank's stock currently held by stockholders other than the MHC). The shares of
Common Stock to be sold by the Company pursuant to the MHC's and Bank's Plan of
Conversion and Reorganization (the "Plan") are hereinafter called the
"Securities."
<PAGE>
- 2 -
The Securities are being offered for sale in accordance with the Plan
pursuant to which the MHC will be converted from a mutual holding company to a
stock holding company and, as a part of the Conversion (as hereinafter defined),
the Bank will become a wholly owned subsidiary of the Company. Specifically, (i)
the Bank will organize the Company as a direct subsidiary of the Bank; (ii) the
Company will organize an interim savings bank as a wholly owned federal stock
savings bank subsidiary of the Company (the "Interim Savings Bank"); (iii) the
MHC will convert into an interim federal stock savings association and
simultaneously merge with and into the Bank and the Bank's common stock held by
the MHC will be canceled; (iv) the Interim Savings Bank will merge with and into
the Bank, the Company's stock held by the Bank will be canceled, the Interim
Savings Bank stock held by the Company will become Bank common stock and the
Bank's minority stockholders will receive common stock of the Company; and (v)
the Company will offer common stock in a subscription offering (the
"Subscription Offering"), as described below. Pursuant to the Plan, the Company
is offering to the Bank's tax qualified employee benefit plans, including the
Employee Stock Ownership Plan (the "ESOP") (collectively, the "Employee Plans"),
and, to certain of the Bank's depositors and borrowers, rights to subscribe for
the Securities in the Subscription Offering. To the extent Securities are not
subscribed for in the Subscription Offering, such Securities may be offered to
certain members of the general public, with preference given to minority
stockholders of the Bank and then to depositors of Mid-Iowa FSB, the federally
chartered savings bank that will be acquired by the Company immediately
following the Conversion (as hereinafter defined), and then to certain natural
persons residing in the Community, as defined in the Plan, in a direct community
offering (the "Community Offering" and, together with the Subscription Offering,
as each may be extended or reopened from time to time, the "Subscription and
Community Offering") to be commenced concurrently with, during or immediately
following the Subscription Offering. It is currently anticipated by the Bank,
the MHC and the Company that any Securities not subscribed for in the
Subscription and Community Offering will be offered, subject to Section 3
hereof, in a syndicated community offering (the "Syndicated Community
Offering"). The Subscription and Community Offering and the Syndicated Community
Offering are hereinafter referred to collectively as the "Offerings." The
conversion of the MHC from mutual to stock form, the merger of the MHC into the
Bank, the acquisition of the Bank's common stock by the Company and the
offerings are hereinafter referred to collectively as the "Conversion." It is
acknowledged that the number of Securities to be sold in the Conversion may be
increased or decreased as described in the Prospectus (as hereinafter defined).
If the number of Securities is increased or decreased in accordance with the
Plan, the term "Securities" shall mean such greater or lesser number, where
applicable.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-69245), including a
related prospectus, for the registration of the Securities under the Securities
Act of 1933, as amended (the "Securities Act"), has filed such amendments
thereto, if any, and such amended prospectuses as may have been required to the
date hereof by the Commission in order to declare such registration statement
effective, and will file such additional amendments thereto and such amended
prospectuses and prospectus supplements as may hereafter be required. Such
registration statement (as amended to date, if
<PAGE>
- 3 -
applicable, and as from time to time amended or supplemented hereafter) and the
prospectuses constituting a part thereof (including in each case, all documents
incorporated or deemed to be incorporated by reference therein and the
information, if any, deemed to be a part thereof pursuant to the rules and
regulations promulgated by the Commission under the Securities Act, as from time
to time amended or supplemented pursuant to the Securities Act or otherwise (the
"Securities Act Regulations")), are hereinafter referred to as the "Registration
Statement" and the "Prospectus," respectively, except that if any revised
prospectus shall be used by the Company in connection with the Subscription and
Community Offering or the Syndicated Community Offering which differs from the
Prospectus on file at the Commission at the time the Registration Statement
becomes effective (whether or not such revised prospectus is required to be
filed by the Company pursuant to Rule 424(b) of the Securities Act Regulations),
the term "Prospectus" shall refer to such revised prospectus from and after the
time it is first provided to the Agents for such use.
Concurrently with the execution of this Agency Agreement (the
"Agreement"), the Company is delivering to the Agents copies of the Prospectus
of the Company to be used in the Subscription and Community Offering. Such
prospectus contains information with respect to the Bank, the MHC, the Company
and the Common Stock.
SECTION 1. REPRESENTATIONS AND WARRANTIES.
(a) The Company, the MHC and the Bank jointly and severally represent
and warrant to the Agents as of the date hereof as follows:
(i) The Registration Statement has been declared effective by
the Commission, no stop order has been issued with respect thereto and no
proceedings therefor have been initiated or, to the knowledge of the Company,
the MHC and the Bank, threatened by the Commission. At the time the Registration
Statement became effective and at the Closing Time referred to in Section 2
hereof, the Registration Statement complied, and will comply, in all material
respects with the requirements of the Securities Act and the Securities Act
Regulations and did not and will not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading. The Prospectus, at the date
hereof, does not and at the Closing Time referred to in Section 2 hereof will
not, include an untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; PROVIDED, HOWEVER,
that the representations and warranties in this subsection shall not apply with
respect to either of the Agents to statements in, or omissions from, the
Registration Statement or Prospectus made in reliance upon, and in conformity
with, information with respect to such agent furnished to the Company in writing
by such agent expressly for use in the Registration Statement or Prospectus (the
"Agent Information," which the Company and the Bank acknowledge appears only in
the section captioned "Market for the Common Stock" and the first two paragraphs
of the section captioned "The Conversion-Plan of Distribution and Selling
Commissions" of the Prospectus).
<PAGE>
- 4 -
(ii) The Company has filed with the Department of the
Treasury, Office of Thrift Supervision (the "OTS") the Company's application for
approval of its acquisition of the Bank (the "Holding Company Application") on
Form H-(e)3 promulgated under the savings and loan holding company provisions of
the Home Owners' Loan Act, as amended, ("HOLA"), and the regulations promulgated
thereunder. The Company has received written notice from the OTS of its approval
of the acquisition of the Bank, such approval remains in full force and effect
and no order has been issued by the OTS suspending or revoking such approval and
no proceedings therefor have been initiated or, to the knowledge of the Company,
the MHC or the Bank, threatened by the OTS. At the date of such approval and at
the Closing Time referred to in Section 2, the Holding Company Application
complied and will comply in all material respects with the applicable provisions
of HOLA and the regulations promulgated thereunder.
(iii) Pursuant to the rules and regulations of the OTS
governing the conversion of federally chartered mutual savings banks and mutual
holding companies to stock form (the "Conversion Regulations"), the MHC has
filed with the OTS an application for conversion, and has filed such amendments
thereto and supplementary materials as may have been required to the date hereof
(such application, as amended to date, if applicable, and as from time to time
amended or supplemented hereafter, is hereinafter referred to as the "Conversion
Application"), including copies of the MHC's Proxy Statement, dated
______________, 1999, relating to the Conversion (the "Proxy Statement"), and
the Prospectus. The OTS has, by letter dated __________, 199__, approved the
Conversion Application, such approval remains in full force and effect and no
order has been issued by the OTS suspending or revoking such approval and no
proceedings therefor have been initiated or, to the knowledge of the Company,
the MHC or the Bank, threatened by the OTS. At the date of such approval and at
the Closing Time referred to in Section 2, the Conversion Application complied
and will comply in all material respects with the applicable provisions of the
Conversion Regulations.
(iv) At the time of their use, the Proxy Statement and any
other proxy solicitation materials will comply in all material respects with the
applicable provisions of the Conversion Regulations and will not contain an
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements therein, in the light of the circumstances under
which they were made, not misleading. The Company and the Bank will promptly
file the Prospectus and any supplemental sales literature with the Commission
and the OTS. The Prospectus and all supplemental sales literature, as of the
date the Registration Statement became effective and at the Closing Time
referred to in Section 2, complied and will comply in all material respects with
the applicable requirements of the Conversion Regulations and, at or prior to
the time of their first use, will have received all required authorizations of
the OTS for use in final form.
(v) Neither the Commission nor the OTS has, by order or
otherwise, prevented or suspended the use of the Prospectus or any supplemental
sales literature authorized by the Company or the Bank for use in connection
with the Offerings.
<PAGE>
- 5 -
(vi) At the Closing Time referred to in Section 2, the Company
and the Bank will have completed the conditions precedent to the Conversion in
accordance with the Plan, the applicable Conversion Regulations and all other
applicable laws, regulations, decisions and orders, including all material
terms, conditions, requirements and provisions precedent to the Conversion
imposed upon the Company or the Bank by the OTS, the Federal Deposit Insurance
Corporation (the "FDIC"), or any other regulatory authority, other than those
which the regulatory authority permits to be completed after the Conversion.
(vii) RP Financial, Inc., which prepared the valuation of the
Company and the Bank as part of the Conversion, has advised the Company, the MHC
and the Bank in writing that it satisfies all requirements for an appraiser set
forth in the Conversion Regulations and any interpretations or guidelines issued
by the OTS with respect thereto.
(viii) The accountants who certified the consolidated
financial statements and supporting schedules of the Bank included in the
Registration Statement have advised the Company, the MHC and the Bank in writing
that they are independent public accountants within the meaning of the Code of
Ethics of the American Institute of Certified Public Accountants (the "AICPA"),
and such accountants are, with respect to the Company, the MHC, the Bank and
each subsidiary of the Bank, independent certified public accountants as
required by the Securities Act and the Securities Act Regulations.
(ix) The only direct subsidiaries of the MHC are the Bank and
Equity Services, Inc. Equity Services, Inc. has no subsidiaries. The only direct
subsidiary of the Bank is First Financial Corporation of Sioux City ("FFC"). The
only direct subsidiaries of FFC are Sioux Financial Co. and United Escrow Inc.
United Escrow Inc. has no subsidiaries. The only subsidiaries of Sioux Financial
Co. are Sioux Abstract Company and Rerick Abstract Company, both of which have
no subsidiaries. All of the direct and indirect subsidiaries of the MHC except
the Bank are referred to collectively as the "Subsidiaries."
(x) The consolidated financial statements of the Bank and the
related notes thereto included in the Registration Statement and the Prospectus
present fairly the financial position of the Bank and its subsidiaries at the
dates indicated and the results of operations, total stockholders' equity and
cash flows for the periods specified, and comply as to form in all material
respects with the applicable accounting requirements of the Securities Act
Regulations and the Conversion Regulations; except as otherwise stated in the
Registration Statement, said financial statements have been prepared in
conformity with generally accepted accounting principles applied on a consistent
basis; and the supporting schedules and tables included in the Registration
Statement present fairly the information required to be stated therein.
(xi) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as otherwise
stated therein, (A) there has been no material adverse change in the financial
condition, results of operations or business affairs of the Company,
<PAGE>
- 6 -
the MHC, the Bank or any of the Subsidiaries, considered as one enterprise,
whether or not arising in the ordinary course of business, and (B) except for
transactions specifically referred to or contemplated in the Prospectus, there
have been no transactions entered into by the Company, the MHC, the Bank or any
of the Subsidiaries, other than those in the ordinary course of business, which
are material with respect to the Company, the MHC, the Bank and the
Subsidiaries, considered as one enterprise.
(xii) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Delaware with full corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Prospectus and to
enter into and perform its obligations under this Agreement; and the Company is
duly qualified as a foreign corporation to transact business and is in good
standing in the State of Iowa and in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except where the failure to so qualify
would not have a material adverse effect on the financial condition, results of
operations or business affairs of the Company, the Bank and the Subsidiaries,
considered as one enterprise.
(xiii) The MHC has been duly chartered and is validly existing
as a mutual holding company under the laws of the United States with corporate
power and authority to own, lease and operate its properties and to conduct its
business as described in the Prospectus and to enter into and perform its
obligations under this Agreement; the MHC is qualified to do business in any
jurisdiction in which the failure to so qualify would have a material adverse
effect on the financial condition, results of operations or business of the
Company, the MHC, the Bank and the Subsidiaries, considered as one enterprise;
upon consummation of the Conversion, the MHC will merge with and into the Bank,
with the Bank being the surviving institution.
(xiv) Upon consummation of the Conversion, the authorized,
issued and outstanding capital stock of the Company will be as set forth in the
Prospectus in the section captioned "Capitalization" (except for subsequent
issuances, if any, pursuant to reservations, agreements or employee benefit
plans referred to in the Prospectus); no shares of Common Stock have been or
will be issued and outstanding prior to the Closing Time referred to in Section
2; at the time of Conversion, the Securities will have been duly authorized for
issuance and, when issued and delivered by the Company pursuant to the Plan
against payment of the consideration calculated as set forth in the Plan and
stated on the cover page of the Prospectus, will be duly and validly issued and
fully paid and non-assessable; the terms and provisions of the Common Stock and
the capital stock of the Company conform to all statements relating thereto
contained in the Prospectus; the certificates representing the shares of Common
Stock conform to the requirements of applicable law and regulations; and the
issuance of the Securities is not subject to preemptive or other similar rights.
(xv) The Bank, as of the date hereof, is a federally chartered
savings bank in stock form with full corporate power and authority to own, lease
and operate its properties and to conduct its business as described in the
Prospectus; the Company, the MHC, the Bank and the Subsidiaries,
<PAGE>
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have obtained all licenses, permits and other governmental authorizations
currently required for the conduct of their respective businesses or required
for the conduct of their respective businesses as contemplated by the Holding
Company Application and the Conversion Application, except where the failure to
obtain such licenses, permits or other governmental authorizations would not
have a material adverse effect on the financial condition, results of operations
or business affairs of the Company, the MHC, the Bank or the Subsidiaries,
considered as one enterprise; all such licenses, permits and other governmental
authorizations are in full force and effect and the Company, the MHC, the Bank
and the Subsidiaries are in all material respects in compliance therewith;
neither the Company, the MHC, the Bank nor any of the Subsidiaries has received
notice of any proceeding or action relating to the revocation or modification of
any such license, permit or other governmental authorization which, singly or in
the aggregate, if the subject of an unfavorable decision, ruling or finding,
might have a material adverse effect on the financial condition, results of
operations or business affairs of the Company, the MHC, the Bank and the
Subsidiaries, considered as one enterprise; and the Bank is in good standing
under the laws of the United States and is qualified as a foreign corporation in
any jurisdiction in which the failure to so qualify would have a material
adverse effect on the financial condition, results of operations or business
affairs of the Company, the MHC, the Bank and the Subsidiaries, considered as
one enterprise.
(xvi) The deposit accounts of the Bank are insured by the FDIC
up to the applicable limits and upon consummation of the Conversion, the
liquidation account for the benefit of eligible account holders will be duly
established in accordance with the requirements of the Conversion Regulations.
The Bank is a "qualified thrift lender" within the meaning of 12 U.S.C. Section
1467a(m).
(xvii) Upon consummation of the Conversion, the authorized
capital stock of the Bank will be 20,000,000 shares of common stock, par value
$1.00 per share (the "Bank Common Stock") and 10,000,000 shares of preferred
stock (the "Bank Preferred Stock"), and the issued and outstanding capital stock
of the Bank will be 1,000 shares of Bank Common Stock; _____ shares of Bank
Common Stock and no shares of Bank Preferred Stock are issued and outstanding as
of the date hereof. No additional shares of Bank Common Stock and no shares of
Bank Preferred Stock will be issued prior to the Closing Time referred to in
Section 2 except for shares of Bank Common Stock which may be issued pursuant to
the exercise of outstanding stock options; the issued and outstanding shares of
Bank Common Stock have been duly authorized and validly issued, are fully paid
and nonassessable, and have been issued in compliance with all federal and state
securities laws and such shares owned of record by the MHC are owned
beneficially free and clear of any security interest, mortgage, pledge, lien,
encumbrance, claims or equity. The shares of Bank Common Stock to be issued to
the Company will have been duly authorized for issuance and, when issued and
delivered by the Bank pursuant to the Plan against payment of the consideration
calculated as set forth in the Plan and as described in the Prospectus, will be
duly and validly issued and fully paid and nonassessable, and all such Bank
Common Stock will be owned beneficially and of record by the Company free and
clear of any security interest, mortgage, pledge, lien, encumbrance or legal or
equitable claim; the terms and provisions of the Bank Common Stock and the Bank
Preferred
<PAGE>
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Stock conform to all statements relating thereto contained in the Prospectus,
and the certificates representing the shares of the Bank Common Stock will
conform with the requirements of applicable laws and regulations; and the
issuance of the Bank Common Stock is not subject to preemptive or similar
rights.
(xviii) Each of the Subsidiaries has been duly incorporated
and is validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has full corporate power and authority to
own, lease and operate its properties and to conduct its business as described
in the Registration Statement and Prospectus, and is duly qualified to transact
business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except where the failure to so qualify
would not have a material adverse effect on the financial condition, results of
operations or business affairs of the Company, the MHC, the Bank and the
Subsidiaries, considered as one enterprise; the activities of each of the
Subsidiaries are permitted to subsidiaries of a federally chartered savings bank
or mutual holding company by the rules, regulations, resolutions and practices
of the OTS; all of the issued and outstanding capital stock of each of the
Subsidiaries has been duly authorized and validly issued, is fully paid and
nonassessable and is owned by the Bank or the MHC, directly, free and clear of
any security interest, mortgage, pledge, lien, encumbrance or legal or equitable
claim.
(xix) The Company, the MHC and the Bank have taken all
corporate action necessary for them to execute, deliver and perform this
Agreement, and this Agreement has been duly executed and delivered by, and is
the valid and binding agreement of, the Company, the MHC and the Bank,
enforceable in accordance with its terms, except as may be limited by
bankruptcy, insolvency or other laws affecting the enforceability of the rights
of creditors generally and judicial limitations on the right of specific
performance and except as the enforceability of indemnification and contribution
provisions may be limited by applicable securities laws.
(xx) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus and prior
to the Closing Time, except as otherwise may be indicated or contemplated
therein, none of the Company, the MHC, the Bank or any of the Subsidiaries will
have (A) issued any securities or incurred any liability or obligation, direct
or contingent, or borrowed money, except borrowings in the ordinary course of
business from the same or similar sources and in similar amounts as indicated in
the Prospectus, or (B) entered into any transaction or series of transactions
which is material in light of the business of the Company, the MHC, the Bank and
the Subsidiaries, considered as one enterprise, excluding the origination,
purchase and sale of loans or the purchase or sale of investment securities or
mortgaged-backed securities in the ordinary course of business.
<PAGE>
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(xxi) No approval of any regulatory or supervisory or other
public authority is required in connection with the execution and delivery of
this Agreement or the issuance of the Securities that has not been obtained and
a copy of which has been delivered to the Agents, except as may be required
under the securities laws of various jurisdictions.
(xxii) None of the Company, the MHC, the Bank nor any of the
Subsidiaries is in violation of its certificate of incorporation, organization
certificate, articles of incorporation or charter, as the case may be, or bylaws
and none of the Company, the MHC, the Bank nor any of the Subsidiaries is in
default (nor has any event occurred which, with notice or lapse of time or both,
would constitute a default) in the performance or observance of any obligation,
agreement, covenant or condition contained in any contract, indenture, mortgage,
loan agreement, note, lease or other instrument to which the Company, the MHC,
the Bank or any of the Subsidiaries is a party or by which it or any of them may
be bound, or to which any of the property or assets of the Company, the MHC, the
Bank or any of the Subsidiaries is subject, except for such defaults that would
not, individually or in the aggregate, have a material adverse effect on the
financial condition, results of operations or business of the Company, the MHC,
the Bank and the Subsidiaries, considered as one enterprise; and there are no
contracts or documents of the Company, the MHC, the Bank or any of the
Subsidiaries which are required to be filed as exhibits to the Registration
Statement or the Conversion Application which have not been so filed.
(xxiii) The execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated herein have been
duly authorized by all necessary corporate action and do not and will not
conflict with or constitute a breach of, or default under, or result in the
creation or imposition of any lien, charge or encumbrance upon any property or
assets of the Company, the MHC, the Bank or any of the Subsidiaries pursuant to
any contract, indenture, mortgage, loan agreement, note, lease or other
instrument to which the Company, the MHC, the Bank or any of the Subsidiaries is
a party or by which it, or any of them, may be bound, or to which any of the
property or assets of the Company, the MHC, the Bank or any of the Subsidiaries
is subject, except for such defaults that would not, individually or in the
aggregate, have a material adverse effect on the financial condition, results of
operations or business affairs of the Company, the MHC, the Bank or the
Subsidiaries, considered as one enterprise; nor will such action result in any
violation of the provisions of the certificate of incorporation, organization
certificate, articles of incorporation or charter or bylaws of the Company, the
MHC, the Bank or any of the Subsidiaries, or any applicable law, administrative
regulation or administrative or court decree.
(xxiv) No labor dispute with the employees of the Company, the
MHC, the Bank or any of the Subsidiaries exists or, to the knowledge of the
Company, the MHC or the Bank, is imminent or threatened; and the Company, the
MHC and the Bank are not aware of any existing or threatened labor disturbance
by the employees of any of its principal suppliers or contractors which might be
expected to result in any material adverse change in the financial condition,
results of operations or business affairs of the Company, the MHC, the Bank and
the Subsidiaries, considered as one enterprise.
<PAGE>
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(xxv) Each of the Company, the MHC, the Bank and the
Subsidiaries has good and marketable title to all properties and assets for
which ownership is material to the business of the Company, the MHC, the Bank or
the Subsidiaries and to those properties and assets described in the Prospectus
as owned by them, free and clear of all liens, charges, encumbrances or
restrictions, except such as are described in the Prospectus or are not material
in relation to the business of the Company, the MHC, the Bank or the
Subsidiaries, considered as one enterprise; and all of the leases and subleases
material to the business of the Company, the MHC, the Bank or the Subsidiaries
under which the Company, the MHC, the Bank or the Subsidiaries hold properties,
including those described in the Prospectus, are valid and binding agreements of
the Company, the MHC, the Bank and the Subsidiaries, enforceable in accordance
with their terms.
(xxvi) None of the Company, the MHC, the Bank nor any of the
Subsidiaries is in violation of any directive from the OTS or the FDIC to make
any material change in the method of conducting their respective businesses; the
Company, the MHC, the Bank and the Subsidiaries have conducted and are
conducting their businesses so as to comply in all material respects with all
applicable statutes, regulations and administrative and court decrees
(including, without limitation, all regulations, decisions, directives and
orders of the OTS or the FDIC).
(xxvii) There is no action, suit or proceeding before or by
any court or governmental agency or body, domestic or foreign, now pending, or,
to the knowledge of the Company, the MHC or the Bank, threatened, against or
affecting the Company, the MHC, the Bank or any of the Subsidiaries which is
required to be disclosed in the Registration Statement (other than as disclosed
therein), or which might result in any material adverse change in the financial
condition, results of operations or business affairs of the Company, the MHC,
the Bank and the Subsidiaries, considered as one enterprise, or which might
materially and adversely affect the properties or assets thereof or which might
materially and adversely affect the consummation of the Conversion; all pending
legal or governmental proceedings to which the Company, the MHC, the Bank or any
of the Subsidiaries is a party or of which any of their respective property or
assets is the subject which are not described in the Registration Statement,
including ordinary routine litigation incidental to the business, are
considered, in the aggregate, not material; and there are no contracts or
documents of the Company, the MHC, the Bank or any of the Subsidiaries which are
required to be filed as exhibits to the Registration Statement or the Conversion
Application which have not been so filed.
(xxviii) The Bank has obtained an opinion of its counsel,
Luse, Lehman, Gorman, Pomerenk & Schick, a Professional Corporation, with
respect to the legality of the Securities to be issued and the federal income
tax consequences of the Conversion, and an opinion from KPMG Peat Marwick LLP
with respect to the state and local income tax consequences of the Conversion
(including franchise tax, sales or use tax, license fee on foreign corporations,
stock transfer tax, real property transfer gain tax and real estate transfer
tax), copies of which are filed as exhibits to the Registration Statement; all
material aspects of the aforesaid opinions are accurately summarized in the
Prospectus; the facts and representations upon which such opinions are based are
truthful,
<PAGE>
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accurate and complete in all material respects; and none of the Bank, the MHC
nor the Company has taken or will take any action inconsistent therewith.
(xxix) The Company is not required to be registered under the
Investment Company Act of 1940, as amended.
(xxx) All of the loans represented as assets on the most
recent consolidated financial statements or consolidated selected financial
information of the Bank included in the Prospectus meet, or are exempt from, all
requirements of federal, state or local law pertaining to lending, including,
without limitation, truth in lending (including the requirements of Regulations
Z and 12 C.F.R. Part 226 and Section 563.99), real estate settlement procedures,
consumer credit protection, equal credit opportunity and all disclosure laws
applicable to such loans, except for violations which, if asserted, would not
result in a material adverse effect on the financial condition, results of
operations or business of the Company, the MHC, the Bank and the Subsidiaries,
considered as one enterprise.
(xxxi) To the knowledge of the Company, the MHC and the Bank,
with the exception of the intended loan to the Bank's ESOP by the Company to
enable the ESOP to purchase shares of Common Stock in an amount up to 7% of the
Common Stock issued in the Conversion, none of the Company, the MHC, the Bank or
any employee of the Bank has made any payment of funds of the Company, the MHC
or the Bank as a loan for the purchase of the Common Stock or made any other
payment of funds prohibited by law, and no funds have been set aside to be used
for any payment prohibited by law.
(xxxii) The Company, the MHC, the Bank and the Subsidiaries
are in compliance in all material respects with the applicable financial
recordkeeping and reporting requirements of the Currency and Foreign Transaction
Reporting Act of 1970, as amended, and the rules and regulations promulgated
thereunder.
(xxxiii) None of the Company, the MHC, the Bank nor any of the
Subsidiaries nor any properties owned or operated by the Company, the MHC, the
Bank or any of the Subsidiaries is in violation of or liable under any
Environmental Law (as defined below), except for such violations or liabilities
that, individually or in the aggregate, would not have a material adverse effect
on the financial condition, results of operations or business affairs of the
Company, the MHC, the Bank and the Subsidiaries, considered as one enterprise.
There are no actions, suits or proceedings, or demands, claims, notices or
investigations (including, without limitation, notices, demand letters or
requests for information from any environmental agency) instituted or pending,
or to the knowledge of the Company, the MHC or the Bank, threatened, relating to
the liability of any property owned or operated by the Company, the MHC, the
Bank or the Subsidiaries, under any Environmental Law. For purposes of this
subsection, the term "Environmental Law" means any federal, state, local or
foreign law, statute, ordinance, rule, regulation, code, license, permit,
authorization, approval, consent, order, judgment, decree, injunction or
agreement with any
<PAGE>
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regulatory authority relating to (i) the protection, preservation or restoration
of the environment (including, without limitation, air, water, vapor, surface
water, groundwater, drinking water supply, surface soil, subsurface soil, plant
and animal life or any other natural resource), and/or (ii) the use, storage,
recycling, treatment, generation, transportation, processing, handling,
labeling, production, release or disposal of any substance presently listed,
defined, designated or classified as hazardous, toxic, radioactive or dangerous,
or otherwise regulated, whether by type or by quantity, including any material
containing any such substance as a component.
(xxxiv) The Company, the MHC, the Bank and the Subsidiaries
have filed all federal income and state and local franchise tax returns required
to be filed and have made timely payments of all taxes shown as due and payable
in respect of such returns, and no deficiency has been asserted with respect
thereto by any taxing authority.
(xxxv) The Company has received approval, subject to
regulatory approval to consummate the Offerings and issuance, to have the
Securities quoted on the Nasdaq National Market of the Nasdaq Stock Market
("Nasdaq National Market") effective as of the Closing Time referred to in
Section 2 hereof.
(xxxvi) The Company has filed a registration statement for the
Common Stock under Section 12(g) of the Securities Exchange Act of 1934, as
amended, (the "Exchange Act") and such registration statement was declared
effective concurrent with the effectiveness of the Registration Statement.
(b) Any certificate signed by any officer of the Company, the MHC or
the Bank and delivered to either one or both of the Agents or counsel for the
Agents shall be deemed a representation and warranty by the Company, the MHC or
the Bank to each Agent as to the matters covered thereby.
SECTION 2. APPOINTMENT OF SANDLER O'NEILL AND IBS; SALE AND DELIVERY
OF THE SECURITIES; CLOSING.
On the basis of the representations and warranties herein contained and
subject to the terms and conditions herein set forth, the Company hereby
appoints Sandler O'Neill and IBS as its Agents to consult with and advise the
Company, and to assist the Company with the solicitation of subscriptions and
purchase orders for Securities, in connection with the Company's sale of Common
Stock in the Offerings. On the basis of the representations and warranties
herein contained, and subject to the terms and conditions herein set forth,
Sandler O'Neill and IBS accept such appointment and agree to use their best
efforts to assist the Company with the solicitation of subscriptions and
purchase orders for Securities in accordance with this Agreement; PROVIDED,
HOWEVER, that the Agents shall not be obligated to take any action which is
inconsistent with any applicable laws, regulations, decisions or orders. The
services to be rendered by Sandler O'Neill and IBS pursuant to this appointment
include the following: (i) consulting as to the securities marketing
implications
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of any aspect of the Plan of Conversion or related corporate documents; (ii)
reviewing with the Board of Directors the independent appraiser's appraisal of
the Common Stock; (iii) reviewing all offering documents, including the
Prospectus, stock order form and related offering materials (it being understood
that preparation and filing of such documents is the sole responsibility of the
Company, the MHC, the Bank and their counsel); (iv) assisting in the design and
implementation of a marketing strategy for the Offerings; (v) assisting the
Company, the MHC and the Bank in obtaining all requisite regulatory approvals;
(vi) assisting Bank management in preparing for meetings with potential
investors and broker-dealers; and (vii) providing such other general advice and
assistance as may be requested to promote the successful completion of the
Offerings.
The appointment of the Agents hereunder shall terminate upon the
earlier to occur of (a) forty-five (45) days after the last day of the
Subscription and Community Offering, unless the Company and the Agents agree in
writing to extend such period and the OTS agrees to extend the period of time in
which the Shares may be sold, or (b) the receipt and acceptance of subscriptions
and purchase orders for all of the Securities, or (c) the completion of the
Syndicated Community Offering.
If any of the Securities remain available after the expiration of the
Subscription and Community Offering, at the request of the Company and the Bank,
Sandler O'Neill and IBS will seek to form a syndicate of registered brokers or
dealer's ("Selected Dealers") to assist in the solicitation of purchase orders
of such Securities on a best efforts basis, subject to the terms and conditions
set forth in a selected dealer's agreement (the "Selected Dealer's Agreement"),
substantially in the form set forth in Exhibit A to this Agreement. Sandler
O'Neill and IBS will endeavor to limit the aggregate fees to be paid by the
Company and the Bank under any such Selected Dealer's Agreement to an amount
competitive with gross underwriting discounts charged at such time for
underwritings of comparable amounts of stock sold at a comparable price per
share in a similar market environment; PROVIDED, HOWEVER, that the aggregate
fees payable to Sandler O'Neill and IBS and Selected Dealers shall not exceed 7%
of the aggregate Purchase Price of the Securities sold by such Selected Dealers.
Sandler O'Neill and IBS will endeavor to distribute the Securities among the
Selected Dealers in a fashion which best meets the distribution objective of the
Company and the requirements of the Plan, which may result in limiting the
allocation of stock to certain Selected Dealers. It is understood that in no
event shall Sandler O'Neill or IBS be obligated to act as a Selected Dealer or
to take or purchase any Securities.
In the event the Company is unable to sell at least the total minimum
of the Securities, as set forth in the Prospectus, within the period herein
provided, this Agreement shall terminate and the Company shall refund to any
persons who have subscribed for any of the Securities the full amount which it
may have received from them, together with interest as provided in the
Prospectus, and no party to this Agreement shall have any obligation to the
others hereunder, except for the obligations of the Company, the MHC and the
Bank as set forth in Sections 4, 6(a) and 7 hereof and the obligations of the
Agents as provided in Sections 6(b) and 7 hereof. Appropriate arrangements for
placing the funds received from subscriptions for Securities or other offers to
purchase Securities
<PAGE>
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in special interest-bearing accounts with the Bank until all Securities are sold
and paid for were made prior to the commencement of the Subscription Offering,
with provision for refund to the purchasers as set forth above, or for delivery
to the Company if all Securities are sold.
If at least the total minimum of Securities, as set forth in the
Prospectus, are sold, the Company agrees to issue or have issued the Securities
sold and to release for delivery certificates for such Securities at the Closing
Time against payment therefor by release of funds from the special
interest-bearing accounts referred to above. The closing shall be held at the
offices of Luse, Lehman, Gorman, Pomerenk & Schick, a Professional Corporation,
at a time as shall be agreed upon by the parties hereto, on a business day to be
agreed upon by the parties hereto. The Company shall notify the Agents by
telephone, confirmed in writing, when funds shall have been received for all the
Securities. Certificates for Securities shall be delivered directly to the
purchasers thereof in accordance with their directions. Notwithstanding the
foregoing, certificates for Securities purchased through Selected Dealers shall
be made available to the Agents for inspection at least 48 hours prior to the
Closing Time at such office as the Agents shall designate. The hour and date
upon which the Company shall release for delivery all of the Securities, in
accordance with the terms hereof, is herein called the "Closing Time."
The Company will pay any stock issue and transfer taxes which may be
payable with respect to the sale of the Securities.
In addition to the reimbursement of the expenses specified in Section 4
hereof, the Agents will receive the following compensation for their services
hereunder:
(a) One and one-eighth percent (1.125%) of the aggregate actual
purchase price of the Securities sold in the Subscription and Community
Offering, excluding in each case, shares purchased by (i) any employee benefit
plan of the Company or the Bank established for the benefit of their respective
directors, officers and employees, and (ii) any director, officer or employee of
the Company or the Bank or members of their immediate families (which term shall
mean parents, grandparents, spouse, siblings, children and grandchildren); and
(b) with respect to any Securities sold by a National Association of
Securities Dealers, Inc. (the "NASD") member firm (other than Sandler O'Neill or
IBS) under the Selected Dealer's Agreement in the Syndicated Community Offering,
(i) the compensation payable to Selected Dealers under any Selected Dealer's
Agreement, (ii) any sponsoring dealer's fees; and (iii) a management fee to
Sandler O'Neill of one and one-eighth percent (1.125%). Any fees payable to
Sandler O'Neill and IBS for Securities sold by Sandler O'Neill or IBS under any
such agreement shall be limited to an aggregate of one and one-eights percent
(1.125%) of the actual purchase price of such Securities.
If this Agreement is terminated by the Agents in accordance with the
provisions of Section 9(a) hereof or the Conversion is terminated by the
Company, no fee shall be payable by the Company to Sandler O'Neill and IBS;
however, the Company shall reimburse the Agents for all of
<PAGE>
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their reasonable out-of-pocket expenses incurred prior to termination, including
the reasonable fees and disbursements of counsel for the Agents in accordance
with the provisions of Section 4 hereof.
All fees payable to the Agents hereunder shall be payable to Sandler
O'Neill, as representative of the Agents, in immediately available funds at
Closing Time, or upon the termination of this Agreement, as the case may be. In
recognition of the long lead times involved in the conversion process, the Bank
agrees to make advance payments to the Agents in the aggregate amount of
$50,000, $25,000 of which has been previously paid and the remaining $25,000 of
which shall be payable upon execution hereof, which shall be credited against
any fees or reimbursement of expenses payable hereunder.
SECTION 3. COVENANTS OF THE COMPANY.
The Company, the MHC and the Bank covenant with the Agents as follows:
(a) The Company, the MHC and the Bank will prepare and file such
amendments or supplements to the Registration Statement, the Prospectus, the
Conversion Application and the Proxy Statement as may hereafter be required by
the Securities Act Regulations or the Conversion Regulations or as may hereafter
be requested by the Agents. Following completion of the Subscription and
Community Offering, and in the event of a Syndicated Community Offering, the
Company and the Bank will (i) promptly prepare and file with the Commission a
post-effective amendment to the Registration Statement relating to the results
of the Subscription and Community Offering, any additional information with
respect to the proposed plan of distribution and any revised pricing information
or (ii) if no such post-effective amendment is required, will file with, or mail
for filing to, the Commission a prospectus or prospectus supplement containing
information relating to the results of the Subscription and Community Offering
and pricing information pursuant to Rule 424 of the Securities Act Regulations,
in either case in a form acceptable to the Agents. The Company, the MHC and the
Bank will notify the Agents immediately, and confirm the notice in writing, (i)
of the effectiveness of any post-effective amendment of the Registration
Statement, the filing of any supplement to the Prospectus and the filing of any
amendment to the Conversion Application, (ii) of the receipt of any comments
from the OTS or the Commission with respect to the transactions contemplated by
this Agreement or the Plan, (iii) of any request by the Commission or the OTS
for any amendment to the Registration Statement or the Conversion Application or
any amendment or supplement to the Prospectus or for additional information,
(iv) of the issuance by the OTS of any order suspending the Offerings or the use
of the Prospectus or the initiation of any proceedings for that purpose, (v) of
the issuance by the Commission of any stop order suspending the effectiveness of
the Registration Statement or the initiation of any proceedings for that
purpose, and (vi) of the receipt of any notice with respect to the suspension of
any qualification of the Securities for offering or sale in any jurisdiction.
The Company, the MHC and the Bank will make every reasonable effort to prevent
the issuance of any stop order and, if any stop order is issued, to obtain the
lifting thereof at the earliest possible moment.
<PAGE>
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(b) The Company, the MHC and the Bank will give the Agents notice of
their intention to file or prepare any amendment to the Conversion Application
or Registration Statement (including any post-effective amendment) or any
amendment or supplement to the Prospectus (including any revised prospectus
which the Company proposes for use in connection with the Syndicated Community
Offering of the Securities which differs from the prospectus on file at the
Commission at the time the Registration Statement becomes effective, whether or
not such revised prospectus is required to be filed pursuant to Rule 424(b) of
the Securities Act Regulations), will furnish the Agents with copies of any such
amendment or supplement a reasonable amount of time prior to such proposed
filing or use, as the case may be, and will not file any such amendment or
supplement or use any such prospectus to which the Agents or counsel for the
Agents may object.
(c) The Company, the MHC and the Bank will deliver to the Agents as
many signed copies and as many conformed copies of the Conversion Application
and the Registration Statement as originally filed and of each amendment thereto
(including exhibits filed therewith or incorporated by reference therein) as the
Agents may reasonably request, and from time to time such number of copies of
the Prospectus as the Agents may reasonably request.
(d) During the period when the Prospectus is required to be delivered,
the Company, the MHC and the Bank will comply, at their own expense, with all
requirements imposed upon them by the OTS, by the applicable Conversion
Regulations, as from time to time in force, and by the Securities Act, the
Securities Act Regulations, the Exchange Act, and the rules and regulations of
the Commission promulgated thereunder, including, without limitation, Regulation
M under the Exchange Act, so far as necessary to permit the continuance of sales
or dealing in shares of Common Stock during such period in accordance with the
provisions hereof and the Prospectus.
(e) If any event or circumstance shall occur as a result of which it is
necessary, in the opinion of counsel for the Agents, to amend or supplement the
Prospectus in order to make the Prospectus not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser, the Company,
the MHC and the Bank will forthwith amend or supplement the Prospectus (in form
and substance satisfactory to counsel for the Agents) so that, as so amended or
supplemented, the Prospectus will not include an untrue statement of a material
fact or omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances existing at the time it is delivered
to a purchaser, not misleading, and the Company, and the Bank will furnish to
the Agents a reasonable number of copies of such amendment or supplement. For
the purpose of this subsection, the Company, the MHC and the Bank will each
furnish such information with respect to itself as the Agents may from time to
time reasonably request.
(f) The Company, the MHC and the Bank will take all necessary action,
in cooperation with the Agents, to qualify the Securities for offering and sale
under the applicable securities laws of such states of the United States and
other jurisdictions as the Conversion Regulations may require and as the Agents
and the Company have agreed; PROVIDED, HOWEVER, that the Company, the MHC and
the Bank shall not be obligated to file any general consent to service of
process or to qualify as
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a foreign corporation in any jurisdiction in which it is not so qualified. In
each jurisdiction in which the Securities have been so qualified, the Company
and the Bank will file such statements and reports as may be required by the
laws of such jurisdiction to continue such qualification in effect for a period
of not less than one year from the effective date of the Registration Statement.
(g) The Company authorizes Sandler O'Neill and IBS and any Selected
Dealers to act as agent of the Company in distributing the Prospectus to persons
entitled to receive subscription rights and other persons to be offered
Securities having record addresses in the states or jurisdictions set forth in a
survey of the securities or "blue sky" laws of the various jurisdictions in
which the Offerings will be made (the "Blue Sky Survey").
(h) The Company will make generally available to its security holders
as soon as practicable, but not later than 60 days after the close of the period
covered thereby, an earnings statement (in form complying with the provisions of
Rule 158 of the Securities Act Regulations) covering a twelve month period
beginning not later than the first day of the Company's fiscal quarter next
following the "effective date" (as defined in said Rule 158) of the Registration
Statement.
(i) During the period ending on the third anniversary of the expiration
of the fiscal year during which the closing of the transactions contemplated
hereby occurs, the Company will furnish or make publicly available to its
stockholders as soon as practicable after the end of each such fiscal year an
annual report (including consolidated statements of financial condition and
consolidated statements of income, stockholders' equity and cash flows,
certified by independent public accountants) and, as soon as practicable after
the end of each of the first three quarters of each fiscal year (beginning with
the fiscal quarter ending after the effective date of the Registration
Statement), consolidated summary financial information of the Company, the Bank
and their subsidiaries for such quarter in reasonable detail. In addition, such
annual report and quarterly consolidated summary financial information shall be
made public through the issuance of appropriate press releases at the same time,
or prior to the time, of the furnishing thereof to stockholders of the Company.
(j) During the period ending on the third anniversary of the expiration
of the fiscal year during which the closing of the transactions contemplated
hereby occurs, the Company will furnish to the Agents (i) as soon as publicly
available, a copy of each report or other document of the Company furnished
generally to stockholders of the Company or furnished to or filed with the
Commission under the Exchange Act or any national securities exchange or system
on which any class of securities of the Company is listed, and (ii) from time to
time, such other non-confidential information concerning the Company as the
Agents may reasonably request.
(k) The Company and the Bank will conduct the Conversion in all
material respects in accordance with the Plan, the Conversion Regulations and
all other applicable regulations, decisions and orders, including all applicable
terms, requirements and conditions precedent to the Conversion imposed upon the
Company or the Bank by the OTS.
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(l) The Company and the Bank will use the net proceeds received by it
from the sale of the Securities in the manner specified in the Prospectus under
"Use of Proceeds."
(m) The Company will file with the Commission such reports on Form SR
as may be required pursuant to Rule 463 of the Securities Act Regulations, if
such report or substantially similar report is required by the Commission.
(n) The Company will maintain the effectiveness of the Exchange Act
Registration Statement for not less than three years. The Company will file with
the Nasdaq Stock Market all documents and notices required by the Nasdaq Stock
Market of companies that have issued securities that are traded in the
over-the-counter market and quotations for which are reported by the Nasdaq
National Market.
(o) The Company and the Bank will take such actions and furnish such
information as are reasonably requested by the Agents in order for the Agents to
ensure compliance with the NASD's "Interpretation Relating to Free-Riding and
Withholding."
(p) Other than in connection with any employee benefit plan or
arrangement described in the Prospectus, the Company will not, without the prior
written consent of the Agents, sell or issue, contract to sell or otherwise
dispose of, any shares of Common Stock other than the Securities, for a period
of 180 days following the Closing Time.
(q) During the period beginning on the date hereof and ending on the
later of the third anniversary of the Closing Time or the date on which the
Agents receive full payment in satisfaction of any claim for indemnification or
contribution to which they may be entitled pursuant to Sections 6 or 7,
respectively, neither the Company nor the Bank shall, without the prior written
consent of the Agents, which consent shall not be unreasonably withheld, take or
permit to be taken any action that could result in the Bank Common Stock
becoming subject to any security interest, mortgage, pledge, lien or
encumbrance; PROVIDED, HOWEVER, that this covenant shall be null and void if the
Board of Governors of the Federal Reserve System, by regulation, policy
statement or interpretive release, or by written order or written advice
addressed to the Bank or one of the Agents specifically addressing the
provisions of Section 6(a) hereof, permits indemnification of the Agents by the
Bank as contemplated by such provisions.
(r) The Company and the Bank will comply with the conditions imposed
by, or agreed to, with the OTS in connection with its approval of the Holding
Company Application and in connection with its approval of the Conversion
Application.
(s) During the period ending on the first anniversary of the Closing
Time, the Bank will comply with all applicable laws and regulations necessary
for the Bank to continue to be a "qualified thrift lender" within the meaning of
12 U.S.C. Section 1467a(m).
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(t) The Company shall not deliver the Securities until the Company and
the Bank have satisfied each condition set forth in Section 5 hereof, unless
such condition is waived by the Agents.
(u) The Company or the Bank will furnish to Sandler O'Neill and IBS as
early as practicable prior to the Closing Date, but no later than two (2) full
business days prior thereto, a copy of the latest available unaudited interim
consolidated financial statements of the Bank and the Subsidiaries which have
been read by KPMG Peat Marwick LLP, as stated in their letters to be furnished
pursuant to subsections (e) and (f) of Section 5 hereof.
SECTION 4. PAYMENT OF EXPENSES.
The Company, the MHC and the Bank jointly and severally agree to pay
all expenses incident to the performance of their obligations under this
Agreement, including but not limited to (i) the cost of obtaining all securities
and bank regulatory approvals, (ii) the printing and filing of the Registration
Statement as originally filed and of each amendment thereto, (iii) the
preparation, issuance and delivery of the certificates for the Securities to the
purchasers in the Offerings, (iv) the fees and disbursements of the Company's
and the Bank's counsel, accountants, appraiser and other advisors, (v) the
qualification of the Securities under securities laws in accordance with the
provisions of Section 3(f) hereof, including filing fees and the fees and
disbursements of counsel in connection therewith and in connection with the
preparation of the Blue Sky Survey, (vi) the printing and delivery to the Agents
of copies of the Registration Statement as originally filed and of each
amendment thereto and the printing and delivery of the Prospectus and any
amendments or supplements thereto to the purchasers in the Offerings and the
Agents, (vii) the printing and delivery to the Agents of copies of a Blue Sky
Survey, and (viii) the fees and expenses incurred in connection with the listing
of the Securities on the Nasdaq National Market. In the event the Agents incur
any such fees and expenses on behalf of the Bank, MHC or the Company, the Bank
will reimburse the Agents for such fees and expenses whether or not the
Conversion is consummated; PROVIDED, HOWEVER, that the Agents shall not incur
any substantial expenses on behalf of the Bank, the MHC or the Company pursuant
to this Section without the prior approval of the Bank.
The Company, the MHC and the Bank jointly and severally agree to pay
certain expenses incident to the performance of the Agents' obligations under
this Agreement, regardless of whether the Conversion is consummated, including
(i) the filing fees paid or incurred by the Agents in connection with all
filings with the NASD and (ii) all reasonable out-of-pocket expenses incurred by
the Agents relating to the Offerings, including, without limitation,
advertising, promotional, syndication and travel expenses and fees and expenses
of the Agents' counsel up to the aggregate maximum amount of $75,000. All fees
and expenses to which the Agents are entitled to reimbursement under this
paragraph of this Section 4 shall be due and payable upon receipt by the Company
or the Bank of a written accounting therefor setting forth in reasonable detail
the expenses incurred by the Agents.
SECTION 5. CONDITIONS OF AGENT'S OBLIGATIONS.
<PAGE>
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The Company, the Bank and the Agents agree that the issuance and the
sale of Securities and all obligations of the Agents hereunder are subject to
the accuracy of the representations and warranties of the Company and the Bank
herein contained as of the date hereof and the Closing Time, to the accuracy of
the statements of officers and directors of the Company and the Bank made
pursuant to the provisions hereof, to the performance by the Company and the
Bank of their obligations hereunder, and to the following further conditions:
(a) No stop order suspending the effectiveness of the Registration
Statement shall have been issued under the Securities Act or proceedings
therefor initiated or threatened by the Commission, no order suspending the
Offerings or authorization for final use of the Prospectus shall have been
issued or proceedings therefor initiated or threatened by the OTS and no order
suspending the sale of the Securities in any jurisdiction shall have been
issued.
(b) At Closing Time, the Agents shall have received:
(1) The favorable opinion, dated as of the Closing Time, of
Luse, Lehman, Gorman, Pomerenk & Schick, a Professional Corporation, counsel for
the Company, the MHC and the Bank, in form and substance satisfactory to counsel
for the Agents, to the effect that:
(i) The Company has been duly incorporated and
is validly existing as a corporation in good
standing under the laws of the State of
Delaware.
(ii) The Company has full corporate power and
authority to own, lease and operate its
properties and to conduct its business as
described in the Registration Statement and
Prospectus and to enter into and perform its
obligations under this Agreement.
(iii) The Company is duly qualified as a foreign
corporation to transact business and is in
good standing in the State of Iowa and in
each other jurisdiction in which such
qualification is required whether by reason
of the ownership or leasing of property or
the conduct of business, except where the
failure to so qualify would not have a
material adverse effect upon the financial
condition, results of operations or business
affairs of the Company, the Bank and the
Subsidiaries, considered as one enterprise.
(iv) Upon consummation of the Conversion, the
authorized, issued and outstanding capital
stock of the Company will be within the
range as set forth in the Prospectus under
the section captioned "Capitalization" and,
no shares of Common Stock have been or will
be issued and outstanding prior to the
Closing Time.
<PAGE>
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(v) The Securities have been duly and validly
authorized for issuance and sale and, when
issued and delivered by the Company pursuant
to the Plan against payment of the
consideration calculated as set forth in the
Plan, will be duly and validly issued and
fully paid and non-assessable.
(vi) The issuance of the Securities is not
subject to preemptive or other similar
rights arising by operation of law or, to
the best of their knowledge and information,
otherwise.
(vii) The MHC is validly existing and is in good
standing under the laws of the United States
as a mutual holding company, with full
corporate power to own, lease and operate
its properties and to conduct its business
as described in the Registration Statement
and Prospectus and is duly qualified as a
foreign corporation in each jurisdiction in
which such qualification is required, except
where the failure to so qualify would not
have a material adverse effect upon the
financial condition, results of operations
or business affairs of the MHC.
(viii) The Bank has been, at all times since the
date hereof and prior to the Closing Time,
duly organized, and is validly existing and
in good standing under the laws of the
United States of America as a federally
chartered savings bank of stock form, with
full corporate power and authority to own,
lease and operate its properties and to
conduct its business as described in the
Registration Statement and the Prospectus;
and the Bank is duly qualified as a foreign
corporation in each jurisdiction in which
such qualification is required except where
the failure to so qualify would not have a
material adverse effect upon the financial
condition, results of operations or business
affairs of the Bank.
(ix) The Bank is a member in good standing of the
Federal Home Loan Bank of Des Moines and the
deposit accounts of the Bank are insured by
the FDIC up to the applicable limits.
(x) Each of the Subsidiaries has been duly
incorporated and is validly existing as a
corporation in good standing under the laws
of the jurisdiction of its incorporation,
has full corporate power and authority to
own, lease and operate its properties and to
conduct its business as described in the
Registration Statement and Prospectus and is
duly qualified as a foreign corporation to
transact business and is in good standing in
each jurisdiction in which the failure to so
<PAGE>
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qualify would have a material adverse effect
upon the financial condition, results of
operations or business of the Company, the
MHC, the Bank and the Subsidiaries,
considered as one enterprise; the activities
of each of the Subsidiaries are permitted to
subsidiaries of a savings association
holding company and of a federally chartered
savings bank by the rules, regulations,
resolutions and practices of the OTS; all of
the issued and outstanding capital stock of
each of the Subsidiaries has been duly
authorized and validly issued, is fully paid
and non-assessable and is owned by the Bank
or the MHC, directly or through
subsidiaries, free and clear of any security
interest, mortgage, pledge, lien,
encumbrance, claim or equity.
(xi) Upon consummation of the Conversion, all of
the issued and outstanding capital stock of
the Bank when issued and delivered pursuant
to the Plan against payment of consideration
calculated as set forth in the Plan and set
forth in the Prospectus, will be duly
authorized and validly issued and fully paid
and nonassessable, and all such capital
stock will be owned beneficially and of
record by the Company free and clear of any
security interest, mortgage, pledge, lien,
encumbrance, claim or equity.
(xii) The OTS has duly approved the Holding
Company Application and the Conversion
Application and no action is pending, or to
such counsel's knowledge, threatened
respecting the Holding Company Application
or the Conversion Application or the
acquisition by the Company of all of the
Bank's issued and outstanding capital stock;
the Holding Company Application and the
Conversion Application comply as to form in
all material respects with the applicable
requirements of the OTS, and to the
knowledge of such counsel, include all
documents required to be filed as exhibits
thereto, and are to such counsel's
knowledge, truthful, accurate and complete
as to form in all material respects,
excluding the Prospectus filed as part of
the Holding Company Application or the
Conversion Application, and any related
marketing materials as to which no opinion
need be given; and the Company is duly
authorized to become a savings association
holding company and is duly authorized to
own all of the issued and outstanding
capital stock of the Bank to be issued
pursuant to the Plan.
(xiii) The execution and delivery of this Agreement
and the consummation of the transactions
contemplated hereby, (A) have been duly and
validly authorized by all necessary action
on the part of each of the
<PAGE>
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Company, the MHC and the Bank, and this
Agreement constitutes the legal, valid and
binding agreement of each of the Company,
the MHC and the Bank, enforceable in
accordance with its terms, except as rights
to indemnity and contribution hereunder may
be limited under applicable law (it being
understood that such counsel may avail
itself of customary exceptions concerning
the effect of bankruptcy, insolvency or
similar laws and the availability of
equitable remedies); (B) will not result in
any violation of the provisions of the
certificate of incorporation, organization
certificate, articles of incorporation or
charter, as the case may be, or by-laws of
the Company, the MHC, the Bank or any of the
Subsidiaries; and, (C) to such counsel's
knowledge will not conflict with, or
constitute a breach of, or default under,
and no event has occurred which, with notice
or lapse of time or both, would constitute a
default under, or result in the creation or
imposition of any lien, charge or
encumbrance, that, individually or in the
aggregate, would have a material adverse
effect on the financial condition, results
of operations or business affairs of the
Company, the MHC, the Bank and the
Subsidiaries, considered as one enterprise,
upon any property or assets of the Company,
the MHC, the Bank or any of the Subsidiaries
pursuant to any contract, indenture,
mortgage, loan agreement, note, lease or
other instrument to which the Company, the
MHC, the Bank or the Subsidiaries is a party
or by which any of them may be bound, or to
which any of the property or assets of the
Company, the MHC, the Bank or any of the
Subsidiaries is subject.
(xiv) The Prospectus has been duly authorized by
the OTS for final use pursuant to the
Conversion Regulations and no action is
pending, or to such counsel's knowledge, is
threatened, by the OTS to revoke such
authorization.
(xv) The Registration Statement is effective
under the Securities Act and no stop order
suspending the effectiveness of the
Registration Statement has been issued under
the Securities Act or, to such counsel's
knowledge, proceedings therefor initiated or
threatened by the Commission.
(xvi) No further approval, authorization, consent
or other order of any public board or body
is required in connection with the execution
and delivery of this Agreement, the issuance
of the Securities and the consummation of
the Conversion, except as may be required
under
<PAGE>
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the securities or Blue Sky laws of various
jurisdictions as to which no opinion need be
rendered.
(xvii) At the time the Registration Statement
became effective, the Registration Statement
(other than the appraisal, financial
statements, and schedules and other
financial and statistical data included
therein, as to which no opinion need be
rendered) complied as to form in all
material respects with the requirements of
the Securities Act and the Securities Act
Regulations and the Conversion Regulations.
(xviii) The Common Stock conforms to the description
thereof contained in the Prospectus, and the
form of certificate used to evidence the
Common Stock is in due and proper form and
complies with all applicable statutory
requirements.
(xix) There are no legal or governmental
proceedings pending or to such counsel's
knowledge, threatened against or affecting
the Company, the MHC, the Bank or any of the
Subsidiaries which are required,
individually or in the aggregate, to be
disclosed in the Registration Statement and
Prospectus, other than those disclosed
therein, and all pending legal or
governmental proceedings to which the
Company, the MHC, the Bank or any of the
Subsidiaries is a party or to which any of
their property is subject, which are not
described in the Registration Statement,
including ordinary routine litigation
incidental to the business, are, considered
in the aggregate, not material.
(xx) The information in the Prospectus under the
sections captioned "Risk Factors -
Anti-Takeover Provisions in our Governing
Instruments and Voting Control of Management
May Discourage Takeover Attempts," "Dividend
Policy," "Business of First Federal - Legal
Proceedings", "Taxation," "Regulation," "The
Conversion - Effects of Conversion on
Depositors, Borrowers and Members,"
"-Liquidation Rights" and "- Tax Aspects,"
"Restrictions on Acquisitions of First
Federal Bankshares and First Federal,"
"Description of Capital Stock of First
Federal Bankshares" and "Description of
Capital Stock of First Federal," to the
extent that it constitutes matters of law,
summaries of legal matters, documents or
proceedings, or legal conclusions, has been
reviewed by such counsel and is complete and
accurate in all material respects and to the
extent it constitutes summaries of written
legal opinions rendered by a person or
entity other than such counsel
<PAGE>
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has been reviewed by such counsel and is a
complete and accurate summary of such
opinions in all material respects.
(xxi) To such counsel's knowledge, there are no
contracts, indentures, mortgages, loan
agreements, notes, leases or other
instruments required to be described or
referred to in the Registration Statement or
Prospectus or to be filed as exhibits
thereto other than those described or
referred to therein or filed as exhibits
thereto, the descriptions thereof or
references thereto are correct in all
material respects, and no default exists,
and no event has occurred which, with notice
or lapse of time or both, would constitute a
default, in the due performance or
observance of any material obligation,
agreement, covenant or condition contained
in any contract, indenture, mortgage, loan
agreement, note, lease or other instrument
so described, referred to or filed.
(xxii) The Plan has been duly authorized by the
Board of Directors of the MHC and the Board
of Directors of the Company and the Board of
Directors of the Bank and the OTS's approval
of the Plan remains in full force and
effect; to such counsel's knowledge, the
Company and the Bank have conducted the
Conversion in all material respects in
accordance with applicable requirements of
the Conversion Regulations, the Plan and all
other applicable regulations, decisions and
orders thereunder, including all material
applicable terms, conditions, requirements
and conditions precedent to the Conversion
imposed upon the Company or the Bank by the
OTS and, no order has been issued by the OTS
to suspend the Conversion or the Offerings
and no action for such purpose has been
instituted or threatened by the OTS; and, to
the best of such counsel's knowledge, no
person has sought to obtain review of the
final action of the OTS in approving the
Conversion Application or the Holding
Company Application.
(xxiii) To such counsel's knowledge, the Company,
the MHC, the Bank and the Subsidiaries have
obtained all licenses, permits and other
governmental authorizations currently
required for the conduct of their respective
businesses as described in the Registration
Statement and Prospectus except for such
licenses, permits or authorizations the
failure of which to have would not result in
a material adverse change in the financial
condition, results of operations or the
business of the Company, the Bank and the
MHC, considered as one enterprise, and all
such licenses, permits and other
governmental authorizations are
<PAGE>
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in full force and effect, and the Company,
the MHC, the Bank and the Subsidiaries are
in all material respects complying
therewith.
(xxiv) None of the Company, the MHC, the Bank nor
any of the Subsidiaries is in violation of
its certificate of incorporation,
organization certificate, articles of
incorporation or charter, as the case may
be, or bylaws or, to such counsel's
knowledge, in default (nor has any event
occurred which, with notice or lapse of time
or both, would constitute a default) in the
performance or observance of any obligation,
agreement, covenant or condition contained
in any contract, indenture, mortgage, loan
agreement, note, lease or other instrument
to which the Company, the MHC, the Bank or
any of the Subsidiaries is a party or by
which the Company, the MHC, the Bank or any
of the Subsidiaries or any of their property
may be bound in any respect that would have
a material adverse effect upon the financial
condition, results of operations, or
business of the Company, the Bank and the
MHC considered as one enterprise.
(xxv) The Company is not required to be registered
as an investment company under the
Investment Company Act of 1940.
(2) The favorable opinion, dated as of Closing Time, of
Muldoon, Murphy & Faucette LLP, counsel for the Agents, with respect to the
matters set forth in Section 5(b)(1)(i), (iv), (v), (vi) (solely as to
preemptive rights arising by operation of law), (xvii) and (xviii) and such
other matters as the Agents may reasonably require.
(3) In giving their opinions required by subsections (b)(l)
and (b)(2), respectively, of this Section, Luse, Lehman, Gorman, Pomerenk &
Schick and Muldoon, Murphy & Faucette LLP shall each additionally state that
nothing has come to their attention that would lead them to believe that the
Registration Statement (except for the appraisal, financial statements and
schedules and other financial or statistical data included therein, as to which
counsel need make no statement), at the time it became effective, contained an
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not misleading
or that the Prospectus (except for financial statements and schedules and other
financial or statistical data included therein, as to which counsel need make no
statement), at the time it became effective or at Closing Time, included an
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. In giving their
opinions, Luse, Lehman, Gorman, Pomerenk & Schick and Muldoon, Murphy & Faucette
LLP may rely as to matters of fact on certificates of officers and directors of
the MHC, the Company and the Bank and certificates of public officials, and as
to certain matters of Iowa law and Delaware law upon the opinion of local
counsel reasonably satisfactory to the Agents (the Agents shall be notified of
the identity of such counsel at the time of
<PAGE>
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the execution of this Agreement and receive drafts of such counsel's opinion at
least 3 days prior to the Closing Time), which opinions shall be in form and
substance satisfactory to counsel for the Agents, and Muldoon, Murphy & Faucette
LLP may also rely on the opinion of Luse, Lehman, Gorman, Pomerenk & Schick and
such local counsel.
(c) At Closing Time referred to in Section 2, the Company, the MHC and
the Bank shall have completed in all material respects the conditions precedent
to the Conversion in accordance with the Plan, the applicable Conversion
Regulations and all other applicable laws, regulations, decisions and orders,
including all terms, conditions, requirements and provisions precedent to the
Conversion imposed upon the Company or the Bank by the OTS, or any other
regulatory authority, other than those which the OTS permits to be completed
after the Conversion.
(d) At Closing Time referred to in Section 2, there shall not have
been, since the date hereof or since the respective dates as of which
information is given in the Registration Statement and the Prospectus, any
material adverse change in the financial condition, results of operations or
business affairs of the Company, the MHC, the Bank and the Subsidiaries,
considered as one enterprise, whether or not arising in the ordinary course of
business, and the Agents shall have received a certificate of the Chief
Executive Officer of the Company, of the MHC and of the Bank, the President of
the Company, of the MHC and of the Bank and the Chief Financial or Chief
Accounting Officer of the Company, of the MHC and of the Bank, dated as of
Closing Time, to the effect that (i) there has been no such material adverse
change, (ii) there shall have been no material transaction entered into by the
Company, the MHC or the Bank from the latest date as of which the financial
condition of the Company, the MHC or the Bank as set forth in the Registration
Statement and the Prospectus other than transactions referred to or contemplated
therein and transactions in the ordinary cause of business, (iii) none of the
Company, the MHC nor the Bank shall have received from the OTS any direction
(oral or written) to make any material change in the method of conducting its
business with which it has not complied (which direction, if any, shall have
been disclosed to the Agents) or which materially and adversely would affect the
business, financial condition or results of operations of the Company, the MHC,
the Bank or the Subsidiaries, (iv) the representations and warranties in Section
1 hereof are true and correct with the same force and effect as though expressly
made at and as of the Closing Time, (v) the Company, the MHC and the Bank have
complied with all agreements and satisfied all conditions on their part to be
performed or satisfied at or prior to Closing Time, (vi) no stop order
suspending the effectiveness of the Registration Statement has been issued and
no proceedings for that purpose have been initiated or threatened by the
Commission and (vii) no order suspending the Offerings or the authorization for
final use of the Prospectus has been issued and no proceedings for that purpose
have been initiated or threatened by the OTS or the FDIC and no person has
sought to obtain regulatory or judicial review of the action of the OTS in
approving the Plan in accordance with the Conversion Regulations nor has any
person sought to obtain regulatory or judicial review of the action of the OTS
in approving the Holding Company Application.
<PAGE>
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(e) At the time of the execution of this Agreement, the Agents shall
have received from KPMG Peat Marwick LLP a letter dated such date, in form and
substance satisfactory to the Agents, to the effect that: (i) they are
independent public accountants with respect to the Company, the MHC, the Bank,
the Subsidiaries, Mid-Iowa Financial Corp. and its subsidiaries (together
"Mid-Iowa") within the meaning of the Code of Ethics of the American Institute
of Certified Public Accountants, the Securities Act, the Securities Act
Regulations and the Conversion Regulations; (ii) it is their opinion that the
consolidated financial statements and supporting schedules included in the
Registration Statement, and covered by their opinions therein, comply as to form
in all material respects with the applicable accounting requirements of the
Securities Act and the Securities Act Regulations; (iii) based upon limited
procedures as agreed upon by the Agents and KPMG Peat Marwick LLP set forth in
detail in such letter, nothing has come to their attention which causes them to
believe that (A) the unaudited financial statements and supporting schedules of
the Bank and its subsidiaries and Mid-Iowa included in the Registration
Statement do not comply as to form in all material respects with the applicable
accounting requirements of the Securities Act, the Securities Act Regulations
and the Conversion Regulations or are not presented in conformity with generally
accepted accounting principles applied on a basis substantially consistent with
that of the audited financial statements included in the Registration Statement
and the Prospectus, (B) the unaudited amounts of net interest income and net
income set forth under the section captioned "Selected Consolidated Financial
and Other Data of First Federal and Subsidiaries" in the Registration Statement
and Prospectus do not agree with the amounts set forth in unaudited consolidated
financial statements as of and for the dates and periods presented under such
captions or such amounts were not determined on a basis substantially consistent
with that used in determining the corresponding amounts in the audited financial
statements included in the Registration Statement, (C) at a specified date not
more than five days prior to the date of this Agreement, there has been any
increase in the consolidated long term or short term debt of the Bank and the
Subsidiaries or Mid-Iowa or any decrease in consolidated total assets, the
allowance for loan losses, total deposits or net worth of the Bank and its
subsidiaries or Mid-Iowa, in each case as compared with the amounts shown in the
September 30, 1998 balance sheet included in the Registration Statement or, (D)
during the period from September 30, 1998 to a specified date not more than five
days prior to the date of this Agreement, there were any decreases, as compared
with the corresponding period in the preceding year, in total interest income,
net interest income, net interest income after provision for loan losses, income
before income tax expense or net income of the Bank and its subsidiaries, except
in all instances for increases or decreases which the Registration Statement and
the Prospectus disclose have occurred or may occur; and (iv) in addition to the
examination referred to in their opinions and the limited procedures referred to
in clause (iii) above, they have carried out certain specified procedures, not
constituting an audit, with respect to certain amounts, percentages and
financial information which are included in the Registration Statement and
Prospectus and which are specified by the Agents, and have found such amounts,
percentages and financial information to be in agreement with the relevant
accounting, financial and other records of the Company, the MHC, the Bank, the
Subsidiaries, and Mid-Iowa identified in such letter.
<PAGE>
- 29 -
(f) At Closing Time, the Agents shall have received from KPMG Peat
Marwick LLP a letter, dated as of Closing Time, to the effect that they reaffirm
the statements made in the letter furnished pursuant to subsection (e) of this
Section, except that the specified date referred to shall be a date not more
than five days prior to Closing Time.
(g) At Closing Time, the Securities shall have been approved for
listing on the Nasdaq National Market upon notice of issuance.
(h) At Closing Time, the Agents shall have received a letter from RP
Financial, Inc., dated as of the Closing Time, confirming its appraisal.
(i) At Closing Time, counsel for the Agents shall have been furnished
with such documents and opinions as they may require for the purpose of enabling
them to pass upon the issuance and sale of the Securities as herein contemplated
and related proceedings, or in order to evidence the accuracy of any of the
representations or warranties, or the fulfillment of any of the conditions,
herein contained; and all proceedings taken by the Company in connection with
the issuance and sale of the Securities as herein contemplated shall be
satisfactory in form and substance to the Agents and counsel for the Agents.
(j) At any time prior to Closing Time, (i) there shall not have
occurred any material adverse change in the financial markets in the United
States or elsewhere or any outbreak of hostilities or escalation thereof or
other calamity or crisis the effect of which, in the judgment of the Agents, are
so material and adverse as to make it impracticable to market the Securities or
to enforce contracts, including subscriptions or orders, for the sale of the
Securities, and (ii) trading generally on either the American Stock Exchange,
the New York Stock Exchange or the Nasdaq Stock Market shall not have been
suspended, and minimum or maximum prices for trading shall not have been fixed,
or maximum ranges for prices for securities have been required, by either of
said Exchanges or by order of the Commission or any other governmental
authority, and a banking moratorium shall not have been declared by either
Federal or Iowa authorities.
SECTION 6. INDEMNIFICATION.
(a) The Company and the Bank, jointly and severally, agree to indemnify
and hold harmless the Agents, each person, if any, who controls the Agents,
within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act, and its respective partners, directors, officers, employees and
Agents as follows:
(i) from and against any and all loss, liability, claim,
damage and expense whatsoever, as incurred, related to or arising out of the
Conversion or any action taken by the Agents where acting as Agents of the
Company or the Bank or otherwise as described in Section 2 hereof;
<PAGE>
- 30 -
(ii) from and against any and all loss, liability, claim,
damage and expense whatsoever, as incurred, based upon or arising out of any
untrue statement or alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment thereto), or the omission or alleged
omission therefrom of a material fact required to be stated therein or necessary
to make the statements therein not misleading or arising out of any untrue
statement or alleged untrue statement of a material fact contained in the Proxy
Statement or Prospectus (or any amendment or supplement thereto) or the omission
or alleged omission therefrom of a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading;
(iii) from and against any and all loss, liability, claim,
damage and expense whatsoever, as incurred, to the extent of the aggregate
amount paid in settlement of any litigation, or any investigation or proceeding
by any governmental agency or body, commenced or threatened, or of any claim
whatsoever described in clauses (i) or (ii) above, if such settlement is
effected with the written consent of the Company or the Bank, which consent
shall not be unreasonably withheld; and
(iv) from and against any and all expense whatsoever, as
incurred (including, subject to Section 6(c) hereof, the fees and disbursements
of counsel chosen by the Agents), reasonably incurred in investigating,
preparing for or defending against any litigation, or any investigation,
proceeding or inquiry by any governmental agency or body, commenced or
threatened, or any claim pending or threatened whatsoever described in clauses
(i) or (ii) above, to the extent that any such expense is not paid under (i),
(ii) or (iii) above;
PROVIDED, HOWEVER, that the indemnification provided for in this paragraph (a)
shall not apply with respect to an Agent to any loss, liability, claim, damage
or expense to the extent arising out of any untrue statement or alleged untrue
statement of a material fact contained in the Prospectus (or any amendment or
supplement thereto) or the omission or alleged omission therefrom of a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading which was made in
reliance upon and in conformity with written information relating to such agent
furnished to the Company or the Bank by such agent expressly for use in the
Prospectus (or any amendments or supplements thereto), which information the
Company and the Bank acknowledge is included only in the sections captioned
"Market for the Common Stock" and the first two paragraphs of the section
captioned "The Conversion - Plan of Distribution and Selling Commission" of the
Prospectus (the "Agent Information").
(b) The Agents agree to indemnify and hold harmless the Company, the
Bank, their directors and trustees, each of their officers who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act against any and all loss, liability, claim, damage and expense described in
the indemnity contained in subsection (a) of this Section, as incurred, but only
with respect to untrue
<PAGE>
- 31 -
statements or omissions, or alleged untrue statements or omissions, of a
material fact made in the Prospectus (or any amendment or supplement thereto) in
reliance upon and in conformity with the Agent Information.
(c) Each indemnified party shall give notice as promptly as reasonably
practicable to each indemnifying party of any action commenced against it in
respect of which indemnity may be sought hereunder, but failure to so notify an
indemnifying party shall not relieve such indemnifying party from any liability
which it may have otherwise than on account of this indemnity agreement. An
indemnifying party may participate at its own expense in the defense of any such
action. In no event shall the indemnifying parties be liable for fees and
expenses of more than one counsel (in addition to no more than one local counsel
in each separate jurisdiction in which any action or proceeding is commenced)
separate from their own counsel for all indemnified parties in connection with
any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances.
(d) The Company, the MHC and the Bank also agree that the Agents shall
not have any liability (whether direct or indirect, in contract or tort or
otherwise) to the Bank, the MHC, the Company, its security holders or the Bank's
or the Company's creditors relating to or arising out of the engagement of the
Agents pursuant to, or the performance by, the Agents of the services
contemplated by, this Agreement, except to the extent that any loss, claim,
damage or liability is found in a final judgment by a court of competent
jurisdiction to have resulted primarily from the Agent's bad faith, willful
misconduct or gross negligence.
(e) In addition to, and without limiting, the provisions of Section
(6)(a)(iv) hereof, in the event that any Agent, any person, if any, who controls
the Agent within the meaning of Section 15 of the Securities Act or Section 20
of the Exchange Act, or any of its partners, directors, officers, employees or
agents is requested or required to appear as a witness or otherwise gives
testimony in any action, proceeding, investigation or inquiry brought by or on
behalf of or against the Company, the MHC, the Bank, an Agent or any of their
respective agents or affiliates or any participant in the transactions
contemplated hereby in which the Agents or such person or agent is not named as
a defendant, the Company and the Bank jointly and severally agree to reimburse
the Agent for all reasonable and necessary out-of-pocket expenses incurred by it
in connection with preparing or appearing as a witness or otherwise giving
testimony and to compensate the Agents in an amount to be mutually agreed upon.
SECTION 7. CONTRIBUTION.
In order to provide for just and equitable contribution in
circumstances in which the indemnity agreement provided for in Section 6 hereof
is for any reason held to be unenforceable by the indemnified parties although
applicable in accordance with its terms, the Company, the Bank and
<PAGE>
- 32 -
the Agents shall contribute to the aggregate losses, liabilities, claims,
damages and expenses of the nature contemplated by said indemnity agreement
incurred by the Company or the Bank and the Agents, as incurred, in such
proportions (i) that the Agents are responsible for that portion represented by
the percentage that the maximum aggregate marketing fees appearing on the cover
page of the Prospectus bears to the maximum aggregate gross proceeds appearing
thereon and the Company and the Bank are jointly and severally responsible for
the balance or (ii) if, but only if, the allocation provided for in clause (i)
is for any reason held unenforceable, in such proportion as is appropriate to
reflect not only the relative benefits to the Company and the Bank on the one
hand and the Agents on the other, as reflected in clause (i), but also the
relative fault of the Company and the Bank on the one hand and the Agents on the
other, as well as any other relevant equitable considerations; PROVIDED,
HOWEVER, that no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section, each person, if any, who
controls either of the Agents within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act shall have the same rights to contribution
as the Agents, and each director of the Company, each trustee of the Bank, each
officer of the Company who signed the Registration Statement, and each person,
if any, who controls the Company or the Bank within the meaning of Section 15 of
the Securities Act or Section 20 of the Exchange Act shall have the same rights
to contribution as the Company and the Bank. Notwithstanding anything to the
contrary set forth herein, to the extent permitted by applicable law, in no
event shall the Agents be required to contribute an aggregate amount in excess
of the aggregate marketing fees to which the Agents are entitled and actually
paid pursuant to this Agreement.
SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE
DELIVERY.
All representations, warranties and agreements contained in this
Agreement, or contained in certificates of officers of the Company or the Bank
submitted pursuant hereto, shall remain operative and in full force and effect,
regardless of any investigation made by or on behalf of any Agents or
controlling person, or by or on behalf of the Company, and shall survive
delivery of the Securities.
SECTION 9. TERMINATION OF AGREEMENT.
(a) The Agents may terminate this Agreement, by notice to the Company,
at any time at or prior to Closing Time: (i) if there has been, since the date
of this Agreement or since the respective dates as of which information is given
in the Registration Statement, any material adverse change in the financial
condition, results of operations or business affairs of the Company, the MHC, or
the Bank, or the Company, MHC, Bank and the Subsidiaries, considered as one
enterprise, whether or not arising in the ordinary course of business; (ii) if
there has occurred any material adverse change in the financial markets in the
United States or elsewhere or any outbreak of hostilities or escalation thereof
or other calamity or crisis the effect of which, in the judgment of the Agents,
are so material and adverse as to make it impracticable to market the Securities
or to enforce
<PAGE>
- 33 -
contracts, including subscriptions or orders, for the sale of the Securities;
(iii) if trading generally on the Nasdaq Stock Market, the American Stock
Exchange or the New York Stock Exchange has been suspended, or minimum or
maximum prices for trading have been fixed, or maximum ranges for prices for
securities have been required, by either of said Exchanges or by order of the
Commission or any other governmental authority, or if a banking moratorium has
been declared by either Federal or Iowa authorities; (iv) if any condition
specified in Section 5 shall not have been fulfilled when and as required to be
fulfilled; (v) if there shall have been such material adverse change in the
condition or prospects of the Company or the Bank or the prospective market for
the Company's securities as in the Agents' good faith opinion would make it
inadvisable to proceed with the offering, sale or delivery of the Securities;
(vi) if, in the Agents' good faith opinion, the price for the Securities
established by RP Financial, Inc. is not reasonable or equitable under then
prevailing market conditions; or (vii) if the Conversion is not consummated on
or prior to June 30, 1999.
(b) If this Agreement is terminated pursuant to this Section, such
termination shall be without liability of any party to any other party except as
provided in Section 4 hereof relating to the reimbursement of expenses and
except that the provisions of Sections 6 and 7 hereof shall survive any
termination of this Agreement.
SECTION 10. NOTICES.
All notices and other communications hereunder shall be in writing and
shall be deemed to have been duly given if mailed or transmitted by any standard
form of telecommunication. Notices to Sandler O'Neill shall be directed to
Sandler O'Neill at Two World Trade Center, 104th Floor, New York, New York
10048, attention of Catherine A. Lawton, Principal; notices to IBS shall be
directed to IBS at The 1000 Building, 6200 Dutchman's Lane, Suite 305,
Louisville, Kentucky 40205, attention of Paul Reese; copies of all such notices
and other communications to the Agents shall be directed to Muldoon, Murphy &
Faucette LLP, 5101 Wisconsin Avenue, N.W., Washington, D.C. 20016, attention of
John R. Hall, Esquire; notices to the Company and the Bank shall be directed to
either of them at First Federal Savings Bank of Siouxland, 329 Pierce Street,
P.O. Box 897, Sioux City, Iowa 91102, attention of Barry E. Backhaus, President
and Chief Executive Officer with a copy to Luse Lehman Gorman Pomerenk & Schick,
5335 Wisconsin Avenue, N.W., Suite 400, Washington, D.C. 20015, attention of
Robert I. Lipsher, Esq..
SECTION 11. PARTIES.
This Agreement shall inure to the benefit of and be binding upon the
Agents, the Company, the MHC and the Bank and their respective successors.
Nothing expressed or mentioned in this Agreement is intended or shall be
construed to give any person, firm or corporation, other than the Agents, the
Company, the MHC and the Bank and their respective successors and the
controlling persons and officers and directors referred to in Sections 6 and 7
and their heirs and legal representatives, any legal or equitable right, remedy
or claim under or in respect of this Agreement or any provision herein or
therein contained. This Agreement and all conditions and provisions
<PAGE>
- 34 -
hereof and thereof are intended to be for the sole and exclusive benefit of the
Agents, the MHC, the Company and the Bank and their respective successors, and
said controlling persons and officers and directors and their heirs and legal
representatives, and for the benefit of no other person, firm or corporation.
SECTION 12. ENTIRE AGREEMENT; AMENDMENT.
This Agreement represents the entire understanding of the parties
hereto with reference to the transactions contemplated hereby and supersedes any
and all other oral or written agreements heretofore made, except for the
engagement letter dated November 20, 1998, by and among Sandler O'Neill, the
Company, the MHC and the Bank, relating to the Agents' providing conversion
agent services to the Company, the MHC and the Bank in connection with the
Conversion. No waiver, amendment or other modification of this Agreement shall
be effective unless in writing and signed by the parties hereto.
SECTION 13. GOVERNING LAW AND TIME.
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York applicable to agreements made and to be
performed in said State without regard to the conflicts of laws provisions
thereof. Unless otherwise noted, specified times of day refer to Eastern time.
SECTION 14. SEVERABILITY.
Any term or provision of this Agreement which is invalid or
unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective
to the extent of such invalidity or unenforceability without rendering invalid
or unenforceable the remaining terms and provisions of this Agreement or
affecting the validity or enforceability of any of the terms or provisions of
this Agreement in any other jurisdiction. If any provision of this Agreement is
so broad as to be unenforceable, the provision shall be interpreted to be only
so broad as is enforceable.
SECTION 15. HEADINGS.
Sections headings are not to be considered part of this Agreement, are
for convenience and reference only, and are not to be deemed to be full or
accurate descriptions of the contents of any paragraph or subparagraph.
<PAGE>
- 35 -
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
between the Agents, the Company and the Bank in accordance with its terms.
Very truly yours,
FIRST FEDERAL BANKSHARES, INC.
By:
----------------------------------
Title:
FIRST FEDERAL BANKSHARES, M.H.C.
By:
----------------------------------
Title:
FIRST FEDERAL SAVINGS BANK OF
SIOUXLAND
By:
----------------------------------
Title:
CONFIRMED AND ACCEPTED, as of the date first above written:
SANDLER O'NEILL & PARTNERS, L.P.
By: Sandler O'Neill & Partners Corp.,
the sole general partner
By:
-----------------------------
Catherine A. Lawton
Vice President
INVESTMENT BANK SERVICES, INC.
By:
-----------------------------
[Name]
[Title]
<PAGE>
Exhibit 2
PLAN OF CONVERSION AND REORGANIZATION
OF
FIRST FEDERAL BANKSHARES, M.H.C.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. INTRODUCTION.............................................................................................1
2. DEFINITIONS..............................................................................................1
3. PROCEDURES FOR CONVERSION................................................................................6
4. HOLDING COMPANY APPLICATIONS AND APPROVALS...............................................................8
5. SALE OF SUBSCRIPTION SHARES..............................................................................8
6. PURCHASE PRICE AND NUMBER OF SUBSCRIPTION SHARES.........................................................8
7. RETENTION OF CONVERSION PROCEEDS BY THE HOLDING COMPANY..................................................9
8. SUBSCRIPTION RIGHTS OF ELIGIBLE ACCOUNT HOLDERS (FIRST PRIORITY).........................................9
9. SUBSCRIPTION RIGHTS OF EMPLOYEE PLANS (SECOND PRIORITY).................................................10
10. SUBSCRIPTION RIGHTS OF SUPPLEMENTAL ELIGIBLE
ACCOUNT HOLDERS (THIRD PRIORITY) ...................................................................10
11. SUBSCRIPTION RIGHTS OF OTHER MEMBERS (FOURTH PRIORITY)..................................................10
12. COMMUNITY OFFERING......................................................................................11
13. SYNDICATED COMMUNITY OFFERING...........................................................................11
14. LIMITATION ON PURCHASES.................................................................................12
15. PAYMENT FOR SUBSCRIPTION SHARES.........................................................................13
16. MANNER OF EXERCISING SUBSCRIPTION RIGHTS THROUGH ORDER FORMS............................................14
17. UNDELIVERED, DEFECTIVE OR LATE ORDER FORM; INSUFFICIENT PAYMENT.........................................15
18. RESIDENTS OF FOREIGN COUNTRIES AND CERTAIN STATES.......................................................15
19. ESTABLISHMENT OF LIQUIDATION ACCOUNT....................................................................16
20. VOTING RIGHTS OF STOCKHOLDERS...........................................................................17
21. RESTRICTIONS ON RESALE OR SUBSEQUENT DISPOSITION........................................................17
22. REQUIREMENTS FOR STOCK PURCHASES BY DIRECTORS AND OFFICERS
FOLLOWING THE CONVERSION................................................................................17
23. TRANSFER OF DEPOSIT ACCOUNTS............................................................................18
24. REGISTRATION AND MARKETING..............................................................................18
</TABLE>
(i)
<PAGE>
<TABLE>
<S> <C>
25. TAX RULINGS OR OPINIONS.................................................................................18
26. STOCK BENEFIT PLANS AND EMPLOYMENT AGREEMENTS...........................................................18
27. RESTRICTIONS ON ACQUISITION OF BANK AND HOLDING COMPANY.................................................19
28. PAYMENT OF DIVIDENDS AND REPURCHASE OF STOCK............................................................19
29. CHARTER AND BYLAWS......................................................................................19
30. CONSUMMATION OF CONVERSION AND EFFECTIVE DATE...........................................................19
31. EXPENSES OF CONVERSION..................................................................................20
32. AMENDMENT OR TERMINATION OF PLAN........................................................................20
33. CONDITIONS TO CONVERSION................................................................................20
34. INTERPRETATION..........................................................................................20
</TABLE>
EXHIBIT A MHC AGREEMENT OF MERGER
EXHIBIT B BANK AGREEMENT OF MERGER
EXHIBIT C AMENDED CHARTER OF FIRST FEDERAL SAVINGS BANK OF
SIOUXLAND
EXHIBIT D CERTIFICATE OF INCORPORATION OF THE HOLDING COMPANY
EXHIBIT E BYLAWS OF HOLDING COMPANY
(ii)
<PAGE>
PLAN OF CONVERSION AND REORGANIZATION OF
FIRST FEDERAL BANKSHARES, M.H.C.
1. INTRODUCTION
This Plan of Conversion and Reorganization (the "Plan") provides for the
conversion of First Federal Bankshares, M.H.C. (the "Mutual Holding Company")
into First Federal Bankshares, Inc., a capital stock corporation organized under
Delaware law (the "Holding Company"). The Mutual Holding Company currently owns
a majority of the common stock of First Federal Savings Bank of Siouxland (the
"Bank"), a federal stock savings bank which is headquartered in Sioux City,
Iowa. The purpose of the Conversion is to convert the Mutual Holding Company to
the capital stock form of organization, which will provide the Holding Company
and the Bank with greater flexibility and capital resources to respond to
changing regulatory and market conditions and to effect corporate transactions,
including mergers and acquisitions. One of the specific purposes of the
Conversion is to enable the Bank to acquire Mid-Iowa Financial Corp. ("Mid-Iowa
Financial"), a Delaware-chartered holding company and parent of Mid-Iowa Savings
Bank, FSB ("Mid-Iowa Savings"), a federal stock savings bank. Pursuant to an
Agreement and Plan of Reorganization dated August 17, 1998 by and between the
Mutual Holding Company, the Bank, Mid-Iowa Financial and Mid-Iowa Savings, the
Bank will acquire Mid-Iowa Savings and each outstanding share of Mid-Iowa
Financial common stock will be converted into the right to receive $15 in cash.
The Conversion will generate capital to support the acquisition of Mid-Iowa
Financial. The Holding Company will offer its Common Stock upon the terms and
conditions set forth herein to Eligible Account Holders, the Employee Plans
established by the Bank or the Holding Company, Supplemental Eligible Account
Holders and Other Members in the respective priorities set forth in this Plan.
Any Subscription Shares not subscribed for by the foregoing classes of persons
will be offered for sale to certain members of the public directly by the
Holding Company through a Community Offering or a Syndicated Community Offering
or through an underwritten firm commitment public offering, or through a
combination thereof. As part of the Conversion, each Minority Stockholder will
receive Common Stock of the Holding Company in exchange for Minority Shares. The
Conversion will result in the voting interests of the Mutual Holding Company's
members being transferred to persons who purchase Subscription Shares in the
Offering and persons who exchange common stock of the Bank for Common Stock of
the Holding Company. The Conversion will have no impact on depositors, borrowers
or customers of the Bank. After the Conversion, the Bank will continue to be
regulated by the OTS as its chartering authority. The Bank also will continue to
be a member of the Federal Home Loan Bank System and all its insured savings
deposits will continue to be insured by the FDIC to the full extent provided by
applicable law.
This Plan has been adopted by the Board of Directors of the Mutual Holding
Company, and must also be approved by (i) a majority of the total number of
votes entitled to be cast by Voting Members of the Mutual Holding Company at a
Special Meeting of Members to be called for that purpose, and (ii) at least
two-thirds of the outstanding common stock of the Bank at the Special Meeting of
Stockholders, including at least a majority of the votes cast, in person or by
proxy, by the Minority Stockholders. Prior to the submission of this Plan to the
Voting Members and stockholders of the Bank for consideration, this Plan must be
approved by the OTS.
2. DEFINITIONS
For the purposes of this Plan, the following terms have the following
meanings:
Account Holder - Any Person holding a Deposit Account in the Bank.
Acting in Concert - The term Acting in Concert means (i) knowing
participation in a joint activity or interdependent conscious parallel action
towards a common goal whether or not pursuant to an express agreement; or (ii) a
combination or pooling of voting or other interests in the securities of an
issuer for a common purpose pursuant to any contract, understanding,
relationship, agreement or other arrangement, whether written or otherwise. A
person or company which acts in concert with another person or company ("other
party") shall also be deemed to
<PAGE>
be acting in concert with any person or company who is also acting in concert
with that other party, except that any tax-qualified employee stock benefit plan
will not be deemed to be acting in concert with its trustee or a person who
serves in a similar capacity solely for the purpose of determining whether stock
held by the trustee and stock held by the plan will be aggregated.
Actual Purchase Price - The per share price at which the Common Stock is
ultimately sold in accordance with the terms hereof.
Adjusted Majority Ownership Interest - The percentage of the Common Stock
of the Bank owned by the Mutual Holding Company as adjusted to reflect the MHC
Assets Adjustment.
Adjusted Minority Ownership Interest - The Minority Ownership Interest as
adjusted by the MHC Assets Adjustment.
Affiliate - Any person that controls, is controlled by, or is under common
control with another person.
Associate - The term Associate when used to indicate a relationship with
any person, means (i) any corporation or organization (other than the Holding
Company, the Bank or a majority-owned subsidiary of the Bank) of which such
person is an officer or partner or is, directly or indirectly, the beneficial
owner of 10% or more of any class of equity securities, (ii) any trust or other
estate in which such person has a substantial beneficial interest or as to which
such person serves as trustee or in a similar fiduciary capacity, except that
for the purposes of Sections 8 through 15, the term "Associate" does not include
any Non-Tax-Qualified Employee Stock Benefit Plan or any Tax-Qualified Employee
Stock Benefit Plan in which a person has a substantial beneficial interest or
serves as a trustee or in a similar fiduciary capacity, and except that, for
purposes of aggregating total shares that may be held by Officers and Directors
the term "Associate" does not include any Tax-Qualified Employee Stock Benefit
Plan, and (iii) any relative or spouse of such person, or any relative of such
spouse, who has the same home as such person or who is a Director or Officer of
the Bank or the Holding Company, or any of its parents or subsidiaries.
Bank - First Federal Savings Bank of Siouxland, Sioux City, Iowa.
Bank Merger - The merger of the Interim Savings Bank with the Bank as set
forth in this Plan.
Code - The Internal Revenue Code of 1986, as amended.
Common Stock - The common stock, par value $.01 per share, of the Holding
Company.
Community - The State of Iowa, the Nebraska counties of Dakota, Dixon,
Thurston, Cedar and Wayne, and the South Dakota counties of Union, Clay,
Yankton, Lincoln and Turner.
Community Offering - The offering for sale to certain members of the
general public directly by the Holding Company of any shares not subscribed for
in the Subscription Offering.
Control (including the terms "controlled by", "controlling" and "under
common control with") - The possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of a Person, whether
through the ownership of voting securities, by contract or otherwise.
Conversion - The conversion and reorganization of the Mutual Holding
Company to stock form pursuant to this Plan, and all steps incident or necessary
thereto, including the MHC Merger, the Share Exchange and the Offering.
Conversion Stock - The Subscription Shares and the Exchange Shares issued
in the Conversion.
2
<PAGE>
Deposit Account - The term Deposit Account means any withdrawable account
as defined in Section 561.42 of the Rules and Regulations of the OTS, and shall
include all demand deposit accounts and certificates of deposit.
Director - A member of the Board of Directors of the Bank, the Holding
Company or the Mutual Holding Company, as appropriate in the context.
Eligible Account Holder - Any Person holding a Qualifying Deposit on the
Eligibility Record Date for purposes of determining subscription rights and
establishing subaccount balances in the Liquidation Account.
Eligibility Record Date - The date for determining Eligible Account Holders
of the Bank which is September 30, 1997.
Employees - All Persons who are employed by the Bank or any subsidiary of
the Bank, or the Mutual Holding Company.
Employee Plans - Any Tax-Qualified Employee Stock Benefit Plan of the Bank,
including the ESOP.
ESOP - An Employee Stock Ownership Plan and related trust established by
the Bank or the Holding Company.
Estimated Valuation Range - The range of the estimated consolidated pro
forma market value of the Holding Company, which shall also be equal to the
estimated pro forma market value of the total number of shares of Conversion
Stock to be issued in the Conversion, as determined by the Independent Appraiser
prior to the Subscription Offering and as it may be amended from time to time
thereafter. The maximum and minimum of the Estimated Valuation Range will vary
within 15% above and 15% below, respectively, the midpoint of the Estimated
Valuation Range.
Exchange Ratio - The rate at which shares of Holding Company Common Stock
are exchanged for Minority Shares upon consummation of the Conversion. The
Exchange Ratio shall be determined as of the closing of the Conversion and shall
be the ratio that will result in the Minority Stockholders owning in the
aggregate the same percentage of the outstanding shares of Common Stock of the
Holding Company immediately upon completion of the Conversion as the percentage
of Bank common stock owned by them in the aggregate immediately prior to the
consummation of the Conversion, before giving effect to (i) the payment of cash
in lieu of issuing fractional shares of Holding Company Common Stock, (ii) the
MHC Assets Adjustment, and (iii) any shares of Common Stock purchased by the
Minority Stockholders in the Conversion.
Exchange Shares - Shares of Common Stock, par value $.01 per share, of the
Holding Company issued to Minority Stockholders in exchange for Minority Shares.
FDIC - The Federal Deposit Insurance Corporation.
Holding Company - The Delaware (or other state) corporation formed for the
purpose of acquiring all of the shares of capital stock of the Bank in
connection with the Conversion. Shares of Common Stock of the Holding Company
will be issued in the Conversion to Participants and others in the Conversion.
Independent Appraiser - The appraiser retained by the Mutual Holding
Company and the Bank to prepare an appraisal of the pro forma market value of
the Conversion Stock.
Independent Valuation - The estimated pro forma market value of the Holding
Company and the Bank as determined by the Independent Appaiser.
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Interim Savings Bank - One or more interim savings bank subsidiaries of the
Bank or the Holding Company established by the Bank or the Holding Company to
effect the Conversion.
Liquidation Account - The account established for Eligible Account Holders
and Supplemental Eligible Account Holders as set forth in this Plan pursuant to
12 C.F.R. ss.563b.3(f) and OTS policy.
Member - Any Person or entity who qualifies as a member of the Mutual
Holding Company pursuant to its charter and bylaws.
MHC Assets Adjustment - The adjustment to the number of shares of Common
Stock issued in the Conversion to Minority Stockholders in exchange for their
shares of Bank common stock to reflect the market value of assets of the Mutual
Holding Company other than common stock of the Bank, which adjustment shall be
made by multiplying the Minority Ownership Interest by a fraction, (i) the
numerator of which is the pro forma market value of the Holding Company less the
market value of assets of the Holding Company other than the Bank common stock,
and (ii) the denominator of which is the pro forma market value of the Holding
Company.
MHC Merger - The merger of the Mutual Holding Company with the Bank as set
forth in this Plan.
Minority Ownership Interest - The percentage of the Bank's common stock
held by stockholders other than the Mutual Holding Company immediately prior to
the completion of the Conversion.
Minority Shares - Any outstanding common stock of the Bank, or shares of
common stock of the Bank issuable upon the exercise of options or grant of stock
awards, held by persons other than the Mutual Holding Company.
Minority Stockholder - Any owner of Minority Shares immediately prior to
the closing of the Conversion.
Mutual Holding Company - First Federal Bankshares, M.H.C., the mutual
holding company of the Bank.
OTS - The Office of Thrift Supervision of the Department of the Treasury or
any successor thereto.
Offering - The offering for sale, pursuant to this Plan, of Common Stock in
a Subscription Offering, Community Offering, and Syndicated Community Offering
(or underwritten public offering), as the case may be. The term "Offering" does
not include the Common Stock of the Holding Company issued in exchange for
Minority Shares pursuant to this Plan.
Offering Range - The aggregate purchase price of the Common Stock to be
sold in the Offering based on the Independent Valuation expressed as a range
which may vary within 15% above or 15% below the midpoint of such range, with a
possible adjustment by up to 15% above the maximum of such range. The Offering
Range will be equal to the Estimated Valuation Range multiplied by the Adjusted
Minority Ownership Interest.
Officer - An executive officer of the Bank or the Mutual Holding Company as
appropriate in the context, which includes the Chief Executive Officer,
President, Senior Vice Presidents, Vice President in charge of principal
business functions, Secretary and Controller and any Person performing functions
similar to those performed by the foregoing persons.
Order Form - Any form (together with any attached cover letter and/or
certifications or acknowledgments), sent by the Bank to any Participant or
Person containing among other things a description of the alternatives available
to such Person under this Plan and by which any such Person may make elections
regarding subscriptions for Conversion Stock in the Subscription Offering.
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Other Member - Any Member on the Voting Record Date who is not an Eligible
Account Holder or Supplemental Eligible Account Holder.
Participant - Any Eligible Account Holder, Employee Plan, Supplemental
Eligible Account Holder or Other Member.
Person - An individual, a corporation, a partnership, an association, a
joint-stock company, a trust (including Individual Retirement Accounts and KEOGH
Accounts), any unincorporated organization, a government or political
subdivision thereof or any other entity.
Plan - This Plan of Conversion and Reorganization of the Mutual Holding
Company, including the MHC Merger and the Bank Merger, as it exists on the date
hereof and as it may hereafter be amended in accordance with its terms.
Prospectus - The one or more documents used in offering the Conversion
Stock.
Qualifying Deposit - The aggregate balance of all Deposit Accounts in the
Bank of (i) an Eligible Account Holder at the close of business on the
Eligibility Record Date, provided such aggregate balance is not less than $50,
and (ii) a Supplemental Eligible Account Holder at the close of business on the
Supplemental Eligibility Record Date, provided such aggregate balance is not
less than $50.
Recognition Plans - The Bank's Recognition and Retention Plans and related
trusts adopted by the Board of Directors of the Bank and/or the Holding Company.
Resident - Any Person who occupies a dwelling within the Community, has a
present intent to remain within the Community for a period of time, and
manifests the genuineness of that intent by establishing an ongoing physical
presence within the Community together with an indication that such presence
within the Community is something other than merely transitory in nature. To the
extent the Person is a corporation or other business entity, the principal place
of business or headquarters shall be in the Community. To the extent a Person is
a personal benefit plan, the circumstances of the beneficiary shall apply with
respect to this definition. In the case of all other benefit plans,
circumstances of the trustee shall be examined for purposes of this definition.
The Bank may utilize deposit or loan records or such other evidence provided to
it to make a determination as to whether a Person is a resident. In all cases,
however, such a determination shall be in the sole discretion of the Bank. A
Participant must be a "Resident" for purposes of determining whether such Person
"resides" in the Community as such term is used in this Plan.
SEC - The Securities and Exchange Commission.
Share Exchange - The Exchange of Minority Shares for Holding Company Common
Stock in the Conversion.
Special Meeting of Members - The special meeting of members of the Mutual
Holding Company and any adjournments thereof held to consider and vote upon this
Plan.
Special Meeting of Stockholders - The special meeting of stockholders of
the Bank and any adjournments thereof held to consider and vote upon this Plan.
Subscription Offering - The offering of Subscription Shares to
Participants.
Subscription Price - The price per share of Subscription Shares to be paid
by Participants in the Subscription Offering and Persons in the Community
Offering.
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Subscription Shares - The $.01 par value common stock offered and issued by
the Holding Company in the Offering. Subscription Shares do not include shares
of Common Stock issued in exchange for Minority Shares in the Share Exchange.
Supplemental Eligible Account Holder - Any Person, other than Directors and
Officers of the Bank and their Associates, holding a Qualifying Deposit on the
Supplemental Eligibility Record Date, who is not an Eligible Account Holder.
Supplemental Eligibility Record Date - The date for determining
Supplemental Eligible Account Holders, which shall be the last day of the
calendar quarter preceding OTS approval of the application for conversion.
Syndicated Community Offering - The offering of Subscription Shares
following the Subscription and Community Offerings through a syndicate of
broker-dealers.
Tax-Qualified Employee Stock Benefit Plan - Any defined benefit plan or
defined contribution plan, such as an employee stock ownership plan, stock bonus
plan, profit-sharing plan or other plan, which, with its related trust, meets
the requirements to be "qualified" under Section 401 of the Internal Revenue
Code. The Bank may make scheduled discretionary contributions to a tax-qualified
employee stock benefit plan, provided such contributions do not cause the Bank
to fail to meet its regulatory capital requirement. A "Non-Tax-Qualified
Employee Stock Benefit Plan" is any defined benefit plan or defined contribution
plan which is not so qualified.
Voting Member - Any Person who at the close of business on the Voting
Record Date is entitled to vote as a member of the Mutual Holding Company
pursuant to its charter and bylaws.
Voting Record Date - The date fixed by the Directors in accordance with OTS
regulations for determining eligibility to vote at the Special Meeting of
Members and/or the Special Meeting of Stockholders.
3. PROCEDURES FOR CONVERSION
A. After approval of the Plan by the Board of Directors of the Bank and the
Mutual Holding Company, the Plan and all other necessary information will be
submitted to the OTS for its approval. Notice of the adoption of the Plan and
all other necessary information by the Board of Directors of the Bank and the
Mutual Holding Company and the submission of the Plan to the OTS for its
approval will be published in a newspaper having general circulation in each
community in which an office of the Bank is located, and copies of the Plan will
be made available at each office of the Bank for inspection by the Members. Upon
receipt of notice from the OTS to do so, the Mutual Holding Company also will
cause to be published a notice of the filing with the OTS of an application to
convert in accordance with the provisions of the Plan.
B. Promptly following approval by the OTS, the Plan will be submitted to a
vote of (i) the Voting Members, at the Special Meeting of Members, and (ii) the
stockholders of the Bank at the Special Meeting of Stockholders. The Mutual
Holding Company will mail to all Members as of the Voting Record Date, at their
last known address appearing on the records of the Bank, a proxy statement in
either long or summary form describing the Plan which will be submitted to a
vote of the Members at the Special Meeting of Members. The Mutual Holding
Company will also mail to all Participants either a Prospectus and Order Form
for the purchase of Subscription Shares or a letter informing them of their
right to receive a Prospectus and Order Form and a postage prepaid card to
request such materials, subject to the provisions of Sections 16 through 18 of
the Plan. In addition, all Participants will receive, or be given the
opportunity to request by either returning a postage prepaid card which will be
distributed with the proxy statement or by letter addressed to the Bank's
Secretary, a copy of the Plan as well as the certificate of incorporation or
bylaws of the Holding Company. Upon approval of the Plan by (i) a majority of
the total number of votes eligible to be cast by the Voting Members, (ii) at
least two-thirds of the outstanding common stock of the Bank, and (iii) a
majority vote of Minority Stockholders present in person or by proxy, the Mutual
Holding Company, the Holding Company and the Bank will take all other necessary
steps pursuant to applicable laws and regulations to
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consummate the Conversion and Offering. The Conversion must be completed within
24 months of the approval of this Plan by the Voting Members, unless a longer
time period is permitted by governing laws and regulations.
C. The Conversion will be effected as follows, or in any other manner
approved by the OTS which is consistent with the purposes of this Plan and
applicable laws and regulations. The choice of which method to use to effect the
Conversion will be made by the Board of Directors of the Mutual Holding Company
immediately prior to the closing of the Conversion. Each of the steps set forth
below shall be deemed to occur in such order as is necessary to consummate the
Conversion pursuant to (i) the Plan, (ii) the intent of the Board of Directors
of the Mutual Holding Company and the Bank, and (iii) OTS regulations. Approval
of this Plan by the Members and stockholders of the Bank shall also constitute
approval of each of the conditions to the implementation of this Plan, including
the Bank Merger and the MHC Merger, as discussed herein.
1. The Bank will organize the Holding Company (which will become the
stock holding company of the Bank) as a first-tier subsidiary of the
Bank.
2. The Holding Company will organize Interim Savings Bank as a
wholly-owned subsidiary of the Holding Company.
3. The Mutual Holding Company will convert into an interim federal stock
savings association and will simultaneously merge with and into the
Bank (the "MHC Merger") pursuant to the Agreement of Merger attached
hereto as Exhibit A between the Mutual Holding Company and the Bank,
whereby the shares of Bank common stock held by the Mutual Holding
Company will be canceled and each Eligible Account Holder and
Supplemental Eligible Account Holder will receive an interest in the
Liquidation Account of the Bank in exchange for such Member's interest
in the Mutual Holding Company.
4. Interim Savings Bank will merge with and into the Bank (the "Bank
Merger") with the Bank as the resulting entity pursuant to the
Agreement of Merger attached hereto as Exhibit B between the Bank, the
Holding Company and the Interim Savings Bank, whereby each Minority
Stockholder shall receive Common Stock of the Holding Company in
exchange for Minority Shares, based on the Exchange Ratio, with cash
paid in lieu of fractional shares based upon the Actual Purchase
Price.
5. All of the shares of common stock of Interim Savings Bank held by the
Holding Company shall be converted into shares of common stock of the
Bank.
6. Contemporaneously with the Bank Merger, the Holding Company will offer
for sale in the Offering Subscription Shares representing the pro
forma market value of the Holding Company immediately prior to the
Conversion.
D. As part of the Conversion, each of the Minority Shares shall
automatically, without further action of the holder thereof, be converted into
and become the right to receive Common Stock of the Holding Company based upon
the Exchange Ratio established by the Board of Directors of the Holding Company
and the Bank, subject to OTS approval. The basis for exchange of Minority Shares
for Common Stock of the Holding Company shall be fair and reasonable. Options to
purchase shares of Bank common stock which are outstanding immediately prior to
the consummation of the Conversion shall be converted into options to purchase
shares of Holding Company Common Stock, with the number of shares subject to the
option and the exercise price per share to be adjusted based upon the Exchange
Ratio so that the aggregate exercise price remains unchanged, and with the
duration of the option remaining unchanged.
E. Concurrently with the filing of the Conversion Application with the OTS,
the Holding Company will register the Conversion Stock with the SEC and any
appropriate state securities authorities. In addition, if required by applicable
law and regulations, the Board of Directors of the Bank will prepare preliminary
proxy
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materials as well as other applications and information for review by the OTS in
connection with the solicitation of stockholder and member approval of the Plan.
F. The Charter of the Bank will be amended upon consummation of the
Conversion to reflect the establishment of the Liquidation Account. The Charter,
as amended, will read in the form of Exhibit C. The Bylaws of the Bank shall be
unaffected by the Conversion.
G. The home office and branch offices of the Bank will be unaffected by the
Conversion. The executive offices of the Holding Company will be located at the
current offices of the Mutual Holding Company.
4. HOLDING COMPANY APPLICATIONS AND APPROVALS
The Board of Directors of the Holding Company and the Bank will take all
necessary steps to convert the Mutual Holding Company to stock form, form the
Holding Company and complete the Offering. The Holding Company shall make timely
applications for any requisite regulatory approvals, including an Application on
Form AC and a Holding Company Application on Form H-(e)1 or H-(e)1-S, to be
filed with the OTS and a Registration Statement on Form S-1 to be filed with the
SEC.
5. SALE OF SUBSCRIPTION SHARES
The Subscription Shares will be offered simultaneously in the Subscription
Offering to the Participants in the respective priorities set forth in Sections
8 through 12. The Subscription Offering may begin as early as the mailing of the
Proxy Statement for the Special Meeting of Members. The Common Stock will not be
insured by the FDIC. The Bank will not knowingly lend funds or otherwise extend
credit to any Person to purchase shares of the Common Stock.
Any shares of Common Stock not subscribed for in the Subscription Offering
will be offered for sale in the Community Offering as provided in Section 12.
The Subscription Offering may begin prior to the Special Meeting of Members and,
in that event, the Community Offering may also begin prior to the Special
Meeting of Members. The offer and sale of Common Stock prior to the Special
Meeting of Members, however, will be subject to the approval of this Plan by the
Voting Members and stockholders of the Bank.
If feasible, any shares of Common Stock remaining after the Subscription
and Community Offerings, will be sold in a Syndicated Community Offering in a
manner that will achieve the widest distribution of the Common Stock. The sale
of all Common Stock subscribed for in the Subscription and Community Offerings
will be consummated simultaneously on the date the sale of Common Stock in the
Syndicated Community Offering is consummated and only if all unsubscribed for
Common Stock is sold.
6. PURCHASE PRICE AND NUMBER OF SUBSCRIPTION SHARES
The total number of shares (or a range thereof) of Common Stock to be
issued and offered in the Conversion will be determined jointly by the Boards of
Directors of the Bank and of the Holding Company immediately prior to the
commencement of the Subscription and Community Offerings and will be based on
the Estimated Valuation Range divided by the Subscription Price. The Offering
Range will be equal to the Estimated Valuation Range multiplied by the Minority
Ownership Interest. The estimated pro forma consolidated market value of the
Holding Company will be subject to adjustment if necessitated by market or
financial conditions, with the approval of the OTS, if necessary, and the
maximum of the Estimated Valuation Range may be increased by up to 15%
subsequent to the commencement of the Subscription and Community Offerings to
reflect changes in market and financial conditions. The number of shares of
Conversion Stock issued in the Conversion will be equal to the estimated pro
forma market value of the Holding Company, as may be amended, divided by the
Subscription Price, and the number of Subscription Shares sold in the Offering
will be equal to the product of (i) the estimated pro forma consolidated market
value of the Holding Company, as may be amended, divided by the Subscription
Price, and (ii) the Adjusted Majority Ownership Interest.
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All shares sold in the Offering will be sold at a uniform price per share
referred to in this Plan as the Subscription Price. The estimated consolidated
pro forma market value of the Holding Company will be determined for such
purpose by the Independent Appraiser. Prior to the commencement of the
Subscription and Community Offerings, an Estimated Valuation Range will be
established, which range will vary within 15% above to 15% below the midpoint of
such range. The number of shares of Common Stock to be issued and the purchase
price per share may be increased or decreased by the Holding Company. In the
event that the aggregate purchase price of the Common Stock is below the minimum
of the Estimated Valuation Range, or materially above the maximum of the
Estimated Valuation Range, resolicitation of purchasers may be required,
provided that up to a 15% increase above the maximum of the Estimated Valuation
Range will not be deemed material so as to require a resolicitation. Any such
resolicitation shall be effected in such manner and within such time as the Bank
shall establish, with the approval of the OTS if required.
Notwithstanding the foregoing, no sale of Common Stock may be consummated
unless, prior to such consummation, the Independent Appraiser confirms to the
Holding Company and to the OTS that, to the best knowledge of the Independent
Appraiser, nothing of a material nature has occurred which, taking into account
all relevant factors, would cause the Independent Appraiser to conclude that the
number of shares of Conversion Sock issued in the Conversion multiplied by the
Subscription Price is incompatible with its estimate of the aggregate
consolidated pro forma market value of the Holding Company. An increase in the
aggregate value of the Conversion Stock by up to 15% above the maximum of the
Estimated Valuation Range would not be deemed to be material. If such
confirmation is not received, the Holding Company may cancel the Subscription
and Community Offerings and/or the Syndicated Community Offering, extend the
Conversion, establish a new Subscription Price and/or Estimated Valuation Range,
extend, reopen or hold new Subscription and Community Offerings and/or
Syndicated Community Offering or take such other action as the OTS may permit.
The Common Stock to be issued in the Conversion shall be fully paid and
nonassessable.
7. RETENTION OF CONVERSION PROCEEDS BY THE HOLDING COMPANY
Upon the consummation of the sale of all of the Common Stock and the
issuance of Exchange Shares to Minority Stockholders, the Holding Company will
own all of the capital stock of the Bank. The Holding Company will apply to the
OTS to retain up to 50% of the proceeds of the Offering. The Offering proceeds
will provide economic strength to the Holding Company and the Bank and may
facilitate the possible expansion of the Bank through acquisitions of other
financial service organizations and possible diversification into other related
businesses. The Offering proceeds also may be used by the Holding Company for
other business and investment purposes, including the possible payment of
dividends and future repurchases of the Common Stock as permitted by the OTS.
8. SUBSCRIPTION RIGHTS OF ELIGIBLE ACCOUNT HOLDERS (FIRST PRIORITY)
A. Each Eligible Account Holder shall receive, without payment,
nontransferable subscription rights to subscribe in the Subscription Offering
for the greater of 85,000 Subscription Shares, .10% of the total offering of
shares, or 15 times the product (rounded down to the next whole number) obtained
by multiplying the aggregate number of Exchange Shares and Subscription Shares
issued in the Conversion by a fraction of which the numerator is the amount of
the Eligible Account Holder's Qualifying Deposit and the denominator is the
total amount of Qualifying Deposits of all Eligible Account Holders, in each
case on the Eligibility Record Date, subject to the purchase limitations of
Section 14.
B. In the event that Eligible Account Holders exercise subscription rights
for a number of Subscription Shares in excess of the total number of such shares
eligible for subscription, the Subscription Shares shall be allocated among the
subscribing Eligible Account Holders so as to permit each subscribing Eligible
Account Holder, to the extent possible, to purchase a number of shares
sufficient to make his or her total allocation of Subscription Shares equal to
the lesser of 100 shares or the number of shares subscribed for by the Eligible
Account Holder. Any
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shares remaining after that allocation will be allocated among the subscribing
Eligible Account Holders whose subscriptions remain unsatisfied in the
proportion that the amount of the Qualifying Deposit of each Eligible Account
Holder whose subscription remains unsatisfied bears to the total amount of the
Qualifying Deposits of all Eligible Account Holders whose subscriptions remain
unsatisfied. If the amount so allocated exceeds the amount subscribed for by any
one or more Eligible Account Holders, the excess shall be reallocated (one or
more times as necessary) among those Eligible Account Holders whose
subscriptions are still not fully satisfied on the same principle until all
available shares have been allocated.
C. Subscription rights as Eligible Account Holders received by Directors
and Officers and their Associates which are based on increased deposits in the
Bank made by such persons during the 12 months preceding the Eligibility Record
Date shall be subordinated to the subscription rights of all other Eligible
Account Holders.
9. SUBSCRIPTION RIGHTS OF EMPLOYEE PLANS (SECOND PRIORITY)
At the discretion of the Board of Directors of the Bank, the Employee Plans
of the Holding Company and the Bank shall receive, without payment, subscription
rights to purchase in the aggregate up to 8% of the Common Stock offered in the
Subscription Offering, including any shares of Common Stock to be issued in the
Subscription Offering as a result of an increase in the Estimated Valuation
Range after commencement of the Subscription Offering and prior to completion of
the Conversion. Consistent with applicable laws and regulations and practices
and policies of the OTS, the Employee Plans may use funds contributed by the
Holding Company or the Bank and/or borrowed from an independent financial
institution to exercise such subscription rights, and the Holding Company and
the Bank may make scheduled discretionary contributions thereto, provided that
such contributions do not cause the Holding Company or the Bank to fail to meet
any applicable regulatory capital requirements. The Employee Plans shall not be
deemed to be Associates or Affiliates of or Persons Acting in Concert with any
Director or Officer of the Holding Company or the Bank.
10. SUBSCRIPTION RIGHTS OF SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS (THIRD
PRIORITY)
A. Each Supplemental Eligible Account Holder shall receive, without
payment, nontransferable subscription rights to subscribe in the Subscription
Offering for the greater of 85,000 Subscription Shares, .10% of the total
offering of shares, or 15 times the product (rounded down to the next whole
number) obtained by multiplying the aggregate number of Exchange Shares and
Subscription Shares issued in the Conversion by a fraction of which the
numerator is the amount of the Supplemental Eligible Account Holder's Qualifying
Deposit and the denominator is the total amount of Qualifying Deposits of all
Supplemental Eligible Account Holders, in each case on the Supplemental
Eligibility Record Date, subject to the availability of sufficient shares after
filling in full all subscription orders of the Eligible Account Holders under
Section 8 and, at the discretion of the Board of Directors, the Employee Plans
under Section 9, and to the purchase limitations specified in Section 14.
B. In the event that Supplemental Eligible Account Holders exercise
Subscription Rights for a number of Subscription Shares in excess of the total
number of such shares eligible for subscription, the Subscription Shares shall
be allocated among the subscribing Supplemental Eligible Account Holders so as
to permit each such subscribing Supplemental Eligible Account Holder, to the
extent possible, to purchase a number of shares sufficient to make his or her
total allocation of Subscription Shares equal to the lesser of 100 shares or the
number of shares subscribed for by each such Supplemental Eligible Account
Holder. Any shares remaining after that allocation will be allocated among the
subscribing Supplemental Eligible Account Holders whose subscriptions remain
unsatisfied in the proportion that the amount of the Qualifying Deposit of each
such Supplemental Eligible Account Holder bears to the total amount of the
Qualifying Deposits of all Supplemental Eligible Account Holders whose
subscriptions remain unsatisfied. If the amount so allocated exceeds the amount
subscribed for by any one or more Supplemental Eligible Account Holders, the
excess shall be reallocated (one or more times as necessary) among those
Supplemental Eligible Account Holders whose subscriptions are still not fully
satisfied on the same principle until all available shares have been allocated
or all subscriptions satisfied.
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11. SUBSCRIPTION RIGHTS OF OTHER MEMBERS (FOURTH PRIORITY)
A. Each Other Member shall receive, without payment, nontransferable
subscription rights to subscribe in the Subscription Offering for the greater of
85,000 Subscription Shares, or .10% of the total offering of shares, subject to
the purchase limitations specified in Section 14.
B. In the event that such Other Members subscribe for a number of
Subscription Shares which, when added to the Subscription Shares subscribed for
by the Eligible Account Holders, Employee Plans and Supplemental Eligible
Account Holders, is in excess of the total number of Subscription Shares being
issued, the subscriptions of such Other Members will be allocated to those Other
Members residing in the Community in proportion to the amounts of their relative
subscriptions and thereafter to those Other Members not residing in the
Community.
12. COMMUNITY OFFERING
If less than the total number of shares of Common Stock to be subscribed
for in the Offering are sold in the Subscription Offering, shares remaining
unsubscribed for will be made available for purchase in the Community
Offering to certain members of the general public, which may subscribe
together with any Associate or group of persons Acting in Concert for up to
85,000 Subscription Shares, subject to the purchase limitations specified in
Section 14. The shares may be made available in the Community Offering
through a direct community marketing program which may provide for
utilization of a broker, dealer, consultant or investment banking firm
experienced and expert in the sale of savings institutions securities. Such
entities may be compensated on a fixed fee basis or on a commission basis, or
a combination thereof. Shares offered in the Community Offering will be
available for purchase by the general public with preference given first to
Minority Stockholders, and then to natural persons residing in the Community
(such natural persons referred to as the "Preferred Subscribers"). Any excess
of shares will be available for purchase by the general public. The Holding
Company shall make distribution of the Subscription Shares to be sold in the
Community Offering in such a manner as to promote a wide distribution of
Common Stock. The Holding Company reserves the right to reject any or all
orders in whole or in part, which are received in the Community Offering. The
number of Subscription Shares that any person may purchase in the Community
Offering shall not exceed the purchase limitations specified in Section 14.
Subject to the foregoing, if the amount of stock remaining is insufficient
to fill the orders of Preferred Subscribers, such stock will be allocated among
the Preferred Subscribers in the manner that permits each such person, to the
extent possible, to purchase the number of shares necessary to make his total
allocation of Common Stock equal to the lesser of 100 shares offered or the
number of shares subscribed for by each such Preferred Subscriber; provided that
if there are insufficient shares available for such allocation, then shares will
be allocated among Preferred Subscribers whose orders remain unsatisfied in the
proportion that the unfilled subscription of each bears to the total unfilled
subscriptions of all Preferred Subscribers whose subscription remain
unsatisfied. If all orders of Preferred Subscribers are filled, any shares
remaining will be allocated to other persons who purchase in the Community
Offering applying the same allocation described above for Preferred Subscribers.
The Bank may establish all other terms and conditions of such offer. It is
expected that the Community Offering will commence concurrently with the
Subscription Offering. The Community Offering must be completed within 45 days
after the completion of the Subscription Offering unless otherwise extended by
the OTS.
13. SYNDICATED COMMUNITY OFFERING
If feasible, the Board of Directors may determine to offer all Subscription
Shares not subscribed for in the Subscription and Community Offerings in a
Syndicated Community Offering, subject to such terms, conditions and procedures
as may be determined by the Holding Company, in a manner that will achieve the
widest distribution of the Common Stock subject to the right of the Bank to
accept or reject in whole or in part any subscriptions in the
Syndicated Community Offering. In the Syndicated Community Offering, any person
together with any Associate or group of Persons acting in concert may purchase a
number of Subscription Shares that when combined with Exchange Shares received
by such person, together with any Associate or group of Persons acting in
concert is equal to 85,000 shares, subject to the purchase limitations specified
in Section 14 and provided, however, that the shares
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purchased by any Person together with an Associate or group of Persons acting in
concert pursuant to Section 12 shall be counted toward meeting the maximum
purchase limitation found in this Section 13. Provided that the Subscription
Offering has commenced, the Bank may commence the Syndicated Community Offering
at any time after the mailing to the Members of the Proxy Statement to be used
in connection with the Special Meeting of Members, provided that the completion
of the offer and sale of the Subscription Shares shall be conditioned upon the
approval of this Plan by the Voting Members. If the Syndicated Community
Offering is not sooner commenced pursuant to the provisions of the preceding
sentence, the Syndicated Community Offering will be commenced as soon as
practicable following the date upon which the Subscription and Community
Offerings terminate.
Alternatively, if a Syndicated Community Offering is not held, the Bank
shall have the right to sell any Subscription Shares remaining following the
Subscription and Community Offerings in an underwritten firm commitment public
offering. The provisions of Section 14 shall not be applicable to sales to
underwriters for purposes of such an offering but shall be applicable to the
sales by the underwriters to the public. The price to be paid by the
underwriters in such an offering shall be equal to the Subscription Price less
an underwriting discount to be negotiated among such underwriters and the Bank,
which will in no event exceed an amount deemed to be acceptable by the OTS.
If for any reason a Syndicated Community Offering or an underwritten firm
commitment public offering of shares of Subscription Shares not sold in the
Subscription and Community Offerings cannot be effected, or in the event that
any insignificant residue of shares of Subscription Shares is not sold in the
Subscription and Community Offerings or in the Syndicated Community or
underwritten firm commitment public offering, other arrangements will be made
for the disposition of unsubscribed shares by the Bank, if possible. Such other
purchase arrangements will be subject to the approval of the OTS.
14. LIMITATION ON PURCHASES
The following limitations shall apply to all purchases of shares of
Subscription Shares:
A. The maximum number of Subscription Shares which may be subscribed for or
purchased in all categories in the Offering by any Person or Participant
together with any Associate or group of Persons Acting in Concert shall not
exceed 85,000 shares, except for the Employee Plans which may subscribe for up
to 8% of the Common Stock offered in the Subscription Offering (including shares
issued in the event of an increase in the Estimated Valuation Range of 15%);
provided, however, that, in the event the maximum purchase limitation is
increased, orders for Subscription Shares in the Community Offering and in the
Syndicated Offering (or, alternatively, an underwritten firm commitment public
offering), if any, shall, as determined by the Bank, first be filled to a
maximum of 1,000 shares and thereafter remaining shares shall be allocated, on
an equal number of shares basis per order, until all orders have been filled.
B. The maximum number of shares of Common Stock which may be purchased in
all categories of the Offering by Officers and Directors of the Bank and their
Associates in the aggregate, when combined with Exchange Shares received by such
persons, shall not exceed 25% of the Conversion Stock offered in the Conversion.
C. The maximum number of Subscription Shares which may be subscribed for or
purchased in all categories in the Offering by any Person or Participant
together with any Associate or group of Persons Acting in Concert together with
Exchange Shares received in the Share Exchange by any such Person, or
Participant together with any Associate or group of Persons Acting in Concert
shall not exceed 85,000 shares, except for the Employee Plans which may
subscribe for up to 8% of the Holding Company Common Stock offered in the
Subscription Offering (including shares issued in the event of an increase in
the maximum of the Offering Range of 15%). Pursuant to this limitation, certain
depositors may not be permitted to purchase stock in the Offering.
Notwithstanding this limitation, Minority Stockholders who receive more than
85,000 shares issued in the Conversion shall not be required to divest any such
shares (except as otherwise may be required by the OTS).
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D. A minimum of 25 shares of Common Stock must be purchased by each Person
purchasing shares in the Offering to the extent those shares are available;
provided, however, that in the event the minimum number of shares of Common
Stock purchased times the price per share exceeds $500, then such minimum
purchase requirement shall be reduced to such number of shares which when
multiplied by the price per share shall not exceed $500, as determined by the
Board.
If the number of shares of Common Stock otherwise allocable pursuant to
Sections 8 through 13, inclusive, to any Person or that Person's Associates
would be in excess of the maximum number of shares permitted as set forth above,
the number of shares of Common Stock allocated to each such person shall be
reduced to the lowest limitation applicable to that Person, and then the number
of shares allocated to each group consisting of a Person and that Person's
Associates shall be reduced so that the aggregate allocation to that Person and
his or her Associates complies with the above limits, and such maximum number of
shares shall be reallocated among that Person and his or her Associates as they
may agree, or in the absence of an agreement, in proportion to the shares
subscribed by each (after first applying the maximums applicable to each Person,
separately).
Depending upon market or financial conditions, the Board of Directors of
the Holding Company, with the approval of the OTS and without further approval
of the Members, may decrease or further increase the purchase limitations in
this Plan, provided that the maximum purchase limitations may not be increased
to a percentage in excess of 5% of the shares issued in the Conversion, except
as provided below. If the Holding Company increases the maximum purchase
limitations, the Holding Company is only required to resolicit Persons who
subscribed for the maximum purchase amount and may, in the sole discretion of
the Holding Company, resolicit certain other large subscribers. In the event
that the maximum purchase limitation is increased to 5% of the shares issued in
the Conversion, such limitation may be further increased to 9.99%, provided that
orders for Common Stock exceeding 5% of the shares issued in the Conversion,
shall not exceed in the aggregate 10% of the shares issued in the Conversion.
Requests to purchase additional Subscription Shares in the event that the
purchase limitation is so increased will be determined by the Board of Directors
of the Holding Company in its sole discretion.
In the event of an increase in the total number of shares offered in the
Subscription Offering due to an increase in the Estimated Valuation Range of up
to 15% (the "Adjusted Maximum"), the additional shares will be used in the
following order of priority: (i) to fill the Employee Plans' subscription to the
Adjusted Maximum; (ii) in the event that there is an oversubscription at the
Eligible Account Holder, Supplemental Eligible Account Holder or Other Member
levels, to fill unfulfilled subscriptions of such subscribers according to such
respective priorities exclusive of the Adjusted Maximum; and (iii) to fill
unfulfilled subscriptions in the Community Offering exclusive of the Adjusted
Maximum with preference given to Preferred Subscribers.
For purposes of this Section 14, the Directors of the Bank and the Holding
Company shall not be deemed to be Associates or a group affiliated with each
other or otherwise Acting in Concert solely as a result of their being Directors
of the Bank or the Holding Company.
Each Person purchasing Common Stock in the Offering shall be deemed to
confirm that such purchase does not conflict with the above purchase limitations
contained in this Plan.
15. PAYMENT FOR SUBSCRIPTION SHARES
All payments for Common Stock subscribed for in the Subscription, Community
and Syndicated Community Offerings must be delivered in full to the Holding
Company, together with a properly completed and executed Order Form and
certification or acknowledgment form, or purchase order in the case of the
Syndicated Community Offering, on or prior to the expiration date of the
Offering; provided, however, that if the Employee Plans subscribe for shares
during the Subscription Offering, such plans will not be required to pay for the
shares at the time they subscribe but rather may pay for such shares of Common
Stock subscribed for by such plans at the Subscription Price per share upon
consummation of the Conversion.
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Notwithstanding the foregoing, the Holding Company shall have the right, in
its sole discretion, to permit institutional investors to submit contractually
irrevocable orders in the Offering and to thereafter submit payment by wire
transfer for the Common Stock for which they are subscribing in the Offering at
any time prior to 48 hours before the completion of the Conversion, unless such
48 hour period is waived by the Holding Company in its sole discretion.
Payment for Common Stock subscribed for shall be made either by check,
money order, certified or teller's check or bank draft. Alternatively,
subscribers in the Subscription and Community Offerings may pay for the shares
subscribed for by authorizing the Bank on the Order Form to make a withdrawal
from the subscriber's Deposit Account at the Bank in an amount equal to the
Subscription Price for each of such shares. Such authorized withdrawal, whether
from a savings passbook or certificate account, shall be without penalty as to
premature withdrawal. If the authorized withdrawal is from a certificate
account, and the remaining balance does not meet the applicable minimum balance
requirement, the certificate shall be canceled at the time of withdrawal,
without penalty, and the remaining balance will earn interest at the passbook
rate. Funds for which a withdrawal is authorized will remain in the subscriber's
Deposit Account but may not be used by the subscriber during the Subscription
and Community Offerings. Thereafter, the withdrawal will be given effect only to
the extent necessary to satisfy the subscription (to the extent it can be
filled) at the Subscription Price per share. Interest will continue to be earned
on any amounts authorized for withdrawal until such withdrawal is given effect.
Interest will be paid by the Bank at not less than the passbook annual rate on
payments for Common Stock received in cash or by check. Such interest will be
paid from the date payment is received by the Bank until consummation or
termination of the Conversion. If for any reason the Conversion is not
consummated, all payments made by subscribers in the Subscription, Community and
Syndicated Community Offerings will be refunded to them with interest. In case
of amounts authorized for withdrawal from Deposit Accounts, refunds will be made
by canceling the authorization for withdrawal. The Bank is prohibited by
regulation from knowingly making any loans or granting any lines of credit for
the purchase of stock in the Conversion, and therefore, will not do so.
16. MANNER OF EXERCISING SUBSCRIPTION RIGHTS THROUGH ORDER FORMS
As soon as practicable after the Prospectus prepared by the Holding Company
and Bank has been declared effective by the SEC, Order Forms will be distributed
to the Eligible Account Holders, Employee Plans, Supplemental Eligible Account
Holders, Other Members and Minority Stockholders at their last known addresses
appearing on the records of the Bank for the purpose of subscribing for shares
of Common Stock in the Subscription Offering and will be made available for use
by those Persons entitled to purchase in the Community Offering. Notwithstanding
the foregoing, the Bank may elect to send Order Forms only to those Persons who
request them after receipt of such notice in a form approved by the OTS and
which is adequate to apprise the Eligible Account Holders, Employee Plans,
Supplemental Eligible Account Holders, Other Members and Minority Stockholders
of the pendency of the Subscription Offering. Such notice may be included with
the proxy statement for the Special Meeting of Members and the proxy statement
for the Special Meeting of Stockholders and may also be included in the notice
of the pendency of the Conversion and the Special Meeting of Members sent to all
Members in accordance with regulations of the OTS.
Each Order Form will be preceded or accompanied by the Prospectus
describing the Holding Company, the Bank, the Common Stock and the Subscription
and Community Offerings. Each Order Form will contain, among other things, the
following:
A. A specified date by which all Order Forms must be received by the
Holding Company, which date shall be not less than 20, nor more than 45 days,
following the date on which the Order Forms are mailed by the Holding Company,
and which date will constitute the termination of the Subscription Offering;
B. The Subscription Price per share for shares of Common Stock to be sold
in the Subscription and Community Offerings;
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C. A description of the minimum and maximum number of Subscription Shares
which may be subscribed for pursuant to the exercise of Subscription Rights or
otherwise purchased in the Community Offering;
D. Instructions as to how the recipient of the Order Form is to indicate
thereon the number of Subscription Shares for which such person elects to
subscribe and the available alternative methods of payment therefor;
E. An acknowledgment that the recipient of the Order Form has received a
final copy of the Prospectus prior to execution of the Order Form;
F. A statement to the effect that all subscription rights are
nontransferable, will be void at the end of the Subscription Offering, and can
only be exercised by delivering to the Holding Company within the subscription
period such properly completed and executed Order Form, together with payment in
the full amount of the aggregate purchase price as specified in the Order Form
for the shares of Common Stock for which the recipient elects to subscribe in
the Subscription Offering (or by authorizing on the Order Form that the Bank
withdraw said amount from the subscriber's Deposit Account at the Bank); and
G. A statement to the effect that the executed Order Form, once received by
the Holding Company, may not be modified or amended by the subscriber without
the consent of the Holding Company.
Notwithstanding the above, the Holding Company reserves the right in its
sole discretion to accept or reject orders received on photocopied or
facsimilied order forms.
17. UNDELIVERED, DEFECTIVE OR LATE ORDER FORM; INSUFFICIENT PAYMENT
In the event Order Forms (a) are not delivered and are returned to the
Holding Company or the Bank by the United States Postal Service or the Holding
Company is unable to locate the addressee, (b) are not received back by the
Holding Company or are received by the Holding Company after the expiration date
specified thereon, (c) are defectively filled out or executed, (d) are not
accompanied by the full required payment, or, in the case of institutional
investors in the Community Offering, by delivering irrevocable orders together
with a legally binding commitment to pay in cash, check, money order or wire
transfer the full amount of the Subscription Price prior to 48 hours before the
completion of the Conversion, unless waived by the Holding Company, for each of
the shares of Common Stock subscribed for (including cases in which deposit
accounts from which withdrawals are authorized are insufficient to cover the
amount of the required payment), or (e) are not mailed pursuant to a "no mail"
order placed in effect by the account holder, the subscription rights of the
Person to whom such rights have been granted will lapse as though such Person
failed to return the completed Order Form within the time period specified
thereon; provided, however, that the Holding Company may, but will not be
required to, waive any immaterial irregularity on any Order Form or require the
submission of corrected Order Forms or the remittance of full payment for
subscribed shares by such date as the Holding Company may specify. The
interpretation of the Holding Company of terms and conditions of this Plan and
of the Order Forms will be final, subject to the authority of the OTS.
18. RESIDENTS OF FOREIGN COUNTRIES AND CERTAIN STATES
The Holding Company will make reasonable efforts to comply with the
securities laws of all States in the United States in which Persons entitled to
subscribe for shares of Common Stock pursuant to this Plan reside. However, no
such Person will be issued subscription rights or be permitted to purchase
shares of Common Stock in the Subscription Offering if such Person resides in a
foreign country or in a State of the United States with respect to which all of
the following apply: (A) a small number of Persons otherwise eligible to
subscribe for shares under this Plan reside in such State; (B) the issuance of
subscription rights or the offer or sale of shares of Common Stock to such
Persons would require the Holding Company under the securities laws of such
state, to register as a broker, dealer, salesman or agent or to register or
otherwise qualify its securities for sale in such state; or (C) such
registration or qualification would be impracticable for reasons of cost or
otherwise.
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19. ESTABLISHMENT OF LIQUIDATION ACCOUNT
The Bank shall establish at the time of the Conversion a Liquidation
Account in an amount equal to the greater of: (a) approximately 51% (the Mutual
Holding Company stock ownership interest in the Bank) of the Bank's total
stockholders' equity as reflected in the latest statement of financial condition
contained in the final Prospectus utilized in the Conversion; or (b) the
retained earnings of the Bank at the time the Bank underwent its initial mutual
holding company reorganization. Following the Conversion, the Liquidation
Account will be maintained by the Bank for the benefit of the Eligible Account
Holders and Supplemental Eligible Account Holders who continue to maintain their
Deposit Accounts at the Bank. Each Eligible Account Holder and Supplemental
Eligible Account Holder shall, with respect to his Deposit Account, hold a
related inchoate interest in a portion of the liquidation account balance, in
relation to his Deposit Account balance at the Eligibility Record Date or
Supplemental Eligibility Record Date, respectively, or to such balance as it may
be subsequently reduced, as hereinafter provided.
In the unlikely event of a complete liquidation of the Bank (and only in
such event), following all liquidation payments to creditors (including those to
Account Holders to the extent of their Deposit Accounts) each Eligible Account
Holder and Supplemental Eligible Account Holder shall be entitled to receive a
liquidating distribution from the Liquidation Account, in the amount of the then
adjusted subaccount balance for his Deposit Account then held, before any
liquidation distribution may be made to any holders of the Bank's capital stock.
No merger, consolidation, purchase of bulk assets with assumption of Deposit
Accounts and other liabilities, or similar transactions with an FDIC-insured
institution, in which the Bank is not the surviving institution, shall be deemed
to be a complete liquidation for this purpose. In such transactions, the
Liquidation Account shall be assumed by the surviving institution.
The initial subaccount balance for a Deposit Account held by an Eligible
Account Holder and Supplemental Eligible Account Holder shall be determined by
multiplying the opening balance in the Liquidation Account by a fraction, the
numerator of which is the amount of the Qualifying Deposits of such account
holder and the denominator of which is the total amount of all Qualifying
Deposits of all Eligible Account Holders and Supplemental Eligible Account
Holders. Such initial subaccount balance shall not be increased, but shall be
subject to downward adjustment as described below.
If, at the close of business on any June 30 annual closing date, commencing
on or after the effective date of the Conversion, the deposit balance in the
Deposit Account of an Eligible Account Holder or Supplemental Eligible Account
Holder is less than the lesser of (i) the balance in the Deposit Account at the
close of business on any other annual closing date subsequent to the Eligibility
Record Date or Supplemental Eligibility Record Date, or (ii) the amount of the
Qualifying Deposit in such Deposit Account as of the Eligibility Record Date or
Supplemental Eligibility Record Date, the subaccount balance for such Deposit
Account shall be adjusted by reducing such subaccount balance in an amount
proportionate to the reduction in such deposit balance. In the event of such
downward adjustment, the subaccount balance shall not be subsequently increased,
notwithstanding any subsequent increase in the deposit balance of the related
Deposit Account. If any such Deposit Account is closed, the related subaccount
shall be reduced to zero.
The creation and maintenance of the Liquidation Account shall not operate
to restrict the use or application of any of the net worth accounts of the Bank,
except that the Bank shall not declare or pay a cash dividend on, or repurchase
any of, its capital stock if the effect thereof would cause its net worth to be
reduced below (i) the amount required for the Liquidation Account; or (ii) the
net worth requirements contained in Part 567 of the Rules and Regulations of the
OTS.
20. VOTING RIGHTS OF STOCKHOLDERS
Following consummation of the Conversion, voting rights with respect to the
Bank shall be held and exercised exclusively by the holders of its capital
stock. The holders of the voting capital stock of the Holding Company shall have
the exclusive voting rights with respect to the Holding Company.
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21. RESTRICTIONS ON RESALE OR SUBSEQUENT DISPOSITION
A. All Subscription Shares purchased by Directors or Officers of the
Holding Company or the Bank in the Offering shall be subject to the restriction
that, except as provided in Section 21B, or as may be approved by the OTS, no
interest in such shares may be sold or otherwise disposed of for value for a
period of one year following the date of purchase in the Offering.
B. The restriction on disposition of Subscription Shares set forth in
Section 21A above shall not apply to the following:
(i) Any exchange of such shares in connection with a merger or
acquisition involving the Bank or the Holding Company, as the case may be,
which has been approved by the OTS; and
(ii) Any disposition of such shares following the death of the person
to whom such shares were initially sold under the terms of this Plan.
C. With respect to all Subscription Shares subject to restrictions on
resale or subsequent disposition, each of the following provisions shall apply:
(i) Each certificate representing shares restricted by this Section,
shall bear a legend prominently stamped on its face giving notice of the
restriction;
(ii) Instructions shall be issued to the stock transfer agent for the
Holding Company not to recognize or effect any transfer of any certificate
or record of ownership of any such shares in violation of the restriction
on transfer; and
(iii) Any shares of capital stock of the Holding Company issued with
respect to a stock dividend, stock split, or otherwise with respect to
ownership of outstanding Subscription Shares subject to the restriction on
transfer hereunder shall be subject to the same restriction as is
applicable to such shares.
22. REQUIREMENTS FOR STOCK PURCHASES BY DIRECTORS AND OFFICERS FOLLOWING
THE CONVERSION
For a period of three years following the Conversion, no Officer, Director
or their Associates shall purchase, without the prior written approval of the
OTS, any outstanding shares of Common Stock of the Holding Company except from a
broker-dealer registered with the SEC. This provision shall not apply to
negotiated transactions involving more than 1% of the outstanding shares of
Common Stock of the Holding Company, the exercise of any options pursuant to a
stock option plan or purchases of common stock of the Holding Company made by or
held by any Tax-Qualified Employee Stock Benefit Plan or Non-Tax-Qualified
Employee Stock Benefit Plan of the Bank or the Holding Company (including the
Employee Plans or the Recognition Plans) which may be attributable to any
Officer or Director. As used herein, the term "negotiated transaction" means a
transaction in which the securities are offered and the terms and arrangements
relating to any sale are arrived at through direct communications between the
seller or any person acting on its behalf and the purchaser or his investment
representative. The term "investment representative" shall mean a professional
investment advisor acting as agent for the purchaser and independent of the
seller and not acting on behalf of the seller in connection with the
transaction.
23. TRANSFER OF DEPOSIT ACCOUNTS
Each person holding a Deposit Account at the Bank at the time of the
Conversion shall retain an identical Deposit Account at the Bank following the
Conversion in the same amount and subject to the same terms and conditions
(except as to voting and liquidation rights).
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24. REGISTRATION AND MARKETING
Within the time period required by applicable laws and regulations, the
Holding Company will register the securities issued in connection with the
Conversion pursuant to the Securities Exchange Act of 1934 and will not
deregister such securities for a period of at least three years thereafter,
except that the maintenance of registration for three years requirement may be
fulfilled by any successor to the Bank or any holding company of the Bank. In
addition, the Bank or Holding Company will use its best efforts to encourage and
assist a market-maker to establish and maintain a market for the Conversion
Stock and to list those securities on a national or regional securities exchange
or the Nasdaq Stock Market.
25. TAX RULINGS OR OPINIONS
Consummation of the Conversion is expressly conditioned upon prior receipt
by the Mutual Holding Company and the Bank of either a ruling or an opinion of
counsel with respect to federal tax laws, and either a ruling or an opinion of
counsel or tax advisor with respect to Iowa tax laws, to the effect that
consummation of the transactions contemplated by the Conversion and this Plan
will not result in a taxable reorganization under the provisions of the
applicable codes or otherwise result in any adverse tax consequences to the
Mutual Holding Company, the Holding Company or the Bank, or the account holders
receiving subscription rights before or after the Conversion, except in each
case to the extent, if any, that subscription rights are deemed to have value on
the date such rights are issued.
26. STOCK BENEFIT PLANS AND EMPLOYMENT AGREEMENTS
A. The Holding Company and the Bank are authorized to adopt Tax-Qualified
Employee Stock Benefit Plans in connection with the Conversion, including
without limitation, an ESOP. Existing as well as any newly created Tax-Qualified
Employee Stock Benefit Plans may purchase Subscription Shares in the Conversion,
to the extent permitted by the terms of such benefit plans and this Plan.
B. As a result of the Conversion, the Holding Company shall be deemed to
have ratified and approved the Bank's 1992 Incentive Stock Option Plan, and 1992
Stock Option Plan for Outside Directors (the "Option Plans") and the Recognition
and Retention Plan (the "Retention Plan"), and shall have agreed to issue (and
reserve for issuance) Holding Company Common Stock in lieu of Bank common stock
pursuant to the terms of such benefit plans. Upon consummation of the
Conversion, the Bank common stock held by such benefit plans shall be converted
into Holding Company Common Stock based upon the Exchange Ratio. Also upon
consummation of the Conversion, (i) all rights to purchase, sell or receive Bank
common stock and all rights to elect to make payment in Bank common stock under
any agreement between the Bank and any Director, Officer or Employee thereof or
under any plan or program of the Bank (including, without limitation, the Bank's
Employee Stock Ownership Plan and the Recognition Plan), shall automatically, by
operation of law, be converted into and shall become an identical right to
purchase, sell or receive Holding Company Common Stock and an identical right to
make payment in Holding Company Common Stock under any such agreement between
the Bank and any Director, Officer or Employee thereof or under such plan or
program of the Bank, and (ii) rights outstanding under the Option Plan shall be
assumed by the Holding Company and thereafter shall be rights only for shares of
Holding Company Common Stock, with each such right being for a number of shares
of Holding Company common stock based upon the Exchange Ratio and the number of
shares of Bank common stock that were available thereunder immediately prior to
consummation of the Conversion, with the price adjusted to reflect the Exchange
Ratio but with no change in any other term or condition of such right.
C. The Holding Company and the Bank are authorized to enter into employment
agreements with their executive officers.
D. The Holding Company and the Bank are authorized to adopt stock option
plans, restricted stock grant plans and other Non-Tax-Qualified Employee Stock
Benefit Plans, provided that no such plans will be established, no stock options
shall be granted, and no shares of Conversion Stock shall be purchased pursuant
to any of such plans prior to six months after the consummation of the
Conversion and the receipt of stockholder approval
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of such plans. All such plans implemented within one year following the
consummation of the Conversion shall be submitted to the Midwest Regional
Director of the OTS for approval in accordance with OTS regulations.
27. RESTRICTIONS ON ACQUISITION OF BANK AND HOLDING COMPANY
A. In accordance with OTS regulations, for a period of three years from the
date of consummation of the Conversion, no Person, other than the Holding
Company, shall directly or indirectly offer to acquire or acquire the beneficial
ownership of more than 10% of any class of an equity security of the Bank
without the prior written consent of the OTS.
B. The Certificate of Incorporation of the Holding Company will contain a
provision stipulating that in no event shall any record owner of any outstanding
shares of the Holding Company's Common Stock who beneficially owns in excess of
10% of such outstanding shares be entitled or permitted to any vote in respect
to any shares held in excess of 10%. In addition, the Certificate of
Incorporation and Bylaws of the Holding Company contain provisions which provide
for staggered terms of the directors, noncumulative voting for directors,
limitations on the calling of special meetings, a fair price provision for
certain business combinations and certain notice requirements.
28. PAYMENT OF DIVIDENDS AND REPURCHASE OF STOCK
A. The Holding Company may repurchase any shares of its capital stock
during the first three years following consummation of the Conversion, except as
prohibited by OTS regulations or authorization.
B. The Bank shall not declare or pay a cash dividend on, or repurchase any
of, its capital stock if the effect thereof would cause its regulatory capital
to be reduced below (i) the amount required for the Liquidation Account or (ii)
the federal regulatory capital requirement in Section 567.2 of the Rules and
Regulations of the OTS. Otherwise, the Bank may declare dividends or make
capital distributions in accordance with applicable law and regulations.
29. CHARTER AND BYLAWS
By voting to adopt this Plan, Members of the Mutual Holding Company will be
voting to adopt the Certificate of Incorporation and Bylaws for a Delaware
corporation attached as Exhibits D and E to this Plan.
30. CONSUMMATION OF CONVERSION AND EFFECTIVE DATE
The Effective Date of the Conversion shall be the date upon which the
Articles of Combination shall be filed with the OTS with respect to the MHC
Merger and the Bank Merger, with the Bank being the surviving institution in
each case. The Articles of Combination shall be filed with the OTS after all
requisite regulatory, member and stockholder approvals have been obtained, all
applicable waiting periods have expired, and sufficient subscriptions and orders
for Subscription Shares have been received. The sale of all Subscription Shares
in the Subscription Offering, Community Offering and/or Syndicated Community
Offering shall occur simultaneously on the closing date of the Conversion.
31. EXPENSES OF CONVERSION
The Mutual Holding Company, the Bank and the Holding Company may retain and
pay for the services of legal, financial and other advisors to assist in
connection with any or all aspects of the Conversion, including the Offering,
and such parties shall use their best efforts to assure that such expenses shall
be reasonable.
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32. AMENDMENT OR TERMINATION OF PLAN
If deemed necessary or desirable, this Plan may be substantively amended as
a result of comments from regulatory authorities or otherwise at any time prior
to solicitation of proxies from Members and Bank stockholders to vote on this
Plan by the Board of Directors of the Mutual Holding Company, and at any time
thereafter by the Board of Directors of the Mutual Holding Company with the
concurrence of the OTS. Any amendment to this Plan made after approval by the
Members and Bank stockholders with the approval of the OTS shall not necessitate
further approval by the Members unless otherwise required by the OTS. This Plan
may be terminated by the Board of Directors of the Mutual Holding Company at any
time prior to the Special Meeting of Members and the Special Meeting of
Stockholders to vote on this Plan, and at any time thereafter with the
concurrence of the OTS.
By adoption of this Plan, the Members of the Mutual Holding Company
authorize the Board of Directors of the Mutual Holding Company to amend or
terminate this Plan under the circumstances set forth in this Section.
33. CONDITIONS TO CONVERSION
Consummation of the Conversion pursuant to this Plan is expressly
conditioned upon the following:
A. Prior receipt by the Mutual Holding Company and the Bank of rulings of
the United States Internal Revenue Service and the state taxing
authorities, or opinions of counsel or tax advisers as described in
Section 25;
B. The sale of all of the Subscription Shares offered in the Conversion;
and
C. The completion of the Conversion within the time period specified in
Section 3.
34. INTERPRETATION
All interpretations of this Plan and application of its provisions to
particular circumstances by a majority of the Board of Directors of the Bank
shall be final, subject to the authority of the OTS.
Dated: October 1, 1998
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Exhibit 8.1
[LUSE LEHMAN GORMAN POMERENK & SCHICK LETTERHEAD]
December 18, 1998
Boards of Directors
First Federal Bankshares, Inc.
First Federal Savings Bank of Siouxland
First Federal Bankshares, MHC
329 Pierce Street
Sioux City, Iowa 51102
Ladies and Gentlemen:
You have requested this firm's opinion regarding certain federal income
tax consequences which will result from the conversion of First Federal
Bankshares, MHC (the "Mutual Holding Company"), to stock holding company form as
First Federal Bankshares, Inc. (the "Company"), as effectuated pursuant to the
two integrated transactions described below. Our opinion is based upon the
existing provisions of the Internal Revenue Code of 1986, as amended (the "Code)
and regulations thereunder, both final and proposed (the "Treasury
Regulations"), and upon current Internal Revenue Service ("IRS") published
rulings and existing court decisions, any of which could be changed at any time.
Any such changes may be retroactive and could significantly modify the
statements and opinions expressed herein. Similarly, any change in the facts and
assumptions stated below, upon which this opinion is based, could modify the
conclusions. This opinion is as of the date hereof, and we disclaim any
obligation to advise you of any change in any matter considered herein after the
date hereof.
We, of course, opine only as to the matters we expressly set forth, and
no opinions should be inferred as to any other matters or as to the tax
treatment of the transactions that we do not specifically address. We express no
opinion as to other federal laws and regulations, or as to laws and regulations
of other jurisdictions, or as to factual or legal matters other than as set
forth herein.
We have made such other investigations as we have deemed relevant or
necessary for the purpose of this opinion. We have further assumed the absence
of adverse facts not apparent from the face of the instruments and documents we
examined and have relied upon the accuracy of the factual matters set forth in
the Plan of Conversion and Reorganization (the "Plan") and the Registration
Statement on Form S-1 filed by First Federal Bankshares, Inc. (the "Company")
with the Securities and Exchange Commission ("SEC") under the Securities Act of
1933, as amended,
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Boards of Directors
First Federal Bankshares, Inc.
First Federal Savings Bank of Siouxland
First Federal Bankshares, MHC
December 18, 1998
Page 2
and the Application for Conversion on Form AC filed with the Office of Thrift
Supervision (the "OTS").
We specifically express no opinion concerning tax matters relating to
the Plan under state and local tax laws and under Federal income tax laws except
on the basis of the documents and assumptions described above. We note that in
December 1994, the IRS published Revenue Procedure 94-76 which states that the
IRS will not issue private letter rulings with respect to the downstream merger
of a corporation into a less than "80 percent distributee", i.e, a corporation
in which the merging corporation possesses less than 80 percent of the total
voting power and less than 80 percent of the total value of such corporation's
stock. The IRS assumed this "no-rule" position to study whether such downstream
mergers circumvent the purpose behind the repeal of GENERAL UTILITIES &
OPERATING CO. V. HELVERING, 296 U.S. 200 (1935). In January 1996, the IRS
published Notice 96-6 and Revenue Procedure 96-22 indicating in the former, that
it intended to close its study project on this issue and, in the latter, that
its determination not to issue advance rulings on such downstream mergers would
be made permanent. If the IRS were ultimately to conclude that such mergers
circumvent the repeal of GENERAL UTILITIES, the IRS could issue regulations
which could have the effect of taxing to the merging corporation, as of the
effective time of the merger, the fair market value of the assets of such
corporation over its basis in such assets. Accordingly, the issuance of such
regulations prior to the consummation of the transactions contemplated herein
could significantly modify the opinions expressed herein.
For purposes of this opinion, we are relying on the representations
provided to us by the Mutual Holding Company and First Federal Savings Bank of
Siouxland (the "Bank") as described in the Affidavits of the President of the
Mutual Holding Company and the Bank, incorporated herein by reference.
The Proposed Transactions
Based solely upon our review of the documents described above, and in
reliance upon such documents, we understand that the relevant facts are as
follows. In July 1992, the Bank, a Federally-chartered mutual savings bank,
reorganized into the mutual holding company form of organization.
At that time, the Bank sold 630,000 shares of common stock ("Bank
Common Stock") at $10.00 per share to the public (the "Minority Stockholders").
After the conclusion of the sale to Minority Stockholders, the Mutual Holding
Company held 55% of the Bank's Common Stock outstanding. The shares of Bank
Common Stock that were sold to the Minority Stockholders constituted
approximately 45% of the issued and outstanding shares of Bank Common Stock.
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Boards of Directors
First Federal Bankshares, Inc.
First Federal Savings Bank of Siouxland
First Federal Bankshares, MHC
December 18, 1998
Page 3
At the present time, two transactions referred to as the "MHC Merger"
and the "Bank Merger" are being undertaken. The MHC Merger and the Bank Merger
are being accomplished pursuant to a Plan of Conversion and Reorganization
(hereafter referred to as the "Plan"). Pursuant to the Plan, the conversion
("Conversion") will be effected in the following steps, each of which will be
completed contemporaneously.
(i) The Bank will organize the Company (which will become the
stock holding company of the Bank) as a first tier
wholly-owned subsidiary of the Bank;
(ii) The Company will organize an interim savings bank ("Interim")
as a wholly-owned stock savings bank subsidiary of the
Company;
(iii) Mutual Holding Company will exchange its charter for an
interim federal stock savings association charter and will
simultaneously merge in a statutory merger with and into the
Bank (the "MHC Merger") with the Bank as the resulting entity,
pursuant to the Agreement of Merger between Mutual Holding
Company and the Bank, whereby each member of the Mutual
Holding Company who is an Eligible Account Holder or
Supplemental Eligible Account Holder will receive an interest
in a liquidation account established in the Bank pursuant to
regulations of the Commissioner (the "Liquidation Account") in
exchange for such member's ownership interest in the Mutual
Holding Company. In conjunction with the MHC Merger, the
Bank's stock held by the Mutual Holding Company will be
canceled.
(iv) Interim will merge in a statutory merger with and into the
Bank with the Bank as the resulting institution (the "Bank
Merger") pursuant to the Agreement of Merger between the Bank,
the Company and Interim, whereby each Minority Stockholder
will receive common stock of the Company ("Company Common
Stock") in exchange for minority Shares, based on an exchange
ratio (the "Exchange Ratio"), with cash paid in lieu of
fractional shares.
(v) As a result of the Bank Merger, the Company will own all of
the common stock of the Bank, and the Company will offer for
sale Company Common Stock in an offering (the "Offering") that
will occur contemporaneously with the Conversion (discussed
below).
The Plan complies with the provisions of Subpart A of 12 C.F.R. Part
563b, which sets forth the OTS regulations for conversions of mutual
institutions to stock form. The Plan also complies
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Boards of Directors
First Federal Bankshares, Inc.
First Federal Savings Bank of Siouxland
First Federal Bankshares, MHC
December 18, 1998
Page 4
with the provisions of 12 C.F.R. Section 575.12(a), which is the OTS regulation
governing the conversion of mutual holding companies to stock form.
In the MHC Merger, a liquidation account is being established by the
Bank for the benefit of Eligible Account Holders and Supplemental Account
Holders. Pursuant to Section 19 of the Plan, the initial balance of the
liquidation account will be equal to the sum of (i) approximately 51% (the
Mutual Holding Company stock ownership interest in the Bank) of the Bank's total
stockholders' equity as reflected in its latest statement of financial condition
contained in the final Prospectus utilized in the Conversion, or (ii) the
retained earnings of the Bank at the time the Bank underwent its initial mutual
holding company reorganization.
Upon the date of consummation of the Bank Merger ("the Effective
Date"), Interim will be merged with and into the Bank and Interim will cease to
exist as a legal entity. All of the then outstanding shares of Bank Common Stock
will be converted into and become shares of Company Common Stock pursuant to the
Exchange Ratio that ensures that after the Conversion and before giving effect
to Minority Stockholders' purchases in the Offering and receipt of cash in lieu
of fractional shares, Minority Stockholders will own the same aggregate
percentage of the Company's Common Stock as they currently own of the Bank
Common Stock. The common stock of Interim owned by the Company prior to the Bank
Merger will be converted into and become shares of common stock of the Bank on
the Effective Date. The Company Common Stock held by the Bank immediately prior
to the Effective Date will be canceled on the Effective Date. Immediately
following the Bank Merger, additional shares of the Company Common Stock will be
sold to depositors and former shareholders of the Bank and to members of the
public in the Offering.
As a result of the MHC Merger and the Bank Merger, the Company will be
a publicly held corporation, will register the Company Common Stock under
Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and will become subject to the rules and regulations thereunder and file
periodic reports and proxy statements with the SEC. The Bank will become a
wholly owned subsidiary of the Company and will continue to carry on its
business and activities as conducted immediately prior to the Conversion.
The stockholders of the Company will be the former Minority
Stockholders of the Bank immediately prior to the Bank Merger (i.e., all
stockholders of the Bank, excluding the Mutual Holding Company), plus those
persons who purchase shares of Company Common Stock in the Offering.
Nontransferable rights to subscribe for the Company Common Stock have been
granted, in order of priority, to depositors of the Bank who have account
balances of $50.00 or more as of the close of business on September 30, 1997
("Eligible Account Holders"), the Bank's tax-qualified
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Boards of Directors
First Federal Bankshares, Inc.
First Federal Savings Bank of Siouxland
First Federal Bankshares, MHC
December 18, 1998
Page 5
employee plans ("Employee Plans"), depositors of the Bank who have account
balances of $50.00 or more as of the close of business on the last day of the
calendar quarter preceding OTS approval of the application for conversion
("Supplemental Eligible Account Holders"), other members of the Bank (other than
Eligible Account Holders and Supplemental Eligible Account Holders) ("Other
Members"), and owners of shares of Bank Common Stock other than the Mutual
Holding Company ("Minority Stockholders"). Subscription rights are
nontransferable. The Company will also offer shares of Company Common Stock not
subscribed for in the Subscription Offering, if any, for sale in a community
offering to certain members of the general public (the "Community Offering").
Opinions
Based on the foregoing description of the MHC Merger and the Bank
Merger, and subject to the qualifications and limitations set forth in this
letter, we are of the opinion that:
1. The conversion of the Mutual Holding Company from a Federally
chartered mutual holding company to a Federally chartered interim stock savings
association will constitute a mere change in identity, form or place of
organization within the meaning of Section 368(a)(1)(F) of the Code.
2. The MHC Merger qualifies as a tax-free reorganization within the
meaning of Section 368(a)(1)(A) of the Code. (Section 368(a)(1)(A) of the Code.)
3. The Mutual Holding Company will not recognize any gain or loss on
the transfer of its assets to the Bank in exchange for an interest in a
liquidation account established in the Bank.
(Section 361 of the Code.)
4. The exchange of the members' equity interests in the Mutual Holding
Company for interests in a liquidation account established at the Bank in the
MHC Merger will satisfy the continuity of interest requirement of Section
1.368-1(b) of the Income Tax Regulations (cf. Rev. Rul.
69-3, 1969-1 C.B. 103, and Rev. Rul. 69-646, 1969-2 C.B. 54).
5. No gain or loss will be recognized by the Bank upon the receipt of
the assets of the Mutual Holding Company in exchange for the transfer to the
members of the Mutual Holding Company of an interest in the liquidation account
in the Bank. (Section 1032(a) of the Code.)
6. The basis of the assets of Mutual Holding Company (other than Bank
Common Stock) to be received by Bank will be the same as the basis of such
assets in the hands of the Mutual
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Boards of Directors
First Federal Bankshares, Inc.
First Federal Savings Bank of Siouxland
First Federal Bankshares, MHC
December 18, 1998
Page 6
Holding Company immediately prior to the transfer. The basis of the Bank stock
will be zero. See Revised Rule 74-503. (Section 362(b) of the Code.)
7. The holding period of the assets of the Mutual Holding Company
(other than Bank Common Stock) to be received by Bank will include the holding
period of those assets in the hands of the Mutual Holding Company immediately
prior to the transfer. (Section 1223(2) of the Code.)
8. Mutual Holding Company members will recognize no gain or loss upon
the receipt of an interest in the liquidation account in Bank in exchange for
their membership interest in Mutual Holding Company. (Section 354(a) of the
Code.)
In addition, with respect to the Bank Merger, we are of the opinion
that:
9. The Bank Merger qualifies as a reorganization within the meaning of
Section 368(a)(1)(A) of the Code, pursuant to Section 368(a)(2)(E) of the Code.
The Bank Merger is not disqualified as a tax-free reorganization by reason of
the fact that because Company Common Stock will be conveyed to the Bank's
stockholders in exchange for their Bank Common Stock. (Section 368(a)(2)(E) of
the Code.) The Bank, the Company and Interim will each be a party to the
reorganization within the meaning of Section 368(b).
10. Interim will not recognize any gain or loss on the transfer of its
assets to Bank in exchange for Bank Common Stock and the assumption by Bank of
the liabilities, if any, of Interim.
(Section 361(a) and 357(a) of the Code.)
11. Bank will not recognize any gain or loss on the receipt of the
assets of Interim in exchange for Bank Common Stock. (Section 1032(a) of the
Code.)
12. Bank's basis in the assets received from Interim in the proposed
transaction will, in each case, be the same as the basis of such assets in the
hands of Interim immediately prior to the transaction. (Section 362(b) of the
Code.)
13. Bank's holding period for the assets received from Interim in the
proposed transaction will, in each instance, include the period during which
such assets were held by Interim.
(Section 1223(2) of the Code.)
14. The Company will not recognize any gain or loss upon its receipt of
Bank Common Stock in exchange for Interim stock. (Section 354(a) of the Code.)
<PAGE>
Boards of Directors
First Federal Bankshares, Inc.
First Federal Savings Bank of Siouxland
First Federal Bankshares, MHC
December 18, 1998
Page 7
15. Bank shareholders will not recognize any gain or loss upon their
exchange of Bank Common Stock solely for shares of Company Common Stock
(including fractional shares which the Bank shareholders otherwise would be
entitled to receive). (Section 354(a) of the Code.)
16. Cash received in the Bank Merger by a Bank stockholder in lieu of a
fractional share interest of Company Common Stock will be treated as having been
received as a distribution in full payment in exchange for the fractional share
interest of Bank Common Stock which such stockholder would otherwise be entitled
to receive, and will qualify as capital gain or loss (assuming the Bank Common
Stock surrendered in exchange therefor was held as a capital asset by such
stockholder).
17. Each Bank shareholder's basis in his or her Company Common Stock
received in the exchange (including fractional shares which the Bank
shareholders otherwise would be entitled to receive) will be the same as the
basis of the Bank Common Stock surrendered in exchange therefor.
(Section 358(a) of the Code.)
18. The Company's basis in the Bank Common Stock received in the Bank
Merger will be the same as the basis of the property exchanged therefor.
(Section 362(b) of the Code.)
19. Each Bank shareholder's holding period in his or her Company Common
Stock received in the exchange (including fractional shares which the Bank
shareholders otherwise would be entitled to receive) will include the period
during which the Bank stock surrendered was held, provided that the Bank Common
Stock surrendered is a capital asset in the hands of the Bank shareholder on the
date of the exchange. (Section 1223(1) of the Code.)
20. No gain or loss will be recognized by the Company on the receipt of
money in exchange for Company Common Stock in the Offering. (Section 1032(a) of
the Code.)
21. No gain or loss will be recognized by Eligible Holders upon
distribution to them of non-transferable subscription rights to purchase shares
of Company Common Stock, provided that the amount paid for the Company Common
Stock is equal to the fair market value of such stock.
See Revised Rule 90-11.
Analysis
Section 368(a)(1)(A) of the Code defines the term "reorganization" to
include a "statutory merger or consolidation" of corporations such as the MHC
Merger and the Bank Merger. Section
<PAGE>
Boards of Directors
First Federal Bankshares, Inc.
First Federal Savings Bank of Siouxland
First Federal Bankshares, MHC
December 18, 1998
Page 8
368(a)(2)(E) of the Code provides that a transaction otherwise qualifying as a
merger under Section 368(a)(1)(A), such as the Bank Merger, shall not be
disqualified by reason of the fact that common stock of a corporation (referred
to in the Code as the "controlling corporation") (i.e., the Company) which
before the merger was in control of the merged corporation is used in the
transaction if:
(i) after the transaction, the corporation surviving the merger
(the Bank) holds substantially all of its properties and the
properties of the merged corporation (Interim) (other than
common stock of the controlling corporation (the Company)
distributed in the transaction); and
(ii) in the transaction, former stockholders of the surviving
corporation (the Bank stockholders) exchanged, for an amount
of voting common stock of the controlling corporation, an
amount of common stock in the surviving corporation which
constitutes control of such corporation.
Section 1.368-2(b)(1) of the Treasury Regulations provides that, in
order to qualify as a reorganization under Section 368(a)(1)(A), a transaction
must be a merger or consolidation effected pursuant to the corporation laws of
the United States or a state. The Plan provides that the MHC Merger and the Bank
Merger will be accomplished in accordance with applicable state and federal law.
Treasury Regulations and case law require that, in addition to the
existence of statutory authority for a merger, certain other conditions must be
satisfied in order to qualify a proposed transaction as a reorganization within
the meaning of Section 368(a)(1)(A) of the Code. The "business purpose test,"
which requires a proposed merger to have a bona fide business purpose, must be
satisfied. See 26 C.F.R. Section 1.368-1(c). We believe that the MHC Merger and
Bank Merger satisfy the business purpose test for the reasons set forth in the
Prospectus under the caption "The Conversion--Purposes of Conversion." The
"continuity of business enterprise test" requires an acquiring corporation
either to continue an acquired corporation's historic business or use a
significant portion of its historic assets in a business. See 26 C.F.R. Section
1.368-1(d). We believe that the business conducted by the Bank prior to the MHC
Merger and the Bank Merger will be unaffected by the transactions.
The "continuity of interest doctrine" requires that the continuing
common stock interest of the former owners of an acquired corporation,
considered in the aggregate, represent a "substantial part" of the value of
their former interest, and provide them with a "definite and substantial
interest" in the affairs of the acquiring corporation or a corporation in
control of the acquiring corporation.
<PAGE>
Boards of Directors
First Federal Bankshares, Inc.
First Federal Savings Bank of Siouxland
First Federal Bankshares, MHC
December 18, 1998
Page 9
PAULSEN V. COMM'R., 469 U.S. 131 (1985); HELVERING V. MINNESOTA TEA CO., 296
U.S. 378 (1935); JOHN A. NELSON CO. V. HELVERING, 296 U.S. 374 (1935); SOUTHWEST
NATURAL GAS CO. V. COMM'R., 189 F.2D 332 (5TH CIR. 1951), cert. denied, 342 U.S.
860 (1951). We believe that the MHC Merger satisfies the continuity of interest
doctrine based on the information set forth in the Company's Registration
Statement and based on Revenue Rulings 69-646, 1969-2 C.B. 54 and 69-3, 1965-1
C.B. 103. We believe that the Bank Merger satisfies the continuity of interest
doctrine based on representations received from the Bank in connection with the
preparation of this opinion to the effect that, to the best knowledge of the
management of the Bank, former shareholders of the Bank owning 50% or more of
all of the outstanding stock of the Bank immediately prior to the Conversion,
disregarding shares held by the Mutual Holding Company that were canceled in the
MHC Merger, would continue to own shares of the Company immediately after the
Bank Merger. In addition, we believe other applicable requirements of the
Treasury Regulations and case law which are preconditions to qualification of
the MHC Merger and the Bank Merger as a reorganization, within the meaning of
Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code, are satisfied on the basis
of the information contained in the Plan and the Prospectus.
Section 354 of the Code provides that no gain or loss shall be
recognized by stockholders who exchange common stock in a corporation, such as
the Bank, which is a party to a reorganization, solely for common stock in
another corporation which is a party to the reorganization, such as the Company.
Section 356 of the Code provides that stockholders shall recognize gain to the
extent they receive money as part of a reorganization, such as cash received in
lieu of fractional shares. Section 358 of the Code provides that, with certain
adjustments for money received in a reorganization, such as cash received in
lieu of fractional shares, a stockholder's basis in the common stock he or she
receives in a reorganization shall equal the basis of the common stock which he
or she surrendered in the transaction. Section 1223(1) states that, where a
stockholder receives property in an exchange which has the same basis as the
property surrendered, he or she shall be deemed to have held the property
received for the same period as the property exchanged, provided that the
property exchanged had been held as a capital asset.
Section 361 of the Code provides that no gain or loss shall be
recognized to a corporation such as the Interim which is a party to a
reorganization on any transfer of property pursuant to a plan of reorganization
such as the Plan of Conversion. Section 362 of the Code provides that if
property is acquired by a corporation such as the Bank in connection with a
reorganization, then the basis of such property shall be the same as it would be
in the hands of the transferor immediately prior to the transfer. Section
1223(2) of the Code states that where a corporation such as the Savings Bank
will have a carryover basis in property received from another corporation which
is a party to a reorganization, the holding period of such assets in the hands
of the acquiring corporation shall
<PAGE>
Boards of Directors
First Federal Bankshares, Inc.
First Federal Savings Bank of Siouxland
First Federal Bankshares, MHC
December 18, 1998
Page 10
include the period for which such assets were held by the transferor, provided
that the property transferred had been held as a capital asset. Section 1032 of
the Code states that no gain or loss shall be recognizes to a corporation, such
as the Company, on the receipt of property in exchange for common stock.
We hereby consent to the filing of the opinion as an exhibit to the
MHC's Application for Conversion on Form AC as filed with the OTS and to the
Company's Registration Statement on Form S-1 as filed with the SEC. We also
consent to the references to our firm in the Prospectus contained in the Forms
AC and S-1 under the captions "The Conversion--Tax Aspects" and "Legal
Opinions."
Very truly yours,
/s/ Luse Lehman Gorman Pomerenk & Schick
----------------------------------------
LUSE LEHMAN GORMAN POMERENK
& SCHICK, A PROFESSIONAL CORPORATION
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KPMG Peat Marwick LLP Letterhead
[LETTERHEAD]
December 18, 1998
PRIVATE & CONFIDENTIAL
Board of Directors
First Federal Bankshares, Inc.
First Federal Bankshares, MHC
First Federal Savings Bank of Siouxland
329 Pierce Street
Sioux City, IA 51102
RE: STATE INCOME TAX OPINION RELATED TO THE CONVERSION OF FIRST
FEDERAL BANKSHARES (MHC), TO STOCK HOLDING COMPANY FORM AS FIRST
FEDERAL BANKSHARES, INC. (COMPANY), AND THE RELATED TRANSACTIONS
Board Members:
You have requested our opinion as to the Iowa state income tax consequences
resulting from the proposed conversion of First Federal Bankshares, MHC (Mutual
Holding Company) to a stock holding company form known as First Federal
Bankshares, Inc. (Company) and the related transactions.
You have submitted to us a copy of the federal tax opinion (federal tax opinion)
as to the income tax consequences of the proposed transaction prepared by your
counsel, Luse Lehman Gorman Pomerenk & Schick. The federal tax opinion is based
upon the existing provisions of the Internal Revenue Code of 1986, as amended
(the Code), and regulations thereunder, both final and proposed Treasury
Regulations, and upon current Internal Revenue Service published rulings and
existing court decisions.
Our opinion regarding the Iowa state tax consequences is based on our review and
reliance upon the facts, assumptions, and opinions contained in the federal tax
opinion. It is also based on existing Iowa state tax law which is subject to
change. We have not reviewed the legal documents necessary to effectuate the
steps to be undertaken, and we assume that all steps will be properly
effectuated under state and federal law and will be consistent with legal
documentation.
<PAGE>
Page 2
Board of Directors
First Federal Bankshares, Inc.
First Federal Bankshares, MHC
First Federal Savings Bank of Siouxland
December 18, 1998
THE PROPOSED TRANSACTIONS
The facts and representations of the proposed transactions are as follows:
In July 1992, First Federal Savings Bank of Siouxland (Bank), a
federally-chartered mutual savings bank, reorganized into the mutual holding
company form of organization. At that time, Bank sold 630,000 shares of common
stock (Bank Common Stock) at $10.00 per share to the public (Minority
Stockholders). After the conclusion of the sale to Minority Stockholders,
Mutual Holding Company held 55.0% of Bank's Common Stock outstanding. The
shares of Bank Common Stock that were sold to Minority Stockholders constituted
45.0% of the issued and outstanding shares of Bank Common Stock.
At the present time, two transactions referred to as the "MHC Merger"
and the "Bank Merger" are being undertaken. The MHC Merger and the Bank
Merger are being accomplished pursuant to a Plan of Conversion and
Reorganization (Plan). Pursuant to the Plan, the conversion (Conversion) will
be effected in the following steps, each of which will be completed
contemporaneously:
(i) Bank will organize Company (which will become the stock holding
company of the Bank) as a first-tier wholly-owned subsidiary of
Bank.
(ii) Company will organize an interim savings bank (Interim), as a
wholly-owned stock savings bank subsidiary of Company.
(iii) Mutual Holding Company will exchange its charter for an interim
federal stock savings association charter and will simultaneously
merge in a statutory merger with and into Bank (MHC Merger), with
Bank as the resulting entity whereby each member of Mutual
Holding Company who is an Eligible Account Holder or Supplemental
Account Holder will receive an interest in a liquidation account
(Liquidation Account) established in Bank pursuant to
regulations of the Office of Thrift Supervision (OTS) in exchange
for such member's ownership interest in Mutual Holding Company.
In conjunction with the MHC Merger, Bank's stock held by Mutual
Holding Company will be canceled.
<PAGE>
Page 3
Board of Directors
First Federal Bankshares, Inc.
First Federal Bankshares, MHC
First Federal Savings Bank of Siouxland
December 18, 1998
(iv) Interim will merge in a statutory merger with and into Bank with
Bank as the resulting institution (Bank Merger) pursuant to the
Agreement of Merger between Bank, Company, and Interim, whereby
each Minority Stockholder will receive common stock of Company
(Company Common Stock) in exchange for minority shares based on
an exchange ratio (Exchange Ratio) with cash paid in lieu of
fractional shares.
(v) As a result of the Bank Merger, Company will own all of the
common stock of Bank, and Company will offer for sale Company
Common Stock in an offering (Offering) that will occur
contemporaneously with the Conversion (discussed below).
The Plan complies with the provisions of Subpart A of 12 C.F.R. Part
563b, which sets forth the OTS regulations for conversions of mutual
institutions to stock form. The Plan also complies with the provisions of 12
C.F.R. Section 575.12(a) which is the OTS regulation governing the conversion of
mutual holding companies to stock form.
In the MHC Merger, a Liquidation Account is being established by Bank
for the benefit of Eligible Account Holders and Supplemental Account Holders.
Pursuant to Section 19 of the Plan, the initial balance of the Liquidation
Account will be equal to the sum of (i) approximately 51% (Mutual Holding
Company stock ownership interest in Bank) of Bank's total stockholders' equity
as reflected in its latest statement of financial condition contained in the
final Prospectus utilized in the Conversion , or (ii) the retained earnings of
Bank at the time Bank underwent its initial mutual holding company
reorganization.
Upon the date of consummation of the Bank Merger (Effective Date),
Interim will be merged with and into Bank and Interim will cease to exist as a
legal entity. All of the then outstanding shares of Bank Common Stock will be
converted into and become shares of Company Common Stock pursuant to the
Exchange Ratio that ensures that after the Conversion and before giving effect
to Minority Stockholders' purchases in the Offering and receipt of cash in lieu
of fractional shares, Minority Stockholders will own the same aggregate
percentage of Company Common Stock as they currently own of Bank Common Stock.
The common stock of Interim owned by Company prior to the Bank Merger will be
converted into and become shares of common stock of Bank on the Effective Date.
Company Common Stock held by Bank immediately prior to the Effective Date will
be
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Page 4
Board of Directors
First Federal Bankshares, Inc.
First Federal Bankshares, MHC
First Federal Savings Bank of Siouxland
December 18, 1998
canceled on the Effective Date. Immediately following the Bank Merger,
additional shares of Company Common Stock will be sold to depositors and former
shareholders of Bank and to members of the public in the Offering.
As a result of the MHC Merger and the Bank Merger, Company will be a
publicly-held corporation, will register Company Common Stock under Section
12(g) of the Securities Exchange Act of 1934, as amended (Exchange Act), and
will become subject to the rules and regulations thereunder and file periodic
reports and proxy statements with the Securities and Exchange Commission. Bank
will become a wholly-owned subsidiary of Company and will continue to carry on
its business and activities as conducted immediately prior to Conversion.
The stockholders of Company will be the former Minority Stockholders of
Bank immediately prior to the Bank Merger (i.e., all stockholders of Bank,
excluding Mutual Holding Company) plus those persons who purchase shares of
Company Common Stock in the Offering. Nontransferable rights to subscribe for
Company Common Stock have been granted, in order of priority, to depositors of
Bank who have account balances of $50.00 or more as of the close of business on
September 30, 1997 (Eligible Account Holders), Bank's tax-qualified employee
plans (Employee Plans), depositors of Bank who have account balances of $50.00
or more as of the close of business on December 31, 1998 (Supplemental Account
Holders), other members of Bank (other than Eligible Account Holders and
Supplemental Account Holders) (Other Members), and owners of shares of Bank
Common Stock other than Mutual Holding Company (Minority Stockholders).
Subscription rights are nontransferable. Company will also offer shares of
Company Common Stock not subscribed for in the Subscription Offering, if any,
for sale in a community offering to certain members of the general public
(Community Offering).
FEDERAL TAX OPINIONS
Based on the foregoing description of the MHC Merger and the Bank
Merger, and subject to the qualifications and limitations set forth in the
federal tax opinion, Luse Lehman Gorman Pomerenk & Schick is of the opinion
that:
1. The conversion of Mutual Holding Company from a federally-chartered
mutual holding company to a federally-chartered interim stock savings
association will
<PAGE>
Page 5
Board of Directors
First Federal Bankshares, Inc.
First Federal Bankshares, MHC
First Federal Savings Bank of Siouxland
December 18, 1998
constitute a mere change in identity, form or place of organization within
the meaning of Section 368(a)(1)(F) of the Code.
2. The MHC Merger qualifies as a tax-free reorganization within the
meaning of Section 368(a)(1)(A) of the Code.
3. Mutual Holding Company will not recognize any gain or loss on the
transfer of its assets to Bank in exchange for an interest in Liquidation
Account established in Bank. (Section 361 of the Code.)
4. The exchange of the members' equity interests in Mutual Holding
Company for interests in Liquidation Account established at Bank in the MHC
Merger will satisfy the continuity of interest requirement of Section
1.368-1(b) of the Income Tax Regulations (CF. Rev. Rul. 69-3, 1969-1 C.B.
103, and Rev. Rul. 69-646, 1962-2 C.B. 54).
5. No gain or loss will be recognized by Bank upon the receipt of the
assets of Mutual Holding Company in exchange for the transfer to the
members of Mutual Holding Company of an interest in Liquidation Account in
Bank. (Section 1032(a) of the Code.)
6. The basis of the assets of Mutual Holding Company (other than Bank
Common Stock) to be received by Bank will be the same as the basis of such
assets in the hands of Mutual Holding Company immediately prior to the
transfer. The basis of the Bank stock will be zero. See Revised Rule
74-503. (Section 362(b) of the Code.)
7. The holding period of the assets of Mutual Holding Company (other
than Bank Common Stock) to be received by Bank will include the holding
period of those assets in the hands of Mutual Holding Company immediately
prior to the transfer. (Section 1223(2) of the Code.)
8. Mutual Holding Company members will recognize no gain or loss upon
the receipt of an interest in Liquidation Account in Bank in exchange for
their membership interest in Mutual Holding Company. (Section 354(a) of the
Code.)
<PAGE>
Page 6
Board of Directors
First Federal Bankshares, Inc.
First Federal Bankshares, MHC
First Federal Savings Bank of Siouxland
December 18, 1998
In addition, with respect to the Bank Merger, Luse Lehman Gorman
Pomerenk & Schick is of the opinion that:
9. The Bank Merger qualifies as a reorganization within the meaning of
Section 368(a)(1)(A) of the Code, pursuant to Section 368(a)(2)(E) of the
Code. The Bank Merger is not disqualified as a tax-free reorganization by
reason of the fact that Company Common Stock will be conveyed to Bank's
stockholders in exchange for their Bank Common Stock. (Section 368(a)(2)(E)
of the Code.) Bank, Company, and Interim will each be a party to the
reorganization within the meaning of Section 368(b).
10. Interim will not recognize any gain or loss on the transfer of its
assets to Bank in exchange for Bank Common Stock and the assumption by Bank
of the liabilities, if any, of Interim. (Section 361(a) and 357(a) of the
Code.)
11. Bank will not recognize any gain or loss on the receipt of the
assets of Interim in exchange for Bank Common Stock (Section 1032(a) of the
Code.)
12. Bank's basis in the assets received from Interim in the proposed
transaction will, in each case, be the same as the basis of such assets in
the hands of Interim immediately prior to the transaction. (Section 362(b)
of the Code.)
13. Bank's holding period for the assets received from Interim in the
proposed transaction will, in each instance, include the period during which
such assets were held by Interim. (Section 1223(2) of the Code.)
14. Company will not recognize any gain or loss upon its receipt of
Bank Common Stock in exchange for Interim stock. (Section 354(a) of the
Code.)
15. Bank shareholders will not recognize any gain or loss upon their
exchange of Bank Common Stock solely for shares of Company Common Stock
(including fractional shares which Bank shareholders otherwise would be
entitled to receive). (Section 354(a) of the Code.)
16. Cash received in the Bank Merger by a Bank stockholder in lieu of a
fractional share interest of Company Common Stock will be treated as having
been received as a distribution in full payment in exchange for the
fractional share interest of Bank
<PAGE>
Page 7
Board of Directors
First Federal Bankshares, Inc.
First Federal Bankshares, MHC
First Federal Savings Bank of Siouxland
December 18, 1998
Common Stock which such stockholder would otherwise be entitled to receive,
and will qualify as capital gain or loss (assuming Bank Common Stock
surrendered in exchange therefor was held as a capital asset by such
stockholder).
17. Each Bank shareholder's basis in his or her Company Common Stock
received in the exchange (including fractional shares which Bank
shareholders otherwise would be entitled to receive) will be the same as the
basis of Bank Common Stock surrendered in exchange therefor. (Section
358(a) of the Code.)
18. The Company's basis in the Bank Common Stock received in the Bank
Merger will be the same as the basis of the property exchanged therefor.
(Section 362(b) of the Code.)
19. Each Bank shareholder's holding period in his or her Company Common
Stock received in the exchange (including fractional shares which Bank
shareholders otherwise would be entitled to receive) will include the period
during which Bank stock surrendered was held, provided that Bank Common
Stock surrendered is a capital asset in the hands of the Bank shareholder on
the date of the exchange. (Section 1223(1) of the Code.)
20. No gain or loss will be recognized by Company on the receipt of
money in exchange for Company Common Stock in the Offering. (Section
1032(a) of the Code.)
21. No gain or loss will be recognized by Eligible Holders upon
distribution to them of non-transferable subscription rights to purchase
shares of Company Common Stock, provided that the amount paid for the
Company Common Stock is equal to the fair market value of such stock. See
Revised Rule 90-11.
IOWA TAX OPINIONS
Section 422.34 of the Code of Iowa, 1997, specifically exempts "savings
banks" from taxation as a corporation. Section 422.61 defines a "financial
institution" for purposes of the Iowa franchise tax. Bank is a
federally-chartered stock savings bank and, as such, is treated as financial
institution under Iowa law. Accordingly, it is required to pay a franchise
tax for the privilege of doing business in Iowa.
<PAGE>
Page 8
Board of Directors
First Federal Bankshares, Inc.
First Federal Bankshares, MHC
First Federal Savings Bank of Siouxland
December 18, 1998
Under the Code of Iowa, both corporations and financial institutions compute
their net income using federal taxable income as a starting point. Federal
taxable income is properly computed for federal income tax purposes pursuant to
the Code, which is specifically cited in the Code of Iowa. Several specific
adjustments are enumerated in Section 422.61 of the Code of Iowa to determine
net income for Iowa franchise tax purposes.
The Iowa statute places strict reliance on the Code and, based on the foregoing
information, we render the following opinion with respect to the Iowa tax
consequences of the proposed transaction:
1. For Iowa state income tax purposes, the conversion of Mutual Holding
Company will constitute a mere change in identity, form, or place
of organization.
2. The MHC Merger will qualify as a tax-free reorganization.
3. The Bank Merger will qualify as a tax-free reorganization.
4. All of the other provisions of the federal tax opinion shall also
apply on a similar basis for Iowa purposes. In summary, no gain or
loss will be recognized as a result of the transactions. Gain or
loss will be recognized by a Bank stockholder measured by the
difference between the cash received and the tax basis in fractional
shares of Bank Common Stock.
In conclusion, based upon the federal tax opinion, the facts and representations
set forth above and subject to any contingencies stated herein, it is the
opinion of KPMG Peat Marwick LLP that the conversion of Mutual Holding Company
will be treated as a mere change in identity, form, or place of organization for
Iowa state income tax purposes. Further, the MHC Merger and Bank Merger will
constitute tax-free reorganizations for Iowa state income tax purposes.
The opinions expressed above are rendered only with respect to the specific
matters discussed herein, and we express no opinion with respect to any other
federal or state income tax or legal aspect of the Offering. If any of the
above-stated facts, circumstances, or assumptions are not entirely complete or
accurate, it is imperative that we be informed
<PAGE>
Page 9
Board of Directors
First Federal Bankshares, Inc.
First Federal Bankshares, MHC
First Federal Savings Bank of Siouxland
December 18, 1998
immediately, as the inaccuracy or incompleteness could have a material effect on
our conclusions. In rendering our opinion, we are relying upon the relevant
provisions of the Code of Iowa, the Code, the regulations thereunder, and
judicial and administrative interpretations thereof, which are subject to change
or modification by subsequent legislative regulatory, administrative, or
judicial decisions. Any such changes could also have an effect on the validity
of our opinion.
Very truly yours,
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
<PAGE>
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
SEVERANCE AGREEMENT
This AGREEMENT is made effective as of September 18, 1996 by and between
First Federal Savings Bank of Siouxland (the "Bank"), a federally-chartered
savings institution, with its main office at 329 Pierce Street, Sioux City, Iowa
and Barry E. Backhaus (the "Executive"). The Bank is the majority-owned
subsidiary of First Federal Bankshares, MHC (the "Holding Company"), a mutual
holding company chartered and regulated under the laws of the Office of Thrift
Supervision.
WHEREAS, the Bank recognizes the substantial contribution Executive has
made to the Bank and wishes to protect his position therewith for the period
provided in this Agreement; and
WHEREAS, Executive has been appointed to, and has agreed to serve in the
position of President and Chief Executive Officer for the Bank, a position of
substantial responsibility.
NOW, THEREFORE, in consideration of the contribution and responsibilities
of Executive, and upon the other terms and conditions hereinafter provided, the
parties hereto agree as follows:
1. TERM OF AGREEMENT
The term of this Agreement shall be deemed to have commenced as of the date
first above written and shall continue for a period of thirty-six (36) full
calendar months thereafter. Commencing on the first anniversary date of this
Agreement and continuing at each anniversary date thereafter, the board of
directors of the Bank may extend this Agreement for an additional year. The
Board of Directors of the Bank ("Board") will review this Agreement and will
conduct an annual performance evaluation of Executive for purposes of
determining whether to extend this Agreement, and the results thereof shall be
included in the minutes of the Board's meeting.
2. PAYMENTS TO EXECUTIVE UPON CHANGE IN CONTROL
(a) Upon the occurrence of a Change in Control (as herein defined) of the
Bank or the Holding Company followed at any time during the term of this
Agreement by the voluntary or involuntary termination of Executive's employment,
other than for Cause, as defined in Section 2(c), the provisions of Section 3
shall apply. Upon the occurrence of a Change in Control, Executive shall have
the right to elect to voluntarily terminate his employment at any time during
the term of this Agreement following any demotion, loss of title, office or
significant authority, reduction in his annual compensation or benefits, or
relocation of his principal place of employment by more than 30 miles from its
location immediately prior to the Change in Control.
(b) A "Change in Control" of the Bank or the Holding Company shall mean (i)
a plan of reorganization, merger, merger conversion, consolidation or sale of
all or substantially all of the assets of the Bank or the Holding Company or a
similar transaction occurs in which the Bank or the Holding Company is not the
resulting entity; (ii) individuals who constitute the board of directors of the
Bank or the board of directors of the Holding Company cease for any reason to
constitute a majority thereof; or (iii) a change in control within the meaning
of 12 C.F.R. Section 574.4 occurs, as determined by the board of directors of
the Bank or the Holding Company, provided, however, that a change in control
shall not be deemed to occur under 2(b)(i) or 2(b)(iii) of this Section 2, if
the transaction constituting a change in control is approved by a majority of
the board of directors of the Bank or the Holding Company, as the case may be.
In the event the Holding Company converts from the mutual form of organization
to the stock form of organization on a stand-alone basis at any time subsequent
to the effective date of this Agreement ("Stock Holding Company")
<PAGE>
a "Change in Control" of the Bank or the Holding Company shall mean a change in
control of a nature that: (I) would be required to be reported in response to
Item 1 of the current report on Form 8-K, as in effect on the date hereof,
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the
"Exchange Act"); or (II) results in a Change in Control of the Bank or the Stock
Holding Company within the meaning of the Home Owners' Loan Act of 1933 and the
Rules and Regulations promulgated by the Office of Thrift Supervision (or its
predecessor agency), as in effect on the date hereof; or (III) without
limitation, such a Change in Control shall be deemed to have occurred at such
time as (a) any "person" (as the term is used in Sections 13(d) and 14(d) of the
Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities representing 25%
or more of the combined voting power of the Bank's or Stock Holding Company's
outstanding securities except for any securities of the Bank purchased by the
Stock Holding Company or any securities purchased by the Bank's Employee Stock
Ownership Plan and Trust; or (b) individuals who constitute the Board of the
Bank or the Stock Holding Company on the date hereof (the "Incumbent Board")
cease for any reason to constitute at least a majority thereof, provided that
any person becoming a director subsequent to the date hereof whose election was
approved by a vote of at least three-quarters of the directors comprising the
Incumbent Board, or whose nomination for election by the Stock Holding Company's
stockholders was approved by the Stock Holding Company's Nominating Committee,
shall be, for purposes of this clause (b), considered as though he were a member
of the Incumbent Board; or (c) a plan of reorganization, merger, consolidation
sale of all or substantially all the assets of the Bank or the Stock Holding
Company or similar transaction occurs in which the Bank or the Stock Holding
Company is not the surviving entity.
(c) Executive shall not have the right to receive termination benefits
pursuant to Section 3 upon Termination for Cause. The term "Termination for
Cause" shall mean termination because of Executive's personal dishonesty,
incompetence, willful misconduct, any breach of fiduciary duty involving
personal profit, intentional failure to perform stated duties, willful violation
of any law, rule, or regulation (other than traffic violations or similar
offenses) or final cease-and-desist order, or material breach of any material
provision of this Agreement. In determining incompetence, the acts or
omissions shall be measured against standards generally prevailing in the
savings institutions industry. Notwithstanding the foregoing, Executive shall
not be deemed to have been Terminated for Cause unless and until there shall
have been delivered to him a copy of a resolution duly adopted by the
affirmative vote of not less than three-fourths of the Board of Directors of the
Bank at a meeting of the Board called and held for that purpose (after
reasonable notice to Executive and an opportunity for him, together with
counsel, to be heard before the Board), finding that in the good faith opinion
of the Board, Executive was guilty of conduct justifying Termination for Cause
and specifying the particulars thereof in detail. Executive shall not have the
right to receive compensation or other benefits for any period after Termination
for Cause.
3. TERMINATION BENEFITS
(a) (i) Upon the occurrence of a Change in Control, followed at any time
during the term of this Agreement by the involuntary termination of Executive's
employment, other than for Termination for Cause, the Bank shall be obligated to
pay Executive, or in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be, as severance pay or liquidated
damages, or both, a sum equal to three (3) times the average of the three (3)
preceding years Executive's Base Salary, including bonuses and any other cash
compensation paid or accrued to Executive during such year, and the amount of
any benefits received pursuant to any employee benefit plans, on behalf of
Executive, maintained by the Bank during such years. At the election of
Executive, which election is to be made within thirty (30) days of the Date of
Termination (as defined in Section 4), such payment may be made in a lump sum or
paid in equal monthly installments during the thirty-six (36) months following
Executive's termination. In the event that no election is made, payment to
Executive will be made on a monthly basis during the remaining term of this
Agreement.
<PAGE>
(ii) Upon the occurrence of a Change in Control, followed at any time
during the firm of this Agreement by the voluntary termination of Executive's
employment, the Bank shall be obligated to pay Executive or in the event of his
subsequent death, his beneficiary or beneficiaries of his estate, as the case
may be as severance pay or liquidated damages, or both a sum equal to the
Executive's preceding year's Base Salary, including bonuses and any other cost
compensation paid or accrued to Executive during such year, and the amount of
any benefits received pursuant to any employee benefit plans on behalf of
Executive, maintained by the Bank during such year. As the election of
Executive, which election is to be made within thirty (30) days of the date of
Termination such payment may be made in a lump sum or paid in monthly
installments during the twelve (12) months following Executive's termination.
In the event that no election is made, payment to Executive will be made on a
monthly basis during the remaining term of the Agreement.
(b) Upon the occurrence of a Change in Control of the Bank or the Holding
Company followed at any time during the term of this Agreement by Executive's
voluntary or involuntary termination of employment, other than for Termination
for Cause, the Bank shall cause to be continued life, medical, dental and
disability coverage substantially identical to the coverage maintained by the
Bank for Executive prior to his severance. Such coverage and payments shall
cease upon the expiration of thirty-six (36) months.
(c) Upon the occurrence of a Change in Control, Executive will have such
rights as specified in the Bank's Incentive Stock Option Plan or any other
employee benefit plan with respect to options and such other rights as may have
been granted to Executive under such plans.
(d) Upon a Change in Control, Executive will be entitled to the benefits
under the Bank's Recognition and Retention Plans and Trusts or any other such
plans.
(e) In the event that Executive is receiving monthly payments pursuant to
Section 3(a) on an annual basis, thereafter, Executive shall elect whether the
balance of the amount payable under this Agreement at that time shall be paid in
a lump sum or on a pro rata basis. Such election shall be irrevocable for the
year for which such election is made.
(f) Notwithstanding the preceding paragraphs of this Section 3, in no event
shall the aggregate payments or benefits to be made or afforded to Executive
under said paragraphs (the "Termination Benefits") constitute an "excess
parachute payment" under Section 280G of the Code or any successor thereto, and
in order to avoid such a result Termination Benefits will be reduced, if
necessary, to an amount (the "Non-Triggering Amount"), the value of which is one
dollar ($1.00) less than an amount equal to three (3) times Executive's "base
amount", as determined in accordance with said Section 280G. The allocation of
the reduction required hereby among the Termination Benefits provided by the
preceding paragraphs of this Section 3 shall be determined by Executive.
4. NOTICE OF TERMINATION
(a) Any purported termination by the Bank or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean (A) if Executive's employment is
terminated for Disability, thirty (30) days after a Notice of Termination is
given (provided that he shall not have returned to the performance of his duties
on a full-time basis during such thirty (30) day period), and (B) if his
employment
<PAGE>
is terminated for any other reason, the date specified in the Notice of
Termination (which, in the case of a Termination for Cause, shall be immediate).
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, except upon the occurrence of a
Change in Control and voluntary termination by Executive in which case the Date
of Termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration award, or
by a final judgment, order or decree of a court of competent jurisdiction (the
time for appeal there from having expired and no appeal having been perfected)
and provided further that the Date of Termination shall be extended by a notice
of dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Bank will continue to pay
Executive his full compensation in effect when the notice giving rise to the
dispute was given (including, but not limited to, Base Salary) and continue him
as a participant in all compensation, benefit and insurance plans in which he
was participating when the notice of dispute was given, until the earlier of 120
days from the date of the Notice of Termination or the date upon which the
dispute is finally resolved in accordance with this Agreement. Amounts paid
under this Section are in addition to all other amounts due under this Agreement
and shall not be offset against or reduce any other amounts due under this
Agreement.
5. SOURCE OF PAYMENTS
It is intended by the parties hereto that all payments provided in this
Agreement shall be paid in cash or check from the general funds of the Bank.
The Holding Company guarantees payment and provision of all amounts and benefits
due hereunder to Executive and, if such amounts and benefits due from the Bank
are not timely paid or provided by the Bank, such amounts and benefits shall be
paid or provided by the Holding Company.
6. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior agreement between the Bank and Executive, except that
this Agreement shall not affect or operate to reduce any benefit or compensation
inuring to Executive of a kind elsewhere provided. No provision of this
Agreement shall be interpreted to mean that Executive is subject to receiving
fewer benefits than those available to him without reference to this Agreement.
Nothing in this Agreement shall confer upon Executive the right to continue in
the employ of the Bank or shall impose on the Bank any obligation to employ or
retain Executive in its employ for any period.
7. NO ATTACHMENT
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, the Bank and their respective successors and assigns.
<PAGE>
8. MODIFICATION AND WAIVER
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future or as to any act other than that
specifically waived.
9. REQUIRED REGULATORY PROVISIONS
(a) The Bank may terminate Executive's employment at any time, but any
termination by the Bank, other than Termination for Cause, shall not prejudice
Executive's right to compensation or other benefits under this Agreement.
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause as defined in Section 2.
(b) If Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) (12 USC 1918(e)(3)) or 8(g) (12 USC 1818(g)) of the Federal
Deposit Insurance Act, as amended by the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989, the Bank's obligations under this
contract shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the Bank
may in its discretion (i) pay Executive all or part of the compensation withheld
while their contract obligations were suspended and (ii) reinstate (in whole or
in part) any of the obligations which were suspended.
(c) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e) (12 USC Section 1818(e)) or 8(g) (12 USC Section 1818(g)) of the
Federal Deposit Insurance Act, as amended by the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989, all obligations of the Bank under this
contract shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
(d) If the Bank is in default as defined in Section 3(x) (12 USC
1813(x)(1)) of the Federal Deposit Insurance Act, as amended by the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989, all obligations of
the Bank under this contract shall terminate as of the date of default, but this
paragraph shall not affect any vested rights of the contracting parties.
(e) All obligations of the Bank under this contract shall be terminated,
except to the extent determined that continuation of the contract is necessary
for the continued operation of the institution, (i) by the Federal Deposit
Insurance Corporation, at the time FDIC enters into an agreement to provide
assistance to or on behalf of the Bank under the authority contained in Section
13(c) (12 USC Section 1823(c)) of the Federal Deposit Insurance Act, as amended
by the Financial Institutions Reform, Recovery, and Enforcement Act of 1982; or
(ii) by the Office of Thrift Supervision ("OTS") at the time the OTS or its
District Director approves a supervisory merger to resolve problems related to
the operations of the Bank or when the Bank is determined by the OTS or FDIC to
be in an unsafe or unsound condition. Any rights of the parties that have
already vested, however, shall not be affected by such action.
<PAGE>
10. REINSTATEMENT OF BENEFITS UNDER SECTION 9(b)
In the event Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice described in
Section 9(b) hereof (the "Notice") during the term of this Agreement and a
Change in Control, as defined herein, occurs, the Bank will assume its
obligation to pay and Executive will be entitled to receive all of the
termination benefits provided for under Section 3 upon the Bank's receipt of a
dismissal of charges in the Notice.
11. SEVERABILITY
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
12. HEADINGS FOR REFERENCE ONLY
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
13. GOVERNING LAW
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by the laws of the state of Iowa, to the extent not
preempted by federal law as now or hereafter in effect.
14. ARBITRATION
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the employee within fifty
(50) miles from the location of the Bank, in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
Executive shall be entitled to seek specific performance of his right to be paid
until the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
15. PAYMENT OF LEGAL FEES
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Bank if Executive is successful on the merits pursuant to a
legal judgment, arbitration or settlement, which payments are guaranteed by the
Holding Company pursuant to Section 5.
16. INDEMNIFICATION
The Bank shall provide Executive (including his heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense, or in lieu thereof, shall indemnify
Executive (and his heirs, executors and administrators) to the fullest extent
permitted under Iowa law against all expenses and liabilities reasonably
incurred by him in connection with or arising out of any action, suit or
proceeding in which he may be involved by reason of his having been a director
or officer of
<PAGE>
the Bank (whether or not he continues to be a director or officer at the time of
incurring such expenses or liabilities), such expenses and liabilities to
include, but not be limited to, judgments, court costs and attorneys' fees and
the cost of reasonable settlements.
17. SUCCESSOR TO THE BANK
The Bank shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank or the Holding Company,
expressly and unconditionally to assume and agree to perform the Bank's
obligations under this Agreement, in the same manner and to the same extent that
the Bank would be required to perform if no such succession or assignment had
taken place.
<PAGE>
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
SEVERANCE AGREEMENT
This AGREEMENT is made effective as of September 18, 1996 by and between
First Federal Savings Bank of Siouxland (the "Bank"), a federally-chartered
savings institution, with its main office at 329 Pierce Street, Sioux City, Iowa
and Jon G. Cleghorn (the "Executive"). The Bank is the majority-owned
subsidiary of First Federal Bankshares, MHC (the "Holding Company"), a mutual
holding company chartered and regulated under the laws of the Office of Thrift
Supervision.
WHEREAS, the Bank recognizes the substantial contribution Executive has
made to the Bank and wishes to protect his position therewith for the period
provided in this Agreement; and
WHEREAS, Executive has been appointed to, and has agreed to serve in the
position of Executive Vice President for the Bank, a position of substantial
responsibility.
NOW, THEREFORE, in consideration of the contribution and responsibilities
of Executive, and upon the other terms and conditions hereinafter provided, the
parties hereto agree as follows:
1. TERM OF AGREEMENT
The term of this Agreement shall be deemed to have commenced as of the date
first above written and shall continue for a period of thirty-six (36) full
calendar months thereafter. Commencing on the first anniversary date of this
Agreement and continuing at each anniversary date thereafter, the board of
directors of the Bank may extend this Agreement for an additional year. The
Board of Directors of the Bank ("Board") will review this Agreement and will
conduct an annual performance evaluation of Executive for purposes of
determining whether to extend this Agreement, and the results thereof shall be
included in the minutes of the Board's meeting.
2. PAYMENTS TO EXECUTIVE UPON CHANGE IN CONTROL
(a) Upon the occurrence of a Change in Control (as herein defined) of the
Bank or the Holding Company followed at any time during the term of this
Agreement by the voluntary or involuntary termination of Executive's employment,
other than for Cause, as defined in Section 2(c), the provisions of Section 3
shall apply. Upon the occurrence of a Change in Control, Executive shall have
the right to elect to voluntarily terminate his employment at any time during
the term of this Agreement following any demotion, loss of title, office or
significant authority, reduction in his annual compensation or benefits, or
relocation of his principal place of employment by more than 30 miles from its
location immediately prior to the Change in Control.
(b) A "Change in Control" of the Bank or the Holding Company shall mean (i)
a plan of reorganization, merger, merger conversion, consolidation or sale of
all or substantially all of the assets of the Bank or the Holding Company or a
similar transaction occurs in which the Bank or the Holding Company is not the
resulting entity; (ii) individuals who constitute the board of directors of the
Bank or the board of directors of the Holding Company cease for any reason to
constitute a majority thereof; or (iii) a change in control within the meaning
of 12 C.F.R. Section 574.4 occurs, as determined by the board of directors of
the Bank or the Holding Company, provided, however, that a change in control
shall not be deemed to occur under 2(b)(i) or 2(b)(iii) of this Section 2, if
the transaction constituting a change in control is approved by a majority of
the board of directors of the Bank or the Holding Company, as the case may be.
In the event the Holding Company converts from the mutual form of organization
to the stock form of organization on a stand-alone basis at any time subsequent
to the effective date of this Agreement ("Stock Holding Company")
<PAGE>
a "Change in Control" of the Bank or the Holding Company shall mean a change in
control of a nature that: (I) would be required to be reported in response to
Item 1 of the current report on Form 8-K, as in effect on the date hereof,
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the
"Exchange Act"); or (II) results in a Change in Control of the Bank or the Stock
Holding Company within the meaning of the Home Owners' Loan Act of 1933 and the
Rules and Regulations promulgated by the Office of Thrift Supervision (or its
predecessor agency), as in effect on the date hereof; or (III) without
limitation, such a Change in Control shall be deemed to have occurred at such
time as (a) any "person" (as the term is used in Sections 13(d) and 14(d) of the
Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities representing 25%
or more of the combined voting power of the Bank's or Stock Holding Company's
outstanding securities except for any securities of the Bank purchased by the
Stock Holding Company or any securities purchased by the Bank's Employee Stock
Ownership Plan and Trust; or (b) individuals who constitute the Board of the
Bank or the Stock Holding Company on the date hereof (the "Incumbent Board")
cease for any reason to constitute at least a majority thereof, provided that
any person becoming a director subsequent to the date hereof whose election was
approved by a vote of at least three-quarters of the directors comprising the
Incumbent Board, or whose nomination for election by the Stock Holding Company's
stockholders was approved by the Stock Holding Company's Nominating Committee,
shall be, for purposes of this clause (b), considered as though he were a member
of the Incumbent Board; or (c) a plan of reorganization, merger, consolidation
sale of all or substantially all the assets of the Bank or the Stock Holding
Company or similar transaction occurs in which the Bank or the Stock Holding
Company is not the surviving entity.
(c) Executive shall not have the right to receive termination benefits
pursuant to Section 3 upon Termination for Cause. The term "Termination for
Cause" shall mean termination because of Executive's personal dishonesty,
incompetence, willful misconduct, any breach of fiduciary duty involving
personal profit, intentional failure to perform stated duties, willful violation
of any law, rule, or regulation (other than traffic violations or similar
offenses) or final cease-and-desist order, or material breach of any material
provision of this Agreement. In determining incompetence, the acts or
omissions shall be measured against standards generally prevailing in the
savings institutions industry. Notwithstanding the foregoing, Executive shall
not be deemed to have been Terminated for Cause unless and until there shall
have been delivered to him a copy of a resolution duly adopted by the
affirmative vote of not less than three-fourths of the Board of Directors of the
Bank at a meeting of the Board called and held for that purpose (after
reasonable notice to Executive and an opportunity for him, together with
counsel, to be heard before the Board), finding that in the good faith opinion
of the Board, Executive was guilty of conduct justifying Termination for Cause
and specifying the particulars thereof in detail. Executive shall not have the
right to receive compensation or other benefits for any period after Termination
for Cause.
3. TERMINATION BENEFITS
(a) (i) Upon the occurrence of a Change in Control, followed at any time
during the term of this Agreement by the involuntary termination of Executive's
employment, other than for Termination for Cause, the Bank shall be obligated to
pay Executive, or in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be, as severance pay or liquidated
damages, or both, a sum equal to three (3) times the average of the three (3)
preceding years Executive's Base Salary, including bonuses and any other cash
compensation paid or accrued to Executive during such year, and the amount of
any benefits received pursuant to any employee benefit plans, on behalf of
Executive, maintained by the Bank during such years. At the election of
Executive, which election is to be made within thirty (30) days of the Date of
Termination (as defined in Section 4), such payment may be made in a lump sum or
paid in equal monthly installments during the thirty-six (36) months following
Executive's termination. In the event that no election is made, payment to
Executive will be made on a monthly basis during the remaining term of this
Agreement.
<PAGE>
(ii) Upon the occurrence of a Change in Control, followed at any time
during the firm of this Agreement by the voluntary termination of Executive's
employment, the Bank shall be obligated to pay Executive or in the event of his
subsequent death, his beneficiary or beneficiaries of his estate, as the case
may be as severance pay or liquidated damages, or both a sum equal to the
Executive's preceding year's Base Salary, including bonuses and any other cost
compensation paid or accrued to Executive during such year, and the amount of
any benefits received pursuant to any employee benefit plans on behalf of
Executive, maintained by the Bank during such year. As the election of
Executive, which election is to be made within thirty (30) days of the date of
Termination such payment may be made in a lump sum or paid in monthly
installments during the twelve (12) months following Executive's termination.
In the event that no election is made, payment to Executive will be made on a
monthly basis during the remaining term of the Agreement.
(b) Upon the occurrence of a Change in Control of the Bank or the Holding
Company followed at any time during the term of this Agreement by Executive's
voluntary or involuntary termination of employment, other than for Termination
for Cause, the Bank shall cause to be continued life, medical, dental and
disability coverage substantially identical to the coverage maintained by the
Bank for Executive prior to his severance. Such coverage and payments shall
cease upon the expiration of thirty-six (36) months.
(c) Upon the occurrence of a Change in Control, Executive will have such
rights as specified in the Bank's Incentive Stock Option Plan or any other
employee benefit plan with respect to options and such other rights as may have
been granted to Executive under such plans.
(d) Upon a Change in Control, Executive will be entitled to the benefits
under the Bank's Recognition and Retention Plans and Trusts or any other such
plans.
(e) In the event that Executive is receiving monthly payments pursuant to
Section 3(a) on an annual basis, thereafter, Executive shall elect whether the
balance of the amount payable under this Agreement at that time shall be paid in
a lump sum or on a pro rata basis. Such election shall be irrevocable for the
year for which such election is made.
(f) Notwithstanding the preceding paragraphs of this Section 3, in no event
shall the aggregate payments or benefits to be made or afforded to Executive
under said paragraphs (the "Termination Benefits") constitute an "excess
parachute payment" under Section 280G of the Code or any successor thereto, and
in order to avoid such a result Termination Benefits will be reduced, if
necessary, to an amount (the "Non-Triggering Amount"), the value of which is one
dollar ($1.00) less than an amount equal to three (3) times Executive's "base
amount", as determined in accordance with said Section 280G. The allocation of
the reduction required hereby among the Termination Benefits provided by the
preceding paragraphs of this Section 3 shall be determined by Executive.
4. NOTICE OF TERMINATION
(a) Any purported termination by the Bank or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes of
this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean (A) if Executive's employment is
terminated for Disability, thirty (30) days after a Notice of Termination is
given (provided that he shall not have returned to the performance of his duties
on a full-time basis during such thirty (30) day period), and (B) if his
employment
<PAGE>
is terminated for any other reason, the date specified in the Notice of
Termination (which, in the case of a Termination for Cause, shall be immediate).
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, except upon the occurrence of a
Change in Control and voluntary termination by Executive in which case the Date
of Termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration award, or
by a final judgment, order or decree of a court of competent jurisdiction (the
time for appeal there from having expired and no appeal having been perfected)
and provided further that the Date of Termination shall be extended by a notice
of dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Bank will continue to pay
Executive his full compensation in effect when the notice giving rise to the
dispute was given (including, but not limited to, Base Salary) and continue him
as a participant in all compensation, benefit and insurance plans in which he
was participating when the notice of dispute was given, until the earlier of 120
days from the date of the Notice of Termination or the date upon which the
dispute is finally resolved in accordance with this Agreement. Amounts paid
under this Section are in addition to all other amounts due under this Agreement
and shall not be offset against or reduce any other amounts due under this
Agreement.
5. SOURCE OF PAYMENTS
It is intended by the parties hereto that all payments provided in this
Agreement shall be paid in cash or check from the general funds of the Bank.
The Holding Company guarantees payment and provision of all amounts and benefits
due hereunder to Executive and, if such amounts and benefits due from the Bank
are not timely paid or provided by the Bank, such amounts and benefits shall be
paid or provided by the Holding Company.
6. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior agreement between the Bank and Executive, except that
this Agreement shall not affect or operate to reduce any benefit or compensation
inuring to Executive of a kind elsewhere provided. No provision of this
Agreement shall be interpreted to mean that Executive is subject to receiving
fewer benefits than those available to him without reference to this Agreement.
Nothing in this Agreement shall confer upon Executive the right to continue in
the employ of the Bank or shall impose on the Bank any obligation to employ or
retain Executive in its employ for any period.
7. NO ATTACHMENT
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, the Bank and their respective successors and assigns.
<PAGE>
8. MODIFICATION AND WAIVER
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future or as to any act other than that
specifically waived.
9. REQUIRED REGULATORY PROVISIONS
(a) The Bank may terminate Executive's employment at any time, but any
termination by the Bank, other than Termination for Cause, shall not prejudice
Executive's right to compensation or other benefits under this Agreement.
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause as defined in Section 2.
(b) If Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) (12 USC 1918(e)(3)) or 8(g) (12 USC 1818(g)) of the Federal
Deposit Insurance Act, as amended by the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989, the Bank's obligations under this
contract shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the Bank
may in its discretion (i) pay Executive all or part of the compensation withheld
while their contract obligations were suspended and (ii) reinstate (in whole or
in part) any of the obligations which were suspended.
(c) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e) (12 USC Section 1818(e)) or 8(g) (12 USC Section 1818(g)) of the
Federal Deposit Insurance Act, as amended by the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989, all obligations of the Bank under this
contract shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
(d) If the Bank is in default as defined in Section 3(x) (12 USC
1813(x)(1)) of the Federal Deposit Insurance Act, as amended by the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989, all obligations of
the Bank under this contract shall terminate as of the date of default, but this
paragraph shall not affect any vested rights of the contracting parties.
(e) All obligations of the Bank under this contract shall be terminated,
except to the extent determined that continuation of the contract is necessary
for the continued operation of the institution, (i) by the Federal Deposit
Insurance Corporation, at the time FDIC enters into an agreement to provide
assistance to or on behalf of the Bank under the authority contained in Section
13(c) (12 USC Section 1823(c)) of the Federal Deposit Insurance Act, as amended
by the Financial Institutions Reform, Recovery, and Enforcement Act of 1982; or
(ii) by the Office of Thrift Supervision ("OTS") at the time the OTS or its
District Director approves a supervisory merger to resolve problems related to
the operations of the Bank or when the Bank is determined by the OTS or FDIC to
be in an unsafe or unsound condition. Any rights of the parties that have
already vested, however, shall not be affected by such action.
<PAGE>
10. REINSTATEMENT OF BENEFITS UNDER SECTION 9(b)
In the event Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice described in
Section 9(b) hereof (the "Notice") during the term of this Agreement and a
Change in Control, as defined herein, occurs, the Bank will assume its
obligation to pay and Executive will be entitled to receive all of the
termination benefits provided for under Section 3 upon the Bank's receipt of a
dismissal of charges in the Notice.
11. SEVERABILITY
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
12. HEADINGS FOR REFERENCE ONLY
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
13. GOVERNING LAW
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by the laws of the state of Iowa, to the extent not
preempted by federal law as now or hereafter in effect.
14. ARBITRATION
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the employee within fifty
(50) miles from the location of the Bank, in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
Executive shall be entitled to seek specific performance of his right to be paid
until the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
15. PAYMENT OF LEGAL FEES
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Bank if Executive is successful on the merits pursuant to a
legal judgment, arbitration or settlement, which payments are guaranteed by the
Holding Company pursuant to Section 5.
16. INDEMNIFICATION
The Bank shall provide Executive (including his heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense, or in lieu thereof, shall indemnify
Executive (and his heirs, executors and administrators) to the fullest extent
permitted under Iowa law against all expenses and liabilities reasonably
incurred by him in connection with or arising out of any action, suit or
proceeding in which he may be involved by reason of his having been a director
or officer of the Bank (whether or not he continues to be a director or officer
at the time of incurring such expenses or
<PAGE>
liabilities), such expenses and liabilities to include, but not be limited to,
judgments, court costs and attorneys' fees and the cost of reasonable
settlements.
17. SUCCESSOR TO THE BANK
The Bank shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank or the Holding Company,
expressly and unconditionally to assume and agree to perform the Bank's
obligations under this Agreement, in the same manner and to the same extent that
the Bank would be required to perform if no such succession or assignment had
taken place.
<PAGE>
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
SEVERANCE AGREEMENT
This AGREEMENT is made effective as of September 18, 1996 by and between
First Federal Savings Bank of Siouxland (the "Bank"), a federally-chartered
savings institution, with its main office at 329 Pierce Street, Sioux City, Iowa
and Sandra Sabel (the "Executive"). The Bank is the majority-owned subsidiary
of First Federal Bankshares, MHC (the "Holding Company"), a mutual holding
company chartered and regulated under the laws of the Office of Thrift
Supervision.
WHEREAS, the Bank recognizes the substantial contribution Executive has
made to the Bank and wishes to protect her position therewith for the period
provided in this Agreement; and
WHEREAS, Executive has been appointed to, and has agreed to serve in the
position of Senior Vice President for the Bank, a position of substantial
responsibility.
NOW, THEREFORE, in consideration of the contribution and responsibilities
of Executive, and upon the other terms and conditions hereinafter provided, the
parties hereto agree as follows:
1. TERM OF AGREEMENT
The term of this Agreement shall be deemed to have commenced as of the date
first above written and shall continue for a period of thirty-six (36) full
calendar months thereafter. Commencing on the first anniversary date of this
Agreement and continuing at each anniversary date thereafter, the board of
directors of the Bank may extend this Agreement for an additional year. The
Board of Directors of the Bank ("Board") will review this Agreement and will
conduct an annual performance evaluation of Executive for purposes of
determining whether to extend this Agreement, and the results thereof shall be
included in the minutes of the Board's meeting.
2. PAYMENTS TO EXECUTIVE UPON CHANGE IN CONTROL
(a) Upon the occurrence of a Change in Control (as herein defined) of the
Bank or the Holding Company followed at any time during the term of this
Agreement by the voluntary or involuntary termination of Executive's employment,
other than for Cause, as defined in Section 2(c), the provisions of Section 3
shall apply. Upon the occurrence of a Change in Control, Executive shall have
the right to elect to voluntarily terminate her employment at any time during
the term of this Agreement following any demotion, loss of title, office or
significant authority, reduction in her annual compensation or benefits, or
relocation of her principal place of employment by more than 30 miles from its
location immediately prior to the Change in Control.
(b) A "Change in Control" of the Bank or the Holding Company shall mean (i)
a plan of reorganization, merger, merger conversion, consolidation or sale of
all or substantially all of the assets of the Bank or the Holding Company or a
similar transaction occurs in which the Bank or the Holding Company is not the
resulting entity; (ii) individuals who constitute the board of directors of the
Bank or the board of directors of the Holding Company cease for any reason to
constitute a majority thereof; or (iii) a change in control within the meaning
of 12 C.F.R. Section 574.4 occurs, as determined by the board of directors of
the Bank or the Holding Company, provided, however, that a change in control
shall not be deemed to occur under 2(b)(i) or 2(b)(iii) of this Section 2, if
the transaction constituting a change in control is approved by a majority of
the board of directors of the Bank or the Holding Company, as the case may be.
In the event the Holding Company converts from the mutual form of organization
to the stock form of organization on a stand-alone basis at any time subsequent
to the effective date of this Agreement ("Stock Holding Company")
<PAGE>
a "Change in Control" of the Bank or the Holding Company shall mean a change in
control of a nature that: (I) would be required to be reported in response to
Item 1 of the current report on Form 8-K, as in effect on the date hereof,
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the
"Exchange Act"); or (II) results in a Change in Control of the Bank or the Stock
Holding Company within the meaning of the Home Owners' Loan Act of 1933 and the
Rules and Regulations promulgated by the Office of Thrift Supervision (or its
predecessor agency), as in effect on the date hereof; or (III) without
limitation, such a Change in Control shall be deemed to have occurred at such
time as (a) any "person" (as the term is used in Sections 13(d) and 14(d) of the
Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities representing 25%
or more of the combined voting power of the Bank's or Stock Holding Company's
outstanding securities except for any securities of the Bank purchased by the
Stock Holding Company or any securities purchased by the Bank's Employee Stock
Ownership Plan and Trust; or (b) individuals who constitute the Board of the
Bank or the Stock Holding Company on the date hereof (the "Incumbent Board")
cease for any reason to constitute at least a majority thereof, provided that
any person becoming a director subsequent to the date hereof whose election was
approved by a vote of at least three-quarters of the directors comprising the
Incumbent Board, or whose nomination for election by the Stock Holding Company's
stockholders was approved by the Stock Holding Company's Nominating Committee,
shall be, for purposes of this clause (b), considered as though he were a member
of the Incumbent Board; or (c) a plan of reorganization, merger, consolidation
sale of all or substantially all the assets of the Bank or the Stock Holding
Company or similar transaction occurs in which the Bank or the Stock Holding
Company is not the surviving entity.
(c) Executive shall not have the right to receive termination benefits
pursuant to Section 3 upon Termination for Cause. The term "Termination for
Cause" shall mean termination because of Executive's personal dishonesty,
incompetence, willful misconduct, any breach of fiduciary duty involving
personal profit, intentional failure to perform stated duties, willful violation
of any law, rule, or regulation (other than traffic violations or similar
offenses) or final cease-and-desist order, or material breach of any material
provision of this Agreement. In determining incompetence, the acts or
omissions shall be measured against standards generally prevailing in the
savings institutions industry. Notwithstanding the foregoing, Executive shall
not be deemed to have been Terminated for Cause unless and until there shall
have been delivered to him a copy of a resolution duly adopted by the
affirmative vote of not less than three-fourths of the Board of Directors of the
Bank at a meeting of the Board called and held for that purpose (after
reasonable notice to Executive and an opportunity for him, together with
counsel, to be heard before the Board), finding that in the good faith opinion
of the Board, Executive was guilty of conduct justifying Termination for Cause
and specifying the particulars thereof in detail. Executive shall not have the
right to receive compensation or other benefits for any period after Termination
for Cause.
3. TERMINATION BENEFITS
(a) (i) Upon the occurrence of a Change in Control, followed at any time
during the term of this Agreement by the involuntary termination of Executive's
employment, other than for Termination for Cause, the Bank shall be obligated to
pay Executive, or in the event of her subsequent death, her beneficiary or
beneficiaries, or her estate, as the case may be, as severance pay or liquidated
damages, or both, a sum equal to three (3) times the average of the three (3)
preceding years Executive's Base Salary, including bonuses and any other cash
compensation paid or accrued to Executive during such year, and the amount of
any benefits received pursuant to any employee benefit plans, on behalf of
Executive, maintained by the Bank during such years. At the election of
Executive, which election is to be made within thirty (30) days of the Date of
Termination (as defined in Section 4), such payment may be made in a lump sum or
paid in equal monthly installments during the thirty-six (36) months following
Executive's termination. In the event that no election is made, payment to
Executive will be made on a monthly basis during the remaining term of this
Agreement.
<PAGE>
(ii) Upon the occurrence of a Change in Control, followed at any time
during the firm of this Agreement by the voluntary termination of Executive's
employment, the Bank shall be obligated to pay Executive or in the event of her
subsequent death, her beneficiary or beneficiaries of her estate, as the case
may be as severance pay or liquidated damages, or both a sum equal to the
Executive's preceding year's Base Salary, including bonuses and any other cost
compensation paid or accrued to Executive during such year, and the amount of
any benefits received pursuant to any employee benefit plans on behalf of
Executive, maintained by the Bank during such year. As the election of
Executive, which election is to be made within thirty (30) days of the date of
Termination such payment may be made in a lump sum or paid in monthly
installments during the twelve (12) months following Executive's termination.
In the event that no election is made, payment to Executive will be made on a
monthly basis during the remaining term of the Agreement.
(b) Upon the occurrence of a Change in Control of the Bank or the Holding
Company followed at any time during the term of this Agreement by Executive's
voluntary or involuntary termination of employment, other than for Termination
for Cause, the Bank shall cause to be continued life, medical, dental and
disability coverage substantially identical to the coverage maintained by the
Bank for Executive prior to her severance. Such coverage and payments shall
cease upon the expiration of thirty-six (36) months.
(c) Upon the occurrence of a Change in Control, Executive will have such
rights as specified in the Bank's Incentive Stock Option Plan or any other
employee benefit plan with respect to options and such other rights as may have
been granted to Executive under such plans.
(d) Upon a Change in Control, Executive will be entitled to the benefits
under the Bank's Recognition and Retention Plans and Trusts or any other such
plans.
(e) In the event that Executive is receiving monthly payments pursuant to
Section 3(a) on an annual basis, thereafter, Executive shall elect whether the
balance of the amount payable under this Agreement at that time shall be paid in
a lump sum or on a pro rata basis. Such election shall be irrevocable for the
year for which such election is made.
(f) Notwithstanding the preceding paragraphs of this Section 3, in no event
shall the aggregate payments or benefits to be made or afforded to Executive
under said paragraphs (the "Termination Benefits") constitute an "excess
parachute payment" under Section 280G of the Code or any successor thereto, and
in order to avoid such a result Termination Benefits will be reduced, if
necessary, to an amount (the "Non-Triggering Amount"), the value of which is one
dollar ($1.00) less than an amount equal to three (3) times Executive's "base
amount", as determined in accordance with said Section 280G. The allocation of
the reduction required hereby among the Termination Benefits provided by the
preceding paragraphs of this Section 3 shall be determined by Executive.
4. NOTICE OF TERMINATION
(a) Any purported termination by the Bank or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes of
this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean (A) if Executive's employment is
terminated for Disability, thirty (30) days after a Notice of Termination is
given (provided that he shall not have returned to the performance of her duties
on a full-time basis during such thirty (30) day period), and (B) if her
employment
<PAGE>
is terminated for any other reason, the date specified in the Notice of
Termination (which, in the case of a Termination for Cause, shall be immediate).
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, except upon the occurrence of a
Change in Control and voluntary termination by Executive in which case the Date
of Termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration award, or
by a final judgment, order or decree of a court of competent jurisdiction (the
time for appeal there from having expired and no appeal having been perfected)
and provided further that the Date of Termination shall be extended by a notice
of dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Bank will continue to pay
Executive her full compensation in effect when the notice giving rise to the
dispute was given (including, but not limited to, Base Salary) and continue him
as a participant in all compensation, benefit and insurance plans in which he
was participating when the notice of dispute was given, until the earlier of 120
days from the date of the Notice of Termination or the date upon which the
dispute is finally resolved in accordance with this Agreement. Amounts paid
under this Section are in addition to all other amounts due under this Agreement
and shall not be offset against or reduce any other amounts due under this
Agreement.
5. SOURCE OF PAYMENTS
It is intended by the parties hereto that all payments provided in this
Agreement shall be paid in cash or check from the general funds of the Bank.
The Holding Company guarantees payment and provision of all amounts and benefits
due hereunder to Executive and, if such amounts and benefits due from the Bank
are not timely paid or provided by the Bank, such amounts and benefits shall be
paid or provided by the Holding Company.
6. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior agreement between the Bank and Executive, except that
this Agreement shall not affect or operate to reduce any benefit or compensation
inuring to Executive of a kind elsewhere provided. No provision of this
Agreement shall be interpreted to mean that Executive is subject to receiving
fewer benefits than those available to him without reference to this Agreement.
Nothing in this Agreement shall confer upon Executive the right to continue in
the employ of the Bank or shall impose on the Bank any obligation to employ or
retain Executive in its employ for any period.
7. NO ATTACHMENT
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, the Bank and their respective successors and assigns.
<PAGE>
8. MODIFICATION AND WAIVER
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future or as to any act other than that
specifically waived.
9. REQUIRED REGULATORY PROVISIONS
(a) The Bank may terminate Executive's employment at any time, but any
termination by the Bank, other than Termination for Cause, shall not prejudice
Executive's right to compensation or other benefits under this Agreement.
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause as defined in Section 2.
(b) If Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) (12 USC 1918(e)(3)) or 8(g) (12 USC 1818(g)) of the Federal
Deposit Insurance Act, as amended by the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989, the Bank's obligations under this
contract shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the Bank
may in its discretion (i) pay Executive all or part of the compensation withheld
while their contract obligations were suspended and (ii) reinstate (in whole or
in part) any of the obligations which were suspended.
(c) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e) (12 USC Section 1818(e)) or 8(g) (12 USC Section 1818(g)) of the
Federal Deposit Insurance Act, as amended by the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989, all obligations of the Bank under this
contract shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
(d) If the Bank is in default as defined in Section 3(x) (12 USC
1813(x)(1)) of the Federal Deposit Insurance Act, as amended by the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989, all obligations of
the Bank under this contract shall terminate as of the date of default, but this
paragraph shall not affect any vested rights of the contracting parties.
(e) All obligations of the Bank under this contract shall be terminated,
except to the extent determined that continuation of the contract is necessary
for the continued operation of the institution, (i) by the Federal Deposit
Insurance Corporation, at the time FDIC enters into an agreement to provide
assistance to or on behalf of the Bank under the authority contained in Section
13(c) (12 USC Section 1823(c)) of the Federal Deposit Insurance Act, as amended
by the Financial Institutions Reform, Recovery, and Enforcement Act of 1982; or
(ii) by the Office of Thrift Supervision ("OTS") at the time the OTS or its
District Director approves a supervisory merger to resolve problems related to
the operations of the Bank or when the Bank is determined by the OTS or FDIC to
be in an unsafe or unsound condition. Any rights of the parties that have
already vested, however, shall not be affected by such action.
<PAGE>
10. REINSTATEMENT OF BENEFITS UNDER SECTION 9(b)
In the event Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice described in
Section 9(b) hereof (the "Notice") during the term of this Agreement and a
Change in Control, as defined herein, occurs, the Bank will assume its
obligation to pay and Executive will be entitled to receive all of the
termination benefits provided for under Section 3 upon the Bank's receipt of a
dismissal of charges in the Notice.
11. SEVERABILITY
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
12. HEADINGS FOR REFERENCE ONLY
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
13. GOVERNING LAW
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by the laws of the state of Iowa, to the extent not
preempted by federal law as now or hereafter in effect.
14. ARBITRATION
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the employee within fifty
(50) miles from the location of the Bank, in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
Executive shall be entitled to seek specific performance of her right to be paid
until the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
15. PAYMENT OF LEGAL FEES
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Bank if Executive is successful on the merits pursuant to a
legal judgment, arbitration or settlement, which payments are guaranteed by the
Holding Company pursuant to Section 5.
16. INDEMNIFICATION
The Bank shall provide Executive (including her heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense, or in lieu thereof, shall indemnify
Executive (and her heirs, executors and administrators) to the fullest extent
permitted under Iowa law against all expenses and liabilities reasonably
incurred by him in connection with or arising out of any action, suit or
proceeding in which he may be involved by reason of her having been a director
or officer of
<PAGE>
the Bank (whether or not he continues to be a director or officer at the time of
incurring such expenses or liabilities), such expenses and liabilities to
include, but not be limited to, judgments, court costs and attorneys' fees and
the cost of reasonable settlements.
17. SUCCESSOR TO THE BANK
The Bank shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank or the Holding Company,
expressly and unconditionally to assume and agree to perform the Bank's
obligations under this Agreement, in the same manner and to the same extent that
the Bank would be required to perform if no such succession or assignment had
taken place.
<PAGE>
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
EMPLOYMENT AGREEMENT
This Agreement is made as of this 16th day of October, 1997, by and between
First Federal Savings Bank of Siouxland (the "Bank"), a federally chartered
savings institution, with its principal administrative office at 329 Pierce
Street, Sioux City, Iowa 51102 and Steven L. Opsal (the "Employee").
WHEREAS, Employee is, as of the date hereof, employed as President and
Chief Executive Officer of Grinnell Federal Savings Bank, Grinnell, Iowa
("Grinnell"), which institution has entered into an Agreement and Plan of
Reorganization (the "Merger Agreement") with the Bank as of the date hereof (all
capitalized terms used herein without definition shall be defined as in the
Merger Agreement);
WHEREAS, the Bank wishes to retain the services of Employee as an employee
of the Bank following the Effective Time for the period provided in this
Agreement; and
WHEREAS, Executive is willing to serve in the employ of the Bank on a
full-time basis for said period;
WHEREAS, in consideration of the waiver and relinquishment of any rights of
the Employee under that certain employment agreement between the Employee and
Grinnell dated January 5, 1994 and subsequently amended and restated on January
19, 1996, including but not limited to rights under Section 8 thereof relating
to the change of control of Grinnell, the Bank desires to enter into this
Agreement with the Employee;
WHEREAS, the Bank desires to employ Employee and Employee desires to be
employed by the Bank upon the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. POSITION AND RESPONSIBILITIES
As of the Effective Time, the Bank agrees to employ Employee as Executive
Vice President of the Bank and President and Chief Executive Officer of Grinnell
Federal Savings Bank, a division of First Federal Savings Bank of Siouxland
("Grinnell Federal") and Employee agrees to accept employment by the Bank upon
the terms and conditions herein set forth. The Bank further agrees to appoint
Employee as a Director of the Bank as of the Effective Time and agrees to
nominate Employee for re-election as a Director of the Bank at the next
scheduled meeting of shareholders at which Directors are elected, coincident
with or immediately following the Effective Time.
2. TERMS AND DUTIES
(a) The period of Employee's employment under this Agreement shall begin
as of the Effective Time and shall continue for a period of thirty-six (36) full
calendar months thereafter subject to earlier termination as provided herein
(the "term of employment"). Following the expiration of the thirty-six (36)
month term of this Agreement, if not earlier terminated, Employee and the Bank
shall enter into a severance agreement with the Bank that is consistent with
severance agreements made available to other
<PAGE>
executive officers of the Bank and that provides for a benefit only in the event
of a Change in Control (as hereinafter defined).
(b) During the term of employment, except for periods of absence
occasioned by illness, reasonable vacation periods, and reasonable leaves of
absence, Employee shall devote substantially all his business time, attention,
skill, and efforts to the faithful performance of his duties as Executive Vice
President of the Bank and President and Chief Executive Officer of Grinnell
Federal and shall have such other powers and duties as the Bank's Chief
Executive Officer may prescribe from time to time; provided, however, that,
except with the approval of the Board, as evidenced by a resolution of such
Board, from time to time, Employee may not serve, or continue to serve, on the
boards of directors of, and hold any other offices or positions in, companies or
organizations, which, in such Board's judgment, present a conflict of interest
with the Bank, or may materially affect the performance of Employee's duties
pursuant to this Agreement. Nothing in this Section shall be construed as
preventing the Employee from serving from time to time on boards, committees, or
holding positions of non-profit or governmental organizations, including
religious and civic groups, without the need for Board approval.
3. COMPENSATION AND BENEFITS
(a) SALARY. The Bank agrees to pay the Employee during the term of
employment, not less frequently than on a monthly basis, a minimum annual salary
of $110,000 ("Base Salary").
Adjustments in Base Salary or other compensation shall not limit or reduce
any other obligation of the Bank under this Agreement. The Employee's Base
Salary in effect from time to time during the term of employment shall not
thereafter be reduced.
(b) EXPENSES. The Employee shall be entitled to receive prompt
reimbursement for all reasonable expenses incurred by the Employee in performing
services under this Agreement, including for the attendance of seminars on
topics related to the business of the Bank, in accordance with the policies and
procedures applicable to the executive officers of the Bank, PROVIDED THAT the
Employee accounts for such expenses as required under such policies and
procedures.
(c) PARTICIPATION IN EMPLOYEE BENEFIT PLANS. The Employee shall be
entitled, while employed hereunder, to participate in all plans relating to
group life and disability insurance, medical and dental coverage, education, or
other fringe benefits to the extent to which the Bank's employees participate.
The Bank further agrees to cause to be awarded to the Employee within
sixty (60) days following the Effective Time, Two Thousand (2,000) shares of
restricted stock under the Bank's Recognition and Retention Plan and Trust
Agreement and Four Thousand (4,000) options under the Bank's 1992 Incentive
Stock Option Plan. It is expected that such shares and options will vest in
four equal annual installments commencing on the first anniversary of the date
of award and continuing each year until all shares and options are fully vested.
Said shares and options shall be subject to the terms of the respective plans
under which they are granted.
(d) VACATIONS; LEAVE. The Employee shall be entitled to a minimum of
four (4) weeks annual paid vacation in accordance with the policies established
by the Bank's Board of Directors. The Employee shall also be entitled to
reasonable leave to attend seminars on topics related to the business of the
Bank.
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<PAGE>
(e) ADDITIONAL BENEFITS From and after the Effective Time and during
the term of this Agreement, the Bank shall provide the following additional
benefits to the Employee:
(1) COUNTRY CLUB MEMBERSHIP The Bank shall provide the
Employee with the funds neccessary to maintain the Employee as a member of a
country club located in the Bank's market area and customarily joined by
executives in the banking industry for purposes related to the business of the
Bank.
(2) AUTOMOBILE The Bank shall provide the Employee with the
use of a Bank-owned automobile. The Bank shall pay (or reimburse the Employee)
for all maintenance costs related to the use of such automobile for business
purposes.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION
(a) INVOLUNTARY TERMINATION. The Board of Directors may terminate the
Employee's employment at any time, but, except in the case of Termination for
Cause, death or disability, termination of employment shall not prejudice the
Employee's right to compensation under this Agreement, as set forth herein. In
the event of Involuntary Termination, other than Termination for Cause, death or
disability, or in connection with or within twelve (12) months after a Change in
Control, the Employee shall be entitled to receive, as a severance benefit, his
then applicable Base Salary for the then-remaining term of this Agreement, in a
lump sum payment, payable within thirty days of such termination of employment.
The term "Involuntary Termination" means termination of the employment of
Employee without the Employee's express written consent, and shall include a
material diminution of or interference with the Employee's duties,
responsibilities and benefits including (without limitation) any of the
following actions unless consented to in writing by the Employee: (1) a change
in the principal workplace of the Employee to a location outside of a 30 mile
radius from any office of Grinnell, as determined immediately prior to the
Effective Time, (2) a material change in Employee's function, duties, or
responsibilities, which change would cause Employee's position to become one of
lesser responsibility, importance, or scope from the position and attributes
described in Section 1 hereof, (3) liquidation or dissolution of the Bank other
than liquidations or dissolutions that are caused by reorganizations that do not
affect the status of Employee, (4) failure to re-elect or re-apppoint Employee
as a Director of the Holding Company, or (5) breach of this Agreement by the
Bank. Upon the occurrence of any event described in clauses (1),(2), (3), (4),
or (5) of this Section 4(a), Employee shall have the right to elect to terminate
his employment under this Agreement by resignation upon sixty (60) days prior
written notice given within a reasonable period of time not to exceed four
calendar months after the initial event giving rise to said right to elect.
Notwithstanding the preceding sentence, in the event of a continuing breach of
this Agreement by the Bank, the Employee, after giving due notice within the
prescribed time frame of an initial event specified above, shall not waive any
of his rights solely under this Agreement and this Section 4 by virtue of the
fact that Employee has submitted his resignation but has remained in the
employment of the Bank and is engaged in good faith discussions to resolve any
occurrence of an event described in clauses (1), (2), (3) or (4) of this Section
4(a). The term "Involuntary Termination" does not include Termination for Cause
or termination of employment due to retirement, death, disability or suspension
or temporary or permanent prohibition from participation in the conduct of the
Bank's affairs pursuant to any of Sections 12(a) through 12(e) hereof.
3
<PAGE>
(b) TERMINATION FOR CAUSE. In the event of Termination for Cause, the
Bank shall pay the Employee the Employee's salary through the date of
termination, and the Bank shall have no further obligation to the Employee under
this Agreement.
The terms "Termination for Cause" and "Terminated For Cause" mean
termination of the employment of the Employee because of the Employee's personal
dishonesty, incompetence, willful misconduct, breach of a fiduciary duty
involving personal profit, intentional failure to perform stated duties, willful
violation of any law, rule, or regulation (other than traffic violations or
similar offenses) or final cease-and-desist order, or material breach of any
provision of this Agreement. The Employee shall not be deemed to have been
Terminated for Cause unless and until there shall have been delivered to the
Employee a copy of a resolution, duly adopted by the affirmative vote of not
less than a majority of the entire membership of the Board of Directors of the
Bank at a meeting of the Board called and held for such purpose (after
reasonable notice to the Employee and an opportunity for the Employee, together
with the Employee's counsel, to be heard before the Board), stating that in the
good faith opinion of the Board the Employee has engaged in conduct described in
the preceding sentence and specifying the particulars thereof in detail.
(c) VOLUNTARY TERMINATION. The Employee's employment may be voluntarily
terminated by the Employee at any time upon 90 days written notice to the Bank
or upon such shorter period as may be agreed upon between the Employee and the
Chief Executive Officer of the Bank. In the event of such voluntary
termination, the Bank shall be obligated to continue to pay to the Employee the
Employee's Base Salary and benefits only through the date of termination, at the
time such payments are due, and the Bank shall have no further obligation to the
Employee under this Agreement.
5. TERMINATION UPON RETIREMENT, DISABILITY OR DEATH
In the event of the death of the Employee during the term of employment,
the Employee's estate, or such person as the Employee may have previously
designated in writing, shall be entitled to receive from the Bank the Base
Salary of the Employee through the last day of the calendar month in which the
Employee died.
If during the term of employment hereunder the Employee shall become
disabled or incapacitated to the extent that he is unable to perform the
principal duties of his employment, he shall be entitled to receive disability
benefits of the type provided for other employees of the Bank. The Bank, in its
discretion, based on competent medical advice, shall determine whether Employee
is and continues to be, disabled for purposes of this paragraph.
If Employee's employment with the Bank shall terminate due to retirement on
or after age 65, the Employee shall be entitled to receive from the Bank the
Base Salary of the Employee through the last day of the calendar month in which
the Employee retired.
6. CHANGE IN CONTROL
(a) Involuntary Termination. Notwithstanding any provision herein to the
contrary, if the Employee's employment is involuntarily terminated (other than
for cause, death or disability, or pursuant to any of Sections 12(a) - (e)
hereof) in connection with or within 12 months after a Change in Control which
occurs at any time during the term of employment, the Bank shall pay to the
Employee in a lump sum in cash within 30 days after the date of termination of
employment an amount equal to 299% of the
4
<PAGE>
Employee's "base amount" of compensation, as defined in Section 280G of the
Internal Revenue Code of 1986, as amended (the "Code").
(b) Voluntary Termination. If the Employee voluntarily terminates his
employment hereunder in connection with or within 30 days following a Change in
Control which occurs at any time during the term of employment, the Employee
shall be entitled to receive the payment provided by Section 6(a) hereof in the
manner provided by Section 6(a) hereof.
(c) Definitions. The term "Change in Control" means (1) an event of a
nature that (i) results in a change in control of the Bank or Bancorp within the
meaning of the Home Owners' Loan Act of 1933 and 12 C.F.R. Part 574 as in effect
on the date hereof; or (ii) would be required to be reported in response to Item
1 of the current report on Form 8-K, as in effect on the date hereof, pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange
Act"); (2) any person (as the term is used in Sections 13(d) and 14(d) of the
Exchange Act) is or becomes the beneficial owner (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly of securities of the Bank or Bancorp
representing 25% or more of the Bank's or Bancorp's outstanding securities; (3)
individuals who are members of the board of directors of the Bank or Bancorp on
the date hereof (the "Incumbent Board") cease for any reason to constitute at
least a majority thereof, provided that any person becoming a director
subsequent to the date hereof whose election was approved by a vote of at least
three-quarters of the directors comprising the Incumbent Board, shall be
considered a member of the Incumbent Board; or (4) the acquisition of a
controlling influence over the management or policies of the Bank or Bancorp by
any person or by persons acting as a "group" (within the meaning of Section
13(d) of the Securities Exchange Act of 1934). The term "Change in Control"
shall not include an acquisition of securities by an employee benefit plan of
the Bank or Bancorp. In the application of 12 C.F.R. Part 574 to a
determination of a Change in Control, determinations to be made by the OTS or
its Director under such regulations shall be made by the Board of Directors.
7. CERTAIN REDUCTION OF PAYMENTS BY THE BANK.
(a) Notwithstanding any other provision of this Agreement, if
payments under this Agreement, together with any other payments received or to
be received by the Employee in connection with a Change in Control would be
deemed to include an "excess parachute payment" pursuant to Section 280G of the
Code, then benefits under this Agreement shall be reduced (not less than zero)
to the extent necessary to avoid the payment of an excess parachute payment by
the Bank.
(b) Any payments made to the Employee pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance with 36 U.S.C.
Section 1828(k) and any regulations promulgated thereunder.
8. POST-TERMINATION OBLIGATIONS
(a) All payments and benefits to Employee under this Agreement shall be
subject to Employee's compliance with paragraph (b) of this Section 8 during the
term of employment and for one (1) full year after the expiration or termination
thereof.
(b) Employee shall, upon reasonable notice, furnish such information and
assistance to the Bank as may reasonably be required by the Bank in connection
with any litigation in which it or any of its subsidiaries or affiliates is, or
may become, a party.
5
<PAGE>
9. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior employment agreement between the Bank, any predecessor
of the Bank, or Grinnell and Employee.
10. NO ATTACHMENT
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Employee and the Bank and their respective successors and assigns.
11. MODIFICATION AND WAIVER
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
12. REQUIRED PROVISIONS
(a) The Bank may terminate the Employee's employment at any time, but any
termination by the Bank, other than Termination for Cause, shall not prejudice
Employee's right to compensation benefits under this Agreement. Employee shall
not have the right to receive compensation or other benefits for any period
after Termination for Cause as defined in Section 4 hereof.
(b) If the Employee is suspended from office and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) (12 U.S.C. Sections 1818(e)(3)) or 8(g) (12 U.S.C. Section
1818(g)) of the Federal Deposit Insurance Act, as amended by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 (relating to the
violation of any law, unsafe or unsound practice, breach of fiduciary duty or
criminal violation), the Bank's obligations under this contract shall be
suspended as of the date of service, unless stayed by appropriate proceedings.
If the charges in the notice are dismissed, the Bank may in its discretion (i)
pay the Employee all or part of the compensation withheld while their contract
obligations were suspended and (ii) reinstate (in whole or in part) any of the
obligations which were suspended.
(c) If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e) (12 U.S.C. Sections 1818(e)) or 8(g) (12 U.S.C. Section 1818(g))
of the Federal Deposit Insurance Act, as amended by the Financial Institutions
Reform, Recovery and Enforcement Act of 1989 (relating to the violation of any
law, unsafe or unsound practice,
6
<PAGE>
breach of fiduciary duty or criminal violation), all obligations of the Bank
under this contract shall terminate as of the effective date of the order, but
vested rights of the contracting parties shall not be affected.
(d) If the Bank is in default as defined in Section 3(x) (12 U.S.C.
Section 1813(x)(1)) of the Federal Deposit Insurance Act, as amended by the
Financial Institutions Reform, Recovery and Enforcement Act of 1989 (relating to
the adjudication of a court or public authority pursuant to which a conservator,
receiver, or other legal custodian is appointed), all obligations of the Bank
under this contract shall terminate as of the date of default, but this
paragraph shall not affect any vested rights of the contracting parties.
(e) All obligations of the Bank under this Agreement shall be terminated,
except to the extent determined that continuation of this Agreement is necessary
for the continued operation of the institution, (i) by the Federal Deposit
Insurance Corporation ("FDIC"), at the time FDIC enters into an agreement to
provide assistance to or on behalf of the Bank under the authority contained in
Section 13(c) (12 U.S.C. Section 1823(c)) of the Federal Deposit Insurance Act,
as amended by the Financial Institutions Reform, Recovery and Enforcement Act of
1989; or (ii) when the Bank is determined by the FDIC to be in an unsafe or
unsound condition. Any rights of the parties that have already vested, however,
shall not be affected by such action.
13. SEVERABILITY
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
14. HEADINGS FOR REFERENCE ONLY
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
15. GOVERNING LAW
This Agreement shall be governed by the laws of the State of Iowa, but only
to the extent not superseded by federal law.
16. ARBITRATION
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction; provided,
however, that Employee shall be entitled to seek specific performance of his
right to be paid until the date of termination during the pendency of any
dispute or controversy arising under or in connection with this Agreement.
7
<PAGE>
17. PAYMENT OF LEGAL FEES
All reasonable legal fees paid or incurred by Employee pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Bank, provided that the dispute or interpretation has been
settled by Employee and the Bank or resolved in the Employee's favor.
18. SUCCESSOR TO THE BANK
The Bank shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank, expressly and
unconditionally to assume and agree to perform the Bank's obligations under this
Agreement, in the same manner and to the same extent that the Bank would be
required to perform if no such succession or assignment had taken place.
17. CONTINGENT ON CLOSING
The duties and obligations of the Employee and the Bank hereunder, and the
relinquishment of the Employee's rights under the employment agreement between
the Employee and Grinnell, are expressly conditioned on the closing of the
merger between the Bank and Grinnell ("Merger"). In the event that the Merger
is not consummated on the Effective Time, this Agreement shall be null and void.
8
<PAGE>
FIRST FEDERAL SAVINGS BANK OF SIOUX CITY
1992 STOCK OPTION PLAN FOR OUTSIDE DIRECTORS
I. PURPOSE
The purpose of the First Federal Savings Bank of Sioux City 1992 Stock
Option Plan for Outside Directors (the "Directors' Option Plan") is to promote
the grown and profitability of First Federal Savings Bank of Sioux City (the
"Association"), and to provide outside directors of the Association with an
incentive to achieve long-term objectives of the Association, attract and retain
non-employee directors of outstanding competence and to provide such outside
directors with an opportunity to acquire an equity interest in the Association.
II. GRANT OF OPTIONS
(a) INITIAL GRANT. Each outside director (for purposes of this
Directors' Option Plan, the term "Outside Director" shall mean a member of the
Board of Directors of the Association not also serving as an employee of the
Association), who is serving in such capacity on the date of the Association's
initial public offering and at the effective date of this Directors' Option
Plan, shall be granted a single non-qualified stock option to purchase 1,000
shares of the Common Stock of the Association ("Common Stock") subject to
adjustment pursuant to Section IV. The Chairman of the Board of the Association
shall receive an additional non-qualified stock option to purchase an additional
1,000 shares of Common Stock, subject to adjustment pursuant to Section IV. The
purchase price per share of the Common Stock deliverable upon the exercise of
each non-qualified stock option shall be the initial public offering price of
the Common Stock of the Association in connection with the reorganization of
First Federal Savings and Loan Association of Sioux City as a mutual holding
company (the "Holding Company") and the establishment of the Association as its
majority-owned subsidiary (the "Reorganization").
(b) SUBSEQUENT GRANTS. Each person who becomes an Outside Director
following the closing of the Association's initial public offering shall be
granted a single non-qualified stock option to purchase 500 shares of Common
Stock, subject to adjustment pursuant to Section IV, to the extent shares remain
available under the Stock Option Plan.
(c) FAIR MARKET VALUE. For purposes of the Directors' Option Plan, when
used in connection with Common Stock on a certain date, "Fair Market Value"
means the reported closing price of the Common Stock as reported by the National
Association of Securities Dealers Automated Quotation ("NASDAQ") System (as
published by the WALL STREET JOURNAL, if published) on the day prior to such
date, or if the Common Stock was not traded on such date, on the next preceding
day on which the Common Stock was traded thereon; PROVIDED, HOWEVER, that if the
Common Stock is not reported on the NASDAQ System, Fair Market Value shall mean
the average sale price of all shares of Common Stock sold during the 30-day
period immediately preceding the date on which such stock option was granted,
and if no shares of stock have been sold within such 30-day period, the average
sale price of the last three sales of Common Stock. For purposes of the grant of
options in the Reorganization, Fair Market Value shall mean the initial public
offering price of the Common Stock.
III. TERMS AND CONDITIONS
(a) OPTION AGREEMENT. Each option shall be evidenced by a written option
agreement between the Association and the outside director specifying the number
of shares of Common Stock that may be acquired through its exercise and
containing such other terms and conditions that are not inconsistent with the
terms of this grant.
(b) TERMINATION OF OPTION. Each option shall expire upon the earlier of
(i) one hundred and twenty (120) months following the date of grant, or (ii) one
(1) year following the date on which the outside director ceases to serve in
such capacity for any reason other than Cause. "Cause" is defined as personal
dishonesty, willful misconduct, any breach of fiduciary duty involving personal
profit, intentional failure to perform stated duties, or the willful violation
of any law, rule or regulation (other than traffic violations or similar
offenses) that results in a material loss to the
<PAGE>
Association or an affiliate of the Association, or a final cease-and-desist
order. If the Outside Director dies before fully exercising any portion of an
option then exercisable, such option may be exercised by such Outside Director's
personal representative(s), heir(s) or devisee(s) at any time within the one (1)
year period following his or her death; PROVIDED, HOWEVER, that in no event
shall the option be exercisable more than one hundred and twenty (120) months
after the date of its grant. If the Outside Director is terminated for Cause all
options awarded to him or her shall expire upon such termination.
(c) MANNER OF EXERCISE. The option may be exercised from time to time,
in whole or in part, by delivering a written notice of exercise to the Chief
Executive Officer of the Association. Such notice is irrevocable and must be
accompanied by full payment of the purchase price in cash or shares of
previously acquired Common Stock of the Association at the Fair Market Value of
such shares determined on the exercise date by the manner described in Section
II(b) hereof. If previously acquired shares of Common Stock are tendered in
payment of all or part of the exercise price, the value of such shares shall be
determined as of the date of such exercise.
(d) SURRENDER OPTION. In the event of an Outside Director's termination
of employment as a result of death, Disability or retirement, the Outside
Director (or his or her personal representative(s), heir(s), or devisee(s)) may,
in a form acceptable to the Committee, make application to surrender all or part
of options held by such Outside Director in exchange for a cash payment from the
Association of an amount equal to the difference between the Fair Market Value
of the Common Stock on the date of termination of employment and the exercise
price per share of the option on the Date of Grant. Whether the Association
accepts such application or determines to make payment, in whole or part, is
within its absolute and sole discretion, it being expressly understood that the
Association is under no obligation to any Outside Director whatsoever to make
such payments. In the event that the Association accepts such application and
determines to make payment, such payment shall be in lieu of the exercise of the
underlying option and such option shall cease to be exercisable. As used herein,
"Disability" shall mean the permanent and total inability by reason of mental or
physical infirmity, or both, of an Outside Director to perform the duties
customarily performed by him or her. Additionally, a medical doctor selected or
approved by the Board of Directors of the Association must determine that it is
either not possible to determine when such Disability will terminate or that it
appears probable that such Disability will be permanent during such Outside
Director's lifetime.
(e) TRANSFERABILITY. Each option granted hereby may be exercised only by
the Outside Director to whom it is issued or in the event of the Outside
Director's death, his or her personal representative(s), heir(s) or devisee(s)
pursuant to the terms of Section III(b) hereof.
(f) LIMITATIONS UPON EXERCISE OF OPTIONS. Notwithstanding any other
provision of this Director's Option Plan, so long as the Holding Company remains
in the mutual form of organization, an option granted under this Plan may not be
exercised if the exercise of such an option would result in the Holding Company
owning less than 50.1 percent of the Common Stock of the Association.
IV. COMMON STOCK SUBJECT TO THE PLAN
The shares that shall be issued and delivered upon exercise of options
granted under the Directors' Option Plan may be either authorized and unissued
shares of Common Stock or authorized and issued shares of Common Stock held by
the Association as treasury stock. The number of shares of Common Stock reserved
for issuance under the Directors' Option Plan shall not exceed 2% of the Common
Stock of the Association issued in connection with the Reorganization, subject
to adjustments pursuant to this Section IV. Any shares of Common Stock subject
to an option that for any reason either terminates unexercised or expires, shall
again be available for issuance under the Directors' Option Plan.
In the event of any change or changes in the outstanding Common Stock of
the Association by reason of any stock dividend or split, recapitalization,
reorganization, merger, consolidation, split-off, combination or any similar
corporate change, or other increase or decrease in such shares effected without
receipt or payment of consideration by the Association, the number of shares of
Common Stock that may be issued under this Directors' Option Plan, the number of
shares of Common Stock subject to options granted under the Directors' Option
Plan, and the option price of such options, shall be automatically adjusted to
prevent dilution or enlargement of the rights granted to an Outside Director
under the Directors' Option Plan.
<PAGE>
V. TREATMENT OF OPTIONS IN THE EVENT OF A CONVERSION TRANSACTION
In the event that the Holding Company converts (a "Conversion Transaction")
from the mutual to stock form of organization ("Stock Holding Company") either
on a stand-alone basis or in the context of a merger conversion, any options
outstanding shall, at the option of the holder, (i) be convertible into options
for Common Stock of the Stock Holding Company, or (ii) be exercised by the
holder prior to the effective date of the Conversion Transaction and the holder
shall be entitled to exchange, in the same manner as other minority stockholders
of the Association, the shares of Common Stock of the Stock Holding Company.
Provided, however, that if for any reason such options are not to be converted
or such shares are not exchanged, the holders of options under this plan shall
receive cash payment for the shares of stock represented by the options in an
amount equal to the initial offering price of the Common Stock of the Stock
Holding Company at the closing of the Conversion Transaction, less the original
exercise price of such options and, with respect to options that have been
exercised, the Stock Holding Company shall redeem such shares for cash in the
same manner as such redemption would occur for other minority stockholders of
the Association. Any exchange, conversion of options, or cash payment for shares
shall be subject to applicable federal and state regulations and, if necessary,
subject to the approval of the appropriate Regulatory Authorities.
VI. EFFECTIVE DATE OF THE PLAN; SHAREHOLDER RATIFICATION
The Directors' Option Plan has been adopted by the Board of Directors of
the Association and shall become effective upon the Reorganization. Following
the Reorganization, the Directors' Option Plan shall be presented to
shareholders of the Association for ratification for purposes of (i) obtaining
favorable treatment under Section 16(b) of the Securities Exchange Act of 1934,
and (ii) maintaining listing on the NASDAQ National Market System; PROVIDED,
HOWEVER, that the failure to obtain shareholder ratification will not affect the
validity of the Directors' Option Plan and the options granted thereunder.
VII. TERMINATION OF THE PLAN
The right to grant options under the Directors' Option Plan will terminate
upon the earlier of ten years after the Effective Date or the issuance of the
Common Stock or exercise of options equal to the maximum number of shares of
Common Stock reserved for issuance under the Directors' Option Plan. A majority
of the shareholders of the Association represented in person or proxy at a
meeting of the shareholders may terminate the Directors' Option Plan; PROVIDED,
HOWEVER, no such termination shall, without the consent of the affected
individual, affect such individual's rights under a previously granted option.
VIII. APPLICABLE LAW
The Plan will be administered in accordance with the laws of the State of
Iowa.
<PAGE>
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
1992 INCENTIVE STOCK OPTION PLAN
1. PURPOSE. The purpose of the First Federal Savings Bank of Siouxland 1992
Incentive Stock Option Plan (the "Plan") is to advance the interests of First
Federal Savings Bank of Siouxland (the "Association") and its shareholders by
providing key employees of the Association and its affiliates, including First
Federal Bankshares, M.H.C., the mutual holding company of the Association (the
"Company"), upon whose judgment, initiative and efforts the successful conduct
of the business of the Association and its affiliates largely depends, with an
additional incentive to perform in a superior manner as well as to attract
people of experience and ability.
2. DEFINITIONS.
(a) "Affiliate" means (i) a member of a controlled group of
corporations of which the Association is a member or (ii) an unincorporated
trade or business that is under common control with the Association as
determined in accordance with Section 414(c) of the Internal Revenue Code of
1986, as amended (the "Code"), and the regulations issued thereunder. For
purposes hereof, a "controlled group of corporations" shall mean a controlled
group of corporations as defined in Section 1563(a) of the Code determined
without regard to Section 1563(a)(4) and (e)(3)(C) thereof.
(b) "Award" means an Award of Non-Statutory Stock Options, Incentive
Stock Options, and/or Limited Rights granted under the provisions of the Plan.
(c) "Board of Directors" means the Board of Directors of the
Association.
(d) "Change in Control"of the Association or the Company shall mean
(I) a plan of reorganization, merger, merger conversion, consolidation or sale
of all or substantially all of the assets of the Association or the Company or a
similar transaction in which the Association or the Company is not the resulting
entity; (II) individuals who constitute the board of directors of the
Association or the board of directors of the Company cease for any reason to
constitute a majority thereof: or (III) a Change in Control within the meaning
of 12 C.F.R Section 57 4.4 occurs, as determined by the board of directors of
the Bank or the Holding Company, provided, however, that a change in control
shall not be deemed under 2(d)(I) or 2(d)(III) of this section if the
transaction(s) constituting a change in control is approved by a majority of the
Board of Directors of the Association or the Company, as the case may be. In the
event the Company converts from the mutual form of organization to the stock
form of organization at any time subsequent to the effective date of this
Agreement ("Stock Holding Company"), a "Change in Control" of the Association
means a change in control of a nature that: (i) would be required to be reported
in response to Item I of the current report on Form 8-K, as in effect on the
date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 (the "Exchange Act"); or (ii) results in a change in control of the
Association or the Company within the meaning of the Home Owners' Loan Act of
1933 and the Rules and Regulations promulgated by the Office of Thrift
Supervision (or its predecessor agency), as in effect on the effective date of
this Plan; or (iii) without limitation, such a Change in Control shall be deemed
to have occurred at such time as (a) any "person" (as the term is used in
Sections 13(d) and 14(d) of the Exchange Act) other than the Company is or
becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the Association representing 20%
or more of the Association's outstanding securities ordinarily having the right
to vote at the election of directors except for any securities of the
Association purchased by the Company in connection with the Reorganization and
any securities purchased by the Association's employee stock ownership plan and
trust: or (b) individuals who constitute the Board of Directors on the date
hereof (the "Incumbent Board") cease for any reason to constitute at least a
majority thereof, provided that any person becoming a director subsequent to the
date hereof whose election was approved by a vote of at least three quarters of
the directors comprising the Incumbent Board, or whose nomination for election
by the Association's shareholders was approved by the same nominating committee
serving under an Incumbent Board, shall be, for purposes of this clause (b),
considered as though he were a member of the Incumbent Board; or (c) a plan of
reorganization, a merger, consolidation, sale of all or substantially all the
assets of the association or the Company or similar transaction in which the
Association or Company is not the surviving institution occurs and which the
Incumbent
<PAGE>
Board does not approve or consent to; or (d) a proxy statement soliciting
proxies from stockholders of the Association, by someone other then the current
management of the Association, seeking stockholder approval of a plan of
reorganization, merger or consolidation of the Company or the Association or
similar transaction with one or more corporations as a result of which the
outstanding shares of the class of securities then subject to the plan or
transaction are exchanged for or converted into cash or property or securities
not issued by the Association or the Company shall be distributed; or (e) a
tender offer is made for 20% or more of the voting securities of the
Association.
(e) "Committee" means a Committee of the Board of Directors
consisting of all non-employee (I.E., "outside") directors.
(f) "Common Stock" means the Common Stock of the Association.
(g) "Conversion Transaction" means the conversion of the Company from
the mutual to stock form of organization either on a stand-alone basis or in the
context of a merger conversion.
(h) "Date of Grant" means the actual date on which an Award is
granted by the Committee.
(i) "Disability" means the permanent and total inability by reason of
mental or physical infirmity, or both, of an employee to perform the work
customarily assigned to him. Additionally, a medical doctor selected or approved
by the Board of Directors must advise the Committee that it is either not
possible to determine when such Disability will terminate or that it appears
probable that such Disability will be permanent during the remainder of such
employee's lifetime.
(j) "Fair Market Value" means, when used in connection with the
Common Stock on a certain date, the reported closing price of the Common Stock
as reported by the National Association of Securities Dealers Automated
Quotation ("NASDAQ") System (as published by the WALL STREET JOURNAL, if
published) on the day prior to such date, or if the Common Stock was not traded
on such date, on the next preceding day on which the Common Stock was traded
thereon; PROVIDED, HOWEVER, that if the Common Stock is not reported on the
NASDAQ System, Fair Market Value shall mean the average sale price of all shares
of Common Stock sold during the 30-day period immediately preceding the date on
which such stock option was granted, and if no shares of stock have been sold
within such 30-day period, the average sale price of the last three sales of
Common Stock. For purposes of the grant of options in the Reorganization, Fair
Market Value shall mean the initial public offering price of the Common Stock.
(k) "Incentive Stock Option" means an Option granted by the Committee
to a Participant, which Option is designated as an Incentive Stock Option
pursuant to Section 8.
(l) "Limited Right" means the right to receive an amount of cash
based upon the terms set forth in Section 9.
(m) "Non-Statutory Stock Option" means an Option granted by the
Committee to a participant and which is not designated by the Committee as an
Incentive Stock Option.
(n) "Normal Retirement" means retirement at the normal or early
retirement date as set forth in the First Federal Savings and Loan Association
Retirement Plan, or any successor plan.
(p) "Option" means Award granted under Section 7 or Section 8.
(q) "Participant" means an employee of the Association or its
affiliates chosen by the Committee to participate in the Plan.
(r) "Plan Year or Years" means a calendar year or years commencing on
or after January 1, 1992.
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<PAGE>
(s) "Reorganization" means the reorganization of First Federal
Savings and Loan Association of Sioux City as a mutual holding company and the
establishment of the Association as its majority-owned subsidiary.
(t) "Termination for Cause" means the termination upon an intentional
failure to perform stated duties, or breach of a fiduciary duty involving
personal dishonesty, or willful violation of any law, rule or regulation (other
than traffic violations or similar offenses) or final cease-and-desist order,
any of which results in material loss to the Association, the Company, or one of
its affiliates.
3. ADMINISTRATION.
The Plan shall be administered by the Committee. The Committee is
authorized, subject to the provisions of the Plan, to establish such rules and
regulations as it deems necessary for the proper administration of the Plan and
to make whatever determinations and interpretations in connection with the Plan
it deems necessary or advisable. All determinations and interpretations made by
the Committee shall be binding and conclusive on all Participants in the Plan
and on their legal representatives and beneficiaries.
4. TYPES OF AWARDS.
Awards under the Plan may be granted in any one or a combination of:
(a) Incentive Stock Options;
(b) Non-Statutory Stock Options; and
(c) Limited Rights as defined herein in Sections 7-9.
5. STOCK SUBJECT TO THE PLAN.
Subject to adjustment as provided in Section 14, the maximum number of
shares reserved for issuance under the Plan is 8% of the shares of Common Stock
of the Association, issued in connection with the Reorganization. These shares
of Common Stock may be either authorized but unissued shares or shares
previously issued and reacquired by the Association. To the extent that options
or rights granted under the Plan are exercised, the shares covered will be
unavailable for future grants under the Plan, to the extent that options
together with any related rights granted under the Plan terminate, expire or are
canceled without having been exercised or, in the case of Limited Rights
exercised for cash, new Awards may be made with respect to these shares.
6. ELIGIBILITY.
Officers and other employees of the Association or its affiliates shall
be eligible to receive Incentive Stock Options, Non-Statutory Stock Options
and/or Limited Rights under the Plan. Directors who are not employees or
officers of the Association or its affiliates shall not be eligible to receive
Awards under the Plan.
7. NON-STATUTORY STOCK OPTIONS.
7.1 GRANT OF NON-STATUTORY STOCK OPTIONS.
The Committee may, from time to time, grant Non-Statutory Stock Options
to eligible employees and, upon such terms and conditions as the Committee may
determine, grant Non-Statutory Stock Options in exchange for and upon surrender
of previously granted Awards under this Plan. Non-Statutory Stock Options
granted under this Plan are subject to the following terms and conditions:
(a) PRICE. The purchase price per share of Common Stock deliverable
upon the exercise of each Non-Statutory Stock Option shall be determined by the
Committee on the date the option is granted. Except as provided below, such
purchase price shall not be less than 100% of the Fair Market Value of the
Association's Common Stock
-3-
<PAGE>
on the date the option is granted. The purchase price per share of Common Stock
deliverable upon the exercise of each Non-Statutory Stock Option granted in
exchange for and upon surrender of previously granted awards shall be not less
than 85% of the Fair Market Value of the Association's Common Stock on the date
the option is granted, but in no event may the purchase price of any
Non-Statutory Stock Option be less than the par value of the Common Stock.
Shares may be purchased only upon full payment of the purchase price. Payment of
the purchase price may be made, in whole or in part, through the surrender of
shares of the Common Stock of the Association at the Fair Market Value of such
shares determined in the manner described in Section 20).
(b) TERMS OF OPTIONS. The term during which each Non-Statutory Stock
Option may be-exercised shall be determined by the Committee, but in no event
shall a Non-Statutory Stock Option be exercisable in whole or in part more than
10 years and one day from the Date of Grant. The Committee shall determine the
date on which each Non Statutory Stock Option shall become exercisable in
installments. The shares comprising each installment may be purchased in whole
or in part at any time after such installment becomes purchasable. The
Committee, in its sole discretion, may accelerate the time at which any
Non-Statutory Stock Option may be exercised in whole or in part. Notwithstanding
the above, in the event of a Change in Control of the Association, all
Non-Statutory Stock Options shall become immediately exercisable.
(c) TERMINATION OF EMPLOYMENT. Upon the termination of an employee's
service for any reason other than Disability, Normal Retirement, death or
Termination for Cause, his Non-Statutory Stock Options shall be exercisable only
as to those shares that were immediately purchasable by him at the date of
termination and only for a period of one year following termination. In the
event of Termination for Cause, all rights under his Non-Statutory Stock Options
shall expire upon termination. In the event of the death, Disability or Normal
Retirement of any employee, all Non-Statutory Stock Options held by such
employee, whether or not exercisable at such time, shall be exercisable by such
employee or his legal representatives or beneficiaries for one year following
the date of his death, Normal Retirement or cessation of employment due to
Disability, PROVIDED that in no event shall the period extend beyond the
expiration of the Non-Statutory Stock Option term.
8. INCENTIVE STOCK OPTIONS.
8.1 GRANT OF INCENTIVE STOCK OPTIONS.
The Committee, from time to time, may grant Incentive Stock Options to
eligible employees. Incentive Stock Options granted pursuant to the Plan shall
be subject to the following terms and conditions:
(a) PRICE. The purchase price per share of Common Stock deliverable
upon the exercise of each Incentive Stock Option shall be not less than 100% of
the Fair Market Value of the Association's Common Stock on the date the
Incentive Stock Option is granted. However, if an employee owns stock possessing
more than 10% of the total combined voting power of all classes of Common Stock
of the Association, the purchase price per share of Common Stock deliverable
upon the exercise of each Incentive Stock Option shall not be less than 110% of
the Fair Market Value of the Association's Common Stock on the date the
Incentive Stock Option is granted. Shares may be purchased only upon payment of
the full purchase price. Payment of the purchase price may be made, in whole or
in part, through the surrender of shares of the Common Stock of the Association
at the Fair Market Value of such shares determined in the manner described in
Section 2(j).
(b) AMOUNTS OF OPTIONS. Incentive Stock Options may be granted to any
eligible employee in such amounts as determined by the Committee, PROVIDED that
the amount granted is consistent with the terms of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"). In the case of an option intended
to qualify as an Incentive Stock Option, the aggregate Fair Market Value
(determined as of the time the option is granted) of the Common Stock with
respect to which Incentive Stock Options granted are exercisable for the first
time by the Participant during any calendar year (under all plans of the
Participant's employer corporation and its parent and subsidiary corporations)
shall not exceed $100,000. The provisions of this Section 8.1(b) shall be
construed and applied in accordance with Section 422(d) of the Code and the
regulations, if any, promulgated thereunder.
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<PAGE>
(c) TERMS OF OPTIONS. The term during which each Incentive Stock
Option may be exercised shall be determined by the Committee, but in no event
shall an Incentive Stock Option be exercisable in whole or in part more than 10
years from the Date of Grant. If any employee, at the time an Incentive Stock
Option is granted to him, owns Common Stock representing more than 10% of the
total combined voting power of the Association (or, under Section 425(d) of the
Code, is deemed to own Common Stock representing more than 10% of the total
combined voting power of all such classes of Common Stock by reason of the
ownership of such classes of Common Stock directly or indirectly, by or for any
brother, sister, spouse, ancestor or lineal descendent of such employee, or by
or for any corporation, partnership, estate or trust of which such employee is a
shareholder, partner or beneficiary), the Incentive Stock Option granted to him
shall not be exercisable after the expiration of five years from the Date of
Grant. No Incentive Stock Option granted under this Plan is transferable except
by will or the laws of descent and distribution and is exercisable in his
lifetime only by the employee to which it is granted.
The Committee shall determine the date on which each Incentive Stock
Option shall become exercisable and may provide that an Incentive Stock Option
shall become exercisable in installments. The shares comprising each installment
may be purchased in whole or in part at any time after such installment becomes
purchasable, provided that the amount able to be first exercised in a given year
is consistent with the terms of Section 422 of the Code. The Committee, in its
sole discretion, may accelerate the time at which any Incentive Stock Option may
be exercised in whole or in part; PROVIDED that it is consistent with the terms
of Section 422 of the Code. Notwithstanding the above, in the event of a Change
in Control of the Association, all Incentive Stock Options shall become
immediately exercisable.
(d) TERMINATION OF EMPLOYMENT. Upon the termination of an employee's
service for any reason other then Disability, Normal Retirement, Change in
Control, death or Termination for Cause, his Incentive Stock Options shall be
exercisable only as to those shares which were immediately purchasable by him at
the date of termination and only for a period of three months following
termination. In the event of Termination for Cause all rights under his
Incentive Stock Options shall expire upon termination.
In the event of death or Disability of any employee, all Incentive Stock
Options held by such employee, whether or not exercisable at such time, shall be
exercisable by such employee or his legal representatives or beneficiaries for
one year following the date of his death or cessation of employment due to
Disability. Upon termination of an employee's service due to Normal Retirement,
or a Change in Control, all Incentive Stock Options held by such employee,
whether or not exercisable at such time, shall be exercisable for a period of
one year following the date of his cessation of employment; provided, however,
that such option shall not be eligible for treatment as an Incentive Stock
Option in the event such option is exercised more than three months following
the date of his Normal Retirement or the Change in Control. In no event shall
the exercise period extend beyond the expiration of the Incentive Stock Option
term.
(e) COMPLIANCE WITH CODE. The options granted under this Section 8 of
the Plan are intended to qualify as incentive stock options within the meaning
of Section 422 of the Code, but the Association makes no warranty as to the
qualification of any option as an incentive stock option within the meaning of
Section 422 of the Code.
9. LIMITED RIGHTS.
9.1 GRANT OF LIMITED RIGHTS.
The Committee may grant a Limited Right simultaneously with the grant of
any option, with respect to all or some of the shares covered by such option.
Limited Rights granted under this Plans are subject to the following terms and
conditions:
(a) TERMS OF RIGHTS. In no event shall have Limited Right be
exercisable in whole or in part before the expiration of six months from the
date of a grant of the Limited Right. A Limited Right may be exercised only in
the event of a Change in Control of the Association.
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The Limited Right may be exercised only when the underlying option is
eligible to be exercised, provided that the Fair Market Value of the underlying
shares on the day of exercise is greater than the exercise price of the related
option.
Upon exercise of a Limited Right, the related option shall cease to be
exercisable. Upon exercise or termination of an option, any related Limited
Rights shall terminate. The Limited Rights may be for no more than 100% of the
difference between the exercise price and the Fair Market Value of the Common
Stock subject to the underlying option. The Limited Right is transferable only
when the underlying option is transferable and under the same conditions.
(b) PAYMENT. Upon exercise of a Limited Right, the holder shall
promptly receive from the Association an amount of cash equal to the difference
between the Fair Market Value on the Date of Grant of the related option and the
Fair Market Value of the underlying shares on the date the Limited Right is
exercised, multiplied by the number of shares with respect to which such Limited
Right is being exercised.
(c) STOCK TO BE OPTIONED. The maximum number of shares of Common
Stock that may be optioned or sold under the Plan is 41,400 shares. Such shares
may be treasury, or authorized but unissued, shares of Common Stock of the
Association. Any shares subject to an Option under the Plan which Option for any
reason expires or is terminated unexercised as to such shares, may again be
subject to an Option under the Plan.
10. SURRENDER OPTION.
In the event of a Participant's termination of employment as a result of
death, Disability or Retirement, the Participant (or his personal
representative(s), heir(s), or devisee(s)) may, in a form acceptable to the
Committee, make application to surrender all or part of options held by such
Participant in exchange for a cash payment from the Association of an amount
equal to the difference between the Fair Market Value of the Common Stock on the
date of termination of employment and the exercise price per share of the option
on the Date of Grant. Whether the Association accepts such application or
determines to make payment, in whole or part, is within its absolute and sole
discretion, it being expressly understood that the Association is under no
obligation to any Participant whatsoever to make such payments. In the event
that the Association accepts such application and determines to make payment,
such payment shall be in lieu of the exercise of the underlying option and such
option shall cease to be exercisable.
11. RIGHTS OF A SHAREHOLDER; NONTRANSFERABILITY.
An optionee shall have no rights as a shareholder with respect to any
shares covered by a Non-Statutory and/or Incentive Stock Option until the date
of issuance of a stock certificate for such shares. Nothing in this Plan or in
any Award granted confers on any person any right to continue in the employ of
the Association or its affiliates or to continue to perform services for the
Association or its affiliates or interferes in any way with the right of the
Association or its affiliates to terminate his services as an officer or other
employee at any time.
No Award under the Plan shall be transferable by the optionee other than
by will or the laws of descent and distribution and may only be exercised during
his lifetime by the optionee, or by a guardian or legal representative.
12. AGREEMENT WITH GRANTEES.
Each Award of Options, and/or Limited Rights will be evidenced by a
written agreement, executed by the Participant and the Association or its
affiliates that describes the conditions for receiving the Awards including the
date of Award, the purchase price if any, applicable periods, and any other
terms and conditions as may be required by the Board of Directors or applicable
securities law.
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13. DESIGNATION OF BENEFICIARY.
A Participant, with the consent of the Committee, may designate a person
or persons to receive, in the event of death, any stock option or Limited Rights
Award to which he would then be entitled. Such designation will be made upon
forms supplied by and delivered to the Association and may be revoked in
writing. If a Participant fails effectively to designate a beneficiary, then his
estate will be deemed to be the beneficiary.
14. DILUTION AND OTHER ADJUSTMENTS.
In the event of any change in the outstanding shares of Common Stock of
the Association by reason of any stock dividend or split, recapitalization,
merger, consolidation, spin-off, reorganization, combination or exchange of
shares, or other similar corporate change, or other increase or decrease in such
shares without receipt or payment of consideration by the Association, the
Committee will make such adjustments to previously granted Awards, to prevent
dilution or enlargement of the rights of the Participant, including any or all
of the following:
(a) adjustments in the aggregate number or kind of shares of Common
Stock which may be awarded under the Plan;
(b) adjustments in the aggregate number or kind of shares of Common
Stock covered by Awards already made under the Plan,
(c) subject to Section 8.1 (a) hereof, adjustments in the purchase
price of outstanding Incentive and/or Non-Statutory Stock Options, or any
Limited Rights attached to such options.
No such adjustments may, however, materially change the value of
benefits available to a Participant under a previously granted Award.
15. LIMITATIONS UPON EXERCISE OF OPTIONS.
Notwithstanding any other provision of the Plan, so long as the Company
remains in the mutual form of organization, an option granted under this Plan
may not be exercised if the exercise of such an option would result in the
Holding Company owning less than 50.1 percent of the Common Stock of the
Association.
16. TREATMENT OF OPTIONS IN THE EVENT OF A CONVERSION TRANSACTION.
In the event that the Company converts to stock form in a Conversion
Transaction ("Stock Holding Company"), any options outstanding shall, at the
option of the holder, (i) be convertible into options for Common Stock of the
Stock Holding Company, or (ii) be exercised by the holder prior to the effective
date of the Conversion Transaction and the holder shall be entitled to exchange,
in the same manner as other minority stockholders of the Association, the shares
of Common Stock of the Association received upon such exercise for shares of
Common Stock of the Stock Holding Company. Provided, however, that if for any
reason such options are not to be converted or such shares are not exchanged,
the holders of options under this plan shall receive cash payment for the shares
of stock represented by the options in an amount equal to the initial offering
price of the Common Stock of the Stock Holding Company at the closing of the
Conversion Transaction, less the original exercise price of such options and,
with respect to options that have been exercised, the Stock Holding Company
shall redeem such shares for cash in the same manner as such redemption would
occur for other minority stockholders of the Association. Any exchange,
conversion of options, or cash payment for shares shall be subject to applicable
federal and state regulations and, if necessary, subject to the approval of the
appropriate Regulatory Authorities.
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17. WITHHOLDING.
There may be deducted from each distribution of cash and/or Common Stock
under the Plan the amount of tax required by any governmental authority to be
withheld.
18. AMENDMENT OF THE PLAN.
The Board of Directors may at any time, and from time to time, modify or
amend the Plan in any respect; PROVIDED, HOWEVER, that if necessary to continue
to qualify the Plan under the Securities and Exchange Commission Rule 16b-3,
shareholder approval shall be required for any such modification or amendment
that:
(a) increases the maximum number of shares for which options may be
granted under the Plan (SUBJECT, HOWEVER, to the provisions of Section 14
hereof);
(b) reduces the exercise price at which Awards may be granted
(SUBJECT, HOWEVER, to the provisions of Sections 8.1(a) and 14 hereof):
(c) extends the period during which options may be granted or
exercised beyond the times originally prescribed (SUBJECT, HOWEVER, to the
provisions of Section 8.1(a) hereof); or
(d) changes the persons eligible to participate in the Plan.
Failure to ratify or approve amendments or modifications to subsections
(a) through (d) of this Section 18 by shareholders shall be effective only as to
the specific amendment or modification requiring such ratification. Other
provisions, sections, and subsections of this Plan will remain in full force and
effect.
No such termination, modification or amendment may affect the rights of
a Participant under an outstanding Award.
19. EFFECTIVE DATE OF PLAN.
The Plan shall become effective upon the consummation of the
Reorganization (the "Effective Date"). The Plan shall be presented to
shareholders for ratification for purposes of: (i) obtaining favorable treatment
under Section 16(b) of the Exchange Act; (ii) obtaining preferential tax
treatment for Incentive Stock Options; and (iii) maintaining listing on the
NASDAQ National Market System. The failure to obtain shareholder ratification
will not affect the validity of the Plan and the options thereunder; PROVIDED,
HOWEVER, that if the Plan is not ratified, the Plan shall remain in full force
and effect, and any Incentive Stock Options granted under the Plan shall be
deemed to be Non-Statutory Stock Options.
20. TERMINATION OF THE PLAN.
The right to grant Awards under the Plan will terminate upon the earlier
often (10) years after the Effective Date or the issuance of Common Stock or the
exercise of options or related rights equaling the maximum number of shares
reserved under the Plan as set forth in Section 5 hereof. The Board of Directors
has the right to suspend or terminate the Plan at any time; PROVIDED that no
such action will, without the consent of a Participant, adversely affect his
rights under a previously granted Award.
21. APPLICABLE LAW.
The Plan will be administered in accordance with the laws of the State
of Iowa.
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FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
RECOGNITION AND RETENTION PLAN
AND TRUST AGREEMENT
ARTICLE I
THE PLAN AND TRUST
1.01 First Federal Savings Bank of Siouxland (the "Association") on July
13, 1992, established the First Federal Savings Bank of Siouxland Recognition
and Retention Plan (the "Plan") and Trust (the "Trust"). The Association now
desires to amend the Plan and Trust to more accurately reflect the Associations
intention regarding the treatment of said Plan and Trust under the Internal
Revenue Code of 1986 ("Code"), as amended, and the Employee Retirement Income
Security Act of 1974 ("ERISA"), as amended upon the terms and conditions
hereinafter stated in this Recognition and Retention Plan and Trust Agreement,
as amended (the "Agreement").
1.02 The Trustee hereby accepts this Trust, as amended, and agrees to
hold the Trust assets existing on the date of this Agreement and all additions
and accretions thereto upon the terms and conditions hereinafter stated.
1.03 It is the intention of the Association that this Trust shall
constitute an unfunded arrangement and shall not affect the status of the Plan
as an unfunded plan maintained for the purpose of providing deferred
compensation for a select group of management or highly compensated employees
for purposes of Title I of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA").
ARTICLE II
PURPOSE OF THE PLAN AND TRUST
2.01 The purpose of the Plan is to retain employees and officers of
experience and ability by providing such persons with a proprietary interest in
the Association as compensation for their contributions to the Association and
its Affiliates and as an incentive to make such contributions and to promote the
Association's growth and profitability in the future.
2.02 The purpose of the Trust is to provide a vehicle into which the
Association can contribute assets to be held, subject to the claims of the
Association's creditors in the event of the Association's Insolvency, as defined
herein, until paid to Plan Recipients and their Beneficiaries in such manner and
at such times as specified in the Plan.
ARTICLE III
DEFINITIONS
The following words and phrases when used in this Plan with an initial
capital letter, unless the context clearly indicates otherwise, shall have the
meanings set forth below. Wherever appropriate, the masculine pronoun shall
include the feminine pronoun and the singular shall include the plural.
3.01 "AFFILIATE" means the Company and those subsidiaries of the
Association or the Company which, with the consent of the Board, agree to
participate in this Plan.
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3.02 "ASSOCIATION" means First Federal Savings Bank of Siouxland.
3.03 "BENEFICIARY" means the person or persons designated by a Recipient
to receive any benefits payable under the Plan in the event of such Recipient's
death. Such person or persons shall be designated in writing on forms provided
for this purpose by the Committee and may be changed from time to time by
similar written notice to the Committee. In the absence of a written
designation, the Beneficiary shall be the Recipient's surviving spouse, if any,
or if none, his estate.
3.04 "BOARD" means the Board of Directors of the Association.
3.05 "COMMITTEE" means a Committee of the Board consisting of all
Directors of the Association or a committee appointed by the majority thereof.
Notwithstanding anything herein to the contrary, no Recipient hereunder, as
defined herein, shall be appointed as a member of the Committee.
3.06 "COMMON STOCK" means shares of the common stock of the Association.
3.07 "COMPANY" shall mean First Federal Bankshares, M.H.C., the mutual
holding company of the Association.
3.08 "CONVERSION TRANSACTION" means the conversion of the Company from
the mutual to the stock form of organization either on a stand-alone basis or in
the context of a merger conversion.
3.09 "DISABILITY" means the permanent and total inability by reason of
mental or physical infirmity, or both, of an employee to perform the work
customarily assigned to him. Additionally, a medical doctor selected or
approved by the Board must advise the Committee that it is either not possible
to determine when such Disability will terminate or that it appears probable
that such Disability will be permanent during the remainder of said
participant's lifetime.
3.10 "EMPLOYEE" means any person who is currently employed by the
Association or an Affiliate, including officers and who would be considered a
member of a select group of management or highly compensated employees for
purposes of Title I of ERISA.
3.11 "MINORITY STOCK OFFERING" means one or more offerings of Common
Stock by the Association to persons other than the Company.
3.12 "NORMAL RETIREMENT" means retirement at the normal or early
retirement date as set forth in the First Federal Savings and Loan Association
Retirement Plan.
3.13 "PLAN SHARES" means shares of Common Stock held in the Trust and
issued or issuable to a Recipient pursuant to the Plan.
3.14 "PLAN SHARE AWARD" means a right granted under this Plan to earn
Plan Shares.
3.15 "PLAN SHARE RESERVE" means the shares of Common Stock held by the
Trustee pursuant to Sections 5.03 and 5.04.
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3.16 "RECIPIENT" means an Employee or Director who receives a Plan Share
Award under the Plan.
3.17 "REORGANIZATION" means the reorganization of First Federal Savings
and Loan Association of Sioux City as a mutual holding company and the
establishment of the Association as its majority-owned subsidiary.
3.18 "TRUSTEE" means that person(s) or entity nominated by the Committee
and approved by the Board pursuant to Sections 4.01 and 4.02 to hold legal title
to the Plan assets for the purposes set forth herein. Notwithstanding anything
herein to the contrary, no Recipient hereunder, as defined herein, shall be
nominated or appointed as Trustee.
ARTICLE IV
ADMINISTRATION OF THE PLAN
4.01 ROLE OF THE COMMITTEE. The Plan shall be administered and
interpreted by the Committee, which shall have all of the powers allocated to it
in this and other Sections of the Plan. The interpretation and construction by
the Committee of any provisions of the Plan or of any Plan Share Award granted
hereunder shall be final and binding. The Committee shall act by vote or
written consent of a majority of its members. Subject to the express provisions
and limitations of the Plan, the Committee may adopt such rules, regulations and
procedures as it deems appropriate for the conduct of its affairs. The
Committee shall report its actions and decisions with respect to the Plan to the
Board at appropriate times, but in no event less than one time per calendar
year. The Committee shall recommend to the Board one or more persons or entity
to act as Trustee(s) in accordance with the provision of this Plan and Trust and
the terms of Article VIII..
4.02 ROLE OF THE BOARD. The members of the Committee and the Trustee
or Trustees shall be appointed or approved by, and will serve at the pleasure
of, the Board. The Board may in its discretion from time to time remove
members from, or add members to, the Committee, and may remove, replace or
add Trustees. The Board shall have all of the powers allocated to it in this
and other Sections of the Plan, may take any action under or with respect to
the Plan which the Committee is authorized to take, and may reverse or
override any action taken or decision made by the Committee under or with
respect to the Plan; PROVIDED, HOWEVER, that except as provided in Section
7.01(d), the Board may not revoke any Plan Share Award except in the event of
Revocation for Misconduct, or with respect to unearned Plan Share Awards in
the event a Recipient of a Plan Share Award voluntarily terminates employment
with the Association prior to Normal Retirement.
4.03 LIMITATION ON LIABILITY. No member of the Board or the Committee
or the Trustee(s) shall be liable for any determination made in good faith with
respect to the Plan or any Plan Shares or Plan Share Awards granted under it.
If a member of the Board or the Committee or any Trustee is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of anything done or not done by him in such capacity under or with
respect to the Plan, the Association shall indemnify such member against expense
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and
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in a manner he reasonably believed to be in the best interests of the
Association and its Affiliates and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
ARTICLE V
CONTRIBUTIONS; PLAN SHARE RESERVE
5.01 AMOUNT AND TIMING OF CONTRIBUTIONS. The Board shall determine the
amounts (or the method of computing the amounts) to be contributed by the
Association and its Affiliates to the Trust established under this Plan. Such
amounts shall be paid to the Trustees at the time of contribution. No
contributions by Employees shall be permitted.
5.02 INITIAL INVESTMENT. Any amounts held by the Trust prior to the
effective date of the Reorganization and the Minority Stock Offering shall be
invested by the Trustee in such interest-bearing account or accounts at the
Association as the Trustee shall determine to be appropriate.
5.03 INVESTMENT OF TRUST ASSETS UPON THE REORGANIZATION; CREATION OF
PLAN SHARE RESERVE. Upon the consummation of the Reorganization and the
Minority Stock Offering, the Trustee may invest up to one hundred percent (100%)
of the Trust's assets in Common Stock of the Association except as otherwise
provided below; PROVIDED, HOWEVER, that the Trust shall not invest in more than
18,900 shares of Common Stock (or three percent (3.0%) of the shares of Common
Stock issued in connection with the Reorganization). Any Common Stock so
purchased shall constitute the "Plan Share Reserve." Any earnings received with
respect to Common Stock held in the Plan Share Reserve shall be held in an
interest-bearing account. Any earnings received with respect to Common Stock
subject to a Plan Share Award shall be held in an interest-bearing account on
behalf of the individual Recipient.
5.04 EFFECT OF ALLOCATIONS, RETURNS AND FORFEITURES UPON PLAN SHARE
RESERVES. Upon the allocation of Plan Share Awards under Section 6.02, or the
decision of the Committee to return Plan Shares to the Association, the Plan
Share Reserve shall be reduced by the number of Shares subject to the Awards so
allocated or returned. Any Shares subject to an Award that may not be earned
because of a forfeiture by the Recipient pursuant to Section 7.01 shall be
returned (added) to the Plan Share Reserve.
ARTICLE VI
ELIGIBILITY; ALLOCATIONS
6.01 ELIGIBILITY. Employees of the Association and its Affiliates are
eligible to receive Plan Share Awards.
6.02 ALLOCATIONS. The Committee may determine which of the Employees
referenced in Section 6.01 will be granted Plan Share Awards and the number of
Shares covered by each Award; PROVIDED, HOWEVER, that the number of Shares
covered by such Awards may not exceed the number of Shares in the Plan Share
Reserve immediately prior to the grant of such Awards, and PROVIDED FURTHER,
that in no event shall any Awards be made that will violate the Charter, Bylaws
or Plan of Reorganization from Mutual Savings Association to Mutual Holding
Company and Stock Issuance of the Association or any applicable federal or state
law or regulation. In the event Plan Shares are forfeited for any reason, the
Committee, from time to time, may determine which of the Employees referenced in
Section 6.01 will be granted
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additional Plan Share Awards to be awarded from forfeited Plan Shares. In
selecting those Employees to whom Plan Share Awards will be granted and the
number of Plan Shares covered by such Awards, the Committee shall consider the
position and responsibilities of the eligible Employees, the length and value of
their services to the Association and its Affiliates, the compensation paid to
the Employees and any other factors the Committee may deem relevant, and the
Committee may request the written recommendation of the Chief Executive Officer
and other senior executive officers of the Association and its Affiliates. All
allocations by the Committee shall be subject to review, and approval or
rejection, by the Board.
6.03 FORM OF ALLOCATION. As promptly as practicable after a
determination is made pursuant to Section 6.02 that a Plan Share Award has been
granted, the Committee shall notify the Recipient in writing of the grant of the
Award, the number of Plan Shares covered by the Award, and the terms upon which
the Plan Shares subject to the Award may be earned. The date on which the
Committee so notifies the Recipient shall be considered the date of the initial
grant of Plan Share Awards. The date on which the Committee so notifies the
Recipient shall be considered the date of grant of any subsequent Plan Share
Awards. The Committee shall maintain records as to all grants of Plan Share
Awards under the Plan.
6.04 ALLOCATIONS NOT REQUIRED. Notwithstanding anything to the contrary
in Sections 6.01 and 6.02, no Employee shall have any right or entitlement to
receive a Plan Share Award hereunder, such Awards being at the total discretion
of the Committee and the Board, nor shall the salaried Employees as a group have
such a right. The Committee, with the approval of the Board (or if so directed
by the Board), may return all Common Stock in the Plan Share Reserve to the
Association at any time, and cease issuing Plan Share Awards.
ARTICLE VII
EARNING AND DISTRIBUTION OF PLAN SHARES; VOTING RIGHTS
7.01 EARNING PLAN SHARES; FORFEITURES
(a) GENERAL RULES. Unless the Committee shall specifically state to
the contrary at the time a Plan Share award is granted, Plan Shares subject to
an Award shall be earned by a Recipient at the rate of twenty percent (20%) of
the aggregate number of Shares covered by the Award at the end of each full
twelve months of consecutive employment with the Association or an Affiliate
after the date of grant of the Award; PROVIDED, HOWEVER, that the Committee may
provide for a less or more rapid earnings rate than that set forth herein for
all Awards or for any given Award. If the employment of a Recipient is
terminated prior to the fifth anniversary (or such later date as the Committee
shall determine) of the date of grant of an Award for any reason (except as
specifically provided in subsections (b) and (c) below), the Recipient shall
forfeit the right to earn any Shares subject to the Award that have not
theretofore been earned.
In determining the number of Plan Shares that are earned, fractional shares
shall be rounded down to the nearest whole number; PROVIDED that such fractional
shares shall be aggregated and earned, on the fifth anniversary of the date of
grant.
(b) EXCEPTION FOR TERMINATION DUE TO DEATH, DISABILITY AND NORMAL
RETIREMENT. Notwith-standing the general rule contained in Section 7.01(a),
Plan Shares subject to a Plan Share Award held by a Recipient whose employment
with the Association or an Affiliate terminates due to death, Disability or
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Normal Retirement, or any part thereof that has not theretofore been earned,
shall be deemed earned as of the Recipient's last day of employment with the
Association or an Affiliate.
(c) EXCEPTION FOR TERMINATIONS AFTER A CHANGE IN CONTROL.
Notwithstanding the general rule contained in Section 7.01(a), all Plan Shares
subject to a Plan Share Award held by a Recipient whose employment with the
Association or an Affiliate terminates following a Change in Control of the
Association or the Company shall be deemed earned as of the Recipient's last day
of employment with the Association or an Affiliate. A "Change in Control" of
the Association shall mean (i) a plan of reorganization, merger, merger
conversion, consolidation or sale of all or substantially all of the assets of
the Association or the Company or a similar transaction occurs in which the
Association or the Company is not the resulting entity; (ii) individuals who
constitute the board of directors of the Association or the board of directors
of the Company cease for any reason to constitute a majority thereof; or (iii) a
change in control within the meaning of 12 C.F.R. Section 574.4 occurs, as
determined by the board of directors of the Association or the Company;
PROVIDED, HOWEVER, that a change in control shall not be deemed to occur under
7.01(c)(i) or 7.01(c)(iii) of this section if the transaction(s) constituting a
change in control is approved by a majority of the board of directors of the
Association or the Company, as the case may be. In the event that the Company
converts from the mutual form of organization to the stock form of organization
on a stand-alone basis at any time subsequent to the effective date of this
Agreement ("Stock Company"), a "change in control" of the Association or the
Stock Company for purposes of this Agreement shall mean an event of a nature
that: (I) would be required to be reported in response to Item 1 of the current
report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); (II) results
in a Change in Control of the Association or the Stock Company within the
meaning of the Home Owners' Loan Act of 1933 and the Rules and Regulations
promulgated by the Office of Thrift Supervision (or its predecessor agency), as
in effect on the date hereof; or (III) without limitation, such a change in
control shall be deemed to have occurred at such time as (a) any "person" (as
the term is used in Sections 13(d) and 14(d) of the of the Exchange Act) is or
becomes the "beneficial owner" (as defined in Rule 13d-3 promulgated under the
Exchange Act), directly or indirectly, of securities of the Association
purchased by the Association's employee stock ownership plan and trust; or (b)
individuals who constitute the Board of the Association or the Stock Company on
the date hereof (the "Incumbent Board") cease for any reason to constitute at
least a majority thereof; PROVIDED that any person becoming a director
subsequent to the date hereof whose election was approved by a vote of at least
three-quarters of the directors comprising the Incumbent Board, or whose
nomination for election by the Stock Company's stockholders was approved by the
same Nominating Committee serving under an Incumbent Board, shall be, for
purposes of this clause (b), considered as though he were a member of the
Incumbent Board; or (c) a plan of reorganization is adopted, or a merger,
consolidation, sale of all or substantially all the assets of the Association or
the Stock Company or similar transaction occurs in which the Association or the
Stock Company is not the resulting entity; or (d) a proxy statement soliciting
proxies from stockholders of the Stock Company, by someone other than the
current management of the Stock Company seeking stockholder approval of a plan
of reorganization, merger or consolidation of the Stock Company or Association
or similar transaction with one or more corporations as a result of which the
outstanding shares of the class of securities then subject to the Plan are to be
exchanged for or converted into cash or property or securities not issued by the
Association or the Stock Company shall be distributed; or (e) a tender offer is
made for 20% or more of the voting securities of the Association or Stock
Company.
(d) REVOCATION FOR CAUSE. Notwithstanding anything hereinafter to the
contrary, the Board may by resolution immediately revoke, rescind and terminate
any Plan Share Award, or portion thereof,
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previously awarded under this Plan, to the extent Plan Shares have not been
delivered thereunder to the Recipient, whether or not yet earned, in the case of
an Employee who is discharged from the Association or an Affiliate for cause (as
hereinafter defined), or who is discovered after termination of employment to
have engaged in conduct that would have justified termination for Cause.
"Cause" is defined as personal dishonesty, willful misconduct, any breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, or the willful violation of any law, rule or regulation (other than
traffic violations or similar offenses) that results in a material loss to the
Association or an Affiliate, or final cease-and-desist order.
7.02 ACCRUAL OF DIVIDENDS. Whenever Plan Shares are paid to a Recipient
or Beneficiary under Section 7.03, such Recipient or Beneficiary shall also be
entitled to receive, with respect to each Plan Share paid, an amount equal to
any cash dividends and a number of shares of Common Stock equal to any stock
dividends, declared and paid with respect to a share of Common Stock between the
date the relevant Plan Share Award was granted and the date the Plan Shares are
being distributed. There shall also be distributed an appropriate amount of net
earnings, if any, of the Trust with respect to any cash dividends so paid out.
7.03 DISTRIBUTION OF PLAN SHARES
(a) TIMING OF DISTRIBUTIONS; GENERAL RULE. Except as provided in
subsection (b) below, Plan Shares shall be distributed to the Recipient or his
Beneficiary, as the case may be, as soon as practicable after they have been
earned.
(b) TIMING; EXCEPTION FOR 10% SHAREHOLDERS. Notwithstanding subsection
(a) above, no Plan Shares may be distributed prior to the date that is five (5)
years from the effective date of the Reorganization to the extent the Recipient
or Beneficiary, as the case may be, would after receipt of such shares own in
excess of ten (10) percent of the issued and outstanding shares of Common Stock,
including shares held by the Company. Any Plan Shares remaining unpaid solely
by reason of the operation of this subsection (b) shall be paid to the Recipient
or his Beneficiary on the date that is five (5) years from the effective date of
the Reorganization.
(c) FORM OF DISTRIBUTION. All Plan Shares, together with any shares
representing stock dividends, shall be distributed in the form of Common
Stock. One share of Common Stock shall be given for each Plan Share earned
and payable. Payments representing accumulated cash dividends (and earning
thereon) shall be made in cash.
(d) WITHHOLDING. The Trustee may withhold from any payment or
distribution made under this Plan sufficient amounts of cash or shares of Common
Stock to cover any applicable withholding and employment taxes, and if the
amount of such payment is insufficient, the Trustee may require the Recipient or
Beneficiary to pay to the Trustee the amount required to be withheld as a
condition of delivering the Plan Shares. The Trustee shall pay over to the
Association or Affiliate that employs or employed such Recipient any such amount
withheld from or paid by the Recipient or Beneficiary.
7.04 VOTING OF PLAN SHARES. All shares of Common Stock held by the
Trust shall be voted by the Trustee.
7
<PAGE>
ARTICLE VIII
TRUST
8.01 TRUST. The Trustee shall receive, hold, administer, invest and
make distributions and disbursements from the Trust in accordance with the
provisions of the Plan and Trust and the applicable directions, rules,
regulations, procedures and policies established by the Committee pursuant to
the Plan. The principal of the Trust, and any earnings thereon shall be held
separate and apart from other funds of the Association and shall be used
exclusively for the uses and purposes of Plan participants and general creditors
as herein set forth. Plan participants and their beneficiaries shall have no
preferred claim on, or any beneficial ownership interest in, any assets of the
Trust. Any rights created under the Plan and this Trust Agreement shall be mere
unsecured contractual rights of Plan participants and their beneficiaries
against the Association. Any assets held by the Trust will be subject to the
claims of the Association's general creditors under federal and state law in the
event of Insolvency, as defined in Section 8.06.
8.02 GRANTOR TRUST. The Trust is intended to be a grantor trust, of
which the Association is the grantor, within the meaning of Subpart E, part I,
subchapter J, chapter 1, subtitle A of the Internal Revenue Code of 1986, as
amended, and shall be construed accordingly.
8.03 REVOCABILITY. The Trust hereby established shall be revocable by
the Association.
8.04 MANAGEMENT OF TRUST. It is the intent of this Plan and Trust that,
subject to the provisions of this Plan, the Trustee shall have complete
authority and discretion with respect to the management, control and investment
of the Trust, and that the Trustee shall invest all assets of the Trust, except
those attributable to cash dividends paid with respect to Plan Shares, in Common
Stock to the fullest extent practicable, and except to the extent that the
Trustee determines that the holding of monies in cash or cash equivalents is
necessary to meet the obligation of the Trust. Notwithstanding anything herein
to the contrary, the Association shall have the right at anytime, and from time
to time in its sole discretion to substitute assets of equal fair market value
for any asset held by the Trust. This right is exercisable by the Association
in a nonfiduciary capacity without the approval or consent of any person in a
fiduciary capacity. In performing its duties, the Trustee shall have the power
to do all things and execute such instruments as may be deemed necessary or
proper, including the following powers:
(a) To invest up to one hundred percent (100%) of all Trust assets in
Common Stock without regard to any law now or hereafter in force limiting
investments for the Trustee or other fiduciaries. In making such investments,
the Trustee is authorized to purchase Common Stock from the Association or an
Affiliate or from any other source, and such Common Stock so purchased may be
outstanding, newly issued, or treasury shares.
(b) To invest any Trust assets not otherwise invested in accordance
with (a) above in such deposit accounts, and certificates of deposit (including
those issued by the Association), obligations of the United States government or
its agencies or such other investments as shall be considered the equivalent of
cash.
(c) To sell, exchange or otherwise dispose of any property at any time
held or acquired by the Trust.
8
<PAGE>
(d) To cause stocks, bonds or other securities to be registered in the
name of a nominee, without the addition of words indicating that such security
is an asset of the Trust (but accurate records shall be maintained showing that
such security is an asset of the Trust).
(e) To hold cash without interest in such amounts as may be in the
opinion of the Trustee reasonable for the proper operation of the Plan and
Trust.
(f) To employ brokers, agents, custodians, consultants and accountants.
(g) To hire counsel to render advice with respect to their rights,
duties and obligations hereunder, and such other legal services or
representation as they may deem desirable.
(h) To hold funds and securities representing the amounts to be
distributed to a Recipient or his Beneficiary as a consequence of a dispute as
to the disposition thereof, whether in a segregated account or held in common
with other assets of the Trust.
Notwithstanding anything herein contained to the contrary, the Trustee
shall not be required to make any inventory, appraisal or settlement or report
to any court, or to secure any order of court for the exercise of any power
herein contained, or give bond.
8.05 INSOLVENCY OF BANK. (a) In the event of the Association's
Insolvency, the Trustee shall cease payment of benefits to Plan participants and
their Beneficiaries. The Association shall be considered "Insolvent" for
purposes of this Trust Agreement if (i) the Association is unable to pay its
debts as they become due, (ii) the Association is subject to a pending
proceeding as a debtor under the United States Bankruptcy Code, if applicable,
or (iii) the Association is subject to liquidation proceedings under applicable
federal and state laws.
(b) At all times during the continuance of this Trust, the principal
and income of the Trust shall be subject to claims of general creditors of the
Association under federal and state law as set forth below.
(1) The Board and the Chief Executive Officer of the Association
shall have the duty to inform the Trustee in writing of the Association's
Insolvency. If a person claiming to be a creditor of the Association alleges in
writing to the Trustee that the Association has become Insolvent, the Trustee
shall determine whether the Association is Insolvent and, pending such
determination, the Trustee shall discontinue payment of benefits to Plan
Recipients or their Beneficiaries.
(2) Unless the Trustee has actual knowledge of Bank's
Insolvency, or has received notice from the Association or a person claiming to
be a creditor alleging that the Association is Insolvent, the Trustee shall have
no duty to inquire whether the Association is Insolvent. The Trustee may in all
events rely on such evidence concerning the Association's solvency as may be
furnished to the Trustee and that provides the Trustee with a reasonable basis
for making a determination concerning Bank's Insolvency.
(3) If at any time the Trustee has determined that the
Association is Insolvent, Trustees shall discontinue payments to Plan Recipients
or their Beneficiaries and shall hold the assets of the Trust for the benefit of
the Association's general creditors. Nothing in this Trust shall in any way
diminish any rights of Plan participants or their beneficiaries to pursue their
rights as general creditors of the Association with respect to benefits due
under the Plan or otherwise.
9
<PAGE>
(4) The Trustee shall resume the payment of benefits to Plan
participants or their beneficiaries only after the Trustee has determined that
the Association is not Insolvent (or is no longer Insolvent).
(c) Provided that there are sufficient assets, if the Trustee
discontinues the payment of benefits from the Trust pursuant to Section
8.05(b)(3) hereof and subsequently resumes such payments, the first payment
following such discontinuance shall include the aggregate amount of all payments
due to Recipients or their Beneficiaries under the terms of the Plan for the
period of such discontinuance, less the aggregate amount of any payments made to
Plan Recipients or their Beneficiaries by the Association in lieu of the
payments provided for hereunder during any such period of discontinuance.
8.06 RECORDS AND ACCOUNTS. The Trustee shall maintain accurate and
detailed records and accounts of all transactions of the Trust, which shall be
available at all reasonable times for inspection by any legally entitled person
or entity to the extent required by applicable law, or any other person
determined by the Committee.
8.07 EARNINGS. All earnings, gains and losses with respect to Trust
assets shall be accumulated and reinvested, and shall be allocated, in
accordance with a reasonable procedure adopted by the Committee, to bookkeeping
accounts for Recipients or to the general account of the Trust, depending on the
nature and allocation of the assets generating such earnings, gains and losses.
In particular, any earnings on cash dividends received with respect to shares of
Common Stock shall be allocated to accounts for Recipients, if such shares are
the subject of outstanding Plan Share Awards, or, otherwise to the Plan Share
Reserve.
8.08 EXPENSES. All costs and expenses incurred in the operation and
administration of this Plan, including those incurred by the Trustee, shall be
borne by the Association.
8.09 INDEMNIFICATION. The Association shall indemnify, defend and hold
the Trustee harmless against all claims, expenses and liabilities arising out of
or related to the exercise of the Trustee's powers and the discharge of their
duties hereunder, unless the same shall be due to their gross negligence or
willful misconduct.
ARTICLE IX
MISCELLANEOUS
9.01 ADJUSTMENTS FOR CAPITAL CHANGES. In the event of any change in the
outstanding shares of Common Stock of the Association by reason of any stock
dividend or split, recapitalization, merger, consolidation, spin-off,
reorganization, combination or exchange of shares, or other similar corporate
change, or other increase or decrease in such shares effected without receipt or
payment of consideration by the Association, the Committee shall adjust the
aggregate number of Plan Shares available for issuance pursuant to the Plan and
shall adjust the number of shares to which any Plan Share Award relates to
prevent dilution or enlargement of the rights granted to the Recipient under the
Plan.
9.02 TREATMENT OF PLAN SHARES IN THE EVENT OF CONVERSION TRANSACTION.
In the event that the Holding Company converts to stock form in a Conversion
Transaction ("Stock Holding Company"), any Plan Share Awards and rights to Plan
Shares may be exchanged into shares of Common Stock of the
10
<PAGE>
Stock Holding Company, provided, however, that if for any reason such shares are
not to be exchanged, the Stock Holding Company shall, simultaneously with the
closing of the Conversion Transaction, purchase Plan Share Awards and rights to
Plan Shares for cash equal to the fair market value of such Awards or Shares.
Any exchange of shares or cash payment for shares shall be subject to applicable
federal and state regulations and, if necessary, subject to the approval of the
appropriate Regulatory authorities.
9.03 AMENDMENT AND TERMINATION OF PLAN. The Board may, by resolution,
at any time amend or terminate the Plan. This Trust may be amended by a written
instrument executed by Trustees and the Association. The power to amend or
terminate shall include the power to direct the Trustee to return to the
Association all or any part of the assets of the Trust, including shares of
Common Stock held in the Plan Share Reserve, as well as shares of Common Stock
and other assets subject to Plan Share Awards but not yet earned by the
Employees to whom they are allocated. However, the termination of the Trust
shall not affect a Recipient's right to earn Plan Share Awards and to the
distribution of Common Stock relating thereto, including earnings thereon, in
accordance with the terms of this Plan and the grant by the Committee or Board.
9.04 NONTRANSFERABLE. Plan Share Awards and rights to Plan Shares shall
not be transferable by a Recipient, and during the lifetime of the Recipient,
Plan Shares may only be earned by and paid to the Recipient who was notified in
writing of the Award by the Committee pursuant to Section 6.03.
9.05 EMPLOYMENT RIGHTS. Neither the Plan nor any grant of a Plan Share
Award or Plan Shares hereunder nor any action taken by the Trustee, the
Committee or the Board in connection with the Plan shall create any right on the
part of any Employee to continue in the employ of the Association or an
Affiliate thereof, or the Company.
9.06 VOTING AND DIVIDEND RIGHTS. No Recipient shall have any voting or
dividend rights or other rights of a shareholder in respect of any Plan Shares
covered by a Plan Share Award, except as expressly provided in Sections 7.02 and
7.04, prior to the time said Plan Shares are actually distributed to such
Recipient.
9.07 GOVERNING LAW. The Plan and Trust and this Agreement shall be
governed by the laws of the State of Iowa.
9.08 EFFECTIVE DATE. This Plan is effective as of the effective date of
the Reorganization (the "Effective Date"). Following the Reorganization and
Minority Stock Offering, the Plan may, but is not required to be presented to
shareholders of the Association; PROVIDED, HOWEVER, that the failure to obtain
shareholder ratification will not affect the validity of the Plan and the awards
granted thereunder.
9.09 TERM OF PLAN. This Plan shall remain in effect until the earlier
of (1) 21 years from the Effective Date, (2) termination by the Board, or (3)
the distribution of all assets of the Trust. Termination of the Plan shall not
affect any Plan Share Awards previously granted, and such Awards shall remain
valid and in effect until they have been earned and paid, or by their terms
expire or are forfeited.
11
<PAGE>
DEFERRED COMPENSATION PLAN FOR DIRECTORS
BE IT RESOLVED by the Directors of First Federal Savings Bank of Siouxland
("Bank"), this 23rd day of March, 1995, that the following deferred compensation
plan for directors of the Bank ("Plan") is hereby adopted.
1. PURPOSE: The purpose of this Plan is to enable Directors of the Bank to
elect to receive their fees as members of the Board of Directors and
special compensation for services on Committees of the Board in the form
most advantageous to them. The Plan permits them to elect to receive this
compensation either currently or to defer it and to further elect that it
be held for them as a contractual obligation of the Bank.
2. EFFECTIVE DATE: The Plan shall be effective from and after January 1,
1995.
3. ELIGIBILITY: All Directors of the Bank who, as of January 1, of any year
will be eligible to participate in the Plan during that year.
4. COMPENSATION COVERED BY THE PLAN: The compensation covered by the Plan
(covered compensation) will be fees paid to members of the Board of
Directors for their services as such and for services on Committees of the
Board of Directors. Compensation for Directors who are also Bank employees
and special compensation for services rendered to the Bank as part of their
business or professional activities, such as legal investment advisory and
like services, will not be covered compensation for purposes of the Plan.
5. ELECTION TO DEFER: Each Director may, in lieu of receiving current covered
compensation, elect to defer all or one-half of covered compensation by
filing an instrument in the form of Exhibit A hereto.
6. INVESTMENT OF DEFERRED COVERED COMPENSATION IN CASH: The Bank will
maintain a special memorandum account of such covered compensation for the
Directors who elect to defer compensation. As of the last day of each
month, the Bank shall credit to the special memorandum account the amounts
of covered compensation accrued for that month. At the end of each month,
the special memorandum account will be credited with interest on the amount
in such account at the beginning of that month at a rate equal to the
average weighted cost of certificates of deposit for the previous month.
7. DISTRIBUTION OF DEFERRED COVERED COMPENSATION: At the time of election
to defer, each Director also shall elect by filing an instrument with
the administrator in the form of Exhibit B hereto the time at which and
manner in which the value of the compensation so deferred shall be
distributed to the Director. Such election shall be irrevocable, except
that changes in the time and manner of distribution may be allowed if
unanimously approved by the full Board of Directors of the Bank. A
Director shall be entitled to elect to receive, or to commence
receiving, his or her deferred compensation as follows:
(a) death;
(b) disability that makes the director unable to perform the
principal duties of his or her occupation; and
(c) termination of services as a Director of the Bank.
Each Director be enabled to elect to receive the value of his or her deferred
compensation in either a lump sum or in approximately equal monthly installments
over a period of ten (10) years. A Director may elect to receive his or her
deferred compensation in monthly instruments over a period of time shorter than
ten years, which election shall not be binding on the Bank unless approved by
the Executive Committee of the Board of Directors.
8. MANNER OF ELECTION: Prior to January 1 of each year, each Director shall
be entitled to file an instrument in the form of Exhibit A hereto with the
administrator exercising his or her election under Section 5 of the Plan.
Such election shall be irrevocable with respect to the calendar year
following its date of filing. It may be revoked
<PAGE>
or amended, effective as of January 1 of the year following its revocation
or amendment. If a Director does not file an instrument under the Plan,
his or her covered compensation shall be paid to him or her in cash on a
non-deferred basis. An election once filed continue in effect until
revoked or amended by the Director.
9. ADMINISTRATION OF THE PLAN: The administrator of the Plan shall be the
President of the Bank or a Committee of officers or employees of the Bank
appointed by the President. The Presided shall, from time to time, advise
Directors as to the identity of the administrator. The administrator shall
interpret the Plan and make all decisions with respect to the rights of
Directors hereunder.
10. AMENDMENT OR TERMINATION: This Plan may be amended or terminated at any
time by the Board of Directors of the Bank.
11. Interests in compensation deferred for the directors shall not be
assignable or transferable except by will or the laws of descent and
distribution. The establishment of this Plan gives the participant no
right or security interest in any asset of the Bank or its subsidiaries.
ADOPTED this 23rd day of March, 1995.
<PAGE>
EXHIBIT 10.11
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
MANAGEMENT INCENTIVE PAY (FISCAL YEAR 97(98))
<TABLE>
<CAPTION>
-10 -5 0 10 20 30 50 70 100 WEIGHT SCORE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
R.O.A.A 0.52 0.58 0.64 0.70 0.76 0.82 0.88 0.94 1.00 0.40 8.00
R.O.A.E. 7.20 7.80 8.40 9.00 9.60 10.20 10.80 11.40 12.00 0.40 0.00
OPR EXP/AVG ASST 2.40 2.35 2.30 2.25 2.20 2.15 2.10 2.05 2.00 0.20 6.00
- -------------------------------------------------------------------------------------------------------------------
*Three Year Rolling Average P.I. 14.00
</TABLE>
<TABLE>
<CAPTION>
If nonperforming assets/total assets is
Raw Data 1998 greater than base, pay only a % of incentive pay
<S> <C> <C> <C>
R.O.A.A. 0.71 If >1.00% Pay 90% of incentive
R.O.A.E. 8.39 If >1.25% Pay 85% of incentive
OPER EXP/AVG ASST 2.19 If >1.50% Pay 75% of incentive
NONPERF ASST 0.19 If >1.75% Pay 65% of incentive
If >2.00% Pay 50% of incentive
</TABLE>
<TABLE>
<CAPTION>
Raw Data 1997 Incentive Pay Earnings Scale
<S> <C> <C> <C>
R.O.A.A. 0.73 P.I. % Salary
R.O.A.E. 8.95 100.00 30.00
OPER EXP/AVG ASST 2.11 95.00 28.00
NONPERF ASST 0.11 90.00 26.00
85.00 24.00
80.00 22.00
75.00 20.00
Raw Data 1996 70.00 18.00
65.00 16.00
R.O.A.A 0.70 60.00 14.00
R.O.A.E. 8.44 55.00 12.00
OPER EXP/AVG ASST 2.10 50.00 10.00
NONPERF ASST 0.17 45.00 9.00
40.00 8.00
35.00 7.00
30.00 6.00
25.00 5.00
20.00 4.00
15.00 3.00
10.00 2.00
</TABLE>
<PAGE>
GFS BANCORP, INC.
CASH-ONLY SAR PLAN
------------------------
FIRST AMENDMENT
------------------------
WHEREAS, GFS Bancorp, Inc. (the "Company") maintains the GFS Bancorp, Inc.
Cash-only SAR Plan (the "Plan"), and the Company has determined that (i) it is
in the best interests of the Company, its stockholders, and the option holders
under its stock option plans to amend the Plan by revising the definition of
"Market Value" and (ii) the amendment is an immaterial change to the Plan; and
WHEREAS, the Company's Board of Directors previously approved resolutions
that gave the Company's President the authority to make necessary immaterial
changes to the Plan without obtaining Board approval.
NOW, THEREFORE, the Plan shall be amended as follows, effective
immediately.
1. The definition of "Market Value" under Article I of the Plan shall be
revised in its entirety to read and provide as follows:
"Market Value" means the closing bid price of the Company's common
stock on the date the Participant exercises his SAR.
2. Nothing contained herein shall be held to alter, vary or affect any of
the terms, provisions, or conditions of the Plan or stock appreciation right
agreement entered into thereunder, other than as stated above.
<PAGE>
GFS BANCORP, INC.
---------------------------
CASH-ONLY SAR PLAN
---------------------------
The Board of Directors of GFS Bancorp, Inc. has adopted this Plan,
effective on the Closing Date.
ARTICLE I
DEFINITIONS
"Agreement" means a written agreement, substantially in the form attached
as Exhibit "A", by which the Company grants a Cash-Only SAR. Each such
Agreement shall constitute a binding contract between the Company and the
Participant, and each Participant, upon acceptance of such Agreement, shall be
bound by the terms and restrictions of the Plan and of such Agreement.
"Bank" means First Federal Savings Bank of Siouxland.
"Beneficiary" means the personal representative(s) of a deceased
Participant's estate or the person or persons to whom his or her rights have
passed by will or by the laws of descent and distribution. In the absence of a
valid beneficiary designation, a Participant's estate shall automatically be
deemed the Participant's Beneficiary for purposes of the Plan.
"Board" means the Board of Directors of the Company through the Closing
Date, and thereafter the Board of Directors of the Bank.
"Cash-Only SAR" means a cash-only stock appreciation right granted pursuant
to Article III hereof.
"Closing Date" means the date on which the Bank closes its merger with
Grinnell.
"Committee" means the committee appointed to administer the Plan pursuant
to Article II hereof.
"Company" means GFS Bancorp, Inc. through the Closing Date, and thereafter
shall mean First Federal Savings Bank of Siouxland.
"Director" means a member of the Board.
1
<PAGE>
"Effective Date" means the Closing Date.
"Employee" means any person employed by the Company.
"Grinnell" means, collectively, Grinnell Federal Savings Bank and GFS
Bancorp, Inc., unless the context clearly requires a different meaning.
"Market Value" means the fair market value of the Company's common stock.
If the common stock is listed on a national securities exchange (including the
NASDAQ National Market System) on the date in question, then the Market Value
per Share shall be the average of the highest and lowest selling price on such
exchange on such date, or if there were no sales on such date, then the exercise
price shall be the mean between the bid and asked price on such date. If the
common stock is traded otherwise than on a national securities exchange on the
date in question, then the Market Value per Share shall be the mean between the
bid and asked price on such date, or, if there is no bid and asked price on such
date, then on the next prior business day on which there was a bid and asked
price. If no such bid and asked price is available, then the Market Value per
Share shall be its fair market value as determined by the Committee.
"Merger Agreement" means the merger agreement between the Bank and
Grinnell.
"Participant" means anyone who holds a Surrendered Option.
"Plan" means this GFS Bancorp, Inc. Cash-Only SAR Plan, which shall be
automatically assumed by the Bank on the Closing Date and thereafter be known as
the First Federal Bank of Siouxland Cash-Only SAR Plan.
"Rule 16b-3" means Rule 16b-3 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended.
"Shares" means shares of common stock of the Company (or any successor
entity).
"Surrendered Option" means a stock option that (i) was granted under a
stock option plan maintained by Grinnell, and (ii) is outstanding, exercisable,
and not exercised on the Closing Date.
ARTICLE II
PLAN ADMINISTRATION
The Plan shall be administered by the Committee, which shall consist of at
least two (2) non-Employee Directors who are appointed by the Board. All
persons designated as members of the Committee shall be "non-employee directors"
within the meaning of Rule 16b-3. Members of the Committee shall serve at the
pleasure of the Board.
2
<PAGE>
The Committee shall have discretionary authority (but only to the extent
not contrary to the express provisions of the Plan, any Agreement, or
resolutions adopted by the Board) to interpret the Plan, to prescribe, amend and
rescind rules and regulations relating to the Plan, to determine the form and
content of Cash-Only SARs to be issued in the form of Agreements under the Plan
and to make other determinations necessary or advisable for the administration
of the Plan. Any member of the Committee may execute Agreements on behalf of
the Bank and cause them to be delivered to Participants. In addition, the
Committee shall have and may exercise such other power and authority as may be
specifically delegated to it by the Board from time to time. A majority of the
entire Committee shall constitute a quorum and the action of a majority of the
members present at any meeting at which a quorum is present shall be deemed the
action of the Committee.
All decisions, determinations and interpretations made by the Committee in
accordance with the Plan shall be final and conclusive on all persons affected
thereby. In addition to such other rights of indemnification as they may have,
the members of the Committee shall be indemnified by the Company in connection
with any claim, action, suit or proceeding relating to any action taken or
failure to act under or in connection with the Plan or any Agreement to the full
extent provided for under the Company's governing instruments and applicable
law.
ARTICLE III
GRANTS OF CASH-ONLY SARS
Subject to the terms of the Plan, the Committee shall grant Cash-Only SARs
pursuant to an Agreement which shall be entered into with each director,
officer, or employee of Grinnell who holds a Surrendered Option on the Closing
Date. Subject to the requirements of Section 7.12(a) and (d) of the Merger
Agreement, each Participant shall surrender his or her Surrendered Options for
Cash-Only SARs in an amount and having an exercise price that, in the aggregate,
gives each such Participant an equivalent value of Cash-Only SARs for his or her
Surrendered Options. In addition, the terms of exercise, exercisability, and
expiration of each Cash-Only SAR shall mirror those of the Surrendered Option,
and shall be specifically stated in the Agreement.
ARTICLE IV
SETTLEMENT OF CASH-ONLY SARS
A Participant (or the Beneficiary of a deceased Participant) may elect to
exercise his or her Cash-Only SARs at any time and from time to time with
respect to any or all of the Shares subject thereto. A Participant shall make
such an election (i) in writing, (ii) by specifically stating the number of
Shares as to which the Cash-Only SAR is being exercised, and (iii) by delivering
notice of said election by certified mail addressed to the Bank's President or
Treasurer.
As soon as reasonably practicable after receiving an election to exercise
Cash-Only SARs, the Bank shall make a lump sum payment, in cash, to the
Participant (or the Beneficiary of a
3
<PAGE>
deceased Participant). The amount of such payment shall equal the product
obtained when the number of Shares as to which the Cash-Only SAR is being
exercised is multiplied by the excess (if any) of the Market Value per Share
over the exercise price per Share applicable to the Cash-Only SAR.
Notwithstanding the foregoing: the Bank may reduce any cash payment to the
Participant by an amount sufficient to satisfy applicable federal, state, or
local income tax withholding obligations.
ARTICLE V
SOURCE OF PAYMENTS
The Company's obligation to make payments pursuant to the Plan shall
constitute an unfunded, unsecured promise by the Company to provide cash
payments as and to the extent such payments become due. Payments shall be made
from the general assets of the Company, and no person shall, by virtue of this
Plan, have any interest in such assets (other than as an unsecured creditor of
the Company). In no event shall any Participant have the right to be paid in
Shares of common stock of the Bank or any other company.
ARTICLE VI
ASSIGNMENT
Except as otherwise provided by this Plan, it is agreed that neither the
Participant nor his Beneficiary nor any other person or persons shall have any
right to sell, assign, transfer, encumber and pledge or otherwise convey any
Cash-Only SAR, which Cash-Only SARs are expressly declared to be nonassignable
and nontransferable.
ARTICLE VII
NO RETENTION OF SERVICES
This Plan shall not be deemed to constitute a contract of employment
between the Company and/or the Bank and any Participant, and no Employee or
Participant shall have a right to be granted a Cash-Only SAR or, having received
such a grant, the right to again be granted a Cash-Only SAR.
4
<PAGE>
ARTICLE VIII
AMENDMENT AND TERMINATION
The Board may amend or terminate the Plan at any time, provided that no
such amendment or termination shall, without the written consent of an affected
Participant, alter or impair any Agreement or rights of the Participant under
the Plan.
ARTICLE IX
RECAPITALIZATION; REORGANIZATION OR SALE
The number and kind of Shares subject to Cash-Only SAR under the Plan, and
the number and kind of Shares subject to Surrendered Options, and the exercise
prices thereof, shall be proportionately adjusted for any increase, decrease,
change or exchange of Shares for a different number or kind of Shares or other
securities of the Company which results from a merger, consolidation,
recapitalization, reorganization, reclassification, stock dividend, split-up,
combination of Shares, or similar event in which the number or kind of Shares is
changed without the receipt or payment of consideration by the Company.
In the event of (i) the liquidation or dissolution of the Company, (ii) a
merger or consolidation in which the Company is not the surviving entity, or
(iii) the sale or disposition of all or substantially all of the Company's
assets (any of the foregoing to be referred to herein as a "Transaction"), all
outstanding Cash-Only SARs, together with the exercise prices thereof, shall be
equitably adjusted for any change or exchange of Shares for a different number
or kind of Shares or other securities which results from the Transaction.
The Bank agrees that it will not merge or consolidate with any other
corporation or organization, or permit its business activities to be taken over
by any other organization, unless and until the succeeding or continuing
corporation or other organization shall expressly assume the rights and
obligations of the Bank herein set forth. The Bank further agrees that it will
not cease its business activities or terminate its existence, other than as
heretofore set forth in this Article IX, without having made adequate provision
for the fulfillment of its obligation hereunder.
ARTICLE X
STATE LAW
This Plan shall be construed and governed in all respects under and by the
laws of the State of Iowa, to the extent not preempted by federal law. If any
provision of this Plan shall be held by a court of competent jurisdiction to be
invalid or unenforceable, the remaining provisions hereof shall continue to be
fully effective.
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ARTICLE XI
HEADINGS
Heading and subheadings in this Plan are inserted for convenience and
reference only and constitute no part of this Plan.
6
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FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
EMPLOYEE STOCK OWNERSHIP PLAN
<PAGE>
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
EMPLOYEE STOCK OWNERSHIP PLAN
This Employee Stock Ownership Plan, executed as of July 13, 1992, by First
Federal Savings Bank of Siouxland a federally chartered savings bank (the
"Company"),
WITNESSETH THAT
WHEREAS, the board of directors of the Company has resolved to adopt an
employee stock ownership plan for eligible employees in accordance with the
terms and conditions presented to the
directors;
NOW, THEREFORE, the Company hereby adopts the following Plan setting forth
the terms and conditions pertaining to contributions by Employers and the
payment of benefits to Participants and Beneficiaries, effective January 1,
1992.
IN WITNESS WHEREOF, the Company has adopted this Plan and caused this
instrument to be executed by its duly authorized officers as of the above date.
ATTEST:
By: /s/ By: /s/ Barry Backhaus
---------------------------- -----------------------------
Secretary President
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Section 1. Plan Identity.. . . . . . . . . . . . . . . . . . . . . . . . . . . .1
1.1 NAME.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
1.2 PURPOSE. . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
1.3 EFFECTIVE DATE.. . . . . . . . . . . . . . . . . . . . . . . . .1
1.4 FISCAL PERIOD. . . . . . . . . . . . . . . . . . . . . . . . . .1
1.5 SINGLE PLAN FOR ALL EMPLOYERS. . . . . . . . . . . . . . . . . .1
1.6 INTERPRETATION OF PROVISIONS.. . . . . . . . . . . . . . . . . .1
Section 2. Definitions.. . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Section 3. Eligibility for Participation.. . . . . . . . . . . . . . . . . . . .7
3.1 INITIAL ELIGIBILITY. . . . . . . . . . . . . . . . . . . . . . .7
3.2 DEFINITION OF ELIGIBILITY YEAR. . . . . . . . . . . . . . . . . .7
3.3 TERMINATED EMPLOYEES. . . . . . . . . . . . . . . . . . . . . . .7
3.4 CERTAIN EMPLOYEES INELIGIBLE. . . . . . . . . . . . . . . . . . .8
3.5 PARTICIPATION AND REPARTICIPATION.. . . . . . . . . . . . . . . .8
Section 4. Employer Contributions and Credits.. . . . . . . . . . . . . . . . .8
4.1 DISCRETIONARY CONTRIBUTIONS. . . . . . . . . . . . . . . . . . .8
4.2 CONTRIBUTIONS FOR STOCK OBLIGATIONS.. . . . . . . . . . . . . . .8
4.3 DEFINITIONS RELATED TO CONTRIBUTIONS. . . . . . . . . . . . . . .9
4.4 CONDITIONS AS TO CONTRIBUTIONS. . . . . . . . . . . . . . . . . .9
Section 5. Limitations on Contributions and Allocations. . . . . . . . . . . . 10
5.1 LIMITATION ON ANNUAL ADDITIONS. . . . . . . . . . . . . . . . . 10
5.2 COORDINATED LIMITATION WITH OTHER PLANS.. . . . . . . . . . . . 10
5.3 EFFECT OF LIMITATIONS. . . . . . . . . . . . . . . . . . . . . 11
5.4 LIMITATIONS AS TO CERTAIN PARTICIPANTS. . . . . . . . . . . . . 11
Section 6. Trust Fund and Its Investment.. . . . . . . . . . . . . . . . . . . 12
6.1 CREATION OF TRUST FUND. . . . . . . . . . . . . . . . . . . . . 12
6.2 STOCK FUND AND INVESTMENT FUND. . . . . . . . . . . . . . . . . 12
6.3 ACQUISITION OF STOCK. . . . . . . . . . . . . . . . . . . . . . 12
<PAGE>
Section 7. Voting Rights and Dividends on Stock. . . . . . . . . . . . . . . . 13
7.1 VOTING AND TENDERING OF STOCK.. . . . . . . . . . . . . . . . . 13
7.2 DIVIDENDS ON STOCK. . . . . . . . . . . . . . . . . . . . . . . 14
Section 8. Adjustments to Accounts.. . . . . . . . . . . . . . . . . . . . . . 14
8.1 ADJUSTMENTS FOR TRANSACTIONS. . . . . . . . . . . . . . . . . . 14
8.2 VALUATION OF INVESTMENT FUND. . . . . . . . . . . . . . . . . . 14
8.3 ADJUSTMENTS FOR INVESTMENT EXPERIENCE.. . . . . . . . . . . . . 15
Section 9. Vesting of Participants' Interests. . . . . . . . . . . . . . . . . 15
9.1 DEFERRED VESTING IN ACCOUNTS. . . . . . . . . . . . . . . . . . 15
9.2 COMPUTATION OF VESTING YEARS. . . . . . . . . . . . . . . . . . 15
9.3 FULL VESTING UPON CERTAIN EVENTS. . . . . . . . . . . . . . . . 15
9.4 FULL VESTING UPON PLAN TERMINATION. . . . . . . . . . . . . . . 15
9.5 FORFEITURE, REPAYMENT, AND RESTORAL. . . . . . . . . . . . . . 16
9.6 ACCOUNTING FOR FORFEITURES. . . . . . . . . . . . . . . . . . . 16
9.7 VESTING AND NONFORFEITABILITY.. . . . . . . . . . . . . . . . . 16
Section 10. Payment of Benefits.. . . . . . . . . . . . . . . . . . . . . . . . 16
10.1 BENEFITS FOR PARTICIPANTS. . . . . . . . . . . . . . . . . . . 16
10.2 TIME FOR DISTRIBUTION. . . . . . . . . . . . . . . . . . . . . 17
10.3 MARITAL STATUS.. . . . . . . . . . . . . . . . . . . . . . . . 18
10.4 DELAY IN BENEFIT DETERMINATION.. . . . . . . . . . . . . . . . 19
10.5 ACCOUNTING FOR BENEFIT PAYMENTS. . . . . . . . . . . . . . . . 19
10.6 OPTIONS TO RECEIVE AND SELL STOCK. . . . . . . . . . . . . . . 19
10.7 RESTRICTIONS ON DISPOSITION OF STOCK.. . . . . . . . . . . . . 20
Section 11. Rules Governing Benefit Claims and Review of Appeals. . . . . . . . 20
11.1 CLAIM FOR BENEFITS.. . . . . . . . . . . . . . . . . . . . . . 20
11.2 NOTIFICATION BY COMMITTEE. . . . . . . . . . . . . . . . . . . 20
11.3 CLAIMS REVIEW PROCEDURE. . . . . . . . . . . . . . . . . . . . 20
Section 12. The Committee and Its Functions.. . . . . . . . . . . . . . . . . . 21
12.1 AUTHORITY OF COMMITTEE.. . . . . . . . . . . . . . . . . . . . 21
12.2 IDENTITY OF COMMITTEE. . . . . . . . . . . . . . . . . . . . . 21
12.3 DUTIES OF COMMITTEE. . . . . . . . . . . . . . . . . . . . . . 21
12.4 VALUATION OF STOCK.. . . . . . . . . . . . . . . . . . . . . . 22
12.5 COMPLIANCE WITH ERISA. . . . . . . . . . . . . . . . . . . . . 22
12.6 ACTION BY COMMITTEE. . . . . . . . . . . . . . . . . . . . . . 22
<PAGE>
12.7 EXECUTION OF DOCUMENTS.. . . . . . . . . . . . . . . . . . . . 22
12.8 ADOPTION OF RULES. . . . . . . . . . . . . . . . . . . . . . . 22
12.9 RESPONSIBILITIES TO PARTICIPANTS.. . . . . . . . . . . . . . . 22
12.10 ALTERNATIVE PAYEES IN EVENT OF INCAPACITY.. . . . . . . . . . 23
12.11 INDEMNIFICATION BY EMPLOYERS. . . . . . . . . . . . . . . . . 23
12.12 NONPARTICIPATION BY INTERESTED MEMBER.. . . . . . . . . . . . 23
Section 13. Adoption, Amendment, or Termination of the Plan. . . . . . . . . . 23
13.1 ADOPTION OF PLAN BY OTHER EMPLOYERS. . . . . . . . . . . . . . 23
13.2 ADOPTION OF PLAN BY SUCCESSOR. . . . . . . . . . . . . . . . . 23
13.3 PLAN ADOPTION SUBJECT TO QUALIFICATION.. . . . . . . . . . . . 24
13.4 RIGHT TO AMEND OR TERMINATE. . . . . . . . . . . . . . . . . . 24
Section 14. Miscellaneous Provisions. . . . . . . . . . . . . . . . . . . . . . 25
14.1 PLAN CREATES NO EMPLOYMENT RIGHTS. . . . . . . . . . . . . . . 25
14.2 NONASSIGNABILITY OF BENEFITS . . . . . . . . . . . . . . . . . 25
14.3 LIMIT OF EMPLOYER LIABILITY. . . . . . . . . . . . . . . . . . 25
14.4 TREATMENT OF EXPENSES. . . . . . . . . . . . . . . . . . . . . 25
14.5 NUMBER AND GENDER. . . . . . . . . . . . . . . . . . . . . . . 25
14.6 NONDIVERSION OF ASSETS.. . . . . . . . . . . . . . . . . . . . 25
14.7 SEPARABILITY OF PROVISIONS.. . . . . . . . . . . . . . . . . . 25
14.8 SERVICE OF PROCESS.. . . . . . . . . . . . . . . . . . . . . . 25
14.9 GOVERNING STATE LAW. . . . . . . . . . . . . . . . . . . . . . 25
Section 15. Top-Heavy Provisions. . . . . . . . . . . . . . . . . . . . . . . . 26
15.1 DETERMINATION OF TOP-HEAVY STATUS. . . . . . . . . . . . . . . 26
15.2 MINIMUM CONTRIBUTIONS. . . . . . . . . . . . . . . . . . . . . 27
15.3 MINIMUM VESTING. . . . . . . . . . . . . . . . . . . . . . . . 28
15.4 MAXIMUM COMPENSATION.. . . . . . . . . . . . . . . . . . . . . 28
</TABLE>
<PAGE>
SECTION 1. PLAN IDENTITY.
1.1 NAME. The name of this Plan is "First Federal Savings Bank of
Siouxland Employee Stock Ownership Plan."
1.2 PURPOSE. The purpose of this Plan is to describe the terms and
conditions under which contributions made pursuant to the Plan will be credited
and paid to the Participants and their Beneficiaries.
1.3 EFFECTIVE DATE. The Effective Date of this Plan is January 1, 1992.
1.4 FISCAL PERIOD. This Plan shall be operated on the basis of a January
1 - December 31 fiscal year for the purpose of keeping the Plan's books and
records and distributing or filing any reports or returns required by law.
1.5 SINGLE PLAN FOR ALL EMPLOYERS. This Plan shall be treated as a single
plan with respect to all participating Employers for the purpose of crediting
contributions and forfeitures and distributing benefits, determining whether
there has been any termination of Service, and applying the limitations set
forth in Section 5.
1.6 INTERPRETATION OF PROVISIONS. The Employers intend this Plan and the
Trust to be a qualified stock bonus plan under Section 401(a) of the Code and an
employee stock ownership plan within the meaning of Section 407(d)(6) of ERISA
and Section 4975(e)(7) of the Code. The Plan is intended to have its assets
invested primarily in qualifying employer securities of one or more Employers
within the meaning of Section 407(d)(3) of ERISA, and to satisfy any requirement
under ERISA or the Code applicable to such a plan.
Accordingly, the Plan and Trust Agreement shall be interpreted and applied
in a manner consistent with this intent and shall be administered at all times
and in all respects in a nondiscriminatory manner.
SECTION 2. DEFINITIONS.
The following capitalized words and phrases shall have the meanings
specified when used in this Plan and in the Trust Agreement, unless the context
clearly indicates otherwise:
"Account" means a Participant's interest in the assets accumulated under
this Plan as expressed in terms of a separate account balance which is
periodically adjusted to reflect his Employers contributions, the Plan's
investment experience, and distributions and forfeitures.
"Active Participant" means any Employee who then satisfied the
eligibility requirements of Section 3 and who qualifies as an Active
Participant for a particular Plan Year under Section 4.3.
"Beneficiary" means the person or persons who are designated by a
Participant to receive
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benefits payable under the Plan on the Participant's death. In the absence of
any designation or if all the designated Beneficiaries shall die before the
Participant dies or shall die before all benefits have been paid, the
Participants Beneficiary shall be his surviving spouse, if any, or his estate if
he is not survived by a spouse. The Committee may rely upon the advice of the
Participant's executor or administrator as to the identity of the Participant's
spouse.
"Break in Service" means any five or more consecutive 12-month periods
beginning January 1 in which an Employee has 500 or fewer Hours of Service per
period. Solely for this purpose, an Employee shall be considered employed for
his normal hours of paid employment during a Recognized Absence, unless he does
not resume his Service at the end of the Recognized Absence. Further, if an
Employee in absent for any period beginning on or after January 1, 1985, (i) by
reason of the Employee's pregnancy, (ii) by reason of the birth of the
Employee's child, (iii) by reason of the placement of a child with the Employee
in connection with the Employee's adoption of the child, or (iv) for purposes of
caring for such child for a period beginning immediately after such birth or
placement, the Employee shall be credited with the Hours of Service which would
normally have been credited but for such absence, up to a maximum of 501 Hours
of Service, in the first 12-month period which would otherwise be counted toward
a Break in Service.
"Cash Compensation" has the meaning given such term in Section 4.3
hereof.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means the committee responsible for the administration of
this Plan In accordance with Section 12.
"Company" means First Federal Savings Bank of Siouxland, and any
entity which succeeds to the business of First Federal Savings Bank of
Siouxland and adopts this Plan as its own pursuant to Section 13.2.
"Disability" means only a disability which renders the Participant
totally unable, as a result of bodily or mental disease or injury, to perform
any duties for an Employer for which he is reasonably fitted, which
disability is expected to be permanent or of long and indefinite duration.
However, this term shall not include any disability directly or indirectly
resulting from or related to habitual drunkenness or addiction to narcotics,
a criminal act or attempt, service in the armed forces of any country, an act
of war, declared or undeclared, any injury or disease occurring while
compensation to the Participant is suspended, or any injury which is
intentionally self-inflicted. Further, this term shall apply only if (i) the
Participant is sufficiently disabled to qualify for the payment of
disability benefits under the federal Social Security Act or Veterans
Disability Act, or (ii) the Participant's disability is certified by a
physician selected by the Committee. Unless the Participant is sufficiently
disabled to qualify for disability benefits under the federal Social Security
Act or Veterans Disability Act, the Committee may require the Participant to
be appropriately examined from time to time by one or more physicians chosen
by the Committee, and no Participant who refuses to be examined shall be
treated an having a Disability. In any event, the Committee's good faith
decision as to whether a Participant's Service has been terminated by
Disability shall be final and conclusive.
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"Early Retirement" means retirement on or after a Participant's
attainment of age 55 and the completion of ten years of Service for an
Employer.
"Effective Date" means January 1, 1992.
"Employee" means any individual who is or has been employed or
self-employed by an Employer. "Employee" also means an individual employed
by a leasing organization who, pursuant to an agreement between an Employer
and the leasing organization, has performed services for the Employer and any
related persons (within the meaning of Section 414(n)(6) of the Code) on a
substantially full-time basis for more than one year, if such services are of
a type historically performed by employees in the Employer's business field.
However, such a "leased employee" shall not be considered an Employee if (i)
he participates in a money purchase pension plan sponsored by the leasing
organization which provides for immediate participation, immediate full
vesting, and an annual contribution of at least 10 percent of the Employee's
Total Compensation, and (ii) leased employees do not constitute more than 20
percent of the Employers total work force (including leased employees, but
excluding Highly Paid Employees and any other employees who have not
performed services for the Employer on a substantially full-time basis for at
least one year).
"Employer" means the Company or any affiliate within the purview of
section 434(b), (c) or (m) and 415(h) of the Code, any other corporation,
partnership, or proprietorship which adopts this Plan with the Company's
consent pursuant to Section 13.1, and any entity which succeeds to the
business of any Employer and adopts the Plan pursuant to Section 13.2.
"Entry Date" means the Effective Date of the Plan and each July 1 and
January 1 of each Plan Year thereafter.
"ERISA" means the Employee Retirement Income Security Act of 1974
(P.L. 93-406, as amended).
"Highly Paid Employee" for any Plan Year means an Employee who, during
either of that or the immediately preceding Plan Year, (i) owned more than
five percent of the outstanding equity interest or the outstanding voting
interest in any Employer, (ii) had Total Compensation exceeding $75,000 (as
adjusted pursuant to section 415(d) of the Code), (iii) had Total
Compensation exceeding $50,000 (as adjusted pursuant to section 415(d) of the
Code) and was among the most highly compensated one-fifth of all Employees,
or (iv) was at any time an officer of an Employer and had Total Compensation
exceeding $45,000 (or 50 percent of the currently applicable dollar limit
under Section 415(b)(1)(A) of the Code). For this purpose:
(a) "Total Compensation" shall include any amount which is excludable
from the Employee's gross income for tax purposes pursuant to Sections 125,
402(a)(8), 402(h)(1)(B), or 403(b) of the Code.
(b) The number of Employees in "the most highly compensated
one-fifth of all Employees" shall be determined by taking into account
all individuals working for all related Employer
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entities described in the definition of a "Service", but excluding any
individual who has not completed six months of Service, who normally
works fewer than 17-1/2 hours per week or in fewer than six months per
year, who has not reached age 21, whose employment is covered by a
collective bargaining agreement, or who is a nonresident alien who
receives no earned income from United States sources.
(c) The number of individuals counted as "officers" shall not be
more than the lesser of (i) 50 individuals and (ii) the greater of 3
individuals or 10 percent of the total number of Employees. If no
officer earns more than $45,000 (or the adjusted limit), then the
highest paid officer shall be a Highly Paid Employee.
(d) A former employee shall be treated as a highly compensated
employee if such employee wan a highly paid employee when such employee
separated from service, or if such employee was a highly paid employee
at any time after attaining age 55.
"Hours of Service" means hours to be credited to an Employee under the
following rules:
(a) Each hour for which an Employee is paid or is entitled to be paid
for services to an Employer in an Hour of Service.
(b) Each hour for which an Employee is directly or indirectly paid or
is entitled to be paid for a period of vacation, holidays, illness,
disability, lay-off, jury duty, temporary military duty, or leave of
absence in an Hour of Service. However, except as otherwise specifically
provided, no more than 501 Hours of Service shall be credited for any
single continuous period which an Employee performs no duties. Further, no
Hours of Service shall be credited on account of payments made solely under
a plan maintained to comply with workers Compensation, unemployment
compensation, or disability insurance laws, or to reimburse an Employee for
medical expenses.
(c) Each hour for which back pay (ignoring any mitigation of damages)
is either awarded or agreed to by an Employer is an Hour of Service.
However, no more than 501 Hours of Service shall be credited for any single
continuous period during which an Employee would not have performed any
duties.
(d) Hours of Service shall be credited in any one period only under
one of the foregoing paragraphs (a), (b) and (c); an Employee may not get
double credit for the name period.
(e) If an Employer finds it impractical to count the actual Hours of
Service for any class or group of non-hourly Employees, each Employee in
that class or group shall be credited with 45 Hours of Service for each
weekly pay period in which he has at least one Hour of Service. However, an
Employee shall be credited only for his normal working hours during a paid
absence.
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<PAGE>
(f) Hours of Service to be credited on account of a payment to an
Employee (including back pay) shall be recorded in the period of Service
for which the payment was made. If the period overlaps two or more Plan
Years, the Hours of Service credit shall be allocated in proportion to the
respective portions of the period included in the several Plan Years.
However, in the case of periods of 31 days or less, the Administrator may
apply a uniform policy of crediting the Hours of Service to either the
first Plan Year or the second.
(g) In all respects an Employee's Hours of Service shall be counted
as required by Section 2530.200b-2(b) and (c) of the Department of
Labor's regulations under Title I of ERISA.
"Investment Fund" means that portion of the Trust Fund consisting of
assets other than Stock.
"Normal Retirement Date" means a Participant's 65th birthday.
"Participant" means any Employee who is participating in the Plan, or who
has previously participated in the Plan and still has a balance credited to his
Account.
"Plan Year" means the plan year commencing January 1, 1992 and ending
December 31, 1992 and each period of 12 consecutive months beginning on January
1 of each succeeding year.
"Recognized absence" means a period for which--
(a) an Employer grants an Employee a leave of absence for a limited
period, but only if an Employer grants such leave on a nondiscriminatory
basis; or
(b) an Employee is temporarily laid off by an Employer because of a
change in business conditions; or
(c) an Employee is on active military duty, but only to the extent
that his employment rights are protected by the Military Selective Service
Act of 1967 (38 U.S.C. Sec. 2021).
"Service" means an Employee's period(s) of employment or self-employment
with an Employer, excluding for initial eligibility purposes any period in which
the individual was a nonresident alien and did not receive from an Employer any
earned Income which constituted income from sources within the United States. An
Employee's Service shall include any service which constitutes service with a
predecessor employer, which predecessor employer shall include the First Federal
Savings and Loan Association, within the meaning of Section 414(a) of the Code.
An Employees Service shall also include any service with an entity which is not
an Employer, but only either (i) for a period after 1975 in which the other
entity is a member of a controlled group of corporations or is under common
control with other trades and businesses within the meaning of Section 414 (b)
or 414(c) of the Code, and a member of the controlled group or one of the trades
and businesses is an Employer, or (ii) for a period after 1979 in which the
other entity is a member of an affiliated service group within the meaning of
Section 414(m) of the Code, and a member of the affiliated service group is an
Employer.
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"Spouse" means the individual, if any, to whom a Participant is lawfully
married on the date benefit payments to the Participant are to begin, or on the
date of the Participant's death, if earlier.
"Stock" means shares of the Company's voting common stock or preferred
stock meeting the requirements of Section 409(e)(3) of the Code issued by an
Employer or an affiliated corporation.
"Stock Fund" means that portion of the Trust Fund consisting of Stock.
"Stock Obligation" means an indebtedness arising from any extension of
credit to the Plan or the Trust which was obtained for the purpose of buying
Stock and which satisfies the requirements set forth in Section 6.3.
"Total Compensation" means a Participant's wages, salary, overtime,
bonuses, commissions, and any other amounts received for personal services
rendered while in Service from any Employer or an affiliate (within the purview
of Section 414(b), (c), and (m) of the Code), plus his earned income from any
such entity as defined in Section 401(c)(2) of the Code if he is self-employed.
"Total Compensation" shall additionally include (i) severance payments and
amounts paid as a result of termination, (ii) foreign earned income whether or
not excludable from gross income under Section 911 of the Code, and without
regard to the exclusion from gross income in Sections 931 and 933 of the Code,
(iii) amounts described in Sections 104(a)(3), 105(a), and 105(h) of the Code to
the extent includable in gross income, (iv) amounts described in Section 105(d)
of the Code, (v) amounts received from an Employer for moving expenses which are
not deductible under Section 217 of the Code, (vi) amounts includable in gross
income in the year of, and on account of, the grant of a nonqualified stock
option, (vii) amounts includable in gross income pursuant to Section 83(b) of
the Code, and (viii) amounts includable in gross income under an unfunded
nonqualified plan of deferred compensation, but shall exclude (ix) Employer
contributions to or amounts received from a funded or qualified plan of deferred
compensation, (x) Employer contributions to a simplified employee pension
account described in Section 408(k) of the Code, (xi) Employer contributions to
a Section 403(b) annuity contract, and (xii) amounts realized from the exercise
of a non-qualified stock option, or (xiii) amounts realized from the sale,
exchange or other disposition of stock acquired under a qualified stock option,
and (xiv) any other amounts expended by the Employer on the Participant's behalf
which receive special tax benefits and which are excludable from income. This
definition of Total Compensation is intended to satisfy the requirements of
Sections 415(c)(3) and 414 (b) of the Code. A Participant's Total Compensation
shall exclude any compensation in any limitation year beginning after 1988 in
excess of $200,000 (or the limit currently in effect under Section 4011(a)(17)
of the Code).
"Trust" or "Trust Fund" means the trust fund created under this Plan.
"Trust Agreement" means the agreement between the Company and the
Trustee concerning the Trust Fund. If any assets of the Trust Fund are held
in a co-mingled trust fund with assets of other qualified retirement plans,
"Trust Agreement" shall be deemed to include the trust agreement governing
that co-mingled trust fund. With respect to the allocation of investment
responsibility for
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the assets of the Trust Fund, the provisions of Section 2.2 of the Trust
Agreement are incorporated herein by reference.
"Trustee" means one or more corporate persons or individuals selected
from time to time by the Company to serve as trustee or co-trustees of the
Trust Fund.
"Unallocated Stock Fund" means that portion of the Stock Fund
consisting of the Plan's holding of stock which have been acquired in
exchange for one or more Stock obligations and which have not yet been
allocated to the Participant's Accounts in accordance with Section 4.2
"Valuation Date" means the last day of the Plan Year and each other
date as of which the committee shall determine the investment experience of
the Investment Fund and adjust the Participants' accounts accordingly.
"Valuation Period" means the period following a Valuation Date and
ending with the next Valuation Date.
"Vesting Year" means a unit of Service credited to a Participant
pursuant to Section 9.2 for purposes of determining his vested interest in
his Account.
SECTION 3. ELIGIBILITY FOR PARTICIPATION.
3.1 INITIAL ELIGIBILITY. An Employee shall enter the Plan as of the
Entry Date coinciding with or next following the later of the following dates:
(a) the last day of the Employee's first Eligibility Year, and
(b) the Employee's 21st birthday. However, if an Employee in not in
active Service with an Employer on the date he would otherwise first enter
the Plan, his entry shall be deferred until the next day he is in Service.
3.2 DEFINITION OF ELIGIBILITY YEAR. An "Eligibility Year" means an
applicable eligibility period (as defined below) in which the Employee has
completed 12 consecutive months of service for the Employer. For this purpose:
(a) an Employee's first "eligibility period" is the 12-consecutive
month period beginning on the first day on which he has an Hour of Service,
and
(b) his subsequent eligibility periods will be 12-consecutive month
periods beginning on each January 1 after that first day of Service.
3.3 TERMINATED EMPLOYEES. No Employee shall have any interest or rights
under this Plan if he is never in active Service with an Employer on or after
the Effective Date.
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3.4 CERTAIN EMPLOYEES INELIGIBLE. No Employee shall participate in the
Plan while his Service is covered by a collective bargaining agreement
between an Employer and the Employees collective bargaining representative if
(i) retirement benefits have been the subject of good faith bargaining
between the Employer and the representative and (ii) the collective
bargaining agreement does not provide for the Employee's participation in the
Plan. No Employee shall participate in the Plan while he is actually employed
by a leasing organization rather than by an Employer.
3.5 PARTICIPATION AND REPARTICIPATION. Subject to the satisfaction of
the foregoing requirements, an Employee shall participate in the Plan during
each period of his Service from the date on which he first becomes eligible
until his termination. For this purpose, an Employee returning within five
years of his or her termination who previously satisfied the initial
eligibility requirements shall re-enter the Plan as of the date of his return
to Service with an Employer.
SECTION 4. EMPLOYER CONTRIBUTIONS AND CREDITS.
4.1 DISCRETIONARY CONTRIBUTIONS. The Employer shall from time to time
contribute, with respect to a Plan Year, such amounts as it may determine
from time to time. The Employer shall have no obligation to contribute any
amount under this Plan except as so determined in its sole discretion. The
Employer's contributions and available forfeitures for a Plan Year shall be
credited as of the last day of the year to the Accounts of the Active
Participants in proportion to their amounts of Cash Compensation.
Contributions by Participants are neither required nor permitted.
4.2 CONTRIBUTIONS FOR STOCK OBLIGATIONS. If the Trustee, upon
instructions from the Committee, incurs any Stock Obligation upon the
purchase of Stock, the Employer shall contribute for each Plan Year an amount
sufficient to cover all payments of principal and interest as they come due
under the terms of the Stock Obligation. If there is more than one Stock
Obligation, the Employer shall designate the one to which any contribution is
to be applied. The Employer's obligation to make contributions under this
Section 4.2 shall be reduced to the extent of any investment earnings
realized on such contributions and any dividends paid by the Employer on
Stock held in the Unallocated Stock Account, which earnings and dividends
shall be applied to the Stock Obligation related to that Stock.
In each Plan Year in which Employer contributions, earnings on
contributions, or dividends on unallocated Stock are used as payments under a
Stock Obligation, a certain number of shares of the Stock acquired with that
Stock Obligation which is then held in the Unallocated Stock Fund shall be
released for allocation among the Participants. The number of shares released
shall bear the same ratio to the total number of those shares then held in
the Unallocated Stock Fund (prior to the release) as (i) the principal and
interest payments made on the Stock Obligation in the current Plan Year bears
to (ii) the sum of (i) above, and the remaining principal and interest
payments required (or projected to be required on the basis of the interest
rate in effect at the end of the Plan Year) to satisfy the Stock Obligation.
At the direction of the Committee, the current and projected payments of
interest under a Stock Obligation may be ignored in calculating the number of
shares to be released in each year if (i) the
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<PAGE>
Stock Obligation provider for annual payments of principal and interest at a
cumulative rate that is not less rapid at any time than level annual payments
of such amounts for 10 years, (ii) the interest included in any payment is
ignored only to the extent that it would be determined to be interest under
standard loan amortization tables, and (iii) the term of the Stock
Obligation, by reason of renewal, extension, or refinancing, has not exceeded
10 years from the original acquisition of the Stock.
For there purposes, each Stock Obligation, the Stock purchased with it,
and any dividends on such Stock, shall be considered separately. The Stock
released from the Unallocated Stock Fund in any Plan Year shall be credited
as of the last day of the year to the Accounts of the Active Participants in
proportion to their amounts of Cash Compensation.
4.3 DEFINITIONS RELATED TO CONTRIBUTIONS. For the purposes of this Plan,
the following terms have the meanings specified:
"Active Participant" means a Participant who has satisfied the
eligibility requirement under Section 3. However, a Participant shall not
qualify as an Active Participant unless (i) he is in active Service with an
Employer as of the last day of the Plan Year, or (ii) he in on a Recognized
Absence as of that date, or (iii) his Service terminated during the Plan Year
by reason of Disability, death or retirement.
"Cash Compensation" means a Participant's cash compensation from his
Employer with respect to that portion of a Plan Year in which he is an Active
Participant. A Participant's cash compensation shall include amounts
contributed under a salary reduction agreement pursuant to Section 401(k) or
Section 125 of the Code, but shall exclude any contributions or payments to
any trust, fund or plan to provide retirement, death, health, disability or
similar welfare benefits to the participant. A Participants Cash
Compensation shall exclude any compensation in any Plan Year beginning after
1988 in excess of $200,000 (or the limit currently in effect under Section
401(a)(17) of the Code).
4.4 CONDITIONS AS TO CONTRIBUTIONS. Employers' contributions shall in
all events be subject to the limitation set forth in Section 5. Contributions
may be made in the form of cash, or securities and other property to the
extent permissible under ERISA, including Stock, and shall be held by the
Trustee in accordance with the Trust Agreement. In addition to the provisions
of Section 13.3 for the return of an Employer's contributions in connection
with a failure of the Plan to qualify initially under the Code, any amount
contributed by an Employer due to a good faith mistake of fact, or based upon
a good faith but erroneous determination of its deductibility under Section
404 of the Code, shall be returned to the Employer within one year after the
date on which the contribution was originally made, or within one year after
its nondeductibility has been finally determined. However, the amount to be
returned shall be reduced to take account of any adverse investment
experience within the Trust Fund in order that the balance credited to each
Participant's Account is not less that it would have been if the contribution
had never been made.
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<PAGE>
SECTION 5. LIMITATIONS ON CONTRIBUTIONS AND ALLOCATIONS.
5.1 LIMITATION ON ANNUAL ADDITIONS. Notwithstanding the provisions of
Section 4, the annual addition to a Participant's accounts under this and any
other defined contribution plans maintained by the Employer or an affiliate
(within the purview of Section 414(b), (c), and (m) and Section 415(h) of the
Code, which affiliate shall be deemed an Employer for this purpose) shall not
exceed for any limitation year an amount equal to the lesser of --
5.1-1 $30,000, or the dollar limitation currently in effect; or
5.1-2 25 percent of the Participants Total Compensation for such
limitation year.
For purposes of this Section 5.1 and the following Section 5.2, the
"annual addition" to a Participant's accounts means the Employer
contributions and Employee forfeitures credited to a Participant's account
with respect to a limitation year. The $30,000 limitations referred to shall,
for each limitation year ending after 1988, be automatically adjusted to the
new dollar limitations determined by the Commissioner of Internal Revenue for
the calendar year beginning in that limitation year.
Notwithstanding the foregoing, if the special limitations on annual
additions described in section 415(c)(6) of the Code applies, the limitations
described in this section shall be adjusted accordingly. A "limitation year"
means each 12 consecutive month period beginning January 1.
5.2 COORDINATED LIMITATION WITH OTHER PLANS. Aside from the limitation
prescribed by Section 5.1 with respect to the annual addition to a
Participant's accounts for any single limitation, year, if a Participant has
ever participated in one or more defined benefit plans maintained by an
Employer or an affiliate, then the annual additions to his accounts shall be
limited on a cumulative basis so that the sum of his defined contribution
plan fraction and his defined benefit plan fraction does not exceed one. For
this purpose:
5.2-1 A Participant's defined contribution plan fraction with respect
to a Plan Year shall be a fraction, (i) the numerator of which is the sum
of the annual additions to his accounts through the current year, and (ii)
the denominator of which is the sum of the lesser of the following amounts
-A- and -B- determined for the current limitation year and each prior
limitation year of Service with an Employer: -A- is 1.25 times $30,000, or
1.0 times such dollar limitation if the Plan is top-heavy, and -B- is 35
percent of the Participant's Total Compensation for such year. Further, if
the Participant participated in any related defined contribution plan in
any years beginning before 1976, any-excess of the sum of the actual annual
additions to the Participant's accounts for those years over the maximum
annual additions which could have been made in accordance with Section 5.1
shall be ignored, and voluntary contributions by the Participant during
those years shall be taken into account as to each such year only to the
extent that his
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<PAGE>
average annual voluntary contribution in those years exceeded 10 percent of
his average annual Total Compensation in those years.
5.2-2 A Participant's defined benefit plan fraction with respect to a
limitation year shall be a fraction, (i) the numerator of which is his
projected annual benefit payable at normal retirement under the Employers'
defined benefit plans, and (ii) the denominator of which is the lesser of
(a) 1.25 times $90,000, or 1.0 times such dollar limitation if the Plan is
top-heavy, and (b) 1.4 times the Participant's average Total Compensation
during his highest-paid three consecutive limitation years.
5.3 EFFECT OF LIMITATIONS. The Committee shall take whatever action may
be necessary from time to time to assure compliance with the limitations set
forth in Section 5.1 and 5.2. Specifically, the Committee shall see that each
Employer restrict its contributions for any Plan Year to an amount which,
taking into account the amount of available forfeitures, may be completely
allocated to the Participants consistent with those limitations. Where the
limitations would otherwise be exceeded by any Participant, further
allocations to the Participant shall be curtailed to the extent necessary to
satisfy the limitations. Where an excessive amount is contributed on account
of a mistake as to one or more Participants' compensation, or there is an
amount of forfeitures which may not be credited in the Plan Year in which it
becomes available, the amount shall be held in a suspense account to be
allocated in lieu of any Employer contributions in future years until it is
eliminated, and to be returned to the Employer if it cannot be credited
consistent with these limitations before the termination of the Plan.
5.4 LIMITATIONS AS TO CERTAIN PARTICIPANTS. Aside from the limitations
set forth in Section 5.1 and 5.2, if the Plan acquires any Stock in a
transaction as to which a selling shareholder or the estate of a deceased
shareholder is claiming the benefit of Section 1042 of the Code, the
Committee shall see that none of such Stock, and no other assets in lieu of
such Stock, are allocated to the Accounts of certain Participants in order to
comply with Section 409(n) of the Code.
This restriction shall apply at all times to a Participant who owns
(taking into account the attribution rules under Section 318(a) of the Code,
without regard to the exception for employee plan trusts in Section
318(a)(2)(B)(i) more than 25 percent of any class of stock of a corporation
which issued the Stock acquired by the Plan, or another corporation within
the same controlled group, as defined in Section 409(1)(4) of the Code (any
such class of stock hereafter called a "Related Class"). For this purpose, a
Participant who owns more than 25 percent of any Related Class at any time
within the one year preceding the Plan's purchase of the Stock shall be
subject to the restriction as to all allocations of the Stock, but any other
Participant shall be subject to the restriction only as to allocations which
occur at a time when he owns more than 25 percent of any Related Class.
Further, this restriction shall apply to the selling shareholder
claiming the benefit of Section 1042 and any other Participant who is related
to such a shareholder within the meaning of Section 267(b) of the Code,
during the period beginning on the date on which the Plan purchases the Stock
and ending 10 years after the later of (i) the date of such purchase, and
(ii) the date of the allocation under
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<PAGE>
Section 4.2 attributable to the final payment on whatever Stock Obligations
were incurred with the purchase.
This restriction shall not apply to any Participant who is a lineal
descendant of a selling shareholder if the aggregate amounts allocated under
the Plan for the benefit of all such descendants do not exceed five percent
of the Stock acquired from the shareholder.
SECTION 6. TRUST FUND AND ITS INVESTMENT.
6.1 CREATION OF TRUST FUND. All amounts received under the Plan from
Employers and investments shall be held as the Trust Fund pursuant to the
terms of this Plan and of the Trust Agreement between the Company and the
Trustee. The benefits described in this Plan shall be payable only from the
assets of the Trust Fund, and none of the Company, any other Employer, its
board of directors or trustees, its stockholders, its officers, its
employees, the Committee, and the Trustee shall be liable for payment of any
benefit under this Plan except from the Trust Fund.
6.2 STOCK FUND AND INVESTMENT FUND. The Trust Fund held by the Trustee
shall be divided into the Stock Fund, consisting entirely of Stock, and the
Investment Fund, consisting of all assets of the Trust other than Stock. The
Trustee shall have no investment responsibility for the Stock Fund, but shall
accept any Employer contributions made in the form of Stock, and shall
acquire, sell, exchange, distribute, and otherwise deal with and dispose of
Stock in accordance with the instructions of the Committee. The Trustee shall
have full responsibility for the investment of the Investment Fund, except to
the extent such responsibility may be delegated from time to time to one or
more investment managers pursuant to Section 2.2 of the Trust Agreement.
6.3 ACQUISITION OF STOCK. From time to time the Committee may, in its
sole discretion, direct the Trustee to acquire Stock from the issuing
Employer or from shareholders, including shareholders who are or have been
Employees, Participants, or fiduciaries with respect to the Plan. The Trustee
shall pay for such Stock no more than its fair market value, which shall be
determined conclusively by the Committee pursuant to Section 12.4. The
Committee may direct the Trustee to finance the acquisition of Stock by
incurring or assuming indebtedness to the seller or another party which
indebtedness shall be called a "Stock Obligation". Any Stock Obligation
shall be subject to the following conditions and limitations:
6.3-1 A Stock Obligation shall be for a specific term, shall not be
payable on demand except in the event of default, and shall bear a
reasonable rate of interest.
6.3-2 A Stock Obligation may, but need not, be secured by a collateral
pledge of either the Stock acquired in exchange for the Stock Obligation,
or the Stock previously pledged in connection with a prior Stock Obligation
which is being repaid with the proceeds of the current Stock Obligation. No
other assets of the Plan and Trust may be used as collateral for a Stock
Obligation, and no creditor under a Stock Obligation shall have any right
or recourse to any Plan and Trust assets other than Stock remaining subject
to a collateral pledge.
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6.3-3 Any pledge of Stock to secure a Stock Obligation must provide
for the release of pledged Stock in connection with payments on the Stock
obligations in the ratio prescribed in Section 4.2.
6.3-4 Repayments of principal and interest on any Stock Obligation
shall be made by the Trustee only from Employer cash contributions
designated for such payments, from earnings on such contributions, and from
cash dividends received on Stock held in the Unallocated Stock Fund.
6.4 PARTICIPANTS' OPTION TO DIVERSIFY. The Committee shall provide for a
procedure under which each Participant may, during the first five years of a
certain six-year period, elect to have up to 25 percent of the value of his
Account committed to alternative investment options within the Investment
Fund. For the sixth year in this period, the Participant may elect to have up
to 50 percent of the value of his Account committed to other investments. The
six-year period shall begin with the Plan Year following the first Plan Year
in which the Participant has both reached aged 55 and completed 10 years of
participation in the Plan; a Participant's election to diversify his Account
must be made within the 90-day period immediately following the last day of
each of the six Plan Years. The Committee shall see that the Investment Fund
includes a sufficient number of investment options to comply with Section
401(a)(28)(B) of the Code. The Trustee shall comply with any investment
directions received from Participants in accordance with the procedures
adopted from time to time by the Committee under this Section 6.4.
SECTION 7. VOTING RIGHTS AND DIVIDENDS ON STOCK.
7.1 VOTING AND TENDERING OF STOCK. The Trustee generally shall vote all
shares of Stock held under the Plan in accordance with the written
instructions of the Committee. However, if any Employer has registration-type
class of securities within the meaning of Section 409(e)(4) of the Code, or
if a matter submitted to the holders of the Stock involves a merger,
consolidation, recapitalization, reclassification, liquidation, dissolution,
or sale of substantially all assets of an entity, then (i) the shares of
Stock which have been allocated to Participants' Accounts shall be voted by
the Trustee in accordance with the Participants' written instructions, and
(ii) the Trustee shall vote any unallocated Stock in a manner calculated to
most accurately reflect the instructions it has received from Participants
regarding the allocated Stock. In the event no shares of Stock have been
allocated to Participants' Accounts at the time Stock is to be voted, each
Participant shall be deemed to have one share of Stock allocated to his or
her account for the sole purpose of providing the Trustee with voting
instructions.
Notwithstanding any provision hereunder to the contrary, all unallocated
shares of Stock must be voted by the Trustee in a manner determined by the
Trustee to be for the exclusive benefit of the Participants and
Beneficiaries. Whenever such voting rights are to be exercised, the
Employers, the Committee, and the Trustee shall see that all Participants are
provided with the same notices and other materials as are provided to other
holders of the Stock, and are provided with adequate opportunity to deliver
their instructions to the Trustee regarding the voting of Stock allocated to
their
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Accounts. The instructions of the Participants with respect to the voting of
allocated shares hereunder shall be confidential.
7.1-1 In the event of a tender offer, Stock shall be tendered by the
Trustee in the same manner as set forth above with respect to the voting of
Stock. Notwithstanding any provision hereunder to the contrary, Stock must
be tendered by the Trustee in a manner determined by the Trustee to be for
the exclusive benefit of the Participants and Beneficiaries.
7.2 DIVIDENDS ON STOCK. Dividends on Stock which are received by the
Trustee in the form of additional Stock shall be retained in the Stock Fund,
and shall be allocated among the Participants' Accounts and the Unallocated
Stock Fund in accordance with their holdings of the Stock on which the
dividends have been paid. Dividends on Stock credited to Participants'
Accounts which are received by the Trustee in the form of cash shall, at the
direction of the Employer paying the dividends, either (i) be credited to the
Accounts in accordance with Section 8.03 and invested as part of the
Investment Fund, (ii) be distributed immediately to the Participants in
proportion with the Participants' Account balance or (iii) be distributed to
the Participants within 90 days of the close of the Plan Year in which paid
in proportion with the Participants' Account balance. Dividends on Stock held
in the Unallocated Stock Fund which are received by the Trustee in the form
of cash shall be applied as soon as practicable to payments of principal and
interest under the Stock Obligation incurred with the purchase of the Stock.
SECTION 8. ADJUSTMENTS TO ACCOUNTS.
8.1 ADJUSTMENTS FOR TRANSACTIONS. An Employer contribution pursuant to
Section 4.1 shall be credited to the Participants' Accounts as of the last
day of the Plan Year for which it is contributed. Stock released from the
Unallocated Stock Fund upon the Trust's repayment of a Stock Obligation
pursuant to Section 4.2 shall be credited to the Participants' Accounts as of
the last day of the Plan Year in which the repayment occurred. Any excess
amounts remaining from the use of proceeds of a sale of Stock from the
Unallocated Stock Fund to repay a Stock Obligation shall be allocated as of
the last day of the Plan Year in which the repayment occurred among the
Participants' Accounts in proportion to the opening balance in each Account.
Any benefit which is paid to a Participant or Beneficiary pursuant to Section
10 shall be charged to the Participant's Account as of the first day of the
Valuation Period in which it is paid. Any forfeiture or restoral shall be
charged or credited to the Participant's Account as of the first day of the
Valuation Period in which the forfeiture or restoral occurs pursuant to
Section 9.6.
8.2 VALUATION OF INVESTMENT FUND. As of each Valuation Date, the Trustee
shall prepare a balance sheet of the Investment Fund, recording each asset
(including any contribution receivable from an Employer) and liability at its
fair market value. Any liability with respect to short positions or options
and any item of accrued income or expense and unrealized appreciation or
depreciation shall be included; provided, however, that such an item may be
estimated or excluded if it is not readily ascertainable unless estimating or
excluding it would result in a material distortion. The Committee shall then
determine the net gain or loss of the Investment Fund since the preceding
Valuation Date, which shall mean the entire income of the Investment Fund,
including realized and unrealized capital
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<PAGE>
gains and losses, net of any expenses to be charged to the general Investment
Fund and excluding any contributions by the Employer. The determination of
gain or loss shall be consistent with the balance sheets of the Investment
Fund for the current and preceding Valuation Dates.
8.3 ADJUSTMENTS FOR INVESTMENT EXPERIENCE. Any net gain or loss of the
Investment Fund during a Valuation Period, as determined pursuant to Section
8.2, shall be allocated as of the last day of the Valuation Period among the
Participants' Accounts in proportion to the opening balance in each Account,
as adjusted for benefit payments and forfeitures during the Valuation Period,
without regard to whatever Stock may be credited to an Account.
SECTION 9. VESTING OF PARTICIPANTS' INTERESTS.
9.1 DEFERRED VESTING IN ACCOUNTS. A Participant's vested interest in his
Account shall be based on his Vesting Years in accordance with the following
Table, subject to the balance of this Section 9:
<TABLE>
<CAPTION>
Vesting Percentage of
Years Interest Vested
------- ---------------
<S> <C>
Fewer than 5 0%
5 or more 100%
</TABLE>
9.2 COMPUTATION OF VESTING YEARS. For purposes of this Plan, a "Vesting
Year" means each 12-month period in which an Employee has at least 1,000
Hours of Service, beginning with his initial Service with any Employer, and
including certain Service with other employers as provided in the definition
of "Service". However, a Participant's Vesting Years shall be computed
subject to the following conditions and qualifications:
(a) A Participant's vested interest in his Account accumulated before
a Break in Service shall be determined without regard to any Service after
the Break. Further, if a Participant has a Break in Service before his
interest in his Account has become vested to some extent, he shall lose
credit for any Vesting Year before the Break.
(b) Unless otherwise specifically excluded, a Participant's Vesting
Years shall include any period of active military duty to the extent
required by the Military Selective Service Act of 1967 (38 U.S.C. Section
2021).
9.3 FULL VESTING UPON CERTAIN EVENTS. Notwithstanding Section 9.1, a
Participant's interest in his Account shall fully vest on the Participant's
Normal Retirement Date, provided the Participant is in Service on or after
that date. The Participant's interest shall also fully vest in the event that
his Service is terminated by Early Retirement, Disability or by death.
9.4 FULL VESTING UPON PLAN TERMINATION. Notwithstanding Section 9.1, a
Participant's interest in his Account shall fully vest if he is in active
Service upon termination of this Plan or upon the
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<PAGE>
permanent and complete discontinuance of contributions by his Employer. In
the event of a partial termination, the interest of each Participant who is
in Service shall fully vest with respect to that part of the Plan which is
terminated.
9.5 FORFEITURE, REPAYMENT, AND RESTORAL. If a Participant's Service
terminates before his interest in his Account is fully vested, that portion
which has not vested shall be forfeited if he either (i) receives a
distribution of his entire vested interest pursuant to Section 10.1, or (ii)
attains normal retirement age. If a Participant's Service terminates prior to
having any portion of his Account become vested, such Participant shall be
deemed to have a received a distribution of his vested interest as of the
Valuation Date next following his termination of Service.
If a Participant who has received his entire vested interest returns to
Service before he has a Break in Service, he may repay to the Trustee an
amount equal to the distribution. The Participant may repay such amount at
any time within five years after he has returned to Service. The amount shall
be credited to his account as of the last day of the Plan Year in which it is
repaid; an additional amount equal to that portion of his Account which was
previously forfeited shall be restored to his Account at the same time from
other Employees' forfeitures and, if such forfeitures are insufficient, from
a special contribution by his Employer for that year.
In the case of a terminated Participant who does not receive a
distribution of his entire vested interest and whose Service resumes before a
Break in Service occurs, any undistributed vested balance from his prior
participation shall be maintained as a fully vested subaccount with his
Account.
9.6 ACCOUNTING FOR FORFEITURES. A forfeiture shall be charged to the
Participant's Account as of the first day of the first Valuation Period in
which the forfeiture becomes certain pursuant to Section 9.5. Except as
otherwise provided in that Section, a forfeiture shall be added to the
contributions of the terminated Participant's Employer which are to be
credited to other Participants pursuant to Section 4.1 as of the last day of
the Plan Year in which the forfeiture becomes certain.
9.7 VESTING AND NONFORFEITABILITY. A Participant's interest in his
Account which has become vested shall be nonforfeitable for any reason.
SECTION 10. PAYMENT OF BENEFITS.
10.1 BENEFITS FOR PARTICIPANTS. For a Participant whose Service ends for
any reason, distribution will be made to or for the benefit of the
Participant or, in the case of the Participant's death, his Beneficiary, by
either, or a combination of, the following methods:
10.1.1 By payment in a lump sum, in accordance with Section 10.2; or
10.1.2 By payment in a series of substantially equal annual installments
over a period not to exceed five (5) years, provided the maximum period over
which the distribution of a Participant's Account may be made shall be
extended by 1 year, up to five (5) additional years, for each $100,000
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<PAGE>
(or fraction thereof) by which such Participant's Account balance exceeds
$500,000 (the aforementioned figures are subject to cost-of-living
adjustments prescribed by the Secretary of the Treasury pursuant to Section
409(o)(2) of the Code).
The Participant shall select the manner in which his vested Account
balance will be distributed to him. If a Participant so desires, he may
direct how his benefits are to be paid to his Beneficiary. If a deceased
Participant did not file a direction with the Committee, the Participant's
benefits shall be distributed to his Beneficiary in a lump sum.
Notwithstanding any provision to the contrary, if the value of a
Participant's vested Account balance, at the time of any distribution does
not equal or exceed $3,500, then such Participant's vested Account shall be
distributed in a lump sum within 60 days after the end of the Plan Year in
which employment terminates. If the value of a Participant's Account exceeds
$3,500, the Participant may, subject to the restrictions of Section 10.2,
elect, in a written election filed with the Committee, when to receive the
distribution of his Account and no distribution will commence without the
consent of the Participant. A Participant may modify such an election at any
time, provided any new benefit payment date is at least 30 days after a
modified election is delivered to the Committee. Distribution of a
Participant's vested Account will be made in whole shares of Company Stock,
cash or a combination of both, as determined by the Committee, provided,
however, that the Committee shall notify the Participant of his right to
demand distribution of his vested Account balance entirely in whole shares of
Company Stock (with the value of any fractional share paid in cash).
10.2 TIME FOR DISTRIBUTION.
10.2.1 Distribution of the balance of a Participant's Account generally
shall commence as soon as practicable as of the last day of the Plan year
next following his termination of Service for any reason, but not later than
one year after the close of the plan year:
(i) in which the Participant separates from service by reason of
attainment of Normal Retirement Age under the Plan, Disability, or death; or
(ii) which is the fifth Plan Year following the year in which the
Participant resigns or is dismissed, unless he is reemployed before such date.
10.2.2 Notwithstanding any other provision in this Section 10.2 to the
contrary, distribution of the balance of a Participant's Account, unless the
Participant otherwise elects an earlier distribution date, shall begin not
later than 60 days after the last day of the Plan year in which the last of
the following events occurs:
(i) the date on which the Participant attains the age of 65;
(ii) the tenth Anniversary of the date on which the Participant
commenced participation in the Plan; or
(iii) the date on which the Participant's employment with the
Employer terminates.
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10.2.3 Notwithstanding any other provision in this Section 10.2 to the
contrary, distribution of a Participant's Account shall commence (whether or
not he remains in the employ of the Employer) not later than the April 1 of
the calendar year next following the calendar year in which the Participant
attains age 70 and 1/2 years. A Participant's benefits from that portion of
his Account committed to the Investment Fund shall be calculated on the basis
of the most recent Valuation Date before the date of payment.
10.2.4 Notwithstanding the above provisions of Section 10.2,
distribution upon the death of a Participant shall be made in accordance with
the following requirements and shall otherwise comply with Section 401(a)(9)
of the Code and any regulations issued thereunder. If a Participant dies
before his distribution has commenced, distribution of his Account to his
Beneficiary shall commence not later than the earlier of:
(i) one year after the end of the Plan Year in which the
Participant died, or
(ii) if the Beneficiary is the surviving spouse, the later of one
year after the Participant's death or the date the Participant would have
attained age 70 and 1/2, and shall be completed within five years after the
Participant's death.
If the Participant dies after distribution has commenced pursuant to
Section 10.1.2 but before his entire interest in the Plan has been
distributed to him, then the remaining portion of that interest shall, in
accordance with Section 401(a)(9) of the Code, be distributed at least as
rapidly as under the method of distribution being used under Section 10.1.2
at the date of his death.
If a married Participant dies before his benefit payments begin, then
unless he has specifically elected otherwise the Committee shall cause the
balance in his Account to be paid to his Spouse. No election by a married
Participant of a different Beneficiary shall be valid unless the election is
accompanied by the Spouse's written consent, which (i) must acknowledge the
effect of the election, (ii) must explicitly provide either that the
designated Beneficiary may not subsequently be changed by the Participant
without the Spouse's further consent, or that it may be changed without such
consent, and (iii) must be witnessed by the Committee, its representative, or
a notary public. (This requirement shall not apply if the Participant
establishes to the Committee's satisfaction that the Spouse cannot be
located.)
10.3 MARITAL STATUS. The Committee shall from time to time take whatever
steps it deems appropriate to keep informed of each Participant's marital
status. Each Employer shall provide the Committee with the most reliable
information in the Employer's possession regarding its Participants' marital
status, and the Committee may, in its discretion, require a notarized
affidavit from any Participant as to his marital status. The Committee, the
Plan, the Trustee, and the Employers shall be fully protected and discharged
from any liability to the extent of any benefit payments made as a result of
the Committee's good faith and reasonable reliance upon information obtained
from a Participant and his Employer as to his marital status.
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<PAGE>
10.4 DELAY IN BENEFIT DETERMINATION. If the Committee is unable to
determine the benefits payable to a Participant or Beneficiary on or before
the latest date prescribed for payment pursuant to Section 10.1 or 10.2, the
benefits shall in any event be paid within 60 days after they can first be
determined, with whatever makeup payments may be appropriate in view of the
delay.
10.5 ACCOUNTING FOR BENEFIT PAYMENTS. Any benefit payment shall be
charged to the Participant's Account as of the first day of the Valuation
Period in which the payment is made.
10.6 OPTIONS TO RECEIVE AND SELL STOCK. Unless ownership of virtually
all Stock is restricted to active Employees and qualified retirement plans
for the benefit of Employees pursuant to the certificates of incorporation or
by-laws of the Employers issuing Stock, a terminated Participant or the
Beneficiary of a deceased participant may instruct the Committee to
distribute the Participant's entire vested interest in his Account in the
form of Stock. In that event, the Committee shall apply the Participant's
vested interest in the Investment Fund to purchase sufficient Stock from the
Stock Fund or from any owner of stock to make the required distribution. In
all other cases, the Participant's vested interest in the Stock Fund shall be
distributed in shares of Stock, and his vested interest in the Investment
Fund shall be distributed in cash.
Any Participant who receives Stock pursuant to Section 10.1, and any
person who has received Stock from the Plan or from such a Participant by
reason of the Participant's death or incompetency, by reason of divorce or
separation from the Participant, or by reason of a rollover contribution
described in Section 402(a)(5) of the Code, shall have the right to require
the Employer which issued the Stock to purchase the Stock for its current
fair market value (hereinafter referred to as the "put right"). The put
right shall be exercisable by written notice to the Committee during the
first 60 days after the Stock is distributed by the Plan, and, if not
exercised in that period, during the first 60 days in the following Plan Year
after the Committee has communicated to the Participant its determination as
to the Stock's current fair market value. However, the put right shall not
apply to the extent that the Stock, at the time the put right would otherwise
be exercisable, may be sold on an established market in accordance with
federal and state securities laws and regulations. If the put right is
exercised, the Trustee may, if so directed by the Committee in its sole
discretion, assume the Employer's rights and obligations with respect to
purchasing the Stock.
The Employer or the Trustee, as the case may be, may elect to pay for
the Stock in equal periodic installments, not less frequently than annually,
over a period not longer than five years from the 30th day after the put
right is exercised, with adequate security and interest at a reasonable rate
on the unpaid balance, all such terms to be set forth in a promissory note
delivered to the seller with normal terms as to acceleration upon any uncured
default.
Nothing contained herein shall be deemed to obligate any Employer to
register any Stock under any federal or state securities law or to create or
maintain a public market to facilitate the transfer or disposition of any
Stock. The put right described herein may only be exercised by a person
described in the second preceding paragraph, and may not be transferred with
any Stock to any other person. As to all Stock purchased by the Plan in
exchange for any Stock Obligation, the put right shall be nonterminable. The
put right for Stock acquired through a Stock Obligation shall continue
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<PAGE>
with respect to such Stock after the Stock Obligation is repaid or the Plan
ceases to be an employee stock ownership plan.
10.7 RESTRICTIONS ON DISPOSITION OF STOCK. Except in the case of Stock
which is traded on an established market, a Participant who receives Stock
pursuant to Section 10.1, and any person who has received Stock from the Plan
or from such a Participant by reason of the Participant's death or
incompetency, by reason of divorce or separation from the Participant, or by
reason of a rollover contribution described in Section 402(a)(5) of the Code,
shall, prior to any sale or other transfer of the Stock to any other person,
first offer the Stock to the issuing Employer and to the Plan at its current
fair market value. This restriction shall apply to any transfer, whether
voluntary, involuntary, or by operation of law, and whether for consideration
or gratuitous. Either the Employer or the Trustee may accept the offer within
14 days after it is delivered. Any Stock distributed by the Plan shall bear a
conspicuous legend describing the right of first refusal under this Section
10.7, as well as any other restrictions upon the transfer of the Stock
imposed by federal and state securities laws and regulations.
SECTION 11. RULES GOVERNING BENEFIT CLAIMS AND REVIEW OF APPEALS.
11.1 CLAIM FOR BENEFITS. Any Participant or Beneficiary who qualifies
for the payment of benefits shall file a claim for his benefits with the
Committee on a form provided by the Committee. The claim, including any
election of an alternative benefit form, shall be filed at least 30 days
before the date on which the benefits are to begin. If a Participant or
Beneficiary fails to file a claim by the 30th day before the date on which
benefits become payable, he shall be presumed to have filed a claim for
payment for the Participant's benefits in the standard form prescribed by
Sections 10.1 or 10.2.
11.2 NOTIFICATION BY COMMITTEE. Within 90 days after receiving a claim
for benefits (or within 180 days, if special circumstances require an
extension of time and written notice of the extension is given to the
Participant or Beneficiary within 90 days after receiving the claim for
benefits), the Committee shall notify the Participant or Beneficiary whether
the claim has been approved or denied. If the Committee denies a claim in any
respect, the Committee shall set forth in a written notice to the Participant
or Beneficiary:
(i) each specific reason for the denial;
(ii) specific references to the pertinent Plan provisions on which the
denial is based;
(iii) a description of any additional material or information which
could be submitted by the Participant or Beneficiary to support his claim,
with an explanation of the relevance of such information; and
(iv) an explanation of the claims review procedures met forth in
Section 11.3.
11.3 CLAIMS REVIEW PROCEDURE. Within 60 days after a Participant or
Beneficiary receives notice from the Committee that his claim for benefits
has been denied in any respect, he may file with the
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<PAGE>
Committee a written notice of appeal setting forth his reasons for disputing
the Committee's determination. In connection with his appeal the Participant
or Beneficiary or his representative may inspect or purchase copies of
pertinent documents and records to the extent not inconsistent with other
Participants' and Beneficiaries' rights of privacy. Within 60 days after
receiving a notice of appeal from a prior determination (or within 120 days,
if special circumstances require an extension of time and written notice of
the extension is given to the Participant or Beneficiary and his
representative within 60 days after receiving the notice of appeal), the
Committee shall furnish to the Participant or Beneficiary and his
representative, if any, a written statement of the Committee's final decision
with respect to his claim, including the reasons for such decision and the
particular Plan provisions upon which it is based.
SECTION 12. THE COMMITTEE AND ITS FUNCTIONS.
12.1 AUTHORITY OF COMMITTEE. The Committee shall be the "plan
administrator" within the meaning of ERISA and shall have exclusive
responsibility and authority to control and manage the operation and
administration of the Plan, including the interpretation and application of
its provisions, except to the extent such responsibility and authority are
otherwise specifically (i) allocated to the Company, the Employers, or the
Trustee under the Plan and Trust Agreement, (ii) delegated in writing to
other persons by the Company, the Employers, the Committee, or the Trustee,
or (iii) allocated to other parties by operation of law. The Committee shall
have exclusive responsibility regarding decisions concerning the payment of
benefits under the Plan. The Committee shall have no investment
responsibility with respect to the Investment Fund except to the extent, if
any, specifically provided in the Trust Agreement. In the discharge of its
duties, the Committee may employ accountants, actuaries, legal counsel, and
other agents (who also may be employed by an Employer or the Trustee in the
same or some other capacity) and may pay their reasonable expenses and
compensation.
12.2 IDENTITY OF COMMITTEE. The Committee shall consist of three or more
individuals selected by the Company. Any individual, including a director,
trustee, shareholder, officer, or employee of an Employer, shall be eligible
to service as a member of the Committee. The Company shall have the power to
remove any individual serving on the Committee at any time without cause upon
10 days written notice, and any individual may resign from the Committee at
any time upon 10 days written notice to the Company. The Company shall notify
the Trustee of any change in membership of the Committee.
12.3 DUTIES OF COMMITTEE. The Committee shall keep whatever records may
be necessary to implement the Plan and shall furnish whatever reports may be
required from time to time by the Company. The Committee shall furnish to the
Trustee whatever information may be necessary to properly administer the
Trust. The Committee shall see to the filing with the appropriate government
agencies of all reports and returns required of the plan Committee under
ERISA and other laws.
Further, the Committee shall have exclusive responsibility and authority
with respect to the Plan's holdings of Stock and shall direct the Trustee in
all respects regarding the purchase, retention, sale, exchange, and pledge of
Stock and the creation and satisfaction of Stock Obligations. The
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<PAGE>
Committee shall at all times act consistently with the Company's long-term
intention that the Plan, as an employee stock ownership plan, be invested
primarily in Stock. Subject to the direction of the Board as to the
application of Employer contributions to Stock Obligations, and subject to
the provisions of Sections 6.4 and 10.6 as to Participants' rights under
certain circumstances to have their Accounts invested in Stock or in assets
other than Stock, the Committee shall determine in its sole discretion the
extent to which assets of the Trust shall be used to repay Stock Obligations,
to purchase Stock, or to invest in other assets to be selected by the Trustee
or an investment manager. No provision of the Plan relating to the allocation
or vesting of any interests in the Stock Fund or the Investment Fund shall
restrict the Committee from changing any holdings of the Trust, whether the
changes involve an increase or a decrease in the Stock or other assets
credited to Participants' Accounts. In determining the proper extent of the
Trust's investment in Stock, the Committee shall be authorized to employ
investment counsel, legal counsel, appraisers, and other agents to pay their
reasonable expenses and compensation.
12.4 VALUATION OF STOCK. If the valuation of any Stock is not
established by reported trading on a generally recognized public market, the
Committee shall have the exclusive authority and responsibility to determine
its value for all purposes under the Plan. Such value shall be determined as
of each Valuation Date, and on any other date as of which the Plan purchases
or sells such Stock. The Committee shall use generally accepted methods of
valuing stock of similar corporations for purposes of arm's length business
and investment transactions, and in this connection the Committee shall
obtain, and shall be protected in relying upon, the valuation of such Stock
as determined by an independent appraiser experienced in preparing valuations
of similar businesses.
12.5 COMPLIANCE WITH ERISA. The Committee shall perform all acts
necessary to comply with ERISA. Each individual member or employee of the
Committee shall discharge his duties in good faith and in accordance with the
applicable requirements of ERISA.
12.6 ACTION BY COMMITTEE. All actions of the Committee shall be governed
by the affirmative vote of a number of members which is a majority of the
total number of members currently appointed, including vacancies. The members
of the Committee may meet informally and may take any action without meeting
as a group.
12.7 EXECUTION OF DOCUMENTS. Any instrument executed by the Committee
shall be signed by any member or employee of the Committee.
12.8 ADOPTION OF RULES. The Committee shall adopt such rules and
regulations of uniform applicability as it deems necessary or appropriate for
the proper administration and interpretation of the Plan.
12.9 RESPONSIBILITIES TO PARTICIPANTS. The Committee shall determine
which Employees qualify to enter the Plan. The Committee shall furnish to
each eligible Employee whatever summary plan descriptions, summary annual
reports, and other notices and information may be required under ERISA. The
Committee also shall determine when a Participant or his Beneficiary
qualifies for the payment of benefits under the Plan. The Committee shall
furnish to each such Participant or
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<PAGE>
Beneficiary whatever information is required under ERISA (or is otherwise
appropriate) to enable the Participant or Beneficiary to make whatever
elections may be available pursuant to Sections 6 and 10, and the Committee
shall provide for the payment of benefits in the proper form and amount from
the assets of the Trust Fund. The Committee may decide in its sole discretion
to permit modifications of elections and to defer or accelerate benefits to
the extent consistent with applicable law and the best interests of the
individuals concerned.
12.10 ALTERNATIVE PAYEES IN EVENT OF INCAPACITY. If the Committee finds
at any time that an individual qualifying for benefits under this Plan is a
minor or is incompetent, the Committee may direct the benefits to be paid, in
the case of a minor, to his parents, his legal guardian, a custodian for him
under the Uniform Gifts to Minors Act, or the person having actual custody of
him, or, in the case of an incompetent, to his spouse, his legal guardian, or
the person having actual custody of him, the payments to be used for the
individual's benefit. The Committee and the Trustee shall not be obligated to
inquire as to the actual use of the funds by the person receiving them under
this Section 12.10, and any such payment shall completely discharge the
obligations of the Plan, the Trustee, the Committee, and the Employers to the
extent of the payment.
12.11 INDEMNIFICATION BY EMPLOYERS. Except as separately agreed in
writing, the Committee, and any member or employee of the Committee, shall be
indemnified and held harmless by the Employer, jointly and severally, to the
fullest extent permitted by law against any and all costs, damages, expenses,
and liabilities reasonably incurred by or imposed upon it or him in
connection with any claim made against it or him or in which it or he may be
involved by reason of its or his being, or having been, the Committee, or a
member or employee of the Committee, to the extent such amounts are not paid
by insurance.
12.12 NONPARTICIPATION BY INTERESTED MEMBER. Any member of the Committee
who also is a Participant in the Plan shall take no part in any determination
specifically relating to his own participation or benefits unless his
abstention would leave the Committee incapable of acting on the matter.
SECTION 13. ADOPTION, AMENDMENT, OR TERMINATION OF THE PLAN.
13.1 ADOPTION OF PLAN BY OTHER EMPLOYERS. With the consent of the
Company, any entity may become a participating Employer under the Plan by (i)
taking such action as shall be necessary to adopt the Plan, (ii) becoming a
party to the Trust Agreement establishing the Trust Fund, and (iii) executing
and delivering such instruments and taking such other action as may be
necessary or desirable to put the Plan into effect with respect to the
entity's Employees.
13.2 ADOPTION OF PLAN BY SUCCESSOR. In the event that any Employer shall
be reorganized by way of merger, consolidation, transfer of assets or
otherwise, so that an entity other than an Employer shall succeed to all or
substantially all of the Employer's business, the successor entity may be
substituted for the Employer under the Plan by adopting the Plan and becoming
a party to the Trust Agreement. Contribution by the Employer shall be
automatically suspended from the effective date of any such reorganization
until the date upon which the substitution of the successor entity for the
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<PAGE>
Employer under the Plan becomes effective. If, within 90 days following the
effective date of any such reorganization, the successor entity shall not
have elected to become a party to the Plan, or if the Employer shall adopt a
plan of complete liquidation other than in connection with a reorganization,
the Plan shall be automatically terminated with respect to Employees of the
Employer as of the close of business on the 90th day following the effective
date of the reorganization, or as of the close of business on the date of
adoption of a plan of complete liquidation, as the case may be.
13.3 PLAN ADOPTION SUBJECT TO QUALIFICATION. Notwithstanding any other
provision of the Plan, the adoption of the Plan and the execution of the
Trust Agreement are conditioned upon their being determined initially by the
Internal Revenue Service to meet the qualification requirements of Section
401(a) of the Code, so that the Employers may deduct currently for federal
income tax purposes their contributions to the Trust and so that the
Participants may exclude the contributions from their gross income and
recognize income only when they receive benefits. In the event that this Plan
is held by the Internal Revenue Service not to qualify initially under
Section 401(a), the Plan may be amended retroactively to the earliest date
permitted by U.S. Treasury Regulations in order to secure qualification under
Section 401(a). If this Plan is held by the Internal Revenue Service not to
qualify initially under Section 401(a) either as originally adopted or as
amended, each Employer's contributions to the Trust under this Plan
(including any earnings thereon) shall be returned to it and this Plan shall
be terminated. In the event that this Plan is amended after its initial
qualification and the Plan as amended is held by the Internal Revenue Service
not to qualify under Section 401(a), the amendment may be modified
retroactively to the earliest date permitted by U.S. Treasury Regulations in
order to secure approval of the amendment under Section 401(a).
13.4 RIGHT TO AMEND OR TERMINATE. The Company intends to continue this
Plan as a permanent program. However, each participating Employer separately
reserves the right to suspend, supersede, or terminate the Plan at any time
and for any reason, as it applies to that Employer's Employees, and the
Company reserves the right to amend, suspend, supersede, merge, consolidate,
or terminate the Plan at any time and for any reason, as it applies to the
Employees of each Employer. No amendment, suspension, supersession, merger,
consolidation, or termination of the Plan shall reduce any Participant's or
Beneficiary's proportionate interest in the Trust Fund, or shall divert any
portion of the Trust Fund to purposes other than the exclusive benefit of the
Participants and their Beneficiaries prior to the satisfaction of all
liabilities under the Plan. Moreover, there shall not be any transfer of
assets to a successor plan or merger or consolidation with another plan
unless, in the event of the termination of the successor plan or the
surviving plan immediately following such transfer, merger, or consolidation,
each participant or beneficiary would be entitled to a benefit equal to or
greater than the benefit he would have been entitled to if the plan in which
he was previously a participant or beneficiary had terminated immediately
prior to such transfer, merger, or consolidation. Following a termination of
this Plan by the Company, the Trustee shall continue to administer the Trust
and pay benefits in accordance with the Plan as amended from time to time and
the Committee's instructions.
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SECTION 14. MISCELLANEOUS PROVISIONS.
14.1 PLAN CREATES NO EMPLOYMENT RIGHTS. Nothing in this Plan shall be
interpreted as giving any Employee the right to be retained as an Employee by
an Employer, or as limiting or affecting the rights of an Employer to control
its Employees or to terminate the Service of any Employee at any time and for
any reason, subject to any applicable employment or collective bargaining
agreements.
14.2 NONASSIGNABILITY OF BENEFITS. No assignment, pledge, or other
anticipation of benefits from the Plan will be permitted or recognized by the
Employer, the Committee, or the Trustee. Moreover, benefits from the Plan
shall not be subject to attachment, garnishment, or other legal process for
debts or liabilities of any Participant or Beneficiary, to the extent
permitted by law. This prohibition on assignment or alienation shall apply to
any judgment, decree, or order (including approval of a property settlement
agreement) which relates to the provision of child support, alimony, or
property rights to a present or former spouse, child or other dependent of a
Participant pursuant to a State domestic relations or community property law,
unless the judgment, decree, or order is determined by the Committee to be a
qualified domestic relations order within the meaning of Section 414(p) of
the Code.
14.3 LIMIT OF EMPLOYER LIABILITY. The liability of the Employer with
respect to Participants under this Plan shall be limited to making
contributions to the Trust from time to time, in accordance with Section 4.
14.4 TREATMENT OF EXPENSES. All expenses incurred by the Committee and
the Trustee in connection with administering this Plan and Trust Fund shall
be paid by the Trustee from the Trust Fund to the extent the expenses have
not been paid or assumed by the Employer or by the Trustee.
14.5 NUMBER AND GENDER. Any use of the singular shall be interpreted to
include the plural, and the plural the singular. Any use of the masculine,
feminine, or neuter shall be interpreted to include the masculine, feminine,
or neuter, as the context shall require.
14.6 NONDIVERSION OF ASSETS. Except as provided in Sections 5.3 and
13.3, under no circumstances shall any portion of the Trust Fund be diverted
to or used for any purpose other then the exclusive benefit of the
Participants and their Beneficiaries prior to the satisfaction of all
liabilities under the Plan.
14.7 SEPARABILITY OF PROVISIONS. If any provision of this Plan is held
to be invalid or unenforceable, the other provisions of the Plan shall not be
affected but shall be applied as if the invalid or unenforceable provision
had not been included in the Plan.
14.8 SERVICE OF PROCESS. The agent for the service of process upon the
Plan shall be the president of the Company, or such other person as may be
designated from time to time by the Company.
14.9 GOVERNING STATE LAW. This Plan shall be interpreted in accordance
with the laws of the State of Iowa to the extent those laws are applicable
under the provisions of ERISA.
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<PAGE>
SECTION 15. TOP-HEAVY PROVISIONS.
15.1 DETERMINATION OF TOP-HEAVY STATUS. The Committee shall determine on
a regular basis whether each Plan Year is or is not a "Top-Heavy Year" for
purposes of implementing the provisions of Sections 15.2, 15.3, 15.4, and 5.2
which apply only to the extent the Plan is top-heavy or super top-heavy
within the meaning of Section 416 and the Treasury Regulations promulgated
thereunder. In making this determination, the Committee shall use the
following definitions and principles:
15.1-1 The "Employer" includes all business entities which are
considered commonly controlled or affiliated within the meaning of Sections
414(b), 414(c), End 414(m) of the Code.
15.1-2 The "plan aggregation group" includes each qualified retirement
plan maintained by the Employer (i) in which a Key Employee is a Participant
during the Plan Year, or (ii) which enables any plan described in clause (i)
to satisfy the requirements of Section 401(a)(4) or 410 of the Code, or
(iii) which provides contributions or benefits comparable to those of the
plans described in clauses (i) and (ii) and which is designated by the
Committee as part of the plan aggregation group.
15.1-3 The "determination date", with respect to the first Plan Year of
any plan, means the last day of that Plan Year, and with respect to each
subsequent Plan Year, means the last day of the preceding Plan Year. If any
other plan has a determination date which differs from this Plan's
determination date, the top-heaviness of this Plan shall be determined on the
basis of the other plan's determination date falling within the same calendar
years as this Plan's determination date.
15.1-4 A "Key Employee", with respect to a Plan Year, means an Employee
who at any time during the five years ending on the top-heavy determination
date for the Plan Year has received compensation from an Employer and has
been (i) an officer of the Employer having Total Compensation greater than 50
percent of the limit then in effect under Section 415(b)(1)(A) of the Code,
(ii) one of the 10 Employees owning the largest interests in the Employer
having Total Compensation greater than the limit then in effect under Section
415(c)(1)(A), (iii) an owner of more than five percent of the outstanding
equity interest or the outstanding voting interest in any Employer, or (iv)
an owner of more than one percent of the outstanding equity interest or the
outstanding voting interest in an Employer whose Total Compensation exceeds
$150,000. In determining which individuals are Key Employees, the rules of
Section 415(i) of the Code and Treasury Regulations promulgated thereunder
shall apply. The Beneficiary of a Key Employee shall also be considered a
Key Employee.
15.1-5 A "Non-key Employee" means an Employee who at any time during
the five years ending on the top-heavy determination date for the Plan Year
has received compensation from an Employer and who has never been a Key
Employee, and the Beneficiary of any such Employee.
15.1-6 The "aggregated benefits" for any Plan Year means (i) the
adjusted account balances in defined contribution plans on the determination
date, plus (ii) the adjusted value of accrued benefits in defined benefit
plans, calculated as of the annual valuation date coinciding with or next
preceding the determination date, with respect to Key Employees and Non-key
Employees under all plans
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<PAGE>
within the plan aggregation group which includes this Plan. For this purpose,
the "adjusted account balance" for and the "adjusted value of accrued
benefit" for any Employee shall be increased by all plan distributions made
with respect to the Employee during the five years ending on the
determination date. Further, the adjusted account balance under a plan shall
not include any amount attributable to a rollover contribution or similar
transfer to the plan initiated by an Employee and made after 1983, unless
both plans involved are maintained by the Employer, in which event the
transferred amount shall be counted in the transferee plan and ignored for
all purposes in the transferor plan. Finally, the adjusted value of accrued
benefits under any defined benefit plan shall be determined by assuming
whichever actuarial assumptions were applied by the Pension Benefit Guaranty
Corporation to determine the sufficiency of plan assets for plans terminating
on the valuation date.
15.1-7 This Plan shall be "top-heavy" for any Plan Year in which the
aggregated benefits of the Key Employees exceed 60 percent of the total
aggregated benefits for both Key Employees and Non-key Employees.
15.1-8 This Plan shall be "super top-heavy" for any Plan Year in which
the aggregated benefits of the Key Employees exceed 90 percent of the total
aggregated benefits for both Key Employees and Non-key Employees.
15.1-9 A "Top-Heavy Year" means a Plan Year in which the Plan is
top-heavy.
15.2 MINIMUM CONTRIBUTIONS. For any Top-Heavy Year, each Employer shall
make a special contribution on behalf of each Participant to the extent that
the total allocations to his Account pursuant to Section 4 is less than the
lesser of:
(i) four percent of his Total Compensation for that year, or
(ii) the highest ratio of such allocation to Total Compensation
received by any Key Employee for that year. For purposes of the special
contribution of this Section 15.2, a Key Employee's Total Compensation
shall include amounts the Key Employee elected to defer under a qualified
401(k) arrangement. Such a special contribution shall be made on behalf of
each Participant who is employed by an Employer on the last day of the Plan
Year, regardless of the number of his Hours of Service, and shall be
allocated to his Account.
For any Plan Year when (1) the Plan is top-heavy and (2) a Non-key
Employee is a Participant in both this Plan and a defined benefit plan
included in the plan aggregation group which is top-heavy, the sum of the
Employer contributions and forfeitures allocated to the Account of each such
Non-key Employee shall be equal to at least five percent (5%) of such Non-key
Employee's Total Compensation for that year.
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<PAGE>
15.3 MINIMUM VESTING. If a Participant's vested interest in his Account
is to be determined in a Top-Heavy Year, it shall be based on the following
"top-heavy table":
<TABLE>
<CAPTION>
Vesting Percentage of
Years Interest Vested
--------- ---------------
<S> <C>
Fewer than 3 0%
3 or more 100%
</TABLE>
15.4 MAXIMUM COMPENSATION. For any Top-Heavy Year, a participant's "Cash
Compensation" as defined in Section 4.3, and his "Total Compensation" for
purposes of Section 15.2, shall not exceed $200,000 (or the limit currently
in effect under Section 415(d) of the Code).
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<PAGE>
AMENDMENT NO. 1
TO THE
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
EMPLOYEE STOCK OWNERSHIP PLAN
1. The definitions of "Total Compensation" as set forth in Section 2
and of "Cash Compensation" as set forth in Section 4.3 are amended by adding
to the end of both definitions, the following sentences.
"For purposes of applying the $200,000 limit on compensation, the
family unit of a Participant who is either a five percent (5%) owner
or is both a highly-compensated employee and one of the ten (10) most
highly compensated employees will be treated as a single employer with
one compensation, and, the $200,000 limit will be allocated among the
members of the family unit pro rata in proportion to their respective
Total Compensation. A family unit is the Participant who is a five
percent (5%) owner or one of the ten (10) most highly compensated
employees, the Participant's spouse and the Participant's lineal
descendants who have not attained age nineteen (19) before the close
of the year."
2. Section 9.5, which relates to forfeitures, repayments and restorals
is amended by deleting "(ii) attains normal retirement age" at the end of
the first sentence and substituting in its place "(ii) incurs a Break in
Service."
3. Section 10.2.3, which relates to the commencement of distributions,
is amended by adding "(i)" after the term "Participant's Account" in the
first sentence and by adding the word "and" and a new clause (ii) to read as
follows at the end of the first sentence:
"and (ii) shall otherwise be made in accordance with Section
401(a)(9) of the Code and regulations promulgated thereunder."
<PAGE>
4. Section 10 is amended by adding to the end thereof a new Section
10.8 "Rollover of Benefits" to read as follows:
"10.8 ROLLOVER OF BENEFITS
10.8.1. This Section 10.8 applies to distributions made on
or after January 1, 1993. Notwithstanding any provision of the
plan to the contrary that would otherwise limit a distributee's
election under this Section 10.8, a distributee may elect, at the
time and in the manner prescribed by the plan administrator, to
have any portion of an eligible rollover distribution paid
directly to an eligible retirement plan specified by the
distributee in a direct rollover.
10.8.2. An "eligible rollover distribution" is any
distribution of all or any portion of the balance to the credit
of the distributee, except that an eligible rollover distribution
does not include: any distribution that is one of a series of
substantially equal periodic payments (not less frequently than
annually) made for the life (or life expectancy) of the
distributee or the joint lives (or joint life expectancies) of
the distributee and the distributee's designed beneficiary, or
for a specified period of ten years or more; any distribution to
the extent such distribution is required under section 401(a)(9)
of the Code; and the portion of any distribution that is not
includable in gross income (determined without regard to the
exclusion for net unrealized appreciation with respect to
employer securities).
10.8.3. An "eligible retirement plan" is an individual
retirement account described in section 408(a) of the Code, an
individual retirement annuity described in section 408(b) of the
Code, an annuity plan described in section 403(a) of the Code, or
a qualified trust described in section 401(a) of the Code, that
accepts the distributee's eligible rollover distribution.
However, in the case of an eligible rollover distribution to the
surviving spouse, an eligible retirement plan is an individual
retirement account or individual retirement annuity.
10.8.4. A "distributee" includes an employee or former
employee. In addition, the employee's or former employee's
surviving spouse and the employee's or former employee's spouse
or former spouse who is the alternate payee under a qualified
domestic relations order, as defined in section 414(p) of the
Code, are distributees with regard to the interest of the spouse
or former spouse.
10.8.5. A "direct rollover" is a payment by the plan to the
eligible retirement plan specified by the distributee."
<PAGE>
AMENDMENT NO. 2
TO
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
EMPLOYEE STOCK OWNERSHIP PLAN
I. MODEL AMENDMENT NO. 1
The definition of "Total Compensation" under Section 2 shall be amended
by adding the following language to the end thereof:
"In addition to other applicable limitations set forth in the plan,
and notwithstanding any other provision of the plan to the contrary, for
plan years beginning on or after January 1, 1994, the annual compensation
of each employee taken into account under the plan shall not exceed the
OBRA '93 annual compensation limit. The OBRA '93 annual compensation limit
is $150,000, as adjusted by the Commissioner for increases in the cost of
living in accordance with Section 401(a)(17)(B) of the Internal Revenue
Code. The cost-of-living adjustment in effect for a calendar year applies
to any period, not exceeding 12 months, over which compensation is
determined (determination period) beginning in such calendar year. If a
determination period consists of fewer than 12 months, the OBRA '93 annual
compensation limit will be multiplied by a fraction, the numerator of which
is the number of months in the determination period, and the denominator of
which is 12.
"For plan years beginning on or after January 1, 1994, any reference
in this plan to the limitation under Section 401(a)(17) of the Code shall
mean the OBRA '93 annual compensation limit set forth in this provision.
"If compensation for any prior determination period is taken into
account in determining an employee's benefits accruing in the current plan
year, the compensation for that prior determination period is subject to
the OBRA '93 annual compensation limit in effect for that prior
determination period. For this purpose, for determination periods
beginning before the first day of the first plan year beginning on or after
January 1, 1994, the OBRA '93 annual compensation limit is $150,000."
II. MODEL AMENDMENT NO. 2
New Section 10.9 shall be added to the Plan, effective as of January 1,
1995, and shall read as follows:
<PAGE>
"SECTION 10.9 WAIVER OF 30-DAY NOTICE PERIOD TO RECEIVE DISTRIBUTION
"If a distribution is one to which Sections 401(a)(11) and 417 of the
Internal Revenue Code do not apply, such distribution may commence less
than 30 days after the notice required under Section 1.41(a)-11(c) of the
Income Tax Regulations is given, provided that:
(1) the plan administrator clearly informs the participant that the
participant has a right to a period of at least 30 days after receiving the
notice to consider the decision of whether or not to elect a distribution
(and, if applicable, a particular distribution option), and
(2) the participant, after receiving the notice, affirmatively elects
a distribution."
<PAGE>
AMENDMENT NO. 3
TO
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
EMPLOYEE STOCK OWNERSHIP PLAN
The First Federal Savings Bank of Siouxland (the "Bank") Employee Stock
Ownership Plan is hereby amended effective January 1, 1996, unless otherwise
stated in accordance with the following:
Section 4.2 of the Plan is hereby amended by the deletion of the last
sentence of the first paragraph.
Section 7.2 of the Plan is hereby amended to read in full as follows:
7.2 DIVIDENDS ON STOCK. Dividends on Stock which are received by the
Trustee in the form of additional Stock shall be retained in the Stock
Fund, and shall be allocated among the Participant's Accounts and the
Unallocated Stock Fund in accordance with their holdings of the Stock
on which the dividends have been paid. Dividends on Stock credited to
Participants' Accounts which are received by the Trustee in the form
of cash shall, at the direction of the Employer paying the dividends,
either (i) be credited to the Accounts in accordance with Section 8.3
and invested as part of the Investment Fund, (ii) be distributed
immediately to the Participants in proportion with the Participants'
Account balance, (iii) be distributed to the Participants within 90
days of the close of the Plan Year in which paid in proportion with
the Participants' Account balance, (iv) be used to pay Plan expenses,
or (v) be used to make payments on an exempt loan. If dividends
allocated to a Participant's Account are used to repay an exempt loan,
stock with a fair market value equal to the dividends so used must be
allocated to such Participant's Account in lieu of the dividends.
Dividends on Stock held in the Unallocated Stock Fund which are
received by the Trustee in the form of cash shall, at the direction of
the Employer paying the dividends, either (i) be credited to the
Accounts in accordance with Section 8.3 and invested as part of the
Investment Fund, (ii) be distributed immediately to the Participants
in proportion with the Participants' Account balance, (iii) be
distributed to the Participants within 90 days of the close of the
Plan Year in which paid in proportion with the Participants' Account
balance, (iv) be used to pay Plan expenses, or (v) be applied to
payments of principal and interest under the Stock Obligation incurred
with the purchase of the Stock.
A new Section 14.11 is added to the Plan and reads as follows:
14.11 UNCLAIMED ACCOUNTS. Neither the Employer nor the Trustees shall
be under any obligation to search for, or ascertain the
whereabouts of, any Participant or Beneficiary. The Employer or
the Trustees, by certified or registered mail
<PAGE>
addressed to his last known address of record with the Employer,
shall notify any Participant or Beneficiary that he is entitled
to a distribution under this Plan, and the notice shall quote the
provisions of this Section. If the Participant or Beneficiary
fails to claim his benefits or make his whereabouts known in
writing to the Employer or the Trustees within seven (7) calendar
years after the date of notification, the benefits of the
Participant or Beneficiary under the Plan will be disposed of as
follows:
(a) If the whereabouts of the Participant is unknown but the
whereabouts of the Participant's Beneficiary is known to the
Trustees, distribution will be made to the Beneficiary.
(b) If the whereabouts of the Participant and his Beneficiary
are unknown to the Trustees, the Plan will forfeit the
benefit, provided that the benefit is subject to a claim for
reinstatement if the Participant or Beneficiary make a claim
for the forfeited benefit.
Any payment made pursuant to the power herein conferred upon the
Trustees shall operate as a complete discharge of all obligations of
the Trustees, to the extent of the distributions so made.
A new Section 14.12 is added to the Plan and reads as follows:
14.12 QUALIFIED DOMESTIC RELATIONS ORDER. Section 14.2 shall not
apply to a "qualified domestic relations order" defined in
Code Section 414(p), and such other domestic relations orders
permitted to be so treated by the Committee under the
provisions of the Retirement Equity Act of 1984. Further, to
the extent provided under a "qualified domestic relations
order", a former Spouse of a Participant shall be treated as
the Spouse or surviving Spouse for all purposes under the Plan.
In the case of any domestic relations order received by the Plan:
(a) The Employer or the Committee shall promptly notify the
Participant and any other alternate payee of the receipt of
such order and the Plan's procedures for determining the
qualified status of domestic relations orders, and
(b) Within a reasonable period after receipt of such order, the
Employer or the Committee shall determine whether such order
is a qualified domestic relations order and notify the
Participant and each alternate payee of such determination.
The Employer or the Committee shall establish reasonable
procedures to determine the qualified status of domestic
relations orders and to administer distributions under such
2
<PAGE>
qualified orders.
During any period in which the issue of whether a domestic relations
order is a qualified domestic relations order is being determined (by
the Employer or Committee, by a court of competent jurisdiction, or
otherwise), the Employer or the Committee shall segregate in a
separate account in the Plan or in an escrow account the amounts which
would have been payable to the alternate payee during such period if
the order had been determined to be a qualified domestic relations
order. If within eighteen (18) months the order (or modification
thereof) is determined to be a qualified domestic relations order, the
Employer or the Committee shall pay the segregated amounts (plus any
interest thereon) to the person or persons entitled thereto. If
within eighteen (18) months it is determined that the order is not a
qualified domestic relations order, or the issue as to whether such
order is a qualified domestic relations order is not resolved, then
the Employer or the Committee shall pay the segregated amounts (plus
any interest thereon) to the person or persons who would have been
entitled to such amounts if there had been no order. Any
determination that an order is a qualified domestic relations order
which is made after the close of the eighteen (18) month period shall
be applied prospectively only. The term "alternate payee" means any
Spouse, former Spouse, child or other dependent of a Participant who
is recognized by a domestic relations order as having a right to
receive all, or a portion of, the benefit payable under a Plan with
respect to such Participant.
3
<PAGE>
AMENDMENT NO. 4
TO THE
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
EMPLOYEE STOCK OWNERSHIP PLAN
The First Federal Savings Bank of Siouxland (the "Bank") Employee Stock
Ownership Plan (the "Plan") is hereby amended effective January 1, 1998,
unless otherwise stated, in accordance with the following:
1. The definition of "Employee" is amended, effective January 1, 1997, to
read as follows:
"EMPLOYEE" means any individual who is or has been employed or
self-employed by an Employer. "Employee" also means an individual
employed by a leasing organization who, pursuant to an agreement between
an Employer and the leasing organization, has performed services for the
Employer and any related persons (within the meaning of Section
414(n)(6) of the Code) on a substantially full-time basis for more than
one year, if such services are performed under the primary direction or
control of the Employer. However, such a "leased employee" shall not be
considered an Employee if (i) he participates in a money purchase
pension plan sponsored by the leasing organization which provides for
immediate participation, immediate full vesting, and an annual
contribution of at least 10 percent of the Employee's Total
Compensation, and (ii) leased employees do not constitute more than 20
percent of the Employer's total work force (including leased employees,
but excluding Highly Paid Employees and any other Employees who have
not performed services for the Employer on a substantially full-time
basis for at least one year).
2. The definition of "Highly Paid Employee" is amended, effective January
1, 1997, to read as follows:
"HIGHLY PAID EMPLOYEE" for any Plan Year means an Employee who,
during either of that or the immediately preceding Plan Year was at any
time a five percent owner of the Employer (as defined in Code Section
416(i)(1)) or had Total Compensation exceeding $80,000 and was among the
most highly compensated one-fifth of all Employees. For this purpose:
(a) "Total Compensation" shall include any amount which is
excludable from the Employee's gross income for tax purposes pursuant to
Sections 125, 402(a)(8), 402(h)(1)(B), or 403(b) of the Code.
(b) The number of Employees in "the most highly compensated
one-fifth of all Employees" shall be determined by taking into account
all individuals working for all related Employer entities described in
the definition of "Service", but excluding any
<PAGE>
individual who has not completed six months of Service, who normally
works fewer than 17-1/2 hours per week or in fewer than six months per
year, who has not reached age 21, whose employment is covered by a
collective bargaining agreement, or who is a nonresident alien who
receives no earned income from United States sources.
3. The definition of "Service" shall be amended to read as follows:
"SERVICE" means an Employee's period(s) of employment or
self-employment with an Employer, excluding for initial eligibility
purposes any period in which the individual was a nonresident alien and
did not receive from an Employer any earned income which constituted
income from sources within the United States. An Employee's Service
shall include any Service which constitutes Service with a predecessor
Employer, which predecessor Employer shall include the First Federal
Savings and Loan Association, within the meaning of Section 414(a) of
the Code. Service of an Employee who was an employee of Grinnell
Federal Savings Bank on March 31, 1998 (the effective date of the merger
by and between First Federal Savings Bank of Siouxland, GFS Bancorp,
Inc. and Grinnell Federal Savings Bank) shall include service with
Grinnell Federal Savings Bank for eligibility and vesting purposes,
subject to applicable Break In Service rules. An Employee's Service
shall also include any Service with an entity which is not an Employer,
but only either (i) for a period after 1975 in which the other entity is
a member of a controlled group of corporations or is under common
control with other trades and businesses within the meaning of Section
414(b) or 414(c) of the Code, and a member of the controlled group or
one of the trades and businesses is an Employer, (ii) for a period after
1979 in which the other entity is a member of an affiliated service
group within the meaning of Section 414(m) of the Code, and a member of
the affiliated service group is an Employer, or (iii) all Employers
aggregated with the Employer under Section 414(o) of the Code (but not
until the Proposed Regulations under Section 414(o) become effective).
Notwithstanding any provision of this Plan to the contrary,
contributions, benefits and service credit with respect to qualified
military service will be provided in accordance with Section 414(u) of
the Code.
4. The definition of "Total Compensation" is amended by adding the following
to the end thereof:
For Plan Years beginning after December 31, 1997, any elective
deferral as defined in Code Section 402(g)(3) and any amount which is
contributed or deferred by the Employer at the election of the Participant
and which is not includible in gross income of the Participant by reason of
Code Section 125 shall also be included in the definition of Total
Compensation.
5. Section 9.4 is amended to read as follows:
9.4 FULL VESTING UPON PLAN TERMINATION. Notwithstanding Section 9.1,
a Participant's interest in his Account shall fully vest upon termination
of this Plan or upon the permanent and complete discontinuance of
contributions by his Employer. In the event
<PAGE>
of a partial termination, the interest of each affected Participant shall
fully vest with respect to that part of the Plan which is terminated.
6. Section 9.5 is amended to read as follows:
9.5 FORFEITURE, REPAYMENT, AND RESTORAL. If a Participant's Service
terminates before his interest in his Account is fully vested, that portion
which has not vested shall be forfeited if he either (i) receives a
distribution of his entire vested interest pursuant to Section 10.1, or
(ii) incurs a Break in Service. If a Participant's Service terminates
prior to having any portion of his Account become vested, such Participant
shall be deemed to have received a distribution of his vested interest as
of the Valuation Date next following his termination of Service.
If a Participant who has received his entire vested interest returns
to Service before he has a Break in Service, he may repay to the Trustee an
amount equal to the distribution. The Participant may repay such amount at
any time within five years after he has returned to Service. The amount
shall be credited to his Account at the time it is repaid; an additional
amount equal to that portion of his Account which was previously forfeited
shall be restored to his Account at the same time from other Employees'
forfeitures and, if such forfeitures are insufficient, from a special
contribution by his Employer for that year. A Participant who was deemed
to have received a distribution of his vested interest in the Plan shall
have his Account restored as of the first day on which he performs an Hour
of Service after his return.
7. The last full paragraph of Section 10.1, BENEFITS FOR PARTICIPANTS, is
amended to read as follows:
The Participant shall elect the manner in which his vested Account
balance will be distributed to him. If a Participant so desires, he may
direct how his benefits are to be paid to his Beneficiary. If a deceased
Participant did not file a direction with the Committee, the Participant's
benefits shall be distributed to his Beneficiary in a lump sum.
Notwithstanding any provision to the contrary, if the value of a
Participant's vested Account balance at the time of any distribution, does
not equal or exceed $3,500 ($5,000 for Plan Years beginning after August 5,
1997), then such Participant's vested Account shall be distributed in a
lump sum within 60 days after the end of the Plan year in which employment
terminates. If the value of a Participant's vested Account balance is, or
has ever been, in excess of $3,500 ($5,000 for Plan Years beginning after
August 5, 1997), then his benefits shall not be paid prior to the later of
the time he has attained Normal Retirement or age 62 unless he elects an
early payment date in a written election filed with the Committee. A
Participant may modify such an election at any time, provided any new
benefit payment date is at least 30 days after a modified election is
delivered to the Committee. Failure of a Participant to consent to a
distribution prior to the later of Normal Retirement or age 62 shall be
deemed to be an election to defer commencement of payment of any benefit
under this section.
<PAGE>
8. Section 10.2.1 is amended to read as follows:
10.2.1 If the Participant and, if applicable, with the consent of
the Participant's spouse, elects the distribution of the balance of the
Participant's Account, distribution shall commence as soon as practicable
following his termination of Service, but not later than one year after the
close of the Plan Year:
(i) in which the Participant separates from service by reason of
attainment of Normal Retirement Age under the Plan, Disability, or
death; or
(ii) which is the fifth Plan Year following the year in which the
Participant resigns or is dismissed, unless he is reemployed before
such date.
No distribution shall be made hereunder, unless the Plan has obtained, to
the extent applicable, the consent of the Participant and the Participant's
spouse.
9. Section 10.2.3 is amended, effective January 1, 1997, to read as follows:
10.2.3 Notwithstanding anything to the contrary, (1) with respect
to a 5-percent owner (as defined in Code Section 416), distribution of a
Participant's Account shall commence (whether or not he remains in the
employ of the Employer) not later than the April 1 of the calendar year
next following the calendar year in which the Participant attains age 70-
1/2, and (2) with respect to all other Participants, payment of a
Participant's benefit will commence not later than April 1 of the calendar
year following the calendar year in which the Participant attains age
70-1/2, or, if later, the year in which the Participant retires. A
Participant's benefit from that portion of his Account committed to the
Investment Fund shall be calculated on the basis of the most recent
Valuation Date before the date of payment.
10. The first paragraph of Section 10.6 is amended to read as follows:
Unless ownership of virtually all Stock is restricted to active Employees
and qualified retirement plans for the benefit of Employees pursuant to the
certificates of incorporation or by-laws of the Employers issuing Stock, a
terminated Participant or the Beneficiary of a deceased Participant may
instruct the Committee to distribute the Participant's entire vested
interest in his Account in the form of Stock. In that event, the Committee
shall apply the Participant's vested interest in the Investment Fund to
purchase sufficient Stock from the Stock Fund or from any owner of Stock to
make the required distribution. Alternatively, a terminated Participant or
the Beneficiary of a deceased Participant may instruct the Committee to
distribute the Participant's entire vested interest in his Account in cash.
In all other cases, the Participant's vested interest in the Stock Fund
shall be distributed in shares of Stock, and his vested interest in the
Investment Fund shall be distributed in cash.
11. Section 12.4 is amended by the addition of the following sentence to the
end thereof:
<PAGE>
For purposes of the preceding sentence, the term "independent
appraiser" means any appraiser meeting requirements similar to the
requirements of the regulations prescribed under Section 170(a)(1) of the
Code.
12. Section 15.1-4 is amended by replacing the reference to Section 415(i) with
Section 416(i).
<PAGE>
EXHIBIT 10.15
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
Profit Sharing Plan
This new plan will replace the current incentive plan. The new profit sharing
plan will be based upon R.O.A. and net income. The pool of money to be allocated
will be determined on First Federal's performance in these two areas. Individual
allocations will be made to the employee's tenure and performance.
The following are proposed scales and formulas for the new profit sharing plan:
<TABLE>
<CAPTION>
ROA % of Net Income for pool
--- ------------------------
<S> <C>
0-.19% 0
.20-.29% 0
.30-.39% 2
.40-.49% 2
.50-.59% 5
.60-.69% 5
.70-.79% 6
.80-.89% 6
.90-.99% 8
1.0 & greater 8
</TABLE>
<TABLE>
<CAPTION>
Tenure (weighted at 15% of total plan)
--------------------------------------
<S> <C>
0-1 yr 0%
1-2 yrs 25%
2-5 yrs 50%
5-10 yrs 100%
10-15 yrs 110%
15-20 yrs 115%
20 + yrs 120%
</TABLE>
<TABLE>
<CAPTION>
Performance (weighted at 85% of total plan)
-------------------------------------------
<S> <C>
1 0%
2 10%
3 20%
4 35%
5 50%
6 65%
7 80%
8 90%
9 100%
10 110%
</TABLE>
If ROA was .68 and net income was $4,200,000 then we would have a pool of 5% of
the $4,200,000 or $210,000. Approximately 20% of this pool would be allocated to
top management ($42,000) and 50% would be allocated to all other employees
through the profit sharing plan ($105,000). The remaining portion would help
fund other incentive programs sponsored throughout the year.
Employees in direct sales positions will remain on commission plans rather than
be included in the profit sharing plan. We anticipate paying approximately
$82,000 in commissions. We also pay CSO, Life and Annuity commissions, as well
as bonus amounts for special programs.
<PAGE>
Example pay out under new profit sharing plan:
$105,000 (employee pool)/$2,981,149 (salaries of those included in the plan) =
3.5%
<TABLE>
<S> <C>
Salary: $36,000
Tenure: 4 years
Performance: 8
</TABLE>
$36,000 x 3.5% = $1,260
$1,260 x 15% (tenure) x 50% = $94.50
$1,260 x 85% (performance) x 90% = $963.90
Total pay out = $1,058.40
<PAGE>
Exhibit 23.2
Consent of Independent Auditors
The Board of Directors
First Federal Savings Bank of Siouxland:
We consent to the use of our reports included in the Registration Statement on
Form S-1 to be filed with the Securities and Exchange Commission and in the
Application for Conversion on Form AC to be filed with the Office of Thrift
Supervision and to the reference to our firm under the headings "Consolidated
Statements of Operations," "Taxation - Tax Aspects," and "Experts" in the
Prospectus.
/s/ KPMG Peat Marwick LLP
- -------------------------
Des Moines, Iowa
February 8, 1999
<PAGE>
Exhibit 23.4
Consent of Independent Auditors
The Board of Directors
Mid-Iowa Financial Corp.:
We consent to inclusion in the Registration Statement on Form S-1 of First
Federal Bankshares, Inc. to be filed with the Securities and Exchange Commission
and in the Application for Conversion on Form AC to be filed with the Office of
Thrift Supervision of our report date November 6, 1998 with respect to the
consolidated balance sheets of Mid-Iowa Financial Corp. as of September 30, 1998
and 1997 and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
September 30, 1998, and to the reference to our firm under the heading "Experts"
in the Prospectus.
/s/ KPMG Peat Marwick LLP
- ---------------------------
Des Moines, Iowa
February 8, 1999
<PAGE>
Exhibit 99.2
RP FINANCIAL, LC.
- ------------------------------------------
Financial Services Industry Consultants
October 7, 1998
Mr. Barry E. Backhaus
Chairman, President and Chief Executive Officer
First Federal Savings Bank of Siouxland
329 Pierce Street
Sioux City, Iowa 51101-1411
Dear Mr. Backhaus:
This letter sets forth the agreement between First Federal Savings Bank
of Siouxland ("First Federal" or the "Bank"), subsidiary of First Federal
Bankshares, M.H.C., Sioux City, Iowa ("Bankshares" or the "Mutual Holding
Company"), and RP Financial, LC. ("RP Financial"), whereby the Bank has engaged
RP Financial to prepare the written document and financial projections
reflecting the post-conversion activities of the Bank in conjunction with the
public stock offering of shares of common stock of First Federal and the
contemporaneous cash acquisition of Mid-Iowa Financial Corp., Newton, Iowa
("Mid-Iowa Financial"). These services are described in greater detail below.
DESCRIPTION OF PROPOSED SERVICES
RP Financial's business planning services will include the following
areas: (1) determining the Bank's current financial and operating condition,
business strategies and anticipated future strategies, both currently and
incorporating the merger transaction; (2) quantifying the impact of business
strategies, incorporating the use of offering proceeds; (3) preparing detailed
financial projections on a quarterly basis for a period of at least three fiscal
years to reflect the impact of selected business strategies, the use of offering
proceeds and the merger transaction; (4) preparing the written business plan
document which conforms with applicable regulatory guidelines, including a
description of the use of offering proceeds, post-merger operations and how the
convenience and needs of the community will be addressed; and (5) preparing the
detailed schedules of the capitalization and inter-company cash flows.
Contents of the business plan will include: Philosophy/Goals; Economic
Environment and Background; Lending, Leasing and Investment Activities; Deposit,
Savings and Borrowing Activity; Asset and Liability Management; Operations;
Records, Systems and Controls; Growth, Profitability and Capital; Responsibility
for Monitoring this Plan.
RP Financial agrees to prepare the business plan and accompanying
financial projections in writing such that the business plan conforming to
regulatory guidelines can be filed with the appropriate federal and state
regulatory agencies in conjunction with the filing of the stock offering and
merger applications.
<PAGE>
MR. BARRY E. BACKHAUS
OCTOBER 7, 1998
PAGE 2
FEE STRUCTURE AND PAYMENT SCHEDULE
The Bank agrees to compensate RP Financial for preparation of the
business plan on a fixed fee basis of $10,000. Payment of the professional fees
shall be made upon delivery of the completed business plan.
The Bank also agrees to reimburse RP Financial for those direct
reasonable out-of-pocket expenses necessary and incidental to providing the
business planning services. Reimbursable expenses will likely include shipping,
telephone/facsimile printing, computer and data services, and shall be paid to
RP Financial as incurred and billed. RP Financial will agree to limit
reimbursable expenses to an amount not to exceed $10,000 in conjunction with the
business planning and appraisal engagements, subject to written authorization
from the Bank to exceed such level.
In the event the Bank shall, for any reason, discontinue this planning
engagement prior to delivery of the completed business plan and payment of the
progress payment fee, the Bank agrees to compensate RP Financial according to RP
Financial's standard billing rates for consulting services based on accumulated
and verifiable time expenses, not to exceed the fixed fee described above, plus
reimbursable expenses incurred.
If during the course of the planning engagement, unforeseen events
occur so as to materially change the nature or the work content of the business
planning services described in this contract, the terms of said contract shall
be subject to renegotiation by the Bank and RP Financial. Such unforeseen events
may include changes in regulatory requirements as it specifically relates to the
Bank or changes in the structure of the merger transaction which will
dramatically impact the Bank.
* * * * * * * * * * *
Please acknowledge your agreement to the foregoing by signing as
indicated below and returning to RP Financial a signed copy of this letter.
Very truly yours,
/s/ William E. Pommerening
----------------------------
William E. Pommerening
CEO and Managing Director
Agreed To and Accepted By: Barry E. Backhaus /s/ Barry E. Backhaus
----------------------------
Chairman, President and Chief Executive Officer
Upon Authorization by the Board of Directors For: First Federal Savings Bank of
Siouxland Subsidiary of First
Federal Bankshares, M.H.C.
Sioux City, Iowa
Date Executed: 10-19-98
--------------------------
<PAGE>
RP FINANCIAL, LC.
- ------------------------------------------
Financial Services Industry Consultants
October 7, 1998
Mr. Barry E. Backhaus
Chairman, President and Chief Executive Officer
First Federal Savings Bank of Siouxland
329 Pierce Street
Sioux City, Iowa 51101-1411
Dear Mr. Backhaus:
This letter sets forth the agreement between First Federal Savings Bank
of Siouxland ("First Federal" or the "Bank"), subsidiary of First Federal
Bankshares, M.H.C., Sioux City, Iowa ("Bankshares" or the "Mutual Holding
Company"), and RP Financial, LC. ("RP Financial") for independent conversion
appraisal services pertaining to the mutual-to-stock conversion of Bankshares
and the cash acquisition of Mid-Iowa Financial Corp., Newton, Iowa ("Mid-Iowa
Financial"). The specific appraisal services to be rendered by RP Financial are
described below. These appraisal services will be rendered by a team of two
senior consultants on staff and will be directed by the undersigned.
DESCRIPTION OF APPRAISAL SERVICES
Prior to preparing the appraisal report, RP Financial will conduct a
financial due diligence, including on-site interviews of senior management and
reviews of financial and other documents and records, to gain insight into the
operations, financial condition, profitability, market area, risks and various
internal and external factors of First Federal, all of which will be considered
in estimating the pro forma market value of the Bank. In addition, RP Financial
will evaluate the anticipated expected synergies and costs as well as accounting
and other adjustments resulting from the merger.
RP Financial will prepare a detailed written valuation report of the
Bank which will be fully consistent with applicable federal regulatory
guidelines and standard pro forma valuation practices. The appraisal report will
include an analysis of the Bank's financial condition and operating results, as
well as an assessment of the Bank's interest rate risk, credit risk and
liquidity risk, including an analysis on a pro forma basis taking into account
the related merger transaction. The appraisal report will describe the Bank's
business strategies, market area, prospects for the future and the intended use
of proceeds, incorporating the merger transaction. A peer group analysis
relative to comparable publicly-traded savings institutions will be conducted
for the purpose of determining appropriate valuation adjustments for the Bank
relative to the peer group.
<PAGE>
MR. BARRY E. BACKHAUS
OCTOBER 7, 1998
PAGE 2
We will review pertinent sections of the Bank's prospectus and hold
discussions with the Bank to obtain necessary data and information for the
appraisal report, including the impact of key deal elements on the pro forma
market value, such as dividend policy, use of proceeds and reinvestment rate,
tax rate, offering expenses, characteristics of stock plans, and the pro forma
impact of the merger transaction.
The appraisal report will establish a midpoint pro forma market value.
The appraisal report may be periodically updated throughout the conversion
process as appropriate. There will be at least one updated valuation which would
be prepared at the time of the closing of the stock offering.
RP Financial agrees to deliver the appraisal report and subsequent
updates, in writing, to the Bank at the above address in conjunction with the
filing of the regulatory application. Subsequent updates will be filed promptly
as certain events occur which would warrant the preparation and filing of such
valuation updates. Further, RP Financial agrees to perform such other services
as are necessary or required in connection with the regulatory review of the
appraisal and respond to the regulatory comments, if any, regarding the
valuation appraisal and subsequent updates. RP Financial expects to formally
present the appraisal report, including the appraisal methodology, peer group
selection and assumptions, to the Board of Directors for review and acceptance.
FEE STRUCTURE AND PAYMENT SCHEDULE
The Bank agrees to pay RP Financial a fixed fee of $30,000 for
preparation and delivery of the original appraisal report and a $5,000 fee for
each subsequent appraisal update, plus reimbursable expenses. Payment of these
fees shall be made according to the following schedule:
- $5,000 upon execution of the letter of agreement engaging RP
Financial's appraisal services;
- $25,000 upon delivery of the completed original appraisal report;
and,
- $5,000 upon completion of each subsequent valuation update that
may be required.
The Bank will reimburse RP Financial for reasonable out-of-pocket
expenses incurred in preparation of the valuation. Such out-of-pocket expenses
will likely include travel, printing, telephone, facsimile, shipping, computer
and data services. RP Financial will agree to limit reimbursable expenses to an
amount not to exceed $10,000 in conjunction with the appraisal and business
planning engagements, subject to written authorization from the Bank to exceed
such level.
<PAGE>
MR. BARRY E. BACKHAUS
OCTOBER 7, 1998
PAGE 3
In the event the Bank shall, for any reason, discontinue the proposed
transaction prior to delivery of the completed documents set forth above and
payment of the respective progress payment fees, the Bank agrees to compensate
RP Financial according to RP Financial's standard billing rates for consulting
services based on accumulated and verifiable time expenses, not to exceed the
respective fee caps noted above, after applying full credit to the initial
$5,000 retainer fee towards such payment. RP Financial's standard billing rates
range from $75 per hour for research associates to $250 per hour for managing
directors.
If during the course of the proposed transaction, unforeseen events
occur so as to materially change the nature or the work content of the services
described in this contract, the terms of said contract shall be subject to
renegotiation by the Bank and RP Financial. Such unforeseen events shall
include, but not be limited to, major changes in the conversion regulations,
appraisal guidelines or processing procedures as they relate to conversion
appraisals, changes in the structure of the merger terms, major changes in
management or procedures, operating policies or philosophies, and excessive
delays or suspension of processing of conversion or merger applications by the
regulators such that completion of the conversion transaction requires the
preparation by RP Financial of a new appraisal.
REPRESENTATIONS AND WARRANTIES
The Bank and RP Financial agree to the following:
1. The Bank agrees to make available or to supply to RP Financial such
information with respect to its business and financial condition as RP Financial
may reasonably request in order to provide the aforesaid valuation. Such
information heretofore or hereafter supplied or made available to RP Financial
shall include: annual financial statements, periodic regulatory filings and
material agreements, debt instruments, off balance sheet assets or liabilities,
commitments and contingencies, unrealized gains or losses and corporate books
and records. All information provided by the Bank to RP Financial shall remain
strictly confidential (unless such information is otherwise made available to
the public), and if the conversion is not consummated or the services of RP
Financial are terminated hereunder, RP Financial shall upon request promptly
return to the Bank the original and any copies of such information.
2. The Bank hereby represents and warrants to RP Financial that any
information provided to RP Financial does not and will not, to the best of the
Bank's knowledge, at the times it is provided to RP Financial, contain any
untrue statement of a material fact or in response to informational requests by
RP Financial fail to state a material fact necessary to make the statements
therein not false or misleading in light of the circumstances under which they
were made.
3. (a) The Bank agrees that it will indemnify and hold harmless RP
Financial, any affiliates of RP Financial, the respective directors, officers,
agents and employees of RP Financial or their successors and assigns who act for
or on behalf of RP Financial in connection with the
<PAGE>
MR. BARRY E. BACKHAUS
OCTOBER 7, 1998
PAGE 4
services called for under this agreement (hereinafter referred to as "RP
Financial"), from and against any and all losses, claims, damages and
liabilities (including, but not limited to, all losses and expenses in
connection with claims under the federal securities laws) attributable to (i)
any untrue statement or alleged untrue statement of a material fact contained in
the financial statements or other information furnished or otherwise provided by
the Bank to RP Financial, either orally or in writing; (ii) the omission or
alleged omission of a material fact from the financial statements or other
information furnished or otherwise made available by the Bank to RP Financial;
or (iii) any action or omission to act by the Bank, or the Bank's respective
officers, directors, employees or agents which action or omission is undertaken
in bad faith or negligent. The Bank will be under no obligation to indemnify RP
Financial hereunder if a court determines that RP Financial was negligent or
acted in bad faith with respect to any actions or omissions of RP Financial
related to a matter for which indemnification is sought hereunder. Reasonable
time devoted by RP Financial to situations for which indemnification is provided
hereunder, shall be an indemnifiable cost payable by the Bank at the normal
hourly professional rate chargeable by such employee.
(b) RP Financial shall give written notice to the Bank of such
claim or facts within thirty days of the assertion of any claim or discovery of
material facts upon which the RP Financial intends to base a claim for
indemnification hereunder. In the event the Bank elects, within seven days of
the receipt of the original notice thereof, to contest such claim by written
notice to RP Financial, the Bank shall not be obligated to make payments under
Section 3(c), but RP Financial will be entitled to be paid any amounts payable
by the Bank hereunder, together with interest on such costs from the date
incurred at the annual rate of prime plus two percent within five days after the
final determination of such contest either by written acknowledgement of the
Bank or a final judgment of a court of competent jurisdiction, unless it is
determined in accordance with Section 3(c) hereof that RP Financial is not
entitled to indemnity hereunder. If the Bank does not so elect to contest a
claim for indemnification by RP Financial hereunder, RP Financial shall (subject
to the Bank's receipt of the written statement and undertaking under Section
3(c) hereof) be paid promptly and in any event within thirty days after receipt
by the Bank of billing statements or invoices for which RP Financial is entitled
to reimbursement under Section 3(c) hereof.
(c) Subject to the Bank's right to contest under Section 3(b)
hereof, the Bank shall pay for or reimburse the reasonable expenses, including
attorneys' fees, incurred by RP Financial in advance of the final disposition of
any proceeding within thirty days of the receipt of such request if RP Financial
furnishes the Bank: (1) a written statement of RP Financial's good faith belief
that it is entitled to indemnification hereunder; and (2) a written undertaking
to repay the advance if it ultimately is determined in a final adjudication of
such proceeding that it or he is not entitled to such indemnification.
(d) In the event the Bank does not pay any indemnified loss or
make advance reimbursements of expenses in accordance with the terms of this
agreement, RP Financial shall have all remedies available at law or in equity to
enforce such obligation.
It is understood that, in connection with RP Financial's
above-mentioned engagement, RP Financial may also be engaged to act for the Bank
in one or more additional capacities, and that
<PAGE>
MR. BARRY E. BACKHAUS
OCTOBER 7, 1998
PAGE 5
the terms of the original engagement may be embodied in one or more separate
agreements. The provisions of Paragraph 3 herein shall apply to the original
engagement, any such additional engagement, any modification of the original
engagement or such additional engagement and shall remain in full force and
effect following the completion or termination of RP Financial's engagement(s).
This agreement constitutes the entire understanding of the Bank and RP Financial
concerning the subject matter addressed herein, and such contract shall be
governed and construed in accordance with the laws of the Commonwealth of
Virginia. This agreement may not be modified, supplemented or amended except by
written agreement executed by both parties.
First Federal and RP Financial are not affiliated, and neither First
Federal nor RP Financial has an economic interest in, or is held in common with,
the other and has not derived a significant portion of its gross revenues,
receipts or net income for any period from transactions with the other.
* * * * * * * * * * *
Please acknowledge your agreement to the foregoing by signing as
indicated below and returning to RP Financial a signed copy of this letter,
together with the initial retainer fee of $5,000.
Very truly yours,
/s/ William E. Pommerening
----------------------------
William E. Pommerening
CEO and Managing Director
Agreed To and Accepted By: Barry E. Backhaus /s/ Barry E. Backhaus
----------------------------
Chairman, President and Chief Executive Officer
Upon Authorization by the Board of Directors For: First Federal Savings Bank of
Siouxland, Subsidiary of First
Federal Bankshares, M.H.C.
Sioux City, Iowa
Date Executed: 10-19-98
-------------------------
<PAGE>
Exhibit 99.3
[DRAFT 2/5/99]
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
PROPOSED LETTERS/QUESTION & ANSWER BROCHURES
INDEX
1. Dear Member Letter including IRA or Qualified Plan *
2. Dear Member Letter for Non Eligible States
3. Dear Friend Letter - Eligible Account Holders who are no longer Members *
4. Dear Potential Investor Letter *
5. Dear Customer Letter - Used as a Cover Letter for States Requiring "Agent"
Mailing *
6. Proxy Request
7. Proxy and Stock Question & Answer Brochure *
8. Stockholder Question & Answer Brochure *
9. Mailing Insert/Lobby Poster
9. Invitation Letter - Informational Meetings
10. Dear Subscriber/Acknowledgment Letter - Initial Response to Stock Order
Received
11. Dear Charter Shareholder - Confirmation Letter
12. Dear Interested Investor - No Shares Available Letter
13. Welcome Shareholder Letter - For Initial Certificate Mailing
14. Dear Interested Subscriber Letter - Subscription Rejection
15. Letter for Sandler O'Neill Mailing to Clients *
* Accompanied by a Prospectus
Note: Items 1 through 9 are produced by the Financial Printer and Items
10 through 15 are produced by the Conversion Center.
<PAGE>
[ FIRST FEDERAL BANKSHARES, INC. ]
Dear Member:
The Boards of Directors of First Federal Savings Bank of Siouxland and First
Federal Bankshares, M.H.C. have voted unanimously in favor of a Plan of
Conversion and Reorganization (the "Plan" or the "Plan of Conversion") whereby
First Federal Bankshares, M.H.C. will convert from a federally chartered mutual
holding company to a stock corporation to be named First Federal Bankshares,
Inc. Pursuant to this Plan, First Federal Bankshares, Inc. will own all of the
common stock held by the First Federal Savings Bank of Siouxland (which is to be
renamed First Federal Bank). We are converting so that the First Federal Savings
Bank of Siouxland will be structured in the form of ownership used by most other
holding companies of savings institutions, commercial banks and most other
business entities, and to allow First Federal Savings Bank of Siouxland to
become stronger.
As part of the conversion and reorganization, the shares of common stock owned
by the existing shareholders (other than First Federal Bankshares, M.H.C.) of
First Federal Savings Bank of Siouxland will be exchanged for shares of common
stock of First Federal Bankshares, Inc. In addition, shares of common stock of
First Federal Bankshares, Inc. will be offered to certain depositors and
borrowers of First Federal Savings Bank of Siouxland and members of the general
public.
TO ACCOMPLISH THE CONVERSION AND REORGANIZATION, YOUR PARTICIPATION IS EXTREMELY
IMPORTANT. On behalf of the Board, I ask that you help us meet our goal by
reading the enclosed material and then casting your vote in favor of the Plan
and mailing your signed proxy card immediately in the enclosed _______
postage-paid envelope marked "PROXY RETURN". Should you choose to attend the
Special Meeting of Members and wish to vote in person, you may do so by revoking
any previously executed proxy. If you have an IRA or other qualified plan
account for which First Federal Savings Bank of Siouxland acts as trustee and we
do not receive a proxy from you, First Federal Savings Bank of Siouxland, as
trustee for such account, intends to vote in favor of the Plan of Conversion on
your behalf.
If the Plan of Conversion is approved let me assure you that:
o Deposit accounts will continue to be federally insured to the
same extent permitted by law.
o Existing deposit accounts and loans will not undergo any change.
o Voting for approval will not obligate you to buy any shares of
common stock.
As a qualifying account holder, you may also take advantage of your
nontransferable rights to subscribe for shares of First Federal Bankshares,
Inc's common stock on a priority basis, before the stock is offered to the
general public. The enclosed proxy statement and prospectus describes the stock
offering and the operations of First Federal Savings Bank of Siouxland. If you
wish to purchase stock, please complete the stock order and certification form
and mail it along with full payment for the shares (or appropriate instructions
authorizing withdrawal from a deposit account with First Federal Savings Bank of
Siouxland) to First Federal Savings Bank of Siouxland in the enclosed YELLOW
postage-paid envelope marked "STOCK ORDER RETURN", or return it to any branch
office of First Federal Savings Bank of Siouxland. Your order must be physically
received by First Federal Savings Bank of Siouxland no later than 12:00 noon
Central time on ___, _____ X, 1999. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE
MAKING AN INVESTMENT DECISION.
If you wish to use funds in your IRA or qualified plan at First Federal Savings
Bank of Siouxland to subscribe for common stock, please be aware that federal
law requires that such funds first be transferred to a self-directed retirement
account with a trustee other than First Federal Savings Bank of Siouxland. The
transfer of such funds to a new trustee takes time, so please make arrangements
as soon as possible.
If you have any questions after reading the enclosed material, please call our
Conversion Center at (XXX) XXX-XXXX, Monday through Friday, between the hours of
10:00 a.m. and 4:00 p.m. Please note that the Conversion Center will be closed
for First Federal Savings Bank of Siouxland holidays.
Sincerely,
Barry E. Backhaus
President, Chief Executive Officer and
Chairman of the Board
THE SHARES OF COMMON STOCK OFFERED IN THE CONVERSION AND REORGANIZATION ARE NOT
SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
<PAGE>
[ FIRST FEDERAL BANKSHARES, INC. ]
Dear Member:
The Boards of Directors of First Federal Savings Bank of Siouxland and First
Federal Bankshares, M.H.C. have voted unanimously in favor of a Plan of
Conversion and Reorganization (the "Plan" or the "Plan of Conversion") whereby
First Federal Bankshares, M.H.C. will convert from a federally chartered mutual
holding company to a stock corporation to be named First Federal Bankshares,
Inc. Pursuant to this Plan, First Federal Bankshares, Inc. will own all of the
common stock held by First Federal Savings Bank of Siouxland (which is to be
renamed First Federal Bank). We are converting so that First Federal Savings
Bank of Siouxland will be structured in the form of ownership used by most other
holding companies of savings institutions, commercial banks and most other
business entities, and to allow First Federal Savings Bank of Siouxland to
become stronger.
As part of the conversion and reorganization, the shares of common stock owned
by the existing shareholders (other than First Federal Bankshares, M.H.C.) of
First Federal Savings Bank of Siouxland will be exchanged for shares of common
stock of First Federal Bankshares, Inc. In addition, shares of common stock of
First Federal Bankshares, Inc. will be offered to certain depositors and
borrowers of First Federal Savings Bank of Siouxland and members of the general
public.
TO ACCOMPLISH THE CONVERSION AND REORGANIZATION, YOUR PARTICIPATION IS EXTREMELY
IMPORTANT. On behalf of the Board, I ask that you help us meet our goal by
reading the enclosed material and then casting your vote in favor of the Plan
and mailing your signed proxy card immediately in the enclosed _______
postage-paid envelope marked "PROXY RETURN". Should you choose to attend the
Special Meeting of Members and wish to vote in person, you may do so by revoking
any previously executed proxy. If you have an IRA or other qualified plan
account for which First Federal Savings Bank of Siouxland acts as trustee and we
do not receive a proxy from you, First Federal Savings Bank of Siouxland, as
trustee for such account, intends to vote in favor of the Plan of Conversion on
your behalf.
If the Plan of Conversion is approved let me assure you that:
o Deposit accounts will continue to be federally insured to the
same extent permitted by law.
o Existing deposit accounts and loans will not undergo any change.
We regret that we are unable to offer you common stock in the subscription
offering and community offering, because the laws of your state or jurisdiction
require us to register either (1) the to-be-issued common stock of First Federal
Bankshares, Inc., or (2) an agent of First Federal Savings Bank of Siouxland to
solicit the sale of such stock, and the number of eligible subscribers in your
state or jurisdiction does not justify the expense of such registration.
If you have any questions after reading the enclosed material, please call our
Conversion Center at (XXX) XXX-XXXX, Monday through Friday, between the hours of
10:00 a.m. and 4:00 p.m. Please note that the Conversion Center will be closed
for First Federal Savings Bank of Siouxland holidays.
Sincerely,
Barry E. Backhaus
President, Chief Executive Officer and
Chairman of the Board
THE SHARES OF COMMON STOCK OFFERED IN THE CONVERSION AND REORGANIZATION ARE NOT
SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
<PAGE>
[ FIRST FEDERAL BANKSHARES, INC. ]
Dear Friend:
The Boards of Directors of First Federal Savings Bank of Siouxland and First
Federal Bankshares, M.H.C. have voted unanimously in favor of a Plan of
Conversion and Reorganization (the "Plan" or the "Plan of Conversion") whereby
First Federal Bankshares, M.H.C. will convert from a federally chartered mutual
holding company to a stock corporation to be named First Federal Bankshares,
Inc. Pursuant to this Plan, First Federal Bankshares, Inc. will own all of the
common stock held by First Federal Savings Bank of Siouxland (which is to be
renamed First Federal Bank). We are converting so that First Federal Savings
Bank of Siouxland will be structured in the form of ownership used by most other
holding companies of savings institutions, commercial banks and most other
business entities, and to allow First Federal Savings Bank of Siouxland to
become stronger. We are also converting to raise capital to fund the acquisition
of Mid-Iowa Financial Corp. The conversion and reorganization will in no way
affect the insurance of deposit accounts or the services offered by First
Federal Savings Bank of Siouxland.
As part of the conversion and reorganization, the shares of common stock owned
by the existing shareholders (other than First Federal Bankshares, M.H.C.) of
First Federal Savings Bank of Siouxland will be exchanged for shares of common
stock of First Federal Bankshares, Inc. In addition, shares of common stock of
First Federal Bankshares, Inc. will be offered to certain depositors and
borrowers of First Federal Savings Bank of Siouxland and members of the general
public.
As a former account holder, you may take advantage of your nontransferable
rights to subscribe for shares of First Federal Bankshares, Inc. common stock on
a priority basis, before the stock is offered to the general public. The
enclosed prospectus describes the stock offering and the operations of First
Federal Savings Bank of Siouxland. If you wish to purchase stock, please
complete the stock order and certification form and mail it along with full
payment for the shares (or appropriate instructions authorizing withdrawal from
a deposit account with First Federal Savings Bank of Siouxland) to First Federal
Savings Bank of Siouxland in the enclosed postage-paid envelope, or return it to
any branch office of First Federal Savings Bank of Siouxland. Your order must be
physically received by the Bank no later than 12:00 noon Central time on ___,
______ X, 1999. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE MAKING AN INVESTMENT
DECISION.
If you have any questions after reading the enclosed material, please call our
Conversion Center at (XXX) XXX- XXXX, Monday through Friday, between the hours
of 10:00 a.m. and 4:00 p.m. Please note that the Conversion Center will be
closed for First Federal Savings Bank of Siouxland holidays.
Sincerely,
Barry E. Backhaus
President, Chief Executive Officer and
Chairman of the Board
THE SHARES OF COMMON STOCK OFFERED IN THE CONVERSION AND REORGANIZATION ARE NOT
SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
<PAGE>
[ FIRST FEDERAL BANKSHARES, INC. ]
Dear Potential Investor:
We are pleased to provide you with the enclosed material regarding the
conversion and reorganization of First Federal Savings Bank of Siouxland (which
is to be renamed First Federal Bank) and First Federal Bankshares, M.H.C., the
mutual holding company of First Federal, into the stock holding company
structure.
This information packet includes the following:
PROSPECTUS: This document provides detailed information about First
Federal Savings Bank of Siouxland's operations, the proposed stock
offering by First Federal Bankshares, Inc., a holding company formed by
First Federal Savings Bank of Siouxland to become First Federal Savings
Bank of Siouxland's parent company upon completion of the conversion and
reorganization. Please read it carefully prior to making an investment
decision.
QUESTION AND ANSWER BROCHURE: This answers commonly asked questions
about the stock offering.
STOCK ORDER AND CERTIFICATION FORM: Use this form to subscribe for stock
and return it together with full payment for the shares (or appropriate
instructions authorizing withdrawal from a deposit account with the Bank)
in the enclosed postage-paid envelope. Your order must be physically
received by First Federal Savings Bank of Siouxland no later than 12:00
noon, Central time on _____, _____X, 1999.
We are pleased to offer you this opportunity to become one of our charter
shareholders. If you have any questions regarding the conversion or the
prospectus, please call our Conversion Center at (XXX) XXX-XXXX, Monday through
Friday, between the hours of 10:00 a.m. and 4:00 p.m. Please note that the
Conversion Center will be closed for First Federal Savings Bank of Siouxland
holidays.
Sincerely,
Barry E. Backhaus
President, Chief Executive Officer and
Chairman of the Board
THE SHARES OF COMMON STOCK OFFERED IN THE CONVERSION AND REORGANIZATION ARE NOT
SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
<PAGE>
[ SANDLER O'NEILL & PARTNERS, L.P. LETTERHEAD ]
Dear Customer of First Federal Savings Bank of Siouxland:
At the request of First Federal Savings Bank of Siouxland and First Federal
Bankshares, M.H.C., we have enclosed material regarding the offering of common
stock by First Federal Bankshares, Inc., the company formed by First Federal
Savings Bank of Siouxland and First Federal Bankshares, M.H.C. to become First
Federal Savings Bank of Siouxland's parent company. This material is offered in
connection with the conversion and reorganization of First Federal Savings Bank
of Siouxland and First Federal Bankshares, M.H.C. and includes a prospectus and
a stock order and certification form, which offer you the opportunity to
subscribe for shares of common stock of First Federal Bankshares, Inc.
We recommend that you read this material carefully. If you decide to subscribe
for shares, you must return the properly completed and signed stock order and
certification form, along with full payment for the shares (or appropriate
instructions authorizing withdrawal from a deposit account with First Federal
Savings Bank of Siouxland), no later than 12:00 noon, Central time on ___,
______ X, 1999 in the accompanying YELLOW postage-paid envelope marked "STOCK
ORDER RETURN". If you have any questions after reading the enclosed material,
please call the Conversion Center at (XXX) XXX-XXXX, Monday through Friday,
between the hours of 10:00 a.m. and 4:00 p.m., and ask for a Sandler O'Neill
representative. Please note that the Conversion Center will be closed for First
Federal Savings Bank of Siouxland holidays.
We have been asked to forward these documents to you in view of certain
requirements of the securities laws of your jurisdiction. We should not be
understood as recommending or soliciting in any way any action by you with
regard to the enclosed material.
Sincerely,
Sandler O'Neill & Partners, L.P.
THE SHARES OF COMMON STOCK OFFERED IN THE CONVERSION AND REORGANIZATION ARE NOT
SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
Enclosure
<PAGE>
LOGO:FIRST FEDERAL SAVINGS BANK
OF SIOUXLAND
-------------------------------
WE NEED YOUR VOTE!
-------------------------------
DEAR CUSTOMER OF FIRST FEDERAL SAVINGS BANK OF SIOUXLAND:
YOUR VOTE ON OUR PLAN OF CONVERSION AND REORGANIZATION HAS NOT YET
BEEN RECEIVED. YOUR VOTE IS VERY IMPORTANT TO US. PLEASE VOTE AND
MAIL THE ENCLOSED PROXY TODAY. IF YOU HAVE MORE THAN ONE ACCOUNT
YOU MAY RECEIVE MORE THAN ONE PROXY.
REMEMBER: VOTING DOES NOT OBLIGATE YOU TO BUY STOCK.
THE BOARD OF DIRECTORS OF FIRST FEDERAL SAVINGS BANK
OF SIOUXLAND HAS UNANIMOUSLY APPROVED THE PLAN OF
CONVERSION AND REORGANIZATION AND URGES YOU TO
VOTE IN FAVOR OF THE PLAN. YOUR FIRST FEDERAL DEPOSIT
ACCOUNTS OR LOANS WILL NOT BE AFFECTED IN ANY WAY.
DEPOSIT ACCOUNTS WILL CONTINUE TO BE FEDERALLY
INSURED.
A POSTAGE-PAID ENVELOPE IS ENCLOSED WITH THE PROXY FORM. IF YOU
HAVE ANY QUESTIONS, PLEASE CALL OUR CONVERSION CENTER AT (XXX) XXX-
XXXX.
PLEASE VOTE TODAY BY RETURNING ALL PROXY FORMS RECEIVED.
SINCERELY,
FIRST FEDERAL SAVINGS
BANK OF SIOUXLAND
<PAGE>
QUESTIONS
& ANSWERS
About the
Conversion
&
Reorganization
[logo]
7-1
<PAGE>
QUESTIONS AND
ANSWERS
BACKGROUND
In July 1992, First Federal Savings Bank of Siouxland reorganized into a
federally chartered mutual holding company structure, sold 46.4% of its stock to
the public and issued the remaining 53.6% of its stock to First Federal
Bankshares, M.H.C.
ABOUT THE CONVERSION
AND REORGANIZATION
The Boards of Directors of First Federal Savings Bank of Siouxland and First
Federal Bankshares, M.H.C. have voted unanimously in favor of a Plan of
Conversion and Reorganization (the "Plan" or the "Plan of Conversion") whereby
First Federal Bankshares, M.H.C. will convert to a stock corporation and will
merge into First Federal Savings Bank of Siouxland. Pursuant to this Plan, First
Federal Savings Bank of Siouxland will become the wholly owned subsidiary of a
newly formed holding company, First Federal Bankshares, Inc., a Delaware
corporation which will own all of the common stock issued by First Federal
Savings Bank of Siouxland (which is to be renamed First Federal Bank). As part
of the conversion and reorganization, First Federal Bankshares, Inc. will be
offering its common stock for sale. As a result of the conversion and
reorganization, the shares of common stock owned by the existing shareholders
(other than First Federal Bankshares, M.H.C.) of First Federal Savings Bank of
Siouxland will be exchanged for shares of common stock of First Federal
Bankshares, Inc. The public shareholders will be mailed instructions for
exchanging their shares after the consummation of the conversion and
reorganization.
It is necessary for First Federal Bankshares, M.H.C. to receive a majority of
the outstanding votes in favor of the conversion and reorganization, so YOUR
VOTE IS VERY IMPORTANT. Please return your proxy in the enclosed_______
postage-paid envelope marked "PROXY RETURN". YOUR BOARD OF DIRECTORS URGES YOU
TO VOTE "FOR" THE CONVERSION AND REORGANIZATION AND RETURN YOUR PROXY TODAY.
7-2
<PAGE>
EFFECT OF THE CONVERSION
AND REORGANIZATION
Q. WHAT IS THE REASON FOR THE CONVERSION AND
REORGANIZATION?
A. First Federal Bankshares, M.H.C. does not have stockholders and has
no authority to issue capital stock. As a result of the conversion
and reorganization, First Federal Savings Bank of Siouxland will be
structured in the form of ownership used by most other holding
companies of savings institutions, commercial banks and most other
business entities, and to allow First Federal Savings Bank of
Siouxland to become stronger. It will also raise capital to fund the
acquisition of Mid-Iowa Financial Corp. It will enhance the ability
of First Federal Bankshares, Inc. and First Federal Savings Bank of
Siouxland to access capital markets, expand current operations,
acquire other financial institutions or branch offices and diversify
into other financial services to the extent allowable by applicable
law and regulation.
Q. WHAT WILL BE THE EFFECT OF THE CONVERSION AND
REORGANIZATION?
A. - The conversion and reorganization will have no effect on the
balance or terms of any deposit account or loan. Your deposits
will continue to be federally insured to the fullest extent
permissible.
- The officers and employees of First Federal Savings Bank of
Siouxland will continue in their current capacities.
- First Federal Bankshares, Inc. will replace First Federal
Bankshares, M.H.C., and First Federal Savings Bank of Siouxland
will become a wholly owned subsidiary of First Federal
Bankshares, Inc.
- First Federal Bankshares, Inc. will be a stock corporation and
will sell its common stock.
- First Federal Bankshares, Inc. common stock will be publicly held
and will be traded on the Nasdaq National Market under the symbol
"FFSX".
- The current shareholders will exchange their First Federal Savings
Bank of Siouxland stock for the stock of First Federal Bankshares,
Inc. pursuant to an exchange ratio.
7-3
<PAGE>
ABOUT VOTING
Q. WHO IS ELIGIBLE TO VOTE ON THE CONVERSION?
A. Depositors and certain borrowers as of _____ XX, 1999, ("Voting
Members") who continue to be members of First Federal Bankshares,
M.H.C. as of the date of the Special Meeting of Members.
Shareholders of First Federal Savings Bank of Siouxland as of _____
XX, 1999 also have the right to vote and will be mailed a separate
proxy card.
Q. HOW DO I VOTE?
A. You may vote by mailing your signed proxy card(s) in the GRAY
postage-paid envelope marked "PROXY RETURN". Should you choose to
attend the Special Meeting of Members and decide to change your
vote, you may do so by revoking any previously executed proxy.
Q. AM I REQUIRED TO VOTE?
A. No. Members are not required to vote. However, because the
conversion and reorganization will produce a fundamental change in
First Federal Savings Bank of Siouxland's corporate structure, the
Board of Directors encourages all members to vote.
Q. WHY DID I RECEIVE SEVERAL PROXIES?
A. If you have more than one account you may have received more than
one proxy depending upon the ownership structure of your accounts.
PLEASE VOTE, SIGN AND RETURN ALL PROXY CARDS THAT YOU RECEIVED.
Q. DOES MY VOTE FOR CONVERSION AND REORGANIZATION
MEAN THAT I MUST BUY COMMON STOCK OF FIRST
FEDERAL BANKSHARES, INC.?
A. No. Voting for the Plan of Conversion and Reorganization does not
obligate you to buy shares of common stock of First Federal
Bankshares, Inc.
Q. I HAVE A JOINT SAVINGS ACCOUNT. MUST BOTH PARTIES
SIGN THE PROXY CARD?
A. Only one signature is required, but both parties should sign if
possible.
Q. WHO MUST SIGN PROXIES FOR TRUST OR CUSTODIAN
ACCOUNTS?
A. The trustee or custodian must sign proxies for such accounts, not
the beneficiary.
Q. I AM THE EXECUTOR (ADMINISTRATOR) FOR A DECEASED
DEPOSITOR. CAN I SIGN THE PROXY CARD?
A. Yes. Please indicate on the card the capacity in which you are
signing the card.
7-4
<PAGE>
ABOUT THE STOCK
INVESTMENT IN COMMON STOCK INVOLVES CERTAIN RISKS. FOR A DISCUSSION OF THESE
RISKS AND OTHER FACTORS, INVESTORS ARE URGED TO READ THE ACCOMPANYING
PROSPECTUS.
Q. WHAT ARE THE PRIORITIES OF PURCHASING THE COMMON
STOCK?
A. The common stock of First Federal Bankshares, Inc. will be offered
in the subscription offering in the following order of priority:
- Eligible Account Holders (depositors with accounts totalling $50 or
more as of September 30, 1997).
- First Federal's employee stock benefit plans,
including the Employee Stock Ownership Plan
(ESOP).
- Supplemental Eligible Account Holders (depositors with accounts
totalling $50 or more as of December 31, 1998).
- Other Members (depositors as of February 2, 1999 and borrowers as of
February 11, 1992, whose loans continue to be outstanding as of
February 2, 1999).
Concurrently with the subscription offering, common stock that is not
sold in the subscription offering will be offered to members of the
general public in a community offering and then to the general public
in a syndicated community offering.
Q. WILL ANY ACCOUNT I HOLD WITH FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
BE CONVERTED INTO STOCK?
A. No. All accounts remain as they were prior to the conversion and
reorganization. As an Eligible Account Holder, Supplemental Eligible
Account Holder or Other Member, you receive priority over the general
public in exercising your right to subscribe for shares of common
stock.
Q. WILL I RECEIVE A DISCOUNT ON THE PRICE OF THE STOCK?
A. No. Federal regulations require that the offering price of the
stock be the same for everyone: customers, directors, officers,
employees of First Federal Savings Bank of Siouxland and the general
public.
7-5
<PAGE>
Q. HOW MANY SHARES OF STOCK ARE BEING OFFERED, AND AT WHAT PRICE?
A. Not including shares to be issued to public stockholders in exchange
for their shares of First Federal Savings Bank of Siouxland common
stock, First Federal Bankshares, Inc. is offering for sale between
2,635,000 and 3,565,000 shares of common stock at a subscription price
of $10 per share. Under certain circumstances, First Federal
Bankshares, Inc. may sell up to 4,099,750 shares.
Q. HOW MUCH STOCK CAN I PURCHASE?
A. The minimum purchase is $250 (25 shares). As more
fully discussed in the Plan of Conversion and Reorganization outlined
in the prospectus, the maximum purchase by any person in the
subscription offering is $850,000 (85,000 shares); in the community
offering and syndicated community offering, the maximum purchase by any
person, including purchases by associates of such person or entity, is
$850,000 (85,000 shares). In addition, no person, together with
associates of and persons acting in concert with such person, may
purchase in the aggregate more than the number of shares of common
stock that when combined with the shares received by such person in
exchange for shares of First Federal Savings Bank of Siouxland's common
stock would exceed the overall maximum purchase limitation of 85,000
shares.
Q. HOW DO I ORDER STOCK?
A. You may subscribe for shares of common stock by completing and
returning the stock order and certification form, together with your
payment, either in person to any branch office of First Federal
Savings Bank of Siouxland or by mail in the YELLOW postage-paid
envelope marked "STOCK ORDER RETURN." Stock order forms may not be
delivered to a walk up or drive through window located at any of
First Federal Savings Bank of Siouxland's branch offices.
Q. HOW CAN I PAY FOR MY SHARES OF STOCK?
A. You can pay for the common stock by check, cash,
money order or withdrawal from your deposit account at First Federal
Savings Bank of Siouxland. If you choose to pay by cash, you must
deliver the stock order form and payment in person to any branch office
of First Federal Savings Bank of Siouxland and it will be converted to
a bank check or a money order. PLEASE DO NOT SEND CASH IN THE MAIL.
7-6
<PAGE>
Q. WHEN IS THE DEADLINE TO SUBSCRIBE FOR STOCK?
A. An executed order and certification form with the
required full payment must be physically received at First Federal
Savings Bank of Siouxland by 12:00 noon Central time, on _____, ______
X, 1999.
Q. CAN I SUBSCRIBE FOR SHARES USING FUNDS IN MY IRA/QUALIFIED PLAN AT
THE BANK?
A. Federal regulations do not permit the purchase of common stock with
your existing IRA or qualified plan at First Federal Savings Bank of
Siouxland. To use such funds to subscribe for common stock, you need
to establish a "self-directed" trust account with an outside
trustee. Please call our Conversion Center if you require additional
information. Transfer of such funds takes time, so please make
arrangements as soon as possible.
Q. CAN I SUBSCRIBE FOR SHARES AND ADD SOMEONE ELSE WHO IS NOT ON MY
ACCOUNT TO MY STOCK REGISTRATION?
A. No. Federal regulations prohibit the transfer of subscription rights.
Adding the names of other persons who are not owners of your qualifying
account(s) will result in your order becoming null and void.
Q. WILL PAYMENTS FOR COMMON STOCK EARN INTEREST UNTIL THE CONVERSION AND
REORGANIZATION CLOSES?
A. Yes. Any payments made by cash, check or money order will earn
interest at First Federal Savings Bank of Siouxland's passbook rate
from the date of receipt to the completion or termination of the
conversion and reorganization. Withdrawals from a deposit account
or a certificate of deposit at First Federal Savings Bank of
Siouxland may be made without penalty to buy common stock.
Depositors who elect to pay for their common stock by withdrawal
will receive interest at the contractual rate on the account until
the completion or termination of the conversion and reorganization.
Q. WILL DIVIDENDS BE PAID ON THE STOCK?
A. First Federal Savings Bank of Siouxland currently pays a cash dividend
of $0.12 per share per quarter, or $0.48 per share per year. After the
Conversion and Reorganization, the Company expects to maintain this
dividend rate, as adjusted for the exchange ratio in the conversion.
7-7
<PAGE>
Q. WILL MY STOCK BE COVERED BY DEPOSIT INSURANCE?
A. No. The common stock cannot be insured by the Bank Insurance Fund
or the Savings Association Insurance Fund of the FDIC or any other
government agency nor is it insured or guaranteed by First Federal
Savings Bank of Siouxland or its holding company.
Q. WHERE WILL THE STOCK BE TRADED?
A. Upon completion of the conversion, First Federal Bankshares, Inc.
expects the stock to be traded over-the-counter and to be quoted on
the Nasdaq National Market under the symbol "FFSX".
Q. CAN I CHANGE MY MIND AFTER I PLACE AN ORDER TO SUBSCRIBE FOR STOCK?
A. No. After receipt, your order may not be modified or withdrawn.
ADDITIONAL INFORMATION
Q. WHAT IF I HAVE ADDITIONAL QUESTIONS OR REQUIRE MORE INFORMATION?
A. First Federal Savings Bank of Siouxland's proxy statement and
prospectus describes the conversion and reorganization in detail.
Please read the proxy statement and prospectus carefully before
voting or subscribing for stock. If you have any questions after
reading the enclosed material you may call our Conversion Center at
(XXX) XXX-XXXX, Monday through Friday, between the hours of 10:00
a.m. and 4:00 p.m. Additional material may only be obtained from
the Conversion Center. Please note that the Conversion Center will
be closed for First Federal Savings Bank of Siouxland holidays. TO
ENSURE THAT EACH PURCHASER RECEIVES A PROSPECTUS AT LEAST 48 HOURS
PRIOR TO THE EXPIRATION DATE OF __________ X, 1999 AT 12:00 NOON,
CENTRAL TIME, IN ACCORDANCE WITH RULE 15c2-8 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED, NO PROSPECTUS WILL BE MAILED ANY
LATER THAN FIVE DAYS PRIOR TO SUCH DATE OR HAND DELIVERED ANY LATER
THAN TWO DAYS PRIOR TO SUCH DATE.
THE SHARES OF COMMON STOCK OFFERED IN THE CONVERSION ARE NOT SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENT AGENCY NOR IS THE COMMON STOCK INSURED OR
GUARANTEED BY FIRST FEDERAL SAVINGS BANK OF SIOUXLAND OR FIRST FEDERAL
BANKSHARES, INC.
THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY COMMON STOCK.
THE OFFER IS MADE ONLY BY THE PROSPECTUS.
7-8
<PAGE>
LOGO: FIRST FEDERAL SAVINGS BANK
OF SIOUXLAND
Please Support Us
Vote Your
Proxy Card Today
IF YOU HAVE MORE THAN ONE ACCOUNT, YOU MAY HAVE RECEIVED MORE THAN ONE PROXY
DEPENDING UPON THE OWNERSHIP STRUCTURE OF YOUR ACCOUNTS. PLEASE VOTE, SIGN AND
RETURN ALL PROXY CARDS THAT YOU RECEIVED.
<PAGE>
[FIRST FEDERAL BANKSHARES, INC.]
____________________, 1999
Dear Mr. Smith:
We are pleased to announce that the Boards of Directors of First Federal Savings
Bank of Siouxland and First Federal Bankshares, M.H.C. have adopted a Plan of
Conversion and Reorganization whereby the First Federal Bankshares, M.H.C. will
convert from a federally chartered mutual holding company to a stock corporation
to be named First Federal Bankshares, Inc. Pursuant to this Plan, First Federal
Bankshares Inc. will own all of the common stock held by First Federal Savings
Bank of Siouxland (which is to be renamed First Federal Bank). We are converting
so that First Federal Savings Bank of Siouxland will be structured in the form
of ownership used by most other holding companies of savings institutions,
commercial banks and most other business entities, and to allow First Federal
Savings Bank of Siouxland to become stronger. It will also raise capital to fund
the acquisition of Mid-Iowa Financial Corp.
You are cordially invited to join members of our senior management team at an
informational meeting to be held on at 7:30 P.M. to learn more about the
conversion and the stock offering.
A member of our staff will be calling to confirm your interest in attending the
meeting.
If you would like additional information regarding the meeting or our
conversion, please call our Conversion Center number at (XXX) XXX-XXXX, Monday
through Friday between the hours of 10:00 a.m. to 4:00 p.m. Please note that the
Conversion Center will be closed for First Federal Savings Bank of Siouxland
holidays.
Sincerely,
Signature
Title
THE SHARES OF COMMON STOCK OFFERED IN THE CONVERSION AND REORGANIZATION ARE NOT
SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY COMMON STOCK.
THE OFFER IS MADE ONLY BY THE PROSPECTUS.
(Printed by Conversion Center)
<PAGE>
[FIRST FEDERAL BANKSHARES, INC.]
____________________, 1999
Dear Subscriber:
We hereby acknowledge receipt of your order for shares of common stock in First
Federal Bankshares, Inc.
At this time, we cannot confirm the number of shares of First Federal
Bankshares, Inc. common stock that will be issued to you. Such allocation will
be made in accordance with the Plan of Conversion and Reorganization following
completion of the stock offering.
If you have any questions, please call our Conversion Center at (XXX) XXX-XXXX.
Sincerely,
FIRST FEDERAL BANKSHARES, INC.
Conversion Center
THE SHARES OF COMMON STOCK OFFERED IN THE CONVERSION AND REORGANIZATION ARE NOT
SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
(Printed by Conversion Center)
<PAGE>
[FIRST FEDERAL BANKSHARES, INC.]
___________________, 1999
Dear Charter Shareholder:
We appreciate your interest in the stock offering of First Federal Bankshares,
Inc. Due to the excellent response from our eligible account holders, we are
unable to fill all orders in full. Consequently, in accordance with the
provisions of the Plan of Conversion and Reorganization, you were allocated
______ shares at a price of $10.00 per share. If your subscription was paid for
by check, a refund of any balance due you with interest will be mailed to you
promptly.
The purchase date and closing of the transaction occurred on __________ XX,
1999. Trading will commence on the Nasdaq National Market under the symbol
"FFSX" on __________ XX, 1999. Your stock certificate will be mailed to you
shortly.
We thank you for your interest in First Federal Bankshares, Inc., and welcome
you as a charter shareholder.
Sincerely,
FIRST FEDERAL BANKSHARES, INC.
Conversion Center
THE SHARES OF COMMON STOCK OFFERED IN THE CONVERSION AND REORGANIZATION ARE NOT
SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
<PAGE>
[ FIRST FEDERAL BANKSHARES, INC. ]
____________________, 1999
Dear Interested Investor:
We recently completed our subscription and community offerings. Unfortunately,
due to the excellent response from our eligible account holders, stock was not
available for our supplemental eligible account holders, other members, or
community friends. If your subscription was paid for by check, a refund of any
balance due you with interest will be mailed to you promptly.
We appreciate your interest in First Federal Bankshares, Inc. and hope you
become an owner of our stock in the future. The stock trades on the Nasdaq
National Market under the symbol "FFSX".
Sincerely,
FIRST FEDERAL BANKSHARES, INC.
Conversion Center
THE SHARES OF COMMON STOCK OFFERED IN THE CONVERSION AND REORGANIZATION ARE NOT
SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
(Printed by Conversion Center)
<PAGE>
[ FIRST FEDERAL BANKSHARES, INC. ]
____________________, 1999
Welcome Shareholder:
We are pleased to enclose the stock certificate that represents your share of
ownership in First Federal Bankshares, Inc., the parent company of First Federal
Bank.
Please examine your stock certificate to be certain that it is properly
registered. If you have any questions about your certificate, you should contact
the Transfer Agent immediately at the following address:
Transfer Agent
Address
Telephone Number
Also, please remember that your certificate is a negotiable security which
should be stored in a secure place, such as a safe deposit box or on deposit
with your stockbroker.
On behalf of the Board of Directors of First Federal Bankshares, Inc. and the
employees of First Federal Savings Bank of Siouxland, I would like to thank you
for supporting our offering.
Sincerely,
Barry E. Backhaus
President, Chief Executive Officer and
Chairman of the Board
THE SHARES OF COMMON STOCK OFFERED IN THE CONVERSION AND REORGANIZATION ARE NOT
SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
(Printed by Conversion Center)
<PAGE>
[ FIRST FEDERAL BANKSHARES, INC. ]
____________________, 1999
Dear Interested Subscriber:
We regret to inform you that First Federal Savings Bank of Siouxland, First
Federal Bankshares, M.H.C. and First Federal Bankshares, Inc., the parent
company for the First Federal Savings Bank of Siouxland, have decided not to
accept your order for shares of First Federal Bankshares, Inc. common stock in
our community offering. This action is in accordance with our Plan of Conversion
and Reorganization which gives First Federal Savings Bank of Siouxland, First
Federal Bankshares, M.H.C. and First Federal Bankshares, Inc. the absolute right
to reject the subscription of any community member, in whole or in part, in the
community offering.
Enclosed is a check representing your subscription and interest earned.
Sincerely,
FIRST FEDERAL BANKSHARES, INC.
Conversion Center
(Printed by Conversion Center)
<PAGE>
[ SANDLER O'NEILL & PARTNERS, L.P. LETTERHEAD ]
____________________, 1999
To Our Friends:
We are enclosing the offering material for First Federal Bankshares, Inc. in
connection with the Plan of Conversion and Reorganization of First Federal
Savings Bank of Siouxland and First Federal Bankshares, Inc. the mutual holding
company of First Federal Savings Bank of Siouxland, into the stock holding
company structure
Sandler O'Neill & Partners, L.P. is managing First Federal Savings Bank of
Siouxland's subscription and community offerings, which will conclude at
12:00 noon, Central time on ___________ , 1999. Sandler O'Neill is also
providing conversion agent and proxy solicitation services. In the event that
all the stock is not subscribed for in the subscription and community
offerings, Sandler O'Neill will form and manage a syndicate of broker/dealers
to sell the remaining stock.
Members of the general public, other than residents of , are eligible to
participate. If you have any questions about this transaction, please do not
hesitate to call or write.
Sincerely,
Sandler O'Neill & Partners, L.P.
THE SHARES OF COMMON STOCK OFFERED IN THE CONVERSION AND REORGANIZATION ARE NOT
SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
(Printed by Sandler O'Neill)
<PAGE>
LOGO: FIRST FEDERAL BANKSHARES, INC.
SUBSCRIPTION & COMMUNITY OFFERING STOCK ORDER FORM
BANK USE
IMPORTANT-PLEASE NOTE: A properly completed original stock order form must be
used to subscribe for Common Stock. Copies of this form are not required to
be accepted. Please read the Stock Ownership Guide and Stock Order Form
Instructions as you complete this form.
FIRST FEDERAL BANKSHARES, INC.
Conversion Center
XX Street
__________, IA XXXXX
(XXX) XXX-XXXX
- -------------------------------
EXPIRATION DATE
for Stock Order Forms:
Day, Month XX, 199X
12:00 Noon, Central Time
<TABLE>
<S> <C> <C>
(1) Number of Shares SUBSCRIPTION PRICE (2) TOTAL PAYMENT DUE
/ / X $10.00 = / /
</TABLE>
The minimum purchase is 25 shares. The maximum purchase share prices are (i)
to the Subscription Offering-for any eligible subscriber, $850,000 ($85,000
shares); and (ii) in the Community Offering-for any person, together with
Associates or persons acting in concert, $850,000 (85,000 shares). In
addition, no person, together with associates of and persons acting in
concert with each person, may purchase in the aggregate more than the number
of shares of Conversion Stock that when combined with Exchange Shares
received by such person would exceed the overall maximum purchase limitation
of $850,000 (85,000 shares).
(3) EMPLOYEE/OFFICER/DIRECTOR INFORMATION
/ / Check here if you are an employee, officer or director of First Federal
Savings Bank of Siouxland or a member of such person's immediate family.
(4) METHOD OF PAYMENT/CHECK
Enclosed is a check, bank draft or money order made payable to First Federal
Savings Bank of Siouxland in the amount indicated in this box.
CHECK AMOUNT
(5) METHOD OF PAYMENT/WITHDRAWAL
The undersigned authorizes withdrawal from the following account(s) at First
Federal Savings Bank of Siouxland. Individual Retirement Accounts maintained at
First Federal Savings Bank of Siouxland cannot be used. There is no penalty
for early withdrawal used for this payment.
<TABLE>
<CAPTION>
<S> <C> <C>
ACCOUNT NUMBER(S) WITHDRAWAL AMOUNTS(S) BANK USE
- -------------------- --------------------- --------
- -------------------- --------------------- --------
- -------------------- --------------------- --------
- ------------------------ --------------------- --------
TOTAL WITHDRAWAL AMOUNT
- ------------------------ --------------------- --------
</TABLE>
(6) PURCHASER INFORMATION
a. / / Check here if you are an Eligible Account Holder with a deposit
account(s) totalling $50.00 or more on 9/30/97. LIST ACCOUNT(S) BELOW.
b. / / Check here if you are a Supplemental Eligible Account Holder with a
deposit account(s) totaling $50.00 or more on December 31, 1998. LIST
ACCOUNT(S) BELOW.
c. / / Check here if you were a depositor as of February 2, 1999 or a
borrower with a loan outstanding as of 2/11/99 which continued to
be outstanding as of February 2, 1999. LIST ACCOUNT(S) OR LOAN(S)
BELOW.
d. / / Check here and indicate the number of First Federal Savings Bank of
Siouxland shares CURRENTLY owned by you. Complete 6(d) on reverse side
for any persons associated or acting in concert with you. / /
<TABLE>
<S> <C> <C>
ACCOUNT TITLE (NAME ON ACCOUNTS) ACCOUNT NUMBER(S) BANK USE
- -------------------------------- ----------------- --------
- -------------------------------- ----------------- --------
- -------------------------------- ----------------- --------
- -------------------------------- ----------------- --------
</TABLE>
PLEASE NOTE: Failure to list all your accounts at the First Federal Saving
Bank of Siouxland may result in the loss of part or all of your subscription
rights. If additional space is needed, please utilize the back of this stock
order form.
(7) STOCK REGISTRATION/FORM OF STOCK OWNERSHIP
<TABLE>
<S> <C> <C> <C>
/ / Individual / / Join Tenants / / Tenants in Common / / / /-/ / /-/ / / / /
/ / Fiduciary / / Company/Corp/ / / Uniform / / IRA or Qualified Plan - Beneficial Owners SS#
(i.e. trust, estate, etc.) Partnership Transfers to
Minors Act
</TABLE>
(8) NAME(S) IN WHICH STOCK IS TO BE REGISTERED (PLEASE PRINT CLEARLY) ADDING
THE NAMES OF ANOTHER PERSON(S) WHO ARE NOT OWNERS OF YOUR QUALIFYING
ACCOUNT(S) WILL RESULT IN YOUR ORDER BECOMING NULL AND VOID.
<TABLE>
<S> <C>
Name(s) Social Security # or Tax ID#
- ------------------------------------------------------------------------------------------------------------------------
Names(s) continued Social Security # or Tax ID#
- ------------------------------------------------------------------------------------------------------------------------
Street Address County of Residence
- ------------------------------------------------------------------------------------------------------------------------
City State Zip Code
- ----------------------- ----------------------------------------------
(9) TELEPHONE - Daytime ( ) Evening ( )
------------------------------------------------------
</TABLE>
/ / (10) NASD AFFILIATION - Check here if you are a member of the National
Association of Securities Dealers, Inc. ("NASD"), a person
associated with an NASD member, a member of the immediate family of
any such person to whose support such person contributes, directly
or indirectly, or the holder of an account in which an NASD member
or person associated with an NASD member has a beneficial interest.
To comply with conditions under which an exemption from the NASD's
Interpretation With Respect to Free-Riding and Withholding is
available, you agree, if you have checked the NASD Affiliation box,
(i) not to sell, transfer or hypothecate the stock for a period of
90 days following issuance, and (ii) to report this subscription in
writing to the applicable NASD member within one day of payment
therefor.
/ / (11) ASSOCIATES - ACTING IN CONCERT
Check here, and complete the reverse side of this Form, if you or
any associates (as defined on the reverse side of this Form) or
persons acting in concert with you have submitted other orders for
shares in the Subscription and/or Community Offerings.
(12) ACKNOWLEDGMENT - To be effective, this Stock Order Form and
accompanying Certification Form must be properly completed and
actually received by First Federal Savings Bank of Siouxland no
later than 12:00 Noon, Central time, on DAY, MONTH, DATE, 1999,
unless extended; otherwise this Stock Order Form and all
subscription rights will be void. The undersigned agrees that after
receipt by First Federal Savings Bank of Siouxland, this Stock Order
Form may not be modified, withdrawn or canceled without the Bank's
consent and if authorization to withdraw from deposit accounts at
the First Federal Savings Bank of Siouxland has been given as payment
for shares, the amount authorized for withdrawal shall not otherwise
be available for withdrawal by the undersigned. UNDER PENALTY OF
PERJURY, I hereby certify that the Social Security or Tax ID Number
and the information provided on this Stock Order Form is true,
correct and complete, that I am not subject to back-up withholding,
and that I am purchasing solely for my own account and that there is
no agreement or understanding regarding the sale or transfer of such
shares, or my right to subscribe for shares herewith. It is
understood that this Stock Order Form will be accepted in accordance
with, and subject to, the terms and conditions of the Plan of
Conversion and Reorganization described in the accompanying
Prospectus. The undersigned hereby acknowledges receipt of the
Prospectus at least 48 hours prior to delivery of this Stock Order Form
to the First Federal Savings Bank of Siouxland.
Federal regulations prohibit any person from transferring, or
entering into any agreement, directly or indirectly, to transfer the
legal or beneficial ownership of subscription rights or the
underlying securities to the account of another. First Federal
Savings Bank of Siouxland, First Federal Bankshares, MHC and First
Federal Bankshares, Inc., 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 such transfer.
<TABLE>
<S> <C> <C> <C>
Signature Date Signature Date
</TABLE>
BANK USE ONLY
BANK USE ONLY
<PAGE>
<TABLE>
<S> <C> <C>
ITEM (6)a, (6)b, (6)c-CONTINUED
Account Title (Names on Accounts) Account Number(s) Bank Use
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</TABLE>
Item 6(d)- continued
List below the number of First Federal Savings Bank of Siouxland shares
currently owned by Associates (as defined below) or by persons acting in
concert with you.
<TABLE>
<S> <C> <C>
Registration Name(s) on Stock Certificates Number of Share(s) Bank Use
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</TABLE>
Item (11)- (continued)
List below all other orders submitted by you or Associates
(as defined) or by persons acting in concert with you.
<TABLE>
<S> <C>
Name(s) listed on other Stock Order Forms Number of Shares Ordered
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- -------------------------------------------------------------------------------
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</TABLE>
"Associate" is defined as: (i) any corporation or organization (other than
First Federal Savings Bank of Siouxland, First Federal Bankshares, M.H.C.,
First Federal Bankshares, Inc. or a majority-owned subsidiary of the First
Federal Savings Bank of Siouxland) of which such person is a director,
officer or partner or is, directly or indirectly, the beneficial owner of 10%
or more of any class of equity securities; (ii) any trust or other estate in
which such person has a substantial beneficial interest or as to which such
person serves as a trustee or in a similar fiduciary capacity, provided,
however, such term shall not include First Federal Savings Bank of Siouxland,
First Federal Bankshares, M.H.C., First Federal Bankshares, Inc's employee
stock benefit plans in which such person has a substantial beneficial
interest or serves as a trustee or in a similar fiduciary capacity; and
(iii) any relative or spouse of such person, or any relative of such spouse,
who either has the same home as such person or who is a director or officer
of the First Federal Savings Bank of Siouxland, First Federal Bankshares,
Inc., First Federal Bankshares, M.H.C. or any subsidiaries thereof. Directors
of the First Federal Savings Bank of Siouxland, First Federal Bankshares,
Inc. or the First Federal Bankshares, M.H.C. are not treated as Associates
solely because of their Board memberships.
CERTIFICATION FORM
I ACKNOWLEDGE THAT THIS SECURITY IS NOT A DEPOSIT OR ACCOUNT AND IS NOT
FEDERALLY INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
AND IS NOT INSURED OR GUARANTEED BY FIRST FEDERAL SAVINGS BANK OF SIOUXLAND,
THE FEDERAL GOVERNMENT OR BY ANY GOVERNMENT AGENCY. THE ENTIRE AMOUNT OF AN
INVESTOR'S PRINCIPAL IS SUBJECT TO LOSS.
If anyone asserts that this security is federally insured or guaranteed, or
is as safe as an insured deposit, I should call ____________________________
located at ______________________________ at (XXX) XXX-XXXX.
I further certify that, before purchasing the common stock, par value $0.01
per share, of First Federal Bankshares, Inc., the proposed holding company
for First Federal Savings Bank of Siouxland, I received a Prospectus of the
First Federal Bankshares, Inc. dated February XX, 1999 relating to such offer
of Common Stock.
The Prospectus that I received contains disclosure concerning the nature of
the Common Stock being offered by the First Federal Bankshares, Inc. and
describes the risks involved in the investment in this Common Stock,
including but not limited to the:
<TABLE>
<S> <C>
1. Increasing Interest Rates May Decrease Our Profits and the Value of Our Investment Portfolio. (page )
2. Our Return on Equity May Be Lower Than Our Peers Following the Conversion Portfolio. (page )
3. Our $10.00 Per Share Offering Price Does Not Assure Immediate Post Conversion Price Appreciation. (page )
4. Certain Loans We Make Have Higher Default Risks then Residential Mortgage Loans. (page )
5. Implementing Our Stock-based Benefit Plans Will Increase Our Future Comepnsation Expense
and May Dilute the Voting Interests of Our Stockholders. (page )
6. 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. (page )
7. Compensation Expense For Our Employee Stock Ownership Plan. (page )
8. Our Agreement to Make Payments After a Change in Control in Various Employee Contracts and Plans
May Discourage Anti-Takeover Attempts. (page )
9. Anti-Takeover Provisions in Our Governing Instruments And Voting Control of Management May
Discourage Takeover Attempts. (page )
10. 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. (page )
11. Risks Related to The Acquisition of Mid-Iowa Financial. (page )
</TABLE>
THIS CERTIFICATION MUST BE SIGNED IN ORDER TO PURCHASE STOCK
Signature Date Signature Date
- ------------------------------------ ------------------------------------
Name (Please Print) Date Name (Please Print) Date
- ------------------------------------ ------------------------------------
<PAGE>
[LOGO] FIRST FEDERAL BANKSHARES, INC.
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STOCK OWNERSHIP GUIDE
INDIVIDUAL
Include the first name, middle initial and last name of the shareholder.
Avoid the use of two initials. Please omit words that do not affect ownership
rights, such as "Mrs.", "Mr.", "Dr.", "special account", "single person", etc.
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JOINT TENANTS
Joint tenants with right of survivorship may be specified to identify two or
more owners. When stock is held by joint tenants with right of survivorship,
ownership is intended to pass automatically to the surviving joint tenant(s)
upon the death of any joint tenant. All parties must agree to the transfer or
sale of shares held by joint tenants.
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TENANTS IN COMMON
Tenants in common may also be specified to identify two or more owners. When
stock is held by tenants in common, upon the death of one co-tenant,
ownership of the stock will be held by the surviving co-tenant(s) and by the
heirs of the deceased co-tenant. All parties must agree to the transfer or
sale of shares held by tenants in common.
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UNIFORM TRANSFERS TO MINORS ACT ("UTMA")
Stock may be held in the name of a custodian for a minor under the Uniform
Transfers to Minors Act of each state. There may be only one custodian and
one minor designated on a stock certificate. The standard abbreviation for
Custodian is "CUST", while the Uniform Transfers to Minors Act is "UTMA".
Standard U.S. Postal Service state abbreviations should be used to describe
the appropriate state. For example, stock held by John Doe as custodian for
Susan Doe under the New Jersey Uniform Transfers to Minors Act will be
abbreviated John Doe, CUST Susan Doe UTMA, NJ (use minor's social security
number).
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FIDUCIARIES
Information provided with respect to stock to be held in a fiduciary capacity
must contain the following:
- The name(s) of the fiduciary. If an individual, list the first name,
middle initial and last name. If a corporation, list the full corporate
title (name). If an individual and a corporation, list the corporation's
title before the individual.
- The fiduciary capacity, such as administrator, executor, personal
representative, conservator, trustee, committee, etc.
- A description of the document governing the fiduciary relationship, such
as a trust agreement or court order. Documentation establishing a fiduciary
relationship may be required to register your stock in a fiduciary capacity.
- The date of the document governing the relationship, except that the date
of a trust created by a will need not be included in the description.
- The name of the maker, donor or testator and the name of the beneficiary.
An example of fiduciary ownership of stock in the case of a trust is: John
Doe, Trustee Under Agreement Dated 10-1-87 for Susan Doe.
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STOCK ORDER FORM INSTRUCTIONS
TERMS 1 AND 2-
Fill in the number of shares that you wish to purchase and the total payment
due. The amount due is determined by multiplying the number of shares by the
subscription price of $10.00 per share. The minimum purchase in the
Subscription and Community Offerings is 25 shares. In the Subscription
Offering, the maximum purchase by each Eligible Account Holder, Supplemental
Eligible Account Holder and Other Member is $850,000 (85,000 shares), and the
maximum purchase in the Community Offering by any person, together with
associates or persons acting in concert is $850,000 (85,000 shares). The
Primary Parties have reserved the right to reject the subscription of any
order received in the Community Offering, in whole or in part. In addition,
no person, together with associates of and persons acting in concert with
such person, may purchase in the aggregate more than the number of shares of
Conversion Stock that when combined with Exchange Shares received by such
person would exceed the overall maximum purchase limitation of $850,000
(85,000 shares).
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ITEM 3-
Please check this box to indicate whether you are an employee, officer or
director of First Federal Savings Bank of Siouxland or a member of such
person's immediate family.
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ITEM 4-
Payment for shares may be made in cash (only if delivered by you in person to
a branch office of First Federal Savings Bank of Siouxland) or by check, bank
draft or money order payable to First Federal Savings Bank of Siouxland. Your
funds will earn interest at the Bank's passbook rate of interest (until the
Conversion is completed. DO NOT MAIL CASH TO PURCHASE STOCK! Please insert the
total check(s) amount in this box if your method of payment is by check, bank
draft or money order.
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ITEM 5-
If you pay for your stock by a withdrawal from a deposit account at First
Federal Savings Bank of Siouxland insert the account number(s) and the
amount of your withdrawal authorization for each account. The total amount
withdrawn should equal the amount of your stock purchase. There will be no
penalty assessed for early withdrawals from certificate accounts used for
stock purchases. THIS FORM OF PAYMENT MAY NOT BE USED IF YOUR ACCOUNT IS AN
INDIVIDUAL RETIREMENT ACCOUNT OR QUALIFIED PLAN.
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ITEM 6-
a. Please check this box if you are an Eligible Account Holder with a deposit
account(s) totaling $50.00 or more on 9/30/97.
b. Please check this box if you are a Supplemental Eligible Account Holder
with a deposit account(s) totaling $50.00 or more on December 31, 1998.
c. Check here if you were a depositor as of February 2, 1999 or a
borrower with a loan outstanding as of February 11, 1992 which continued to
be outstanding as of February 2, 1999. Please list all names on the
account(s) and all account number(s) of accounts you had at these dates at
the First Federal Savings Bank of Siouxland in order to insure proper
identification of your purchase rights.
Please note: Failure to list all your accounts at the First Federal
Savings Bank of Siouxland may result in the
loss of part or all of your subscription rights.
d. Please indicate the number of First Federal Savings Bank of Siouxland
shares CURRENTLY owned by you. Please list any associates or persons acting
in concert with you and share amounts on the reverse side of this Stock
Order Form.
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ITEMS 7, 8 AND 9-
The stock transfer industry has developed a uniform system of shareholder
registrations that will be used in the issuance of your First Federal
Bankshares, Inc. Common Stock. Please complete items 7, 8 and 9 as fully and
accurately as possible, and be certain to supply your social security or Tax
I.D. number(s) and your daytime and evening telephone number(s). We will need
to call you if we cannot execute your order as given. If you have any
questions regarding the registration of your stock, please consult your legal
advisor. Stock ownership must be registered in one of the ways described
above under "Stock Ownership Guide".
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ITEM 10-
Please check this box if you are a member of the NASD or if this item otherwise
applies to you.
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ITEM 11-
Please check this box if you or any associate (as defined on the reverse side
of the Stock Order Form) or person acting in concert with you has submitted
another order for shares and complete the reverse side of the Stock Order
Form.
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ITEM 12-
Please sign and date the Stock Order Form and Certification Form where
indicated. Before you sign, review the Stock Order Form, including the
acknowledgement, and the Certification Form. Normally, one signature is
required. An additional signature is required only when payment is to be made
by withdrawal from a deposit account that requires multiple signatures to
withdraw funds.
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You may mail your completed Stock Order Form and Certification Form in the
envelope that has been provided, or you may deliver your Stock Order Form and
Certification Form to any branch of First Federal Savings Bank of Siouxland.
Your Stock Order Form and Certification Form, properly completed, and payment
in full (or withdrawal authorization at the subscription price) must be
received by First Federal Bankshares, Inc. no later than 12:00 noon, Central
time, on __________________ 1999 or it will become void. If you have any
remaining questions, or if you would like assistance in completing your Stock
Order Form and Certification Form, you may call our Conversion Center Monday
through Friday from 10:00 a.m. to 4:00 p.m.
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