<PAGE>
As filed with the Securities and Exchange Commission on June 23, 2000
Registration No. 333-36368
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO.1
TO THE
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
FIRST FEDERAL BANCSHARES, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CERTIFICATE OF INCORPORATION)
DELAWARE 6035 37-1397683
(State or Other Jurisdiction (Primary Standard (IRS Employer
of Incorporation or Industrial Classification Identification No.)
Organization) Code Number)
109 EAST DEPOT STREET 109 EAST DEPOT STREET
COLCHESTER, ILLINOIS 62326 COLCHESTER, ILLINOIS 62326
(309) 776-3225 (309) 776-3225
(Address and Telephone Number (Address of Principal Place of Business
of Principal Executive Offices) or Intended Principal Place of Business)
JAMES J. STEBOR
PRESIDENT AND CHIEF EXECUTIVE OFFICER
FIRST FEDERAL BANCSHARES, INC.
109 EAST DEPOT STREET
COLCHESTER, ILLINOIS 62326
(309) 776-3225
(Name, Address and Telephone Number of Agent for Service)
Copies to:
PAUL M. AGUGGIA, ESQUIRE DANIEL C. McKAY II, ESQUIRE
AARON M. KASLOW, ESQUIRE MARY C. WAGHORNE, ESQUIRE
MULDOON, MURPHY & FAUCETTE LLP VEDDER, PRICE, KAUFMAN & KAMMHOLZ
5101 WISCONSIN AVENUE, N.W. 222 NORTH LASALLE STREET
WASHINGTON, D.C. 20016 CHICAGO, ILLINOIS 60601
(202) 362-0840 (312) 609-7500
APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC: As soon as practicable
after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please 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, please check the following box. /___/
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT PRICE (1) FEE
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock
$.01 par Value 2,578,875 Shares $10.00 $25,788,750 $ (2)
----------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) The Registration Fee of $6,809 was previously paid upon the initial
filing of the Form SB-2 on May 5, 2000.
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 STATEMENT
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 COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
<PAGE>
[TO BE USED IN CONNECTION WITH SYNDICATED COMMUNITY OFFERING ONLY]
PROSPECTUS SUPPLEMENT FOR SYNDICATED COMMUNITY OFFERING
[LOGO] FIRST FEDERAL BANCSHARES, INC.
(Proposed Holding Company for First Federal Bank)
109 EAST DEPOT STREET
COLCHESTER, ILLINOIS 62326
(309) 776-3225
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
First Federal Bank is converting from the mutual to stock form of
organization. After the conversion, First Federal Bancshares will own all of
First Federal's stock. First Federal Bancshares has already received
subscriptions for _________ shares. Up to ________ shares will be sold in the
conversion. The conversion will not be completed and no common stock will be
sold unless additional subscriptions are received for at least the minimum
number of shares in the offering. First Federal Bancshares will hold all funds
of subscribers in an interest-bearing savings account at First Federal until the
conversion is completed or terminated. Funds will be returned promptly with
interest if the conversion is terminated.
Friedman, Billings, Ramsey & Co., Inc. will use its best efforts to
assist First Federal Bancshares in selling at least the minimum number of shares
but does not guarantee that this number will be sold. Neither FBR nor any
selected broker-dealer is obligated to purchase any shares of common stock in
the syndicated community offering. FBR intends to make a market in the common
stock.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PRICE PER SHARE: $10.00
EXPECTED TRADING MARKET AND SYMBOL: NASDAQ NATIONAL MARKET "____"
THIS OFFERING WILL EXPIRE NO LATER THAN __:__ _.M., CENTRAL TIME,
__________, 2000, UNLESS EXTENDED.
- NUMBER OF SHARES
MINIMUM/MAXIMUM
- ESTIMATED UNDERWRITING COMMISSIONS AND OTHER EXPENSES
MINIMUM/MAXIMUM
- ESTIMATED NET OFFERING PROCEEDS TO FIRST FEDERAL BANCSHARES
MINIMUM/MAXIMUM
- ESTIMATED NET OFFERING PROCEEDS PER SHARE TO FIRST FEDERAL
BANCSHARES
MINIMUM/MAXIMUM
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT INSURED OR GUARANTEED
BY FIRST FEDERAL BANCSHARES, FIRST FEDERAL, THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
INVESTING IN FIRST FEDERAL BANCSHARES' COMMON STOCK INVOLVES RISK. PLEASE REFER
TO "RISK FACTORS" BEGINNING ON PAGE __ OF THE ATTACHED PROSPECTUS DATED ________
__, 2000.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION, THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE OFFICE OF THRIFT SUPERVISION, NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS SUPPLEMENT IS TRUTHFUL OR COMPLETE. ANYONE WHO TELLS YOU OTHERWISE IS
COMMITTING A CRIME.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
The date of this Prospectus Supplement is _______________, 2000
<PAGE>
THE SYNDICATED COMMUNITY OFFERING
First Federal Bancshares is offering for sale between ___________ and
__________ shares of common stock at price of $10.00 per share in a syndicated
community offering. These shares are to be sold in connection with the
conversion of First Federal from a mutual savings bank to a stock savings bank
and the issuance of First Federal's outstanding capital stock to First Federal
Bancshares. The remaining __________ shares of common stock to be sold in
connection with the conversion have been subscribed for in subscription and
direct community offerings. The prospectus in the form used in the subscription
and direct community offerings is attached to this prospectus supplement. The
purchase price for all shares sold in the syndicated community offering will be
the same as the price paid by subscribers in the subscription and direct
community offerings.
Funds sent with purchase orders will earn interest at First Federal's
passbook rate from the date First Federal receives them until the completion or
termination of the conversion. If the syndicated community offering is not
completed by _________________, 2000, and the Office of Thrift Supervision
allows more time to complete the conversion, First Federal will contact everyone
who subscribed for shares to see if they still want to purchase stock, and
subscribers will be able to confirm, modify or cancel their subscriptions. A
failure to respond will be treated as a cancellation of the purchase order. If
payment for the stock was made by check or money order, subscription funds will
be returned with accrued interest. If payment was authorized by withdrawal of
funds on deposit at First Federal, that authorization would terminate. The
conversion must be completed by _______, 2002.
The minimum number of shares which may be purchased is 25 shares. Except for the
First Federal employee stock ownership plan, which intends to purchase up to 8%
of the total number of shares of common stock sold in the conversion, no person,
together with related persons and persons acting together, may purchase more
than $150,000 of common stock (15,000 shares) in the syndicated community
offering. However, the maximum amount of shares of common stock that may be
subscribed for or purchased in all categories of the conversion by any person,
related persons or persons acting together is 1% of the stock being offered
(which equals ______ shares). First Federal Bancshares reserves the right, in
its absolute discretion, to accept or reject, in whole or in part, any or all
subscriptions in the syndicated community offering. If a subscription is
rejected in part, you cannot cancel the remainder of your order.
First Federal Bancshares and First Federal have engaged FBR as their
financial advisor to assist them in the sale of the common stock in the
syndicated community offering. FBR expects to use the services of other
registered broker-dealers and that fees to FBR and other selected broker-dealers
will not exceed __% of the aggregate purchase price of the shares sold in the
syndicated community offering.
Before this offering, there has not been a public market for the common
stock, and there can be no assurance that an active and liquid trading market
for the common stock will develop. The absence or discontinuance of an active
and liquid trading market may hurt the market price of the common stock. See
"RISK FACTORS--POSSIBLE LIMITED MARKET FOR FIRST FEDERAL BANCSHARES' COMMON
STOCK MAY NEGATIVELY AFFECT THE MARKET PRICE." in the attached prospectus.
2
<PAGE>
PROSPECTUS [LOGO]
First Federal Bancshares, Inc.
(Proposed Holding Company for First Federal Bank)
2,242,500 Shares of Common Stock
First Federal Bank, F.S.B. is converting from the mutual form to the stock form
of organization. As part of the conversion, First Federal Bancshares, Inc. is
offering its shares of common stock to depositors and borrowers of First Federal
and, if necessary to complete the offering, to the general public. After the
conversion, First Federal Bancshares will own First Federal.
PRICE PER SHARE: $10.00
MINIMUM PURCHASE: 25 SHARES ($250.00)
EXPECTED TRADING MARKET: NASDAQ NATIONAL MARKET
PROPOSED TRADING SYMBOL: FFBI
<TABLE>
<CAPTION>
MINIMUM MAXIMUM
--------- ---------
<S> <C> <C>
Number of shares: 1,657,500 2,242,500
Gross offering proceeds: $16,575,000 $22,425,000
Estimated underwriting commissions
and other offering expenses: $ 904,000 $ 984,000
Estimated net proceeds: $15,671,000 $21,441,000
Estimated net proceeds per share: $ 9.45 $ 9.56
</TABLE>
With regulatory approval, First Federal Bancshares may increase the maximum
number of shares by up to 15%, to 2,578,875 shares, without any further notice.
Friedman, Billings, Ramsey & Co., Inc. will use its best efforts to assist First
Federal Bancshares in selling at least the minimum number of shares, but does
not guarantee that this number will be sold. FBR is not obligated to purchase
any shares of common stock in the offering. FBR intends to make a market in the
common stock.
The offering to depositors and borrowers of First Federal will end at 12:00
Noon, Central time, on ________, 2000. An offering to the general public may
also be held and may end as early as 12:00 Noon, Central time, on _________ __,
2000. If the conversion is not completed by _________ __, 2000, and the Office
of Thrift Supervision allows more time to complete the conversion, all
subscribers will be able to increase, decrease or cancel their orders. All
extensions may not go beyond ________, 2002. First Federal Bancshares will hold
all funds of subscribers in an interest-bearing savings account at First Federal
until the conversion is completed or terminated. Funds will be returned
promptly with interest if the conversion is terminated.
--------------------------------------------------------------------------------
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT INSURED OR GUARANTEED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
INVESTING IN FIRST FEDERAL BANCSHARES' COMMON STOCK INVOLVES RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE _.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION
NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE
SECURITIES OR DETERMINED WHETHER THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANYONE
WHO TELLS YOU OTHERWISE IS COMMITTING A CRIME.
--------------------------------------------------------------------------------
For assistance, please contact First Federal's conversion center at
(___) ___-____.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
The date of this prospectus is ________, 2000
<PAGE>
[map of Illinois showing office locations of First Federal appears here]
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING
The following are answers to frequently asked questions. You should
read this entire prospectus, including "RISK FACTORS" beginning on page __ and
"THE CONVERSION" beginning on page __, for more information.
Q. WHY IS FIRST FEDERAL CONVERTING TO STOCK FORM?
A. We have decided to convert to a stock company to increase our potential
for long-term growth and financial strength in ways not available to us
as a mutual company. The conversion will be important to our future
growth and performance because it will allow us to compete more
effectively in our market.
Q. HOW MANY SHARES OF STOCK ARE BEING OFFERED, AND AT WHAT PRICE?
A. We are offering for sale up to 2,242,500 shares of common stock at a
subscription price of $10.00 per share. We must sell at least 1,657,500
shares. If, as a result of changing stock market or financial
conditions, the independent appraiser retained by us to determine the
market value of First Federal concludes that the market value has
increased, we may sell up to 2,578,875 shares without notice to you.
Q. WILL I BE CHARGED A COMMISSION?
A. No. You will not be charged a commission or fee to purchase shares in
the conversion.
Q. HOW MUCH STOCK MAY I BUY?
A. The minimum order is 25 shares. Generally, no person or group of
persons on a single account may purchase more than $150,000 of common
stock (which equals 15,000 shares) in the subscription offering, and no
person, either alone or together with associates and persons acting in
concert with such person, may purchase more than 1% of the stock being
offered (which equals 22,425 shares).
Q. WILL FIRST FEDERAL BANCSHARES PAY DIVIDENDS ON THE STOCK?
A. We intend to adopt a policy of paying regular cash dividends, but we
have not yet decided on the amount or frequency of payments.
Q. HOW DO I SELL MY STOCK AFTER I PURCHASE IT?
A. We expect our stock to be quoted on the Nasdaq National Market under
the symbol "FFBI". There can be no assurance that an active trading
market will develop or that you will be able to sell your shares for
more money than you originally paid. You should consider the
possibility that you may be unable to easily sell our stock. There may
also be a wide spread between the bid and asked price for our stock.
Q. WILL MY STOCK BE COVERED BY DEPOSIT INSURANCE OR GUARANTEED BY ANY
GOVERNMENT AGENCY?
A. No. Unlike insured deposit accounts at First Federal, our stock will
not be insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
Q. WHEN IS THE DEADLINE TO SUBSCRIBE FOR STOCK?
A. We must receive a properly signed and completed order form with the
required payment on or before 12:00 noon, Central time on ___________,
2000.
-i-
<PAGE>
Q. HOW DO I PURCHASE STOCK?
A. First, you should read this entire prospectus carefully. Then,
complete, sign and return the enclosed stock order and certification
form, together with your payment. Subscription orders may be delivered
in person to our office during regular banking hours, or by mail in the
enclosed business reply envelope. Subscription orders received after
the subscription offering expiration date may be held for participation
in any community offering.
Q. CAN I CHANGE MY MIND AFTER I PLACE AN ORDER TO SUBSCRIBE FOR STOCK?
A. No. Once we receive your order, you cannot cancel or change it without
our consent. If we intend to sell fewer than 1,657,500 shares or more
than 2,578,875 shares, all subscribers will be notified and given the
opportunity to change or cancel their orders. If you do not respond to
this notice, we will return your funds promptly with interest.
Q. HOW CAN I PAY FOR THE STOCK?
A. You have two options: (1) send us a check or money order, or (2)
authorize a withdrawal from your deposit account at First Federal
(without any penalty for early withdrawal). Please do not send cash in
the mail.
Q. CAN I SUBSCRIBE FOR SHARES USING FUNDS IN MY INDIVIDUAL RETIREMENT
ACCOUNT AT FIRST FEDERAL?
A. Yes. However, you cannot purchase stock with your existing IRA at First
Federal. You must establish a self-directed IRA with an outside trustee
to subscribe for stock using your IRA funds. Please call our conversion
center at (___) __________ to get more information. The transfer of IRA
funds takes time, so please make arrangements at least one week before
the expiration of the subscription offering.
Q. WHO IS ELIGIBLE TO PURCHASE STOCK IN THE SUBSCRIPTION OFFERING?
A. Certain past and present depositors and borrowers of First Federal,
along with First Federal's employee stock ownership plan, are eligible
to purchase stock in the subscription offering. Depositors with at
least $50 on deposit as of October 31, 1998 will have first priority in
the subscription offering.
Q. WHAT HAPPENS IF THERE ARE NOT ENOUGH SHARES OF STOCK TO FILL ALL
ORDERS?
A. If there is an oversubscription, then you may not receive any or all of
the shares you want to purchase. We will allocate shares in the order
of priority established in our plan of conversion.
Q. WHO CAN HELP ANSWER ANY OTHER QUESTIONS I MAY HAVE ABOUT THE STOCK
OFFERING?
A. For answers to other questions, we encourage you to read this
prospectus. Questions may also be directed to our conversion center at
(___) _________ during weekdays between the hours of 9:00 a.m. and 5:00
p.m, Central time. You may also visit our conversion center, which is
located at First Federal's Macomb office at 430 West Jackson Street,
Macomb, Illinois.
-ii-
<PAGE>
SUMMARY
YOU SHOULD READ THIS ENTIRE DOCUMENT CAREFULLY BEFORE YOU DECIDE TO INVEST. FOR
ASSISTANCE, PLEASE CONTACT FIRST FEDERAL'S CONVERSION CENTER AT (___) ___-____.
THE COMPANIES
FIRST FEDERAL BANCSHARES, INC. First Federal formed First Federal
109 EAST DEPOT STREET Bancshares to be its holding company. To
COLCHESTER, ILLINOIS 62326 date, First Federal Bancshares has only
(309) 776-3225 conducted organizational activities.
After the conversion, First Federal
Bancshares will own all of First
Federal's capital stock and will direct,
plan and coordinate First Federal's
business activities. In the future,
First Federal Bancshares might become an
operating company or acquire or organize
other operating subsidiaries, including
other financial institutions or
financial services companies, although
it currently has no specific plans or
agreements to do so.
FIRST FEDERAL BANK First Federal is a community-oriented
109 EAST DEPOT STREET financial institution dedicated to
COLCHESTER, ILLINOIS 62326 serving the financial service needs of
(309) 776-3225 consumers and businesses within its
www.First-Federal-Bank.com market area. First Federal currently
operates out of its main office in
Colchester, Illinois and its five branch
offices in Quincy (2), Mt. Sterling,
Macomb and Bushnell, Illinois.
The goal of First Federal is to be the
premier community-oriented financial
institution in the markets that it
serves by providing retail and
commercial products and services with
high quality customer service. At
February 29, 2000, First Federal had
total assets of $213.2 million, deposits
of $182.6 million and total equity of
$24.0 million.
For a discussion of First Federal's
business strategy and recent results of
operations, see "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS." For a discussion
of First Federal's business activities,
see "BUSINESS OF FIRST FEDERAL BANK."
THE CONVERSION
WHAT IS THE CONVERSION? (PAGE __) The conversion is a change in First
Federal's legal form of organization. As
a mutual savings bank, First Federal
currently has no stock or stockholders.
Instead, First Federal operates for the
mutual benefit of its depositors, who
elect directors and vote on other
important matters. Through the
conversion, First Federal will change
its corporate form to become a stock
savings bank and all of its shares will
be owned by First Federal Bancshares. In
other words, First Federal will become a
wholly-owned subsidiary of First Federal
Bancshares. Voting rights in First
Federal Bancshares will belong to its
stockholders.
1
<PAGE>
First Federal is conducting the
conversion under the terms of its plan
of conversion. The Office of Thrift
Supervision has approved the plan of
conversion with the condition that it be
approved by First Federal's members.
First Federal has called a special
meeting for ______________, 2000 to vote
on the plan of conversion.
REASONS FOR THE CONVERSION The Board of Directors determined to
(PAGE __) convert to a stock company to increase
First Federal's potential for long-term
growth and financial strength in ways
not available to it as a mutual company.
The conversion will be important to
First Federal's future growth and
performance because it will:
- enhance its ability to expand
through the acquisition of
other financial institutions
or their assets;
- enhance its ability to
diversify into other financial
services related activities;
- facilitate balance sheet
growth;
- enhance its ability to attract
and retain qualified
management through stock-based
compensation plans; and
- expand its ability to serve
the public.
Currently, First Federal does not have
any specific plans or arrangements for
diversification or expansion.
BENEFITS OF THE CONVERSION TO First Federal Bancshares and First
MANAGEMENT (PAGE __) Federal intend to adopt the following
benefit plans and employment agreements:
- EMPLOYEE STOCK OWNERSHIP PLAN.
This plan intends to purchase
8% of the shares issued in the
conversion. First Federal will
allocate these shares to
employees over a period of
years in proportion to their
compensation.
- STOCK-BASED INCENTIVE PLAN.
Under this plan, which will be
adopted after the conversion
and submitted to stockholders
for their approval, First
Federal Bancshares may award
stock options and shares of
restricted stock to key
employees and directors of
First Federal Bancshares and
its affiliates. The number of
options available under this
plan will be equal to 10% of
the number of shares issued in
the conversion. The number of
shares available for
restricted stock awards will
equal 4% of the number of
shares issued in the
conversion. Shares of
restricted stock will be
awarded at no cost to the
recipient.
2
<PAGE>
- EMPLOYMENT AND CHANGE IN
CONTROL AGREEMENTS. First
Federal Bancshares and First
Federal intend to enter into
employment agreements with
James J. Stebor, President of
First Federal. First Federal
also intends to enter into
Change in Control Agreements
with four senior executive
officers. These agreements
will provide for severance
benefits if the executives are
terminated following a change
in control of First Federal
Bancshares or First Federal.
- EMPLOYEE SEVERANCE
COMPENSATION PLAN. This plan
will provide severance
benefits to eligible employees
if there is a change in
control of First Federal
Bancshares or First Federal.
The following table summarizes the total
number and dollar value of the shares of
common stock that the employee stock
ownership plan expects to acquire and
the total value of all restricted stock
awards that are expected to be available
under the stock-based incentive plan,
based on the sale of 2,242,500 shares in
the conversion. The table assumes the
value of the shares is $10.00 per share.
The table does not include a value for
the options because their exercise price
would be equal to the fair market value
of the common stock on the day that the
options are granted. As a result,
financial gains can be realized on an
option only if the market price of the
common stock increases above the price
at which the option is granted.
<TABLE>
<CAPTION>
PERCENTAGE
OF SHARES
NUMBER ESTIMATED ISSUED
OF VALUE IN THE
SHARES OF SHARES CONVERSION
------- ---------- ----------
<S> <C> <C> <C>
Employee stock
ownership plan... 179,400 $1,794,000 8.0%
Restricted stock
awards .......... 89,700 897,000 4.0
Stock options ..... 224,250 -- 10.0
------- ---------- ----
Total .... 493,350 $2,691,000 22.0%
------- ---------- ----
------- ---------- ----
</TABLE>
For a discussion of risks associated
with these plans and agreements, see
"RISK FACTORS--IMPLEMENTATION OF
ADDITIONAl BENEFIT PLANS WILL INCREASE
FIRST FEDERAL'S FUTURE COMPENSATION
EXPENSE," "RISK FACTORS--ISSUANCE OF
SHARES FOR BENEFIT PROGRAMS MAY REDUCE
YOUR OWNERSHIP INTEREST" and "RISK
FACTORS--VARIOUS FACTORS COULD MAKE
TAKEOVER ATTEMPTS THAT YOU WANT TO OCCUR
MORE DIFFICULT TO ACHIEVE."
3
<PAGE>
THE OFFERING
PERSONS WHO CAN ORDER STOCK IN First Federal Bancshares is offering
THE OFFERING (PAGE __) shares of its common stock in a
"subscription offering" in the following
NOTE: SUBSCRIPTION RIGHTS ARE NOT order of priority to:
TRANSFERABLE, AND PERSONS WITH
SUBSCRIPTION RIGHTS MAY NOT 1. Persons with $50 or more on
SUBSCRIBE FOR SHARES FOR THE deposit at First Federal as of
BENEFIT OF ANY OTHER PERSON. IF YOU October 31, 1998.
VIOLATE THIS PROHIBITION, YOU MAY
LOSE YOUR RIGHTS TO PURCHASE SHARES 2. The First Federal employee
AND MAY FACE CRIMINAL PROSECUTION stock ownership plan, which
AND/OR OTHER SANCTIONS. provides retirement benefits
to First Federal's employees.
3. Persons with $50 or more on
deposit at First Federal as of
June 30, 2000.
4. First Federal's depositors as
of July 5, 2000 and borrowers
of First Federal as of
March 27, 1990 whose loans
continue to be outstanding as
of July 5, 2000.
If the offering is oversubscribed,
shares will be allocated in order of the
priorities described above under a
formula outlined in the plan of
conversion.
First Federal Bancshares may offer
shares not sold in the subscription
offering to the general public in a
community offering. People and trusts of
people who are residents of Adams,
Brown, McDonough, Hancock, Schuyler,
Henderson, Fulton, Warren and Pike
Counties in Illinois and Marion, Lewis
and Ralls Counties in Missouri will have
first preference to purchase shares in a
community offering. The community
offering, if held, may begin at any time
during the subscription offering or
immediately after the end of the
subscription offering.
DEADLINE FOR ORDERING STOCK The subscription offering will end at
12:00 Noon, Central time, on _________
__, 2000. First Federal expects that the
community offering will terminate at the
same time, although it may continue for
up to 45 days after the end of the
subscription offering, or longer if
regulators approve a later date. All
extensions, in the aggregate, may not go
beyond ______________, 2002.
PURCHASE PRICE The purchase price is $10.00 per share.
The Boards of Directors of First Federal
Bancshares and First Federal consulted
with FBR in determining this price. You
will not pay a commission to buy any
shares in the conversion.
NUMBER OF SHARES TO BE SOLD First Federal Bancshares is offering for
sale between 1,657,500 and 2,242,500
shares of its common stock in this
offering. With regulatory approval,
First Federal Bancshares may increase
the number of shares to be sold to
2,578,875 shares without giving
4
<PAGE>
you further notice or the opportunity to
change or cancel your order.
HOW THE OFFERING RANGE WAS
DETERMINED (PAGE __) The offering range is based on an
independent appraisal of First Federal
by RP Financial, LC., an appraisal firm
experienced in appraisals of savings
institutions. RP Financial has estimated
that as of April 28, 2000, First
Federal's market value ranged between
$16,575,000 and $22,425,000, with a
midpoint of $19,500,000. This results in
an offering of between 1,657,500 and
2,242,500 shares of stock at an offering
price of $10.00 per share. RP
Financial's appraisal was based in part
on First Federal's financial condition
and results of operations and the effect
on First Federal of the additional
capital raised by the sale of common
stock in this offering. RP Financial's
independent appraisal will be updated
before the conversion is completed.
THE INDEPENDENT APPRAISAL DOES NOT
INDICATE MARKET VALUE. First Federal
Bancshares cannot guarantee that anyone
who purchases shares in the conversion
will be able to sell their shares at or
above the $10.00 purchase price.
PURCHASE LIMITATIONS (PAGE __) First Federal's plan of conversion
establishes limitations on the
purchase of stock in the offering.
These limitations include the
following:
- The minimum purchase is 25
shares.
- The maximum purchase in the
subscription offering by any
person, or group of persons
through a single deposit
account or similarly titled
deposit accounts, is $150,000
of common stock, which equals
15,000 shares.
- The maximum purchase by any
person in the community
offering is $150,000 of common
stock, which equals 15,000
shares.
- The maximum purchase in the
subscription offering and
community offering combined by
any person, related persons or
persons acting together is 1%
of the common stock offered
for sale, which equals
$224,250 of common stock or
22,425 shares.
HOW TO PURCHASE COMMON STOCK If you want to place an order for shares
(PAGE __) in the conversion, you must complete an
original stock order form and send it
together with full payment to First
Federal. You must sign the certification
that is on the reverse side of the stock
order form. First Federal must receive
your stock order form before the end of
the subscription offering or the end of
the community offering, as appropriate.
Once First Federal receives your order,
you cannot cancel or change it without
First Federal's consent.
To ensure that First Federal properly
identifies your subscription rights, you
must list all of your deposit accounts
as of the eligibility dates on the stock
order form. If you fail to do so,
5
<PAGE>
your subscription may be reduced or
rejected if the offering is
oversubscribed.
First Federal Bancshares and First
Federal may, in their sole discretion,
reject orders received in the community
offering either in whole or in part.
If your order is rejected in part, you
cannot cancel the remainder of your
order.
You may pay for shares in the
subscription offering or the community
offering in any of the following ways:
- BY CASH, if paid in person.
- BY CHECK OR MONEY ORDER made
payable to First Federal
Bancshares, Inc.
- BY AUTHORIZING WITHDRAWAL FROM
AN ACCOUNT AT FIRST FEDERAL.
To use funds in an Individual
Retirement Account at First
Federal, you must transfer
your account to an
unaffiliated institution or
broker. Please contact the
conversion center at least one
week before the end of the
subscription offering for
assistance.
First Federal will pay interest on your
subscription funds at the rate it pays
on passbook accounts, which is currently
3%, from the date it receives your funds
until the conversion is completed or
terminated. All funds authorized for
withdrawal from deposit accounts with
First Federal will earn interest at the
applicable account rate until the
conversion is completed. There will be
no early withdrawal penalty for
withdrawals from certificates of deposit
used to pay for stock. If, as a result
of a withdrawal from a certificate of
deposit, the balance falls below the
minimum balance requirement, the
remaining funds will earn interest at
First Federal's passbook rate.
HOW FIRST FEDERAL BANCSHARES AND First Federal Bancshares will use 50% of
FIRST FEDERAL WILL USE THE PROCEEDS the net offering proceeds to buy all of
OF THIS OFFERING (PAGE __) the common stock of First Federal. First
Federal will use the funds it receives
for general business purposes, including
originating loans and purchasing
securities.
First Federal Bancshares also will loan
an amount equal to 8% of the gross
proceeds of the offering to the employee
stock ownership plan to fund its
purchase of common stock in the
conversion, and will keep the remainder
of the net proceeds for general business
purposes. These purposes may include,
for example, investment in securities,
paying cash dividends or buying back
shares of common stock.
First Federal Bancshares and First
Federal may also use the proceeds of the
offering to expand and diversify their
businesses, although they have no
specific plans to do so at this time.
6
<PAGE>
PURCHASES BY DIRECTORS AND First Federal's directors and officers
EXECUTIVE OFFICERS (PAGE __) intend to subscribe for 98,200 shares,
which equals 4.38% of the shares that
would be sold at the maximum of the
offering range. If fewer shares are sold
in the conversion, then directors and
executive officers may own a greater
percentage of First Federal Bancshares.
Directors and executive officers will
pay the same $10.00 per share price as
everyone else who purchases shares in
the conversion.
MARKET FOR FIRST FEDERAL BANCSHARES First Federal Bancshares intends to have
COMMON STOCK (PAGE __) its common stock quoted on the Nasdaq
National Market under the symbol "FFBI".
After shares of the common stock begin
trading, you may contact a stock broker
to buy or sell shares. First Federal
Bancshares cannot assure you that there
will be an active trading market for the
common stock.
FIRST FEDERAL BANCSHARES' DIVIDEND First Federal Bancshares intends to
POLICY (PAGE __) adopt a policy of paying regular cash
dividends, but has not yet decided on
the amount or frequency of payments.
7
<PAGE>
RISK FACTORS
YOU SHOULD CONSIDER CAREFULLY THE FOLLOWING RISK FACTORS AND ALL OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE PURCHASING FIRST FEDERAL
BANCSHARES COMMON STOCK.
FIRST FEDERAL'S RETURN ON EQUITY WILL INITIALLY DECLINE AFTER CONVERSION
Return on equity, which equals net income divided by average equity, is
a ratio used by many investors to compare the performance of a particular
company with other companies. First Federal Bancshares expects that its return
on average equity will initially decline after the offering as a result of the
additional capital that will be raised in this offering and the time needed to
effectively deploy the net proceeds to generate a market rate of return. Over
time, First Federal Bancshares intends to use the net proceeds from this
offering to increase earnings per share and book value per share, without
assuming undue risk, with the goal of achieving a return on equity competitive
with other publicly traded financial institutions. This goal could take a number
of years to achieve, and First Federal Bancshares cannot assure you that this
goal will be attained. Consequently, you should not expect a competitive return
on equity in the near future. See "PRO FORMA DATA" for an illustration of the
financial effects of this offering.
STRONG COMPETITION COULD HURT FIRST FEDERAL'S PROFITS
First Federal faces intense competition both in making loans and
attracting deposits. This competition has made it more difficult for First
Federal to make new loans and has forced it to offer higher deposit rates in its
market area. Competition for loans and deposits has contributed to a narrowing
of its interest rate spread, which has hurt net interest income. The competition
for deposits, particularly from mutual funds and other stock market investment
vehicles, also has contributed to slower growth in First Federal's deposit base
in recent years. First Federal expects competition to increase in the future as
a result of legislative, regulatory and technological changes and the continuing
trend of consolidation in the financial services industry. Technological
advances, for example, have lowered barriers to entry, allowed banks to expand
their geographic reach by providing services over the Internet and made it
possible for non-depository institutions to offer products and services that
traditionally have been provided by banks. The Gramm-Leach-Bliley Act, which
permits affiliation among banks, securities firms and insurance companies, also
will change the competitive environment in which First Federal conducts
business. Some of the institutions with which First Federal competes are
significantly larger than First Federal and, therefore, have significantly
greater resources. Due to its relatively small size, First Federal has fewer
resources to devote to marketing and is less able to take advantage of
technological advancements. For more information about First Federal's market
area and the competition it faces, see "BUSINESS OF FIRST FEDERAL BANK--MARKET
AREA" and "BUSINESS OF FIRST FEDERAl BANK--COMPETITION."
FIRST FEDERAL'S MARKET AREA LIMITS ITS GROWTH POTENTIAL
Except for its offices in Quincy, Illinois, First Federal's offices are
located in small towns in rural counties, most of which are experiencing a
decline in population that is not expected to change in the foreseeable future.
The small population and slow growth of the rural counties served by First
Federal provide limited growth opportunities, if any. As a result, First
Federal's ability to achieve loan and deposit growth in those areas depends, in
large part, on First Federal increasing its market share or growth by
acquisition. For a discussion of First Federal's market area, see "BUSINESS OF
FIRST FEDERAL BANK--MARKET AREA."
A DOWNTURN IN THE LOCAL ECONOMY COULD HURT FIRST FEDERAL'S PROFITS
Nearly all of First Federal's loans are made to borrowers who live
and work in west central Illinois. As a result of this concentration, a
downturn in the economy in west central Illinois would likely cause
significant increases in nonperforming loans and assets, which could hurt
First Federal's profits. For a discussion of First Federal's market area, see
"BUSINESS OF FIRST FEDERAL BANK--MARKET AREA."
8
<PAGE>
COMMERCIAL BUSINESS LOANS INCREASE THE RISK OF FIRST FEDERAL'S LOAN PORTFOLIO
First Federal added a commercial loan department in September 1999 and
began to offer commercial business loans to small and medium sized businesses in
its market area. Commercial business loans are generally considered to be
riskier than residential mortgage loans because their repayment substantially
depends on the success of the borrower's business, rather than the value of the
collateral securing the loan. In addition, commercial business loans tend to be
larger in amount than residential loans. Although First Federal hired an
experienced commercial loan officer, First Federal has limited experience with
the commercial lending business. Because of its increased emphasis on commercial
loans, First Federal may find it necessary to increase its provision for loan
losses, which would hurt First Federal's profits.
CHANGING INTEREST RATES COULD HURT FIRST FEDERAL'S PROFITS
Like most financial institutions, First Federal's ability to make a
profit depends largely on its net interest income, which is the difference
between interest income it receives from its loans and securities and
interest it pays on deposits and borrowings. If interest rates increase,
First Federal anticipates that its net interest income would decline as
interest paid on its deposits would increase more quickly than the interest
earned on its assets. During the last three fiscal years, First Federal's
interest rate spread--which is the difference between the average rate
earned on interest-earnings assets and the average rate paid on
interest-bearing liabilities--has declined from 2.37% for fiscal 1998 to
2.10% for fiscal 1999 to 2.06% for fiscal 2000. If interest rates decline,
however, First Federal's loans may be refinanced at lower rates or paid off
and its investments may be prepaid earlier than expected and it may have to
redeploy such loan or investment proceeds into lower-yielding assets, which
might also lower First Federal's income. For further discussion of how
changes in interest rates could impact First Federal, see "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--MANAGEMENT OF INTEREST RATE RISK AND MARKET RISK ANALYSIS."
IMPLEMENTATION OF NEW BENEFIT PLANS WILL INCREASE FIRST FEDERAL'S FUTURE
COMPENSATION EXPENSE
First Federal will recognize additional material employee compensation
and benefit expenses stemming from the shares purchased or granted to employees
and executives under new benefit plans. These new expenses will reduce First
Federal's profits. First Federal cannot predict the actual amount of these new
expenses because applicable accounting practices require that they be based on
the fair market value of the shares of common stock at specific points in the
future. First Federal would recognize expenses for its employee stock ownership
plan when shares are committed to be released to participants' accounts and
would recognize expenses for restricted stock awards over the vesting period of
awards made to recipients. These expenses have been estimated in the pro forma
financial information under "PRO FORMA DATA" assuming the $10.00 per share
purchase price as fair market value. Actual expenses, however, may be higher or
lower, depending on the price of First Federal Bancshares' common stock. For
further discussion of these plans, see "MANAGEMENT OF FIRST FEDERAL
BANK--BENEFITS."
ISSUANCE OF SHARES FOR BENEFIT PROGRAMS MAY REDUCE YOUR OWNERSHIP INTEREST
If stockholders approve the new stock-based incentive plan, First
Federal Bancshares intends to issue shares to its officers and directors through
this plan. If the restricted stock awards under the stock-based incentive plan
are funded from authorized but unissued stock, your ownership interest could be
reduced by up to approximately 3.85%. If the shares issued upon the exercise of
stock options under the stock-based incentive plan are issued from authorized
but unissued stock, your ownership interest could be reduced by up to
approximately 9.09%. See "PRO FORMA DATA" and "MANAGEMENT OF FIRST FEDERAL
BANK--BENEFITS."
9
<PAGE>
VARIOUS FACTORS COULD MAKE TAKEOVER ATTEMPTS THAT YOU WANT TO OCCUR MORE
DIFFICULT TO ACHIEVE
Provisions of First Federal Bancshares' Certificate of Incorporation
and Bylaws, federal and state regulations and various other factors may make it
more difficult for companies or persons to acquire control of First Federal
Bancshares without the consent of First Federal Bancshares' Board of Directors.
It is possible, however, that you might like to see a takeover attempt succeed
because, for example, the potential acquiror could be offering a premium over
the then prevailing price of First Federal Bancshares common stock. The factors
that may discourage takeover attempts or make them more difficult include:
- ANTI-TAKEOVER PROVISIONS AND STATUTORY PROVISIONS. Provisions
in First Federal Bancshares' Certificate of Incorporation and
Bylaws, the corporate law of the State of Delaware, and
federal regulations may make it difficult and expensive to
pursue a takeover attempt that management opposes. These
provisions will also make the removal of the current Board of
Directors or management of First Federal Bancshares, or the
appointment of new directors, more difficult. These provisions
include: limitations on voting rights of beneficial owners of
more than 10% of First Federal Bancshares' common stock;
supermajority voting requirements for certain business
combinations; the election of directors to staggered terms of
three years; and the elimination of cumulative voting for
directors. The Certificate of Incorporation and Bylaws of
First Federal Bancshares also contain provisions regarding the
timing and content of stockholder proposals and nominations
and limitations on the calling of special meetings. For
further information about these provisions, see "RESTRICTIONS
ON ACQUISITION OF FIRST FEDERAL BANCSHARES AND FIRST FEDERAL."
- EXPECTED VOTING CONTROL BY MANAGEMENT AND EMPLOYEES. The
shares of common stock that First Federal's directors and
executive officers intend to purchase in the conversion, when
combined with the shares that may be awarded to participants
under First Federal's and First Federal Bancshares' benefit
plans, could result in management and employees controlling a
significant percentage of First Federal Bancshares' common
stock. If these individuals were to act together, they could
have significant influence over the outcome of any stockholder
vote. In addition, the total voting power of management and
employees is likely to exceed 20% of First Federal Bancshares'
outstanding stock. That level would enable management and
employees as a group to defeat any stockholder matter that
requires an 80% vote. For information about management's
intended stock purchases and the number of shares that may be
awarded under new benefit plans, see "MANAGEMENT OF FIRST
FEDERAL BANK--BENEFITS," "SHARES To BE PURCHASED BY MANAGEMENT
WITH SUBSCRIPTION RIGHTS" and "RESTRICTIONS ON ACQUISITION OF
FIRST FEDERAL BANCSHARES AND FIRST FEDERAL."
- REQUIRED CHANGE IN CONTROL PAYMENTS. If a change in control
had occurred at February 29, 2000 and all current executive
officers and employees of First Federal were terminated, the
aggregate value of the severance benefits required to be paid
under employment and change in control agreements with
executive officers and the employee severance plan, based on
1999 compensation data, would have been approximately $1.2
million. This estimate does not take into account future
salary adjustments or bonus payments or the value of the
continuation of other employee benefits. These payments may
have the effect of increasing the costs of acquiring First
Federal Bancshares, thereby discouraging future attempts to
take over First Federal Bancshares or First Federal. For
information about the proposed employment and severance
agreements and severance plan, see "MANAGEMENT OF FIRST
FEDERAL BANK--EXECUTIVE COMPENSATION."
THE RECENT POOR PERFORMANCE OF THRIFT STOCKS COULD NEGATIVELY AFFECT THE PRICE
OF FIRST FEDERAL BANCSHARES' COMMON STOCK
Since mid-1998, financial stocks in general have significantly
underperformed the overall market as a whole. From July 1, 1998 to March 31,
2000, the SNL Thrift Index declined approximately 35%, while the Nasdaq
10
<PAGE>
Composite, which includes a significant number of technology and Internet
companies, rose approximately 139%. During this period, mutual funds that
focus on financial stocks have experienced significant redemptions, which
requires the mutual funds to liquidate investments, which in turn contributed
to stock price declines for many banks and thrifts. Should this trend of
mutual fund flows continue, stock prices of companies in the financial
services sector, including that of First Federal Bancshares, may be
negatively impacted.
POSSIBLE LIMITED MARKET FOR FIRST FEDERAL BANCSHARES' COMMON STOCK MAY
NEGATIVELY AFFECT THE MARKET PRICE
Although First Federal Bancshares intends to list its common stock on
the Nasdaq National Market, First Federal Bancshares does not know whether an
active trading market will develop. Because of the relatively small size of this
offering, you may not be able to sell all of your shares of First Federal
Bancshares common stock on short notice and the sale of a large number of shares
at one time could temporarily depress the market price. For further information
about the trading market for the common stock, see "MARKET FOR THE COMMON
STOCK."
FIRST FEDERAL BANCSHARES' STOCK PRICE MAY DECLINE WHEN TRADING COMMENCES
First Federal Bancshares cannot guarantee that if you purchase shares
in the conversion that you will be able to sell them at or above the $10.00
purchase price. In several recent cases, common stock issued by converted
financial institutions has commenced trading at a price that is below the price
at which these shares were sold in the initial offerings of those companies.
After the shares of First Federal Bancshares begin trading, the trading price of
the common stock will be determined by the marketplace, and will be influenced
by many factors, including prevailing interest rates, investor perceptions and
general industry and economic conditions.
11
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
The following tables contain information concerning the financial
position and results of operations of First Federal. You should read this
information in conjunction with the financial statements included in this
prospectus.
<TABLE>
<CAPTION>
AT FEBRUARY 29/28,
--------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
SELECTED CONSOLIDATED FINANCIAL DATA:
Total assets ......................... $213,187 $201,171 $185,573
Cash and cash equivalents ............ 5,762 16,171 10,700
Loans, net ........................... 113,602 101,834 105,260
Securities held-to-maturity .......... 58,927 51,524 25,640
Securities available-for-sale ........ 29,442 26,622 37,295
Deposits ............................. 182,572 176,682 162,824
FHLB advances ........................ 6,000 -- --
Total equity ......................... 24,026 23,337 21,636
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 29/28,
--------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
SELECTED OPERATING DATA:
Total interest income ................ $ 13,660 $ 13,295 $ 12,917
Total interest expense ............... 8,642 8,350 7,819
-------- -------- --------
Net interest income ............... 5,018 4,945 5,098
Provision for loan losses ............ 119 6 27
-------- -------- --------
Net interest income after provision
for loan losses ................ 4,899 4,939 5,071
Noninterest income ................... 291 236 249
Noninterest expense .................. 2,845 2,723 2,663
-------- -------- --------
Income before income taxes ........... 2,345 2,452 2,657
Income taxes ......................... 837 851 981
-------- -------- --------
Net income ........................ $ 1,508 $ 1,601 $ 1,676
======== ======== ========
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED
FEBRUARY 29/28,
-------------------------
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
SELECTED OPERATING RATIOS AND OTHER DATA (1):
PERFORMANCE RATIOS:
Average yield on interest-earning assets ........... 6.80% 7.04% 7.27%
Average rate paid on interest-bearing liabilities .. 4.74 4.94 4.90
Average interest rate spread (2) ................... 2.06 2.10 2.37
Net interest margin (3) ............................ 2.50 2.62 2.84
Ratio of interest-earning assets to
interest-bearing liabilities ..................... 110.14 111.65 110.65
Net interest income after provision for loan
losses to noninterest expense .................... 172.20 181.38 190.42
Noninterest expense as a percent of
average assets ................................... 1.36 1.40 0.79
Return on average assets ........................... 0.72 0.83 0.50
Return on average equity ........................... 6.55 7.37 8.61
Ratio of average equity to average assets .......... 11.03 11.20 11.60
Efficiency ratio (4) ............................... 54.59 52.56 49.80
REGULATORY CAPITAL RATIOS:
Tier 1 capital ratio ............................... 24.3 25.0 24.8
Core capital ratio ................................. 11.2 11.7 11.4
Tangible capital ratio ............................. 11.2 11.7 11.4
Risk-based capital ratio ........................... 24.9 26.0 25.3
ASSET QUALITY RATIOS:
Nonperforming loans and troubled debt
restructurings as a percent of total loans (5) ... 0.89 0.76 1.06
Nonperforming assets and troubled debt
restructurings as a percent of total assets (6) .. 0.50 0.43 0.63
Allowance for loan losses as a percent
of total loans ................................... 0.42 0.45 0.46
Allowance for loan losses as a percent of
nonperforming loans and troubled debt
restructurings (5) ............................... 47.73 58.44 29.69
Net loans charged-off to average loans ............. 0.09 0.03 0.03
NUMBER AT END OF PERIOD:
Full service offices ............................. 6 6 6
Mortgage loans ................................... 2,413 2,460 2,621
Deposit accounts ................................. 19,699 19,533 19,250
</TABLE>
------------------------------
(1) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of end of period ratios, all ratios are based on
average daily balances during the indicated periods.
(2) Average interest rate spread represents the difference between the weighted
average yield on average interest-earning assets and the weighted average
cost of average interest-bearing liabilities.
(3) Net interest margin represents net interest income as a percent of average
interest-earning assets.
(4) Efficiency ratio represents noninterest expense as a percentage of net
interest income plus noninterest income.
(5) Nonperforming loans consist of all nonaccrual loans and all other loans 90
days or more past due.
(6) Nonperforming assets consist of nonperforming loans, other repossessed
assets and real estate owned.
13
<PAGE>
RECENT DEVELOPMENTS
THE FOLLOWING TABLES CONTAIN INFORMATION CONCERNING THE FINANCIAL POSITION
AND RESULTS OF OPERATIONS OF FIRST FEDERAL AT AND FOR THE DATES INDICATED. THE
DATA PRESENTED AT MAY 31, 2000 AND FOR THE THREE MONTH PERIODS ENDED MAY 31,
2000 AND 1999 ARE DERIVED FROM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS AND, IN THE OPINION OF MANAGEMENT, REFLECT ALL ADJUSTMENTS NECESSARY
TO PRESENT FAIRLY THE RESULTS FOR THESE INTERIM PERIODS. THESE ADJUSTMENTS
CONSIST ONLY OF NORMAL RECURRING ADJUSTMENTS. THE RESULTS OF OPERATIONS FOR THE
THREE MONTHS ENDED MAY 31, 2000 ARE NOT NECESSARILY INDICATIVE OF THE RESULTS OF
OPERATIONS THAT MAY BE EXPECTED FOR THE YEAR ENDED FEBRUARY 28, 2001. THIS
INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS INCLUDED
IN THIS PROSPECTUS.
<TABLE>
<CAPTION>
At MAY 31, AT FEBRUARY 29,
2000 2000
---------- ---------------
(IN THOUSANDS)
<S> <C> <C>
SELECTED CONSOLIDATED FINANCIAL DATA:
Total assets................................................... $215,880 $213,187
Cash and cash equivalents...................................... 6,925 5,762
Loans, net .................................................... 115,255 113,602
Securities held-to-maturity.................................... 58,776 58,927
Securities available-for-sale.................................. 28,536 29,442
Deposits....................................................... 186,385 182,572
FHLB advances.................................................. 4,000 6,000
Total equity................................................... 24,469 24,026
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MAY 31,
------------------------------------
2000 1999
---------- ---------------
(IN THOUSANDS)
<S> <C> <C>
SELECTED OPERATING DATA:
Total Interest income.......................................... $3,677 $3,330
Total Interest expense......................................... 2,351 2,090
------ ------
Net interest income......................................... 1,326 1,240
Provision for loan losses...................................... 29 6
------ ------
Net interest income after provision
for loan losses.......................................... 1,297 1,234
Noninterest income ............................................ 81 86
Noninterest expense............................................ 682 684
------ ------
Income before income taxes..................................... 696 636
Income taxes................................................... 253 229
------ ------
Net income.................................................. $ 443 $ 407
====== ======
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS ENDED
MAY 31,
---------------------------------------
2000 1999
---------- -------------
SELECTED OPERATING RATIOS AND OTHER DATA (1):
PERFORMANCE RATIOS:
<S> <C> <C>
Average yield on interest-earning assets............... 6.98% 6.76%
Average rate paid on interest-bearing liabilities...... 4.97 4.74
Average interest rate spread (2)....................... 2.01 2.03
Net interest margin (3)................................ 2.52 2.52
Ratio of interest-earning assets to
interest-bearing liabilities......................... 111.36 111.57
Net interest income after provision for loan
losses to noninterest expense........................ 186.35 179.88
Noninterest expense as a percent of
average assets....................................... 1.26 1.35
Return on average assets............................... 0.82 0.80
Return on average equity............................... 7.36 6.98
Ratio of average equity to average assets.............. 11.16 11.52
Efficiency ratio (4)................................... 48.47 47.96
ASSET QUALITY RATIOS:
Nonperforming loans and troubled debt
restructurings as a percent of total loans (5)....... 0.50 0.54
Nonperforming assets and troubled debt
restructurings as a percent of total assets (6)...... 0.30 0.27
Allowance for loan losses as a percent
of total loans ...................................... 0.44 0.45
Allowance for loan losses as a percent of
nonperforming loans and troubled debt
restructurings (5)................................... 87.92 83.89
Net loans charged-off to average loans................. - -
</TABLE>
----------
(1) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of end of period ratios, all ratios are based on
average daily balances during the indicated periods.
(2) Average interest rate spread represents the difference between the weighted
average yield on average interest-earning assets and the weighted average
cost of average interest-bearing liabilities.
(3) Net interest margin represents net interest income as a percent of average
interest-earning assets.
(4) Efficiency ratio represents noninterest expense as a percentage of net
interest income plus noninterest income.
(5) Nonperforming loans consist of all nonaccrual loans and all other loans 90
days or more past due.
(6) Nonperforming assets consist of nonperforming loans, other repossessed
assets and real estate owned.
COMPARISON OF FINANCIAL CONDITION AT MAY 31, 2000 AND FEBRUARY 29, 2000
Total assets at May 31, 2000 were $215.9 million compared to $213.2 million
at February 29, 2000, an increase of $2.7 million or 1.3%. The increase was
primarily a result of increased loan originations due to continued market
demand. The increase in loans was funded through an increase in deposits of $3.8
million partially offset by the repayment of $2.0 million in Federal Home Loan
Bank advances.
Total equity at May 31, 2000 was $24.5 million compared to $24.0 million at
February 29, 2000. The increase of $443,000, or 1.8%, was primarily a result of
net income for the period.
15
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MAY 31, 2000 AND MAY
31, 1999
GENERAL. Net income for the three months ended May 31, 2000
increased $36,000, or 8.8%, to $443,000 from $407,000 for the three months
ended May 31, 1999. Return on average assets was 0.82% for the three months
ended May 31, 2000 compared to 0.80% for the same period in the prior year.
Net interest income was $1.3 million for the three months ended May 31, 2000
compared to $1.2 million for the prior period due primarily to increased
volume in loans. Noninterest income decreased slightly by $5,000 which was
offset by a $2,000 decrease in noninterest expense.
INTEREST INCOME. Interest income for the three months ended May 31,
2000 was $3.7 million compared to $3.3 million for the prior period, an
increase of $347,000, or 10.4%. The increase was primarily the result of an
increase in the average balance of interest-earning assets combined with a
slight increase in interest rate. The average yield on interest earning
assets increased to 6.98% for the three months ended May 31, 2000 from 6.76%
for the three months ended May 31, 1999. Both the volume and rate increases
were related to the loan portfolio. First Federal has continued to experience
loan demand and the increased interest rate environment combined with First
Federal=s continued emphasis on commercial lending has resulted in an
increased yield on the overall loan portfolio.
INTEREST EXPENSE. Interest expense for the three months ended May
31, 2000 was $2.4 million compared to $2.1 million for the prior period, an
increase of $261,000, or 12.5%. The increase was due to an increase in volume
of interest-bearing liabilities combined with an increased interest rate on
deposits. The average balance of Federal Home Loan Bank borrowings was $4.3
million for the three months ended May 31, 2000 compared to $0 for the three
months ended May 31, 1999. The average cost of funds increased to 4.97% from
4.74% as a result of an increasing interest rate environment.
PROVISION FOR LOAN LOSSES. First Federal=s provision for loan losses
for the three months ended May 31, 2000 was $29,000 compared to $6,000 for the
three months ended May 31, 1999. The increase in the provision for loan losses
was primarily a result of continued loan growth and the continued expansion of
loan products into business lending, which generally carry more credit risk than
traditional one-to four-family residential mortgage lending. Gross loans were
$115.7 million at May 31, 2000 compared to $102.1 million at May 31, 1999, an
increase of $13.6 million. In addition, commercial loans were $4.2 million at
May 31, 2000 compared to $0 at May 31, 1999. Management increases the allowance
for loan losses through a provision charged to expense based on a statistical
percentage developed considering past loss experiences, delinquency trends and
other factors such as portfolio composition. While management believes the
existing level of reserves is adequate, future adjustments to the allowance may
be necessary due to economic, operating, regulatory and other conditions that
may be beyond First Federal=s control.
NONINTEREST INCOME. The following table shows the components of
noninterest income and the dollar and percentage change from the three months
ended May 31, 1999 to the three months ended May 31, 2000. Percentages are based
on rounded numbers.
16
<PAGE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MAY 31,
--------------------------
DOLLAR PERCENTAGE
2000 1999 CHANGE CHANGE
---- ---- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Service charges on NOW accounts................. $36 $24 $12 50.0%
Other fee income................................ 24 20 4 20.0
Other........................................... 21 42 (21) (50.0)
--- --- --- ----
Total..................................... $81 $86 $(5) (5.8)
=== === === ====
</TABLE>
Service charges on NOW accounts increased as a result of the increased
volume of demand deposits. Other income decreased as a result of First
Federal receiving $20,000 of reimbursement from insurance in the prior year
related to fraud and theft.
NONINTEREST EXPENSE. The following table shows the components of
noninterest expense and the dollar and percentage change from the three months
ended May 31, 1999 to the three months ended May 31, 2000. Percentages are based
on rounded numbers.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MAY 31,
--------------------------
DOLLAR PERCENTAGE
2000 1999 CHANGE CHANGE
---- ---- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Compensation and benefits....................... $353 $308 $ 45 14.6%
Occupancy and equipment......................... 80 82 (2) (2.4)
Data processing................................. 111 121 (10) (8.3)
Federal insurance premiums...................... 20 38 (18) (47.4)
Advertising..................................... 21 38 (17) (44.7)
Other........................................... 97 97 - -
---- ---- -----
Total...................................... $682 $684 $ (2) (0.3)
==== ==== =====
</TABLE>
Compensation and benefits expense increased due to the hiring of a
full-time commercial loan officer and the transfer of temporary employees to
full-time status. Federal insurance premiums decreased as a result of a decrease
in the percentage charged to savings institutions effective January 2000.
INCOME TAX EXPENSE. First Federal=s federal and state income tax
expense increased from $229,000 to $253,000 for the three month periods ended
May 31, 1999 and 2000 as a result of an increase in pretax income. First
Federal=s tax rate for 2000 was 36.4% compared to 36.0% for 1999.
17
<PAGE>
USE OF PROCEEDS
The following table shows how First Federal Bancshares intends to use
the net proceeds of the offering. The actual net proceeds will depend on the
number of shares of common stock sold in the offering and the expenses incurred
in connection with the offering. See "PRO FORMA DATA" for the assumptions used
to arrive at these amounts.
<TABLE>
<CAPTION>
1,657,500 2,242,500 2,578,875
SHARES AT SHARES AT SHARES AT
$10.00 $10.00 $10.00
PER SHARE PER SHARE PER SHARE
---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Offering proceeds............................................. $16,575 $22,425 $25,789
Less: estimated underwriting commissions and
other offering expenses................................ 904 984 1,031
---------- --------- ---------
Net offering proceeds ........................................ 15,671 21,441 24,758
Less:
Proceeds used to purchase
First Federal common stock ............................. 7,836 10,721 12,379
Proceeds used for loan to employee stock ownership plan ... 1,326 1,794 2,063
---------- --------- ---------
Proceeds remaining for First Federal Bancshares .............. $ 6,510 $ 8,927 $10,316
========== ========= =========
</TABLE>
First Federal Bancshares may use the proceeds it retains from the
offering:
- to invest in securities;
- to pay dividends to stockholders;
- to repurchase shares of its common stock;
- to finance the possible acquisition of financial institutions or
other businesses that are related to banking; and
- for general corporate purposes.
First Federal may use the proceeds that it receives from the offering:
- to fund new loans;
- to invest in securities;
- to finance the possible expansion of its business activities; and
- for general corporate purposes.
First Federal Bancshares and First Federal may need regulatory
approvals to engage in some of the activities listed above. See "REGULATION AND
SUPERVISION." Neither First Federal Bancshares nor First Federal currently has
any specific plans or agreements regarding any expansion activities or
acquisitions.
18
<PAGE>
Except as described above, neither First Federal Bancshares nor First
Federal has specific plans for the investment of the proceeds of this offering.
Although First Federal's capital currently exceeds regulatory requirements, it
is converting to stock form primarily to structure itself in the form of
organization used by commercial banks and most other financial services
companies. For a discussion of management's business reasons for undertaking the
conversion, see "THE CONVERSION--REASONS FOR THE CONVERSION."
FIRST FEDERAL BANCSHARES' DIVIDEND POLICY
First Federal Bancshares' Board of Directors intends to adopt a policy
of paying regular cash dividends after the conversion, but has not decided the
amount that may be paid or when the payments may begin. In addition, the Board
of Directors may declare and pay periodic special cash dividends in addition to,
or in lieu of, regular cash dividends. In determining whether to declare or pay
any dividends, whether regular or special, the Board of Directors will take into
account First Federal Bancshares' financial condition and results of operations,
tax considerations, capital requirements, industry standards, and economic
conditions. The regulatory restrictions that affect the payment of dividends by
First Federal to First Federal Bancshares discussed below will also be
considered. First Federal Bancshares cannot guarantee that it will pay dividends
or that, if paid, that First Federal Bancshares will not reduce or eliminate
dividends in the future.
First Federal Bancshares is subject to Delaware law, which generally
limits dividends to an amount equal to the difference between the amount by
which total assets exceed total liabilities and the amount equal to the
aggregate par value of the outstanding shares of capital stock. If there is no
difference between these amounts, dividends are limited to net income for the
current and/or immediately preceding fiscal year.
Dividends from First Federal Bancshares may depend, in part, upon
receipt of dividends from First Federal because First Federal Bancshares
initially will have no source of income other than dividends from First Federal
and earnings from the investment of the net proceeds from the offering retained
by First Federal Bancshares. Office of Thrift Supervision regulations limit
distributions from First Federal to First Federal Bancshares. In addition, First
Federal may not declare or pay a cash dividend on its capital stock if its
effect would be to reduce the regulatory capital of First Federal below the
amount required for the liquidation account to be established as required by
First Federal's plan of conversion. See "REGULATION AND SUPERVISION--FEDERAL
SAVINGS INSTITUTION REGULATION--LIMITATIONS ON CAPITAL DISTRIBUTIONS" AND "THE
CONVERSION--EFFECTS OF CONVERSION TO STOCK FORM--LIQUIDATION ACCOUNT."
Any payment of dividends by First Federal to First Federal Bancshares
that would be deemed to be drawn out of First Federal's bad debt reserves would
require the payment of federal income taxes by First Federal at the then current
income tax rate on the amount deemed distributed. See "FEDERAL AND STATE
TAXATION OF INCOME--FEDERAL INCOME TAXATION" and note 9 of the notes to
financial statements included in this prospectus. First Federal Bancshares does
not contemplate any distribution by First Federal that would result in this type
of tax liability.
Additionally, First Federal Bancshares and First Federal have committed
to the Office of Thrift Supervision that during the one-year period following
the conversion, First Federal Bancshares will not take any action to declare an
extraordinary dividend to stockholders that would be treated by recipients as a
tax-free return of capital for federal income tax purposes.
19
<PAGE>
MARKET FOR THE COMMON STOCK
First Federal Bancshares has not previously issued common stock and
there is currently no established market for the common stock. First Federal
Bancshares intends to have its common stock quoted on the Nasdaq National
Market under the symbol "FFBI" after the conversion.
One of the requirements for continued quotation of the common stock on
The Nasdaq Stock Market is that there be at least three market makers for the
common stock. FBR has advised First Federal Bancshares that it intends to make a
market in the common stock following the conversion, although FBR is under no
obligation to do so. First Federal Bancshares and FBR will cooperate to
encourage and assist at least two additional market makers to make a market in
the common stock. Making a market involves maintaining bid and asked quotations
and being able, as principal, to effect transactions in reasonable quantities at
those quoted prices. Various securities laws and other regulatory requirements
apply to these activities. While First Federal Bancshares believes that there
will be other broker-dealers to act as market makers for the common stock, First
Federal Bancshares cannot guarantee that there will be three or more market
makers for the common stock.
Additionally, the development of a liquid public market depends on the
existence of willing buyers and sellers, the presence of which is not within
First Federal Bancshares' control or under the control of any market maker. The
number of active buyers and sellers of the common stock at any particular time
may be limited. Under such circumstances, you could have difficulty selling your
shares on short notice and therefore you should not view the common stock as a
short-term investment. First Federal Bancshares cannot assure you that an active
and liquid trading market for the common stock will develop or that, if it
develops, it will continue. Furthermore, First Federal Bancshares cannot assure
you that if you purchase shares you will be able to sell them at or above $10.00
per share or that quotations will be available on the Nasdaq National Market as
contemplated.
20
<PAGE>
CAPITALIZATION
The following table presents the historical capitalization of First
Federal at February 29, 2000, and the capitalization of First Federal Bancshares
reflecting the conversion (referred to as "pro forma" information). The pro
forma capitalization gives effect to the assumptions listed under "PRO FORMA
DATA," based on the sale of the number of shares of common stock indicated in
the table. This table does not reflect the issuance of additional shares under
the proposed stock-based incentive plan. A CHANGE IN THE NUMBER OF SHARES TO BE
ISSUED IN THE CONVERSION MAY MATERIALLY AFFECT PRO FORMA CAPITALIZATION.
<TABLE>
<CAPTION>
FIRST FEDERAL BANCSHARES PRO FORMA
CAPITALIZATION BASED UPON THE SALE OF
-------------------------------------
FIRST FEDERAL 1,657,500 2,242,500 2,578,875
CAPITALIZATION SHARES AT SHARES AT SHARES AT
AS OF $10.00 $10.00 $10.00
FEBRUARY 29, 2000 PER SHARE PER SHARE PER SHARE
----------------- ---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Deposits (1)............................................... $182,572 $182,572 $182,572 $182,572
Advances from Federal Home Loan Bank....................... 6,000 6,000 6,000 6,000
-------- -------- -------- --------
Total deposits and borrowed funds.......................... $188,572 $188,572 $188,572 $188,572
======== ======== ======== ========
Stockholders' equity:
Preferred stock:
1,000,000 shares, $.01 par value per share,
authorized; none issued or outstanding............ $ -- $ -- $ -- $ --
Common stock:
4,000,000, $.01 par value per share,
authorized; specified number of shares
assumed to be issued and outstanding.............. -- 17 22 26
Additional paid-in capital................................. -- 15,654 21,419 24,732
Retained earnings (2)...................................... 24,131 24,131 24,131 24,131
Net unrealized gain on available-for-sale securities, net.. (105) (105) (105) (105)
Less:
Common stock acquired by employee
stock ownership plan (3)............................. -- (1,326) (1,794) (2,063)
Common stock to be acquired by stock-based
incentive plan (4)................................... -- (663) (897) (1,032)
-------- -------- -------- --------
Total stockholders' equity................................. $24,026 $37,708 $42,776 $45,689
======== ======== ======== ========
</TABLE>
----------
(1) Does not reflect withdrawals from deposit accounts for the purchase of
common stock in the offering. Withdrawals to purchase common stock will
reduce pro forma deposits by the amounts of the withdrawals.
(2) Retained earnings are restricted by applicable regulatory capital
requirements. Additionally, First Federal will be prohibited from paying
any dividend that would reduce its regulatory capital below the amount in
the liquidation account, which will be established for the benefit of First
Federal's eligible depositors as of October 31, 1998 and June 30, 2000 at
the time of the conversion and decreased subsequently as these account
holders reduce their balances or cease to be depositors. See "THE
CONVERSION--EFFECTS OF CONVERSION TO STOCK FORM--LIQUIDATION ACCOUNT."
(3) Assumes that 8% of the common stock issued in the conversion will be
acquired by the employee stock ownership plan in the conversion with funds
borrowed from First Federal Bancshares. Under generally accepted accounting
principles, the amount of common stock to be purchased by the employee
stock ownership plan represents unearned compensation and is, accordingly,
reflected as a reduction of capital. As shares are released to plan
participants' accounts, a corresponding reduction in the charge against
capital will occur. Since the funds are borrowed from First Federal
Bancshares, the borrowing will be eliminated in consolidation and no
liability or interest expense will be reflected in the consolidated
financial statements of First Federal Bancshares. See "MANAGEMENT OF FIRST
FEDERAL BANK--BENEFITS--EMPLOYEE STOCK OWNERSHIP PLAN."
(4) Assumes the purchase in the open market at $10.00 per share, under the
proposed stock-based incentive plan, of a number of shares equal to 4% of
the shares of common stock issued in the conversion. The shares are
reflected as a reduction of stockholders' equity. See "RISK
FACTORS--ISSUANCE OF SHARES FOR BENEFIT PROGRAMS MAY REDUCE YOUR OWNERSHIP
INTEREST," "PRO FORMA DATA" and "MANAGEMENT OF FIRST FEDERAL
BANK--BENEFITS--STOCK-BASED INCENTIVE PLAN." The stock-based incentive plan
will be submitted to stockholders for approval at a meeting following the
conversion.
21
<PAGE>
REGULATORY CAPITAL COMPLIANCE
At February 29, 2000, First Federal exceeded all regulatory capital
requirements. The following table presents First Federal's capital position
relative to its regulatory capital requirements at February 29, 2000, on a
historical and pro forma basis. The table reflects receipt by First Federal of
50% of the net proceeds of the offering. For purposes of the table, the amount
expected to be borrowed by the employee stock ownership plan and the cost of the
shares expected to be awarded under the stock-based incentive plan as restricted
stock are deducted from pro forma regulatory capital. For a discussion of the
assumptions underlying the pro forma capital calculations presented below, see
"USE OF PROCEEDS," "CAPITALIZATION" and "PRO FORMA DATA." The definitions of the
terms used in the table are those provided in the capital regulations issued by
the Office of Thrift Supervision. For a discussion of the capital standards
applicable to First Federal, see "REGULATION AND SUPERVISION--FEDERAL SAVINGS
INSTITUTION REGULATION--CAPITAL REQUIREMENTS."
<TABLE>
<CAPTION>
PRO FORMA AT FEBRUARY 29, 2000
-----------------------------------------------------------------
15% ABOVE
MINIMUM OF MAXIMUM OF MAXIMUM OF
OFFERING RANGE OFFERING RANGE OFFERING RANGE
---------------------- ------------------ --------------------
HISTORICAL AT 1,657,500 SHARES 2,242,500 SHARES 2,578,875 SHARES
FEBRUARY 29, 2000 AT $10.00 PER SHARE AT $10.00 PER SHARE AT $10.00 PER SHARE
------------------- ---------------------- ------------------- ---------------------
AMOUNT PERCENT(1) AMOUNT PERCENT(1) AMOUNT PERCENT(1) AMOUNT PERCENT(1)
------ ---------- ------- ---------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Generally accepted accounting
principles capital............... $24,026 11.26% $29,873 13.64% $32,056 14.49% $33,310 14.97%
======= ===== ======= ===== ======= ===== ======= =====
Tangible Capital:
Capital level (2)..................... $24,084 11.29% $29,931 13.66% $32,114 14.51% $33,368 14.99%
Requirement........................... 3,200 1.50 3,287 1.50 3,320 1.50 3,339 1.50
------- ----- ------- ----- ------- ----- ------- -----
Excess................................ $20,884 9.79% $26,644 12.16% $28,794 13.01% $30,029 13.49%
======= ===== ======= ===== ======= ===== ======= =====
Core Capital:
Capital level (2)..................... $24,084 11.29% $29,931 13.66% $32,114 14.51% $33,368 14.99%
Requirement........................... 8,532 4.00 8,766 4.00 8,854 4.00 8,904 4.00
------- ----- ------- ----- ------- ----- ------- -----
Excess................................ $15,552 7.29% $21,165 9.66% $23,260 10.51% $24,464 10.99%
======= ===== ======= ===== ======= ===== ======= =====
Total Risk-Based Capital:
Total risk-based capital (3).......... $24,626 24.86% $30,473 30.41% $32,656 32.44% $33,910 33.60%
Requirement........................... 7,924 8.00 8,018 8.00 8,053 8.00 8,073 8.00
------- ----- ------- ----- ------- ----- ------- -----
Excess................................ $16,702 16.86% $22,455 22.41% $24,603 24.44% $25,837 25.60%
======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
----------
(1) Tangible capital and core capital levels are shown as a percentage of
adjusted total assets of $213.3 million. Risk-based capital levels are
shown as a percentage of risk-weighted assets of $99.1 million.
(2) Goodwill and a portion of the net unrealized losses on available-for-sale
securities accounts for the difference between generally accepted
accounting principles capital and each of tangible capital. See note 12
to the notes to financial statements for additional information.
(3) Pro forma amounts and percentages assumes net proceeds are invested in
assets that carry a 20% risk-weighting.
22
<PAGE>
PRO FORMA DATA
The following table shows information about the net income and
stockholders' equity of First Federal Bancshares reflecting the conversion. The
information provided illustrates the pro forma net income and stockholders'
equity of First Federal Bancshares based on the sale of common stock at the
minimum of the offering range, the maximum of the offering range and 15% above
the maximum of the offering range. The actual net proceeds from the sale of the
common stock cannot be determined until the conversion is completed. Net
proceeds indicated in the following tables are based upon the following
assumptions:
- FBR will receive a fee equal to 1.5% of the aggregate purchase
price of the shares sold in the conversion, except that no fee
will be paid with respect to shares purchased by the employee
stock ownership plan, officers, employees, directors of First
Federal or First Federal Bancshares and their associates. See "THE
CONVERSION--MARKETING AND UNDERWRITING ARRANGEMENTS."
- Conversion expenses, excluding the fee paid to FBR, will total
approximately $690,000 regardless of the number of shares sold in
the conversion.
Actual expenses may vary from this estimate, and the fees paid will
depend upon whether a syndicate of broker-dealers or other means is necessary to
sell the shares, and other factors.
Pro forma net income for the year ended February 29, 2000 has been
calculated as if the conversion were completed at March 1, 1999, and the net
proceeds had been invested at 6.39% beginning on that date, which represents
the one-year U.S. Treasury Bill yield as of February 29, 2000. In light of
the changes in the market interest rates in recent periods, First Federal
believes that the U.S. Treasury Bill yield represents a more realistic yield
on the investment of the offering proceeds, rather than the arithmetic
average of the weighted average yield earned by First Federal on its
interest-earning assets and the interest rates paid on its deposits as
required by Office of Thrift Supervision regulation.
A pro forma after-tax return of 3.91% is used for both First Federal
Bancshares and First Federal for the year ended February 29, 2000, after giving
effect to a combined federal and state income tax rate of 38.74%. Historical and
pro forma per share amounts have been calculated by dividing historical and pro
forma amounts by the number of shares of common stock indicated in the table.
When reviewing the following table you should consider the following:
- The final column gives effect to a 15% increase in the offering
range, which may occur without any further notice if RP Financial
increases its appraisal to reflect the results of this offering or
changes in the financial condition or results of operations of
First Federal or changes in market conditions after the offering
begins. See "THE CONVERSION--STOCK PRICING AND NUMBER OF SHARES TO
BE ISSUED."
- Since funds on deposit at First Federal may be withdrawn to
purchase shares of common stock, the amount of funds available to
First Federal Bancshares for investment will be reduced by the
amount of withdrawals for stock purchases. The pro forma tables do
not reflect withdrawals from deposit accounts.
- Historical per share amounts have been computed as if the shares
of common stock expected to be issued in the conversion had been
outstanding at the beginning of the period covered by the table.
However, neither historical nor pro forma stockholders' equity has
been adjusted to reflect the investment of the estimated net
proceeds from the sale of the shares in the conversion, the
additional employee stock ownership plan expense or the proposed
stock-based incentive plan.
23
<PAGE>
- Pro forma stockholders' equity ("book value") represents the
difference between the stated amounts of First Federal's assets
and liabilities. The amounts shown do not reflect the liquidation
account, which will be established for the benefit of eligible
depositors as of October 31, 1998 and June 30, 2000, or the
federal income tax consequences of the restoration to income of
First Federal's special bad debt reserves for income tax purposes,
which would be required in the unlikely event of liquidation.
See "FEDERAL AND STATE TAXATION" and "THE CONVERSION--EFFECTS OF
CONVERSION TO STOCK FORM." The amounts shown for book value do
not represent fair market values or amounts available for
distribution to stockholders in the unlikely event of liquidation.
- The amounts shown as pro forma stockholders' equity per share do
not represent possible future price appreciation of First Federal
Bancshares' common stock.
- The amounts shown do not account for the shares to be reserved for
issuance under the stock-based incentive plan, which requires
stockholder approval at a meeting following the conversion.
The following pro forma data, which are based on First Federal's equity
at February 29, 2000, and net income for the year ended February 29, 2000, may
not represent the actual financial effects of the conversion or the operating
results of First Federal Bancshares after the conversion. The pro forma data
rely exclusively on the assumptions outlined above and in the notes to the pro
forma table. The pro forma data do not represent the fair market value of First
Federal Bancshares' common stock, the current fair market value of First
Federal's or First Federal Bancshares' assets or liabilities, or the amount of
money that would be available for distribution to stockholders if First Federal
Bancshares is liquidated after the conversion.
24
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED FEBRUARY 29, 2000
---------------------------------------------
15% ABOVE
MINIMUM OF MAXIMUM OF MAXIMUM OF
OFFERING OFFERING OFFERING
RANGE RANGE RANGE
-------------- ----------- -----------
1,657,500 2,242,500 2,578,875
SHARES SHARES SHARES
AT $10.00 AT $10.00 AT $10.00
PER SHARE PER SHARE PER SHARE
---------- --------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Gross proceeds...................................................... 16,575 $22,425 $25,789
Less: estimated expenses........................................... (904) (984) (1,031)
------ ------- -------
Estimated net proceeds.............................................. 15,671 21,441 24,758
Less: common stock acquired by employee stock ownership plan (1)... (1,326) (1,794) (2,063)
Less: common stock to be acquired by stock-based incentive plan.... (663) (897) (1,032)
------ ------- -------
Net investable proceeds.......................................... 13,682 $18,750 $21,663
====== ======= =======
PRO FORMA NET INCOME:
Pro forma net income:
Historical....................................................... $1,508 $1,508 $1,508
Pro forma income on net investable proceeds...................... 535 733 847
Less: pro forma employee stock ownership plan adjustments (1)... (81) (110) (126)
Less: pro forma stock-based incentive plan adjustments (2)...... (81) (110) (126)
------ ------- ------
Pro forma net income.......................................... $1,881 $2,021 $2,103
====== ======= ======
Pro forma net income per share:
Historical....................................................... $ 0.98 $ 0.72 $ 0.63
Pro forma income on net investable proceeds...................... 0.35 0.35 0.35
Less: pro forma employee stock ownership plan adjustments (1)... (0.05) (0.05) (0.05)
Less: pro forma stock-based incentive plan adjustments (2)...... (0.05) (0.05) (0.05)
------ ------- ------
Pro forma net income per share................................ $ 1.23 $ 0.97 $ 0.88
====== ======= ======
Number of shares used to calculate pro forma net income
per share (3)..................................................... 1,538,160 2,081,040 2,393,196
Purchase price as a multiple of pro forma net income per share...... 8.13x 10.31x 11.36x
PRO FORMA STOCKHOLDERS' EQUITY:
Pro forma stockholders' equity (book value):
Historical....................................................... $24,026 $24,026 $24,026
Estimated net proceeds........................................... 15,671 21,441 24,758
Less: common stock acquired by employee stock ownership
plan(1) ................................................. (1,326) (1,794) (2,063)
Less: common stock to be acquired by stock-based incentive
plan(2) ................................................. (663) (897) (1,032)
------- ------- -------
Pro forma stockholders' equity................................ $37,708 $42,776 $45,689
======= ======= =======
Pro forma stockholders' equity per share:
Historical....................................................... $ 14.50 $ 10.71 $ 9.32
Estimated net proceeds........................................... 9.45 9.56 9.60
Less: common stock acquired by employee stock ownership
plan(1) ................................................. (0.80) (0.80) (0.80)
Less: common stock to be acquired by stock-based incentive
plan(2) ................................................. (0.40) (0.40) (0.40)
------ ------- -------
Pro forma stockholders' equity per share...................... $ 22.75 $ 19.07 $ 17.72
======= ======= =======
Number of shares used to calculate pro forma stockholders' equity
per share........................................................ 1,657,500 2,242,500 2,578,875
Purchase price as a percentage of pro forma stockholders' equity
per share........................................................ 43.96% 52.44% 56.43%
</TABLE>
----------------------------
(1) Assumes that the employee stock ownership plan will acquire an amount of
stock equal to 8% of the shares of common stock offered in the conversion.
The employee stock ownership plan will borrow the funds used to acquire
these shares from the net proceeds from the conversion retained by First
Federal Bancshares. The amount of this borrowing has been reflected as a
reduction from gross proceeds to determine estimated net investable
proceeds. This borrowing will have an interest rate equal to the prime rate
as published in THE WALL STREET JOURNAL, which is currently _____%. First
Federal
25
<PAGE>
intends to make contributions to the employee stock ownership plan in
amounts at least equal to the principal and interest requirement of the
debt. As the debt is paid down, stockholders' equity will be increased.
First Federal's payment of the employee stock ownership plan debt is based
upon equal installments of principal over a 10-year period, assuming a
combined federal and state income tax rate of 38.74%. Interest income
earned by First Federal Bancshares on the loan to the employee stock
ownership plan offsets the interest paid on the loan by First Federal. No
reinvestment is assumed on proceeds contributed to fund the employee stock
ownership plan. Applicable accounting principles require that compensation
expense for the employee stock ownership plan be based upon shares
committed to be released and that unallocated shares be excluded from
earnings per share computations. The valuation of shares committed to be
released would be based upon the average market value of the shares during
the year, which, for purposes of this calculation, was assumed to be equal
to the $10.00 per share purchase price. See "MANAGEMENT OF FIRST FEDERAL
BANK--BENEFITS--EMPLOYEE STOCK OWNERSHIP PLAN."
(2) In calculating the pro forma effect of the restricted stock awards, it is
assumed that the required stockholder approval has been received, that the
shares used to fund the awards were acquired at the beginning of the
respective period in open market purchases at the $10.00 per share purchase
price, that 20% of the amount contributed was an amortized expense during
the period, and that the combined federal and state income tax rate is
38.74%. The issuance of authorized but unissued shares of the common stock
instead of open market purchases would dilute the voting interests of
existing stockholders by approximately 3.85%.
For purposes of this table, shares of restricted stock issued under the
stock-based incentive plan vest 20% per year and compensation expense is
recognized on a straight-line basis over each vesting period. If the fair
market value per share is greater than $10.00 per share on the date shares
are awarded under the stock-based incentive plan, total stock-based
incentive plan expense would be greater. The total estimated expense was
multiplied by 20%, which is the total percent of shares for which expense
is recognized in the first year.
The following table shows the estimated pro forma net income and
stockholders' equity per share if restricted shares awarded under the
stock-based incentive plan were authorized but unissued shares instead of
repurchased shares. The table also shows the estimated pre-tax stock-based
incentive plan expense. The number of shares used to calculate pro
forma net income per share in the following table is the total number of
shares issued at the indicated point in the offering range, minus the
number of shares sold to the employee stock ownership plan assumed not
to be committed to be released within the first year following the
conversion and plus the number of shares that may be awarded as
restricted stock under the planned stock-based benefit plan. The number
of shares used calculate pro forma stockholders' equity per share in the
following table is the total number of shares issued at the indicated
point in the offering range, plus the number of shares that may be
awarded as restricted stock under the planned stock-based beneficial plan.
<TABLE>
<CAPTION>
15% ABOVE
MINIMUM MAXIMUM MAXIMUM
OF OFFERING OF OFFERING OF OFFERING
RANGE RANGE RANGE
------------ ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Pro forma net income per share:
Year ended February 29, 2000....................... $ 1.19 $ 0.95 $ 0.86
Number of shares used to calculate pro forma net income
per share............................................ 1,604,460 2,170,740 2,496,351
Pro forma stockholders' equity per share:
At February 29, 2000............................... $22.26 $18.73 $17.42
Number of shares used to calculate pro forma
stockholders' equity per share....................... 1,723,800 2,332,200 2,682,030
Pre-tax stock-based incentive plan expense:
Year ended February 29, 2000....................... $133 $179 $206
</TABLE>
(3) Number of shares used to calculate pro forma net income per share is the
total number of shares issued at the indicated point in the offering range,
minus the number of shares sold to the employee stock ownership plan
assumed not to be committed to be released within the first year following
the conversion.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The objective of this section is to help potential investors understand
management's views on First Federal's financial condition and results of
operations. You should read this discussion in conjunction with the financial
statements and the notes to the financial statements that appear at the end of
this prospectus. Years in this discussion (2000, 1999, etc.) refer to First
Federal's February-ending fiscal years. First Federal Bancshares and First
Federal intend to adopt a December 31 fiscal year end in order to be on a
reporting schedule that is more familiar to investors and analysts and that
coincides with First Federal's regulatory reporting schedule.
GENERAL
First Federal's results of operations depend primarily on net interest
income, which is the difference between the interest income earned on First
Federal's interest-earning assets, such as loans and securities, and the
interest expense on its interest-bearing liabilities, such as deposits and
borrowings. First Federal also generates noninterest income primarily from loan
fees and service charges. First Federal's noninterest expenses primarily consist
of employee compensation and benefits, occupancy expense, advertising and other
operating expenses. First Federal's results of operations are also affected by
general economic and competitive conditions, notably changes in market interest
rates, government policies and regulations.
FORWARD LOOKING STATEMENTS
This prospectus contains forward-looking statements that are based on
assumptions and describe future plans, strategies, and expectations of First
Federal and First Federal Bancshares. These forward-looking statements are
generally identified by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. First Federal's and
First Federal Bancshares' ability to predict results or the actual effect of
future plans or strategies is inherently uncertain. Factors that could have a
material adverse effect on the operations of First Federal and First Federal
Bancshares include, but are not limited to, changes in interest rates, general
economic conditions, legislative/regulatory changes, monetary and fiscal
policies of the U.S. Government, including policies of the Department of
Treasury and the Federal Reserve Board, the quality and composition of the loan
or investment portfolios, demand for loan products, deposit flows, competition,
demand for financial services in First Federal's and First Federal Bancshares'
market area and accounting principles. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements.
OPERATING STRATEGY
First Federal is an independent, community-oriented financial
institution with a commitment to providing residential, personal and business
financing and financial services products in the market areas served by its
banking offices. First Federal's mission is to position itself to compete as a
community-based independent financial institution, meeting the needs of its
local customer base and providing high quality personal customer service in
meeting those needs. To accomplish these objectives, in addition to offering a
variety of mortgage loan and retail deposit products, First Federal has:
- expanded its product offering to include credit and debit cards
and a variety of transaction accounts;
- hired an experienced commercial loan officer to head its new
commercial loan department;
- implemented a web site and deployed eight automated teller
machines to provide service outside its banking offices; and
- developed a variety of consumer loan products.
27
<PAGE>
As part of its interest rate risk management strategy, First Federal
emphasizes short-term, balloon and adjustable-rate loans. In recent years, when
market interest rates have been relatively low, First Federal has increased its
portfolio of securities rather than originating long-term, fixed-rate loans.
First Federal's securities portfolio consists primarily of U.S. government
agency obligations and mortgage-backed securities.
COMPARISON OF FINANCIAL CONDITION AT FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
Total assets at February 29, 2000 were $213.2 million compared to
$201.2 million at February 28, 1999, an increase of $12.0 million or 6.0%. The
increase was primarily a result of increased loan originations due to continued
market demand and purchases of securities. The increase in loans was funded
through increased deposits of $5.9 million and borrowings from the Federal Home
Loan Bank of $6.0 million.
Total equity at February 29, 2000 was $24.0 million compared to $23.3
million at February 28, 1999. The increase of $689,000, or 3.0%, was a result of
net income of $1.5 million, partially offset by a $818,000 decrease in the
unrealized gain on securities available for sale.
FISCAL 2000 COMPARED WITH FISCAL 1999
GENERAL. Net income for fiscal 2000 decreased $93,000, or 5.8%, to
$1.5 million from $1.6 million for fiscal 1999. Return on average equity was
6.55% in fiscal 2000 compared to 7.37% in fiscal 1999. Return on assets was
0.72% in fiscal 2000 compared to 0.83% in fiscal 1999. Although net interest
income increased 1.5%, First Federal recorded a larger provision for loan
losses as a result of the growth of First Federal's loan portfolio, increased
charge-offs and expansion into commercial lending. As a result, net interest
income after provision for loan losses decreased slightly from fiscal 1999.
See "--PROVISION FOR LOAN LOSSES." Noninterest income increased $55,000, or
23.3%, while noninterest expense increased $122,000, or 4.5%, primarily as a
result of the addition of a commercial loan department.
INTEREST INCOME. Interest income for fiscal 2000 was $13.7 million
compared to $13.3 million for fiscal 1999, an increase of $365,000, or 2.7%. The
increase was primarily the result of an increase in the average balance of
interest-earning assets to $200.9 million for fiscal 2000 from $188.8 million
for fiscal 1999. The average balance of loans increased 1.1% while the average
balance of securities increased 24.1%. During fiscal 2000, First Federal
invested cash and cash equivalents in higher yielding securities, primarily U.S.
government agency obligations. The average balance of U.S. government agency
obligations increased $14.2 million from $44.5 million for fiscal 1999 to $58.7
million for fiscal 2000. Loans comprised 52.8% of interest-earning assets in
fiscal 2000 compared to 55.6% in fiscal 1999. The increase in the average
balance of interest-earning assets was partially offset by a decrease in the
average yield on earning assets from 7.04% for fiscal 1999 to 6.80% for fiscal
2000. The average yield on earning assets decreased on all categories of assets
as a result of market rates and competition.
INTEREST EXPENSE. Interest expense for fiscal 2000 was $8.6 million
compared to $8.3 million for fiscal 1999, an increase of $292,000, or 3.5%. The
increase was primarily due to an increase in volume of interest-bearing
liabilities to $182.4 million for fiscal 2000 from $169.1 million for fiscal
1999. The average balance of Federal Home Loan Bank borrowings was $5.5 million
for fiscal 2000, compared to $0 for the prior year. In addition, the average
balance of NOW and money market deposits increased $7.1 million to $32.9 million
for fiscal 2000 as a result of marketing efforts by First Federal and the
introduction of tiered interest rates for money market deposit accounts. The
increase in the volume of interest-bearing liabilities was partially offset by a
decrease in the average cost of funds from 4.94% for fiscal 1999 to 4.74% for
fiscal 2000. This was primarily a result of First Federal's effort to reduce
rates offered on certificates of deposit and still remain competitive.
PROVISION FOR LOAN LOSSES. First Federal's provision for the loan
losses for fiscal 2000 was $119,000 compared to $6,000 for fiscal 1999. The
increase in the provision for loan losses was primarily a result of increased
charge-offs in the current year in addition to loan growth and the expansion
of loan products into commercial business lending, which generally carry more
credit risk than traditional one- to four-family residential mortgage
lending. Net charge-offs totaled $93,000 for fiscal 2000 compared to $35,000
for fiscal 1999. In addition, gross loans increased $11.7 million of which
$3.4 million were commercial loans. See "BUSINESS OF FIRST FEDERAL
BANK--ALLOWANCE FOR LOAN LOSES." Management increases the allowance for loan
losses through a provision charged to expense based on a
28
<PAGE>
statistical percentage developed considering past loss experiences, delinquency
trends and other factors such as portfolio composition. While management
believes the existing level of reserves is adequate, future adjustments to the
allowance may be necessary due to economic, operating, regulatory, and other
conditions that may be beyond First Federal's control.
NONINTEREST INCOME. The following table shows the components of
noninterest income and the dollar and percentage change from fiscal 1999 to
fiscal 2000. Percentages are based on rounded numbers.
<TABLE>
<CAPTION>
FISCAL FISCAL DOLLAR PERCENTAGE
2000 1999 CHANGE CHANGE
-------------- ------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Service charges on NOW accounts................. $116 $ 95 $21 22.1%
Other fee income................................ 97 84 13 15.5
Other........................................... 78 57 21 36.8
---- ----- ----
Total..................................... $291 $236 $55 23.7
==== ===== ===
</TABLE>
Service charges on NOW accounts increased as a result of the increased
volume of demand deposits. Other fee income increased due to additional ATM fees
resulting from First Federal's addition of two new ATMs. Other income increased
as a result of $20,000 in insurance reimbursement relating to fraud and theft.
NONINTEREST EXPENSE. The following table shows the components of
noninterest expense and the dollar and percentage change from fiscal 1999 to
fiscal 2000. Percentages are based on rounded numbers.
<TABLE>
<CAPTION>
FISCAL FISCAL DOLLAR PERCENTAGE
2000 1999 CHANGE CHANGE
-------------- ------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Compensation and benefits....................... $1,464 $1,336 $128 9.6%
Occupancy and equipment......................... 354 379 (25) (6.6)
Data processing................................. 425 424 1 0.2
Federal insurance premiums...................... 151 152 (1) (0.6)
Advertising..................................... 104 97 7 7.2
Other........................................... 347 335 12 3.6
------ ------ ----
Total..................................... $2,845 $2,723 $122 4.5
====== ====== ====
</TABLE>
Compensation and benefits expense increased due to the hiring of a
full-time commercial loan officer and the transfer of two temporary employees to
full-time status. In addition, other expense increased due to expenses related
to the issuance of new ATM cards, including special promotions, and expenses
related to the addition of two new ATM machines. Other noninterest expense
includes goodwill amortization, ATM expense, professional fees, supplies,
postage, telephone, courier and miscellaneous expenses.
INCOME TAX EXPENSE. First Federal's federal and state income tax
expense decreased from $851,000 for fiscal 1999 to $837,000 for fiscal 2000 as a
result of a decrease in pretax income. First Federal's effective tax rate for
fiscal 2000 was 35.7% compared to 34.7% for fiscal 1999.
29
<PAGE>
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS/COST
The following table presents certain information for fiscal 2000 and
fiscal 1999 regarding average balances of assets and liabilities, as well as the
total dollar amounts of interest income from average interest-earning assets and
interest expense on average interest-bearing liabilities and the resulting
average yields and costs. The yields and costs for the periods indicated are
derived by dividing income or expense by the average balances of assets or
liabilities, respectively, for the periods presented. Average balances were
derived from daily balances.
<TABLE>
<CAPTION>
AT FEBRUARY 29,
2000 FISCAL 2000 FISCAL 1999
-------------------- ---------------------------------- ---------------------------------
AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- -------- ---------- --------- ----------- --------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans (1).............................. $114,098 7.52% $106,190 $ 7,933 7.47% $104,988 $ 8,189 7.80%
Securities (2)......................... 88,543 6.26 87,641 5,409 6.17 70,640 4,455 6.31
Deposits in other financial
institutions ........................ 6,514 5.81 7,089 318 4.48 13,161 651 4.95
------- -------- ------- -------- -------
Total interest-earning assets........ 209,155 6.93 200,920 13,660 6.80 188,789 13,295 7.04
Noninterest-earning assets.............. 4,032 7,702 5,097
-------- -------- --------
Total assets......................... $213,187 $208,622 $193,886
======== ======== ========
Interest-bearing liabilities:
Deposits:
Savings accounts and certificates..... $145,565 5.05 $144,016 7,108 4.94 $143,268 7,485 5.22
NOW and money market accounts......... 35,592 4.06 32,903 1,216 3.69 25,827 865 3.35
FHLB advances......................... 6,000 6.16 5,498 318 5.79 -- -- --
-------- -------- ------- -------- ------
Total interest-bearing liabilities.. 187,157 4.90 182,417 8,642 4.74 169,095 8,350 4.94
------- ------
Noninterest-bearing liabilities......... 2,004 3,185 3,078
-------- -------- --------
Total liabilities................... 189,161 185,602 172,173
Equity.................................. 24,026 23,020 21,713
-------- -------- --------
Total liabilities and equity........ $213,187 $208,622 $193,886
======== ======== ========
Net interest-earning assets......... $ 18,503 $ 19,694
======== ========
Net interest income/interest
rate spread (3)................. 2.03% $5,018 2.06% $4,945 2.10%
====== ====== ====== ====== ======
Net interest margin (4)............. 2.50% 2.62%
====== =====
Ratio of interest-earning assets
to interest-bearing liabilities.. 110.14% 111.65%
====== ======
</TABLE>
----------
(1) Balances are net of deferred loan origination costs, undisbursed proceeds
of construction loans in process, and include nonperforming loans.
(2) Includes $894,200 in stock in the FHLB of Chicago.
(3) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(4) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
30
<PAGE>
RATE/VOLUME ANALYSIS
The following table presents the effects of changing rates and volumes
on the interest income and interest expense of First Federal. The rate column
shows the effects attributable to changes in rate (changes in rate multiplied by
prior volume). The volume column shows the effects attributable to changes in
volume (changes in volume multiplied by prior rate). The net column represents
the sum of the prior columns. For purposes of this table, changes attributable
to changes in both rate and volume, which cannot be segregated, have been
allocated proportionately based on the absolute value of the change due to rate
and the change due to volume.
<TABLE>
<CAPTION>
FISCAL 2000 COMPARED TO FISCAL 1999
----------------------------------------
INCREASE (DECREASE)
DUE TO
-------------------------
RATE VOLUME NET
---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest-earning assets:
Loans...................................... $(350) $ 94 $(256)
Securities................................. (76) 1,030 954
Deposits in other financial institutions... (33) (300) (333)
------- ------- ------
Total interest-earning assets........ (459) 824 365
Interest-bearing liabilities:
Deposits:
Savings accounts and certificates....... (416) 39 (377)
NOW and money market accounts........... 114 237 351
FHLB advances.............................. -- 318 318
------- -------- ------
Total interest-bearing liabilities... (302) 594 292
------- -------- ------
Increase(decrease) in net
interest income............................ $(157) $ 230 $ 73
======= ======== ======
</TABLE>
MANAGEMENT OF INTEREST RATE RISK AND MARKET RISK ANALYSIS
QUALITATIVE ASPECTS OF MARKET RISK. First Federal's most significant
form of market risk is interest rate risk. The principal objectives of First
Federal's interest rate risk management are to evaluate the interest rate risk
inherent in certain balance sheet accounts, determine the level of risk
appropriate given First Federal's business strategy, operating environment,
capital and liquidity requirements and performance objectives, and manage the
risk consistent with the Board of Director's approved guidelines. First Federal
has an Asset/Liability Committee, responsible for reviewing its asset/liability
policies and interest rate risk position, which meets monthly and reports trends
and interest rate risk position to the Board of Directors quarterly. The extent
of the movement of interest rates is an uncertainty that could have a negative
impact on the earnings of First Federal.
In recent years, First Federal has used the following strategies to
manage interest rate risk: (1) emphasizing the origination of adjustable-rate
and balloon loans and not originating long-term, fixed-rate loans for
retention in its portfolio; (2) emphasizing shorter term consumer loans; (3)
introducing floating-rate commercial business loans tied to the prime rate;
(4) maintaining a high quality securities portfolio that provides adequate
liquidity and flexibility to take advantage of opportunities that may arise
from fluctuations in market interest rates, the overall maturity of which is
monitored in relation to the repricing of its loan portfolio; and (5) using
Federal Home Loan Bank advances to better structure maturities of its
interest rate sensitive liabilities. First Federal currently does not
participate in hedging programs, interest rate swaps or other activities
involving the use of off-balance sheet derivative financial instruments.
31
<PAGE>
QUANTITATIVE ASPECTS OF MARKET RISK. First Federal primarily
utilizes an interest sensitivity analysis prepared by the Office of Thrift
Supervision to review the level of interest rate risk. This analysis measures
interest rate risk by computing changes in the net portfolio value of First
Federal's cash flows from assets, liabilities and off-balance sheet items in
the event of a range of assumed changes in market interest rates. Net
portfolio value represents the market value of portfolio equity and is equal
to the market value of assets minus the market value of liabilities, with
adjustments made for off-balance sheet items. This analysis assesses the risk
of loss in market sensitive instruments in the event of a sudden and
sustained 100 to 300 basis point increase or decrease in market interest
rates with no effect given to any steps that management might take to counter
the effect of that interest rate movement. The following table, which was
prepared by the Office of Thrift Supervision based on data provided by First
Federal, presents the change in First Federal's net portfolio value at
December 31, 1999, that would occur upon an immediate change in interest
rates based on Office of Thrift Supervision assumptions, but without giving
effect to any steps that management might take to counteract that change.
<TABLE>
<CAPTION>
NPV AS % OF PORTFOLIO
CHANGE IN VALUE OF ASSETS
INTEREST RATES NET PORTFOLIO VALUE ----------------------------
IN BASIS POINTS ----------------------------------------------- NPV
(RATE SHOCK) AMOUNT $ CHANGE % CHANGE RATIO CHANGE(1)
--------------- --------- -------- --------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
300 $11,473 $(11,766) (51)% 5.77% (514)bp
200 15,698 (7,541) (32) 7.71 (320)
100 19,767 (3,472) (15) 9.48 (143)
Static 23,239 -- -- 10.91 --
(100) 25,782 2,543 11 11.92 101
(200) 26,023 2,784 12 11.97 106
(300) 26,594 3,355 14 12.15 124
</TABLE>
----------
(1) Expressed in basis points.
The Office of Thrift Supervision uses certain assumptions in assessing
the interest rate risk of savings associations. These assumptions relate to
interest rates, loan prepayment rates, deposit decay rates, and the market
values of certain assets under differing interest rate scenarios, among others.
As with any method of measuring interest rate risk, certain
shortcomings are inherent in the method of analysis presented in the foregoing
table. For example, although certain assets and liabilities may have similar
maturities or periods to repricing, they may react 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 adjustable rate mortgage loans,
have features which restrict changes in interest rates on a short-term basis and
over the life of the asset. Further, if interest rates change, expected rates of
prepayments on loans and early withdrawals from certificates of deposit could
deviate significantly from those assumed in calculating the table.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability to meet current and future financial
obligations of a short-term nature. First Federal further defines liquidity as
the ability to respond to the needs of depositors and borrowers as well as
maintaining the flexibility to take advantage of investment opportunities. First
Federal's primary sources of funds consist of deposit inflows, loan repayments,
maturities, paydowns, and sales of investment and mortgage-backed securities and
borrowings from the Federal Home Loan Bank. While maturities and scheduled
amortization of loans and securities are predictable sources of funds, deposit
flows and mortgage prepayments are greatly influenced by general interest rates,
economic conditions and competition. First Federal generally manages the pricing
of its deposits to be competitive and to increase core deposit relationships.
Federal regulations require First Federal to maintain minimum levels of
liquid assets. The required percentage has varied from time to time based upon
economic conditions and savings flows and is currently 4.0% 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, government agency and corporate
securities and other obligations generally having remaining maturities of less
than
32
<PAGE>
five years. First Federal has historically maintained its liquidity ratio for
regulatory purposes at levels in excess of those required. At February 29, 2000,
First Federal's liquidity ratio for regulatory purposes was 35.08%.
The primary investing activities of First Federal are the origination
of loans and the purchase of securities. In fiscal 2000, First Federal
originated $37.8 million of loans and purchased $24.8 million of securities. In
fiscal 1999, First Federal originated $27.4 million of loans and purchased $55.4
million of securities. Financing activities consist primarily of activity in
deposit accounts and Federal Home Loan Bank advances. First Federal experienced
a net increase in total deposits of $5.9 million and $13.9 million for fiscal
2000 and fiscal 1999, respectively. Deposit flows are affected by the overall
level of interest rates, the interest rates and products offered by First
Federal and its local competitors and other factors. First Federal closely
monitors its liquidity position on a daily basis.
First Federal's most liquid assets are cash and short-term investments.
The levels of these assets are dependent on First Federal's operating,
financing, lending and investing activities during any given period. At February
29, 2000, cash and short-term investments totaled $7.3 million. First Federal
has other sources of liquidity if a need for additional funds arises, including
securities maturing within one year and the repayment of loans. First Federal
may also utilize the sale of securities available-for-sale, federal funds
purchased, and Federal Home Loan Bank advances as a source of funds. At February
29, 2000, First Federal had the ability to borrow a total of approximately $17.9
million from the Federal Home Loan Bank of Chicago. On that date, First Federal
had advances outstanding of $6.0 million.
At February 29, 2000, First Federal had outstanding commitments to
originate loans of $1.4 million, $752,000 of which had fixed interest rates.
These loans are to be secured by properties located in its market area. First
Federal anticipates that it will have sufficient funds available to meet its
current loan commitments. Loan commitments have, in recent periods, been funded
through liquidity or through FHLB borrowings. Certificates of deposit that are
scheduled to mature in one year or less from February 29, 2000 totaled $98.9
million. Management believes, based on past experience, that a significant
portion of those deposits will remain with First Federal. Based on the
foregoing, in addition to First Federal's high level of core deposits and
capital, First Federal considers its liquidity and capital resources sufficient
to meet its outstanding short-term and long-term needs.
Liquidity management is both a daily and long-term responsibility of
management. First Federal adjusts its investments in liquid assets based upon
management's assessment of (1) expected loan demand, (2) expected deposit flows,
(3) yields available on interest-earning deposits and securities, and (4) the
objectives of its asset/liability management program. Excess liquid assets are
invested generally in interest-earning overnight deposits and short- and
intermediate-term U.S. Government and agency obligations and mortgage-backed
securities of short duration. If First Federal requires funds beyond its ability
to generate them internally, it has additional borrowing capacity with the
Federal Home Loan Bank of Chicago.
First Federal is subject to various regulatory capital requirements
administered by the Office of Thrift Supervision including a risk-based capital
measure. The risk-based capital guidelines include both a definition of capital
and a framework for calculating risk-weighted assets by assigning balance sheet
assets and off-balance sheet items to broad risk categories. At February 29,
2000, First Federal exceeded all of its regulatory capital requirements. First
Federal is considered "well capitalized" under regulatory guidelines. See
"REGULATION AND SUPERVISION- FEDERAL SAVINGS INSTITUTION REGULATION - CAPITAL
REQUIREMENTS" and "REGULATORY CAPITAL COMPLIANCE" and note 12 of the notes to
the financial statements.
The capital from the conversion will significantly increase liquidity
and capital resources. Over time, the initial level of liquidity will be reduced
as net proceeds from the stock offering are used for general corporate purposes,
including the funding of lending activities. First Federal's financial condition
and results of operations will be enhanced by the capital from the conversion,
resulting in increased net interest-earning assets and net income. However, due
to the large increase in equity resulting from the capital injection, return on
equity will be adversely impacted following the conversion.
33
<PAGE>
IMPACT OF ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," issued in June 1998 (as amended by SFAS No.
137), standardizes the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts. The Statement requires
entities to carry all derivative instruments in the statement of financial
position at fair value. The accounting for changes in the fair value, gains and
losses, of a derivative instrument depends on whether it has been designated and
qualifies as part of a hedging relationship and, if so, on the reasons for
holding it. If certain conditions are met, entities may elect to designate a
derivative instrument as a hedge of exposures to changes in fair value, cash
flows or foreign currencies. The statement is effective for fiscal years
beginning after June 15, 2000. The statement is not expected to affect First
Federal because First Federal does not currently purchase derivative instruments
or enter into hedging activities.
EFFECT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related financial data
presented in this prospectus have been prepared following 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
primary impact of inflation is reflected in the increased cost of First
Federal's operations. Unlike most industrial companies, virtually all the assets
and liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institution's performance than do 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.
BUSINESS OF FIRST FEDERAL BANCSHARES
GENERAL
First Federal Bancshares was organized as a Delaware business
corporation at the direction of First Federal in April 2000 to become the
holding company for First Federal upon completion of the conversion. As a result
of the conversion, First Federal will be a wholly owned subsidiary of First
Federal Bancshares and all of the issued and outstanding capital stock of First
Federal will be owned by First Federal Bancshares.
BUSINESS
Before the completion of the conversion, First Federal Bancshares will
not engage in any significant activities other than those of an organizational
nature. Following completion of the conversion, First Federal Bancshares'
business activity will be the ownership of the outstanding capital stock of
First Federal and management of the investment of proceeds retained from the
conversion. In the future, First Federal Bancshares may acquire or organize
other operating subsidiaries. There are no current plans, arrangements,
agreements or understandings, written or oral, to do so.
Initially, First Federal Bancshares will neither own nor lease any
property but will instead use the premises, equipment and furniture of First
Federal with the payment of appropriate rental fees, as required by applicable
law and regulations.
Since First Federal Bancshares will hold the outstanding capital stock
of First Federal after the conversion, the competitive conditions applicable to
First Federal Bancshares will be the same as those confronting First Federal.
See "BUSINESS OF FIRST FEDERAL BANK--COMPETITION."
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BUSINESS OF FIRST FEDERAL BANK
GENERAL
First Federal was founded in 1917 as an Illinois-chartered mutual
savings association under the name "Colchester Building and Loan Investment
Association." In 1977, First Federal adopted a federal mutual charter under the
name "First Federal Saving and Loan Association of Colchester." First Federal
changed its name to "First Federal Bank, F.S.B." in 1990. Following completion
of the conversion, First Federal will operate under the name "First Federal
Bank." First Federal is regulated by the Office of Thrift Supervision and the
Federal Deposit Insurance Corporation. First Federal's deposits are insured to
the maximum allowable amount by the Savings Association Insurance Fund of the
Federal Deposit Insurance Corporation. First Federal has been a member of the
Federal Home Loan Bank System since 1934.
First Federal operates as a community-oriented financial institution,
specializing in the acceptance of retail deposits from the general public in the
areas surrounding its six full-service banking offices and using those funds,
together with funds generated from operations and borrowings, to originate
loans. The principal lending activity of First Federal is the origination of
mortgage loans for the purpose of purchasing or refinancing one- to four-family
residential property. First Federal also originates multi-family and commercial
real estate loans, residential construction loans, commercial business loans and
a variety of consumer loans. First Federal originates loans primarily for
long-term investment purposes. See "--LENDING ACTIVITIES." First Federal also
invests in mortgage-backed securities, securities issued by the U.S. Government
and state and local governments, and other permissible investments. First
Federal's revenues are derived principally from the generation of interest and
fees on loans originated and, to a lesser extent, interest and dividends on
investments. First Federal's primary sources of funds are deposits, principal
and interest payments on loans and investments and advances from the Federal
Home Loan Bank of Chicago.
MARKET AREA
First Federal conducts business in west central Illinois from its home
office in Colchester (McDonough County), its two branch offices in Quincy (Adams
County) and its branch offices located in Mt. Sterling (Brown County) and Macomb
and Bushnell (McDonough County). First Federal's primary deposit gathering and
lending area is concentrated in the communities surrounding its six banking
offices and, to a lesser extent, in the surrounding counties.
The market area served by First Federal is generally rural and has an
agriculturally-based economy. Adams County, which is home to the city of Quincy,
is a regional population and employment center for west central Illinois. Quincy
has a diverse employment base and serves as a center for education, healthcare
and related services.
COMPETITION
First Federal faces intense competition for the attraction of deposits
and origination of loans in its market area. Its most direct competition for
deposits has historically come from the several financial institutions operating
in First Federal's market area and, to a lesser extent, from other financial
service companies, such as brokerage firms, credit unions and insurance
companies. While those entities still provide a significant source of
competition for deposits, First Federal also currently faces significant
competition for deposits from the mutual fund industry as customers seek
alternative sources of investment for their funds. In this regard, First Federal
also faces competition for investors' funds from their direct purchase of
short-term money market securities and other corporate and government
securities. First Federal's competition for loans comes primarily from financial
institutions in its market area, and to a lesser extent from other financial
service providers, such as mortgage companies and mortgage brokers.
Additionally, competition for loans may increase due to the increasing number of
non-depository financial service companies entering the mortgage market, such as
insurance companies, securities companies and specialty
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finance companies. First Federal expects competition to increase in the future
as a result of legislative, regulatory and technological changes and the
continuing trend of consolidation in the financial services industry.
Technological advances, for example, have lowered barriers to entry, allowed
banks to expand their geographic reach by providing services over the Internet
and made it possible for non-depository institutions to offer products and
services that traditionally have been provided by banks. The Gramm-Leach-Bliley
Act, which permits affiliation among banks, securities firms and insurance
companies, also will change the competitive environment in which First Federal
conducts business. Some of the institutions with which First Federal competes
are significantly larger than First Federal and, therefore, have significantly
greater resources. Competition for deposits and the origination of loans could
limit First Federal's growth in the future. See "RISK FACTORS--STRONG
COMPETITION COULD HURT FIRST FEDERAL'S PROFITS."
LENDING ACTIVITIES
GENERAL. First Federal's loan portfolio primarily consists of one- to
four-family mortgage loans. To a lesser degree, First Federal's loan portfolio
also includes multi-family and commercial real estate loans, residential
construction loans, commercial business loans and a variety of consumer loans.
Most of First Federal's borrowers are located in the counties where its branches
are located and in the surrounding counties.
First Federal's loans are subject to federal laws and regulations.
Interest rates charged by First Federal on loans are affected principally by
First Federal's current asset/liability strategy, the demand for various types
of loans, the supply of money available for lending purposes and the rates
offered by competitors. These factors are, in turn, affected by general and
economic conditions, monetary policies of the federal government, including the
Federal Reserve Board, legislative tax policies and governmental budgetary
matters.
LOAN PORTFOLIO ANALYSIS. The following table presents the composition
of First Federal's loan portfolio at the dates indicated. First Federal had no
concentration of loans exceeding 10% of total loans receivable other than as
disclosed below.
<TABLE>
<CAPTION>
AT FEBRUARY 29/28,
-------------------------------------------------------------------------------------
2000 1999 1998 1997
------------------- ------------------ ------------------ ----------------------
PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
------- -------- ------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family ................$ 80,383 70.52% $ 76,452 74.76% $ 77,203 72.99% $ 75,947 74.10%
Multi-family and commercial ........ 15,580 13.67 12,767 12.49 14,922 14.11 13,999 13.66
Construction ....................... 1,675 1.47 645 0.63 1,912 1.81 1,883 1.84
-------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans.. 97,638 85.66 89,864 87.88 94,037 88.91 91,829 89.60
Commercial loans .................... 3,885 3.41 532 0.52 469 0.44 610 0.60
Consumer and other loans:
Automobile ......................... 5,874 5.15 5,658 5.53 5,061 4.78 4,581 4.47
Home improvement ................... 2,434 2.14 2,276 2.23 2,513 2.38 2,382 2.32
Share loans ........................ 783 0.68 787 0.77 707 0.67 653 0.64
Other .............................. 3,379 2.96 3,141 3.07 2,984 2.82 2,429 2.37
-------- ------ -------- ------ -------- ------ -------- ------
Total consumer and
other loans............ 12,470 10.93 11,862 11.60 11,265 10.65 10,045 9.80
-------- ------ -------- ------ -------- ------ -------- ------
Total loans ................... 113,993 100.00% 102,258 100.00% 105,771 100.00% 102,484 100.00%
====== ====== ====== ======
Less:
Deferred loan origination fees
and discounts ..................... 92 33 (25) (60)
Allowance for loan losses .......... (483) (457) (486) (467)
-------- -------- -------- --------
Total loans, net .............$113,602 $101,834 $105,260 $101,957
======== ======== ======== ========
</TABLE>
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<PAGE>
The following table presents certain information at February 29, 2000
regarding the dollar amount of loans maturing in First Federal's portfolio based
on their contractual terms to maturity or scheduled amortization, but does not
include potential prepayments. Demand loans, loans having no stated schedule of
repayments and no stated maturity, and overdrafts are reported as becoming due
in one year or less. Loan balances do not include undisbursed loan proceeds, net
deferred loan origination costs and allowance for loan losses.
<TABLE>
<CAPTION>
AT FEBRUARY 29, 2000
------------------------------------------------------------------------
MULTI-
ONE-TO FAMILY AND
FOUR- COMMERCIAL TOTAL
FAMILY REAL ESTATE CONSTRUCTION CONSUMER COMMERCIAL LOANS
-------- ----------- ------------ -------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Amounts due in:
One year or less ..................... $ 1,665 $ 1,247 $ 1,675 $ 1,879 $ 607 $ 7,073
More than one year to three years .... 7,524 2,624 -- 3,377 667 14,192
More than three years to five years... 16,996 5,465 -- 5,504 2,185 30,150
More than five years to 10 years ..... 4,757 1,624 -- 1,690 -- 8,071
More than 10 years to 15 years ....... 25,005 3,254 -- 20 426 28,705
More than 15 years ................... 24,436 1,366 -- -- -- 25,802
-------- -------- -------- -------- -------- --------
Total amount due ................ $ 80,383 $ 15,580 $ 1,675 $ 12,470 $ 3,885 $113,993
======== ======== ======== ======== ======== ========
</TABLE>
Scheduled contractual principal repayments of loans do not reflect the
actual life of the loans. The average life of a loan is substantially less than
its contractual term because of prepayments. In addition, due-on-sale clauses on
loans generally give First Federal the right to declare loans immediately due
and payable if, among other things, the borrower sells the real property with
the mortgage and the loan is not repaid. The average life of a mortgage loan
tends to increase, however, when current mortgage loan market rates are
substantially higher than rates on existing mortgage loans and, conversely,
tends to decrease when rates on existing mortgage loans are substantially higher
than current mortgage loan market rates.
The following table presents the dollar amount of all loans due after
February 29, 2000, which have fixed interest rates and floating or adjustable
interest rates. The total dollar amount of loans due after February 28, 2001
that have fixed interest rates is $46.4 million and those having adjustable
interest rates is $60.5 million.
<TABLE>
<CAPTION>
DUE AFTER FEBRUARY 29, 2000
-------------------------------
FIXED ADJUSTABLE TOTAL
--------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Real estate loans:
One- to four-family .......... $ 25,968 $ 54,415 $ 80,383
Multi-family and commercial... 10,264 5,316 15,580
Construction ................. 908 767 1,675
-------- -------- --------
Total real estate loans... 37,140 60,498 97,638
Consumer loans .................. 12,452 18 12,470
Commercial loans ................ 3,292 593 3,885
-------- -------- --------
Total loans ............... $ 52,884 $ 61,109 $113,993
======== ======== ========
</TABLE>
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<PAGE>
ONE- TO FOUR-FAMILY REAL ESTATE LOANS. First Federal's primary lending
activity is the origination of loans secured by one- to four-family residences
located in its market area. First Federal's residential mortgage loans are
primarily structured as either one-year adjustable-rate mortgage loans or
five-year balloon loans. The loan fees charged, interest rates and other
provisions of First Federal's mortgage loans are determined by First Federal on
the basis of its own pricing criteria and market conditions.
First Federal's adjustable-rate mortgage loans are based on an
amortization schedule that ranges from 10 to 30 years. Interest rates and
payments on First Federal's adjustable-rate mortgage loans generally are
adjusted annually after one year based on the Federal Housing Finance Board's
national average mortgage contract rate for major lenders on the purchase of
previously occupied homes. The maximum amount by which the interest rate may be
increased or decreased on First Federal's adjustable-rate mortgage loans is 2%
per year and the lifetime interest rate cap is generally 5% over the initial
interest rate of the loan. First Federal qualifies the borrower based on the
borrower's ability to repay the loan based on the maximum interest rate at the
first adjustment. The terms and conditions of the adjustable-rate mortgage loans
offered by First Federal, including the index for interest rates, may vary from
time to time.
First Federal's balloon loans have a five-year term and payments based
on an amortization schedule of up to 30 years. The interest rate on First
Federal's balloon loans is fixed for the term of the loan. First Federal
typically notifies the borrower in writing 30 days before the end of the loan
term of the maturity of the loan and that the loan must be repaid or the term
extended. In most instances, a new rate is negotiated to meet market conditions
and an extension of the loan is executed for another five-year term with an
amortization schedule equal to the original amortization term less the prior
balloon term(s). First Federal generally does not extend the loan if the
borrower is delinquent or has had a poor payment history.
In January 2000, First Federal began offering 30-year fixed rate
mortgage loans through the Federal Home Loan Bank's Mortgage Partnership Finance
Program. Through this program, mortgage loans are funded and owned by the
Federal Home Loan Bank and serviced by First Federal. At February 29, 2000,
First Federal was servicing two loans originated through the Mortgage
Partnership Finance Program.
Most loans originated by First Federal conform to Fannie Mae and
Freddie Mac underwriting standards. However, First Federal also originates
residential mortgage loans that are not originated in accordance with the
purchase requirements of Freddie Mac or Fannie Mae. Although such loans satisfy
First Federal's underwriting requirements, they are considered "non-conforming"
because they do not satisfy collateral requirements, income and debt ratios,
acreage limits, insurance requirements or various other requirements imposed by
Freddie Mac and Fannie Mae. Accordingly, First Federal's non-conforming loans
could be sold only after incurring certain costs and/or discounting the purchase
price. First Federal, however, currently does not intend to sell its loans.
First Federal has historically found that its origination of non-conforming
loans has not resulted in high amounts of non-performing loans. In addition,
First Federal believes that these loans satisfy a need in First Federal's local
community. As a result, First Federal intends to continue to originate
non-conforming loans.
Adjustable-rate mortgage loans help reduce First Federal's exposure to
changes in interest rates. The retention of balloon loans in First Federal's
loan portfolio, which through the use of extension agreements function like
adjustable-rate mortgage loans, also helps reduce First Federal's exposure to
changes in interest rates. There are, however, unquantifiable credit risks
resulting from the potential of increased costs due to changed rates to be paid
by the borrower. It is possible that during periods of rising interest rates the
risk of default on adjustable-rate mortgage loans may increase as a result of
repricing and the increased payments required by the borrower. In addition,
although adjustable-rate mortgage loans make First Federal's asset base more
responsive to changes in interest rates, the extent of this interest sensitivity
is limited by the annual and lifetime interest rate adjustment limits. Because
of these considerations First Federal has no assurance that yields on
adjustable-rate mortgage loans will be sufficient to offset increases in First
Federal's cost of funds during periods of rising interest rates. First Federal
believes these risks, which have not had a material adverse effect on First
Federal to date, are less than the risks associated with holding fixed-rate
loans in its portfolio in a rising interest rate environment.
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<PAGE>
First Federal requires all properties securing its mortgage loans to
be appraised by an approved independent state-certified and licensed appraiser.
First Federal's lending policies permit First Federal to lend up to 95% of the
appraised value of the property or the purchase price of the property, whichever
is less; however, First Federal generally requires private mortgage insurance on
the portion of the principal amount that exceeds 80% of the appraised value of
the property. First Federal also requires that fire, casualty, title, hazard
insurance and, if appropriate, flood insurance be maintained on most properties
securing real estate loans made by First Federal.
In an effort to provide financing for moderate income and first-time
home buyers, First Federal offers the Affordable Housing Loan Program through
the Illinois League of Financial Institutions and has its own first-time home
buyer loan program, the Community Home Buyer Program. First Federal offers
residential mortgage loans through these programs to qualified individuals and
originates the loans using modified underwriting guidelines. Most of these loans
have private mortgage insurance on the portion of the principal amount that
exceeds 80% of the appraised value of the property. At February 29, 2000 First
Federal had five and 235 loans originated through the Affordable Housing Loan
Program and the Community Home Buyer Program, respectively.
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LOANS. First Federal originates
mortgage loans for the acquisition and refinancing of multi-family and
commercial real estate properties. In an effort to increase its emphasis on
commercial loans, First Federal hired an experienced commercial loan officer in
September 1999 with the primary responsibility of increasing commercial real
estate and business loan volume.
Most of the multi-family loans and commercial real estate loans
originated by First Federal are five-year balloon loans with payments based on
an amortization schedule of up to 20 years. Generally, the maximum loan-to-value
ratio for a multi-family or commercial real estate loan is 75%. First Federal
requires written appraisals prepared by an approved independent appraiser of all
properties located in Quincy, Illinois securing multi-family or commercial real
estate loans in amounts over $50,000 and all properties located in the remainder
of First Federal's market area securing multi-family or commercial real estate
loans in amounts over $5,000.
At February 29, 2000, First Federal's largest multi-family loan had a
balance of $304,000 and was secured by an apartment complex located in Phoenix,
Arizona. At February 29, 2000, this loan was performing according to its
original terms. At February 29, 2000, First Federal's commercial real estate
loans were secured by a variety of properties, including retail and small office
properties, farmland and churches. At February 29, 2000, First Federal's largest
commercial real estate loan had an outstanding balance of $889,000. The loan is
secured by a gas station/ convenience store located in Macomb, Illinois. At
February 29, 2000, this loan was performing according to its original terms.
Multi-family and commercial real estate lending affords First Federal
an opportunity to receive interest at rates higher than those generally
available from one- to four-family residential lending. However, loans secured
by these properties usually are greater in amount and are more difficult to
evaluate and monitor and, therefore, involve a greater degree of risk than one-
to four-family residential mortgage loans. Because payments on loans secured by
income producing properties are often dependent on 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. First Federal seeks
to minimize these risks by generally limiting the maximum loan-to-value ratio to
75% for multi-family and commercial real estate loans and by strictly
scrutinizing the financial condition of the borrower, the cash flow of the
project, the quality of the collateral and the management of the property
securing the loan. First Federal also attempts to minimize credit risk by
lending almost solely on local properties to businesses with which First Federal
is familiar. First Federal conducts a visual inspection for possible
environmental compliance concerns and requires an environmental audit with
respect to manufacturing facilities securing any loan over $200,000 and any
other property where the inspection discloses possible problems. First Federal
also generally obtains personal loan guarantees from financially capable
parties.
RESIDENTIAL CONSTRUCTION LOANS. First Federal originates construction
loans to professional builders and to individuals for the construction and
acquisition of personal residences. Most of First Federal's construction
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<PAGE>
loans are made to individuals. First Federal's construction loans generally
provide for the payment of interest only during the construction phase, which is
usually six months. In the case of loans to individuals, at the end of the
construction phase, the loan converts to a permanent mortgage loan. Loans can be
made with a maximum loan to value ratio of 80%.
Before making a commitment to fund a construction loan, First Federal
requires an appraisal of the property by a licensed appraiser. First Federal
also reviews and inspects each property before disbursement of funds during the
term of the construction loan. Loan proceeds are disbursed after inspection
based on the percentage of completion.
Construction lending generally involves a higher degree of risk than
single-family permanent mortgage lending because of the greater potential for
disagreements between borrowers and builders and the failure of builders to pay
subcontractors. Additional risk often exists because of the inherent difficulty
in estimating both a property's value and the estimated cost of the property. If
the estimate of construction cost proves to be inaccurate, First Federal may be
required to advance funds beyond the amount originally committed to protect the
value of the property. If the estimate of value upon completion proves to be
inaccurate, First Federal may be confronted with a property whose value is
insufficient to assure full repayment. First Federal has attempted to minimize
the foregoing risks by, among other things, limiting its construction lending to
residential properties, limiting loans to builders for speculative construction
projects and by having all construction loans to individuals convert to
permanent mortgage loans at the end of the construction phase. It is also First
Federal's general policy to obtain regular financial statements and tax returns
from builders so that it can monitor their financial strength and ability to
repay.
COMMERCIAL BUSINESS LOANS. First Federal makes commercial business
loans in its market area to a variety of professionals, sole proprietorships,
partnerships and corporations. First Federal offers a variety of commercial
lending products that include term loans for equipment financing, term loans for
business acquisitions, inventory financing and revolving lines of credit. In
most cases, fixed-rate loans have terms up to 5 years and are fully amortizing.
Revolving lines of credit generally will have adjustable rates of interest and
are governed by a borrowing base certificate, payable on demand, subject to
annual review and renewal. Business loans with variable rates of interest adjust
on a daily basis and are generally indexed to the prime rate as published in THE
WALL STREET JOURNAL. Furthermore, as circumstances warrant, First Federal may
utilize a loan agreement for commercial loans. In an effort to increase its
emphasis on commercial loans, First Federal hired an experienced commercial loan
officer in September 1999 with the responsibility of developing a commercial
lending policy and increasing loan volume.
In making commercial business loans, First Federal considers a number
of factors, including the financial condition of the borrower, the nature of the
borrower's business, economic conditions affecting the borrower, First Federal's
market area, the management experience of the borrower, the debt service
capabilities of the borrower, the projected cash flows of the business and the
collateral. Commercial loans are generally secured by a variety of collateral,
including equipment, inventory and accounts receivable, and supported by
personal guarantees.
Unlike mortgage loans, which generally are made on the basis of the
borrower's ability to make repayment from his or her employment or other income,
and which are secured by real property whose value tends to be more easily
ascertainable, commercial loans are larger in amount and of higher risk and
typically are made on the basis of the borrower's ability to repay the loan from
the cash flow of the borrower's business. As a result, the availability of funds
for the repayment of commercial loans may be substantially dependent on the
success of the business itself. Further, any collateral securing such loans may
depreciate over time, may be difficult to appraise and may fluctuate in value.
To manage these risks, First Federal performs a credit analysis for each
commercial loan at least annually. At February 29, 2000, First Federal's largest
commercial loan was for $519,000 to a warehouse distribution company located in
Kirksville, Missouri. This loan was performing in accordance with its original
terms at February 29, 2000.
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<PAGE>
CONSUMER LOANS. First Federal offers a variety of consumer loans,
including fully amortized home equity loans and second mortgage loans and
automobile loans.
First Federal offers fixed-rate home improvement loans with terms up to
eight years. The home improvement loans are FHA-insured loans in amounts up to
$25,000. The loan-to-value ratios of fixed-rate home improvement loans are
generally limited to 80%.
First Federal's second mortgage loans are generally either five-year
fixed-rate loans or five-year balloon loans. First Federal's second mortgages
are limited to existing First Federal customers. The underwriting standards
employed by First Federal for home equity loans and second mortgage loans
include a determination of the applicant's credit history, an assessment of the
applicant's ability to meet existing obligations and payments on the proposed
loan and the value of the collateral securing the loan.
First Federal also originates consumer loans secured by automobiles
and, occasionally, boats and other recreational vehicles. First Federal offers
fixed-rate automobile loans with terms of up to 60 months. Loan-to-value ratios
and maximum loan terms vary depending on the age of the vehicle. At February 29,
2000, automobile loans were 47% of First Federal's consumer loans.
Other consumer loans offered by First Federal include loans secured by
various personal property and share loans. Loans secured by personal property
generally have a fixed-rate and a maximum term of five years. Share loans are
secured by deposits at First Federal.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of loans that are unsecured or secured by rapidly
depreciating assets such as automobiles. In these 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. The remaining deficiency often does not warrant
further substantial collection efforts against the borrower beyond obtaining a
deficiency judgment. In addition, consumer loan collections are dependent on the
borrower's continuing financial stability, and thus are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
LOANS TO ONE BORROWER. The maximum amount that First Federal may lend
to one borrower is limited by regulation. At February 29, 2000, First Federal's
regulatory limit on loans to one borrower was $3.6 million. At that date, First
Federal's largest amount of loans to one borrower, including the borrower's
related interests, was approximately $3.1 million and consisted of commercial
real estate loans, commercial loans and a commercial working capital loan. These
loans were performing according to their original terms at February 29, 2000.
LOAN APPROVAL PROCEDURES AND AUTHORITY. First Federal's lending
activities follow written, non-discriminatory, underwriting standards and loan
origination procedures established by First Federal's Board of Directors and
management.
First Federal's policies and loan approval limits are established and
approved by the Board of Directors. With respect to residential mortgage loans,
at least two members of First Federal's loan approval committee must approve all
loans up to $300,000. All residential mortgage loans over $300,000 require prior
approval of the full Board of Directors.
With respect to commercial loans, including commercial mortgage loans,
all extensions of credit that would result in total exposure to First Federal of
$100,000 or less require the approval of the commercial loan manager or the
Chief Executive Officer. All extensions of credit that would result in total
exposure to First Federal of over $100,000 but no more than $500,000 require the
approval of the commercial loan manager and the Chief Executive Officer. All
extensions of credit that would result in total exposure to First Federal of
over $500,000 but no more than $1,000,000 require the approval of the commercial
loan manager, the Chief Executive Officer and the
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<PAGE>
commercial loan committee. Credit extensions that would result in total exposure
to First Federal of more than $1,000,000 require the additional approval of the
Board of Directors.
Additionally, various bank personnel have been delegated authority to
approve consumer loans, including automobile loans. The Chief Executive Officer
reviews all consumer loan approvals after each loan is made.
LOAN ORIGINATIONS, PURCHASES AND SALES. First Federal's lending
activities are conducted by its employees operating through First Federal's
offices. First Federal relies on advertising, referrals from realtors and
customers, and personal contact by First Federal's staff to generate loan
originations. First Federal does not use loan correspondents or other
third-parties to originate loans and, in recent years, has not been an active
purchaser of loans. In the past, First Federal purchased whole loans and
participation interests in commercial and residential mortgage loans through a
mortgage company in Colorado. First Federal has also participated in a small
amount of loans through a group of institutions organized to lend to businesses
in the Quincy, Illinois business district. Subject to market conditions, the
existence of available funds and other factors, First Federal anticipates that
it will recommence purchasing loans later in 2000. Except for loans originated
through the Federal Home Loan Bank's Mortgage Partnership Finance Program, First
Federal generally retains for its portfolio all of the loans that it originates.
First Federal's ability to originate adjustable-rate and balloon loans is
dependent upon the relative customer demand for such loans, which is affected by
the current and expected future level of interest rates. As a result of the low
interest rate environment in recent years, First Federal has experienced a
decline in loan demand as customers have preferred fixed-rate, fully amortized
loans.
The following table presents total loans originated, purchased and
repaid during the periods indicated. First Federal did not sell any loans during
the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FEBRUARY 29/28,
-----------------------------------
2000 1999
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Loans at beginning of period .................. $ 102,258 $ 105,771
Originations:
Real estate:
One- to four-family .................. 11,797 12,870
Multi-family and commercial .......... 6,308 352
Construction ......................... 3,236 3,683
--------- ---------
Total real estate loans ........... 21,341 16,905
Consumer:
Home improvement ..................... 1,258 979
Automobile ........................... 3,824 3,864
Other ................................ 4,638 4,072
--------- ---------
Total consumer loans .............. 9,720 8,915
Commercial .............................. 6,754 1,562
--------- ---------
Total loans originated ............ 37,815 27,382
Loans purchased ............................... -- 275
Deduct:
Principal loan repayments and prepayments 26,044 30,988
Loan sales .............................. -- --
Transfers to REO ........................ 36 182
--------- ---------
Sub-total ......................... 26,080 31,170
--------- ---------
Net loan activity ............................. 11,735 (3,513)
--------- ---------
Loans at end of period .................. $ 113,993 $ 102,258
========= =========
</TABLE>
42
<PAGE>
LOAN COMMITMENTS. First Federal issues loan commitments to its
prospective borrowers conditioned on the occurrence of certain events.
Commitments are made in writing on specified terms and conditions and are
honored for up to 30 days from approval. At February 29, 2000, First Federal had
loan commitments and unadvanced loans and lines of credit totaling $4.5 million.
See note 10 of the notes to financial statements included in this prospectus.
LOAN FEES. In addition to interest earned on loans, First Federal
receives income from fees in connection with loan originations, loan
modifications, late payments and for miscellaneous services related to its
loans. Income from these activities varies from period to period depending upon
the volume and type of loans made and competitive conditions.
First Federal charges loan origination fees, which are calculated as a
percentage of the amount borrowed. As required by applicable accounting
principles, loan origination fees, discount points and certain loan origination
costs are deferred and recognized over the contractual remaining lives of the
related loans on a level yield basis. At February 29, 2000, First Federal had
$139,000 of net deferred loan costs.
NONPERFORMING ASSETS AND DELINQUENCIES. All loan payments are due on
the first day of each month. When a borrower on a residential mortgage loan
fails to make a required loan payment, First Federal attempts to cure the
deficiency by contacting the borrower and seeking the payment. A late notice is
mailed after 30 days of delinquency. In most cases, deficiencies are cured
promptly. A second notice is mailed after 60 days of delinquency and First
Federal follows up the second notice with a letter and a phone call to the
borrower. On or about the 90th day of delinquency, First Federal sends a third
late notice and a personal collection letter giving the borrower 10 days in
which to work out a payment schedule. On or about the 120th day of delinquency,
First Federal sends a final late notice and a compulsory collection letter from
First Federal's attorney warning the borrower of possible foreclosure if the
account is not brought up to date within 30 days. While First Federal generally
prefers to work with borrowers to resolve problems, First Federal will institute
foreclosure or other proceedings after five months of delinquency, as necessary,
to minimize any potential loss.
When a borrower on a consumer loan fails to make a required loan
payment, a late notice is mailed on the day after the payment is due. A second
notice is mailed after 10 days of delinquency and First Federal follows up with
a letter and a phone call to the borrower. Depending on the type of collateral,
First Federal may take action to repossess the property securing the loan.
A report listing all delinquent commercial loans and commercial real
estate loans is generated and reviewed by management, including the Board of
Directors, on a monthly basis. The procedures taken by First Federal with
respect to delinquencies vary depending on the nature of the loan and cause of
delinquency. When a commercial borrower fails to make a required payment on a
loan, First Federal takes a number of actions to have the debtor cure the
delinquency and return the account to current status. The commercial loan
department will send a written notice of non-payment after the payment or loan
is first past due. The commercial loan department will then via telephone,
written correspondence or face-to-face contact attempt to ascertain the reasons
for delinquency and the prospects for repayment. In the event that payment is
not received or not otherwise satisfied, additional telephone calls and letters
are generally made. If the loan is 90 days delinquent, First Federal will
commence legal proceedings.
Management informs the Board of Directors monthly of the amount of
loans delinquent more than 30 days, all loans in foreclosure, and all foreclosed
and repossessed property that First Federal owns.
First Federal ceases accruing interest on loans when principal or
interest payments are delinquent 90 days or more unless the loan is adequately
collateralized and in the process of collection. Once the accrual of interest on
a loan is discontinued, all interest previously accrued is reversed against
current period interest income once management determines that interest is
uncollectible.
43
<PAGE>
The following table presents information with respect to First
Federal's nonperforming assets at the dates indicated.
<TABLE>
<CAPTION>
AT FEBRUARY 29/28
------------------------------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Accruing loans past due 90 days or more:
One- to four- family real estate ...... $ 875 $ 642 $ 911 $1,497 $ 420
Multi-family and commercial real estate -- -- 25 158 86
Consumer .............................. 105 121 165 245 121
Commercial ............................ -- -- -- -- --
------ ------ ------ ------ ------
Total 980 763 1,101 1,900 627
Non-accruing loans:
One- to four-family real estate ........ 32 17 18 98 238
Multi-family and commercial real estate -- -- -- -- --
Consumer ............................... -- 2 -- -- --
Commercial ............................. -- -- -- -- --
------ ------ ------ ------ ------
Total ............................... 32 19 18 98 238
Real estate owned (REO) ................... 48 60 25 106 288
Other repossessed assets .................. -- 15 33 22 --
------ ------ ------ ------ ------
Total nonperforming assets .......... 1,060 857 1,177 2,126 1,153
Troubled debt restructurings .............. -- -- -- -- --
====== ====== ====== ====== ======
Troubled debt restructurings and
total nonperforming assets .............. $1,060 $ 857 $1,177 $2,126 $1,153
====== ====== ====== ====== ======
Total nonperforming loans and
troubled debt restructurings as a
percentage of total loans ............... 0.89% 0.76% 1.06% 1.95% 0.90%
Total nonperforming assets and
troubled debt restructurings as a
percentage of total assets .............. 0.50% 0.43% 0.63% 1.18% 0.68%
</TABLE>
44
<PAGE>
Interest income that would have been recorded for the year ended
February 29, 2000 had nonaccruing loans been current according to their original
terms amounted to approximately $7,000. Interest related to these loans of
$3,000 was included in interest income for the year ended February 29, 2000.
The following table sets forth the delinquencies in First Federal's
loan portfolio as of the dates indicated.
<TABLE>
<CAPTION>
AT FEBRUARY 29/28,
------------------------------------------------------------------------------------------
2000 1999
----------------------------------------------- ------------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
----------------------- ----------------------- --------------------- --------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL
OF BALANCE OF OF BALANCE OF OF BALANCE OF BALANCE
LOANS LOANS LOANS LOANS LOANS OF LOANS LOANS OF LOANS
-------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family 22 $ 577 22 $ 907 12 $ 296 20 $ 659
Multi-family and
commercial ..... 2 66 -- -- -- -- -- --
Construction ...... 1 70 -- -- -- -- -- --
Consumer loans:
Home improvement .. 3 11 4 17 1 1 7 33
Automobile ........ 11 86 15 60 10 47 12 61
Other ............. -- -- 2 28 2 47 3 29
Commercial loans ..... -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Total .......... 39 $ 810 43 $1,012 25 $ 391 42 $ 782
====== ====== ====== ====== ====== ====== ====== ======
Delinquent loans to
total loans.. 0.71% 0.89% 0.38% 0.76%
</TABLE>
REAL ESTATE OWNED. 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 sold. When property is acquired it is recorded at the lower
of its cost, which is the unpaid principal balance of the loan plus foreclosure
costs, or fair market value at the date of foreclosure, establishing a new cost
basis. Holding costs and declines in fair value after acquisition of the
property result in charges to expense. At February 29, 2000, First Federal had
$48,000 in real estate owned, which consisted of a single-family residence.
ASSET CLASSIFICATION. Federal banking regulators have adopted
various regulations and practices regarding problem assets of savings
institutions. Under such regulations, examiners have authority to identify
problem assets during examinations and, if appropriate, require them to be
classified.
There are three classifications for problem assets: substandard,
doubtful and loss. Substandard assets have one or more defined weaknesses and
are characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified as loss is considered uncollectible and
of such little value that continuance as an asset of the institution is not
warranted. If an asset or portion thereof is classified as loss, the insured
institution establishes specific allowances for loan losses for the full amount
of the portion of the asset classified as loss. All or a portion of general loan
loss allowances established to cover probable losses related to assets
classified substandard or doubtful can be included in determining an
institution's regulatory capital, while specific valuation allowances for loan
losses generally do not qualify as regulatory capital. Assets that do not
currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are designated "special mention." First Federal monitors "special mention"
assets.
45
<PAGE>
The following table presents classified assets at February 29, 2000.
<TABLE>
<CAPTION>
LOSS DOUBTFUL SUBSTANDARD SPECIAL MENTION
-------------------- -------------------- -------------------- -------------------
PRINCIPAL NUMBER OF PRINCIPAL NUMBER OF PRINCIPAL NUMBER OF PRINCIPAL NUMBER OF
BALANCE LOANS BALANCE LOANS BALANCE LOANS BALANCE LOANS
--------- --------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family $ -- -- -- -- $408 8 $ 33 3
Multi-family and
commercial ..... -- -- -- -- -- -- -- --
Construction ...... -- -- -- -- -- -- -- --
Consumer loans:
Home improvement .. 1 2 -- -- 16 4 -- --
Automobile ........ 26 8 -- -- 23 6 -- --
Share loans ....... -- -- -- -- -- -- -- --
Other ............. 24 1 -- -- 4 1 -- --
Commercial loans ..... -- -- -- -- -- -- -- --
---- ---- ---- ---- ---- ---- ---- ----
Total .......... $ 51 11 -- -- $451 19 $ 33 3
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
ALLOWANCE FOR LOAN LOSSES. In originating loans, First Federal
recognizes that losses will be experienced on loans and that the risk of loss
will vary with, among other things, the type of loan being made, the
creditworthiness of the borrower over the term of the loan, general economic
conditions and, in the case of a secured loan, the quality of the security for
the loan. First Federal maintains an allowance for loan losses to absorb losses
inherent in the loan portfolio. The allowance for loan losses represents
management's estimate of probable losses based on information available as of
the date of the financial statements. The allowance for loan losses is based on
management's evaluation of the collectibility of the loan portfolio, including
past loan loss experience, known and inherent risks in the nature and volume of
the portfolio, information about specific borrower situations and estimated
collateral values, and economic conditions. These factors remained generally
consistent until the fiscal year ended February 29, 2000. During the year
ended February 29, 2000, First Federal increased its provision for loan
losses primarily as a result of increased charge-offs, loan
growth and the expansion of loan products into commercial business lending.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--FISCAL 2000 COMPARED WITH FISCAL 1999--PROVISION FOR LOAN
LOSSES."
The loan portfolio and other credit exposures are regularly reviewed by
management to evaluate the adequacy of the allowance for loan losses. The
methodology for assessing the appropriateness of the allowance includes
comparison to actual losses, peer group comparisons, industry data and economic
conditions. In addition, the regulatory agencies, as an integral part of their
examination process, periodically review First Federal's allowance for loan
losses. Such agencies may require First Federal to make additional provisions
for estimated losses based upon judgments different from those of management.
In connection with assessing the allowance, loss factors are applied to
various pools of outstanding loans. First Federal segregates the loan portfolio
according to risk characteristics (I.E., mortgage loans, business, consumer).
Loss factors are derived using First Federal's historical loss experience and
may be adjusted for significant factors that, in management's judgment, affect
the collectibility of the portfolio as of the evaluation date.
In addition, management assesses the allowance using factors that
cannot be associated with specific credit or loan categories. These factors
include management's subjective evaluation of local and national economic and
business conditions, portfolio concentration and changes in the character and
size of the loan portfolio. The allowance methodology reflects management's
objective that the overall allowance appropriately reflects a margin for the
imprecision necessarily inherent in estimates of expected credit losses.
At February 29, 2000, First Federal's allowance for loan losses
represented 0.42% of total loans and 47.73% of nonperforming loans. Although
management believes that it uses the best information available to establish the
allowance for loan losses, future adjustments to the allowance for loan losses
may be necessary and results of operations could be adversely affected if
circumstances differ substantially from the assumptions used in making the
determinations. Furthermore, while First Federal believes it has established its
existing allowance for loan losses in conformity with generally accepted
accounting principles, there can be no assurance that regulators, in reviewing
First Federal's loan portfolio, will not request First Federal to increase its
allowance for loan losses. In
46
<PAGE>
addition, because future events affecting borrowers and collateral cannot be
predicted with certainty, there can be no assurance that the existing allowance
for loan losses is adequate or that increases will not be necessary should the
quality of any loans deteriorate as a result of the factors discussed above. Any
material increase in the allowance for loan losses may adversely affect First
Federal's financial condition and results of operations.
The following table presents an analysis of First Federal's allowance
for loan losses.
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 29/28,
-------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses,
beginning of year ...................... $ 457 $ 486 $ 467 $ 441 $ 517
Charged-off loans:
One- to four-family real estate ........ -- (89) -- -- (75)
Multi-family and commercial ............ -- -- -- -- --
Consumer ............................... (93) (73) (8) (2) (1)
----- ----- ----- ----- -----
Total charged-off loans ............. (93) (162) (8) (2) (76)
Recoveries on loans previously charged off:
One- to four-family real estate ........ -- 64 -- -- --
Multi-family and commercial ............ -- -- -- -- --
Consumer ............................... -- 63 -- -- --
----- ----- ----- ----- -----
Total recoveries .................... -- 127 -- -- --
----- ----- ----- ----- -----
Net loans charged-off ..................... (93) (35) (8) (2) (76)
Provision for loan losses ................. 119 6 27 27 1
----- ----- ----- ----- -----
Allowance for loan losses, end of
period ................................. $ 483 $ 457 $ 486 $ 467 $ 442
===== ===== ===== ===== =====
Allowance for loan losses to total
loans .................................. 0.42% 0.45% 0.46% 0.46% 0.46%
Allowance for loan losses to
nonperforming loans and
troubled debt restructurings ........... 47.73 58.44 43.43 23.37 50.98
Recoveries to charge-offs ................. 0.00 78.40 0.00 0.00 0.00
</TABLE>
For additional discussion regarding the provision for loan losses in
recent periods, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--FISCAL 2000 COMPARED WITH FISCAL 1999--PROVISION FOR
LOAN LOSSES."
47
<PAGE>
The following table presents the approximate allocation of the
allowance for loan losses by loan category at the dates indicated. Management
believes that the allowance can be allocated by category only on an approximate
basis. The allocation of the allowance to each category is not indicative of
future losses and does not restrict the use of any of the allowance to absorb
losses in any category.
<TABLE>
<CAPTION>
AT FEBRUARY 29/28,
------------------------------------------------------------------------------------------
2000 1999 1998
--------------------------- -------------------------- ---------------------------------
% OF PERCENT % OF PERCENT % OF PERCENT
ALLOWANCE OF LOANS ALLOWANCE OF LOANS ALLOWANCE OF LOANS
IN EACH IN EACH IN EACH IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------ --------- ----- ------ --------- ----- ------ --------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate ........ $207 42.86% 85.66% $180 39.39% 87.88% $197 40.53% 88.91%
Consumer ........... 151 31.26 10.93 142 31.07 11.60 151 31.07 10.65
Commercial ......... 85 17.60 3.41 -- -- 0.52 -- -- 0.44
Unallocated ........ 40 8.28 -- 135 29.54 -- 138 28.40 --
---- ------ ---- ------ ---- ------ ------
Total allowance
for loan losses $483 100.00% $457 100.00% $486 100.00%
==== ====== ==== ====== ==== ======
<CAPTION>
------------------------------------------------------
1997 1996
------------------------------- ----------------------
% OF PERCENT % OF
ALLOWANCE OF LOANS ALLOWANCE
IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE
------ --------- ----- ------ ---------
<S> <C> <C> <C> <C> <C>
Real estate ........ $250 53.53% 89.60% $152 34.47%
Consumer ........... 182 38.97 9.80 140 31.75
Commercial ......... -- -- 0.60 -- --
Unallocated ........ 35 7.50 -- 150 33.79
---- ------ ------ ---- ------
Total allowance
for loan losses $467 100.00% $442 100.00%
==== ====== ==== ======
</TABLE>
48
<PAGE>
INVESTMENT ACTIVITIES
Under federal law, First Federal has authority to invest in various
types of liquid assets, including U.S. Government obligations, securities of
various federal agencies and of state and municipal governments, deposits at the
Federal Home Loan Bank of Chicago and certificates of deposit of federally
insured institutions. Within certain regulatory limits, First Federal may also
invest a portion of its assets in corporate securities, including non-mortgage,
asset-backed instruments. Savings institutions like First Federal are also
required to maintain an investment in Federal Home Loan Bank of Chicago stock.
First Federal is required under federal regulations to maintain a minimum amount
of liquid assets. See "REGULATION AND SUPERVISION" AND "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--LIQUIDITY AND
CAPITAL RESOURCES."
First Federal's Board of Directors has the overall responsibility for
First Federal's investment portfolio, including approval of First Federal's
investment policy and appointment of First Federal's Investment Committee. The
Board of Directors reviews, updates and approves First Federal's investment
policy at least quarterly. The Board of Directors also reviews on at least a
quarterly basis an investment activities reporting package prepared by the
Investment Committee, which provides portfolio activity, risk levels and
compliance with risk limits. The Investment Committee is responsible for
approving major policies for conducting investment activities, including the
establishment of risk limits and also ensures that management has the requisite
skills to manage the risks associated with approved investment activities. First
Federal's Chief Executive Officer is authorized to make investment decisions
consistent with First Federal's investment policy and the recommendations of
First Federal's Investment Committee and is primarily responsible for daily
investment activities. The Investment Committee generally meets monthly with the
Chief Executive Officer in order to review and determine investment strategies
and transactions.
First Federal's investment policy is designed to complement First
Federal's lending activities, provide an alternative source of income through
interest and dividends, diversify First Federal's assets and improve liquidity.
Investment decisions are made in accordance with First Federal's investment
policy and are based upon the quality of a particular investment, its inherent
risks, the composition of the balance sheet, market expectations, First
Federal's liquidity, income and collateral needs and how the investment fits
within First Federal's interest rate risk strategy.
The primary objective of the investment portfolio is to maintain an
adequate source of liquidity sufficient to meet regulatory and operating
requirements, and to safeguard against deposit outflows, reduced loan
amortization and increased loan demand. The investment portfolio primarily
includes debt issues and mortgage-backed securities. All of First Federal's
mortgage-backed securities are issued or guaranteed by agencies of the U.S.
Government. Accordingly, they carry lower credit risk than mortgage-backed
securities of a private issuer. However, mortgage-backed securities still carry
market risk, insofar as increases in market interest rates may cause a decrease
in market value, and prepayment risk, which is risk that the securities will be
repaid before maturity and that First Federal will have to reinvest the funds at
a lower interest rate.
First Federal's investment portfolio grew in 1997, 1998 and the first
half of 1999 due to the low interest rate environment. This low interest rate
environment led to a higher demand for long-term, fixed-rate loans, which First
Federal did not offer, and caused borrowers to refinance adjustable-rate
mortgage loans. Together, the decreased demand for First Federal loan products
and the refinancing of current loans caused an increase in liquidity at First
Federal, which First Federal invested in debt and mortgage-backed securities. As
market conditions permit, First Federal intends to use funds from the sale and
maturity of securities to make new loans or retire debt.
Generally accepted accounting principles require that securities be
categorized as either "held to maturity," "trading securities" or "available for
sale," based on management's intent as to the ultimate disposition of each
security. Debt securities may be classified as "held to maturity" and reported
in financial statements at amortized cost only if the reporting entity has the
positive intent and ability to hold those securities to maturity. Securities
that might be sold in response to changes in market interest rates, changes in
the security's prepayment risk, increases in loan demand, or other similar
factors cannot be classified as "held to maturity." Debt and equity securities
held for current resale are classified as "trading securities." These securities
are reported at fair value, and unrealized gains and losses on the securities
would be included in earnings. First Federal does not currently use or maintain
a trading account. Debt and equity securities not classified as either "held to
maturity" or "trading securities" are classified as
49
<PAGE>
"available for sale." These securities are reported at fair value, and
unrealized gains and losses on the securities are excluded from earnings and
reported, net of deferred taxes, as a separate component of equity.
At February 29, 2000, First Federal did not own any securities, other
than U.S. Government and agency securities, that had an aggregate book value in
excess of 10% of First Federal's retained earnings at that date.
The following table presents the amortized cost and fair value of First
Federal's securities, by type of security, at the dates indicated.
<TABLE>
<CAPTION>
AT FEBRUARY 29/28,
----------------------------------------------------
2000 1999
------------------------ ------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Securities:
Debt securities held-to-maturity:
Obligations of U.S. government agencies .... $ 55,801 $ 52,917 $ 45,996 $ 45,637
Other securities ........................... 1,329 1,328 1,432 1,443
-------- -------- -------- --------
Total ................................ 57,130 54,245 47,428 47,080
Debt securities available-for-sale:
Obligations of U.S. Treasury and U.S.
government agencies ...................... 4,000 3,787 3,000 2,996
Other securities ........................... 526 492 423 425
-------- -------- -------- --------
Total ................................ 4,526 4,279 3,423 3,421
Equity securities available-for-sale:
FHLB stock ................................. 894 894 930 930
FHLMC stock ................................ 26 1,110 26 1,532
U.S. government mortgage securities fund ...... 14,605 13,789 13,765 13,439
Adjustable rate mortgage securities fund ...... 2,093 2,068 1,000 1,000
-------- -------- -------- --------
Total equity securities available-for-sale 17,618 17,861 15,720 16,901
-------- -------- -------- --------
Total debt and equity securities ..... 79,274 76,385 66,572 67,402
Mortgage-related securities:
Mortgage-related securities held-to-
maturity:
FHLMC ...................................... 817 824 1,862 1,925
FNMA ....................................... 968 955 2,216 2,242
GNMA ....................................... 12 12 18 19
-------- -------- -------- --------
Total mortgage-related securities
held-to-maturity ..................... 1,797 1,791 4,096 4,186
Mortgage-related securities available-for-sale:
FHLMC ...................................... 3,669 3,657 1,476 1,478
FNMA ....................................... 2,369 2,255 2,874 2,858
GNMA ....................................... 1,434 1,390 1,939 1,964
-------- -------- -------- --------
Total mortgage-related securities
available-for-sale ..................... 7,472 7,302 6,289 6,300
-------- -------- -------- --------
Total mortgage-related securities .... 9,269 9,093 10,385 10,486
Net unrealized (losses) gains on
available-for-sale securities ......... (174) -- 1,189
-------- -------- -------- --------
Total securities ..................... $ 88,369 $ 85,478 $ 78,146 $ 77,888
======== ======== ======== ========
</TABLE>
50
<PAGE>
The following presents the activity in the securities and
mortgage-backed securities portfolios for the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
FEBRUARY 29/28,
------------------------------
2000 1999
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
MORTGAGE-RELATED SECURITIES:
Mortgage-related securities, beginning of period . $ 10,396 $ 14,957
Purchases:
Mortgage-related securities - held-to-maturity . -- --
Mortgage-related securities - available-for-sale 3,003 2,020
Sales:
Mortgage-related securities - available-for-sale -- --
Repayments and prepayments:
Mortgage-related securities .................... (4,136) (6,613)
Increase (decrease) in net discount .............. 17 53
Increase (decrease) in unrealized gain ........... (181) (21)
-------- --------
Mortgage-related securities, end of period ....... $ 9,099 $ 10,396
======== ========
SECURITIES:
Securities, beginning of period .................. $ 67,750 $ 47,978
Purchases:
Securities - held-to-maturity .................. 18,803 47,200
Securities - available-for-sale ................ 2,100 5,439
Reinvestment of dividends ...................... 933 717
Sales:
Securities - available-for-sale ................ -- --
Redemption of FHLB stock ......................... (35) --
Maturities and calls:
Securities - held-to-maturity .................. (9,103) (16,801)
Securities - available-for-sale ................ -- (16,996)
Increase (decrease) in net discount .............. 5 26
Increase (decrease) in unrealized gain ........... (1,183) 187
-------- --------
Securities, end of period ........................ $ 79,270 $ 67,750
======== ========
</TABLE>
51
<PAGE>
The table below sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of First Federal's
securities and mortgage-related securities as of February 29, 2000.
<TABLE>
<CAPTION>
AT FEBRUARY 29, 2000
----------------------------------------------------------------------------------------
MORE THAN ONE YEAR MORE THAN FIVE YEARS
ONE YEAR OR LESS TO FIVE YEARS TO TEN YEARS MORE THAN TEN YEARS
----------------- ------------------- --------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
-------- -------- ------- -------- -------- -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held-to-maturity securities:
Securities:
Municipal securities .... $ -- --% $ 1,060 4.95% $ 219 5.21% $ 50 6.00%
Obligations of U.S
Government agencies .... 999 6.25 36,997 6.06 17,805 6.36 -- --
Mortgage-related
securities ............... -- -- 1,500 6.85 290 7.57 7 12.00
---- ------- ------ ------
Total securities
at amortized cost .... $ 999 6.25 $39,557 6.06 $18,314 6.37 $ 57 6.84
==== ======= ======= =======
Available-for-sale
securities:
Securities:
Obligations of the U.S.
Treasury ............... $ -- --% $ -- --% $ -- --% $ -- --%
Municipals ............. -- -- -- -- 492 4.48 -- --
Obligations of U.S.
Government agencies .... -- -- -- -- 3,787 6.45 -- --
Equity securities ....... -- -- -- -- -- -- 17,861 6.84
Mortgage-related securities 1,296 5.50 25 8.00 2,190 6.40 3,791 6.15
----- ------- ------- -------
Total securities
at fair value ......... $ 1,296 5.50 $ 25 8.00 $ 6,469 6.30 $21,652 6.55
======= ======= ======= =======
<CAPTION>
TOTAL
------------------
WEIGHTED
CARRYING AVERAGE
VALUE YIELD
------- -------
<S> <C> <C>
Held-to-maturity securities:
Securities:
Municipal securities .... $ 1,329 5.03%
Obligations of U.S
Government agencies .... 55,801 6.16
Mortgage-related
securities ............... 1,797 7.04
-------
Total securities
at amortized cost .... $58,927 6.16
=======
Available-for-sale
securities:
Securities:
Obligations of the U.S.
Treasury ............... $ -- --%
Municipals ............. 492 4.48
Obligations of U.S.
Government agencies .... 3,787 6.45
Equity securities ....... 17,861 6.64
Mortgage-related securities 7,302 6.12
-------
Total securities
at fair value ......... $29,442 6.44
=======
</TABLE>
DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS
GENERAL. Deposits are the major external source of funds for First
Federal's lending and other investment activities. In addition, First Federal
also generates funds internally from loan principal repayments and prepayments
and maturing securities. Scheduled loan repayments are a relatively stable
source of funds, while deposit inflows and outflows and loan prepayments are
influenced significantly by general interest rates and money market conditions.
First Federal may use borrowings from the Federal Home Loan Bank of Chicago to
compensate for reductions in the availability of funds from other sources.
Presently, First Federal has no other borrowing arrangements aside from the
Federal Home Loan Bank.
DEPOSIT ACCOUNTS. Nearly all of First Federal's depositors reside in
Illinois, Missouri or Iowa. First Federal offers a wide variety of deposit
accounts with a range of interest rates and terms. First Federal's deposit
accounts consist of a variety of savings accounts, checking and NOW accounts,
certificates of deposit, individual retirement accounts and money market
accounts. The maturities of First Federal's certificate of deposit accounts
range from 91 days to four years. Deposit account terms vary with the principal
differences being the minimum balance deposit, early withdrawal penalties,
limits on the number of transactions and the interest rate. First Federal
reviews its deposit mix and pricing weekly.
52
<PAGE>
First Federal believes it is competitive in the interest rates it
offers on its deposit products. First Federal determines the rates paid based on
a number of factors, including rates paid by competitors, First Federal's need
for funds and cost of funds, borrowing costs and movements of market interest
rates. First Federal does not utilize brokers to obtain deposits and at February
29, 2000 had no brokered deposits.
In the unlikely event First Federal is liquidated after the conversion,
depositors will be entitled to full payment of their deposit accounts before any
payment is made to First Federal Bancshares as the sole stockholder of First
Federal.
The following table indicates the amount of First Federal's jumbo
certificates of deposits by time remaining until maturity as of February 29,
2000. Jumbo certificates of deposits have principal balances of $100,000 or
more.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
MATURITY PERIOD AMOUNT RATE
------------------------------ ------------------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Three months or less ...... $2,471 5.10%
Over 3 through 6 months.... 2,531 5.04
Over 6 through 12 months... 8,282 5.71
Over 12 months ............ 3,795 5.45
-------
Total............ $17,079 5.49
=======
</TABLE>
The following table presents the deposit activity of First Federal for
the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FEBRUARY 29/28,
------------------------------------------------
2000 1999
-------------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Beginning balance .......................... $ 176,682 $ 162,824
Increase (decrease) before interest credited (1,091) 6,985
Interest credited .......................... 6,981 6,873
--------- ---------
Net increase ............................... 5,890 13,858
--------- ---------
Ending balance ............................. $ 182,572 $ 176,682
========= =========
</TABLE>
53
<PAGE>
The following table sets forth the balances and changes in dollar
amounts in the various accounts offered by First Federal between the dates
indicated.
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 29/28,
------------------------------------------------------------------
2000 1999
--------------------------------------- ------------------------
PERCENT INCREASE/ PERCENT
AMOUNT OF TOTAL (DECREASE) AMOUNT OF TOTAL
---------- ---------- ------------ ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Savings accounts ..................... $ 19,555 10.71% $ (1,205) $ 20,760 11.75%
Money market deposits ................ 18,317 10.03 7,064 11,253 6.37
NOW accounts ......................... 17,275 9.46 1,633 15,642 8.85
Certificates maturing:
Within 1 year ..................... 98,893 54.17 16,488 82,405 46.64
After 1 year, but within 2 years... 22,754 12.46 (12,613) 35,367 20.02
After 2 years, but within 5 years.. 4,363 2.39 (6,217) 10,580 5.99
-------- ------ -------- -------- ------
Total certificates ............. 126,010 69.02 (2,342) 128,352 72.65
Noninterest-bearing deposits ......... 1,415 0.78 741 674 0.38
-------- ------ -------- -------- ------
Total .......................... $182,572 100.00% $ 5,891 $176,681 100.00%
======== ====== ======== ======== ======
</TABLE>
BORROWINGS. First Federal has the ability to use advances from the
Federal Home Loan Bank of Chicago to supplement its supply of lendable funds and
to meet deposit withdrawal requirements. The Federal Home Loan Bank of Chicago
functions as a central reserve bank providing credit for savings banks and
certain other member financial institutions. As a member of the Federal Home
Loan Bank of Chicago, First Federal is required to own capital stock in the
Federal Home Loan Bank of Chicago and is authorized to apply for advances on the
security of the capital stock and certain of its mortgage loans and other
assets, principally securities that are obligations of, or guaranteed by, the
U.S. Government or its agencies, provided certain creditworthiness standards
have been met. Advances are made under several different credit 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 on the financial
condition of the member institution and the adequacy of collateral pledged to
secure the credit. At February 29, 2000, First Federal had the ability to borrow
a total of approximately $17.9 million from the Federal Home Loan Bank of
Chicago.
The following tables presents certain information regarding First
Federal's use of Federal Home Loan Bank of Chicago advances during the periods
and at the dates indicated.
<TABLE>
<CAPTION>
AT OR FOR THE YEARS
ENDED FEBRUARY 29/28,
---------------------------------
2000 1999
--------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
FHLB advances and other borrowings:
Average balance outstanding ................................. $ 5,498 --
Maximum amount outstanding at any month-end during the period 14,000 --
Balance outstanding at end of period ........................ 6,000 --
Weighted average interest rate during the period ............ 5.79% --
Weighted average interest rate at end of period ............. 6.16 --
</TABLE>
54
<PAGE>
PROPERTIES
First Federal currently conducts its business through its main office
located in Colchester, Illinois, and five other full-service banking offices,
all of which it owns. First Federal is considering construction of a building on
property that it owns in Quincy to house its commercial loan department and
corporate offices. First Federal has not developed any plans for the facility or
estimates of construction cost.
<TABLE>
<CAPTION>
NET BOOK VALUE
OF PROPERTY
OR LEASEHOLD
IMPROVEMENTS
YEAR SQUARE AT FEBRUARY 29,
LOCATION ACQUIRED FOOTAGE 2000
------------------------------------ -------------- ---------------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C>
109 East Depot Street
Colchester, Illinois 62326 1940 6,000 $ 52
2001 Maine Street
Quincy, Illinois 62301 1977 4,000 289
101 North 36th Street
Quincy, Illinois 62301 1988 1,400 475
201 West Main Street
Mt. Sterling, Illinois 62353 1978 1,476 31
430 West Jackson Street
Macomb, Illinois 61455 1984 6,000 423
190 East Hurst Street
Bushnell, Illinois 61422 1989 2,000 144
------
$1,414
======
</TABLE>
PERSONNEL
As of February 29, 2000, First Federal had 48 full-time employees and
four part-time employees, none of whom is represented by a collective bargaining
unit. First Federal believes its relationship with its employees is good.
LEGAL PROCEEDINGS
Periodically, there have been various claims and lawsuits involving
First Federal, such as claims to enforce liens, condemnation proceedings on
properties in which First Federal holds security interests, claims involving the
making and servicing of real property loans and other issues incident to First
Federal's business. First Federal is not a party to any pending legal
proceedings that it believes would have a material adverse effect on the
financial condition or operations of First Federal.
55
<PAGE>
MANAGEMENT OF FIRST FEDERAL BANCSHARES
Directors will be elected by the stockholders of First Federal
Bancshares for staggered three-year terms, or until their successors are elected
and qualified. First Federal Bancshares' Board of Directors consists of seven
persons divided into three classes, each of which contains approximately one
third of the Board. One class, consisting of Dr. Stephan L. Roth and Richard D.
Stephens, has a term of office expiring at the first annual meeting of
stockholders; a second class, consisting of Murrel Hollis and Franklin M.
Hartzell, has a term of office expiring at the second annual meeting of
stockholders; and a third class, consisting of Gerald L. Prunty, Eldon M.
Snowden and James J. Stebor, has a term of office expiring at the third annual
meeting of stockholders. Mr. Hartzell serves as Chairman of the Board of
Directors.
The executive officers of First Federal Bancshares 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. The
executive officers of First Federal Bancshares are:
<TABLE>
<CAPTION>
NAME POSITION
------- --------
<S> <C>
James J. Stebor President and Chief Executive Officer
Cathy D. Pendell Treasurer
Ronald A. Feld Corporate Secretary
</TABLE>
Since the formation of First Federal Bancshares, none of the executive
officers, directors or other personnel has received remuneration from First
Federal Bancshares. For information concerning the principal occupations,
employment and compensation of the directors and executive officers of First
Federal Bancshares during the past five years, see "MANAGEMENT OF FIRST FEDERAL
BANK--BIOGRAPHICAL INFORMATION."
The Board of Directors of First Federal Bancshares has established an
Audit Committee consisting of the entire Board of Directors, a Compensation
Committee consisting of Messrs. Roth, Stephens, Hollis, Hartzell, Prunty and
Snowden, and a Nominating Committee consisting of Messrs. Hartzell, Prunty,
Stephens and Hollis.
All of the members of the Audit Committee except for Mr. Stebor are
independent within the meaning of the National Association of Securities
Dealers' listing standards. The Audit Committee will be responsible for
recommending to the Board the independent accounting firm to be retained for the
coming year. The Audit Committee will meet periodically with the independent
accountants and management to review accounting, auditing, internal control
structure and financial reporting matters. The Board of Directors has adopted a
written charter for the Audit Committee.
56
<PAGE>
MANAGEMENT OF FIRST FEDERAL BANK
DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors of First Federal presently is composed of seven
members who are elected for terms of three years, approximately one third of
whom are elected annually as required by the Bylaws of First Federal. The
executive officers of First Federal are elected annually by the Board of
Directors and serve at the Board's discretion. The following tables present
information with respect to the directors and executive officers of First
Federal. Ages presented are as of February 29, 2000.
<TABLE>
<CAPTION>
DIRECTORS
DIRECTOR TERM
NAME AGE POSITION HELD WITH FIRST FEDERAL SINCE EXPIRES
-------- ------- ----------------------------------- -------- ----------
<S> <C> <C> <C> <C>
Franklin M. Hartzell 76 Director 1965 2002
Murrel Hollis 59 Director 1992 2002
Gerald L. Prunty 71 Chairman of the Board 1967 2003
Dr. Stephan L. Roth 74 Director 1976 2001
Eldon M. Snowden 80 Director 1967 2003
James J. Stebor 50 President and Director 1990 2003
Richard D. Stephens 72 Director 1966 2001
</TABLE>
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
<TABLE>
<CAPTION>
NAME AGE POSITION HELD WITH FIRST FEDERAL
-------- ------- -----------------------------------
<S> <C> <C>
Peggy L. Higgins 46 Senior Vice President, Accounting
Cathy D. Pendell 40 Senior Vice President, Accounting
Millie R. Shields 40 Senior Vice President, Compliance
Ronald A. Feld 57 Vice President, Secretary and Branch Manager
</TABLE>
BIOGRAPHICAL INFORMATION
Below is certain information regarding the directors and executive
officers of First Federal. Unless otherwise stated, each director and executive
officer has held his or her current occupation for at least the last five years.
FRANKLIN M. HARTZELL is a partner in the law firm of Hartzell, Glidden,
Tucker & Hartzell in Carthage, Illinois. Mr. Hartzell also serves as a director
and secretary of Pioneer Lumber Company, located in Dallas City, Illinois.
MURREL HOLLIS is a partner and funeral director of Martin-Hollis
Funeral Home in Bushnell, Illinois.
GERALD L. PRUNTY served as President of First Federal from 1969 until
his retirement in 1994.
DR. STEPHAN L. ROTH is a retired family physician.
ELDON M. SNOWDEN is a retired general manager and chief operating
officer of McDonough Telephone Cooperative.
JAMES J. STEBOR has served as President of First Federal since 1994.
Mr. Stebor has been employed by First Federal since 1977.
RICHARD D. STEPHENS is a retired attorney serving as Of Counsel to the
law firm of Flack, McRaven & Stephens in Macomb, Illinois.
57
<PAGE>
KEY EMPLOYEES WHO ARE NOT DIRECTORS
PEGGY L. HIGGINS has served as Senior Vice President of First Federal
since 1998. Prior to becoming Senior Vice President, Ms. Higgins served as a
Vice President. She has been affiliated with First Federal since 1976.
CATHY D. PENDELL has served as Senior Vice President of First Federal
since 1998. Prior to becoming Senior Vice President, Ms. Pendell served as a
Vice President. She has been affiliated with First Federal since 1976. Ms.
Pendell is a certified public accountant.
MILLIE R. SHIELDS has served as Senior Vice President of First Federal
since 1998. Prior to becoming Senior Vice President, Ms. Shields served as a
Vice President. She has been affiliated with First Federal since 1978.
RONALD A. FELD has served as Vice President and Secretary of First
Federal since 1987 and 1990, respectively. In 1995, Mr. Feld became Branch
Manager of First Federal's Colchester office. He has been affiliated with First
Federal since 1984.
MARK A. TYRPIN joined First Federal in September 1999 as Vice President
and head of the commercial loan department. From 1990 until joining First
Federal, Mr. Tyrpin was commercial loan manager with Bank of America (formerly,
NationsBank).
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors held 12 regular meetings and five special
meetings during the fiscal year ended February 29, 2000. The Board of Directors
has designated three principal standing committees. The current members and
functions of those committees are as follows:
The Audit Committee consists of the entire Board of Directors. The
committee receives and reviews all reports prepared by First Federal's
independent auditor.
The Investment Committee consists of Messrs. Hartzell, Prunty, Snowden,
Stebor and Stephens. This committee adopts and reviews the policies and
procedures of the investment management of First Federal.
The Executive Committee consists of Messrs. Hartzell, Prunty, Snowden
and Stebor. This committee evaluates issues of major importance to First Federal
between regularly scheduled Board meetings and reviews and approves loan
applications that do not require the approval of the full Board of Directors.
Designated members of management sit on this committee for the purpose of
reviewing and approving loan applications.
In addition, First Federal has established a Nominating Committee.
DIRECTORS' COMPENSATION
First Federal pays a fee of $700 to each of its directors for
attendance at each board meeting. In addition, each member of the Loan Committee
receives a fee of $25 for each committee meeting attended. First Federal also
pays an annual salary of $5,000 to the Chairman of the Board. After the
conversion, First Federal will continue to pay directors fees and, initially,
First Federal Bancshares will not pay separate fees for service on its Board of
Directors. In addition, after the conversion, First Federal will cease paying a
salary to its Chairman of the Board and First Federal Bancshares will pay an
annual salary of $5,000 to its Chairman of the Board.
58
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following information is furnished for
Mr. Stebor for the fiscal year ended February 29, 2000. No other executive
officer of First Federal received salary and bonus of $100,000 or more during
the fiscal year ended February 29, 2000.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION (1)
-----------------------------------------------------------
OTHER ANNUAL
NAME AND FISCAL COMPENSATION ALL OTHER
POSITION YEAR SALARY BONUS (2) COMPENSATION
--------------------------------- ------------- ------------- ---------- ------------------ -------------
<S> <C> <C> <C> <C> <C>
James J. Stebor..................... 2000 $103,790 $10,379 $10,150(3) --
President and Chief Executive Officer
</TABLE>
---------------------------------
(1) Compensation information for the fiscal years ended February 28, 1999
and 1998 has been omitted as First Federal was neither a public company
nor a subsidiary of a public company at that time.
(2) Does not include the aggregate amount of perquisites and other personal
benefits, which was less than $50,000 or 10% of the total annual salary
and bonus reported.
(3) Consists of directors' and loan committee fees.
EMPLOYMENT AGREEMENTS. Upon the completion of the conversion, First
Federal and First Federal Bancshares each intend to enter into employment
agreements with Mr. Stebor. The employment agreements are intended to ensure
that First Federal and First Federal Bancshares will be able to retain the
services of Mr. Stebor after the conversion. The continued success of First
Federal and First Federal Bancshares depends to a significant degree on the
skills and competence of Mr. Stebor.
The employment agreements will provide for a three-year term. The term
of the First Federal Bancshares employment agreement will extend on a daily
basis until written notice of non-renewal is given by the Board of Directors or
Mr. Stebor. The term of the First Federal employment agreement will be renewable
on an annual basis. The employment agreements provide that Mr. Stebor's base
salary will be reviewed annually. The initial base salary under the employment
agreements for Mr. Stebor will be $110,000. In addition to the base salary, the
employment agreements provide for, among other things, participation in stock
benefits plans and other fringe benefits applicable to executive personnel. The
employment agreements provide for termination by First Federal or First Federal
Bancshares for cause, as defined in the employment agreements, at any time. If
First Federal or First Federal Bancshares chooses to terminate Mr. Stebor's
employment for reasons other than for cause, or if Mr. Stebor resigns from First
Federal or First Federal Bancshares after specified circumstances that would
constitute constructive termination, Mr. Stebor or, if Mr. Stebor dies, his
beneficiary, would be entitled to receive an amount equal to the benefit plan
base salary payments that would have been paid to Mr. Stebor for the remaining
term of the employment agreement and the contributions that would have been made
on Mr. Stebor's behalf to any employee benefit plans of First Federal and First
Federal Bancshares during the remaining term of the employment agreement. First
Federal and First Federal Bancshares would also continue to pay for Mr. Stebor's
health and welfare benefit plan coverage for the remaining term of the
employment agreement. Upon termination of Mr. Stebor for reasons other than
cause or a change in control, Mr. Stebor must adhere to a one-year
non-competition agreement.
Under the employment agreements, if, following a change in control of
First Federal or First Federal Bancshares, Mr. Stebor's employment is
involuntarily terminated or if Mr. Stebor voluntarily terminates his employment
in connection with circumstances specified in the agreement, then Mr. Stebor or,
if Mr. Stebor dies, his beneficiary, would be entitled to a severance payment
equal to the greater of the payments and benefits that would have been paid for
the remaining term of the agreement or three times the average of Mr. Stebor's
five preceding taxable years' annual compensation. First Federal and First
Federal Bancshares would also continue Mr. Stebor's health and welfare benefits
coverage for thirty-six months. Even though both employment agreements provide
for a severance payment if a change in control occurs, Mr. Stebor would not
receive duplicate payments or benefits under the agreements. Under applicable
law, an excise tax would be triggered by change in control-related payments that
equal or exceed three times Mr. Stebor's average annual compensation over the
five years preceding the change in control. The excise tax would equal 20% of
the amount of the payment in excess of one times Mr. Stebor's average
59
<PAGE>
compensation over the preceding five-year period. In the event that payments
related to a change in control of First Federal Bancshares are subject to this
excise tax, First Federal Bancshares will provide Mr. Stebor with an additional
amount sufficient to enable Mr. Stebor to retain the full value of his change in
control benefits as if the excise tax had not applied. If a change in control of
First Federal and First Federal Bancshares occurred, the total amount of
payments due under the employment agreements, based solely on Mr. Stebor's cash
compensation received in the fiscal year ending February 29, 2000 (and without
regard to future base salary adjustments or bonuses and excluding any benefits
under any employee benefit plan which may be payable), would be approximately
$327,000.
First Federal Bancshares will guarantee the payments to Mr. Stebor
under First Federal's employment agreement if they are not paid by First
Federal. First Federal Bancshares will also make all payment due under the First
Federal Bancshares' employment agreement. First Federal or First Federal
Bancshares will pay or reimburse all reasonable costs and legal fees incurred by
Mr. Stebor under any dispute or question of interpretation relating to the
employment agreements, if Mr. Stebor is successful on the merits in a legal
judgment, arbitration or settlement. The employment agreements also provide that
First Federal and First Federal Bancshares will indemnify Mr. Stebor to the
fullest extent legally allowable for all expenses and liabilities he may incur
in connection with any suit or proceeding in which he may be involved by reason
of his having been a director or officer of First Federal Bancshares or First
Federal.
CHANGE IN CONTROL AGREEMENTS. Upon the completion of the conversion,
First Federal intends to enter into change in control agreements with four
senior officers who will not be covered by an employment agreement. Each change
in control agreement will be renewable on an annual basis. The change in control
agreements will have terms of two or three years. The change in control
agreements will provide that if involuntary termination, other than for cause,
or voluntary termination (upon the occurrence of circumstances specified in the
agreements) follows a change in control of First Federal and First Federal
Bancshares, the officers would be entitled to receive a severance payment equal
to two or three times their average annual compensation for the five most recent
taxable years. First Federal would also continue to pay for the officers' health
and welfare benefits coverage for 36 months following termination. If a change
in control of First Federal and First Federal Bancshares occurred and all
officers covered by such agreements were terminated, the total payments that
would be due under the change in control agreements, based solely on the cash
compensation paid in the fiscal year ended February 29, 2000 to the officers
covered by the change in control agreements and excluding any benefits under any
employee benefit plan which may be payable, would equal approximately $497,000.
EMPLOYEE SEVERANCE COMPENSATION PLAN. First Federal's Board of
Directors intends to adopt an employee severance compensation plan in connection
with the conversion. The severance plan will provide benefits to eligible
employees upon a change in control of First Federal Bancshares or First Federal.
First Federal expects eligible employees to include those employees who have
completed a minimum of one year of service with First Federal. Eligible
employees will not include any individual who enters into an employment or
change in control agreement with First Federal or First Federal Bancshares.
Under the severance plan, if a change in control of First Federal Bancshares or
First Federal occurs, eligible employees whose employment is terminated or who
terminate employment upon the occurrence of events specified in the severance
plan, within 12 months of the effective date of a change in control will be
entitled to a severance payment based on the individual's compensation and years
of service. Generally, the severance benefit equals two weeks compensation for
each year of service, up to a maximum of 12 months compensation. Assuming that a
change in control had occurred at February 29, 2000, and resulted in the
termination of all eligible employees, the maximum aggregate payment due under
the severance plan would be approximately $327,000.
BENEFITS
PENSION PLAN. First Federal participates in a multiple-employer defined
benefit pension plan known as the Financial Institutions Retirement Fund.
Generally, salaried employees of First Federal become members of the pension
plan upon the completion of one year of service with First Federal (as described
in the plan document adopted by First Federal) and the attainment of age 21.
First Federal makes annual contributions to the Financial Institutions
Retirement Fund sufficient to fund retirement benefits for its employees, as
determined in accordance with a formula set forth in the plan document.
Participants generally become vested in their accrued benefits under the pension
plan after completing five years of vesting service (as described in the plan
document). In general,
60
<PAGE>
accrued benefits under the pension plan, including reduced benefits payable upon
early retirement or in the event of a disability, are based on an individual's
years of benefit service (as described in the plan document) and the average of
the individual's highest five years' salary (as described in the plan document).
A participant's normal amount of retirement benefit equals 2% multiplied by his
years of benefit service multiplied by his high five-year average salary.
EMPLOYEE STOCK OWNERSHIP PLAN. In connection with the conversion, First
Federal's Board of Directors has authorized the adoption of an employee stock
ownership plan for employees of First Federal and First Federal Bancshares.
Generally, salaried employees of First Federal Bancshares and First Federal will
become eligible to participate in the employee stock ownership plan upon the
completion of one-year of service and attainment of age 21; PROVIDED, HOWEVER,
that all salaried employees who are aged 21 and employed at the date of the
conversion will immediately become participants in the plan.
First Federal Bancshares intends for the trustee of the employee stock
ownership plan to purchase 8% of the shares issued in the conversion. This would
range between 132,600 shares, assuming 1,657,500 shares are issued in the
conversion, and 179,400 shares assuming 2,242,500 shares are issued in the
conversion. It is anticipated that the employee stock ownership plan will borrow
funds from First Federal Bancshares to purchase the stock in the conversion. The
loan will equal 100% of the aggregate purchase price of the common stock. The
loan to the employee stock ownership plan will be repaid principally from First
Federal's contributions to the employee stock ownership plan and dividends
payable on common stock held by the employee stock ownership plan over the
anticipated 10-year term of the loan. The interest rate for the employee stock
ownership plan loan is expected to be the prime rate as published in THE WALL
STREET JOURNAL on the closing date of the conversion. See "PRO FORMA DATA." If
the employee stock ownership plan is unable to acquire 8% of the common stock
sold in the offering, it is anticipated that additional shares may be acquired
following the conversion through open market purchases, subject to approval by
the Office of Thrift Supervision.
In any plan year, First Federal may make additional discretionary
contributions (beyond those necessary to satisfy the loan obligation) to the
employee stock ownership plan for the benefit of plan participants in either
cash or shares of common stock, which may be acquired through the purchase of
outstanding shares in the market or from individual stockholders or which
constitute authorized but unissued shares or shares held in treasury by First
Federal Bancshares. The timing, amount, and manner of discretionary
contributions will be affected by several factors, including applicable
regulatory policies, the requirements of applicable laws and regulations, and
market conditions. First Federal's contributions to the employee stock ownership
plan are not fixed, so benefits payable under the employee stock ownership plan
cannot be estimated.
Shares purchased by the employee stock ownership plan with the proceeds
of the loan from First Federal Bancshares will be held in a suspense account and
released on a pro rata basis as the loan is repaid. Discretionary contributions
to the employee stock ownership plan and shares released from the suspense
account will be allocated among participants on the basis of each participant's
proportional share of compensation.
Participants will vest in their accrued benefits under the employee
stock ownership plan at the rate of 20% per year of service, beginning upon the
completion of one year of service. Participants who are employed at the
completion of the conversion will be fully vested in their accounts. A
participant will also become fully vested at retirement, upon death or
disability, a change in control or upon termination of the employee stock
ownership plan. Benefits are generally distributable upon a participant's
separation from service. Any forfeitures will be reallocated among the remaining
plan participants.
It is anticipated that First Federal will appoint an independent
trustee. The trustees vote all allocated shares held in the employee stock
ownership plan as instructed by the plan participants and unallocated shares and
allocated shares for which no instructions are received must be voted in the
same ratio on any matter as those shares for which instructions are given,
subject to the fiduciary responsibilities of the trustee.
Under applicable accounting requirements, compensation expense for a
leveraged employee stock ownership plan is recorded at the fair market value of
the employee stock ownership plan shares when committed to be released to
participants' accounts. See "PRO FORMA DATA."
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The employee stock ownership plan must meet certain requirements of the
Internal Revenue Code and the Employee Retirement Income Security Act. First
Federal intends to request a determination letter from the Internal Revenue
Service regarding the tax-qualified status of the employee stock ownership plan.
First Federal expects to receive a favorable determination letter, but cannot
guarantee that it will.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. Following the conversion, First
Federal intends to implement a supplemental executive retirement plan to provide
for supplemental retirement benefits with respect to the employee stock
ownership plan. The plan will provide participating executives with benefits
otherwise limited by other provisions of the Internal Revenue Code or the terms
of the employee stock ownership plan loan. Specifically, the plan will provide
benefits to eligible individuals (those designated by the Board of Directors of
First Federal or its affiliates) that cannot be provided under the employee
stock ownership plan as a result of the limitations imposed by the Internal
Revenue Code, but that would have been provided under the employee stock
ownership plan but for such limitations. In addition to providing for benefits
lost under tax-qualified plans as a result of limitations imposed by the
Internal Revenue Code, the new plan will also provide supplemental benefits to
designated individuals upon a change of control before the complete scheduled
repayment of the employee stock ownership plan loan. Generally, upon such an
event, the supplemental executive retirement plan will provide the individual
with a benefit equal to what the individual would have received under the
employee stock ownership plan had he or she remained employed throughout the
term of the employee stock ownership plan loan less the benefits actually
provided under the employee stock ownership plan on behalf of such individual.
An individual's benefits under the supplemental executive retirement plan will
generally become payable upon the change in control of First Federal or First
Federal Bancshares. The Board of Directors intends to designate Mr. Stebor as a
participant in the supplemental executive retirement plan.
First Federal may utilize a grantor trust in connection with the
supplemental executive retirement plan in order to set funds aside with which to
ultimately pay benefits under the plan. The assets of the grantor trust would be
subject to the claims of First Federal's general creditors in the event of First
Federal's insolvency until paid to the individual according to the terms of the
supplemental executive retirement plan.
STOCK-BASED INCENTIVE PLAN. Following the conversion, the Board of
Directors of First Federal Bancshares intends to adopt a stock-based incentive
plan that will provide for the granting of options to purchase common stock and
awards of restricted stock to eligible officers, employees, and directors of
First Federal Bancshares and First Federal. As required by the Office of Thrift
Supervision, the stock-based incentive plan will not be implemented until at
least six months after the completion of the conversion. First Federal
Bancshares will submit the stock-based incentive plan to stockholders for their
approval at which time stockholders will be provided with detailed information
about the plan.
Under the stock-based incentive plan, First Federal Bancshares intends
to reserve shares for the grant of stock options in an amount equal to 10% of
the shares of common stock issued in the conversion. The amount reserved would
range from 165,750 shares, assuming 1,657,500 shares are issued in the
conversion to 224,250 shares, assuming 2,242,500 shares are issued in the
conversion. Additionally, First Federal Bancshares intends to reserve shares for
the grant of stock awards in an amount equal to 4% of the shares of common stock
issued in the conversion. The amount reserved would range from 66,300 shares,
assuming 1,657,500 shares are issued in the conversion to 89,700 shares,
assuming 2,242,500 shares are issued in the conversion. Any common stock awarded
under the Stock-Based Incentive Plan will be awarded at no cost to the
recipients. The plan may be funded through the purchase of common stock by a
trust established in connection with the stock-based incentive plan or from
authorized but unissued shares. If additional authorized but unissued shares are
acquired by the stock-based incentive plan after the conversion, the interests
of existing shareholders would be diluted. See "PRO FORMA DATA."
TRANSACTIONS WITH FIRST FEDERAL
Federal regulations require that all loans or extensions of credit to
executive officers and directors must generally be made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons, must not involve more than
the normal risk of repayment or present other unfavorable features.
Notwithstanding this rule, federal regulations permit First Federal to make
loans to executive officers and directors at reduced interest rates if the loan
is made under a benefit program generally available to all other employees and
does not give preference to any executive officer or director over any other
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employee. In addition, loans made to a director or executive officer in an
amount that, when aggregated with the amount of all other loans to the person
and his or her related interests, are in excess of the greater of $1.0 million
or 5% of First Federal's capital and surplus, up to a maximum of $3.0 million,
must be approved in advance by a majority of the disinterested members of the
Board of Directors. See "REGULATION AND SUPERVISION--FEDERAl SAVINGS INSTITUTION
REGULATION--TRANSACTIONS WITH RELATED PARTIES." The aggregate amount of loans by
First Federal to its executive officers and directors was $124,000 at February
29, 2000, or approximately 0.3% of pro forma stockholders' equity assuming that
2,242,500 shares are issued in the conversion. These loans were performing
according to their original terms at February 29, 2000.
First Federal utilizes the services of the law firm of Hartzell,
Glidden, Tucker & Hartzell, of which Mr. Hartzell, a director of First Federal
and First Federal Bancshares, is a partner, for First Federal's foreclosure,
bankruptcy and certain tax litigation services. First Federal also utilizes the
services of the law firm of Flack, McRaven & Stephens, to which Mr. Stephens, a
director of First Federal and First Federal Bancshares, is Of Counsel, for title
opinions for First Federal's loans.
INDEMNIFICATION FOR DIRECTORS AND OFFICERS
First Federal Bancshares' Certificate of Incorporation contains
provisions that limit the liability of and indemnity of its directors and
officers. These provisions provide that directors and officers will be
indemnified and held harmless by First Federal Bancshares when that individual
is made a party to civil, criminal, administrative and investigative
proceedings. Directors and officers will be indemnified to the fullest extent
authorized by the Delaware General Corporation Law against all expense,
liability and loss reasonably incurred. Insofar as indemnification for
liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of First Federal Bancshares pursuant
to the Certificate of Incorporation or otherwise, First Federal Bancshares has
been advised that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable.
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REGULATION AND SUPERVISION
GENERAL
As a savings and loan holding company, First Federal Bancshares will be
required by federal law to file reports with, and otherwise comply with, the
rules and regulations of the Office of Thrift Supervision. First Federal is
subject to extensive regulation, examination and supervision by the Office of
Thrift Supervision, as its primary federal regulator, and the Federal Deposit
Insurance Corporation, as the deposit insurer. First Federal is a member of the
Federal Home Loan Bank System and, with respect to deposit insurance, of the
Savings Association Insurance Fund managed by the Federal Deposit Insurance
Corporation. First Federal must file reports with the Office of Thrift
Supervision and the Federal Deposit Insurance Corporation concerning its
activities and financial condition in addition to obtaining regulatory approvals
prior to entering into certain transactions such as mergers with, or
acquisitions of, other savings institutions. The Office of Thrift Supervision
and/or the Federal Deposit Insurance Corporation conduct periodic examinations
to test First Federal's safety and soundness and compliance with various
regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulatory requirements and policies, whether by the Office of
Thrift Supervision, the Federal Deposit Insurance Corporation or the U.S.
Congress, could have a material adverse impact on First Federal Bancshares,
First Federal and their operations. Certain of the regulatory requirements
applicable to First Federal and to First Federal Bancshares are referred to
below or elsewhere in this prospectus. The description of statutory provisions
and regulations applicable to savings institutions and their holding companies
included in this prospectus does not purport to be a complete description of
such statutes and regulations and their effects on First Federal and First
Federal Bancshares.
HOLDING COMPANY REGULATION
First Federal Bancshares will be a nondiversified unitary savings and
loan holding company within the meaning of federal law. Under prior law, a
unitary savings and loan holding company, such as First Federal Bancshares, was
not generally restricted as to the types of business activities in which it may
engage, provided that First Federal continued to be a qualified thrift lender.
See "--FEDERAL SAVINGS INSTITUTION REGULATION--QTL TEST." The Gramm-Leach-Bliley
Act of 1999, however, restricts unitary savings and loan holding companies not
existing or applied for before May 4, 1999 to activities permissible for
financial holding companies under the law or for multiple savings and loan
holding companies. First Federal Bancshares will not qualify for the grandfather
and will be limited to the activities permissible for financial holding
companies or multiple savings and loan holding companies. A financial holding
company may engage in activities that are financial in nature, incidental to
financial activities or complementary to a financial activity. A multiple
savings and loan holding company is generally limited to activities permissible
for bank holding companies under Section 4(c)(8) of the Bank Holding Company
Act, subject to the prior approval of the Office of Thrift Supervision, and
certain activities authorized by Office of Thrift Supervision regulation.
A savings and loan holding company is prohibited from, directly or
indirectly, acquiring more than 5% of the voting stock of another savings
institution or savings and loan holding company without prior written approval
of the Office of Thrift Supervision and from acquiring or retaining control of a
depository institution that is not insured by the Federal Deposit Insurance
Corporation. In evaluating applications by holding companies to acquire savings
institutions, the Office of Thrift Supervision considers the financial and
managerial resources and future prospects of the holding company and institution
involved, the effect of the acquisition on the risk to the deposit insurance
funds, the convenience and needs of the community and competitive factors.
The Office of Thrift Supervision may not approve any acquisition that
would result in a multiple savings and loan holding company controlling savings
institutions in more than one state, subject to two exceptions: (i) the approval
of interstate supervisory acquisitions by savings and loan holding companies and
(ii) the acquisition of a savings institution in another state if the laws of
the state of the target savings institution specifically permit such
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acquisitions. The states vary in the extent to which they permit interstate
savings and loan holding company acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, federal regulations do prescribe such restrictions
on subsidiary savings institutions as described below. First Federal must notify
the Office of Thrift Supervision 30 days before declaring any dividend to First
Federal Bancshares. In addition, the financial impact of a holding company on
its subsidiary institution is a matter that is evaluated by the Office of Thrift
Supervision and the agency has authority to order cessation of activities or
divestiture of subsidiaries deemed to pose a threat to the safety and soundness
of the institution.
FEDERAL SAVINGS INSTITUTION REGULATION
BUSINESS ACTIVITIES. The activities of federal savings institutions are
governed by federal law and regulations. These laws and regulations delineate
the nature and extent of the activities in which federal associations may
engage. In particular, many types of lending authority for federal associations,
E.G., commercial, non-residential real property loans and consumer loans, are
limited to a specified percentage of the institution's capital or assets.
CAPITAL REQUIREMENTS. The Office of Thrift Supervision capital
regulations require savings institutions to meet three minimum capital
standards: a 1.5% tangible capital ratio, a 4% leverage ratio (3% for
institutions receiving the highest rating on the CAMELS rating system) and an 8%
risk-based capital ratio. In addition, the prompt corrective action standards
discussed below also establish, in effect, a minimum 2% tangible capital
standard, a 4% leverage ratio (3% for institutions receiving the highest rating
on the CAMEL financial institution rating system), and, together with the
risk-based capital standard itself, a 4% Tier 1 risk-based capital standard. The
Office of Thrift Supervision regulations also require that, in meeting the
tangible, leverage and risk-based capital standards, institutions must generally
deduct investments in and loans to subsidiaries engaged in activities as
principal that are not permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the Office of Thrift Supervision capital
regulation based on the risks believed inherent in the type of asset. Core (Tier
1) capital is defined as common stockholders' equity (including retained
earnings), certain noncumulative perpetual preferred stock and related surplus
and minority interests in equity accounts of consolidated subsidiaries less
intangibles other than certain mortgage servicing rights and credit card
relationships. The components of supplementary capital currently include
cumulative preferred stock, long-term perpetual preferred stock, mandatory
convertible securities, subordinated debt and intermediate preferred stock, the
allowance for loan and lease losses limited to a maximum of 1.25% of
risk-weighted assets and up to 45% of unrealized gains on available-for-sale
equity securities with readily determinable fair market values. Overall, the
amount of supplementary capital included as part of total capital cannot exceed
100% of core capital.
The capital regulations also incorporate an interest rate risk
component. Savings institutions with "above normal" interest rate risk exposure
are subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. For the present time, the Office of Thrift
Supervision has deferred implementation of the interest rate risk capital
charge. At February 29, 2000, First Federal met each of its capital
requirements.
PROMPT CORRECTIVE REGULATORY ACTION. The Office of Thrift Supervision
is required to take certain supervisory actions against undercapitalized
institutions, the severity of which depends upon the institution's degree of
undercapitalization. Generally, a savings institution that has a ratio of total
capital to risk weighted assets of less than 8%, a ratio of Tier 1 (core)
capital to risk-weighted assets of less than 4% or a ratio of core capital to
total assets of less than 4% (3% or less for institutions with the highest
examination rating) is considered to be "undercapitalized." A savings
institution that has a total risk-based capital ratio less than 6%, a Tier 1
capital ratio of less than 3% or a leverage ratio that is less than 3% is
considered to be "significantly undercapitalized" and a savings institution that
has a tangible capital to assets ratio equal to or less than 2% is deemed to be
"critically
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undercapitalized." Subject to a narrow exception, the Office of Thrift
Supervision 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 a savings institution receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Compliance with the plan must be guaranteed by any parent
holding company. In addition, numerous mandatory supervisory actions become
immediately applicable to an undercapitalized institution, including, but not
limited to, increased monitoring by regulators and restrictions on growth,
capital distributions and expansion. 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. First Federal is a member of the Savings
Association Insurance Fund. The Federal Deposit Insurance Corporation maintains
a risk-based assessment system by which institutions are assigned to one of
three categories based on their capitalization and one of three subcategories
based on examination ratings and other supervisory information. An institution's
assessment rate depends upon the categories to which it is assigned. Assessment
rates for insured institutions are determined semiannually by the Federal
Deposit Insurance Corporation and currently range from zero basis points for the
healthiest institutions to 27 basis points for the riskiest.
In addition to the assessment for deposit insurance, institutions are
required to make payments on bonds issued in the late 1980s by the Financing
Corporation to recapitalize the predecessor to the Savings Association Insurance
Fund. During 1999, payments for Savings Association Insurance Fund members
approximated 6.1 basis points, while Bank Insurance Fund members paid 1.2 basis
points. Since January 1, 2000, there has been equal sharing of Financing
Corporation payments between members of both insurance funds.
The Federal Deposit Insurance Corporation has authority to increase
insurance assessments. A significant increase in Savings Association Insurance
Fund insurance premiums would likely have an adverse effect on the operating
expenses and results of operations of First Federal. Management cannot predict
what insurance assessment rates will be in the future.
Insurance of deposits may be terminated by the Federal Deposit
Insurance Corporation upon a finding that the institution has engaged in unsafe
or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order or
condition imposed by the Federal Deposit Insurance Corporation or the Office of
Thrift Supervision. The management of First Federal does not know of any
practice, condition or violation that might lead to termination of deposit
insurance.
LOANS TO ONE BORROWER. Federal law provides that savings institutions
are generally subject to the limits on loans to one borrower applicable to
national banks. A savings institution may not make a loan or extend credit to a
single or related group of borrowers in excess of 15% of its unimpaired capital
and surplus. An additional amount may be lent, equal to 10% of unimpaired
capital and surplus, if secured by specified readily-marketable collateral.
QTL TEST. The HOLA requires savings institutions to meet a qualified
thrift lender test. Under the test, a savings association is required to either
qualify as a "domestic building and loan association" under the Internal Revenue
Code or maintain at least 65% of its "portfolio assets" (total assets less: (1)
specified liquid assets up to 20% of total assets; (2) intangibles, including
goodwill; and (3) the value of property used to conduct business) in certain
"qualified thrift investments" (primarily residential mortgages and related
investments, including certain mortgage-backed securities) in at least 9 months
out of each 12 month period.
A savings institution that fails the qualified thrift lender test is
subject to certain operating restrictions and may be required to convert to a
bank charter. As of February 29, 2000, First Federal met the qualified thrift
lender test. Recent legislation has expanded the extent to which education
loans, credit card loans and small business loans may be considered "qualified
thrift investments."
LIMITATIONS ON CAPITAL DISTRIBUTIONS. Office of Thrift Supervision
regulations impose limitations upon all capital distributions by a savings
institution, including cash dividends, payments to repurchase its shares and
payments to shareholders of another institution in a cash-out merger. Under
current regulations, an application
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to and the prior approval of the Office of Thrift Supervision is required prior
to any capital distribution if the institution does not meet the criteria for
"expedited treatment" of applications under Office of Thrift Supervision
regulations (I.E., generally, examination ratings in the two top categories),
the total capital distributions for the calendar year exceed net income for that
year plus the amount of retained net income for the preceding two years, the
institution would be undercapitalized following the distribution or the
distribution would otherwise be contrary to a statute, regulation or agreement
with Office of Thrift Supervision. If an application is not required, the
institution must still provide prior notice to Office of Thrift Supervision of
the capital distribution if, like First Federal, it is a subsidiary of a holding
company. In the event First Federal's capital fell below its regulatory
requirements 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 such distribution would constitute an unsafe or unsound
practice.
LIQUIDITY. First Federal is required to maintain an average daily
balance of specified liquid assets equal to a monthly average of not less than a
specified percentage of its net withdrawable deposit accounts plus short-term
borrowings. This liquidity requirement is currently 4%, but may be changed from
time to time by the Office of Thrift Supervision to any amount within the range
of 4% to 10%. Monetary penalties may be imposed for failure to meet these
liquidity requirements. First Federal has never been subject to monetary
penalties for failure to meet its liquidity requirements.
ASSESSMENTS. Savings institutions are required to pay assessments to
the Office of Thrift Supervision to fund the agency's operations. The general
assessments, paid on a semi-annual basis, are computed upon the savings
institution's total assets, including consolidated subsidiaries, as reported in
First Federal's latest quarterly thrift financial report.
TRANSACTIONS WITH RELATED PARTIES. First Federal's authority to engage
in transactions with "affiliates" (E.G., any company that controls or is under
common control with an institution, including First Federal Bancshares and its
non-savings institution subsidiaries) is limited by federal law. The aggregate
amount of covered transactions with any individual affiliate is limited to 10%
of the capital and surplus of the savings institution. The aggregate amount of
covered transactions with all affiliates is limited to 20% of the savings
institution's capital and surplus. Certain transactions with affiliates are
required to be secured by collateral in an amount and of a type described in
federal law. The purchase of low quality assets from affiliates is generally
prohibited. The transactions with affiliates must be on terms and under
circumstances that are 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% shareholders ("insiders"), as well as entities such persons
control, is also governed by federal law. Such loans are required to be made on
terms substantially the same as those offered to unaffiliated individuals and
not involve more than the normal risk of repayment. Recent legislation created
an exception for loans made pursuant to a benefit or compensation program that
is widely available to all employees of the institution and does not give
preference to insiders over other employees. The law limits both the individual
and aggregate amount of loans First Federal may make to insiders based, in part,
on First Federal's capital position and requires certain board approval
procedures to be followed. Loans to executive officers are subject to additional
restrictions.
ENFORCEMENT. The Office of Thrift Supervision has primary enforcement
responsibility over savings institutions and has the authority to bring actions
against the institution and all institution-affiliated parties, including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors to institution of receivership, conservatorship or termination of
deposit insurance. Civil penalties cover a wide range of violations and can
amount to $25,000 per day, or even $1 million per day in especially egregious
cases. The Federal Deposit Insurance Corporation has the authority to recommend
to the Director of the Office of Thrift Supervision that enforcement action to
be taken with respect to a particular savings institution. If action is not
taken
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by the Director, the Federal Deposit Insurance Corporation has authority to take
such action under certain circumstances. Federal law also establishes criminal
penalties for certain violations.
STANDARDS FOR SAFETY AND SOUNDNESS. The federal banking agencies have
adopted Interagency Guidelines prescribing Standards for Safety and Soundness.
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. If the Office of Thrift
Supervision determines that a savings institution fails to meet any standard
prescribed by the guidelines, the Office of Thrift Supervision may require the
institution to submit an acceptable plan to achieve compliance with the
standard.
FEDERAL HOME LOAN BANK SYSTEM
First Federal is 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, is required to acquire and
hold shares of capital stock in that Federal Home Loan Bank in an amount at
least equal to 1.0% of the aggregate principal amount of its unpaid residential
mortgage loans and similar obligations at the beginning of each year, or 1/20 of
its advances (borrowings) from the Federal Home Loan Bank, whichever is greater.
First Federal was in compliance with this requirement with an investment in
Federal Home Loan Bank stock at February 29, 2000 of $894,000.
The Federal Home Loan Banks are required to provide funds for the
resolution of insolvent thrifts in the late 1980s 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. If dividends were reduced, or interest on future
Federal Home Loan Bank advances increased, First Federal's net interest income
would likely also be reduced. Recent legislation has changed the structure of
the Federal Home Loan Banks funding obligations for insolvent thrifts, revised
the capital structure of the Federal Home Loan Banks and implemented entirely
voluntary membership for Federal Home Loan Banks. Management cannot predict the
effect that these changes may have with respect to its Federal Home Loan Bank
membership.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The regulations generally provide
that reserves be maintained against aggregate transaction accounts as follows:
for accounts aggregating $44.3 million or less (subject to adjustment by the
Federal Reserve Board) the reserve requirement is 3%; and for accounts
aggregating greater than $44.3 million, the reserve requirement is $1.329
million plus 10% (subject to adjustment by the Federal Reserve Board between 8%
and 14%) against that portion of total transaction accounts in excess of $44.3
million. The first $5.0 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) are exempted from the reserve
requirements. First Federal complies with the foregoing requirements.
PROSPECTIVE LEGISLATION
First Federal is, and First Federal Bancshares, as a savings and loan
holding company, will be extensively regulated and supervised. Regulations,
which affect First Federal on a daily basis, may be changed at any time, and the
interpretation of the relevant law and regulations may also change because of
new interpretations by the authorities who interpret those laws and regulations.
Any change in the regulatory structure or the applicable statutes or
regulations, whether by the Office of Thrift Supervision, the Federal Deposit
Insurance Corporation or the U.S. Congress, could have a material impact on
First Federal Bancshares, First Federal, its operations or the conversion.
Legislation enacted several years ago provided that the Bank Insurance
Fund and the Savings Association Insurance Fund would have merged on January 1,
1999 if there had been no more savings associations as of that date. Congress
did not enact legislation eliminating the savings association charter by that
date. First Federal is
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unable to predict whether the Savings Association Insurance Fund and Bank
Insurance Fund will eventually be merged and what effect, if any, that may have
on its business.
FEDERAL SECURITIES LAWS
First Federal Bancshares has filed with the Securities and Exchange
Commission a registration statement under the Securities Act for the
registration of the common stock to be issued in the conversion. Upon completion
of the conversion, First Federal Bancshares' common stock will be registered
with the Securities and Exchange Commission under the Securities Exchange Act.
First Federal Bancshares will then have to observe the information, proxy
solicitation, insider trading restrictions and other requirements under the
Securities Exchange Act.
The registration under the Securities Act of shares of the common
stock to be issued in the conversion does not cover the resale of those
shares. Shares of the common stock purchased by persons who are not
affiliates of First Federal Bancshares may be resold without registration.
The resale restrictions of Rule 144 under the Securities Act govern shares
purchased by an affiliate of First Federal Bancshares. As defined under Rule
144, an affiliate of First Federal Bancshares is a person that directly or
indirectly controls, is controlled by, or is under common control with First
Federal Bancshares. Generally, executive officers and directors will be
considered affiliates of First Federal Bancshares. If First Federal Bancshares
meets the current public information requirements of Rule 144 under the
Securities Act, each affiliate of First Federal Bancshares 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 Bancshares or (2) the average weekly volume of
trading in such shares during the preceding four calendar weeks. Provision
may be made in the future by First Federal Bancshares to permit affiliates to
have their shares registered for sale under the Securities Act under specific
circumstances.
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FEDERAL AND STATE TAXATION
FEDERAL INCOME TAXATION
GENERAL. First Federal Bancshares and First Federal intend to report
their income on a calendar year basis using the accrual method of accounting.
The federal income tax laws apply to First Federal Bancshares and First Federal
in the same manner as to other corporations with some exceptions, including
particularly First Federal's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to First
Federal or First Federal Bancshares. First Federal's federal income tax returns
have been either audited or closed under the statute of limitations through tax
year 1995. For its 1999 tax year, First Federal's maximum federal income tax
rate was 34%.
BAD DEBT RESERVES. For fiscal years beginning before February 29, 1996,
thrift institutions that qualified under certain definitional tests and other
conditions of the Internal Revenue Code were permitted to use certain favorable
provisions to calculate their deductions from taxable income for annual
additions to their bad debt reserve. A reserve could be established for bad
debts on qualifying real property loans, generally secured by interests in real
property improved or to be improved, under the percentage of taxable income
method or the experience method. The reserve for nonqualifying loans was
computed using the experience method.
Federal legislation enacted in 1996 repealed the reserve method of
accounting for bad debts and the percentage of taxable income method for tax
years beginning after 1995 and require savings institutions to recapture or take
into income certain portions of their accumulated bad debt reserves.
Approximately $2.3 million of First Federal accumulated bad debt reserves would
not be recaptured into taxable income unless First Federal makes a "non-dividend
distribution" to First Federal Bancshares as described below.
DISTRIBUTIONS. If First Federal makes "non-dividend distributions" to
First Federal Bancshares, they will be considered to have been made from First
Federal's unrecaptured tax bad debt reserves, including the balance of its
reserves as of February 28, 1988, to the extent of the "non-dividend
distributions," and then from First Federal's supplemental reserve for losses on
loans, to the extent of those reserves, and an amount based on the amount
distributed, but not more than the amount of those reserves, will be included in
First Federal's taxable income. Non-dividend distributions include distributions
in excess of First Federal's current and accumulated earnings and profits, as
calculated for federal income tax purposes, distributions in redemption of
stock, and distributions in partial or complete liquidation. Dividends paid out
of First Federal's current or accumulated earnings and profits will not be so
included in First Federal's taxable income.
The amount of additional taxable income triggered by a non-dividend is
an amount that, when reduced by the tax attributable to the income, is equal to
the amount of the distribution. Therefore, if First Federal makes a non-dividend
distribution to First Federal Bancshares, approximately one and one-half times
the amount of the distribution not in excess of the amount of the reserves would
be includable in income for federal income tax purposes, assuming a 35% federal
corporate income tax rate. First Federal does not intend to pay dividends that
would result in a recapture of any portion of its bad debt reserves.
STATE TAXATION
ILLINOIS STATE TAXATION. First Federal is required to file Illinois
income tax returns and pay tax at an effective tax rate of 7.18% of Illinois
taxable income. For these purposes, Illinois taxable income generally means
federal taxable income subject to certain modifications the primary one of which
is the exclusion of interest income on United States obligations.
DELAWARE STATE TAXATION. As a Delaware holding company not earning
income in Delaware, First Federal Bancshares will be exempt from Delaware
Corporate income tax, but will be required to file an annual report with and pay
an annual franchise tax to the State of Delaware.
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SHARES TO BE PURCHASED BY MANAGEMENT
WITH SUBSCRIPTION RIGHTS
The following table presents certain information as to the approximate
purchases of common stock by the directors and executive officers of First
Federal, including their associates, as defined by applicable regulations. No
individual has entered into a binding agreement to purchase these shares and,
therefore, actual purchases could be more or less than indicated. Directors and
executive officers and their associates may not purchase more than 31.44% of the
shares sold in the conversion. For purposes of the following table, sufficient
shares are assumed to be available to satisfy subscriptions in all categories.
<TABLE>
<CAPTION>
PERCENT OF PERCENT OF
ANTICIPATED ANTICIPATED SHARES AT SHARES AT
NUMBER OF DOLLAR MINIMUM MAXIMUM
SHARES TO BE AMOUNT TO BE OF ESTIMATED OF ESTIMATED
NAME PURCHASED (1) PURCHASED (1) VALUATION RANGE VALUATION RANGE
---- ------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C>
Franklin M. Hartzell................................. 15,000 $150,000 0.90% 0.67%
Murrel Hollis........................................ 15,000 150,000 0.90 0.67
Gerald L. Prunty..................................... 15,000 150,000 0.90 0.67
Dr. Stephan L. Roth.................................. 15,000 150,000 0.90 0.67
Eldon M. Snowden..................................... 3,500 35,000 0.21 0.16
James J. Stebor...................................... 5,000 50,000 0.30 0.22
Richard D. Stephens.................................. 15,000 150,000 0.90 0.67
All Directors and Officers
as a Group (15 persons)........................... 98,200 982,000 5.92 4.38
</TABLE>
----------
(1) Does not include shares to be awarded under the employee stock ownership
plan and stock-based incentive plan or options to acquire shares under the
stock-based incentive plan.
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THE CONVERSION
THE OFFICE OF THRIFT SUPERVISION HAS APPROVED FIRST FEDERAL'S PLAN OF
CONVERSION, PROVIDED THAT IT IS APPROVED BY THE MEMBERS OF FIRST FEDERAL AND
THAT FIRST FEDERAL BANCSHARES AND FIRST FEDERAL SATISFY CERTAIN OTHER CONDITIONS
IMPOSED BY THE OFFICE OF THRIFT SUPERVISION IN ITS APPROVAL. OFFICE OF THRIFT
SUPERVISION APPROVAL IS NOT A RECOMMENDATION OR ENDORSEMENT OF THE PLAN OF
CONVERSION AND IS NOT A RECOMMENDATION TO PURCHASE COMMON STOCK IN THE OFFERING.
GENERAL
On December 8, 1999, the Board of Directors of First Federal
unanimously adopted the plan of conversion. Under the plan of conversion, First
Federal will convert from a federally chartered mutual savings bank to a
federally chartered stock savings bank and become a wholly owned subsidiary of
First Federal Bancshares, a newly formed Delaware corporation. In addition, the
plan provides that First Federal Bancshares will offer its common stock in a
subscription offering and, if necessary, through a community offering and/or a
syndicate of registered broker-dealers. THE FOLLOWING DISCUSSION OF THE PLAN OF
CONVERSION CONTAINS ALL MATERIAL TERMS ABOUT THE CONVERSION. NEVERTHELESS, YOU
SHOULD READ CAREFULLY THE PLAN OF CONVERSION, WHICH ACCOMPANIES FIRST FEDERAL'S
PROXY STATEMENT AND IS AVAILABLE TO MEMBERS OF FIRST FEDERAL UPON REQUEST. The
plan of conversion is also filed as an exhibit to the registration statement
that First Federal Bancshares has filed with the Securities and Exchange
Commission. See "WHERE YOU CAN FIND MORE INFORMATION."
The Office of Thrift Supervision has approved First Federal's plan of
conversion, subject to, among other things, approval of the plan of conversion
by First Federal's members. First Federal has called a special meeting of its
members for this purpose on _________, 2000. Depositors as of July 5, 2000
and borrowers with loans outstanding as of March 27, 1990, whose loans continue
to be outstanding as of July 5, 2000, will be entitled to vote at the special
meeting. First Federal will complete the conversion only upon completion of the
sale of at least the minimum number of shares of First Federal Bancshares common
stock offered through this prospectus and approval of the plan of conversion by
First Federal's voting members.
The Board of Directors established the aggregate price of the shares of
common stock to be issued in the conversion based upon an independent appraisal
of First Federal giving effect to the conversion. RP Financial, a consulting
firm experienced in the valuation and appraisal of savings institutions,
prepared the appraisal. RP Financial will affirm or, if necessary, update its
appraisal at the completion of the offering.
The completion of the offering depends on market conditions and other
factors beyond First Federal's control. No assurance can be given as to the
length of time after approval of the plan of conversion at the special meeting
that will be required to complete the sale of the common stock. If delays are
experienced, significant changes may occur in the appraisal of First Federal
Bancshares and First Federal as converted, which would require a change in the
offering range. A change in the offering range would result in a change in the
net proceeds realized by First Federal Bancshares from the sale of the common
stock. If the conversion is terminated, First Federal would be required to
charge all conversion expenses against current income.
REASONS FOR THE CONVERSION
After considering the advantages and disadvantages of the conversion,
the Board of Directors of First Federal unanimously approved the conversion as
being in the best interests of First Federal, its customers and employees and
the communities it serves. The Board of Directors concluded that the conversion
offers a number of advantages which will be important to the future growth and
performance of First Federal.
Formation of First Federal as a capital stock savings bank subsidiary
of First Federal Bancshares will permit First Federal Bancshares to sell common
stock, which is a source of capital not available to mutual savings banks. The
capital raised through the sale of common stock in the conversion will support
First Federal's future lending and operational growth and may also support
possible future branching activities or the acquisition of other financial
institutions or financial service companies or their assets. Additional capital
also will increase First Federal's ability to render services to the communities
it serves, although First Federal has no current specific plans, arrangements or
understandings regarding these activities.
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After completion of the conversion, the unissued common and preferred
stock authorized by First Federal Bancshares' certificate of incorporation will
permit First Federal Bancshares to raise additional capital through further
sales of securities and to issue securities in connection with possible
acquisitions, subject to market conditions and any required regulatory
approvals. First Federal Bancshares currently has no plans with respect to
additional offerings of securities.
The conversion will afford First Federal's management, members and
others the opportunity to become stockholders of First Federal Bancshares and
participate more directly in, and contribute to, any future growth of First
Federal Bancshares and First Federal. First Federal Bancshares will use
stock-related incentive programs to attract and retain executive and other
personnel.
EFFECTS OF CONVERSION TO STOCK FORM
GENERAL. Each depositor in a mutual savings bank has both a deposit
account in the institution and a pro rata ownership interest in the net worth of
the institution based upon the balance in his or her account. However, this
ownership interest is tied to the depositor's account and has no value separate
from such deposit account. Furthermore, this ownership interest may only be
realized in the unlikely event that the institution is liquidated. In such
event, the depositors of record at that time, as owners, would be able to share
in any residual surplus and reserves after payment of other claims, including
claims of depositors to the amounts of their deposits. Any depositor who opens a
deposit account obtains a pro rata ownership interest in the net worth of the
institution without any additional payment beyond the amount of the deposit. A
depositor who reduces or closes his account receives a portion or all of the
balance in the account but nothing for his ownership interest in the net worth
of the institution, which is lost to the extent that the balance in the account
is reduced.
When a mutual savings bank converts to stock form, depositors lose all
rights to the net worth of the mutual savings bank, except the right to claim a
pro rata share of funds representing the liquidation account established in
connection with the conversion. Additionally, permanent nonwithdrawable capital
stock is created and offered to depositors which represents the ownership of the
institution's net worth. THE COMMON STOCK OF FIRST FEDERAL BANCSHARES 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 permanent 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 deposit account the seller may
hold in the institution.
No assets of First Federal Bancshares or First Federal will be
distributed in connection with the conversion other than the payment of those
expenses incurred in connection with the conversion.
CONTINUITY. While the conversion is being accomplished, the normal
business of First Federal will continue without interruption, including being
regulated by the Office of Thrift Supervision and the Federal Deposit Insurance
Corporation. After conversion, First Federal will continue to provide services
for depositors and borrowers under current policies by its present management
and staff.
The directors of First Federal at the time of conversion will serve as
directors of First Federal after the conversion. The directors of First Federal
Bancshares will be solely composed of individuals who served on the Board of
Directors of First Federal. All officers of First Federal at the time of
conversion will retain their positions after the conversion.
DEPOSIT ACCOUNTS AND LOANS. First Federal's deposit accounts, account
balances and existing Federal Deposit Insurance Corporation insurance coverage
of deposit accounts will not be affected by the conversion. Furthermore, the
conversion will not affect the loan accounts, loan balances or obligations of
borrowers under their individual contractual arrangements with First Federal.
EFFECT ON VOTING RIGHTS. Voting rights in First Federal, as a mutual
savings bank, belong to its depositor and borrower members. After the
conversion, depositors will no longer have voting rights in First Federal and,
therefore, will no longer be able to elect directors of First Federal or control
its affairs. Instead, First Federal Bancshares, as the sole stockholder of First
Federal, will possess all voting rights in First Federal. The holders of the
common stock of First Federal Bancshares will possess all voting rights in First
Federal Bancshares. Depositors
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of First Federal will not have voting rights after the conversion except to the
extent that they become stockholders of First Federal Bancshares by purchasing
common stock.
TAX EFFECTS. First Federal has received an opinion from Muldoon,
Murphy & Faucette LLP, Washington, D.C., that addresses all the material
federal income tax consequences of the conversion. The opinion, which relies
upon factual representations given by First Federal, concludes that the
conversion will constitute a nontaxable reorganization under Section
368(a)(1)(F) of the Internal Revenue Code. Among other things, the opinion
states the following, which constitutes all of the material federal tax
consequences of the conversion:
- no gain or loss will be recognized to First Federal in its mutual
or stock form by reason of the conversion;
- no gain or loss will be recognized to its account holders upon
the issuance to them of accounts in First Federal immediately
after the conversion, in the same dollar amounts and on the same
terms and conditions as their accounts at First Federal in its
mutual form plus interest in the liquidation account;
- the tax basis of account holders' accounts in First Federal
immediately after the conversion will be the same as the tax
basis of their accounts immediately before conversion;
- the tax basis of each account holder's interest in the
liquidation account will be equal to the value, if any, of that
interest;
- the tax basis of the common stock purchased in the conversion
will be the amount paid and the holding period for the stock will
begin on the date of purchase; and
- no gain or loss will be recognized to account holders upon the
receipt or exercise of subscription rights in the conversion,
except if subscription rights are deemed to have value as
discussed below.
Unlike a private letter ruling issued by the Internal Revenue Service,
an opinion of counsel is not binding on the Internal Revenue Service and the
Internal Revenue Service could disagree with the conclusions reached in the
opinion. If there is a disagreement, no assurance can be given that the
conclusions reached in an opinion of counsel would be sustained by a court if
contested by the Internal Revenue Service.
Based upon past rulings issued by the Internal Revenue Service, the
opinion provides that the receipt of subscription rights by eligible account
holders, supplemental eligible account holders and other individuals under the
plan of conversion will be taxable if the subscription rights are deemed to have
a fair market value. RP Financial, whose findings are not binding on the
Internal Revenue Service, has issued a letter indicating that the subscription
rights do not have any value, based on the fact that the rights are acquired by
the recipients without cost, are nontransferable and of short duration and
afford the recipients the right only to purchase shares of the common stock at a
price equal to its estimated fair market value, which will be the same price
paid by purchasers in the community offering for unsubscribed shares of common
stock. If the subscription rights are deemed to have a fair market value, the
receipt of the rights may only be taxable to those persons who exercise their
subscription rights. First Federal could also recognize a gain on the
distribution of subscription rights. Holders of subscription rights are
encouraged to consult with their own tax advisors as to the tax consequences if
the subscription rights are deemed to have a fair market value.
First Federal has also received an opinion from Crowe, Chizek and
Company LLP, Oak Brook, Illinois, that, assuming the conversion does not result
in any federal income tax liability to First Federal, its account holders, or
First Federal Bancshares, implementation of the plan of conversion will not
result in any Illinois income tax liability to those entities or persons.
The opinions of Muldoon, Murphy & Faucette LLP and Crowe, Chizek and
Company LLP, and the letter from RP Financial are filed as exhibits to the
registration statement that First Federal Bancshares has filed with the
Securities and Exchange Commission. See "WHERE YOU CAN FIND MORE INFORMATION."
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YOU SHOULD CONSULT WITH YOUR OWN TAX ADVISOR REGARDING THE TAX
CONSEQUENCES OF THE CONVERSION PARTICULAR TO YOU.
LIQUIDATION ACCOUNT. In the unlikely event of a complete liquidation of
First Federal, before the conversion, each depositor in First Federal would
receive a pro rata share of any assets of First Federal remaining after payment
of claims of all creditors, including the claims of all depositors up to the
withdrawal value of their accounts. Each depositor's pro rata share of the
remaining assets would be in the same proportion as the value of his or her
deposit account to the total value of all deposit accounts in First Federal at
the time of liquidation.
After the conversion, holders of withdrawable deposit(s) in First
Federal, including certificates of deposit, will not be entitled to share in any
residual assets upon liquidation of First Federal. However, under Office of
Thrift Supervision regulations, First Federal will, at the time of the
conversion, establish a liquidation account in an amount equal to its total
equity as of the date of the latest statement of financial condition contained
in the final prospectus relating to the conversion.
First Federal will maintain the liquidation account after the
conversion for the benefit of eligible account holders and supplemental eligible
account holders who retain their savings accounts in First Federal. Each
eligible account holder and supplemental eligible account holder will, with
respect to each deposit account held, have a related inchoate interest in a
sub-account portion of the liquidation account balance.
The initial subaccount balance for a savings account held by an
eligible account holder or a supplemental eligible account holder will be
determined by multiplying the opening balance in the liquidation account by a
fraction of which the numerator is the amount of the holder's "qualifying
deposit" in the deposit account and the denominator is the total amount of the
"qualifying deposits" of all eligible or supplemental eligible account holders.
The initial subaccount balance will not be increased, but it will be decreased
as provided below.
If the deposit balance in any deposit account of an eligible account
holder or supplemental eligible account holder at the close of business on any
annual closing day of First Federal after October 31, 1998, or June 30, 2000 is
less than the lesser of the deposit balance in a deposit account at the close of
business on any other annual closing date after October 31, 1998 or June 30,
2000, or the amount of the "qualifying deposit" in a savings account on October
31, 1998 or June 30, 2000, then the subaccount balance for a savings account
will be adjusted by reducing the subaccount balance in an amount proportionate
to the reduction in the savings balance. Once reduced, the subaccount balance
will not be subsequently increased, notwithstanding any increase in the savings
balance of the related savings account. If any savings account is closed, the
related subaccount balance will be reduced to zero.
Upon a complete liquidation of First Federal, each eligible account
holder and supplemental eligible account holder will be entitled to receive a
liquidation distribution from the liquidation account in the amount of the then
current adjusted subaccount balance(s) for deposit account(s) held by the holder
before any liquidation distribution may be made to stockholders. No merger,
consolidation, bulk purchase of assets with assumptions of savings accounts and
other liabilities or similar transactions with another federally insured
institution in which First Federal is not the surviving institution will be
considered to be a complete liquidation. In any of these transactions, the
liquidation account will be assumed by the surviving institution.
In the unlikely event First Federal is liquidated after the conversion,
depositors will be entitled to full payment of their deposit accounts before any
payment is made to First Federal Bancshares as the sole stockholder of First
Federal.
SUBSCRIPTION OFFERING AND SUBSCRIPTION RIGHTS
Under the plan of conversion, First Federal has granted rights to
subscribe for First Federal Bancshares common stock to the following persons in
the following order of priority:
1. Persons with deposits in First Federal with balances aggregating
$50 or more ("qualifying deposits") as of October 31, 1998
("eligible account holders"). For this purpose, deposit accounts
include all savings, time, and demand accounts.
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2. Tax-qualified benefit plans of First Federal Bancshares or First
Federal, including First Federal's employee stock ownership plan.
3. Persons with qualifying deposits in First Federal as of June 30,
2000 ("supplemental eligible account holders").
4. Persons with deposits in First Federal as of July 5, 2000 and
borrowers of First Federal who had loans outstanding on March 27,
1990 that continue to be outstanding as of July 5, 2000 ("other
members").
The amount of common stock that any person may purchase will depend on
the availability of the common stock after satisfaction of all subscriptions
having prior rights in the subscription offering and to the maximum and minimum
purchase limitations set forth in the plan of conversion. See "--LIMITATIONS ON
PURCHASES OF SHARES." All persons on a joint account will be counted as a single
depositor for purposes of determining the maximum amount that may be subscribed
for by owners of a joint account.
SUBSCRIPTION RIGHTS ARE NONTRANSFERABLE. IF YOU SELL OR OTHERWISE
TRANSFER YOUR RIGHTS TO SUBSCRIBE FOR COMMON STOCK IN THE SUBSCRIPTION OFFERING
OR SUBSCRIBE FOR COMMON STOCK ON BEHALF OF ANOTHER PERSON, YOU MAY FORFEIT THOSE
RIGHTS AND FACE POSSIBLE FURTHER SANCTIONS AND PENALTIES IMPOSED BY THE OFFICE
OF THRIFT SUPERVISION OR ANOTHER AGENCY OF THE U.S. GOVERNMENT. IF YOU EXERCISE
YOUR SUBSCRIPTION RIGHTS, YOU WILL BE REQUIRED TO CERTIFY THAT YOU ARE
PURCHASING SHARES SOLELY FOR YOUR OWN ACCOUNT AND THAT YOU HAVE NO AGREEMENT OR
UNDERSTANDING WITH ANY OTHER PERSON FOR THE SALE OR TRANSFER OF THE SHARES. ONCE
TENDERED, SUBSCRIPTION ORDERS CANNOT BE REVOKED WITHOUT THE CONSENT OF FIRST
FEDERAL AND FIRST FEDERAL BANCSHARES.
CATEGORY 1: ELIGIBLE ACCOUNT HOLDERS. Each eligible account holder has
the right to subscribe for up to the greater of:
- $150,000 of common stock (which equals 15,000 shares);
- one-tenth of one percent of the total offering of common stock;
or
- 15 times the product, rounded down to the next whole number,
obtained by multiplying the total number of shares of common
stock to be issued by a fraction of which the numerator is the
amount of qualifying deposit of the eligible account holder and
the denominator is the total amount of qualifying deposits of all
eligible account holders.
If there are not sufficient shares to satisfy all subscriptions by
eligible account holders, shares first will be allocated so as to permit each
subscribing eligible account holder, if possible, to purchase a number of
shares sufficient to make the person's total allocation equal 100 shares or
the number of shares actually subscribed for, whichever is less. After that,
unallocated shares will be allocated among the remaining subscribing eligible
account holders whose subscriptions remain unfilled in the proportion that
the amounts of their respective qualifying deposits bear to the total
qualifying deposits of all remaining eligible account holders whose
subscriptions remain unfilled. Subscription rights of eligible account
holders who are also executive officers or directors 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
First Federal in the one year period preceding October 31, 1998.
To ensure a proper allocation of stock, each eligible account holder
must list on his or her stock order form all deposit accounts in which such
eligible account holder had an ownership interest at October 31, 1998. Failure
to list an account, or providing incorrect information, could result in the loss
of all or part of a subscriber's stock allocation.
CATEGORY 2: TAX-QUALIFIED EMPLOYEE BENEFIT PLANS. First Federal's
tax-qualified employee benefit plans have the right to purchase up to 10% of the
shares of common stock issued in the conversion. As a tax-qualified employee
benefit plan, First Federal's employee stock ownership plan intends to purchase
8% of the shares of common stock issued in the conversion. Subscriptions by the
employee stock ownership plan will not be aggregated with shares of common stock
purchased by any other participants in the offering, including subscriptions
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by the officers and directors of First Federal, for the purpose of applying the
purchase limitations in the plan of conversion. If First Federal Bancshares
increases the number of shares offered in the conversion, the employee stock
ownership plan will have a first priority right to purchase any shares exceeding
that amount up to 8% of the common stock. If the plan's subscription is not
filled in its entirety, the employee stock ownership plan may purchase shares in
the open market or may purchase shares directly from First Federal Bancshares
with the approval of the Office of Thrift Supervision.
CATEGORY 3: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. Each supplemental
eligible account holder has the right to subscribe for up to the greater of:
- $150,000 of common stock (which equals 15,000 shares);
- one-tenth of one percent of the total offering of common stock;
or
- 15 times the product, rounded down to the next whole number,
obtained by multiplying the total number of shares of common
stock to be issued by a fraction of which the numerator is the
amount of qualifying deposit of the supplemental eligible account
holder and the denominator is the total amount of qualifying
deposits of all supplemental eligible account holders.
If eligible account holders and First Federal's employee stock
ownership plan subscribe for all of the shares being sold by First Federal
Bancshares, no shares will be available for supplemental eligible account
holders. If shares are available for supplemental eligible account holders but
there are not sufficient shares to satisfy all subscriptions by supplemental
eligible account holders, shares first will be allocated so as to permit each
subscribing supplemental eligible account holder, if possible, to purchase a
number of shares sufficient to make the person's total allocation equal 100
shares or the number of shares actually subscribed for, whichever is less. After
that, unallocated shares will be allocated among the remaining subscribing
supplemental eligible account holders whose subscriptions remain unfilled in the
proportion that the amounts of their respective qualifying deposits bear to the
total qualifying deposits of all remaining supplemental eligible account holders
whose subscriptions remain unfilled.
To ensure a proper allocation of stock, each supplemental eligible
account holder must list on his or her stock order form all deposit accounts in
which such eligible account holder had an ownership interest at June 30, 2000.
Failure to list an account, or providing incorrect information, could result in
the loss of all or part of a subscriber's stock allocation.
CATEGORY 4: OTHER MEMBERS. Each other member of First Federal has the
right to purchase up to $150,000 of common stock (which equals 15,000 shares).
If eligible account holders, First Federal's employee stock ownership plan and
supplemental eligible account holders subscribe for all of the shares being sold
by First Federal Bancshares, no shares will be available for other members. If
shares are available for other members but there are not sufficient shares to
satisfy all subscriptions by other members, shares first will be allocated so as
to permit each subscribing other member, if possible, to purchase a number of
shares sufficient to make the person's total allocation equal 100 shares or the
number of shares actually subscribed for, whichever is less. After that,
unallocated shares will be allocated among the remaining subscribing other
members in the proportion that the number of votes each other member is eligible
to cast as of the record date for persons eligible to vote at First Federal's
special meeting bears to the total votes of all remaining other members whose
subscriptions remain unfilled.
To ensure a proper allocation of stock, each other member must list on
his or her stock order form all deposit accounts in which such other member had
an ownership interest at July 5, 2000 or each loan from First Federal that was
outstanding on March 27, 1990 that continues to be outstanding as of July 5,
2000. Failure to list an account or loan, or providing incorrect information,
could result in the loss of all or part of a subscriber's stock allocation.
EXPIRATION DATE FOR THE SUBSCRIPTION OFFERING. The subscription
offering and all subscription rights under the plan of conversion will expire at
12:00 Noon, Central time, on ___________, 2000. FIRST FEDERAL WILL NOT ACCEPT
ORDERS FOR COMMON STOCK IN THE SUBSCRIPTION OFFERING RECEIVED IN HAND AFTER THAT
TIME. First Federal Bancshares and First Federal may extend the subscription
offering to up to ______, 2000 without regulatory
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approval. First Federal Bancshares and First Federal will make reasonable
attempts to provide a prospectus and related offering materials to holders of
subscription rights, however all subscription rights will expire on the
expiration date, as extended, whether or not First Federal has been able to
locate each person entitled to subscription rights.
Office of Thrift Supervision regulations require that First Federal
Bancshares complete the sale of common stock within 45 days after the close of
the subscription offering. If the sale of the common stock is not completed
within that period, all funds received will be returned promptly with interest
at First Federal's passbook rate and all withdrawal authorizations will be
canceled unless First Federal receives approval of the Office of Thrift
Supervision to extend the time for completing the offering. If regulatory
approval of an extension of the time period has been granted, all subscribers
will be notified of the extension and of the duration of any extension that has
been granted, and will be given the right to increase, decrease or rescind their
orders. If First Federal Bancshares does not receive an affirmative response
from a subscriber to any resolicitation, the subscriber's order will be
rescinded and all funds received will be promptly returned with interest, or
withdrawal authorizations will be canceled. No single extension can exceed 90
days, and all extensions in the aggregate, may not last beyond ______, 2002.
PERSONS IN NON-QUALIFIED STATES. First Federal Bancshares and First
Federal 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
under the plan of conversion reside. However, First Federal Bancshares and First
Federal are not required to offer stock in the subscription offering to any
person who resides in a foreign country or who resides in a state of the United
States in which only a small number of persons otherwise eligible to subscribe
for shares of common stock reside and where First Federal Bancshares or First
Federal determines that compliance with that state's securities laws would be
impracticable for reasons of cost or otherwise. First Federal may determine
compliance with state securities laws to be impracticable based on a request or
requirement that First Federal Bancshares and First Federal or their officers or
directors register as a broker, dealer, salesman or selling agent under the
securities laws of the state, or a request or requirement to register or
otherwise qualify the subscription rights or common stock for sale or submit any
filing in the state.
COMMUNITY OFFERING
To the extent that shares remain available for purchase after
satisfaction of all subscriptions received in the subscription offering, First
Federal Bancshares may offer shares pursuant to the plan of conversion in a
community offering to the following persons in the following order of priority:
1. Persons and trusts of natural persons who are residents of Adams,
Brown, McDonough, Hancock, Schuyler, Henderson, Fulton, Warren or
Pike Counties in Illinois or Marion, Lewis or Ralls Counties in
Missouri.
2. Other persons to whom First Federal delivers a prospectus.
Purchasers in the community offering are eligible to purchase up to
$150,000 of common stock (which equals 15,000 shares). If not enough shares are
available to fill orders in the community offering, the available shares will be
allocated first to each subscriber whose order is accepted by First Federal in
an amount equal to the lesser of 100 shares or the number of shares subscribed
for by each such subscriber, if possible. After that, unallocated shares will be
allocated among such subscribers whose orders remain unsatisfied on a 100 shares
per order basis until all such orders have been filled or the remaining shares
have been allocated.
The community offering, if held, may commence concurrently with or
subsequent to the subscription offering and will terminate no later than 45 days
after the close of the subscription offering unless extended by First Federal
Bancshares and First Federal, with approval of the Office of Thrift Supervision.
FIRST FEDERAL BANCSHARES PRESENTLY INTENDS TO TERMINATE THE COMMUNITY OFFERING
AS SOON AS IT HAS RECEIVED ORDERS FOR ALL SHARES AVAILABLE FOR PURCHASE IN THE
CONVERSION. If First Federal receives regulatory approval of an extension of
time, all subscribers will be notified of the extension and of the duration of
any extension that has been granted, and will be given the right to increase,
decrease or rescind their orders. If First Federal Bancshares does not receive
an affirmative response from a subscriber to any resolicitation, the
subscriber's order will be rescinded and all funds received will be promptly
returned with interest.
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THE OPPORTUNITY TO SUBSCRIBE FOR SHARES OF COMMON STOCK IN THE
COMMUNITY OFFERING IS SUBJECT TO THE RIGHT OF FIRST FEDERAL BANCSHARES AND FIRST
FEDERAL TO REJECT ORDERS, IN WHOLE OR PART, EITHER AT THE TIME OF RECEIPT OF AN
ORDER OR AS SOON AS PRACTICABLE FOLLOWING THE EXPIRATION DATE OF THE OFFERING.
IF YOUR ORDER IS REJECTED IN PART, YOU WILL NOT HAVE THE RIGHT TO CANCEL THE
REMAINDER OF YOUR ORDER.
SYNDICATED COMMUNITY OFFERING
The plan of conversion provides that, if necessary, all shares of
common stock not purchased in the subscription offering and community offering
may be offered for sale to the general public in a syndicated community offering
through a syndicate of registered broker-dealers to be formed and managed by FBR
acting as agent of First Federal Bancshares. Alternatively, First Federal
Bancshares may sell any remaining shares in an underwritten public offering.
Neither FBR nor any registered broker-dealer will have any obligation to take or
purchase any shares of the common stock in the syndicated community offering;
however, FBR has agreed to use its best efforts in the sale of shares in the
syndicated community offering. First Federal Bancshares has not selected any
particular broker-dealers to participate in a syndicated community offering. The
syndicated community offering will terminate no later than 45 days after the
expiration of the subscription offering, unless extended by First Federal
Bancshares and First Federal, with approval of the Office of Thrift Supervision.
See "--COMMUNITY OFFERING" above for a discussion of rights of subscribers in
the event an extension is granted.
THE OPPORTUNITY TO SUBSCRIBE FOR SHARES OF COMMON STOCK IN THE
SYNDICATED COMMUNITY OFFERING IS SUBJECT TO THE RIGHT OF FIRST FEDERAL
BANCSHARES AND FIRST FEDERAL TO REJECT ORDERS, IN WHOLE OR PART, EITHER AT THE
TIME OF RECEIPT OF AN ORDER OR AS SOON AS PRACTICABLE FOLLOWING THE EXPIRATION
DATE OF THE OFFERING. IF YOUR ORDER IS REJECTED IN PART, YOU WILL NOT HAVE THE
RIGHT TO CANCEL THE REMAINDER OF YOUR ORDER.
Stock sold in the syndicated community offering also will be sold at
the $10.00 purchase price. See "--STOCK PRICING AND NUMBER OF SHARES TO BE
ISSUED." Purchasers in the syndicated community offering are eligible to
purchase up to $150,000 of common stock (which equals 15,000 shares).
If First Federal is unable to find purchasers from the general public
for all unsubscribed shares, other purchase arrangements will be made by the
Board of Directors of First Federal, if feasible. Other purchase arrangements
must be approved by the Office of Thrift Supervision and may provide for
purchases for investment purposes by directors, officers, their associates and
other persons in excess of the limitations provided in the plan of conversion
and in excess of the proposed director purchases discussed earlier, although no
purchases are currently intended. If other purchase arrangements cannot be made,
the plan of conversion will terminate.
MARKETING AND UNDERWRITING ARRANGEMENTS
First Federal and First Federal Bancshares have retained FBR to consult
with and advise First Federal and to assist First Federal and First Federal
Bancshares, on a best efforts basis, in the distribution of shares in the
offering. FBR is a broker-dealer registered with the Securities and Exchange
Commission and a member of the National Association of Securities Dealers, Inc.
FBR will assist First Federal in the conversion by acting as marketing advisor
with respect to the subscription offering and will represent First Federal as
placement agent on a best efforts basis in the sale of the common stock in the
community offering if one is held. FBR will conduct training sessions with
directors, officers and employees of First Federal regarding the conversion
process, assist in the establishment and supervision of First Federal's
conversion center and, with management's input, train First Federal's staff to
record properly and tabulate orders for the purchase of common stock and to
respond appropriately to customer inquiries.
Based on negotiations between First Federal and First Federal
Bancshares concerning the fee structure, FBR will receive a fee equal to 1.5% of
the aggregate dollar amount of all stock sold in the subscription and community
offerings to persons other than the employee stock ownership plan, directors,
officers and employees of First Federal or First Federal Bancshares or their
immediate families. First Federal will pay FBR's fee upon completion of the
conversion. First Federal will reimburse FBR for its reasonable out-of-pocket
expenses, including legal fees.
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FBR has not prepared any report or opinion constituting a
recommendation or advice to First Federal Bancshares or First Federal or to
persons who subscribe for stock, nor has it prepared an opinion as to the
fairness to First Federal Bancshares or First Federal of the purchase price or
the terms of the stock to be sold. FBR expresses no opinion as to the prices at
which common stock to be issued may trade. Total marketing fees to FBR are
expected to range from approximately $214,000 at the minimum of the offering
range to approximately $341,000 at 15% above the maximum of the offering range.
See "PRO FORMA DATA" for the assumptions used to arrive at these estimates. FBR
and selected dealers participating in the syndicated community offering may
receive a commission in the syndicated community offering in a maximum amount to
be agreed upon by First Federal Bancshares and First Federal to reflect market
requirements at the time of the allocation of shares in the syndicated community
offering.
With certain limitations, First Federal Bancshares and First Federal
have also agreed to indemnify FBR against liabilities and expenses, including
legal fees, incurred in connection with certain claims or litigation arising out
of or based upon the performance of FBR of its services in connection with the
conversion.
DESCRIPTION OF SALES ACTIVITIES
First Federal Bancshares will offer the common stock in the
subscription offering and community offering principally by the distribution of
this prospectus and through activities conducted at First Federal's conversion
center. The conversion center is expected to operate during normal business
hours throughout the subscription offering and community offering. It is
expected that at any particular time one or more FBR employees will be working
at the conversion center. Employees of FBR will be responsible for mailing
materials relating to the offering, responding to questions regarding the
conversion and the offering and processing stock orders.
Sales of common stock will be made by registered representatives
affiliated with FBR or by the selected dealers managed by FBR. The management
and employees of First Federal may participate in the offering in clerical
capacities, providing administrative support in effecting sales transactions or,
when permitted by state securities laws, answering questions of a mechanical
nature relating to the proper execution of the order form. Management of First
Federal may answer questions regarding the business of First Federal when
permitted by state securities laws. Other questions of prospective purchasers,
including questions as to the advisability or nature of the investment, will be
directed to registered representatives. The management and employees of First
Federal Bancshares and First Federal have been instructed not to solicit offers
to purchase common stock or provide advice regarding the purchase of common
stock.
No officer, director or employee of First Federal or First Federal
Bancshares will be compensated, directly or indirectly, for any activities in
connection with the offer or sale of securities issued in the conversion.
None of First Federal's personnel participating in the offering is
registered or licensed as a broker or dealer or an agent of a broker or dealer.
First Federal's personnel will assist in the above-described sales activities
under an exemption from registration as a broker or dealer provided by Rule
3a4-1 promulgated under the Securities Exchange Act of 1934. Rule 3a4-1
generally provides that an "associated person of an issuer" of securities will
not be deemed a broker solely by reason of participation in the sale of
securities of the issuer if the associated person meets certain conditions.
These conditions include, but are not limited to, that the associated person
participating in the sale of an issuer's securities not be compensated in
connection with the offering at the time of participation, that the person not
be associated with a broker or dealer and that the person observe certain
limitations on his or her participation in the sale of securities. For purposes
of this exemption, "associated person of an issuer" is defined to include any
person who is a director, officer or employee of the issuer or a company that
controls, is controlled by or is under common control with the issuer.
PROCEDURE FOR PURCHASING SHARES IN THE SUBSCRIPTION AND COMMUNITY OFFERINGS
USE OF ORDER FORMS. To purchase shares in the subscription offering,
you must submit a properly completed and executed order form to First Federal by
12:00 Noon, Central time, on _________ __, 2000. Your order form must be
accompanied by full payment for all of the shares subscribed for or include
appropriate authorization in the space provided on the order form for withdrawal
of full payment from a deposit account with First Federal. In order to purchase
shares in the community offering, you must submit a properly completed and
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executed order form to First Federal, accompanied by the required payment for
each share subscribed for, before the community offering terminates, which may
be on or at any time after the end of the subscription offering.
In order to ensure that your stock purchase eligibility and priority
are properly identified, you must list all accounts on the order form, giving
all names in each account, the account number and the approximate account
balance as of the appropriate eligibility date. Failure to list an account or
providing incorrect information, could result in the loss of all or part of a
subscriber's stock allocation.
First Federal Bancshares need not accept order forms that are received
after the expiration of the subscription offering or community offering, as the
case may be, or that are executed defectively or that are received without full
payment or without appropriate withdrawal instructions. In addition, First
Federal and First Federal Bancshares are not obligated to accept orders
submitted on photocopied or facsimilied stock order forms. First Federal
Bancshares and First Federal have the right to waive or permit the correction of
incomplete or improperly executed order forms, but do not represent that they
will do so. Notwithstanding the foregoing, First Federal and First Federal
Bancshares will have the right, each in their sole discretion, to permit
institutional investors to submit irrevocable orders together with a legally
binding commitment for payment and to thereafter pay for the shares of common
stock for which they subscribe in the community offering at any time prior to 48
hours before the completion of the conversion. Under the plan of conversion, the
interpretation by First Federal Bancshares and First Federal of the terms and
conditions of the plan of conversion and of the order form will be final. Once
received, an executed order form may not be modified, amended or rescinded
without the consent of First Federal unless the conversion has not been
completed within 45 days after the end of the subscription offering, unless
extended.
The reverse side of the order form contains a regulatory mandated
certification form. First Federal Bancshares will not accept order forms on
which the certification form is not executed. By executing and returning the
certification form, you will be certifying that you received this prospectus and
acknowledging that the common stock is not a deposit account and is not insured
or guaranteed by any federal or state governmental agency. You will also be
acknowledging that you received disclosure concerning the risks involved in this
offering. The certification form could be used as support to show that you
understand the nature of this investment.
To ensure that each purchaser receives a prospectus at least 48 hours
before the end of the offering as required by Rule 15c2-8 under the Securities
Exchange Act of 1934, no prospectus will be mailed any later than five days
before that date or hand delivered any later than two days before that date.
Execution of the order form will confirm receipt or delivery under Rule 15c2-8.
Order forms will be distributed only when preceded or accompanied by a
prospectus.
PAYMENT FOR SHARES. Payment for subscriptions may be made by cash,
check, bank draft or money order, or by authorization of withdrawal from deposit
accounts maintained with First Federal. Appropriate means by which withdrawals
may be authorized are provided on the order form. No wire transfers or third
party checks will be accepted. Interest will be paid on payments made by cash,
check, bank draft or money order at First Federal's passbook rate from the date
payment is received at the conversion center until the completion or termination
of the conversion. If payment is made by authorization of withdrawal from
deposit accounts, the funds authorized to be withdrawn from a deposit account
will continue to accrue interest at the contractual rates until completion or
termination of the conversion, unless the certificate matures after the date of
receipt of the order form but before closing, in which case funds will earn
interest at the passbook rate from the date of maturity until the conversion is
completed or terminated, but a hold will be placed on the funds, making them
unavailable to the depositor until completion or termination of the conversion.
When the conversion is completed, the funds received in the offering will be
used to purchase the shares of common stock ordered. THE SHARES OF COMMON STOCK
ISSUED IN THE CONVERSION CANNOT AND WILL NOT BE INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. If the conversion is not
consummated for any reason, all funds submitted will be promptly refunded with
interest as described above.
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If a subscriber authorizes First Federal to withdraw the amount of the
purchase price from his or her deposit account, First Federal will do so as of
the effective date of conversion, though the account must contain the full
amount necessary for payment at the time the subscription order is received.
First Federal will waive any applicable penalties for early withdrawal from
certificate accounts. If the remaining balance in a certificate account is
reduced below the applicable minimum balance requirement at the time funds are
actually transferred under the authorization, the certificate will be canceled
at the time of the withdrawal, without penalty, and the remaining balance will
earn interest at First Federal's passbook rate.
The employee stock ownership plan will not be required to pay for the
shares subscribed for at the time it subscribes, but rather may pay for shares
of common stock subscribed for upon the completion of the conversion; provided
that there is in force from the time of its subscription until that time, a loan
commitment from an unrelated financial institution or First Federal Bancshares
to lend to the employee stock ownership plan, at that time, the aggregate
purchase price of the shares for which it subscribed.
Individual retirement accounts maintained in First Federal do not
permit investment in the common stock. 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 those accounts, First Federal will allow a depositor to make a
trustee-to-trustee transfer of the individual retirement account funds to a
trustee offering a self-directed individual retirement account program with the
agreement that the funds will be used to purchase First Federal Bancshares'
common stock in the offering. There will be no early withdrawal or Internal
Revenue Service interest penalties for 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 an individual retirement account at First Federal to purchase
common stock should contact the conversion center as soon as possible so that
the necessary forms may be forwarded for execution and returned before the
subscription offering ends. In addition, federal laws and regulations require
that officers, directors and 10% shareholders who use self-directed individual
retirement account funds to purchase shares of common stock in the subscription
offering, make purchases for the exclusive benefit of individual retirement
accounts.
Certificates representing shares of common stock purchased, and any
refund due, will be mailed to purchasers at the address specified in properly
completed order forms or to the last address of the persons appearing on the
records of First Federal as soon as practicable following the sale of all shares
of common stock. Any certificates returned as undeliverable will be disposed of
as required by applicable law. PURCHASERS MAY NOT BE ABLE TO SELL THE SHARES OF
COMMON STOCK WHICH THEY PURCHASED UNTIL CERTIFICATES FOR THE COMMON STOCK ARE
AVAILABLE AND DELIVERED TO THEM, EVEN THOUGH TRADING OF THE COMMON STOCK MAY
HAVE BEGUN.
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED
Federal regulations require that the aggregate purchase price of the
securities sold in connection with the conversion be based upon an estimated pro
forma value of First Federal Bancshares and First Federal as converted (I.E.,
taking into account the expected receipt of proceeds from the sale of securities
in the conversion), as determined by an independent appraisal. First Federal and
First Federal Bancshares have retained RP Financial, which is experienced in the
evaluation and appraisal of business entities, to prepare an appraisal of the
pro forma market value of First Federal Bancshares and First Federal as
converted and to assist First Federal in preparing a business plan. RP Financial
will receive a fee expected to total approximately $35,000 for its appraisal
services and assistance in the preparation of a business plan, plus reasonable
out-of-pocket expenses incurred in connection with the appraisal. First Federal
has agreed to indemnify RP Financial under certain circumstances against
liabilities and expenses, including legal fees, arising out of, related to, or
based upon the conversion.
RP Financial has prepared an appraisal of the estimated pro forma
market value of First Federal Bancshares and First Federal as converted taking
into account the formation of First Federal Bancshares as the holding company
for First Federal. For its analysis, RP Financial undertook substantial
investigations to learn about First Federal's business and operations.
Management supplied financial information, including annual financial
statements, information on the composition of assets and liabilities, and other
financial schedules. In addition to this information, RP Financial reviewed
First Federal's conversion application as filed with the Office of Thrift
Supervision and First Federal Bancshares' registration statement as filed with
the Securities and Exchange
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Commission. Furthermore, RP Financial visited First Federal's facilities and had
discussions with First Federal's management and its special conversion legal
counsel, Muldoon, Murphy & Faucette LLP. RP Financial did not perform a detailed
individual analysis of the separate components of First Federal Bancshares' or
First Federal's assets and liabilities.
RP Financial's analysis utilized three selected valuation
procedures, the price/book method, the price/earnings method, and
price/assets method, all of which are described in its report. RP Financial
placed the greatest emphasis on the price/earnings and price/book methods in
estimating pro forma market value. In applying these procedures, RP Financial
reviewed, among other factors, the economic make-up of First Federal's
primary market area, First Federal's financial performance and condition in
relation to publicly traded institutions that RP Financial deemed comparable
to First Federal, the specific terms of the offering of First Federal
Bancshares' common stock, the pro forma impact of the additional capital
raised in the conversion, conditions of securities markets in general, and
the market for thrift institution common stock in particular. RP Financial's
analysis provides an approximation of the pro forma market value of First
Federal Bancshares and First Federal as converted based on the valuation
methods applied and the assumptions outlined in its report. Included in its
report were certain assumptions as to the pro forma earnings of First Federal
Bancshares after the conversion that were utilized in determining the
appraised value. These assumptions included estimated expenses and an assumed
after-tax rate of return on the net conversion proceeds as described under
"PRO FORMA DATA," purchases by the employee stock ownership plan of an amount
equal to 8% of the common stock sold in the conversion and purchases in the
open market by the stock-based incentive plan of a number of shares equal to
4% of the common stock sold in the conversion at the $10.00 purchase price.
See "PRO FORMA DATA" for additional information concerning these assumptions.
The use of different assumptions may yield different results.
On the basis of the analysis in its report, RP Financial has advised
First Federal Bancshares and First Federal that, in its opinion, as of April 28,
2000, the estimated pro forma market value of First Federal Bancshares and First
Federal, as converted, was within the valuation range of $16,575,000 to
$22,425,000 with a midpoint of $19,500,000. After reviewing the methodology and
the assumptions used by RP Financial in the preparation of the appraisal, the
Board of Directors established the offering range, which is equal to the
valuation range, of $16,575,000 to $22,425,000 with a midpoint of $19,500,000.
Assuming that the shares are sold at $10.00 per share in the conversion, the
estimated number of shares would be between 1,657,500 and 2,242,500 with a
midpoint of 1,950,000. The purchase price of $10.00 was determined by discussion
among the Boards of Directors of First Federal and First Federal Bancshares and
FBR, taking into account, among other factors, the requirement under Office of
Thrift Supervision regulations that the common stock be offered in a manner that
will achieve the widest distribution of the stock and desired liquidity in the
common stock after the conversion. Since the outcome of the offering relates in
large measure to market conditions at the time of sale, it is not possible to
determine the exact number of shares that will be issued by First Federal
Bancshares at this time. The offering range may be amended, with the approval of
the Office of Thrift Supervision, if necessitated by developments following the
date of the appraisal in, among other things, market conditions, the financial
condition or operating results of First Federal, regulatory guidelines or
national or local economic conditions. RP Financial's appraisal report is filed
as an exhibit to the registration statement that First Federal Bancshares has
filed with the Securities and Exchange Commission. See "WHERE YOU CAN FIND MORE
INFORMATION."
If, upon completion of the subscription offering, at least the minimum
number of shares are subscribed for, RP Financial, after taking into account
factors similar to those involved in its prior appraisal, will determine its
estimate of the pro forma market value of First Federal Bancshares and First
Federal as converted, as of the close of the subscription offering.
No shares will be sold unless RP Financial confirms that, to the best
of its knowledge and judgment, nothing of a material nature has occurred that
would cause it to conclude that the actual total purchase price on an aggregate
basis was materially incompatible with its estimate of the total pro forma
market value of First Federal Bancshares and First Federal as converted at the
time of the sale. If, however, the facts do not justify that statement, the
offering may be canceled, a new offering range and price per share set and new
subscription, community and syndicated community offerings held. Under those
circumstances, subscribers would have the right to modify or rescind their
subscriptions and to have their subscription funds returned promptly with
interest and holds on funds authorized for withdrawal from deposit accounts
would be released or reduced.
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Depending upon market and financial conditions, the number of shares
issued may be more than 2,242,500 shares or less than 1,657,500 shares. If the
total amount of shares issued is less than 1,657,500 or more than 2,578,875 (15%
above the maximum of the offering range), for aggregate gross proceeds of less
than $16,575,000 or more than $25,788,750, subscription funds will be returned
promptly with interest to each subscriber unless he or she indicates otherwise.
If RP Financial establishes a new valuation range, it must be approved by the
Office of Thrift Supervision.
In formulating its appraisal, RP Financial relied upon the
truthfulness, accuracy and completeness of all documents First Federal furnished
to it. RP Financial also considered financial and other information from
regulatory agencies, other financial institutions, and other public sources, as
appropriate. While RP Financial believes this information to be reliable, RP
Financial does not guarantee the accuracy or completeness of the information and
did not independently verify the financial statements and other data provided by
First Federal and First Federal Bancshares or independently value the assets or
liabilities of First Federal Bancshares and First Federal. THE APPRAISAL IS NOT
INTENDED TO BE, AND MUST NOT BE INTERPRETED AS, A RECOMMENDATION OF ANY KIND AS
TO THE ADVISABILITY OF VOTING TO APPROVE THE PLAN OF CONVERSION OR OF PURCHASING
SHARES OF COMMON STOCK. MOREOVER, BECAUSE THE APPRAISAL MUST BE BASED ON MANY
FACTORS WHICH CHANGE PERIODICALLY, THERE IS NO ASSURANCE THAT PURCHASERS OF
SHARES IN THE CONVERSION WILL BE ABLE TO SELL SHARES AFTER THE CONVERSION AT
PRICES AT OR ABOVE THE PURCHASE PRICE.
Copies of the appraisal report of RP Financial including any amendments
thereto, and the detailed memorandum of the appraiser setting forth the method
and assumptions for such appraisal are available for inspection at the main
office of First Federal and the other locations specified under "WHERE YOU CAN
FIND MORE INFORMATION."
LIMITATIONS ON PURCHASES OF SHARES
The plan of conversion imposes limitations upon the purchase of common
stock by eligible subscribers and others in the conversion. In addition to the
purchase limitations described above under "--SUBSCRIPTION OFFERING AND
SUBSCRIPTION RIGHTS," "--COMMUNITY OFFERING" and "--SYNDICATED COMMUNITY
OFFERING," the plan of conversion provides for the following purchase
limitations:
- Except for First Federal's tax-qualified employee benefit plans,
no person, either alone or together with associates of or persons
acting in concert with such person, may purchase in the aggregate
more than 1.0% of the common stock offered (which equals 22,425
shares), subject to increase as described below.
- The Board of Directors and the executive officers of First
Federal, together with their associates, may purchase up to
31.44% of the common stock sold in the offering.
- Each subscriber must subscribe for a minimum of 25 shares.
The 1.0% limitation applies to individual purchases in the offering,
aggregated with purchases by the person's associates and those persons acting in
concert with the purchaser. If you purchase $150,000 of common stock in the
subscription offering, you may still purchase up to $74,250 of common stock in
the community offering. Alternatively, if you purchase $150,000 of common stock
in the subscription offering, your associates and persons acting in concert with
you may purchase in the aggregate up to $74,250 of common stock in the
subscription offering and/or community offering.
For purposes of the plan of conversion, the directors are not deemed to
be acting in concert solely by reason of their Board membership. Pro rata
reductions within each subscription rights category will be made in allocating
shares if the maximum purchase limitations are exceeded.
First Federal's and First Federal Bancshares' Boards of Directors may,
in their sole discretion, increase the maximum purchase limitation up to 9.99%
of the shares of common stock sold in the conversion, provided that orders for
shares that exceed 5% of the shares of common stock sold in the conversion may
not exceed, in the aggregate, 10% of the shares sold in the conversion. First
Federal and First Federal Bancshares do not intend to
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increase the maximum purchase limitation unless market conditions warrant an
increase in the maximum purchase limitation and the sale of a number of shares
in excess of the minimum of the offering range. If the Boards of Directors
decide to increase the purchase limitations, persons who subscribed for the
maximum number of shares of common stock will be given the opportunity to
increase their subscriptions accordingly, subject to the rights and preferences
of any person who has priority subscription rights. First Federal Bancshares and
First Federal, in their discretion, also may give other large subscribers the
right to increase their subscriptions.
The plan of conversion defines "acting in concert" to mean knowing
participation in a joint activity or interdependent conscious parallel action
towards a common goal whether or not by an express agreement; or a combination
or pooling of voting or other interests in the securities of an issuer for a
common purpose under any contract, understanding, relationship, agreement or
other arrangement, whether written or otherwise. In general, a person who acts
in concert with another party will also be deemed to be acting in concert with
any person who is also acting in concert with that other party. FIRST FEDERAL
BANCSHARES AND FIRST FEDERAL MAY PRESUME THAT CERTAIN PERSONS ARE ACTING IN
CONCERT BASED UPON, AMONG OTHER THINGS, JOINT ACCOUNT RELATIONSHIPS AND THE FACT
THAT PERSONS MAY HAVE FILED JOINT SCHEDULES 13D OR 13G WITH THE SECURITIES AND
EXCHANGE COMMISSION WITH RESPECT TO OTHER COMPANIES.
The plan of conversion defines "associate," with respect to a
particular person, to mean:
1. any corporation or organization other than First Federal or a
majority-owned subsidiary of First Federal of which a person is
an officer or partner or is, directly or indirectly, the
beneficial owner of 10% or more of any class of equity
securities;
2. any trust or other estate in which a person has a substantial
beneficial interest or as to which a person serves as trustee or
in a similar fiduciary capacity; and
3. any relative or spouse of a person, or any relative of a spouse,
who either has the same home as a person or who is a director or
officer of First Federal or any of its parents or subsidiaries.
For example, a corporation of which a person serves as an officer would
be an associate of a person and, therefore, all shares purchased by a
corporation would be included with the number of shares that a person could
purchase individually under the purchase limitations described above.
The plan of conversion defines "officer" to mean an executive officer
of First Federal, including its Chief Executive Officer, President, Executive
Vice Presidents, Senior Vice Presidents, Vice Presidents in charge of principal
business functions, Secretary, Treasurer and Controller.
RESTRICTIONS ON REPURCHASE OF STOCK
Under Office of Thrift Supervision regulations, savings associations
and their holding companies may not for a period of three years from the date of
an institution's mutual-to-stock conversion repurchase any of its common stock
from any person, except in an offer made to all of its stockholders to
repurchase the common stock on a pro rata basis, approved by the Office of
Thrift Supervision, or the repurchase of qualifying shares of a director.
Furthermore, repurchases of any common stock are prohibited if they would cause
the association's regulatory capital to be reduced below the amount required for
the liquidation account or the regulatory capital requirements imposed by the
Office of Thrift Supervision. Repurchases are generally prohibited during the
first year following conversion. Upon ten days' written notice to the Office of
Thrift Supervision, and if the Office of Thrift Supervision does not object, an
institution may make open market repurchases of its outstanding common stock
during years two and three following the conversion, provided that certain
regulatory conditions are met and that the repurchase would not adversely affect
the financial condition of the institution. Any repurchases of common stock by
First Federal Bancshares must meet these regulatory restrictions unless the
Office of Thrift Supervision provides otherwise.
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RESTRICTIONS ON TRANSFER OF SHARES AFTER THE CONVERSION APPLICABLE TO
OFFICERS, DIRECTORS AND NASD MEMBERS
Common stock purchased in the conversion will be freely transferable,
except for shares purchased by directors and officers of First Federal and First
Federal Bancshares and by NASD members.
Shares of common stock purchased by directors and officers of First
Federal and First Federal Bancshares may not be sold for a period of one year
following the conversion, except upon the death of the stockholder or unless
approved by the Office of Thrift Supervision. Shares purchased by these persons
after the conversion will be free of this restriction. Shares of common stock
issued by First Federal Bancshares to directors and officers will bear a legend
giving appropriate notice of the restriction and, in addition, First Federal
Bancshares will give appropriate instructions to the transfer agent for First
Federal Bancshares' common stock with respect to the restriction on transfers.
Any shares issued to directors and officers as a stock dividend, stock split or
otherwise with respect to restricted common stock will be similarly restricted.
Purchases of outstanding shares of common stock of First Federal
Bancshares by directors, 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 Bancshares' outstanding
common stock or to the purchase of stock under stock benefit plans.
First Federal Bancshares has filed with the Securities and Exchange
Commission a registration statement under the Securities Act of 1933 for the
registration of the common stock to be issued in the conversion. This
registration does not cover the resale of the shares. Shares of common stock
purchased by persons who are not affiliates of First Federal Bancshares may be
resold without registration. Shares purchased by an affiliate of First Federal
Bancshares will have resale restrictions under Rule 144 of the Securities Act.
If First Federal Bancshares meets the current public information requirements of
Rule 144, each affiliate of First Federal Bancshares who complies with the other
conditions of Rule 144, including those that require the affiliate's sale to be
aggregated with those of certain other persons, would be able to sell in the
public market, without registration, a number of shares not to exceed, in any
three-month period, the greater of 1% of the outstanding shares of First Federal
Bancshares or the average weekly volume of trading in the shares during the
preceding four calendar weeks. Provision may be made in the future by First
Federal Bancshares to permit affiliates to have their shares registered for sale
under the Securities Act under certain circumstances.
Under guidelines of the National Association of Securities Dealers,
Inc., members of that organization and their associates face restrictions on
the transfer of securities purchased with subscription rights and reporting
requirements upon purchase of the securities.
INTERPRETATION, AMENDMENT AND TERMINATION
To the extent permitted by law, all interpretations of the plan of
conversion by First Federal will be final; however, such interpretations have no
binding effect on the Office of Thrift Supervision. The plan of conversion
provides that, if deemed necessary or desirable by the Board of Directors, the
plan of conversion may be substantively amended by the Board of Directors as a
result of comments from regulatory authorities or otherwise, without the further
approval of First Federal's members.
Completion of the conversion requires the sale of all shares of the
common stock within 24 months following approval of the plan of conversion by
First Federal's members. If this condition is not satisfied, the plan of
conversion will be terminated and First Federal will continue its business in
the mutual form of organization. First Federal's Board of Directors may
terminate the plan of conversion at any time.
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RESTRICTIONS ON ACQUISITION OF FIRST FEDERAL BANCSHARES
AND FIRST FEDERAL
GENERAL
First Federal's plan of conversion provides for the conversion of First
Federal from the mutual to the stock form of organization and, as part of the
conversion, the adoption of a new federal stock charter and bylaws by First
Federal's members. The plan of conversion also provides for the concurrent
formation of a holding company. See "THE CONVERSION--GENERAL." As described
below and elsewhere in this document, certain provisions in First Federal
Bancshares' certificate of incorporation and bylaws may have anti-takeover
effects. In addition, provisions in First Federal's federal stock charter and
bylaws may also have anti-takeover effects. Finally, Delaware corporate law and
regulatory restrictions may make it difficult for persons or companies to
acquire control of either First Federal Bancshares or First Federal.
RESTRICTIONS IN FIRST FEDERAL BANCSHARES' CERTIFICATE OF INCORPORATION AND
BYLAWS
First Federal Bancshares' certificate of incorporation and bylaws
contain provisions that could make more difficult an acquisition of First
Federal Bancshares by means of a tender offer, proxy context or otherwise. Some
provisions will also render the removal of the incumbent Board of Directors or
management of First Federal Bancshares more difficult. These provisions may have
the effect of deterring a future takeover attempt that is not approved by the
directors of First Federal Bancshares, but which First Federal Bancshares
stockholders may deem to be in their best interests or in which stockholders may
receive a substantial premium for their shares over then current market prices.
As a result, stockholders who might desire to participate in such a transaction
may not have the opportunity to do so. The following description of these
provisions is only a summary and does not provide all of the information
contained in First Federal Bancshares' certificate of incorporation and bylaws.
See "WHERE YOU CAN FIND MORE INFORMATION" as to where to obtain a copy of these
documents.
BUSINESS COMBINATIONS WITH INTERESTED STOCKHOLDERS. The certificate of
incorporation requires the approval of the holders of at least 80% of First
Federal Bancshares' outstanding shares of voting stock entitled to vote to
approve certain "business combinations" with an "interested stockholder." This
supermajority voting requirement will not apply in cases where the proposed
transaction has been approved by a majority of those members of First Federal
Bancshares' Board of Directors who are unaffiliated with the interested
stockholder and who were directors before the time when the interested
stockholder became an interested stockholder or if the proposed transaction
meets certain conditions that are designed to afford the stockholders a fair
price in consideration for their shares. In each such case, where stockholder
approval is required, the approval of only a majority of the outstanding shares
of voting stock is sufficient. Under Delaware law, absent this provision,
business combinations must be approved by the vote of the holders of only a
majority of the outstanding shares of common stock of First Federal Bancshares
and any other affected class of stock unless the transaction is with a person
who owns 15% or more of the corporation's voting stock.
The term "interested stockholder" includes any individual, group acting
in concert, corporation, partnership, association or other entity (other than
First Federal Bancshares or its subsidiary) who or which is the beneficial
owner, directly or indirectly, of 10% or more of the outstanding shares of
voting stock of First Federal Bancshares.
A "business combination" includes:
1. any merger or consolidation of First Federal Bancshares or any of
its subsidiaries with any interested stockholder or affiliate of
an interested stockholder or any corporation which is, or after
such merger or consolidation would be, an affiliate of an
interested stockholder;
2. any sale or other disposition to or with any interested
stockholder of 25% or more of the assets of First Federal
Bancshares or combined assets of First Federal Bancshares and its
subsidiaries;
3. the issuance or transfer to any interested stockholder or its
affiliate by First Federal Bancshares (or any subsidiary) of any
securities of First Federal Bancshares (or any subsidiary) in
exchange for any cash,
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securities or other property the value of which equals or exceeds
25% of the fair market value of the common stock of First Federal
Bancshares;
4. the adoption of any plan for the liquidation or dissolution of
First Federal Bancshares proposed by or on behalf of any
interested stockholder or its affiliate; and
5. any reclassification of securities, recapitalization, merger or
consolidation of First Federal Bancshares with any of its
subsidiaries which has the effect of increasing the proportionate
share of common stock or any class of equity or convertible
securities of First Federal Bancshares or subsidiary owned
directly or indirectly, by an interested stockholder or its
affiliate.
LIMITATION ON VOTING RIGHTS. The certificate of incorporation of First
Federal Bancshares provides that no record owner of any outstanding First
Federal Bancshares 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 First Federal Bancshares common stock will be entitled or
permitted to any vote in respect of the shares held in excess of the 10% limit.
Beneficial ownership is determined pursuant to the federal securities laws and
includes shares beneficially owned by such person or any of his or her
affiliates (as defined in the certificate of incorporation), shares which such
person or his or her affiliates have the right to acquire upon the exercise of
conversion rights or options and shares as to which such person and his or her
affiliates have or share investment or voting power, but does not include shares
beneficially owned by directors, officers and employees of First Federal or
First Federal Bancshares or shares that are subject to a revocable proxy and
that are not otherwise beneficially, or deemed by First Federal Bancshares to be
beneficially, owned by such person and his or her affiliates.
EVALUATION OF OFFERS. The certificate of incorporation of First Federal
Bancshares further provides that the Board of Directors of First Federal
Bancshares, when evaluating an offer, to (1) make a tender or exchange offer for
any equity security of First Federal Bancshares, (2) merge or consolidate First
Federal Bancshares with another corporation or entity or (3) purchase or
otherwise acquire all or substantially all of the properties and assets of First
Federal Bancshares, may, in connection with the exercise of its judgment in
determining what is in the best interest of First Federal Bancshares and the
stockholders of First Federal Bancshares, give consideration to those factors
that directors of any subsidiary (including First Federal) may consider in
evaluating any action that may result in a change or potential change of control
of such subsidiary, and the social and economic effects of acceptance of such
offer on: First Federal Bancshares' present and future customers and employees
and those of its subsidiaries (including First Federal); the communities in
which First Federal Bancshares and First Federal operate or are located; the
ability of First Federal Bancshares to fulfill its corporate objectives as a
savings and loan holding company; and the ability of First Federal to fulfill
the objectives of a stock savings bank under applicable statutes and
regulations. By having these standards in the certificate of incorporation of
First Federal Bancshares, the Board of Directors may be in a stronger position
to oppose such a transaction if the Board concludes that the transaction would
not be in the best interest of First Federal Bancshares, even if the price
offered is significantly greater than the then market price of any equity
security of First Federal Bancshares.
BOARD OF DIRECTORS
CLASSIFIED BOARD. The Board of Directors of First Federal Bancshares is
divided into three classes, each of which contains approximately one-third of
the number of directors. The stockholders elect one class of directors each year
for a term of three years. The classified Board makes it more difficult and time
consuming for a stockholder group to fully use its voting power to gain control
of the Board of Directors without the consent of the incumbent Board of
Directors of First Federal Bancshares.
FILLING OF VACANCIES; REMOVAL. The certificate of incorporation
provides that any vacancy occurring in the First Federal Bancshares Board,
including a vacancy created by an increase in the number of directors, may be
filled by a vote of a majority of the directors then in office. A person
appointed to fill a vacancy on the Board of Directors will serve until the
expiration of his or her term. The certificate of incorporation of First Federal
Bancshares provides that a director may be removed from the Board of Directors
prior to the expiration of his or her term only for cause and only upon the vote
of 80% of the outstanding shares of voting stock. These provisions make it more
difficult for stockholders to remove directors and replace them with their own
nominees.
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QUALIFICATION. The bylaws provide that to be eligible to serve on the
Board of Directors of First Federal Bancshares a person must reside in a county
in which an office of First Federal is located or in an adjacent county. In
addition, no person 78 years of age or older is eligible to be elected or
appointed to the Board of Directors. This age limitation does not apply to the
members of the initial Board of Directors of First Federal Bancshares. Finally,
the bylaws provide that no person will be eligible to serve on the Board of
Directors who has, in the past 10 years, been subject to a supervisory action
by a financial regulatory agency that involved fraud or other bad actions,
has been convicted of a crime involving dishonesty or breach of trust that is
punishable by a year or more in prison, or is currently charged with such a
crime. These provisions may prevent stockholders from nominating themselves
or persons of their choosing for election to the Board of Directors.
STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS OF
STOCKHOLDERS. Stockholders of First Federal Bancshares must act only through an
annual or special meeting. Stockholders cannot act by written consent in lieu of
a meeting. The certificate of incorporation provides that only a majority of the
Board of Directors of First Federal Bancshares may call special meetings of the
stockholders of First Federal Bancshares. Stockholders are not able to call a
special meeting or require that the Board do so. At a special meeting,
stockholders may consider only the business specified in the notice of meeting
given by First Federal Bancshares. The provisions of First Federal Bancshares'
certificate of incorporation prohibiting stockholder action by written consent
may have the effect of delaying consideration of a stockholder proposal until
the next annual meeting, unless a special meeting is called at the request of a
majority of the Board of Directors. These provisions also would prevent the
holders of a majority of common stock from unilaterally using the written
consent procedure to take stockholder action. Moreover, a stockholder could not
force stockholder consideration of a proposal between annual meetings over the
opposition of the Board of Directors by calling a special meeting of
stockholders.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER NOMINATIONS AND PROPOSALS.
The First Federal Bancshares bylaws establish an advance notice procedure for
stockholders to nominate directors or bring other business before an annual
meeting of stockholders of First Federal Bancshares. A person may not be
nominated for election as a director unless that person is nominated by or at
the direction of the First Federal Bancshares Board or by a stockholder who has
given appropriate notice to First Federal Bancshares before the meeting.
Similarly, a stockholder may not bring business before an annual meeting unless
the stockholder has given First Federal Bancshares appropriate notice of its
intention to bring that business before the meeting. First Federal Bancshares'
Secretary must receive notice of the nomination or proposal not less than 90
days and not more than 120 days prior to the annual meeting. A stockholder who
desires to raise new business must provide certain information to First Federal
Bancshares concerning the nature of the new business, the stockholder and the
stockholder's interest in the business matter. Similarly, a stockholder wishing
to nominate any person for election as a director must provide First Federal
Bancshares with certain information concerning the nominee and the proposing
stockholder.
Advance notice of nominations or proposed business by stockholders
gives the First Federal Bancshares Board time to consider the qualifications of
the proposed nominees, the merits of the proposals and, to the extent deemed
necessary or desirable by the First Federal Bancshares Board, to inform
stockholders and make recommendations about those matters.
PREFERRED STOCK. The certificate of incorporation authorizes the First
Federal Bancshares Board to establish one or more series of preferred stock and,
for any series of preferred stock, to determine the terms and rights of the
series, including voting rights, conversion rates, and liquidation preferences.
Although the First Federal Bancshares Board has no intention at the present time
of doing so, it could issue a series of preferred stock that could, depending on
its terms, impede a merger, tender offer or other takeover attempt. The First
Federal Bancshares Board will make any determination to issue shares with those
terms based on its judgment as to the best interests of First Federal Bancshares
and its stockholders.
AMENDMENT OF CERTIFICATE OF INCORPORATION. First Federal Bancshares'
certificate of incorporation requires the affirmative vote of 80% of the
outstanding voting stock entitled to vote to amend or repeal certain provisions
of the certificate of incorporation, including the provision limiting voting
rights, the provisions relating to approval of business combinations with
related persons, acting by written consent, calling special meetings, the number
and classification of directors, director and officer indemnification by First
Federal Bancshares and amendment of First Federal Bancshares' bylaws and
certificate of incorporation. These supermajority voting
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requirements make it more difficult for the stockholders to amend these
provisions of the First Federal Bancshares certificate of incorporation.
ANTI-TAKEOVER EFFECTS OF FIRST FEDERAL BANCSHARES' CERTIFICATE OF INCORPORATION
AND BYLAWS AND MANAGEMENT REMUNERATION ADOPTED IN CONVERSION
The provisions described above are intended to reduce First Federal
Bancshares' vulnerability to takeover attempts and other transactions which have
not been negotiated with and approved by members of its Board of Directors.
Provisions of the stock-based incentive plan provide for accelerated benefits to
participants if a change in control of First Federal Bancshares or First Federal
occurs or a tender or exchange offer for their stock is made. See "MANAGEMENT OF
FIRST FEDERAL--BENEFITS--STOCK-BASED INCENTIVE PLAN." First Federal Bancshares
and First Federal have also entered into agreements with key officers and
intends to establish the Severance Compensation Plan which will provide such
officers and eligible employees with additional payments and benefits on the
officer's termination in connection with a change in control of First Federal
Bancshares or First Federal. See "MANAGEMENT OF FIRST FEDERAL BANK--EXECUTIVE
COMPENSATION--EMPLOYMENT AGREEMENTS," anD "MANAGEMENT OF FIRST FEDERaL
BANK--EXECUTIVE COMPENSATION--EMPLOYEE SEVERANCE COMPENSATION PLAN." The
foregoing provisions and limitations may make it more difficult for companies or
persons to acquire control of First Federal Bancshares. Additionally, the
provisions could deter offers to acquire the outstanding shares of First Federal
Bancshares which might be viewed by stockholders to be in their best interests.
First Federal Bancshares' Board of Directors believes that the
provisions of the certificate of incorporation and bylaws are in the best
interest of First Federal Bancshares and its stockholders. An unsolicited
non-negotiated takeover proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Accordingly, the Board
of Directors believes it is in the best interests of First Federal Bancshares
and its stockholders to encourage potential acquirors to negotiate directly with
management and that these provisions will encourage such negotiations and
discourage non-negotiated takeover attempts.
DELAWARE CORPORATE LAW
The State of Delaware has a statute designed to provide Delaware
corporations with additional protection against hostile takeovers. The Delaware
takeover statute is intended to discourage certain takeover practices by
impeding the ability of a hostile acquiror to engage in certain transactions
with the target company.
In general, the statute provides that a "person" who owns 15% or more
of the outstanding voting stock of a Delaware corporation (an "interested
stockholder") may not consummate a merger or other business combination
transaction with such corporation at any time during the three-year period
following the date such person became an interested stockholder. The term
"business combination" is defined broadly to cover a wide range of corporate
transactions including mergers, sales of assets, issuances of stock,
transactions with subsidiaries and the receipt of disproportionate financial
benefits.
The statute exempts the following transactions from the requirements of
the statute:
* any business combination if, before the date a person became an
interested stockholder, the board of directors approved either
the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder;
* any business combination involving a person who acquired at
least 85% of the outstanding voting stock in the transaction in
which he became an interested stockholder, excluding, for
purposes of determining the number of shares outstanding,
shares owned by the corporation's directors who are also
officers and specific employee stock plans;
* any business combination with an interested stockholder that is
approved by the board of directors and by a two-thirds vote of
the outstanding voting stock not owned by the interested
stockholder; and
* certain business combinations that are proposed after the
corporation had received other acquisition proposals and which
are approved or not opposed by a majority of certain continuing
members of the board of directors.
A corporation may exempt itself from the requirements of the statute
by adopting an amendment to its certificate of incorporation or bylaws
electing not to be governed by Section 203. At the present time, the Board of
Directors does not intend to propose any such amendment.
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RESTRICTIONS IN FIRST FEDERAL'S FEDERAL STOCK CHARTER AND BYLAWS
Although the Board of Directors of First Federal is not aware of any
effort that might be made to obtain control of First Federal after the
conversion, the Board of Directors believes that it is appropriate to adopt
provisions permitted by federal regulation to protect the interests of the
converted bank and its stockholders from any hostile takeover. These provisions
may, indirectly, inhibit a change in control of First Federal Bancshares, as
First Federal's sole stockholder. See "RISK FACTORS--ANTI-TAKEOVER PROVISIONS
AND STATUTORY PROVISIONS COULD MAKE TAKEOVER ATTEMPTS MORE DIFFICULT TO
ACHIEVE."
First Federal's federal stock charter will contain a provision whereby
the acquisition of beneficial ownership of more than 10% of the issued and
outstanding shares of any class of equity securities of First Federal by any
person (I.E., any individual, corporation, group acting in concert, trust,
partnership, joint stock company or similar organization), either directly or
through an affiliate, will be prohibited for a period of five years following
the date of completion of the conversion. If shares are acquired in violation of
this provision of First Federal's federal stock charter, all shares beneficially
owned by any person in excess of 10% will be considered "excess shares" and will
not be counted as shares entitled to vote and will not be voted by any person or
counted as voting shares in connection with any matters submitted to the
stockholders for a vote. This limitation will not apply to any transaction in
which First Federal forms a holding company without a change in the respective
beneficial ownership interests of its stockholders other than by the exercise of
any dissenter or appraisal rights. If holders of revocable proxies for more than
10% of the shares of the common stock of First Federal Bancshares seek, among
other things, to elect one-third or more of First Federal Bancshares' Board of
Directors, to cause First Federal Bancshares' stockholders to approve the
acquisition or corporate reorganization of First Federal Bancshares or to exert
a continuing influence on a material aspect of the business operations of First
Federal Bancshares, which actions could indirectly result in a change in control
of First Federal, the Board of Directors of First Federal will be able to assert
this provision of First Federal's federal stock charter against such holders.
Although the Board of Directors of First Federal is not currently able to
determine when and if it would assert this provision of First Federal's federal
stock charter, the Board, in exercising its fiduciary duty, may assert this
provision if it were deemed to be in the best interests of First Federal, First
Federal Bancshares and its stockholders. It is unclear, however, whether this
provision, if asserted, would be successful against such persons in a proxy
contest which could result in a change in control of First Federal indirectly
through a change in control of First Federal Bancshares.
In addition, stockholders will not be permitted to cumulate their votes
in the election of Directors. Furthermore, First Federal's Bylaws provide for
the election of three classes of directors to staggered terms.
Finally, the federal stock charter provides for the issuance of shares
of preferred stock on terms, including conversion and voting rights, as may be
determined by First Federal's Board of Directors without stockholder approval.
Although First Federal has no arrangements, understandings or plans at the
present time for the issuance or use of the shares of undesignated preferred
stock proposed to be authorized, the Board believes that the availability of
such shares will provide First Federal with increased flexibility in structuring
possible future financings and acquisitions and in meeting other corporate needs
that may arise. If a proposed merger, tender offer or other attempt to gain
control of First Federal occurs of which management does not approve, the Board
can authorize the issuance of one or more series of preferred stock with rights
and preferences which could impede the completion of such a transaction. An
effect of the possible issuance of such preferred stock, therefore, may be to
deter a future takeover attempt. The Board does not intend to issue any
preferred stock except on terms which the Board deems to be in the best interest
of First Federal and its then existing stockholders.
REGULATORY RESTRICTIONS
OFFICE OF THRIFT SUPERVISION CONVERSION REGULATIONS. Regulations issued
by the Office of Thrift Supervision provide that for a period of three years
following the date of the completion of the conversion, no person, acting singly
or together with associates in a group of persons acting in concert, will
directly or indirectly offer to acquire or acquire the beneficial ownership of
more than 10% of any class of any equity security of First Federal Bancshares
without the prior written approval of the Office of Thrift Supervision. Where
any person, directly or indirectly, acquires beneficial ownership of more than
10% of any class of any equity security of First Federal Bancshares without the
prior written approval of the Office of Thrift Supervision, the securities
beneficially owned by such person in excess of 10% will not be voted by any
person or counted as voting shares in connection
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with any matter submitted to the stockholders for a vote, and will not be
counted as outstanding for purposes of determining the affirmative vote
necessary to approve any matter submitted to the stockholders for a vote.
CHANGE IN BANK CONTROL ACT. The acquisition of 10% or more of the
common stock outstanding may trigger the provisions of the Change in Bank
Control Act. The Office of Thrift Supervision has also adopted a regulation
under the Change in Bank Control Act which generally requires persons who at any
time intend to acquire control of a federally chartered savings association,
including a converted savings bank such as First Federal, to provide 60 days
prior written notice and certain financial and other information to the Office
of Thrift Supervision.
The 60-day notice period does not commence until the information is
deemed to be substantially complete. Control for the purpose of this Act exists
in situations in which the acquiring party has voting control of at least 25% of
any class of First Federal Bancshares' voting stock or the power to direct the
management or policies of First Federal Bancshares. However, under Office of
Thrift Supervision regulations, control is presumed to exist where the acquiring
party has voting control of at least 10% of any class of First Federal
Bancshares' voting securities if specified "control factors" are present. The
statute and underlying regulations authorize the Office of Thrift Supervision to
disapprove a proposed acquisition on certain specified grounds.
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DESCRIPTION OF FIRST FEDERAL BANCSHARES STOCK
--------------------------------------------------------------------------------
The common stock of First Federal Bancshares will represent
nonwithdrawable capital, will not be an account of any type, and will
not be insured by the Federal Deposit Insurance Corporation or any
other government agency.
--------------------------------------------------------------------------------
GENERAL
First Federal Bancshares is authorized to issue 4,000,000 shares of
common stock having a par value of $.01 per share and 1,000,000 shares of
preferred stock having a par value of $.01 per share. First Federal Bancshares
will not issue any shares of preferred stock in the conversion. Each share of
First Federal Bancshares' common stock will have the same relative rights as,
and will be identical in all respects with, each other share of common stock.
Upon payment of the purchase price for the common stock, as required by the plan
of conversion, all stock will be duly authorized, fully paid and nonassessable.
COMMON STOCK
DIVIDENDS. First Federal Bancshares can pay dividends out of statutory
surplus or from certain net profits if, as and when declared by its Board of
Directors. The payment of dividends by First Federal Bancshares is limited by
law and applicable regulation. See "FIRST FEDERAL BANCSHARES' DIVIDEND POLICY"
and "REGULATION AND SUPERVISION." The holders of common stock of First Federal
Bancshares will be entitled to receive and share equally in dividends as may be
declared by the Board of Directors of First Federal Bancshares out of funds
legally available for dividends. If First Federal Bancshares issues preferred
stock, the holders of the preferred stock may have a priority over the holders
of the common stock with respect to dividends.
VOTING RIGHTS. After the conversion, the holders of common stock of
First Federal Bancshares will possess exclusive voting rights in First Federal
Bancshares. They will elect First Federal Bancshares' 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. Except as
discussed in "RESTRICTIONS ON ACQUISITION OF FIRST FEDERAL BANCSHARES AND FIRST
FEDERAL," each holder of common stock will be entitled to one vote per share and
will not have any right to cumulate votes in the election of directors. If First
Federal Bancshares issues preferred stock, holders of First Federal Bancshares
preferred stock may also possess voting rights. Certain matters require a vote
of 80% of the outstanding shares entitled to vote. See "RESTRICTIONS ON
ACQUISITION OF FIRST FEDERAL BANCSHARES AND FIRST FEDERAL."
As a federal mutual savings bank, corporate powers and control of First
Federal are currently vested in (1) its members who elect First Federal's
directors, and (2) its Board of Directors, who elect the officers of First
Federal and who fill any vacancies on the Board of Directors. After the
conversion, voting rights will be vested exclusively in First Federal
Bancshares, which will own all of the outstanding capital stock of First
Federal, and will be voted at the direction of First Federal Bancshares' Board
of Directors. Consequently, the holders of the common stock of First Federal
Bancshares will not have direct control of First Federal.
LIQUIDATION. If there is any liquidation, dissolution or winding up of
First Federal, First Federal Bancshares, as the holder of First Federal's
capital stock, would be entitled to receive all of First Federal's assets
available for distribution after payment or provision for payment of all debts
and liabilities of First Federal, including all deposit accounts and accrued
interest, and after distribution of the balance in the special liquidation
account to eligible account holders and supplemental eligible account holders.
Upon liquidation, dissolution or winding up of First Federal Bancshares, the
holders of its common stock would be entitled to receive all of the assets of
First Federal Bancshares available for distribution after payment or provision
for payment of all its debts and liabilities. If First Federal Bancshares issues
preferred stock, the preferred stock holders may have a priority over the
holders of the common stock upon liquidation or dissolution.
93
<PAGE>
INDEMNIFICATION AND LIMIT ON LIABILITY. First Federal Bancshares'
Certificate of Incorporation contains provisions that limit the liability of and
indemnify its directors, officers and employees. Such provisions provide that
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, by reason of the fact that he or she
is or was a director or officer of First Federal Bancshares will be indemnified
and held harmless by First Federal Bancshares to the fullest extent authorized
by the Delaware General Corporation Law against all expense, liability and loss
reasonably incurred. Under certain circumstances, the right to indemnification
will include the right to be paid by First Federal Bancshares the expenses
incurred in defending any such proceeding in advance of its final disposition.
In addition, a director of First Federal Bancshares will not be personally
liable to First Federal Bancshares or its stockholders for monetary damages
except for liability for any breach of the duty of loyalty, for acts or
omissions not in good faith or which involve intentional misconduct or knowing
violation of the law, under Section 174 of the Delaware General Corporation Law,
or for any transaction from which the director derived an improper personal
benefit.
PREEMPTIVE RIGHTS; REDEMPTION. Holders of the common stock of First
Federal Bancshares will not be entitled to preemptive rights with respect to any
shares that may be issued. The common stock cannot be redeemed.
PREFERRED STOCK
First Federal Bancshares will not issue any preferred stock in the
conversion and it has no current plans to issue any preferred stock after the
conversion. Preferred stock may be issued with designations, powers, preferences
and rights 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.
RESTRICTIONS ON ACQUISITION
Acquisitions of First Federal Bancshares are restricted by provisions
in its certificate of incorporation and bylaws and by rules and regulations of
various regulatory agencies. See "REGULATION AND SUPERVISION" and "RESTRICTIONS
ON ACQUISITION OF FIRST FEDERAL BANCSHARES AND FIRST FEDERAL."
DESCRIPTION OF FIRST FEDERAL BANK STOCK
GENERAL
The federal stock charter of First Federal, to be effective upon
completion of the conversion, authorizes the issuance of stock consisting of
3,000,000 shares of common stock, par value $1.00 per share, and 1,000,000
shares of preferred stock, par value $1.00 per share. 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 will have the same relative rights as, and will be identical in
all respects with, each other share of common stock. After the conversion, the
Board of Directors will be authorized to approve the issuance of common stock up
to the amount authorized by the federal stock charter without the approval of
First Federal's stockholders. All of the issued and outstanding common stock of
First Federal will be held by First Federal Bancshares. FIRST FEDERAL STOCK WILL
REPRESENT NON-WITHDRAWABLE CAPITAL, WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE
AND WILL NOT BE INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION.
COMMON STOCK
DIVIDENDS. The holders of First Federal's common stock will be entitled
to receive and to share equally in such dividends as may be declared by the
Board of Directors of First Federal out of its legally available funds. See
"REGULATION AND SUPERVISION--FEDERAL SAVINGS INSTITUTION REGULATION--LIMITATIONS
ON CAPITAL DISTRIBUTIONS" for certain restrictions on the payment of dividends
and "FEDERAL AND STATE TAXATION--FEDERAL INCOME TAXATION" for a discussion of
the consequences of the payment of cash dividends from income appropriated to
bad debt reserves.
94
<PAGE>
VOTING RIGHTS. Immediately after the conversion, the holders of First
Federal's common stock will possess exclusive voting rights in First Federal.
Each holder of shares of common stock will be entitled to one vote for each
share held. Stockholders will not be entitled 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 common stock will be entitled to receive,
after payment of all First Federal's debts and liabilities (including all
deposit accounts and accrued interest thereon), and distribution of the balance
in the special liquidation account to eligible account holders and supplemental
eligible account holders, all assets of First Federal available for distribution
in cash or in kind. If preferred stock is issued after the conversion, the
holders of the preferred stock may also have priority over the holders of common
stock in the event of liquidation or dissolution.
PREEMPTIVE RIGHTS; REDEMPTION. Holders of First Federal's common stock
will not be entitled to preemptive rights with respect to any shares of First
Federal which may be issued. First Federal's common stock cannot be redeemed.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is American
Securities Transfer & Trust, Inc., Lakewood, Colorado.
REGISTRATION REQUIREMENTS
First Federal Bancshares has registered its common stock with the
Securities and Exchange Commission under Section 12(g) of the Securities
Exchange Act of 1934, as amended, and will not deregister its common stock for a
period of at least three years following the conversion. As a result of
registration, the proxy and tender offer rules, insider trading reporting and
restrictions, annual and periodic reporting and other requirements of that
statute will apply.
LEGAL AND TAX OPINIONS
The legality of the common stock has been passed upon for First Federal
Bancshares by Muldoon, Murphy & Faucette LLP, Washington, D.C. The federal tax
consequences of the conversion have been opined upon by Muldoon, Murphy &
Faucette LLP and the state tax consequences of the conversion have been opined
upon by Crowe, Chizek and Company LLP, Oakbrook, Illinois. Muldoon, Murphy &
Faucette LLP and Crowe, Chizek and Company LLP have consented to the references
to their opinions in this prospectus. Certain legal matters will be passed upon
for FBR by Vedder, Price, Kaufman & Kammholz, Chicago, Illinois.
EXPERTS
The financial statements of First Federal as of February 29, 2000, and
for the year ended February 29, 2000 are included in this prospectus and in the
registration statement in reliance upon the report of Crowe, Chizek and Company
LLP, Oak Brook, Illinois, independent certified public accountants, included
elsewhere in this prospectus, and upon the authority of said firm as experts in
accounting and auditing.
The financial statements of First Federal as of February 28, 1999 and
for the year ended February 28, 1999 are included in this prospectus and in the
registration statement in reliance upon the report of Clifton Gunderson, L.L.C.,
Macomb, Illinois, independent certified public accountants, included elsewhere
in this prospectus, and upon the authority of said firm as experts in accounting
and auditing.
RP Financial has consented to the summary in this prospectus of its
report to First Federal setting forth its opinion as to the estimated pro forma
market value of First Federal Bancshares and First Federal, as converted, and
its letter with respect to subscription rights, and to the use of its name and
statements with respect to it appearing in this prospectus.
95
<PAGE>
CHANGE IN ACCOUNTANTS
Prior to the fiscal year ended February 29, 2000, First Federal's
consolidated financial statements were audited by Clifton Gunderson L.L.C. On
December 22, 1999, First Federal dismissed the former accountant and engaged
Crowe, Chizek and Company LLP, which continues as the independent auditors of
First Federal. The decision to change auditors was approved by the Board of
Directors on December 8, 1999.
For the fiscal year ended February 28, 1999 and up to the date of the
replacement of First Federal's former accountant, there were no disagreements
with the former accountant on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure which, if not
resolved to the satisfaction of the former accountant, would have caused it to
make a reference to the subject matter of the disagreement in connection with
its reports. The independent auditors' report on the consolidated financial
statements for the fiscal year ended February 28, 1999 did not contain an
adverse opinion or a disclaimer of opinion, and was not qualified or modified as
to uncertainty, audit scope, or accounting principles.
WHERE YOU CAN FIND MORE INFORMATION
First Federal Bancshares has filed with the Securities and Exchange
Commission a Registration Statement on Form SB-2 (File No. 333-36368) under the
Securities Act of 1933, as amended, with respect to the common stock offered in
the conversion. This prospectus does not contain all the information contained
in the registration statement, certain parts of which are omitted as permitted
by the rules and regulations of the Securities and Exchange Commission. This
information may be inspected at the public reference facilities maintained by
the Securities and Exchange Commission at 450 Fifth Street, NW, Room 1024,
Washington, D.C. 20549 and at its regional offices at 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661; and 7 World Trade Center, Suite 1300, New
York, New York 10048. Copies may be obtained at prescribed rates from the Public
Reference Room of the Securities and Exchange Commission at 450 Fifth Street,
NW, Washington, D.C. 20549. The public may obtain information on the operation
of the Public Reference Room by calling the Securities and Exchange Commission
at 1-800-SEC-0330. The registration statement also is available through the
Securities and Exchange Commission's World Wide Web site on the Internet at
http://www.sec.gov.
First Federal has filed an application for approval of conversion with
the Office of Thrift Supervision, which includes proxy materials for First
Federal's special meeting of members and certain other information. This
prospectus omits certain information contained in that application. The
application may be inspected, without charge, at the offices of the Office of
Thrift Supervision, 1700 G Street, NW, Washington, D.C. 20552 and at the offices
of the Regional Director of the Office of Thrift Supervision at the Central
Regional Office of the Office of Thrift Supervision, 200 West Madison Street,
Suite 1300, Chicago, Illinois 60606.
A copy of the plan of conversion, as amended, First Federal Bancshares'
Certificate of Incorporation and Bylaws and First Federal's Federal Stock
Charter and Bylaws are available without charge from First Federal.
96
<PAGE>
INDEX TO FINANCIAL STATEMENTS
FIRST FEDERAL BANK
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Reports of Independent Auditors .......................................................... F-1
Statements of Condition as of February 29, 2000 and February 28, 1999 .................... F-3
Statements of Income for the Years Ended February 29, 2000 and February 28, 1999 ......... F-4
Statement of Equity for the Years Ended February 29, 2000 and February 28, 1999 .......... F-5
Statements of Cash Flows for the Years Ended February 29, 2000 and February 28, 1999 ..... F-6
Notes to Financial Statements ............................................................ F-8
</TABLE>
* * *
All schedules are omitted as the required information either is not
applicable or is included in the financial statements or related notes.
Separate financial statements for First Federal Bancshares have not
been included in this prospectus because First Federal Bancshares, which has
engaged only in organizational activities to date, has no significant assets,
contingent or other liabilities, revenues or expenses.
97
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
First Federal Bank, F.S.B.
Colchester, Illinois
We have audited the accompanying statement of condition of First Federal Bank,
F.S.B. as of February 29, 2000 and the related statements of income, equity, and
cash flows for the year then ended. These financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of First Federal Bank, F.S.B. as
of February 29, 2000 and the results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Oak Brook, Illinois
March 17, 2000
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
First Federal Bank, F.S.B.
Colchester, Illinois
We have audited the accompanying statement of condition of First Federal Bank,
F.S.B. as of February 28, 1999, and the related statements of income, equity,
and cash flows for the year then ended. These financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of First Federal Bank, F.S.B. as
of February 28, 1999, and the results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
/s/ Clifton Gunderson L.L.C.
CLIFTON GUNDERSON L.L.C.
Macomb, Illinois
March 23, 1999
F-2
<PAGE>
FIRST FEDERAL BANK, F.S.B.
STATEMENTS OF CONDITION
February 29, 2000 and February 28, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
February 29, February 28
2000 1999
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents (interest-bearing:
2000 - $4,942,412; 1999 - $15,649,496) $ 5,762,295 $ 16,171,077
Time deposits in other financial institutions 1,572,000 1,374,000
Securities available-for-sale 29,441,550 26,622,102
Securities held-to-maturity (fair value:
2000 - $56,036,605; 1999 - $51,265,898) 58,927,169 51,523,629
Loans receivable, net 113,601,769 101,834,122
Real estate owned, net 47,606 59,652
Premises and equipment 1,636,862 1,664,380
Excess of cost over fair value of net assets acquired 46,730 83,544
Accrued interest receivable 2,013,325 1,726,888
Other assets 137,693 112,064
---------------- ----------------
Total assets $ 213,186,999 $ 201,171,458
================ ================
LIABILITIES AND EQUITY
Liabilities
Deposits
Non-interest-bearing $ 1,414,779 $ 673,964
Interest-bearing 181,157,560 176,007,624
---------------- ----------------
182,572,339 176,681,588
Advances from borrowers for taxes and insurance 296,306 275,637
Federal Home Loan Bank advances 6,000,000 -
Accrued interest payable 119,502 125,704
Other liabilities 173,064 752,027
---------------- ----------------
Total liabilities 189,161,211 177,834,956
Equity
Retained earnings 24,130,469 22,622,908
Accumulated other comprehensive income (loss) (104,681) 713,594
---------------- ----------------
Total equity 24,025,788 23,336,502
---------------- ----------------
Total liabilities and equity $ 213,186,999 $ 201,171,458
================ ================
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-3
<PAGE>
FIRST FEDERAL BANK, F.S.B.
STATEMENTS OF INCOME
Years ended February 29, 2000 and February 28, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
February 29, February 28
------------ -----------
2000 1999
<S> <C> <C>
Interest income
Loans $ 7,933,155 $ 8,189,005
Securities 5,408,617 4,454,728
Deposits in other financial institutions 317,803 651,652
--------------- --------------
Total interest income 13,659,575 13,295,385
Interest expense
Savings and certificates 7,107,596 7,485,103
NOW and money market accounts 1,215,652 864,794
Federal Home Loan Bank advances 318,329 -
--------------- --------------
Total interest expense 8,641,577 8,349,897
NET INTEREST INCOME 5,017,998 4,945,488
Provision for loan losses 118,850 5,958
--------------- --------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,899,148 4,939,530
Noninterest income
Service charges on NOW accounts 115,873 94,655
Other fee income 97,047 83,591
Other income 78,219 57,195
--------------- --------------
Total noninterest income 291,139 235,441
Noninterest expense
Compensation and benefits 1,464,462 1,335,599
Occupancy and equipment 353,659 378,863
Data processing 425,038 423,806
Federal insurance premiums 151,200 152,067
Advertising 104,113 97,302
Other noninterest expense 346,595 335,679
--------------- --------------
Total noninterest expense 2,845,067 2,723,316
--------------- --------------
INCOME BEFORE INCOME TAXES 2,345,220 2,451,655
Provision for income taxes 837,659 850,615
--------------- --------------
NET INCOME $ 1,507,561 $ 1,601,040
=============== ==============
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-4
<PAGE>
FIRST FEDERAL BANK, F.S.B.
STATEMENTS OF EQUITY
Years ended February 29, 2000 and February 28, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Other
Retained Comprehensive
Earnings Income (Loss) Total
-------- ------------- -----
<S> <C> <C> <C>
Balance at February 28, 1998 $ 21,021,868 $ 614,281 $ 21,636,149
Comprehensive income
Net income 1,601,040 - 1,601,040
Other comprehensive income
Unrealized gain on securities
available-for-sale, net of tax of
$66,207 - 99,313 99,313
---------------
Total comprehensive income 1,700,353
--------------- -------------- ---------------
Balance at February 28, 1999 22,622,908 713,594 23,336,502
Comprehensive income
Net income 1,507,561 - 1,507,561
Other comprehensive income
Unrealized loss on securities
available-for-sale, net of tax of
$545,470 - (818,275) (818,275)
---------------
Total comprehensive income 689,286
--------------- -------------- ---------------
Balance at February 29, 2000 $ 24,130,469 $ (104,681) $ 24,025,788
=============== ============== ===============
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-5
<PAGE>
FIRST FEDERAL BANK, F.S.B.
STATEMENTS OF CASH FLOWS
Years ended February 29, 2000 and February 28, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
February 29, February 28
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,507,561 $ 1,601,040
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for depreciation 159,140 197,174
Loss (gain) on sale of real estate owned 7,719 (17,758)
Net amortization of premiums and discounts (22,028) (78,933)
Amortization of intangible assets 36,814 41,533
Provision for loan losses 118,850 5,958
Deferred income taxes (82,173) (95,500)
Net changes in
Accrued interest receivable (286,437) (200,570)
Other assets (25,629) 52,717
Deferred loan costs (20,978) (34,472)
Accrued interest payable and other liabilities 42,478 54,020
--------------- ---------------
Net cash provided by operating activities 1,435,317 1,525,209
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in time deposits in other financial institutions (198,000) 1,694,000
Purchase of securities available-for-sale (5,103,276) (7,459,039)
Dividend reinvestments (932,524) (716,944)
Purchase of securities held-to-maturity (18,803,282) (47,200,000)
Principal paydowns on mortgage-backed securities 4,135,828 6,613,299
Proceeds from maturities of securities available-for-sale - 16,995,730
Proceeds from maturities of securities held-to-maturity 9,103,250 16,801,000
Redemption of Federal Home Loan Bank stock 35,300 -
Purchase of loans receivable - (275,000)
Net decrease (increase) in loans receivable (11,901,729) 3,593,839
Capital expenditures on real estate owned (5,569) (13,919)
Proceeds from sale of real estate owned 46,105 105,500
Purchase of property and equipment (131,622) (66,417)
--------------- ---------------
Net cash used in investing activities (23,755,519) (9,927,951)
</TABLE>
--------------------------------------------------------------------------------
(Continued)
F-6
<PAGE>
FIRST FEDERAL BANK, F.S.B.
STATEMENTS OF CASH FLOWS
Years ended February 29, 2000 and February 28, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
February 29, February 28
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits $ 5,890,751 $ 13,857,342
Net increase in advances from borrowers for
taxes and insurance 20,669 16,052
Federal Home Loan Bank advances 6,000,000 -
--------------- ---------------
Net cash provided by financing activities 11,911,420 13,873,394
--------------- ---------------
Net change in cash and cash equivalents (10,408,782) 5,470,652
Cash and cash equivalents
Beginning of year 16,171,077 10,700,425
--------------- ---------------
End of year $ 5,762,295 $ 16,171,077
=============== ===============
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 8,647,779 $ 8,325,641
Taxes 900,147 929,115
Transfer of loans to real estate owned 36,209 182,221
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
FIRST FEDERAL BANK, F.S.B.
NOTES TO FINANCIAL STATEMENTS
February 29, 2000 and February 28, 1999
--------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS: First Federal Bank, F.S.B. (the Bank) was incorporated in
1917 in the State of Illinois for the purpose of providing and servicing loans
and customer deposit accounts. The Bank provides a full range of banking and
related financial services to individual and corporate business customers
located in west central Illinois. The Bank also services a portfolio of mortgage
loans purchased from First Denver Mortgage Company with borrowers located
primarily in the State of Colorado. The Bank's primary deposit products are
demand deposits and time and savings accounts. Its primary lending products are
commercial and residential real estate loans to customers who are predominantly
small and middle market businesses and individuals. The Bank is subject to
competition from other financial institutions and is regulated by federal and
state banking agencies and undergoes periodic examinations by those agencies.
The accounting and reporting policies of the Bank are based upon generally
accepted accounting principles and conform to predominant practices within the
banking industry. Significant accounting policies followed by the Bank are
presented below.
USE OF ESTIMATES: In preparing financial statements, management must make
estimates and assumptions. These estimates and assumptions affect the amounts
reported for assets, liabilities, income, and expenses, as well as affecting the
disclosures provided. Actual results could differ from the current estimates.
The collectibility of loans, fair values of financial instruments, and status of
contingencies are particularly subject to change.
SECURITIES: Securities are classified as held-to-maturity when the Bank has the
positive intent and ability to hold those securities to maturity. Accordingly,
they are stated at cost, adjusted for amortization of premiums and accretion of
discounts. All other securities are classified as available-for-sale since the
Bank may decide to sell those securities in response to changes in market
interest rates, liquidity needs, changes in yields or alternative investments,
and for other reasons. These securities are carried at market value with
unrealized gains and losses charged or credited, net of income taxes, to a
valuation allowance included as a separate component of equity. Realized gains
and losses on disposition are based on the net proceeds and the adjusted
carrying amounts of the securities sold, using the specific identification
method.
LOANS RECEIVABLE: Loans receivable are carried at the unpaid principal balance
outstanding net of the allowance for loans losses and unearned interest.
Interest is accrued as earned based upon the daily outstanding principal
balance.
ALLOWANCE FOR LOAN LOSSES: Because some loans may not be repaid in full, an
allowance for loan losses is maintained. Increases to the allowance are
recorded by a provision for loan losses charged to expense. Estimating the
risk of loss and the amount of loss on any loan is necessarily subjective.
Accordingly, the valuation allowance is maintained at levels considered
adequate to cover estimated losses that are based on delinquencies, property
appraisals, past loss experience, general economic conditions, information
about specific borrower situations
--------------------------------------------------------------------------------
(Continued)
F-8
<PAGE>
FIRST FEDERAL BANK, F.S.B.
NOTES TO FINANCIAL STATEMENTS
February 29, 2000 and February 28, 1999
--------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
including their financial position, and other factors and estimates which are
subject to change over time. While management may periodically allocate portions
of the allowance for specific problem loan situations, including impaired loans
discussed below, the whole allowance is available for any charge-offs that
occur. Loans are charged off in whole or in part when management's estimate of
the undiscounted cash flows from the loan are less than the recorded investment
in the loan, although collection efforts continue and future recoveries may
occur.
Loans considered to be impaired are reduced to the present value of expected
future cash flows or to the fair value of collateral, by allocating a portion of
the allowance for loan losses to such loans. If these allocations cause the
allowance for loan losses to require increase, such increase is reported as a
provision for loan losses.
Smaller balance homogenous loans are defined as residential first mortgage loans
secured by one-to-four-family residences, residential construction loans,
consumer loans, and share loans and are evaluated collectively for impairment.
Commercial real estate loans are evaluated individually for impairment. Normal
loan evaluation procedures, as described in the second preceding paragraph, are
used to identify loans which must be evaluated for impairment. In general, loans
classified as doubtful or loss are considered impaired while loans classified as
substandard are individually evaluated for impairment. Depending on the relative
size of the credit relationship, late or insufficient payments of 30 to 90 days
will cause management to reevaluate the credit under its normal loan evaluation
procedures. While the factors which identify a credit for consideration for
measurement of impairment, or nonaccrual, are similar, the measurement
considerations differ. A loan is impaired when management believes it is
probable that they will be unable to collect all amounts due according to the
contractual terms of the loan agreement. A loan is placed on nonaccrual when
payments are more than 90 days past due unless the loan is adequately
collateralized and in the process of collection.
RECOGNITION OF INCOME ON LOANS: Interest on real estate and certain consumer
loans is accrued over the term of the loans based upon the principal balance
outstanding. Where serious doubt exists as to the collectibility of a loan, the
accrual of interest is discontinued. The carrying values of impaired loans are
periodically adjusted to reflect cash payments, revised estimates of future cash
flows, and increases in the present value of expected cash flows due to the
passage of time. Cash payments representing interest income are reported as
such. Other cash payments are reported as reductions in carrying value, while
increases or decreases due to changes in estimates of future payments and due to
the passage of time are reported as adjustments to the allowance for loan
losses. If these adjustments cause the allowance for loan losses to require
adjustment, such adjustment is reported as an adjustment to the provision for
loan losses.
Loan fees, net of direct loan origination costs, are deferred and amortized over
the contractual life of the loan as a yield adjustment.
--------------------------------------------------------------------------------
(Continued)
F-9
<PAGE>
FIRST FEDERAL BANK, F.S.B.
NOTES TO FINANCIAL STATEMENTS
February 29, 2000 and February 28, 1999
--------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
REAL ESTATE OWNED: Real estate owned represents property obtained through
foreclosure or in settlement of debt obligations and is carried at the lower of
cost (fair value at date of foreclosure) or fair value less estimated selling
expenses. Valuation allowances are recognized when the fair value less selling
expenses is less than the cost of the asset. Changes in the valuation allowance
are charged or credited to income.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of the respective premises and equipment,
which are primarily thirty to fifty years for premises and five to ten years for
furniture, fixtures, and equipment. Maintenance and repairs are charged to
expense as incurred and improvements which extend the useful lives of assets are
capitalized.
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED: The excess of cost over
fair value of net assets acquired is the result of the application of purchase
accounting to the acquisition of another savings institution in 1985. It is
being amortized to expense by the interest method over a period equal to the
estimated remaining life of the long-term interest bearing assets acquired. The
periodic amounts of amortization were determined at the acquisition date based
on the prepayment assumptions used to determine the fair value of the long-term
interest bearing assets. Amortization expense charged to earnings was $36,814
and $41,533 for the years ended February 29, 2000 and February 28, 1999,
respectively.
INCOME TAXES: The provision for income taxes is based on an asset and liability
approach which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of temporary differences between the
carrying amounts and the tax bases of assets and liabilities.
COMPREHENSIVE INCOME: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available-for-sale, net of tax, which are also recognized
as separate components of equity.
STATEMENT OF CASH FLOWS: Cash and cash equivalents include cash on hand, amounts
due from banks, and daily federal funds sold. The Bank reports net cash flows
for customer loan transactions, deposit transactions, and time deposits in other
financial institutions.
RECLASSIFICATIONS: Certain items in the financial statements as of and for the
year ended February 28, 1999 have been reclassified, with no effect on net
income, to conform with the current year presentation.
--------------------------------------------------------------------------------
(Continued)
F-10
<PAGE>
FIRST FEDERAL BANK, F.S.B.
NOTES TO FINANCIAL STATEMENTS
February 29, 2000 and February 28, 1999
--------------------------------------------------------------------------------
NOTE 2 - SECURITIES
The amortized cost and estimated fair value of securities at February 29, 2000
were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE
U.S. government agency bonds $ 3,000,000 $ - $ (152,080) $ 2,847,920
U.S. government agency notes 1,000,000 - (61,400) 938,600
State and municipal obligations 526,098 - (34,036) 492,062
--------------- -------------- -------------- --------------
4,526,098 - (247,516) 4,278,582
U.S. government agency mortgage-
backed securities
FHLMC 3,669,449 23,445 (35,918) 3,656,976
FNMA 2,369,282 753 (114,934) 2,255,101
GNMA 1,433,516 791 (44,166) 1,390,141
--------------- -------------- -------------- --------------
7,472,247 24,989 (195,018) 7,302,218
Marketable equity securities
U.S. League government
mortgage securities fund 14,605,002 - (816,269) 13,788,733
Federal Home Loan Bank stock 894,200 - - 894,200
Federal Home Loan Mortgage
Corporation stock 26,028 1,084,188 - 1,110,216
Adjustable rate mortgage
securities fund 2,092,397 - (24,796) 2,067,601
--------------- -------------- -------------- --------------
17,617,627 1,084,188 (841,065) 17,860,750
--------------- -------------- -------------- --------------
Total $ 29,615,972 $ 1,109,177 $ (1,283,599) $ 29,441,550
=============== ============== ============== ==============
SECURITIES HELD-TO-MATURITY
U.S. government agency bonds $ 29,809,442 $ - $ (1,550,637) $ 28,258,805
U.S. government agency notes 25,991,313 - (1,332,936) 24,658,377
State and municipal obligations 1,329,000 1,948 (2,658) 1,328,290
--------------- -------------- -------------- --------------
57,129,755 1,948 (2,886,231) 54,245,472
U.S. government agency mortgage-
backed securities
FHLMC 817,326 12,161 (5,570) 823,917
FNMA 967,935 - (12,841) 955,094
GNMA 12,153 - (31) 12,122
--------------- -------------- -------------- --------------
1,797,414 12,161 (18,442) 1,791,133
--------------- -------------- -------------- --------------
Total $ 58,927,169 $ 14,109 $ (2,904,673) $ 56,036,605
=============== ============== ============== ==============
</TABLE>
--------------------------------------------------------------------------------
(Continued)
F-11
<PAGE>
FIRST FEDERAL BANK, F.S.B.
NOTES TO FINANCIAL STATEMENTS
February 29, 2000 and February 28, 1999
--------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
The amortized cost and estimated fair value of securities at February 28, 1999
were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE
U.S. government agency bonds $ 2,000,000 $ - $ (110) $ 1,999,890
U.S. government agency notes 1,000,000 - (2,860) 997,140
State and municipal obligations 423,304 1,696 - 425,000
--------------- -------------- -------------- --------------
3,423,304 1,696 (2,970) 3,422,030
U.S. government agency mortgage-
backed securities
FHLMC 1,475,436 2,899 - 1,478,335
FNMA 2,874,233 - (16,581) 2,857,652
GNMA 1,939,403 24,307 - 1,963,710
--------------- -------------- -------------- --------------
6,289,072 27,206 (16,581) 6,299,697
Marketable equity securities
U.S. League government
mortgage securities fund 13,764,875 - (326,364) 13,438,511
Federal Home Loan Bank stock 929,500 - - 929,500
Federal Home Loan Mortgage
Corporation stock 26,028 1,506,336 - 1,532,364
Adjustable rate mortgage
securities fund 1,000,000 - - 1,000,000
--------------- -------------- -------------- --------------
15,720,403 1,506,336 (326,364) 16,900,375
--------------- -------------- -------------- --------------
Total $ 25,432,779 $ 1,535,238 $ (345,915) $ 26,622,102
=============== ============== ============== ==============
</TABLE>
--------------------------------------------------------------------------------
(Continued)
F-12
<PAGE>
FIRST FEDERAL BANK, F.S.B.
NOTES TO FINANCIAL STATEMENTS
February 29, 2000 and February 28, 1999
--------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
SECURITIES HELD-TO-MATURITY
U.S. government agency bonds $ 16,999,167 $ - $ (126,737) $ 16,872,430
U.S. government agency notes 28,996,190 - (231,780) 28,764,410
State and municipal obligations 1,432,250 11,275 - 1,443,525
--------------- -------------- -------------- --------------
47,427,607 11,275 (358,517) 47,080,365
U.S. government agency mortgage-
backed securities
FHLMC 1,861,438 63,307 - 1,924,745
FNMA 2,216,137 25,882 - 2,242,019
GNMA 18,447 322 - 18,769
--------------- -------------- -------------- --------------
4,096,022 89,511 - 4,185,533
--------------- -------------- -------------- --------------
Total $ 51,523,629 $ 100,786 $ (358,517) $ 51,265,898
=============== ============== ============== ==============
</TABLE>
Securities with a carrying amount of $895,000 and $2,067,000 at February 29,
2000 and February 28, 1999, respectively, were pledged to secure public deposits
and for other purposes as required by law.
The scheduled maturities of securities available-for-sale and securities
held-to-maturity at February 29, 2000 were as follows:
<TABLE>
<CAPTION>
Securities Securities
Available-for-sale Held-to-maturity
------------------ ----------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due in one year or less $ - $ - $ 998,811 $ 945,176
Due after one year through
five years - - 38,056,762 36,117,447
Due after five years through
ten years 4,526,098 4,278,582 18,024,182 17,131,570
Due after ten years - - 50,000 51,279
--------------- -------------- -------------- --------------
Subtotal 4,526,098 4,278,582 57,129,755 54,245,472
Marketable equity securities 17,617,627 17,860,750 - -
Mortgage-backed securities 7,472,247 7,302,218 1,797,414 1,791,133
--------------- -------------- -------------- --------------
Total $ 29,615,972 $ 29,441,550 $ 58,927,169 $ 56,036,605
=============== ============== ============== ==============
</TABLE>
--------------------------------------------------------------------------------
(Continued)
F-13
<PAGE>
FIRST FEDERAL BANK, F.S.B.
NOTES TO FINANCIAL STATEMENTS
February 29, 2000 and February 28, 1999
--------------------------------------------------------------------------------
NOTE 3 - LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
February 29, February 28,
2000 1999
---- ----
<S> <C> <C>
First mortgage loans
One-to-four-family $ 80,383,374 $ 76,451,606
Multi-family and commercial 15,580,223 12,766,817
Construction 1,674,636 644,778
---------------- ----------------
Total first mortgage loans 97,638,233 89,863,201
Commercial loans 3,884,536 531,561
Consumer loans
Automobile 5,873,883 5,658,460
Home improvement 2,433,815 2,276,470
Share loans 782,951 787,482
Other 3,379,441 3,140,967
---------------- ----------------
Total consumer loans 12,470,090 11,863,379
---------------- ----------------
Total loans 113,992,859 102,258,141
Less
Unearned discounts (46,730) (85,176)
Deferred loans costs, net 139,004 118,034
Allowance for loan losses (483,364) (456,877)
---------------- ----------------
Loans receivable, net $ 113,601,769 $ 101,834,122
================ ================
</TABLE>
The Bank grants commercial and residential real estate loans and consumer loans
to customers primarily in the west central Illinois area. Generally, the loans
are backed by collateral and are expected to be repaid from cash flow or
proceeds from the sale of selected assets of the borrowers.
Activity in the allowance for loan losses is summarized as follows for the years
ended February 29, 2000 and February 28, 1999, respectively.
<TABLE>
<CAPTION>
February 29, February 28,
2000 1999
---- ----
<S> <C> <C>
Balance at beginning of year $ 456,877 $ 486,140
Provision charged to income 118,850 5,958
Charge-offs (92,363) (161,915)
Recoveries - 126,694
------------ ------------
Balance at end of year $ 483,364 $ 456,877
============ ============
</TABLE>
--------------------------------------------------------------------------------
(Continued)
F-14
<PAGE>
FIRST FEDERAL BANK, F.S.B.
NOTES TO FINANCIAL STATEMENTS
February 29, 2000 and February 28, 1999
--------------------------------------------------------------------------------
NOTE 3 - LOANS RECEIVABLE (Continued)
Impaired loans on which accrual of interest has been discontinued totaled
$32,360 and $19,404 as of February 29, 2000 and February 28, 1999, respectively.
Differences in interest income recorded on the cash basis on nonaccrual loans
for 2000 and 1999, and the amounts that would have been recorded if interest on
such nonaccrual loans had been accrued, was not material to the financial
statements.
Loans outstanding to directors, executive officers, and their associates totaled
$123,761 and $113,336 at February 29, 2000 and February 28, 1999, respectively.
NOTE 4 - LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
financial statements. The unpaid principal balances of these loans are
summarized below:
<TABLE>
<CAPTION>
February 29, February 28,
2000 1999
---- ----
<S> <C> <C>
FHLMC $ 156,682 $ 289,033
City of Quincy, Illinois 954,163 1,233,771
Federal Home Loan Bank 111,112 -
--------------- --------------
Total $ 1,221,957 $ 1,522,804
=============== ==============
</TABLE>
Custodial escrow balances maintained in connection with serviced loans were
$19,676 and $19,738 at February 29, 2000 and February 28, 1999, respectively.
NOTE 5 - ACCRUED INTEREST RECEIVABLE
Accrued interest consists of the following:
<TABLE>
<CAPTION>
February 29, February 28,
2000 1999
---- ----
<S> <C> <C>
Loans $ 724,971 $ 705,354
Securities 1,270,932 1,000,554
Other 17,422 20,980
--------------- --------------
$ 2,013,325 $ 1,726,888
=============== ==============
</TABLE>
--------------------------------------------------------------------------------
(Continued)
F-15
<PAGE>
FIRST FEDERAL BANK, F.S.B.
NOTES TO FINANCIAL STATEMENTS
February 29, 2000 and February 28, 1999
--------------------------------------------------------------------------------
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
February 29, February 28,
2000 1999
---- ----
<S> <C> <C>
Land, buildings, and improvements $ 2,311,025 $ 2,305,157
Furniture, fixtures, and equipment 1,389,781 1,264,027
--------------- --------------
3,700,806 3,569,184
Less accumulated depreciation 2,063,944 1,904,804
--------------- --------------
Totals $ 1,636,862 $ 1,664,380
=============== ==============
</TABLE>
NOTE 7 - DEPOSITS
Certificate of deposit accounts with balances of $100,000 or more totaled
approximately $17,079,000 and $17,234,000 at February 29, 2000 and February 28,
1999, respectively. Deposits greater than $100,000 are not federally insured.
Scheduled maturities of certificates of deposit at February 29, 2000 were as
follows:
<TABLE>
<S> <C> <C>
2001 $ 98,893,357
2002 22,753,758
2003 3,994,139
2004 369,094
-----------------
Total $ 126,010,348
=================
</TABLE>
NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES
The Bank maintains an open line of credit with the Federal Home Loan Bank. The
line of credit has a variable rate of interest. At February 29, 2000, the
balance was $6,000,000 and the interest rate was 6.16%.
The Bank maintains a collateral pledge agreement covering secured advances
whereby the Bank has agreed to at all times keep on hand, free of all other
pledges, liens, and encumbrances, whole first mortgage loans on improved
residential property not more than 90 days delinquent, aggregating no less than
167% of the outstanding secured advances from the Federal Home Loan Bank of
Chicago.
--------------------------------------------------------------------------------
(Continued)
F-16
<PAGE>
FIRST FEDERAL BANK, F.S.B.
NOTES TO FINANCIAL STATEMENTS
February 29, 2000 and February 28, 1999
--------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES
An analysis of the provision for income taxes is as follows:
<TABLE>
<CAPTION>
February 29, February 28,
2000 1999
---- ----
<S> <C> <C>
Current $ 919,832 $ 946,115
Deferred (82,173) (95,500)
------------ ------------
$ 837,659 $ 850,615
============ ============
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at February 29, 2000 and
February 28, 1999 are as follows:
<TABLE>
<CAPTION>
February 29, February 28,
2000 1999
---- ----
<S> <C> <C>
Deferred tax assets
Unrealized losses on securities available-for-sale $ 69,741 $ -
Other 53,850 45,439
------------ ------------
Total deferred tax assets 123,591 45,439
Deferred tax liabilities
Unrealized gains on securities available-for-sale - 475,729
Bad debts 23,390 116,993
Depreciation 56,997 53,122
Other 16,790 824
------------ ------------
Total deferred tax liabilities 97,177 646,668
------------ ------------
Net deferred tax asset (liability) $ 26,414 $ (601,229)
============ ============
</TABLE>
A reconciliation of the federal statutory tax rate of 34% for the years ended
February 29, 2000 and February 29, 1999 to the effective tax rate on income
before income taxes is as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Tax expense at statutory rate $ 797,375 34.0% $ 833,562 34.0%
Tax-exempt interest income (25,116) (1.1) (26,825) (1.1)
State income taxes, net of federal 25,691 1.1 62,231 2.5
Other 39,709 1.7 (18,353) (0.7)
------------- ------ ------------ ------
Tax expense at effective rate $ 837,659 35.7% $ 850,615 34.7%
============= ====== ============ ======
</TABLE>
--------------------------------------------------------------------------------
(Continued)
F-17
<PAGE>
FIRST FEDERAL BANK, F.S.B.
NOTES TO FINANCIAL STATEMENTS
February 29, 2000 and February 28, 1999
--------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES (Continued)
Retained earnings at February 29, 2000 include allocations for federal income
tax purposes representing tax bad debt deductions of approximately $2,300,000
through February 29, 2000, on which no tax has been paid and no deferred federal
income taxes have been provided. Reductions of amounts so allocated for purposes
other than tax bad debt losses will create income for tax purposes only, which
will be subject to the then current corporate income tax rate.
NOTE 10 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet financing needs of its customers. These
financial instruments include commitments to fund loans and previously approved
unused lines of credit. The Bank's exposure to credit loss in the event of
nonperformance by the parties to these financial instruments is represented by
the contractual amount of the instruments. The Bank uses the same credit policy
for commitments as it uses for on-balance-sheet items. The contract amount of
these financial instruments is summarized as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Commitments to extend credit $ 1,362,000 $ 911,000
Unused lines of credit 1,984,000 488,000
Construction loans in process 1,117,000 446,000
</TABLE>
At February 29, 2000, commitments to extend credit include $752,000 of fixed
rate loan commitments with rates ranging from 7.40% to 9.00%. These commitments
are due to expire within 60 days of issuance. Since many commitments expire
without being used, the amounts above do not necessarily represent future cash
commitments. Collateral may be obtained upon exercise of a commitment. The
amount of collateral is determined by management and may include commercial and
residential real estate and other business and consumer assets.
NOTE 11 - PENSION PLAN
The Bank participates in a multi-employer defined benefit pension plan. The plan
provides benefits to substantially all of the Bank's eligible employees. The
plan is funded through Bank contributions to a nationwide plan for savings and
loan associations. Beginning April 1,1997, payments to the plan were suspended
by the plan's executive committee due to the fully funded status of the plan. No
contributions were made to the plan in 2000 and 1999.
--------------------------------------------------------------------------------
(Continued)
F-18
<PAGE>
FIRST FEDERAL BANK, F.S.B.
NOTES TO FINANCIAL STATEMENTS
February 29, 2000 and February 28, 1999
--------------------------------------------------------------------------------
NOTE 12 - REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classifications are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital to risk-weighted assets and of Tier I capital
to average assets. Management believes, as of February 29, 2000, that the Bank
meets all capital adequacy requirements to which it is subject.
As of February 29, 2000, the most recent notification from the Office of Thrift
Supervision categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the following table. There are no conditions or
events since that notification that management believes have changed the Bank's
category.
The following is a reconciliation of the Bank's equity under generally accepted
accounting principles (GAAP) to regulatory capital:
<TABLE>
<CAPTION>
February 29, February 28,
2000 1999
---- ----
(in thousands)
<S> <C> <C>
GAAP equity $ 24,026 $ 23,337
Disallowed intangible assets (47) (84)
Unrealized loss (gain) on securities available-for-sale 105 (714)
------------ ------------
Tier I capital 24,084 22,539
Unrealized gain on equity securities available-for-sale 109 531
General regulatory loan loss reserves 433 408
------------ ------------
Total regulatory capital $ 24,626 $ 23,478
============ ============
</TABLE>
--------------------------------------------------------------------------------
(Continued)
F-19
<PAGE>
FIRST FEDERAL BANK, F.S.B.
NOTES TO FINANCIAL STATEMENTS
February 29, 2000 and February 28, 1999
--------------------------------------------------------------------------------
NOTE 12 - REGULATORY CAPITAL REQUIREMENTS (Continued)
The Bank's actual capital amounts and ratios are also presented in the table.
<TABLE>
<CAPTION>
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> <C>
As of February 29, 2000
Total capital (to risk-weighted
assets) $ 24,626 24.9% $ 7,924 8.0% $ 9,905 10.0%
Tier I capital (to risk-weighted
assets) 24,084 24.3 3,962 4.0 5,943 6.0
Tier I (core) capital (to adjusted
total assets) 24,084 11.3 8,533 4.0 10,666 5.0
As of February 28, 1999
Total capital (to risk-weighted
assets) $ 23,478 26.0% $ 7,225 8.0% $ 9,031 10.0%
Tier I capital (to risk-weighted
assets) 22,539 25.0 3,612 4.0 5,419 6.0
Tier I (core) capital (to adjusted
total assets) 22,539 11.7 7,735 4.0 9,669 5.0
</TABLE>
NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The approximate carrying amount and estimated fair value of financial
instruments as of February 29, 2000 and February 28, 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
Approximate Estimated Approximate Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 5,762,295 $ 5,762,295 $ 16,171,077 $ 16,171,077
Time deposits in other financial
institutions 1,572,000 1,572,000 1,374,000 1,374,000
Securities available-for-sale 29,441,550 29,441,550 26,622,102 26,622,102
Securities held-to-maturity 58,927,169 56,036,605 51,523,629 51,265,898
Loans receivable, net 113,601,769 113,150,080 101,834,122 100,476,591
Accrued interest receivable 2,013,325 2,013,325 1,726,888 1,726,888
Financial liabilities
Deposits 182,572,339 182,882,712 176,681,588 177,322,811
Advance payments by borrowers
for taxes and insurance 296,306 296,306 275,637 275,637
Federal Home Loan Bank advances 6,000,000 6,000,000 - -
Accrued interest payable 119,502 119,502 125,704 125,704
</TABLE>
--------------------------------------------------------------------------------
(Continued)
F-20
<PAGE>
FIRST FEDERAL BANK, F.S.B.
NOTES TO FINANCIAL STATEMENTS
February 29, 2000 and February 28, 1999
--------------------------------------------------------------------------------
NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
For purposes of the above, the following assumptions were used:
CASH AND CASH EQUIVALENTS AND TIME DEPOSITS IN OTHER FINANCIAL INSTITUTIONS:
Fair values are based on their carrying value due to the short-term nature of
these assets.
SECURITIES: The fair value of securities is based on the quoted market value for
the individual security or its equivalent.
LOANS: The fair value for loans has been determined by calculating the present
value of future cash flows based on the current rate the Bank would charge for
similar loans with similar maturities at February 29, 2000 and February 28,
1999, applied for an estimated time period until the loan is assumed to be
repriced or repaid.
DEPOSITS: The fair value for time deposits has been determined by calculating
the present value of future cash flows based on estimates of rates the Bank
would pay on such deposits at February 29, 2000 and February 28, 1999, applied
for the time period until maturity. The estimated fair value of NOW, money
market, and savings accounts is assumed to approximate carrying value as
management establishes rates on these deposits at a level that approximates the
local market area.
ACCRUED INTEREST: The fair value of accrued interest receivable and payable is
assumed to equal the carrying value.
ADVANCE PAYMENTS BY BORROWERS FOR TAXES AND INSURANCE: The fair value of this
liability is assumed to equal the carrying value due to the short-term nature of
the liability.
OFF-BALANCE-SHEET INSTRUMENTS: Off-balance-sheet items consist principally of
unfunded loan commitments. The fair value of these commitments is not material.
Other assets and liabilities of the Bank not defined as financial instruments,
such as property and equipment, are not included in the above disclosures. Also
not included are nonfinancial instruments typically not recognized in financial
statements such as the value of core deposits, loan servicing rights, customer
goodwill, and similar items.
While the above estimates are based on judgments of the most appropriate
factors, there is no assurance that if the Bank disposed of these items on
February 29, 2000 and February 28, 1999, the fair value would have been
achieved, because the market value may differ depending on the circumstances.
The fair values at February 29, 2000 and February 28, 1999 should not
necessarily be considered to apply at subsequent dates.
--------------------------------------------------------------------------------
(Continued)
F-21
<PAGE>
FIRST FEDERAL BANK, F.S.B.
NOTES TO FINANCIAL STATEMENTS
February 29, 2000 and February 28, 1999
--------------------------------------------------------------------------------
NOTE 14 - OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as follows:
<TABLE>
<CAPTION>
February 29, February 28,
2000 1999
---- ----
<S> <C> <C>
Unrealized holdings gains (losses) on securities
available-for-sale $ (1,363,745) $ 165,520
Tax effect 545,470 (66,207)
-------------- ------------
Other comprehensive income (loss) $ (818,275) $ 99,313
============== ============
</TABLE>
NOTE 15 - ADOPTION OF PLAN OF CONVERSION
On December 8, 1999, the Board of Directors of the Bank adopted a Plan of
Conversion to convert from a federal mutual savings bank to a federal stock
savings bank with the concurrent formation of a holding company. The conversion
will be accomplished through the amendment of the Bank's charter and the sale of
the proposed holding company's common stock in an amount equal to the
consolidated pro forma market value of the holding company and the Bank after
giving effect to the conversion. A subscription offering of the shares of common
stock will be offered initially to the Bank's eligible deposit account holders,
then to other members of the Bank. Any shares of the holding company's common
stock not sold in the subscription offering will be offered for sale to the
general public, giving preference to the Bank's market area.
At the time of conversion, the Bank will establish a liquidation account in
an amount equal to its total net worth as of the latest statement of
financial condition appearing in the final prospectus. The liquidation
account will be maintained for the benefit of eligible depositors who
continue to maintain their accounts at the Bank after the conversion. The
liquidation account will be reduced annually to the extent that eligible
depositors have reduced their qualifying deposits. Subsequent increases will
not restore an eligible account holder's interest in the liquidation account.
In the event of a complete liquidation, each eligible depositor will be
entitled to receive a distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for accounts then
held. The liquidation account balance is not available for payment of
dividends.
Conversion costs will be deferred and deducted from the proceeds of the
shares sold in the conversion. If the conversion is not completed, all costs
will be charged to expense. At February 29, 2000, $55,000 has been deferred.
--------------------------------------------------------------------------------
F-22
<PAGE>
================================================================================
You should rely only on the information contained in this prospectus. Neither
First Federal Bancshares nor First Federal Bank has authorized anyone to provide
you with different information. This prospectus does not constitute an offer to
sell or a solicitation of an offer to buy any of the securities offered by this
prospectus to any person or in any jurisdiction in which an offer or
solicitation is not authorized or in which the person making an offer or
solicitation is not qualified to do so, or to any person to whom it is unlawful
to make an offer or solicitation in those jurisdictions. The information
contained in this prospectus is accurate only as of the date of this prospectus,
regardless of the time of delivery of this prospectus or of any sale of the
First Federal Bancshares, Inc. common stock.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Questions and Answers about the Stock Offering .......................................
Summary ..............................................................................
Risk Factors .........................................................................
Selected Financial and Other Data. ...................................................
Recent Developments ..................................................................
Use of Proceeds ......................................................................
First Federal Bancshares' Dividend Policy ............................................
Market for the Common Stock ..........................................................
Capitalization .......................................................................
Regulatory Capital Compliance ........................................................
Pro Forma Data .......................................................................
Management's Discussion and Analysis of Financial ....................................
Condition and Results of Operations .............................................
Business of First Federal Bancshares .................................................
Business of First Federal Bank .......................................................
Management of First Federal Bancshares ...............................................
Management of First Federal Bank .....................................................
Regulation and Supervision ...........................................................
Federal and State Taxation ...........................................................
Shares to be Purchased by Management with ............................................
Subscription Rights .............................................................
The Conversion .......................................................................
Restrictions on Acquisition of First Federal Bancshares ..............................
and First Federal Bank ...........................................................
Description of First Federal Bancshares Stock ........................................
Description of First Federal Bank Stock ..............................................
Registration Requirements ............................................................
Legal and Tax Opinions ...............................................................
Experts ..............................................................................
Change in Accountants ................................................................
Where You Can Find More Information ..................................................
Index of Financial Statements ........................................................
</TABLE>
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DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL ___________, 2000, ALL DEALERS THAT BUY, SELL OR TRADE THESE SECURITIES,
WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
2,242,500 Shares
FIRST FEDERAL BANCSHARES, INC.
(Proposed Holding Company for
First Federal Bank)
COMMON STOCK
--------------
PROSPECTUS
--------------
-----------------
Friedman, Billings, Ramsey & Co., Inc.
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<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
In accordance with the General Corporation Law of the State of Delaware
(being Chapter 1 of Title 8 of the Delaware Code), Articles 10 and 11 of the
Registrant's Certificate of Incorporation provide as follows:
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 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 a majority vote
of the Directors who are not parties to such proceeding, even though less
than a quorum.
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, services to an employee
benefit plan) shall be made only upon delivery to the Corporation of an
undertaking (hereinafter an "undertaking"), by or on behalf of such
indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right
to appeal (hereinafter a "final adjudication") that such indemnitee is not
entitled to be indemnified for such expenses under this Section or
otherwise. The rights to indemnification and to the advancement of expenses
conferred in Sections A and B of this Article TENTH shall be contract rights
and such rights shall continue as to an indemnitee who has ceased to be a
Director, Officer, employee or agent and shall inure to the benefit of the
indemnitee's heirs, executors and administrators.
C. If a claim under Section A or B of this Article TENTH is not
paid in full by the Corporation within 60 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 20
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 expenses
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
II-1
<PAGE>
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
subsidiary or Affiliate 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
a majority vote of the Directors who are not parties to such proceeding,
even though less than a quorum, grant rights to indemnification and to the
advancement of expenses to any employee or agent of the Corporation to the
fullest extent of the provisions of this Article TENTH with respect to the
indemnification and advancement of expenses of Directors and Officers of the
Corporation.
ELEVENTH:
A Director of this Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a Director, except for liability: (i) for any breach of the Director's
duty of loyalty to the Corporation or its stockholders; (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) under Section 174 of the Delaware General Corporation
Law; or (iv) for any transaction from which the Director derived an improper
personal benefit. If the Delaware General Corporation Law is amended to
authorize corporate action further eliminating or limiting the personal
liability of Directors, then the liability of a Director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the Delaware
General Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders of
the Corporation shall not adversely affect any right or protection of a Director
of the Corporation existing at the time of such repeal or modification.
DIRECTOR AND OFFICER INSURANCE POLICY
First Federal Bank, F.S.B. maintains standard insurance coverage for its
directors and officers. Such insurance coverage limits the payment of claims
arising from covered actions to directors and officers to $1,000,000 per
occurrence.
II-2
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
SEC filing ......................................................$ 6,809
OTS filing fee..................................................... 8,400
NASD filing fee.................................................... 3,079
Nasdaq National Market filing fee.................................. 48,750
Edgar, printing, postage and mailing .............................. 150,000
Legal fees and expenses............................................ 250,000
Accounting fees and expenses....................................... 70,000
Appraisers' fees and expenses (including business plan)............ 35,000
Securities marketing firm expenses (1)............................. 30,000
Underwriter's counsel fees......................................... 45,000
Conversion Agent fees and expenses................................. 16,500
Blue Sky fees and expenses......................................... 10,000
Certificate printing............................................... 5,000
Miscellaneous...................................................... 11,462
--------
TOTAL ...................................................... $690,000
========
</TABLE>
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* Unless otherwise noted, fees are based upon the registration of 2,578,875
shares at $10.00 per share.
(1) Friedman, Billings, Ramsey & Co., Inc. will receive a fee of 1.5% of the
aggregate purchase price of the shares of common stock sold in the
subscription offering and the community offering, excluding shares
purchased by the ESOP and by officers and directors of First Federal and
their associates. See "THE CONVERSION--MARKETING AND UNDERWRITING
ARRANGEMENTS," in the Prospectus.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
None.
II-3
<PAGE>
ITEM 27. EXHIBITS.
The exhibits filed as a part of this Registration Statement are as follows:
(a) List of Exhibits (filed herewith unless otherwise noted)
<TABLE>
<S> <C>
1.1 Engagement Letter between First Federal Bank, F.S.B. and Friedman,
Billings, Ramsey & Co., Inc.*
1.2 Draft Form of Agency Agreement
2.0 Plan of Conversion (including the Federal Stock Charter and Bylaws of
First Federal Bank)*
3.1 Certificate of Incorporation of First Federal Bancshares, Inc.*
3.2 Bylaws of First Federal Bancshares, Inc.*
4.0 Specimen Stock Certificate of First Federal Bancshares, Inc.*
5.0 Opinion of Muldoon, Murphy & Faucette LLP re: Legality*
8.1 Opinion of Muldoon, Murphy & Faucette LLP re: Federal Tax Matters
8.2 Opinion of Crowe, Chizek and Company LLP re: State Tax Matters
8.3 Opinion of RP Financial, LC. re: Subscription Rights*
10.1 Draft ESOP Loan Commitment Letter and ESOP Loan Documents*
10.2 Form of First Federal Bank Employment Agreement*
10.3 Form of First Federal Bancshares, Inc. Employment Agreement*
10.4 Form of First Federal Bank Change in Control Agreement*
10.5 Form of First Federal Bank Employee Severance Compensation Plan*
10.6 Form of First Federal Bank Supplemental Executive Retirement Plan*
16.0 Letter on Change in Certifying Accountant*
23.1 Consent of Muldoon, Murphy & Faucette LLP
23.2 Consent of Crowe, Chizek and Company LLP
23.3 Consent of RP Financial, LC.*
23.4 Consent of Clifton Gunderson L.L.C.
24.0 Powers of Attorney*
27.0 Financial Data Schedule*
99.1 Appraisal Report of RP Financial, LC. (P)*
99.2 Draft Marketing Materials
</TABLE>
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(P) Filed pursuant to Rule 202 of Regulation S-T.
*Previously filed.
II-4
<PAGE>
ITEM 28. UNDERTAKINGS.
The small business issuer will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in
the information in the registration statement; and
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to
be the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
The small business issuer will provide to the underwriter at the closing
specified in the underwriting agreement 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 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer 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 small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer 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 small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
II-5
<PAGE>
CONFORMED
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements of filing on Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned, in the
City of Colchester, State of Illinois, on June 23, 2000.
First Federal Bancshares, Inc.
By: /s/James J. Stebor
----------------------------------
James J. Stebor
President, Chief Executive Officer
and Director
(duly authorized representative)
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates stated.
NAME TITLE DATE
/s/ James J. Stebor President, Chief Executive June 23, 2000
----------------------- Officer and Director
James J. Stebor (principal executive
officer)
/s/ Cathy D. Pendell Treasurer June 23, 2000
----------------------- (principal accounting and
Cathy D. Pendell financial officer)
* Director
-----------------------
Franklin M. Hartzell
* Director
-----------------------
Dr. Stephan L. Roth
* Director
-----------------------
Richard D. Stephens
* Director
-----------------------
Murrel Hollis
* Director
-----------------------
Gerald L. Prunty
* Director
-----------------------
Eldon M. Snowden
<PAGE>
* Pursuant to the Power of Attorney filed as Exhibit 24.1 to the
Registration Statement on Form SB-2 for First Federal Bancshares, Inc. on May
5, 2000.
/s/ James J. Stebor President, Chief June 23, 2000
------------------- Executive Officer
James J. Stebor and Director
(principal executive officer)
<PAGE>
EXHIBIT INDEX
LIST OF EXHIBITS (FILED HEREWITH UNLESS OTHERWISE NOTED)
The exhibits filed as a part of this Registration Statement are as follows:
(a) List of Exhibits (filed herewith unless otherwise noted)
<TABLE>
<S> <C>
1.1 Engagement Letter between First Federal Bank, F.S.B. and Friedman,
Billings, Ramsey & Co., Inc.*
1.2 Draft Form of Agency Agreement
2.0 Plan of Conversion (including the Federal Stock Charter and Bylaws of
First Federal Bank)*
3.1 Certificate of Incorporation of First Federal Bancshares, Inc.*
3.2 Bylaws of First Federal Bancshares, Inc.*
4.0 Specimen Stock Certificate of First Federal Bancshares, Inc.*
5.0 Opinion of Muldoon, Murphy & Faucette LLP re: Legality*
8.1 Opinion of Muldoon, Murphy & Faucette LLP re: Federal Tax Matters
8.2 Opinion of Crowe, Chizek and Company LLP re: State Tax Matters
8.3 Opinion of RP Financial, LC. re: Subscription Rights*
10.1 Draft ESOP Loan Commitment Letter and ESOP Loan Documents*
10.2 Form of First Federal Bank Employment Agreement*
10.3 Form of First Federal Bancshares, Inc. Employment Agreement*
10.4 Form of First Federal Bank Change in Control Agreement*
10.5 Form of First Federal Bank Employee Severance Compensation Plan*
10.6 Form of First Federal Bank Supplemental Executive Retirement Plan*
16.0 Letter on Change in Certifying Accountant*
23.1 Consent of Muldoon, Murphy & Faucette LLP
23.2 Consent of Crowe, Chizek and Company LLP
23.3 Consent of RP Financial, LC.*
23.4 Consent of Clifton Gunderson L.L.C.
24.0 Powers of Attorney*
27.0 Financial Data Schedule*
99.1 Appraisal Report of RP Financial, LC. (P)*
99.2 Draft Marketing Materials
</TABLE>
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(P) Filed pursuant to Rule 202 of Regulation S-T.
*Previously filed.
