<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____________________ to ___________________
Commission File Number 0-22742
GFS BANCORP,INC.
- - --------------------------------------------------------------------------------
(Name of small business issuer in its charter)
Delaware 42-1410536
- - --------------------------------------------- ---------------------------------
(State or other jurisdiction of incorporation (IRS Employer Identification No.)
or organization)
1025 Main Street, Grinnell, Iowa 50112-0030
- - --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (515) 236-3121
----------------------------
Securities Registered Pursuant to Section 12(b) of the Act:
None
----
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
---------------------------------------
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days. YES X NO
---. ---.
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained herein, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
State the issuer's revenues for its most recent fiscal year: $6.4 million.
The aggregate market value of the voting stock held by non-affiliates of
the registrant, computed by reference to the closing prices of such stock on the
Nasdaq System as of September 3, 1996, was $7.1 million. (The exclusion from
such amount of the market value of the shares owned by any person shall not be
deemed an admission by the registrant that such person is an affiliate of the
registrant.)
As of September 3, 1996, there were issued and outstanding 502,600 shares
of the Registrant's Common Stock.
Transitionally Small Business disclosure format (check one): yes no X
--- ---
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-KSB - Annual Report to Stockholders for the fiscal year
ended June 30, 1996.
Part III of Form 10-KSB - Proxy Statement for 1996 Annual Meeting of
Stockholders.
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PART I
Item 1. Description of Business
-----------------------
General
The Company. GFS Bancorp, Inc. (the "Company"), a Delaware corporation,
was formed in September 1993 to act as the holding company for Grinnell Federal
Savings Bank ("Grinnell Federal" or the "Bank") upon the completion of the
Bank's conversion from the mutual to the stock form (the "Conversion"). The
Company received approval from the Office of Thrift Supervision (the "OTS") to
acquire all of the common stock of the Bank to be outstanding upon completion of
the Conversion. The Conversion was completed on January 5, 1994. The primary
business activity of the Company is to act as the holding company of the Bank.
The Company also invests in U.S. government obligations, common and preferred
stocks and mutual funds.
The executive offices of the Company and its subsidiary are located at 1025
Main Street, Grinnell, Iowa 50112 and the telephone number at that address is
(515) 236-3121.
Grinnell Federal. Grinnell Federal, originally chartered in 1935, is a
federally chartered savings bank headquartered in Grinnell, Iowa. Its deposits
are insured up to the maximum allowable amount by the Federal Deposit Insurance
Corporation (the "FDIC"). As a federally chartered savings bank, the Bank is
regulated by the Office of Thrift Supervision, Department of the Treasury
("OTS").
Grinnell Federal primarily serves Poweshiek County, as well as, parts of
Marshall, Iowa, and Jasper Counties, Iowa through its office located at 1025
Main Street, Grinnell, Iowa 50112. The Bank competes in loan originations and
in attracting deposits with approximately six financial institutions serving its
primary market area.
Grinnell Federal has been, and intends to continue to be, a community-
oriented financial institution offering a variety of financial services to meet
the needs of the communities it serves. The Bank attracts deposits from the
general public and uses the deposits, together with borrowings and other funds,
to originate loans secured by first mortgages on owner-occupied one- to four-
family residences. To a lesser extent, the Bank also
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originates loans secured by commercial and multi-family real estate, and
construction, consumer and commercial business loans.
In addition, in order to supplement loan demand in its market area,
Grinnell Federal has purchased whole loans and participation interests in loans
secured by one- to four-family owner-occupied real estate in the Des Moines,
Iowa metropolitan area, and multi-family and commercial real estate in the
Madison and Milwaukee, Wisconsin metropolitan areas, originated by a mortgage
broker located in Wisconsin and other savings institutions headquartered in
Iowa. All of such purchased loans meet the Bank's underwriting standards.
The Bank also invests in U.S. Government and agency securities, municipal
bonds and other investment securities. See "- Investment Activities."
The Bank offers a variety of accounts having a wide range of interest rates
and terms. The Bank only solicits deposits in its primary market area and does
not accept brokered deposits.
Market Area. The office of the Bank is located at 1025 Main Street,
Grinnell, Iowa 50112. Through this office, Grinnell Federal currently serves
primarily Poweshiek County and, to a lesser extent, portions of Marshall, Iowa,
and Jasper Counties, Iowa.
Grinnell, Iowa is located in Poweshiek County, and is approximately 55
miles east of Des Moines, Iowa. Poweshiek County has a population of
approximately 19,000 persons, and Grinnell's population is estimated at 8,900
people. Grinnell has a mixed industrial and agricultural economy consisting of
some 200 retail and service enterprises serving the Grinnell area. Major
employers include Grinnell College, Grinnell Mutual Reinsurance Company, DeLong
Sportswear, GTE, Grinnell Regional Medical Center, Donaldson Company and
CertainTeed Company.
Lending Activities
General. Historically, the Bank originated fixed-rate mortgage loans.
Since the early 1980s, however, the Bank has emphasized, subject to market
conditions, the origination and holding of adjustable-rate mortgage ("ARM")
loans and loans with shorter terms to maturity than traditional 30-year, fixed-
rate loans. Management's strategy has been to increase the percentage
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of assets in its portfolio with more frequent repricing or shorter maturities.
In response to customer demand, however, the Bank continues to originate for its
loan portfolio fixed-rate mortgages with terms not greater than 30 years.
The Bank's primary focus in lending activities is on the origination of
loans secured by first mortgages on owner-occupied, one- to four-family
residences. The Bank also originates and purchases loans secured by commercial
and multi-family real estate and a limited number of construction, consumer and
commercial business loans. During fiscal 1996, the Bank originated $14.6
million and purchased $22.9 million in loans which contributed to the increase
in the Bank's loan portfolio. Of the $22.9 million in loans purchased during
the 1996 fiscal year, $9.3 million in participation interests were sold to other
financial institutions with the bank retaining the servicing. See
"- Originations, Purchases and Sales of Loans and Mortgage-Backed Securities"
herein and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in the Company's 1996 Annual Report to Stockholders
attached hereto as Exhibit 13 (the "Annual Report"). At June 30, 1996, the
Bank's net loan portfolio totaled $71.8 million.
All members of the Board of Directors serve as Loan Committee members. At
any given time, the approval of at least two outside directors and one inside
director is required to approve loans for which approval of the Loan Committee
is required. Loan Committee approval is required for unsecured consumer loans
greater than $25,000, secured consumer loans over $50,000, and commercial (non-
real estate) loans of more than $50,000. The Loan Committee must also approve
all loans secured by real estate over $300,000.
The aggregate amount of loans that the Bank is permitted to make under
applicable federal regulations to any one borrower, including related entities,
or the aggregate amount that the Bank can invest in any one real estate project
is, with certain exceptions, generally the greater of 15% of unimpaired capital
and surplus or $500,000. See "Regulation - Federal Regulation of Savings
Associations." At June 30, 1996, the maximum amount which the Bank could have
lent to any one borrower and the borrower's related entities was approximately
$1.4 million. At June 30, 1996, the Bank had no loans with aggregate
outstanding balances in excess of this amount. Since the Bank's current lending
policy generally limits loans secured by real estate to $500,000 and consumer
loans
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to $50,000, the Bank has not been materially restricted by this lending limit.
At June 30, 1996, the Bank had four (4) lending relationships exceeding
$750,000 secured primarily by multi-family and commercial real estate
properties. At June 30, 1996, the foregoing loans were performing in accordance
with their loan repayment terms.
Loan Portfolio Composition. The following table presents the composition
of the Bank's loan portfolios in dollar amounts and in percentages (before
deductions for loans in process, deferred fees and discounts and allowances for
losses) as of the dates indicated.
<TABLE>
<CAPTION>
June 30,
------------------------------------
1996 1995
----------------- -----------------
Amount Percent Amount Percent
-------- ------- -------- -------
(Dollars in Thousands)
Real Estate Loans:
------------------
<S> <C> <C> <C> <C>
One-to four-family..................... $49,015 65.3 $38,337 67.4%
Multi-family........................... 11,589 15.4 7,118 12.5
Commercial............................. 8,184 10.9 6,946 12.2
Construction and land.................. 3,721 5.0 3,222 5.7
------- ----- ------- -----
Total real estate loans............ 72,509 96.6 55,623 97.8
------- ----- ------- -----
Other Loans:
------------
Consumer Loans:
Deposit account....................... 42 .1 96 .2
Automobile............................ 669 .9 412 .7
Home equity line of credit............ 274 .3 41 .1
Home improvement...................... 7 --- 6 ---
Other................................. 296 .4 133 .2
------- ----- ------- -----
Total consumer loans............... 1,288 1.7 688 1.2
Commercial business/1/................ 1,297 1.7 561 1.0
------- ----- ------- -----
Total other loans.................. 2,585 3.4 1,249 2.2
------- ----- ------- -----
Total loans........................ 75,094 100.0% 56,872 100.0%
===== =====
Less:
-----
Loans in process....................... 2,473 1,308
Deferred fees and discounts............ 207 165
Allowance for losses................... 641 400
------- -------
Total loans receivable, net............ $71,773 $54,999
======= =======
</TABLE>
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/1/Includes commercial leases totaling $437,000 at June 30, 1996.
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The following table shows the composition of the Bank's loan portfolios
by fixed- and adjustable-rate at the dates indicated.
<TABLE>
<CAPTION>
June 30,
--------
1996 1995
---------------- ----------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
Fixed-Rate Loans:
-----------------
<S> <C> <C> <C> <C>
Real estate:
One- to four-family.............. $22,568 30.1% $15,288 26.9%
Multi-family..................... 1,236 1.6 862 1.5
Commercial....................... 1,174 1.6 1,043 1.8
Construction and land............ 3,469 4.7 19 .1
------- ----- ------- -----
Total fixed-rate real
estate loans................. 28,447 38.0 17,212 30.3
Non-real estate:
Consumer......................... 1,014 1.3 647 1.1
Commercial business.............. 695 .9 286 .5
------- ----- ------- -----
Total fixed-rate loans......... 30,156 40.2 18,145 31.9
------- ----- ------- -----
Adjustable-Rate Loans:
----------------------
Real estate:
One- to four-family.............. 26,447 35.2 23,049 40.5
Multi-family..................... 10,353 13.8 6,256 11.0
Commercial....................... 7,010 9.3 5,903 10.4
Construction and land............ 252 .3 3,203 5.6
------- ----- ------- -----
Total adjustable-rate
real estate loans............. 44,062 58.6 38,411 67.5
Non-real estate:
Home equity line of credit....... 274 .4 41 .1
Commercial business.............. 602 .8 275 .5
------- ----- ------- -----
Total adjustable-rate loans.... 44,938 59.8 38,727 68.1
------- ----- ------- -----
Total loans.................... 75,094 100.0% 56,872 100.0%
===== =====
Less:
-----
Loans in process.................. 2,473 1,308
Deferred fees and discounts....... 207 165
Allowance for loan losses......... 641 400
------- -------
Total loans receivable, net.... $71,773 $54,999
======= =======
</TABLE>
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The following table illustrates the interest rate sensitivity of the Bank's
loan portfolio at June 30, 1996. Mortgages which have adjustable or
renegotiable interest rates are shown as maturing in the period during which the
contract is due. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
-----------
One- to Multi-family Construction/(1)/ Commercial
four-family and Commercial and Land Consumer Business Total
----------- -------------- ----------------- -------- ---------- -----
Amount Amount Amount Amount Amount Amount
-------- -------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Due During Years Ending
June 30,
1997..................... $ 368 $ --- $ 3,219 $ 244 $ 113 $ 3,944
1998..................... 186 442 100 225 46 999
1999..................... 327 137 150 184 333 1,131
2000 and 2001............ 1,672 288 18 353 509 2,840
2002 to 2006............. 7,127 11,309 --- 282 122 18,840
2007 to 2011............. 10,674 3,858 9 --- 25 14,566
2011 and thereafter...... 28,661 3,739 225 --- 149 32,774
</TABLE>
- - -------------------------------
/(1)/Assumes the term during the construction phase.
At June 30, 1996 the total amount of loans due after June 30, 1997 which
had fixed interest rates was $26.2 million, while the total amount of loans due
after such dates which had floating or adjustable interest rates was $44.9
million.
One- to Four-Family Residential Mortgage Lending. Residential loan
originations are generated by the Bank's marketing efforts, its present
customers, walk-in customers and referrals from real estate brokers and
builders. The Bank has focused its lending efforts primarily on the origination
of loans secured by first mortgages on owner-occupied, single-family residences
in its market area. At June 30, 1996, the Bank's one- to four-family
residential mortgage loans totaled $49.0 million, or 65.3%, of the Bank's loan
portfolio.
The Bank currently makes adjustable-rate one- to four-family residential
mortgage loans in amounts of up to 90% of the lesser of the appraised value or
selling price of the security property. For loans with loan-to-value ratios of
greater than 80%, the Bank typically requires private mortgage insurance to
reduce the Bank's exposure to 70% of the appraised value or selling price of the
security property.
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The Bank currently offers one-year, three-year and five-year ARM loans at
rates determined in accordance with market and competitive factors for a term of
up to 30 years. The interest rate charged on adjustable-rate mortgage loans
currently originated by the Bank is based upon the one year, three year and five
year Treasury Constant Maturity rate. The adjustable-rate loans currently
originated by the Bank provide for a 1% to 3% annual cap and floor, and a 5% to
6% lifetime cap on the interest rate over the rate in effect on the date of
origination. The annual and lifetime caps on increases in interest rates reduce
the extent to which these loans can help protect the Bank against interest rate
risk. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Asset/Liability Management" in the Annual Report.
Approximately 46.2% of the loans secured by one- to four-family real estate
originated by the Bank during fiscal 1996 were originated with adjustable-rates
of interest. See "- Originations, Purchases and Sales of Loans and Mortgage-
Backed Securities."
Adjustable-rate loans decrease the risks associated with changes in
interest rates but involve other risks, primarily because as interest rates
rise, the payment by the borrower rises to the extent permitted by the terms of
the loan, thereby increasing the potential for default. At the same time, the
marketability of the underlying property may be adversely affected by higher
interest rates. The Bank believes that these risks have not had a material
adverse effect on the Bank to date.
The Bank also originates fixed-rate mortgage loans. These fixed-rate loans
currently originated by the Bank have terms of up to 30 years. Interest rates
charged on these fixed-rate loans are competitively priced according to local
market conditions.
In underwriting residential real estate loans, the Bank evaluates both the
borrower's ability to make monthly payments, employment history, credit history
and the value of the property securing the loan. Potential borrowers are
qualified for fixed-rate loans based upon the initial or stated rate of the
loan. Borrowers on adjustable-rate loans are currently qualified at the fully
indexed rate. However, in the past, the Bank qualified borrowers at the initial
rate.
An appraisal or evaluation report of the security property from Board-
approved appraisers is obtained on all mortgage loan applications. In
connection with origination of residential real
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estate loans, the Bank generally requires that the borrower obtain an opinion
from an attorney regarding the title to the property and fire and casualty
insurance to protect the Bank's interest.
In addition, in order to supplement loan demand in the Bank's primary
market area, the Bank has purchased whole loans secured by one- to four-family
real estate located in Iowa, Texas, Colorado, Utah, and Wisconsin originated by
financial institutions and mortgage companies. Generally the loans purchased by
the Bank over the last 2 years are being serviced by the Bank. The potential
risks associated with out of area lending include the lack of control over loan
servicing when loans are serviced by others and the inability to closely monitor
and inspect the property. In order to mitigate these risks, the Bank only
purchases loans that meet its underwriting standards used in originating loans
in its market area.
During fiscal 1996, the Bank purchased 68 loans secured by one- to four-
family real estate totalling $8.5 million; substantially all of which were
located in the States of Iowa and Wisconsin. Of this $8.5 million in purchased
one- to four-family loans, $1.2 million were sold to other financial
institutions. At June 30, 1996, approximately $7.5 million, or 15.3% of the
Bank's one- to four-family residential mortgage loan portfolio was purchased by
the Bank. See "- Originations, Purchases and Sales of Loans and Mortgage-Backed
Securities."
The Bank's residential mortgage loans customarily include due-on-sale
clauses giving the Bank the right to declare the loan immediately due and
payable in the event, among other things, the borrower sells or otherwise
disposes of the property subject to the mortgage and the loan is not repaid. The
Bank on occasion has enforced due-on-sale clauses in its mortgage contracts for
the purpose of increasing its loan portfolio yield. The yield increase is
obtained through the authorization of assumptions of existing loans at higher
rates of interest and the imposition of assumption fees. One- to four-family
real estate loans may be assumed provided home buyers meet the Bank's
underwriting standards and the loan terms are modified, to the extent necessary,
to conform with the Bank's present yield and maturity requirements.
Construction and Land Lending. The Bank also originates and purchases
construction loans for the construction of one- to four-family, multi-family and
commercial real estate, and loans secured
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by land. At June 30, 1996, the Bank's construction and land loan portfolio
totaled $3.7 million.
Construction loans to individuals for their residences are structured
to be converted to permanent loans at the end of the construction phase, which
typically runs up to 12 months. These construction loans have rates and terms
which match any one- to four-family loans then offered by the Bank, except that
during the construction phase, the borrower pays interest only. Residential
construction loans are generally underwritten pursuant to the same guidelines
used for originating permanent residential loans.
Construction loans are obtained principally through continued business
from individuals who have previously borrowed from the Bank, as well as
referrals from existing customers and walk-in customers. The application
process includes a submission to the Bank of accurate plans, specifications and
costs of the project to be constructed/developed. These items are used as a
basis to determine the appraised value of the subject property. Loans are
limited to a percentage of the lesser of current appraised value and/or the cost
of construction (land plus building).
In addition, the Bank has originated and purchased construction loans for
the construction of multi-family and commercial properties located in its market
area and the Madison and Milwaukee, Wisconsin area. Construction loans on
commercial real estate projects may be secured by strip shopping centers,
apartments, small office building, churches or other property and are structured
to be converted to permanent loans at the end of the construction phase, which
generally runs up to 12 months. These construction loans have rates and terms
which match the permanent non-residential real estate loans then offered by the
Bank, except that during the construction phase, the borrower pays interest
only. These loans generally provide for the payment of interest and loan fees
from loan proceeds. At June 30, 1996, the Bank had $786,000 of outstanding loans
for the construction of commercial and multi-family buildings. See "Multi-Family
Commercial Real Estate Lending" and "Originations, Purchases and Sales of Loans
and Mortgage-Backed Securities."
No construction loan is approved unless there is evidence of a commitment
for permanent financing upon completion of the property, whether through the
Bank or another financial institution.
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Because of the uncertainties inherent in estimating construction costs, it
is relatively difficult to evaluate accurately the total loan funds required to
complete a project. Also, the funding of loan fees and interest during the
construction phase makes the monitoring of the progress of the project
particularly important, as customary early warning signals of project
difficulties may not be present.
To a very limited extent, the Bank originates or purchases loans secured by
raw land in its market area and in the Madison, Wisconsin area. Such loans carry
fixed and adjustable rates and terms of one to ten years. At June 30, 1996,
there was $502,000 in outstanding loans secured by raw land.
Multi-Family/Commercial Real Estate Lending. The Bank has purchased whole
loans and participation interests in loans originated by other lenders and, to a
limited extent, has originated loans secured by multi-family and commercial real
estate. At June 30, 1996, the Bank had $19.8 million in multi-family and
commercial real estate loans, representing 26.3% of the bank's loan portfolio.
In the past, the Bank purchased whole loans and interests in loans secured
by multi-family and commercial real estate from financial institutions and
mortgage companies located throughout the United States. Approximately 75.2% of
the property securing the Bank's multi-family and commercial real estate loan
portfolio is located outside the State of Iowa. Many of these properties
securing these purchased loans and participations are located in Texas,
Colorado, Wisconsin and Utah. Some of these areas have experienced adverse
economic conditions, including a general softening in the real estate markets
and local economies, which resulted in increased delinquencies and loan losses
during prior years. However, many of the Bank's multi-family and commercial real
estate loans are now seasoned. During the 1993, 1994, and 1995 fiscal years, the
Bank had no significant delinquencies in this portfolio. In the current fiscal
year, the Bank has experienced several delinquencies in its Wisconsin
multifamily and commercial real estate portfolio. See discussion under "Asset
Quality" herein.
On October 5, 1995, the Bank entered into an exclusive agreement effective
November 1, 1995 ("Agreement") with Bache Funding Corp. of Wisconsin ("Bache"),
a mortgage banking firm headquartered in Madison, Wisconsin. Under the
Agreement, the Bank
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has a right of first refusal on any real estate loans generated by Bache,
including one-to-four family, multi-family, commercial real estate, and land
development loans secured by properties located primarily in the Madison,
Wisconsin metropolitan area. The Bank anticipates that it will sell majority
participation interests in these loans to financial institutions located in Iowa
and contiguous states. The Bank has had experience with Bache originated loans
prior to November 1995. During fiscal 1994 and 1995, the Bank purchased
participation interests totalling approximately $8.8 million in Bache originated
loans from another financial institution.
Since entering into the Agreement with Bache, the Bank purchased $6.0
million one-to-four family, $8.1 million multi-family, $2.1 million commercial,
and $1.0 million residential land development loans from Bache. The dollar
volume of loans for the purpose of land development is not expected to be a
material percentage of Bache originations in future periods. Of the $17.2
million in one-to-four family, commercial, multi-family, and land development
loans purchased from Bache during the period November 1, 1995 through June 30,
1996, $9.3 million in participation interests were sold to other financial
institutions with the Bank retaining the servicing. It is the Bank's policy to
only purchase loans that meet its underwriting standards used in originating
loans in its market area and to perform periodic site inspections.
The table below sets forth by type of security property of the Bank's
multi-family and commercial real estate loans (including construction loans) at
June 30, 1996.
<TABLE>
<CAPTION>
Outstanding Amount
Number of Principal Non-Performing
Loans Balance or of Concern
--------- ----------- --------------
(Dollars in Thousands)
<S> <C> <C> <C>
Office Buildings and
business facilities................... 36 $ 7,733 $ 488
Multi-family............................. 44 11,856 751
Hotel/Motel.............................. 2 971 ---
--- ------- ------
Total commercial and multi-family
real estate loans/(1)/.............. 82 $20,560 $1,239
</TABLE> === ======= ======
- - ------------
/(1)/ Includes $786,000 of multi-family and commercial real estate construction
loans.
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Multi-family and commercial real estate loans originated by the Bank
generally have terms ranging from 10 to 25 years and up to 30-year amortization
schedules. Rates on such loans generally either (i) adjust (subject, in some
cases, to specified interest rate caps) at one, three and five year intervals to
specified spreads over an index, (ii) float (subject, in some cases, to
specified interest rate caps) with changes in a specified prime rate or (iii)
carry fixed rates. Under the Bank's current loan policy, multi-family and
commercial real estate loans (other than loans to facilitate) are written in
amounts of up to 75% of the appraised value of the properties.
Appraisals on properties securing multi-family and commercial real estate
property loans originated by the Bank are performed by an independent appraiser
approved by the Bank at the time the loan is made. All appraisals on multi-
family and commercial real estate loans are reviewed by the Bank's management.
In addition, the Bank's underwriting procedures generally require verification
of the borrower's credit history, income and financial statements, banking
relationships and income projections for the property. Personal guarantees are
generally obtained for all or a portion of most of the Bank's multi-family and
commercial real estate loans. While the Bank continues to monitor multi-family
and commercial real estate loans on a regular basis after origination, updated
appraisals are not normally obtained after closing unless the Bank believes that
there are questions regarding the progress of the loan or the value of the
collateral.
Multi-family and commercial real estate lending affords the Bank an
opportunity to receive interest at rates higher than those generally available
from one- to four-family residential lending. Nevertheless, loans secured by
such properties are generally larger and involve a greater degree of risk than
one- to four-family residential mortgage loans. Because payments on loans
secured by multi-family and commercial real estate properties are often
dependent on the successful operation or management of the properties, repayment
of such loans may be subject to adverse conditions in the real estate market or
the economy. If the cash flow from the project is reduced (for example, if
leases are not obtained or renewed), the borrower's ability to repay the loan
may be impaired. The Bank has attempted to minimize these risks through its
underwriting standards and by lending primarily on existing income-producing
properties.
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<PAGE>
Consumer Lending. Consumer loans generally have shorter terms to maturity
(thus reducing Grinnell Federal's exposure to changes in interest rates) and
carry higher rates of interest than do one- to four-family residential mortgage
loans. In addition, management believes that the offering of consumer loan
products helps to expand and create stronger ties to its existing customer base,
by increasing the number of customer relationships and providing cross-marketing
opportunities. At June 30, 1996, the Bank's consumer loan portfolio totaled
$1.3 million, or 1.7%, of its loan portfolio. Under applicable federal law, the
Bank is authorized to invest up to 35% of its assets in consumer loans.
Grinnell Federal offers a variety of secured consumer loans, including home
improvement loans, home equity line of credit loans, auto loans, mobile home
loans and loans secured by savings deposits and other consumer collateral. The
Bank also offers a limited amount of unsecured loans. The Bank currently
originates substantially all of its consumer loans in its market area. Consumer
loan terms vary according to the type of collateral, length of contract and
creditworthiness of the borrower. The Bank's consumer loans generally have a
fixed-rate of interest.
The Bank does not originate any consumer loans on an indirect basis (i.e.,
where loan contracts are purchased from retailers of goods or services which
have extended credit to their customers).
The underwriting standards employed by the Bank for consumer loans include
a determination of the applicant's payment history on other debts and an
assessment of the ability to meet existing obligations and payments on the
proposed loan. Although creditworthiness of the applicant is a primary
consideration, the underwriting process also includes a comparison of the value
of the security, if any, in relation to the proposed loan amount.
Consumer loans may entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured, such as checking
account overdraft privilege loans, or are secured by rapidly depreciable assets,
such as automobiles. In such cases, any repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment of the outstanding
loan balance as a result of the greater likelihood of damage, loss or
depreciation. In addition, consumer loan collections are dependent on the
borrower's continuing financial stability and thus are more likely to be
affected by adverse personal circumstances. Furthermore, the application of
various
14
<PAGE>
federal and state laws, including bankruptcy and insolvency laws, may limit the
amount which can be recovered on such loans. Although the level of delinquencies
in the Bank's consumer loan portfolio has generally been low (at June 30, 1996,
two consumer loans totalling $1,400 were 60 days or more delinquent), there can
be no assurance that delinquencies will not increase in the future.
Commercial Business Lending. Federally chartered savings institutions,
such as Grinnell Federal, are authorized to make secured or unsecured loans and
issue letters of credit for commercial, corporate, business and agricultural
purposes and to engage in commercial leasing activities, up to a maximum of 10%
of total assets.
At June 30, 1996, Grinnell Federal had $1.3 million in commercial business
loans outstanding, representing 1.7% of the Bank's total loan portfolio, with no
additional commercial business loan commitments. Included in the $1.3 million
in commercial business loans, were $437,000 in commercial equipment leases.
These leases are currently non-performing. Payments on the leases were
suspended in March 1996 when the seller/servicer filed bankruptcy. See "Non-
Performing Assets". In addition, at June 30, 1996, Grinnell Federal had no
letters of credit outstanding.
Most of the Bank's commercial business loans have terms to maturity of 10
years or less and fixed or adjustable interest rates. The Bank's loan policy
provides that commercial loans may not exceed $100,000, without prior Board
approval.
Unlike residential mortgage loans, which generally are made on the basis of
the borrower's ability to make repayment from his or her employment and other
income, and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans are of higher risk and typically
are made on the basis of the borrower's ability to make repayment from the cash
flow of the borrower's business. As a result, the availability of funds for the
repayment of commercial business loans may be dependent upon the success of the
business itself (which, in turn, is likely to be dependent upon the general
economic environment). The Bank's commercial business loans almost always
include personal guarantees and are usually, but not always, secured by business
assets, such as accounts receivable, equipment
15
<PAGE>
and inventory as well as real estate. However, the collateral securing the
loans may depreciate over time, may be difficult to appraise and may fluctuate
in value based on the success of the business.
The Bank recognizes the generally increased risks associated with
commercial business lending. Grinnell Federal's commercial business lending
policy emphasizes credit file documentation and analysis of the borrower's
character, management capabilities, capacity to repay the loan, the adequacy of
the borrower's capital and collateral as well as an evaluation of the industry
conditions affecting the borrower. Analysis of the borrower's past, present and
future cash flows is also an important aspect of Grinnell Federal's credit
analysis.
Originations, Purchases and Sales of Loans and Mortgage-Backed Securities
The Bank originates real estate loans through marketing efforts, the Bank's
customer base, walk-in customers and referrals from real estate brokers. The
Bank originates both adjustable-rate and fixed-rate loans. Its ability to
originate loans is dependent upon the relative demand for fixed-rate or ARM
loans in the origination market, which is affected by the term structure (short
term compared to long term) of interest rates, as well as, the current and
expected future level of interest rates and competition.
Historically, the Bank has purchased loans and loan participations for one-
to four-family, multi-family and commercial real estate loans. Such purchases
have enabled Grinnell Federal to offset the relatively low level of loan demand
in the Bank's principal market area, to take advantage of favorable lending
opportunities in other markets, to diversify its portfolio and to limit
origination expenses while generally providing the Bank with a higher yield than
was available on mortgage-backed securities. During fiscal 1994, the Bank
purchased loans from two Iowa-based financial institutions secured by one- to
four-family and multi-family real estate located in the Des Moines, Iowa
metropolitan area and the Madison and Milwaukee, Wisconsin areas, respectively.
During fiscal 1996, 1995 and 1994, the Bank purchased $5.7 million, $11.8
million and $10.1 million, respectively, of loans pursuant to these agreements.
16
<PAGE>
In addition, during fiscal 1996, the Bank entered into an agreement with
Bache Funding, Inc.("Bache"), a mortgage banking firm headquartered in Madison,
Wisconsin giving the Bank the right of first refusal on any real estate loans
generated by Bache, including one-to-four family, multi-family, commercial real
estate, and land development loans secured by properties located primarily in
the Madison, Wisconsin metropolitan area. The Bank has sold and plans to
continue to sell majority participation interests in these loans to financial
institutions located in Iowa and contiguous states. Since entering into this
agreement, the Bank purchased $6.0 million one-to-four family, $8.1 million
multi-family, $2.1 million commercial, and $1.0 million residential land
development loans. Of the $17.2 million in one-to-four family, commercial,
multi-family, and land development loans purchased from Bache during the period
November 1, 1995 through June 30, 1996, $9.3 million in participation interests
were sold to other financial institutions with the Bank retaining the servicing.
See "Multi-Family/Commercial Real Estate Lending".
The Bank has underwritten its loan purchases utilizing the same criteria it
uses in originating loans. Prior to November 1995, servicing of purchased
multi-family and commercial real estate loans was generally done by the seller.
At June 30, 1996, approximately $16.7 million of Grinnell Federal's loan
portfolio was serviced by others. One- to four-family real estate loans
purchased by the Bank during the past two years and all loans purchased from
Bache are serviced by the Bank.
In addition, the Bank has purchased mortgage-backed securities in the past
to supplement loan demand. During fiscal 1995 and 1996, however, the Bank did
not purchase any mortgage-backed securities. The mortgage-backed securities
purchased in the past generally had fixed rates and maturities of seven to 30
years. See "Investment Activities."
17
<PAGE>
The following table shows the loan origination, purchase and repayment
activities of the Bank for the periods indicated.
<TABLE>
<CAPTION>
Year Ended
---------------------
June 30,
---------------------
1996 1995
---------- ----------
(In Thousands)
<S> <C> <C>
Originations by type
- - --------------------
Adjustable-rate:
Real estate - one- to four-family................ $ 5,441 $ 2,101
- multi-family....................... --- 55
- commercial......................... 163 15
Non-real estate - consumer....................... --- 47
- commercial business............ 202 284
------- -------
Total adjustable-rate..................... 5,806 2,502
------- -------
Fixed-rate:
Real estate - one- to four-family................ 6,336 3,227
- multi-family....................... --- ---
- commercial......................... 548 322
Non-real estate - consumer....................... 1,422 740
- commercial business............ 518 283
------- -------
Total fixed-rate.......................... 8,824 4,572
------- -------
Total loans originated.................... 14,630 7,074
------- -------
Purchases
- - ---------
Real Estate - one- to four-family/(1)/........... 8,472 5,621
- multi-family/(2)/.................. 10,829 3,496
- commercial and land/(3)/........... 3,589 2,635
------- -------
Total loans purchased..................... 22,890 11,752
Mortgage-backed securities....................... --- ---
------- -------
Total loans and mortgage-backed
securities purchased................... 22,890 11,752
------- -------
Sales
- - -----
Real Estate - one- to four-family................ 1,211 ---
multi-family....................... 6,245 ---
commercial and land................ 1,843 ---
------- -------
Total Sales............................... 9,299 ---
</TABLE>
-------------------
/(1)/ Includes $2.4 million of loans for the construction of one- to four-family
residences.
/(2)/ Includes $266,000 of loans for the construction of multi-family real
estate.
/(3)/ Includes $520,000 of loans for the construction of commercial buildings.
18
<PAGE>
Asset Quality
General. When a borrower fails to make a required payment on a loan, the
Bank attempts to cause the delinquency to be cured by contacting the borrower.
In the case of loans secured by real estate, a late notice is sent by the 10th
of the month if payment for the prior month is not received. If the delinquency
is not cured by the 15th of the month, contact with the borrower is made by
phone. Additional written and verbal contacts are made with the borrower to the
extent necessary. If the delinquency is not cured or a payment plan arranged
by the 60th day, the Bank will send a second late notice followed by additional
phone contacts and meetings with the borrower. If the delinquency is not cured
by the 90th day, a 35-day default letter is sent and, once that period lapses,
appropriate action to foreclose on the property is initiated. Interest income
on loans at this point is reduced by the full amount of accrued and uncollected
interest. If foreclosed, the property is sold at a sheriff's sale and may be
purchased by the Bank. Delinquent consumer loans are handled in a similar
manner. If these efforts fail to bring the loan current, appropriate action may
be taken to collect any loan payment that remains delinquent. The Bank's
procedures for repossession and sale of consumer collateral are subject to
various requirements under Iowa consumer protection laws.
Real estate acquired by Grinnell Federal as a result of foreclosure or by
deed in lieu of foreclosure is classified as real estate owned until it is sold.
When property is acquired, it is recorded at the lower of cost or estimated fair
value at the date of acquisition, and any write down resulting therefrom is
charged to the allowance for losses on loans. Upon acquisition, all costs
incurred in maintaining the property are expensed. However, costs relating to
the development and improvement of the property are capitalized to the extent of
net realizable value.
Non-Performing Assets. The table below sets forth the amounts and
categories of non-performing assets in the Bank's loan portfolio. Loans are
placed on non-accrual status when the collection of principal and/or interest
become doubtful (Generally when loans are past due 90 days or more). For all
years presented, the Bank has had no troubled debt restructurings (which involve
forgiving a portion of interest or principal on any loans or making loans at a
rate materially less than that of market rates). Foreclosed assets include
assets acquired in settlement of loans and reflect the lower of cost or fair
value less selling expense.
19
<PAGE>
<TABLE>
<CAPTION>
June 30,
-------------------
1996 1995
-------- --------
(Dollars in
Thousands)
<S> <C> <C>
Non-accruing loans:
One- to four-family.......................... $ 298 $ 6
Non-mortgage commercial loans................ 437 8
Foreclosed assets:
Commercial real estate....................... 227 ---
------ -----
Total non-performing assets.................... $ 962 $ 14
====== =====
Total as a percentage of total assets.......... 1.15% .02%
====== =====
</TABLE>
Total non-performing assets (defined as non-accruing loans for which
payments have been due and uncollected for a period in excess of 90 days plus
foreclosed assets) increased $948,000 to $962,000, or 1.15% of total assets at
June 30, 1996, from $14,000, or 0.02% of total assets at June 30, 1995. This
increase reflects the addition of a $286,000 single family home loan in Houston,
Texas, a $227,000 commercial real estate parcel in the Madison, Wisconsin
metropolitan area and a $437,000 package of equipment leases owned by the Bank.
The commercial real estate parcel consists of a combination retail and four (4)
unit apartment located in Madison, Wisconsin. A lake lot provides additional
collateral. The collateral property was placed in judgement in April 1996.
Management expects no loss on disposition of the property as the borrower has
accepted a purchase offer which is expected to result in a full payoff by
September 30, 1996. The referenced equipment leases were sold and serviced by
Bennett Funding Group and its affiliates (the "Bennett Group"), certain of which
companies have been charged by the Securities and Exchange Commission with,
among other things, the illegal sale of fictitious equipment leases. On April 1,
1996, the Bennett Group filed for Chapter 11 Bankruptcy, resulting in the
suspension of payments on the Bank's leases. On June 27, 1996, the Company
learned that approximately half of the leases may have been pledged more than
once, thus raising a question as to the priority of the Bank's security
interest. Based on the facts available at this time and the Bank's level of
provisions for loan losses, management does not currently expect these events to
have a material adverse effect on the Company's earnings or financial condition.
This conclusion, however, may be altered by future developments in this matter.
Write-downs of this
20
<PAGE>
asset may be necessary, though the size of any such write-downs cannot be
predicted with accuracy at this time.
For the fiscal year ended June 30, 1996, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $16,200. No interest was included in interest
income on such loans for the fiscal year ended June 30, 1996.
Other Assets of Concern. In addition, at June 30, 1996, other assets of
concern totaled $1.5 million and included eleven loans totaling $231,000 secured
by single-family residences, one loan totaling $234,000 secured by commercial
real estate located in Colorado, one loan totaling $254,000 secured by
commercial real estate located in Grinnell, Iowa, which was paid off in August
1996, and three loans totaling $751,000 secured by multi-family real estate
located in Madison, Wisconsin. While these loans raise concerns as to timely
collectibility, based upon information currently available, management does not
anticipate any material loss on these assets.
Management has considered non-performing assets and loans of concern in
establishing the Bank's allowance for loan losses.
Classified Assets. Federal regulations provide for the classification of
loans and other assets, such as debt and equity securities considered by the OTS
to be of lesser quality, as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.
When an insured institution classifies problem assets as either substandard
or doubtful, it may establish general allowances
21
<PAGE>
for loan losses in an amount deemed prudent by management. General allowances
represent loss allowances which have been established to recognize the inherent
risk associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When an insured
institution classifies problem assets as "loss," it is required either to
establish a specific allowance for losses equal to 100% of that portion of the
asset so classified or to charge-off such amount. An institution's
determination as to the classification of its assets and the amount of its
valuation allowances is subject to review by the regulatory authorities, who may
order the establishment of additional general or specific loss allowances.
In connection with the filing of its periodic reports with the OTS and in
accordance with its classification of assets policy, the Bank regularly reviews
problem loans and real estate acquired through foreclosure in its portfolio to
determine whether such assets require classification in accordance with
applicable regulations. Classified assets of the Bank at June 30, 1996, all of
which are included in the table of non-performing assets above or are described
under the caption "- Other Loans of Concern" above, were as follows:
<TABLE>
<CAPTION>
June 30,
-------------------
1996 1995
-------- --------
<S> <C> <C>
(In Thousands)
Special mention................... $ 714 $ 340
Substandard....................... 1,789 78
Doubtful.......................... --- ---
Loss.............................. --- ---
------- ------
Total classified assets and
assets requiring special
mention........................ $ 2,503 $ 418
======= ======
</TABLE>
Classified assets appearing in the table above are included in the non-
performing assets table or discussed under the caption "Other Loans of Concern."
The specific reserves established with respect to assets classified as "loss"
are included in the allowance for real estate acquired through foreclosure or as
a reduction in the book value of the real estate.
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on
22
<PAGE>
management's evaluation of the risk inherent in its loan portfolio and changes
in the nature and volume of its loan activity. Such evaluation, which includes a
review of all loans for which full collectibility may not be reasonably assured,
considers among other matters, the estimated fair value of the underlying
collateral, economic conditions, historical loan loss experience and other
factors that warrant recognition in providing for an adequate loan allowance.
Future adjustments to the allowance may be necessary, and net income could be
significantly affected if circumstances differ substantially from the
assumptions used in making the initial determinations. At June 30, 1996, the
Bank had an allowance for loan losses of $641,000.
The Bank had $249,000 in additions to its allowance for loan losses in
fiscal 1996 as compared to no additions in fiscal 1995 due to the increased
levels of non-performing assets and the increased balance of the loan portfolio.
The following table sets forth an analysis of the Bank's allowance for loan
losses.
<TABLE>
<CAPTION>
At June 30,
--------------
1996 1995
---- ----
(Dollars in
Thousands)
<S> <C> <C>
Balance at beginning of period.................. $400 $400
Total Chargeoffs................................ 8 ---
Recoveries:
Real Estate:
Multi-family.................................. --- ---
----- -----
Net charge-offs................................. 8 ---
Additions (reductions) charged (credited) to
operations.................................... 249 ---
----- -----
Balance at end of period........................ $641 $400
===== =====
Ratio of net charge-offs (recoveries) during
the period to average loans outstanding
during the period............................. .01% (---)%
===== =====
Ratio of net charge-offs (recoveries)
during the period to average
non-performing assets......................... 2.81% (---)%
</TABLE> ===== =====
23
<PAGE>
The distribution of the Bank's allowance for loan losses at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
June 30,
----------------------------------------
1996 1995
------------------- -------------------
Percent Percent
of Loans of Loans
in Each in Each
Category Category
to Total to Total
Amount Loans Amount Loans
-------- ---------- -------- ----------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Real Estate:
One- to four-family..... $ 72 65.3% $ 63 67.4%
Multi-family and
commercial............. 241 26.3 146 24.7
Construction............ 31 5.0 21 5.7
Consumer................ 18 1.7 7 1.2
Commercial business..... 119 1.7 6 1.0
Unallocated............. 160 --- 157 ---
----- ----- ----- -----
Total............... $ 641 100.0% $ 400 100.0%
===== ===== ===== =====
</TABLE>
Investment Activities
General. Grinnell Federal must maintain minimum levels of investments that
qualify as liquid assets under OTS regulations. Liquidity may increase or
decrease depending upon the availability of funds and comparative yields on
investments in relation to the return on loans. Historically, the Bank has
maintained liquid assets at levels above the minimum requirements imposed by the
OTS regulations and at levels believed adequate to meet the requirements of
normal operations, including repayments of maturing debt and potential deposit
outflows. Cash flow projections are regularly reviewed and updated to assure
that adequate liquidity is maintained. At June 30, 1996, the Bank's liquidity
ratio (liquid assets as a percentage of net withdrawable savings deposits and
current borrowings) was 6.7%. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
in the Annual Report and "Regulation - Liquidity."
Federally chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
24
<PAGE>
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally chartered savings institution is otherwise
authorized to make directly.
Generally, the investment policy of the Company and the Bank is to invest
funds among various categories of investments and maturities based upon their
liquidity needs, asset/liability management policies, investment quality and
marketability and performance objectives.
Securities. At June 30, 1996, Company's interest-bearing deposits with
banks totaled $2.0 million, or 2.4% of total assets, and its investment
securities totaled $3.3 million, or 4.0% of total assets. As of such date, the
Bank also had a $1.2 million investment in FHLB stock, satisfying its
requirement for membership in the FHLB of Des Moines. It is the general policy
of the Bank to purchase investment securities which are U.S. Government
securities or federal agency obligations or other issues, such as municipal
bonds, that are rated investment grade. At June 30, 1996, the average term to
maturity or repricing of the securities portfolio was 4.6 years.
In June 1993, the Financial Accounting Standards Board ("FASB") adopted the
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"). SFAS 115 addresses the
accounting and reporting for investments in equity securities that have readily
determinable fair values and for all investments in debt securities. Such
investments should be classified in three categories and accounted for as
follows: (i) debt securities that the entity has the positive intent and
ability to hold to maturity are to be classified as held to maturity and
reported at amortized cost; (ii) debt and equity securities that are held for
current resale are to be classified as trading securities and reported at fair
value, with unrealized gains and losses included in earnings; and (iii) debt and
equity securities not classified as either securities held to maturity or
trading securities are to be classified as securities available for sale and
reported at fair value, with unrealized gains and losses excluded from earnings
and reported as a separate component of shareholders' equity. Management adopted
SFAS 115 effective July 1, 1994.
25
<PAGE>
At June 30, 1996, the Company held no securities for trading purposes,
but did have $757,000 in mutual funds and $916,000 in corporate stock, all
of which are held as available for sale and are carried at the lower of
cost or market value. The following table sets forth the composition of the
Company's securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
June 30,
----------------------------------
1996 1995
---------------- ----------------
Carrying % of Carrying % of
Value Total Value Total
-------- ------ -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Investment Securities:
U.S. Agency Securities............ $1,497 33.9% $1,552 22.5%
U.S. Government Securities........ --- --- --- ---
Certificates of Deposit........... 85 1.9 --- ---
Corporate stock/(1)/.............. 916 20.8 907 13.1
Mutual Funds/(1)/................. 757 17.1 1,814 27.1
Municipal Securities/(1)/......... --- --- 1,749 25.3
------ ----- ------ -----
Subtotal....................... $3,255 73.7 6,078 88.0
FHLB Stock........................ 1,159 26.3 832 12.0
------ ----- ------ -----
Total Investment Securities
and FHLB Stock.................... $4,414 100.0% $6,910 100.0%
====== ====== ====== ======
Average remaining life or
term to repricing of
securities and other
interest-earning assets,
excluding FHLB stock and
other marketable equity
securities.......................... 4.6 yrs 3.1 yrs
Other Interest-Earning Assets:
Interest-earning deposits
with banks........................ $2,049 $4,007
====== ======
</TABLE>
-------------------
/(1)/Classified as securities available for sale. All other securities are
classified as held to maturity.
26
<PAGE>
The composition and maturities of securities portfolio, excluding FHLB
stock and equity securities, are indicated in the following table.
<TABLE>
<CAPTION>
June 30, 1996
-------------------------------------------
Less Than 1 to 5 Over 5 to Over Total Investment
1 Year Years 10 Years 10 Years Securities
------ ----- -------- -------- ----------
Carrying Carrying Carrying Carrying Carrying Market
Value Value Value Value Value Value
----- ----- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. agency securities $ --- $1,497 $ --- $ --- $1,497 $1,472
Certificate of Deposit 85 -- --- --- 85 85
----- ------ --------- -------- ------ ------
Total Securities $ 85 $1,497 $ --- $ --- $1,582 $1,557
Weighted average yield 6.30% 6.53% ---% ---% 6.52% 6.52%
===== ====== ========= ======== ====== ======
</TABLE>
At June 30, 1996 the Company's securities portfolio did not contain
securities of any issuer with an aggregate book value in excess of 10% of the
Company's stockholders' equity, excluding securities issued by the United States
Government or its agencies.
The Company's securities portfolio is managed in accordance with a written
investment policy adopted by the Board of Directors. Investments may be made by
the Company's officers within specified limits and must be approved in advance
by the Board of Directors for transactions over certain limits.
Mortgage-Backed Securities. Grinnell Federal has in the past purchased
mortgage-backed securities in order to supplement loan demand in its market
area. Although such securities are held for investment, they can serve as
collateral for borrowings and, through repayments, as a source for liquidity.
The Bank did not purchase any mortgage-backed securities during fiscal 1996. At
June 30, 1996, the Company's mortgage-backed securities totaled $3.4 million.
The following table sets forth the contractual maturities of the Company's
mortgage-backed securities at June 30, 1996.
<TABLE>
<CAPTION>
June 30, 1996
Less than 1 to 5 5 to 10 Over 10 Balance
1 Year Years Years Years Outstanding
--------- ------ ------- ------- -------------
<S> <C> <C> <C> <C> <C>
Federal Home Loan Mortgage
Corporation.................. $ --- $ 742 $ 44 $ 127 $ 913
Government National Mortgage
Association.................. --- --- --- 2,522 2,522
------ ------ ------ ------ ------
Total...................... $ --- $ 742 $ 44 $2,649 $3,435
====== ====== ====== ====== ======
</TABLE>
27
<PAGE>
For information regarding the carrying and market values of the Company's
mortgage-backed securities portfolio, see Note 2 of the Notes to Consolidated
Financial Statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Financial Condition" in the Annual Report.
Under the OTS's risk-based capital requirements, Government National
Mortgage Association ("GNMA") mortgage-backed securities have a zero percent
risk weighting and Federal National Mortgage Association ("FNMA"), Federal Home
Loan Mortgage Corporation ("FHLMC") and AA-rated mortgage-backed securities have
a 20% risk weighting, in contrast to the 50% risk weighting carried by one- to
four-family performing residential mortgage loans.
Sources of Funds
General. The Company's primary sources of funds are: deposits,
amortization and repayment of loan principal (including mortgage-backed
securities); sales or maturities of investment securities, mortgage-backed
securities and short-term investments; FHLB advances; and funds provided from
operations.
Borrowings are used to compensate for seasonal reductions in deposits or
deposit inflows at less than projected levels, and to support lending
activities. At June 30, 1996, the only borrowings outstanding were FHLB
advances totalling $19.3 million. See "- Borrowings" and Note 7 of the Notes to
Consolidated Financial Statements in the Annual Report.
Deposits. Grinnell Federal offers a variety of deposit accounts having a
wide range of interest rates and terms. The Bank's deposits include savings
accounts, money market savings accounts, NOW, money market checking and regular
checking accounts, and certificate accounts with terms of 3 to 60 months. The
Bank relies primarily on advertising, competitive pricing policies and customer
service to attract and retain these deposits. Grinnell Federal solicits
deposits from its market area only and does not use brokers to obtain deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates and
competition. The variety of deposit accounts offered by the Bank has allowed it
to be competitive in obtaining funds and to respond with flexibility to changes
in consumer demand. The Bank has become more susceptible to short-term
28
<PAGE>
fluctuations in deposit flows as customers have become more interest rate
conscious. The Bank manages the pricing of its deposits in keeping with its
asset/liability management and profitability objectives. Based on its
experience, the Bank believes that its savings, NOW and non-interest-bearing
checking accounts are relatively stable sources of deposits. However, the
ability of the Bank to attract and maintain certificates of deposit, and the
rates paid on these deposits, has been and will continue to be significantly
affected by market conditions.
29
<PAGE>
The following table sets forth the dollar amount of savings deposits
in the various types of deposit programs offered by the Bank for the dates
indicated and the rates offered.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------
1996 1995
--------------------- --------------------
Percent Percent
Amount of Total Amount of Total
-------- --------- ------- ---------
(Dollars in Thousands)
Transactions and Savings Deposits:
- - ---------------------------------
<S> <C> <C> <C> <C>
Savings Accounts (2.50-2.50%)........................ $ 4,192 7.89% $ 3,513 7.62%
NOW Accounts (2.00-5.14%)............................ 3,626 6.83 1,482 3.22
Money Market Savings (3.25-5.51%).................... 5,948 11.20 2,468 5.35
Non-interest bearing checking........................ 1,026 1.93 555 1.21
------- ------ ------- ------
Total Non-Certificates............................... 14,792 27.85 8,018 17.40
------- ------ ------- ------
Certificates:
- - ------------
3.00 - 3.99%....................................... 164 .31 779 1.69
4.00 - 5.99%....................................... 27,392 51.56 20,574 44.65
6.00 - 7.99%....................................... 10,774 20.28 16,699 36.24
8.00 - 9.99%....................................... --- --- 12 .02
10.00 - 11.99%....................................... --- --- --- ---
12.00% and over...................................... --- --- --- ---
------- ------ ------- ------
Total Certificates................................... 38,330 72.15 38,064 82.60
------- ------ ------- ------
Total Deposits....................................... $53,122 100.00% $46,082 100.00%
======= ====== ======= ======
</TABLE>
The following table sets forth the savings flows at the Bank during
the periods indicated. Net increase refers to the amount of deposits during
a period less the amount of withdrawals during the period.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------
1996 1995
---------- ----------
(Dollars in Thousands)
<S> <C> <C>
Opening balance................ $ 46,082 $ 42,016
Deposits....................... 108,377 63,028
Withdrawals.................... (103,249) (60,452)
Interest credited.............. 1,912 1,490
--------- --------
Ending balance................. $ 53,122 $ 46,082
========= ========
Net increase (decrease)........ $ 7,040 $ 4,066
========= ========
Percent increase (decrease).... 15.3% 9.68%
========= ========
</TABLE>
30
<PAGE>
The following table indicates the amount of the Bank's certificates of
deposit by time remaining until maturity as of June 30, 1996.
<TABLE>
<CAPTION>
Maturity
-------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
-------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
(In Thousands)
Certificates of deposit
less than $100,000........... $6,210 $3,903 $11,327 $13,077 $34,517
Certificates of deposit of
$100,000 or more............. 103 513 1,085 1,709 3,410
Public funds/(1)/............. --- 403 --- --- 403
------ ------ ------- ------- -------
Total certificates of
deposit...................... $6,313 $4,819 $12,412 $14,786 $38,330
====== ====== ======= ======= =======
</TABLE>
- - -------------------
/(1)/ Deposits from governmental and other public entities.
Borrowings. Although deposits are the Bank's primary source of funds, the
Bank's policy has been to utilize borrowings when they are a less costly source
of funds or can be invested at a positive rate of return. In addition, the
Bank has relied upon borrowings for short-term liquidity needs.
Grinnell Federal may obtain advances from the FHLB of Des Moines upon the
security of its capital stock in the FHLB of Des Moines and certain of its
mortgage loans and mortgage-backed securities. Such advances may be made
pursuant to several different credit programs, each of which has its own
interest rate and range of maturities.
The following table sets forth the maximum month-end balance and average
balance of FHLB advances for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------
1996 1995
---------- --------
(In Thousands)
<S> <C> <C>
Maximum Balance:
---------------
FHLB advances.................. $22,749 $14,578
Average Balance:
---------------
FHLB advances.................. $18,711 $ 8,851
</TABLE>
The following table sets forth certain information as to the Bank's FHLB
advances at the dates indicated.
<TABLE>
<CAPTION>
June 30,
----------------------
1996 1995
---------- ----------
(Dollars in
Thousands)
<S> <C> <C>
FHLB advances .................................. $19,318 $14,578
Weighted average interest
rate of FHLB advances ......................... 5.98% 6.34%
</TABLE>
31
<PAGE>
Service Corporation Activities
Federal associations generally may invest up to 2% of their assets in
service corporations, plus an additional 1% of assets if for community purposes.
In addition, federal associations may invest up to 50% of their regulatory
capital in conforming loans to their service corporations. In addition to
investments in service corporations, federal associations are permitted to
invest an unlimited amount in operating subsidiaries engaged solely in
activities which a federal association may engage in directly.
Grinnell Federal has one service corporation, Grinnell Service Corporation,
Inc. ("GSCI"), located in Grinnell, Iowa. GSCI was organized by the Bank in
1970 in order to purchase land located in Grinnell, Iowa for development of
single-family building sites. Due to low demand for such land, GSCI experienced
losses of $30,000 and $83,000 for fiscal years ended June 30, 1993 and 1992,
respectively. As a result, the Bank determined to discontinue the development
activities engaged in by its service corporation. During fiscal 1994, GSCI
completed the sale of its remaining lots for a gain of $34,000. GSCI has not
engaged in any real estate development or other substantive activities since
June 30, 1994.
Regulation
General. Grinnell Federal is a federally chartered savings bank, the
deposits of which are federally insured and backed by the full faith and credit
of the United States Government. Accordingly, the Bank is subject to broad
federal regulation and oversight extending to all its operations. The Bank is a
member of the FHLB of Des Moines and is subject to certain limited regulation by
the Board of Governors of the Federal Reserve (the "Federal Reserve Board"). As
the savings and loan holding company of the Bank, the Company also is subject to
federal regulation and oversight. The Bank is a member of the Savings
Association Insurance Fund (the "SAIF") and the deposits of the Bank are insured
by the FDIC. As a result, the FDIC has certain regulatory and examination
authority over the Bank.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this Form 10-KSB.
Federal Regulation of Savings Associations. The OTS has extensive
authority over the operations of savings associations. As part of this
authority, the Bank is required to file periodic
32
<PAGE>
reports with the OTS and is subject to periodic examinations by the OTS and the
FDIC. The last regular OTS and FDIC examinations of Grinnell Federal were as of
May 1996 and May 1991, respectively. When these examinations are conducted by
the OTS and the FDIC, the examiners may require the Bank to provide for higher
general or specific loan loss reserves. All savings associations are subject to
a semi-annual assessment, based upon the savings association's total assets, to
fund the operations of the OTS. The Bank's OTS assessment for the fiscal year
ended June 30, 1996, was $23,173.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Bank and the Company.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of the Bank is
prescribed by federal laws and it is prohibited from engaging in any activities
not permitted by such laws. For instance, no savings institution may invest in
non-investment grade corporate debt securities. In addition, the permissible
level of investment by federal associations in loans secured by non-residential
real property may not exceed 400% of total capital, except with approval of the
OTS. Federal savings associations are also generally authorized to branch
nationwide. The Bank is in compliance with the noted restrictions.
The Bank's general permissible lending limit for loans-to-one-borrower is
equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus).
At June 30, 1996, the Bank's lending limit under this restriction was $1.4
million. At June 30, 1996, the Bank had no loans in excess of this limit. The
Bank is in compliance with the loans-to-one-borrower limitation.
33
<PAGE>
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on matters such as loan
underwriting and documentation, internal controls and audit systems, interest
rate risk exposure and compensation and other employee benefits. Any
institution which fails to comply with these standards must submit a compliance
plan. A failure to submit a plan or to comply with an approved plan will
subject the institution to further enforcement action.
Insurance of Accounts and Regulation by the FDIC. The Bank is a member of
the SAIF, which is administered by the FDIC. Deposits are insured up to
applicable limits by the FDIC. As insurer, the FDIC imposes deposit insurance
premiums and is authorized to conduct examinations of and to require reporting
by FDIC-insured institutions. It also may prohibit any FDIC-insured institution
from engaging in any activity the FDIC determines by regulation or order to pose
a serious risk to the FDIC. The FDIC also has the authority to initiate
enforcement actions against savings associations, after giving the OTS an
opportunity to take such action, and may terminate the deposit insurance if it
determines that the institution has engaged in unsafe or unsound practices, or
is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-
based system under which all insured depository institutions are placed into one
of nine categories and assessed insurance premiums, ranging from .23% to .31% of
deposits, based upon their level of capital and supervisory evaluation. Under
the system, institutions classified as well capitalized (i.e., a core capital
ratio of at least 5%, a ratio of Tier 1 or core capital to risk-weighted assets
("Tier 1 risk-based capital") of at least 6% and a risk-based capital ratio of
at least 10%) and considered healthy pay the lowest premium while institutions
that are less than adequately capitalized (i.e., core or Tier 1 risk-based
capital ratios of less than 4% or a risk-based capital ratio of less than 8%)
and considered of substantial supervisory concern pay the highest premium. Risk
classification of all insured institutions will be made by the FDIC for each
semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semiannual basis,
if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated
34
<PAGE>
reserve level, or such higher reserve ratio as established by the FDIC. The FDIC
may also impose special assessments on SAIF members to repay amounts borrowed
from the United States Treasury or for any other reason deemed necessary by the
FDIC.
As is the case with the SAIF, the FDIC is authorized to adjust the
insurance premium rates for banks that are insured by the Bank Insurance Fund
(the "BIF") of the FDIC in order to maintain the reserve ratio of the BIF at
1.25% of BIF insured deposits. The FDIC has revised the premium schedule for
BIF insured institutions to provide a range of .04% to .31% of deposits. As a
result, such institutions generally pay lower premiums than SAIF-insured
institutions and thus have a competitive advantage over SAIF-insured
institutions such as Grinnell Federal. The revisions became effective in the
third quarter of 1995. Subsequently, the BIF assessment rate has been lowered
to the statutory minimum of $2,000 per year.
The SAIF is not expected to attain the designated reserve ratio until the
year 2002 due to the shrinking deposit base for SAIF assessments and the
requirement that SAIF premiums be used to make the interest payments on bonds
issued by the Financing Corporation ("FICO") in order to finance the costs of
resolving thrift failures in the 1980s. As a result, SAIF members will
generally be subject to higher deposit insurance premiums than BIF members
until, all things being equal, the SAIF attains the required reserve ratio.
The effect of this disparity on the Bank and other SAIF members is
uncertain at this time. It may have the effect of permitting BIF insured
institutions to offer loan and deposit products on more attractive terms than
SAIF members due to the cost savings achieved through lower deposit premiums,
thereby placing SAIF members at a competitive disadvantage. The House of
Representatives and the Senate of the United States provided for a resolution of
the recapitalization of the SAIF in the Balanced Budget Act of 1995 (the
"Reconciliation Bill") which was vetoed by the President in December 1995 for
reasons unrelated to the recapitalization of the SAIF. The Reconciliation Bill
provided that all SAIF member institutions would pay a special assessment
recently estimated to be a one-time charge of 0.85% of the Company's total SAIF-
assessable deposits as of June 30, 1996, or approximately $284,000 after tax.
Such special assessment would be in addition to the Company's annual deposit
insurance premium. However, it is anticipated that after the recapitalization
of the
35
<PAGE>
SAIF, the premiums of SAIF-insured institutions would be reduced to a level
comparable to those currently being assessed BIF-insured commercial banks. A
balanced budget bill subsequently was enacted and signed by the President in
April 1996. That bill did not provide for the recapitalization of the SAIF, and
there can be no assurance whether the SAIF will be recapitalized, whether the
premium disparity between SAIF and BIF insured institutions will be reduced or
eliminated or whether a special assessment will be charged. There can be no
assurance that any particular proposal will be implemented or that premiums for
either BIF or SAIF members will not be adjusted in the future by the FDIC or by
legislative action. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operation" in the Annual
Report.
Regulatory Capital Requirements. Federally insured savings associations,
such as the Bank, are required to maintain a minimum level of regulatory
capital. The OTS has established capital standards, including a tangible
capital requirement, a leverage ratio (or core capital) requirement and a risk-
based capital requirement applicable to such savings associations. These
capital requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations on a case-
by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. At June 30, 1996, the Bank did not have any intangible assets.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of
36
<PAGE>
ownership. For excludable subsidiaries, the debt and equity investments in such
subsidiaries are deducted from assets and capital. All subsidiaries of the Bank
are includable subsidiaries.
At June 30, 1996, the Bank had tangible capital of $8.4 million, or 10.2%
of adjusted total assets, which is approximately $7.1 million above the minimum
requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings association must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio. At June 30, 1996, the
Bank had no intangibles which were subject to these tests.
At June 30, 1996, the Bank had core capital equal to $8.4 million, or 10.2%
of adjusted total assets, which is $5.9 million above the minimum leverage ratio
requirement of 3% as in effect on that date.
The OTS risk-based requirement requires savings associations to have total
capital of at least 8% of risk-weighted assets. Total capital consists of core
capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be
used to satisfy the risk-based requirement only to the extent of core capital.
The OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At June 30, 1996, the Bank had no
capital instruments that qualify as supplementary capital and $586,000 of
general loss reserves, which was 1.25% of risk-weighted assets.
Certain exclusions from capital and assets are required to be made for the
purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in
37
<PAGE>
excess of an 80% loan-to-value ratio and reciprocal holdings of qualifying
capital instruments. The Bank had a no exclusion from capital and assets at June
30, 1996.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, will be multiplied by a risk weight, ranging
from 0% to 100%, based on the risk inherent in the type of asset. For example,
the OTS has assigned a risk weight of 50% for prudently underwritten permanent
one- to four-family first lien mortgage loans not more than 90 days delinquent
and having a loan to value ratio of not more than 80% at origination unless
insured to such ratio by an insurer approved by the FNMA or FHLMC.
The OTS has adopted a final rule that requires every savings association
with more than normal interest rate risk exposure to deduct from its total
capital, for purposes of determining compliance with such requirement, an amount
equal to 50% of its interest-rate risk exposure multiplied by the present value
of its assets. This exposure is a measure of the potential decline in the net
portfolio value (the "NPV") of a savings association, greater than 2% of the
present value of its assets, based upon a hypothetical 200 basis point increase
or decrease in interest rates (whichever results in a greater decline). NPV is
the present value of expected cash flows from assets, liabilities and off-
balance sheet contracts. The rule provides for a two quarter lag between
calculating interest rate risk and recognizing any deduction from capital. The
rule will not become effective until the OTS evaluates the process by which
savings associations may appeal an interest rate risk deduction determination.
It is uncertain as to when this evaluation may be completed. Any savings
association with less than $300 million in assets and a total capital ratio in
excess of 12% is exempt from this requirement unless the OTS determines
otherwise. The Bank meets the criteria for an exemption from this requirement
and has not been advised by the OTS that it is otherwise subject to this rule.
On June 30, 1996, the Bank had total capital of $9.0 million (including
$8.4 million in core capital and $586,000 in qualifying supplementary capital)
and risk-weighted assets of $46.8 million (the Bank had no converted off-balance
sheet assets), or total capital of 19.2% of risk-weighted assets. This amount
was $5.2 million above the 8% requirement in effect on that date.
38
<PAGE>
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1 risked-
based capital ratio or an 8% risk-based capital ratio). Any such association
must submit a capital restoration plan and until such plan is approved by the
OTS may not increase its assets, acquire another institution, establish a branch
or engage in any new activities, and generally may not make capital
distributions. The OTS is authorized to impose the additional restrictions that
are applicable to significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or is
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios
of less than 3% or a risk-based capital ratio of less than 6%) must be made
subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized association is also
subject to the general enforcement authority of the OTS and the FDIC, including
the appointment of a conservator or a receiver.
The OTS is also generally authorized to reclassify an association into a
lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
39
<PAGE>
The imposition by the OTS or the FDIC of any of these measures on the
Company or the Bank may have a substantial adverse effect on the Company's
operations and profitability. Company shareholders do not have preemptive
rights, and therefore, if the Company is directed by the OTS or the FDIC to
issue additional shares of Common Stock, such issuance may result in the
dilution in the percentage of ownership of the Company.
Limitations on Dividends and Other Capital Distributions. OTS regulations
impose various restrictions or requirements on associations with respect to
their ability to pay dividends or make other distributions of capital. OTS
regulations prohibit an association from declaring or paying any dividends or
from repurchasing any of its stock if, as a result, the regulatory capital of
the association would be reduced below the amount required to be maintained for
the liquidation account established in connection with its mutual to stock
conversion.
The OTS utilizes a three-tiered approach to permit associations, based on
their capital level and supervisory condition, to make capital distributions
which include dividends, stock redemptions or repurchases, cash-out mergers and
other transactions charged to the capital account. See "- Regulatory Capital
Requirements."
Generally, Tier 1 associations, which are associations that before and
after the proposed distribution meet their fully phased-in capital requirements,
may make capital distributions during any calendar year equal to the greater of
100% of net income for the year-to-date plus 50% of the amount by which the
lesser of the association's tangible, core or risk-based capital exceeds its
fully phased-in capital requirement for such capital component, as measured at
the beginning of the calendar year, or the amount authorized for a Tier 2
association. However, a Tier 1 association deemed to be in need of more than
normal supervision by the OTS may be downgraded to a Tier 2 or Tier 3
association as a result of such a determination. The Bank meets the requirements
for a Tier 1 association and has not been notified of a need for more than
normal supervision. Tier 2 associations, which are associations that before and
after the proposed distribution meet their current minimum capital requirements,
may make capital distributions of up to 75% of net income over the most recent
four-quarter period.
40
<PAGE>
Tier 3 associations (which are associations that do not meet current
minimum capital requirements) that propose to make any capital distribution and
Tier 2 associations that propose to make a capital distribution in excess of the
noted safe harbor level must obtain OTS approval prior to making such
distribution. Tier 2 associations proposing to make a capital distribution
within the safe harbor provisions and Tier 1 associations proposing to make any
capital distribution need only submit written notice to the OTS 30 days prior to
such distribution. As a subsidiary of the Company, the Bank is required to give
the OTS 30 days' notice prior to declaring any dividend on its stock. The OTS
may object to the distribution during that 30-day period based on safety and
soundness concerns. See "- Regulatory Capital Requirements."
Liquidity. All savings associations, including the Bank, are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. This liquid asset ratio requirement may
vary from time to time (between 4% and 10%) depending upon economic conditions
and savings flows of all savings associations. At the present time, the minimum
liquid asset ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain time deposits,
certain bankers acceptances and short-term United States Treasury obligations)
currently must constitute at least 1% of the association's average daily balance
of net withdrawable deposit accounts and current borrowings. Penalties may be
imposed upon associations for violations of either liquid asset ratio
requirement. At June 30, 1996, the Bank was in compliance with both
requirements, with an overall liquid asset ratio of 6.7% and a short-term liquid
assets ratio of 3.9%.
Accounting. An OTS policy statement applicable to all savings associations
clarifies and re-emphasizes that the investment activities of a savings
association must be in compliance with approved and documented investment
policies and strategies, and must be accounted for in accordance with GAAP.
Under the policy statement, management must support its classification of and
accounting for loans and securities (i.e., whether held for investment, sale or
trading) with appropriate documentation. The Bank is in compliance with these
amended rules.
41
<PAGE>
The OTS has adopted an amendment to its accounting regulations, which may
be made more stringent than GAAP by the OTS, to require that transactions be
reported in a manner that best reflects their underlying economic substance and
inherent risk and that financial reports must incorporate any other accounting
regulations or orders prescribed by the OTS.
Qualified Thrift Lender Test. All savings associations, including the
Bank, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. Such assets primarily consist of
residential housing related loans and investments. At June 30, 1996, the Bank
met the test and has always met the test since its effectiveness.
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "- Holding Company Regulation."
Community Reinvestment Act. Under the Community Reinvestment Act ("CRA"),
every FDIC insured institution has a continuing and affirmative obligation
consistent with safe and sound banking practices to help meet the credit needs
of its entire community, including low and moderate income neighborhoods. The
CRA does not establish specific lending requirements or programs for financial
42
<PAGE>
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the OTS, in connection
with the examination of the Bank, to assess the institution's record of meeting
the credit needs of its community and to take such record into account in its
evaluation of certain applications, such as a merger or the establishment of a
branch, by the Bank. An unsatisfactory rating may be used as the basis for the
denial of an application by the OTS.
The federal banking agencies, including the OTS, have recently revised the
CRA regulations and the methodology for determining an institution's compliance
with the CRA. Due to the heightened attention being given to the CRA in the
past few years, the Bank may be required to devote additional funds for
investment and lending in its local community. The Bank was examined for CRA
compliance in September 1994 and received a rating of satisfactory.
Transactions with Affiliates. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on terms
as favorable to the association as transactions with non-affiliates. In
addition, certain of these transactions, such as loans to an affiliate, are
restricted to a percentage of the association's capital. Affiliates of the Bank
include the Company and any company which is under common control with the Bank.
In addition, a savings association may not lend to affiliates engaged in
activities not permissible for a bank holding company or acquire the securities
of most affiliates. The Bank's subsidiaries are not deemed affiliates.
However, the OTS has the discretion to treat subsidiaries of savings
associations as affiliates on a case-by-case basis.
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
Holding Company Regulation. The Company is a unitary savings and loan
holding company subject to regulatory oversight by the OTS. As such, the
Company is registered and files reports with the OTS and is subject to
regulation and examination by the OTS. In
43
<PAGE>
addition, the OTS has enforcement authority over the Company and its non-savings
association subsidiaries which also permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
association.
As a unitary savings and loan holding company, the Company generally is not
subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of the Company and any of its
subsidiaries (other than the Bank or any other SAIF-insured savings association)
would become subject to such restrictions unless such other associations each
qualify as a QTL and were acquired in a supervisory acquisition.
If the Bank fails the QTL test, the Company must obtain the approval of the
OTS prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure the Company must register as and will become subject to
the restrictions applicable to bank holding companies. The activities
authorized for a bank holding company are more limited than are the activities
authorized for a unitary or multiple savings and loan holding company. See "-
Qualified Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control of
any other SAIF-insured association. Such acquisitions are generally prohibited
if they result in a multiple savings and loan holding company controlling
savings associations in more than one state. However, such interstate
acquisitions are permitted based on specific state authorization or in a
supervisory acquisition of a failing savings association.
Federal Securities Law. The stock of the Company is registered with the
SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
The Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Exchange Act.
44
<PAGE>
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At June 30, 1996, the Bank was in compliance with these
reserve requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve Board may be used to satisfy liquidity
requirements that may be imposed by the OTS. See "- Liquidity."
Savings associations are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve Board regulations require associations to
exhaust other reasonable alternative sources of funds, including FHLB
borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System. The Bank is a member of the FHLB of Des
Moines, which is one of 12 regional FHLBs ("FHLB System"), that administers the
home financing credit function of savings associations. Each FHLB serves as a
reserve or central bank for its members within its assigned region. It is
funded primarily from proceeds derived from the sale of consolidated obligations
of the FHLB System. It makes loans to members (i.e., advances) in accordance
with policies and procedures established by the board of directors of the FHLB,
which are subject to the oversight of the Federal Housing Finance Board. All
advances from the FHLB are required to be fully secured by sufficient collateral
as determined by the FHLB. In addition, all long-term advances are required to
provide funds for residential home financing.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Des Moines. At June 30, 1996, the Bank had $1.2 million in FHLB stock,
which was in compliance with this requirement. In past years, the Bank has
received substantial dividends on its FHLB stock. For the fiscal year ended
June 30, 1996, dividends paid by the FHLB of Des Moines to the Bank totaled
45
<PAGE>
$75,000, which constitutes a $10,000 decrease over the amount of dividends
received in the fiscal year ended June 30, 1995.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately-priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.
Change in Control Regulations. Federal law provides that no company
"directly or indirectly or acting in concert with one or more persons, or
through one or more subsidiaries, or through one or more transactions," may
acquire "control" of a savings association at any time without the prior
approval of the OTS. In addition, federal regulations require that, prior to
obtaining control of a savings association, a person, other than a company, must
give 60 days' prior notice to the OTS and have received no OTS objection to such
acquisition of control. Any company that acquires such control becomes a
"savings and loan holding company" subject to registration, examination and
regulation as a savings and loan holding company. Under federal law (as well as
the regulations referred to below) the term "savings association" includes state
and federally chartered SAIF-insured institutions and federally chartered Banks
whose accounts are insured by the FDIC's BIF and holding companies thereof.
Control, as defined under federal law, means ownership, control of or
holding irrevocable proxies representing more than 25% of any class of voting
stock, control in any manner of the election of a majority of the savings
association's directors, or a determination by the OTS that the acquiror has the
power to direct, or directly or indirectly to exercise a controlling influence
over, the management or policies of the institution. Acquisition of more than
10% of any class of a savings association's voting stock, if the acquiror also
is subject to any one of eight "control factors," constitutes a rebuttable
determination of control under the regulations. Such control factors include
the acquiror being one of the two largest stockholders. The determination of
control may be rebutted by
46
<PAGE>
submission to the OTS, prior to the acquisition of stock or the occurrence of
any other circumstances giving rise to such determination, of a statement
setting forth facts and circumstances which would support a finding that no
control relationship will exist and containing certain undertakings. The
regulations provide that persons or companies which acquire beneficial ownership
exceeding 10% or more of any class of a savings association's stock must file
with the OTS a certification that the holder is not in control of such
institution, is not subject to a rebuttable determination of control and will
take no action which would result in a determination or rebuttable determination
of control without prior notice to or approval of the OTS, as applicable.
Federal and State Taxation
Federal Taxation. Savings associations such as the Bank that meet certain
definitional tests relating to the composition of assets and other conditions
prescribed by the Internal Revenue Code of 1986, as amended (the "Code"), are
permitted to establish reserves for bad debts and to make annual additions
thereto which may, within specified formula limits, be taken as a deduction in
computing taxable income for federal income tax purposes. The amount of the bad
debt reserve deduction for "non-qualifying loans" is computed under the
experience method. The amount of the bad debt reserve deduction for "qualifying
real property loans" (generally loans secured by improved real estate) may be
computed under either the experience method or the percentage of taxable income
method (based on an annual election).
Under the experience method, the bad debt reserve deduction is an amount
determined under a formula based generally upon the bad debts actually sustained
by the savings association over a period of years.
The percentage of specially computed taxable income that is used to compute
a savings association's bad debt reserve deduction under the percentage of
taxable income method (the "percentage bad debt deduction") is 8%. The
percentage bad debt deduction thus computed is reduced by the amount permitted
as a deduction for non-qualifying loans under the experience method.
Legislation that is effective for tax years beginning after December 31,
1995 requires savings associations to recapture into taxable income the portion
of the tax loan reserve that exceeds the 1987 tax loan loss reserve.
Approximately $90,000 of the Banks tax
47
<PAGE>
loan loss reserve at June 30, 1996 were post 1987 loan loss reserves that will
be subject to this provision. A deferred tax liability has been recorded by the
Bank for this item. The Bank will no longer be allowed to use the reserve method
for tax loan loss provisions, but would be allowed to use either the experience
method or the specific charge-off method of accounting for bad debts.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax. Net operating losses can offset no more than
90% of alternative minimum taxable income. For taxable years beginning after
1986 and before 1996, corporations, including savings associations such as the
Bank, are also subject to an environmental tax equal to 0.12% of the excess of
alternative minimum taxable income for the taxable year (determined without
regard to net operating losses and the deduction for the environmental tax) over
$2.0 million.
To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses).
The Company and its subsidiaries file consolidated federal income tax
returns on a fiscal year basis using the accrual method of accounting. Savings
associations, such as the Bank, that file federal income tax returns as part of
a consolidated group are required by applicable Treasury regulations to reduce
their taxable income for purposes of computing the percentage bad debt deduction
for losses attributable to activities of the non-savings association members of
the consolidated group that are functionally related to the activities of the
savings association member.
48
<PAGE>
The Company and its consolidated subsidiaries have not been audited by the
IRS with respect to consolidated federal income tax returns during the past
seven years. In the opinion of management, any examination of still open
returns (including returns of subsidiaries and predecessors of, or entities
merged into, the Company) would not result in a deficiency which could have a
material adverse effect on the financial condition, results of operations or
liquidity of the Company and its consolidated subsidiaries.
Iowa Taxation. The Bank currently files an Iowa franchise tax return, and
the Company and the Bank's service corporation file an Iowa corporation tax
return.
Iowa imposes a franchise tax on the taxable income of both mutual and stock
savings banks. The tax rate is 5%, which may effectively be increased, in
individual cases, by application of a minimum tax provision. Taxable income
under the franchise tax is generally similar to taxable income under the federal
corporate income tax, except that, under the Iowa franchise tax, no deduction is
allowed for Iowa franchise tax payments and taxable income includes interest on
state and municipal obligations. Interest on U.S. obligations is taxable under
the Iowa franchise tax and under the federal corporate income tax.
Taxable income under the Iowa corporate income tax is generally similar to
taxable income under the federal corporate income tax, except that, under the
Iowa tax, no deduction is allowed for Iowa income tax payments; interest from
state and municipal obligations is included in income; interest from U.S.
obligations is excluded from income; and 50% of federal corporate income tax
payments are excluded from income. The Iowa corporate income tax rates range
from 6% to 12% and may be effectively increased, in individual cases, by
application of a minimum tax provision.
Delaware Taxation. As a Delaware holding company, the Company is exempted
from Delaware corporate income tax but is required to file an annual report with
and pay an annual fee to the State of Delaware. The Company is also subject to
an annual franchise tax imposed by the State of Delaware.
49
<PAGE>
Competition
Grinnell Federal faces strong competition, both in originating real estate
and other loans and in attracting deposits. Competition in originating real
estate loans comes primarily from commercial banks. The Bank competes for loans
principally on the basis of the interest rates and loan fees it charges, the
types of loans it originates and the quality of services it provides to
borrowers.
The Bank attracts most of its deposits from Poweshiek County where the
Bank's office is located and parts of Marshall, Jasper, and Iowa, Counties,
Iowa. Competition for those deposits is principally from commercial banks and
credit unions located in the same community. The ability of the Bank to attract
and retain deposits depends on its ability to provide an investment opportunity
that satisfies the requirements of investors as to rate of return, liquidity,
risk and other factors. The Bank competes for these deposits by offering a
variety of deposit accounts at competitive rates and convenient business hours.
Employees
At June 30, 1996, the Bank had a total of 16 full-time and two part-time
employees. The Company's employees are not represented by any collective
bargaining group. Management considers its employee relations to be good.
Item 2. Description of Property
-----------------------
The Bank owns its main office located at 1025 Main Street, Grinnell, Iowa
50112. The total net book value of the Bank's premises and equipment at June
30, 1996, was $234,000.
Item 3. Legal Proceedings
-----------------
The Company and Grinnell Federal are involved from time to time as
plaintiff or defendant in various legal actions arising in the normal course of
its business. While the ultimate outcome of these proceedings cannot be
predicted with certainty, it is the opinion of management, after consultation
with counsel representing the Company and Grinnell Federal in the proceedings,
that the resolution of these proceedings should not have a material effect on
the Company's consolidated financial position or results of operations.
50
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended June 30, 1996.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
---------------------------------------------------------------------
Page 44 of the attached 1996 Annual Report to Stockholders is herein
incorporated by reference.
Item 6. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operation
--------------------------------------------------------------------
Pages 4 through 18 of the attached 1996 Annual Report to Stockholders are
herein incorporated by reference.
Item 7. Financial Statements
--------------------
The following information appearing in the Company's Annual Report to
Stockholders for the year ended June 30, 1996, is incorporated by reference in
this Annual Report on Form 10-KSB as Exhibit 13.
<TABLE>
<CAPTION>
Pages in
Annual Report Section Annual Report
- - --------------------- -------------
<S> <C>
Independent Auditors' Report...................................... 19
Consolidated Balance Sheets as of June 30,
1996 and 1995..................................................... 20
Consolidated Statements of Income for the
Years Ended June 30, 1996, 1995 and 1994.......................... 21
Consolidated Statements of Changes in
Stockholders' Equity for Years Ended
June 30, 1996, 1995 and 1994...................................... 22
Consolidated Statements of Cash Flows for
Years Ended June 30, 1996, 1995 and 1994.......................... 23-24
Notes to Consolidated Financial Statements........................ 25-43
</TABLE>
51
<PAGE>
With the exception of the aforementioned information, the Company's Annual
Report to Stockholders for the year ended June 30, 1996, is not deemed filed as
part of this Annual Report on Form 10-KSB.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
---------------------------------------------------------------
On August 18, 1995, the Company dismissed Vroman, McGowen, Hurst, Clark &
Smith, P.C. ("Vroman McGowen") as their independent auditors. The change of
independent auditors was recommended by the Audit Committee and subsequently
approved by the Board of Directors. There have been no disagreements between
the Company and Vroman McGowen on any matter of accounting principles or
practices, financial statement disclosure or auditing scope of procedure in
connection with the audit of the consolidated financial statements of the
Company for two years ended June 30, 1995 and subsequent interim periods through
August 18, 1995, which, if not resolved to the satisfaction of Vroman McGowen,
would have caused them to make reference to the subject matter of such
disagreements in connection with their report. The reports of Vroman McGowen
on the consolidated financial statements of the Company for the two years ended
June 30, 1995 did not contain an adverse opinion or a disclaimer of opinion and
were not qualified or modified as to uncertainty, audit scope or accounting
principles.
Effective September 15, 1995, the Board of Directors engaged McGladrey &
Pullen, LLP to be its auditors for the 1996 fiscal year, subject to the
ratification of the appointment by the Company's stockholders. The appointment
was ratified at the Annual Meeting of Stockholders held on October 25, 1995.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
------------------------------------------------------------
For information concerning the Board of Directors and executive officers of
the Company, the information contained under the section captioned
"Proposal I -- Election of Directors" in the Company's definitive proxy
statement for the Company's 1996 Annual Meeting of Stockholders (the "Proxy
Statement") is incorporated herein by reference.
52
<PAGE>
Compliance with Section 16(a)
- - -----------------------------
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than 10% of a
registered class of the Company's equity securities, to file with the SEC
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company. Officers, directors and greater
than 10% stockholders are required by SEC regulation to furnish the Company with
copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal years ended June 30, 1996, all Section
16(a) filing requirements applicable to its officers, directors and greater than
10 percent beneficial owners were complied with.
Item 10. Executive Compensation
----------------------
The information contained under the sections captioned "Proposal I --
Election of Directors -- Executive Compensation," "-- Director Compensation,"
and "-- Employment Agreements and Salary Continuation Plan" in the Proxy
Statement is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference to
the section captioned "Voting Securities and Principal Holders thereof" in the
Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by reference to the
sections captioned "Proposal I -- Election of Directors" in the Proxy Statement.
53
<PAGE>
(c) Changes in Control
Management of the Company knows of no arrangements, including any pledge by
any person of securities of the Company, the operation of which may at a
subsequent date result in a change in control of the registrant.
Item 12. Certain Relationships and Related Transactions
----------------------------------------------
The Information required by this item is incorporated herein by reference
to the section captioned "Proposal I -- Election of Directors -- Certain
Transactions" in the Proxy Statement.
Item 13. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
The following is a list of exhibits filed as part of this Annual Report on
Form 10-KSB:
<TABLE>
<CAPTION>
Sequential
Page Number
Where Attached
Exhibits Are
Located in
This
Regulation S-B Form 10-KSB
Exhibit Number Document Report
- - -------------- -------------------------------------- -------------
<C> <S> <C>
3 (a) Articles of Incorporation,
including amendments thereto
(b) By-Laws
4 Instruments defining the rights of
security holders, including
debentures
10 Material Contracts
(a) Employment Contracts between
the Bank and Messrs. Meredith,
Opsal, Nassif and Ms. Rose
(b) 1993 Stock Option and Incentive Plan
(c) Recognition and Retention Plan
(d) Salary Continuation Plan
13 Annual Report to Security Holders
21 Subsidiaries of Registrant
23 Consent of McGladrey & Pullen, LLP
27 Financial Data Schedule
</TABLE>
54
<PAGE>
(b) Reports on Form 8-K
-------------------
On June 24, 1996, the Company filed a press release announcing the
increase in its quarterly cash dividend from $.075 per share to $.10 per share
under a Current Report on Form 8-K. No other reports on Form 8-K were filed
during the three-month period ended June 30, 1996.
55
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GFS BANCORP, INC.
Date: September 25, 1996 /s/ Steven L. Opsal
----------------------------- --------------------------------------
Steven L. Opsal (Duly
Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Steven L. Opsal /s/ LeRoy E. Meredith
- - ------------------------------------ --------------------------------------
Steven L. Opsal, President, LeRoy E. Meredith, Chairman of
Chief Executive Officer and the Board and Director
Director (Principal Executive
Officer)
Date: September 25, 1996 Date: September 25, 1996
------------------------------ -------------------------------
/s/ Theodore Mokricky /s/ David Clay
- - ------------------------------------ --------------------------------------
Theodore Mokricky, Vice David Clay, Director
Chairman of the Board
Date: September 25, 1996 Date: September 25, 1996
------------------------------ -------------------------------
/s/ Thomas M. Groth /s/ Scott A. Jensen
- - ------------------------------------ --------------------------------------
Thomas M. Groth, Director Scott A. Jensen, Director
Date: September 25,1996 Date: September 25, 1996
------------------------------ -------------------------------
/s/ Albert C. Eisenman /s/ Donald H. Howig
- - ------------------------------------ --------------------------------------
Albert C. Eisenman, Director Donald H. Howig, Director
Date: September 25, 1996 Date: September 25, 1996
------------------------------ -------------------------------
/s/ Katherine A. Rose
- - ------------------------------------
Katherine A. Rose, Senior Vice
President and Chief Financial
Officer and Director (Principal
Financial and Accounting Officer)
Date: September 25, 1996
-----------------------------
56
<PAGE>
Index to Exhibits
Sequentially
Numbered Page
Where Attached
Exhibit Exhibits
Number are Located
-------- --------------
3 (a) Articles of Incorporation,
including amendments thereto
(b) By-laws
4 Instruments defining the rights of
security holders, including debentures
10 Material Contracts
(a) Employment Contracts between the
Bank and Messrs. Meredith, Opsal,
Nassif, and Ms. Rose
(b) 1993 Stock Option and Incentive Plan
(c) Recognition and Retention Plan
(d) Salary Continuation Plan
13 Annual Report to Security Holders
21 Subsidiaries of Registrant
23 Consent of McGladrey & Pullen, LLP
27 Financial Data Schedule
<PAGE>
Exhibit 3
(a) Articles of Incorporation, including amendments thereto
(b) By-laws
<PAGE>
CERTIFICATE OF INCORPORATION
OF
GFS BANCORP, INC.
FIRST: The name of the Corporation is GFS Bancorp, Inc. (hereinafter
-----
sometimes referred to as the "Corporation").
SECOND: The address of the registered office of the Corporation in the
------
State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City
of Wilmington, County of New Castle. The name of the registered agent at that
address is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
-----
activity for which a corporation may be organized under the General Corporation
Law of Delaware.
FOURTH:
------
A. The total number of shares of all classes of stock which the
Corporation shall have the authority to issue is two million five hundred
thousand (2,500,000), consisting of:
1. Five hundred thousand (500,000) shares of preferred stock, par
value one cent ($.01) per share (the "Preferred Stock"); and
2. Two million (2,000,000) shares of common stock, par value one
cent ($.01) per share (the "Common Stock").
B. The Board of Directors is hereby expressly authorized, subject to
any limitations prescribed by law, to provide for the issuance of the shares of
Preferred Stock in series, and by filing a certificate pursuant to the
applicable law of the State of Delaware (such certificate being hereinafter
referred to as a "Preferred Stock Designation"), to establish from time to time
the number of shares to be included in each such series, and to fix the
designation, powers, preferences and rights of the shares of each such series
and any qualifications, limitations or restrictions thereof. The number of
authorized shares of the Preferred Stock may be increased or decreased (but not
below the number of shares thereof then outstanding) by the affirmative vote of
the holders of a majority of the Common Stock, without a vote of the holders of
the Preferred Stock, or of any
<PAGE>
series thereof, unless a vote of any such holders is required pursuant to the
terms of any Preferred Stock Designation.
C. 1. Notwithstanding any other provision of this Certificate of
Incorporation, in no event shall any record owner of any outstanding Common
Stock which is beneficially owned, directly or indirectly, by a person who, as
of any record date for the determination of stockholders entitled to vote on any
matter, beneficially owns in excess of 10% of the then-outstanding shares of
Common Stock (the "Limit"), be entitled, or permitted to any vote in respect of
the shares held in excess of the Limit. The number of votes which may be cast by
any record owner by virtue of the provisions hereof in respect of Common Stock
beneficially owned by such person owning shares in excess of the Limit shall be
a number equal to the total number of votes which a single record owner of all
Common Stock owned by such person would be entitled to cast, multiplied by a
fraction, the numerator of which is the number of shares of such class or series
beneficially owned by such person and owned of record by such record owner and
the denominator of which is the total number of shares of Common Stock
beneficially owned by such person owning shares in excess of the Limit.
2. The following definitions shall apply to this Section C of
this Article FOURTH:
(a) An "affiliate" of a specified person shall mean a
person that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with, the person
specified.
(b) "Beneficial ownership" shall be determined pursuant to
Rule 13d-3 of the General Rules and Regulations under the Securities
Exchange Act of 1934 (or any successor rule or statutory provision), or, if
said Rule 13d-3 shall be rescinded and there shall be no successor rule or
statutory provision thereto, pursuant to said Rule 13d-3 as in effect on
the date of incorporation of the Corporation; provided, however, that a
-------- -------
person shall, in any event, also be deemed the "beneficial owner" of any
Common Stock:
(1) which such person or any of its affiliates
beneficially owns, directly or indirectly; or
-2-
<PAGE>
(2) which such person or any of its affiliates has (i)
the right to acquire (whether such right is exercisable immediately or
only after the passage of time), pursuant to any agreement,
arrangement or understanding (but shall not be deemed to be the
beneficial owner of any voting shares solely by reason of an
agreement, contract, or other arrangement with this Corporation to
effect any transaction which is described in any one or more of the
clauses of Section A of Article EIGHTH) or upon the exercise of
conversion rights, exchange rights, warrants, or options or otherwise,
or (ii) sole or shared voting or investment power with respect thereto
pursuant to any agreement, arrangement, understanding, relationship or
otherwise (but shall not be deemed to be the beneficial owner of any
voting shares solely by reason of a revocable proxy granted for a
particular meeting of stockholders, pursuant to a public solicitation
of proxies for such meeting, with respect to shares of which neither
such person nor any such affiliate is otherwise deemed the beneficial
owner); or
(3) which is beneficially owned, directly or indirectly, by any
other person with which such first mentioned person or any of its affiliates
acts as a partnership, limited partnership, syndicate or other group pursuant to
any agreement, arrangement or understanding for the purpose of acquiring,
holding, voting or disposing of any shares of capital stock of this Corporation;
and provided further, however, that (1) no director or officer of this
-------- ------- -------
Corporation (or any affiliate of any such director or officer) shall,
solely by reason of any or all of such directors or officers acting in
their capacities as such, be deemed, for any purposes hereof, to
beneficially own any Common Stock beneficially owned by any other such
director or officer (or any affiliate thereof), and (2) neither any
employee stock ownership or similar plan of this Corporation or any
subsidiary of this Corporation nor any trustee with respect thereto (or any
affiliate of such trustee) shall, solely by reason of such capacity of such
trustee, be deemed, for any purposes hereof, to beneficially own any Common
Stock held under any such plan. For purposes of computing the percentage
beneficial ownership of Common Stock of a person, the outstanding Common
Stock shall include shares deemed owned
-3-
<PAGE>
by such person through application of this subsection but shall not include
any other Common Stock which may be issuable by this Corporation pursuant
to any agreement, or upon exercise of conversion rights, warrants or
options, or otherwise. For all other purposes, the outstanding Common Stock
shall include only Common Stock then outstanding and shall not include any
Common Stock which may be issuable by this Corporation pursuant to any
agreement, or upon the exercise of conversion rights, warrants or options,
or otherwise.
(c) A "person" shall mean any individual, firm,
corporation, or other entity.
(d) The Board of Directors shall have the power to construe
and apply the provisions of this section and to make all determinations
necessary or desirable to implement such provisions, including but not
limited to matters with respect to (1) the number of shares of Common Stock
beneficially owned by any person, (2) whether a person is an affiliate of
another, (3) whether a person has an agreement, arrangement, or
understanding with another as to the matters referred to in the definition
of beneficial ownership, (4) the application of any other definition or
operative provision of this Section to the given facts, or (5) any other
matter relating to the applicability or effect of this Section.
3. The Board of Directors shall have the right to demand that
any person who is reasonably believed to beneficially own Common Stock in excess
of the Limit (or holds of record Common Stock beneficially owned by any person
in excess of the Limit) (a "Holder in Excess") supply the Corporation with
complete information as to (1) the record owner(s) of all shares beneficially
owned by such Holder in Excess, and (2) any other factual matter relating to the
applicability or effect of this section as may reasonably be requested of such
Holder in Excess. The Board of Directors shall further have the right to receive
from any Holder in Excess reimbursement for all expenses incurred by the Board
in connection with its investigation of any matters relating to the
applicability or effect of this section on such Holder in Excess, to the extent
such investigation is deemed appropriate by the Board of Directors as a result
of the Holder in Excess refusing to supply the Corporation with the information
described in the previous sentence.
-4-
<PAGE>
4. Except as otherwise provided by law or expressly provided in
this Section C, the presence, in person or by proxy, of the holders of record of
shares of capital stock of the Corporation entitling the holders thereof to cast
one-third of the votes (after giving effect, if required, to the provisions of
this Section) entitled to be cast by the holders of shares of capital stock of
the Corporation entitled to vote shall constitute a quorum at all meetings of
the stockholders, and every reference in this Certificate of Incorporation to a
majority or other proportion of capital stock (or the holders thereof) for
purposes of determining any quorum requirement or any requirement for
stockholder consent or approval shall be deemed to refer to such majority or
other proportion of the votes (or the holders thereof) then entitled to be cast
in respect of such capital stock.
5. Any constructions, applications, or determinations made by
the Board of Directors, pursuant to this Section in good faith and on the basis
of such information and assistance as was then reasonably available for such
purpose, shall be conclusive and binding upon the Corporation and its
stockholders.
6. In the event any provision (or portion thereof) of this
Section C shall be found to be invalid, prohibited or unenforceable for any
reason, the remaining provisions (or portions thereof) of this Section shall
remain in full force and effect, and shall be construed as if such invalid,
prohibited or unenforceable provision had been stricken herefrom or otherwise
rendered inapplicable, it being the intent of this Corporation and its
stockholders that each such remaining provision (or portion thereof) of this
Section C remain, to the fullest extent permitted by law, applicable and
enforceable as to all stockholders, including stockholders owning an amount of
stock over the Limit, notwithstanding any such finding.
FIFTH: The following provisions are inserted for the management of the
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business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its directors and stockholders:
(a) The business and affairs of the Corporation shall be managed by
or under the direction of the Board of Directors. In addition to the powers
and authority expressly conferred
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upon them by Statute or by this Certificate of Incorporation or the By-laws
of the Corporation, the directors are hereby empowered to exercise all such
powers and do all such acts and things as may be exercised or done by the
Corporation.
(b) The directors of the Corporation need not be elected by written
ballot unless the By-laws so provide.
(c) Subject to the rights of holders of any class or series of
Preferred Stock, any action required or permitted to be taken by the
stockholders of the Corporation must be effected at a duly called annual or
special meeting of stockholders of the Corporation and may not be effected
by any consent in writing by such stockholders.
(d) Subject to the rights of holders of any class or series of
Preferred Stock, special meetings of stockholders of the Corporation may be
called only by the Board of Directors pursuant to a resolution adopted by a
majority of the total number of directors which the Corporation would have
if there were no vacancies on the Board of Directors (the "Whole Board").
(e) Stockholders shall not be permitted to cumulate their votes for
the election of directors.
SIXTH:
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A. The number of directors shall be fixed from time to time
exclusively by the Board of Directors pursuant to a resolution adopted by a
majority of the Whole Board. The directors, other than those who may be elected
by the holders of any class or series of Preferred Stock, shall be divided into
three classes, as nearly equal in number as reasonably possible, with the term
of office of the first class to expire at the conclusion of the first annual
meeting of stockholders, the term of office of the second class to expire at the
conclusion of the annual meeting of stockholders one year thereafter and the
term of office of the third class to expire at the conclusion of the annual
meeting of stockholders two years thereafter, with each director to hold office
until his or her successor shall have been duly elected and qualified. At each
annual meeting of stockholders following such initial classification and
election, directors elected to succeed those directors whose terms expire shall
be elected for a term of office
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to expire at the third succeeding annual meeting of stockholders after their
election, with each director to hold office until his or her successor shall
have been duly elected and qualified.
B. Subject to the rights of the holders of any series of Preferred
Stock then outstanding, newly created directorships resulting from any increase
in the authorized number of directors or any vacancies in the Board of Directors
resulting from death, resignation, retirement, disqualification, removal from
office or other cause may be filled only by a majority vote of the directors
then in office, though less than a quorum, and directors so chosen shall hold
office for a term expiring at the annual meeting of stockholders at which the
term of office of the class to which they have been elected expires, and until
such director's successor shall have been duly elected and qualified. No
decrease in the number of directors constituting the Board of Directors shall
shorten the term of any incumbent director.
C. Advance notice of stockholder nominations for the election of
directors and of business to be brought by stockholders before any meeting of
the stockholders of the Corporation shall be given in the manner provided in the
By-laws of the Corporation.
D. Subject to the rights of the holders of any series of Preferred
Stock then outstanding, any directors, or the entire Board of Directors, may be
removed from office at any time, but only for cause and only by the affirmative
vote of the holders of at least 80% of the voting power of all of the then-
outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors (after giving effect to the provisions of
Article FOURTH of this Certificate of Incorporation), voting together as a
single class.
SEVENTH: The Board of Directors is expressly empowered to adopt, amend or
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repeal the By-laws of the Corporation. Any adoption, amendment or repeal of the
By-laws of the Corporation by the Board of Directors shall require the approval
of a majority of the Whole Board. The stockholders shall also have power to
adopt, amend or repeal the By-laws of the Corporation. In addition to any vote
of the holders of any class or series of stock of this Corporation required by
law or by this Certificate of Incorporation, the affirmative vote of the holders
of at least 80% of the voting power of all of the then-outstanding shares of the
capital stock of the Corporation entitled to vote generally in the
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election of directors (after giving effect to the provisions of Article FOURTH
hereof), voting together as a single class, shall be required to adopt, amend or
repeal any provisions of the By-laws of the Corporation.
EIGHTH:
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A. In addition to any affirmative vote required by law or this
Certificate of Incorporation, and except as otherwise expressly provided in this
Section:
1. any merger or consolidation of the Corporation or any
Subsidiary (as hereinafter defined) with (i) any Interested
Stockholder (as hereinafter defined) or (ii) any other corporation
(whether or not itself an Interested Stockholder) which is, or after
such merger or consolidation would be, an Affiliate (as hereinafter
defined) of an Interested Stockholder; or
2. any sale, lease, exchange, mortgage, pledge, transfer or
other disposition (in one transaction or a series of transactions) to
or with any Interested Stockholder, or any Affiliate of any Interested
Stockholder, of any assets of the Corporation or any Subsidiary having
an aggregate Fair Market Value (as hereafter defined) equaling or
exceeding 25% or more of the combined assets of the Corporation and
its Subsidiaries; or
3. the issuance or transfer by the Corporation or any
Subsidiary (in one transaction or a series of transactions) of any
securities of the Corporation or any Subsidiary to any Interested
Stockholder or any Affiliate of any Interested Stockholder in exchange
for cash, securities or other property (or a combination thereof)
having an aggregate Fair Market Value equaling or exceeding 25% of the
combined assets of the Corporation and its Subsidiaries except
pursuant to an employee benefit plan of the Corporation or any
Subsidiary thereof; or
4. the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation proposed by
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or on behalf of any Interested Stockholder or any Affiliate of any
Interested Stockholder; or
5. any reclassification of securities (including any reverse
stock split), or recapitalization of the Corporation, or any merger or
consolidation of the Corporation with any of its Subsidiaries or any
other transaction (whether or not with or into or otherwise involving
an Interested Stockholder) which has the effect, directly or
indirectly, of increasing the proportionate share of the outstanding
shares of any class of equity or convertible securities of the
Corporation or any Subsidiary which is directly or indirectly owned by
any Interested Stockholder or any Affiliate of any Interested
Stockholder (a "Disproportionate Transaction"); provided, however,
that no such transaction shall be deemed a Disproportionate
Transaction if the increase in the proportionate ownership of the
Interested Stockholder or Affiliate as a result of such transaction is
no greater than the increase experienced by the other stockholders
generally;
shall require the affirmative vote of the holders of at least 80% of the voting
power of the then-outstanding shares of stock of the Corporation entitled to
vote in the election of directors (the "Voting Stock"), voting together as a
single class. Such affirmative vote shall be required notwithstanding the fact
that no vote may be required, or that a lesser percentage may be specified, by
law or by any other provisions of this Certificate of Incorporation or any
Preferred Stock Designation or in any agreement with any national securities
exchange or quotation system or otherwise.
The term "Business Combination" as used in this Article EIGHTH shall mean
any transaction which is referred to in any one or more of paragraphs 1 through
5 of Section A of this Article EIGHTH.
B. The provisions of Section A of this Article EIGHTH shall not be
applicable to any particular Business Combination, and such Business Combination
shall require only the affirmative vote of the majority of the outstanding
shares of capital stock entitled to vote, or such vote as is required by law or
by this Certificate of Incorporation, if, in the case of any Business
Combination that does not involve any cash or other consideration being received
by
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<PAGE>
the stockholders of the Corporation solely in their capacity as stockholders
of the Corporation, the condition specified in the following paragraph 1 is met
or, in the case of any other Business Combination, all of the conditions
specified in either of the following paragraphs 1 and 2 are met:
1. The Business Combination shall have been approved by a
majority of the Disinterested Directors (as hereinafter defined).
2. All of the following conditions shall have been met:
(a) The aggregate amount of the cash and the Fair Market
Value as of the date of the consummation of the Business
Combination of consideration other than cash to be received per
share by the holders of Common Stock in such Business Combination
shall at least be equal to the higher of the following:
I. (if applicable) the Highest Per Share Price,
including any brokerage commissions, transfer taxes and
soliciting dealers' fees, paid by the Interested Stockholder
or any of its Affiliates for any shares of Common Stock
acquired by it (X) within the two-year period immediately
prior to the first public announcement of the proposal of
the Business Combination (the "Announcement Date"), or (Y)
in the transaction in which it became an Interested
Stockholder, whichever is higher.
II. the Fair Market Value per share of Common Stock on
the Announcement Date or on the date on which the Interested
Stockholder became an Interested Stockholder (such latter
date is referred to in this Article EIGHTH as the
"Determination Date"), whichever is higher.
(b) The aggregate amount of the cash and the Fair Market
Value as of the date of the
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consummation of the Business Combination of consideration other
than cash to be received per share by holders of shares of any
class of outstanding Voting Stock other than Common Stock shall
be at least equal to the highest of the following (it being
intended that the requirements of this subparagraph (b) shall be
required to be met with respect to every such class of
outstanding Voting Stock, whether or not the Interested
Stockholder has previously acquired any shares of a particular
class of Voting Stock):
I. (if applicable) the Highest Per Share Price (as
hereinafter defined), including any brokerage commissions,
transfer taxes and soliciting dealers' fees, paid by the
Interested Stockholder for any shares of such class of
Voting Stock acquired by it (X) within the two-year period
immediately prior to the Announcement Date, or (Y) in the
transaction in which it became an Interested Stockholder,
whichever is higher;
II. (if applicable) the highest preferential amount
per share to which the holders of shares of such class of
Voting Stock are entitled in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the
Corporation; and
III. the Fair Market Value per share of such class of
Voting Stock on the Announcement Date or on the
Determination Date, whichever is higher.
(c) The consideration to be received by holders of a
particular class of outstanding Voting Stock (including Common
Stock) shall be in cash or in the same form as the Interested
Stockholder has previously paid for shares of such class of
Voting Stock. If the Interested Stockholder has paid for shares
of any class of Voting Stock with varying forms of consideration,
the form of consideration
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<PAGE>
to be received per share by holders of shares of such class of
Voting Stock shall be either cash or the form used to acquire the
largest number of shares of such class of Voting Stock previously
acquired by the Interested Stockholder. The price determined in
accordance with subparagraph B.2 of this Article EIGHTH shall be
subject to appropriate adjustment in the event of any stock
dividend, stock split, combination of shares or similar event.
(d) After such Interested Stockholder has become an
Interested Stockholder and prior to the consummation of such
Business Combination; (i) except as approved by a majority of the
Disinterested Directors, there shall have been no failure to
declare and pay at the regular date therefor any full quarterly
dividends (whether or not cumulative) on any outstanding stock
having preference over the Common Stock as to dividends or
liquidation; (ii) there shall have been (X) no reduction in the
annual rate of dividends paid on the Common Stock (except as
necessary to reflect any subdivision of the Common Stock), except
as approved by a majority of the Disinterested Directors, and (Y)
an increase in such annual rate of dividends as necessary to
reflect any reclassification (including any reverse stock split),
recapitalization, reorganization or any similar transaction which
has the effect of reducing the number of outstanding shares of
Common Stock, unless the failure to so increase such annual rate
is approved by a majority of the Disinterested Directors; and
(iii) neither such Interested Stockholder nor any of its
Affiliates shall have become the beneficial owner of any
additional shares of Voting Stock except as part of the
transaction which results in such Interested Stockholder becoming
an Interested Stockholder.
(e) After such Interested Stockholder has become an
Interested Stockholder, such Interested Stockholder shall not
have received the benefit, directly or indirectly (except
proportionately as a
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<PAGE>
stockholder), of any loans, advances, guarantees, pledges or
other financial assistance or any tax credits or other tax
advantages provided by the Corporation, whether in anticipation
of or in connection with such Business Combination or otherwise.
(f) A proxy or information statement describing the
proposed Business Combination and complying with the requirements
of the Securities Exchange Act of 1934 and the rules and
regulations thereunder (or any subsequent provisions replacing
such Act, rules or regulations) shall be mailed to stockholders
of the Corporation at least 30 days prior to the consummation of
such Business Combination (whether or not such proxy or
information statement is required to be mailed pursuant to such
Act or subsequent provisions).
C. For the purposes of this Article EIGHTH:
1. A "Person" shall include an individual, a group acting in
concert, a corporation, a partnership, an association, a joint venture, a
pool, a joint stock company, a trust, an unincorporated organization or
similar company, a syndicate or any other group formed for the purpose of
acquiring, holding or disposing of securities.
2. "Interested Stockholder" shall mean any Person (other than
the Corporation or any holding company or Subsidiary thereof) who or which:
(a) is the beneficial owner, directly or indirectly, of
more than 10% of the voting power of the outstanding Voting
Stock; or
(b) is an Affiliate of the Corporation and at any time
within the two-year period immediately prior to the date in
question was the beneficial owner, directly or indirectly, of 10%
or more of the voting power of the then-outstanding Voting Stock;
or
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(c) is an assignee of or has otherwise succeeded to any
shares of Voting Stock which were at any time within the two-year
period immediately prior to the date in question beneficially
owned by any Interested Stockholder, if such assignment or
succession shall have occurred in the course of a transaction or
series of transactions not involving a public offering within the
meaning of the Securities Act of 1933.
3. A Person shall be a "beneficial owner" of any Voting Stock:
(a) which such Person or any of its Affiliates or
Associates (as hereinafter defined) beneficially owns, directly
or indirectly within the meaning of Rule 13d-3 under the
Securities Exchange Act of 1934, as in effect on the date of
incorporation of the Corporation; or
(b) which such Person or any of its Affiliates or
Associates has (i) the right to acquire (whether such right is
exercisable immediately or only after the passage of time),
pursuant to any agreement, arrangement or understanding or upon
the exercise of conversion rights, exchange rights, warrants or
options, or otherwise, or (ii) the right to vote pursuant to any
agreement, arrangement or understanding (but neither such Person
nor any such Affiliate or Associate shall be deemed to be the
beneficial owner of any shares of Voting Stock solely by reason
of a revocable proxy granted for a particular meeting of
stockholders, pursuant to a public solicitation of proxies for
such meeting, and with respect to which shares neither such
Person nor any such Affiliate or Associate is otherwise deemed
the beneficial owner); or
(c) which are beneficially owned, directly or indirectly
within the meaning of Rule 13d-3 under the Securities Exchange
Act of 1934, as in effect on the date of incorporation of the
Corporation, by any other Person with which such Person or any of
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its Affiliates or Associates has any agreement, arrangement or
understanding for the purposes of acquiring, holding, voting
(other than solely by reason of a revocable proxy as described in
Subparagraph (b) of this Paragraph 3) or in disposing of any
shares of Voting Stock;
provided, however, that, in the case of any employee stock ownership or similar
plan of the Corporation or of any Subsidiary in which the beneficiaries thereof
possess the right to vote any shares of Voting Stock held by such plan, no such
plan nor any trustee with respect thereto (nor any Affiliate of such trustee),
solely by reason of such capacity of such trustee, shall be deemed, for any
purposes hereof, to beneficially own any shares of Voting Stock held under any
such plan.
4. For the purpose of determining whether a Person is an
Interested Stockholder pursuant to Paragraph 2 of this Section C, the number of
shares of Voting Stock deemed to be outstanding shall include shares deemed
owned through application of Paragraph 3 of this Section C but shall not include
any other shares of Voting Stock which may be issuable pursuant to any
agreement, arrangement or understanding, or upon exercise of conversion rights,
warrants or options, or otherwise.
5. "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as in effect on the date
of incorporation of the Corporation.
6. "Subsidiary" means any corporation of which a majority of
any class of equity security is owned, directly or indirectly, by the
Corporation; provided, however, that for the purposes of the definition of
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Interested Stockholder set forth in Paragraph 2 of this Section C, the term
"Subsidiary" shall mean only a corporation of which a majority of each class of
equity security is owned, directly or indirectly, by the Corporation.
7. "Disinterested Director" means any member of the Board of
Directors who is unaffiliated with the Interested Stockholder and was a member
of the Board of Directors prior to the time that the Interested Stockholder
became an Interested Stockholder, and any director who is thereafter chosen to
fill any vacancy on the Board of Directors or who is elected and who, in
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either event, is unaffiliated with the Interested Stockholder, and in connection
with his or her initial assumption of office is recommended for appointment or
election by a majority of Disinterested Directors then on the Board of
Directors.
8. "Fair Market Value" means: (a) in the case of stock, the
highest closing sales price of the stock during the 30-day period immediately
preceding the date in question of a share of such stock of the National
Association of Securities Dealers Automated Quotations ("NASDAQ") System or any
system then in use, or, if such stock is admitted to trading on a principal
United States securities exchange registered under the Securities Exchange Act
of 1934, Fair Market Value shall be the highest sale price reported during the
30-day period preceding the date in question, or, if no such quotations are
available, the Fair Market Value on the date in question of a share of such
stock as determined by the Board of Directors in good faith, in each case with
respect to any class of stock, appropriately adjusted for any dividend or
distribution in shares of such stock or in combination or reclassification of
outstanding shares of such stock into a smaller number of shares of such stock,
and (b) in the case of property other than cash or stock, the Fair Market Value
of such property on the date in question as determined by the Board of Directors
in good faith.
9. Reference to "Highest Per Share Price" shall in each case
with respect to any class of stock reflect an appropriate adjustment for any
dividend or distribution in shares of such stock or any stock split or
reclassification of outstanding shares of such stock into a greater number of
shares of such stock or any combination or reclassification of outstanding
shares of such stock into a smaller number of shares of such stock.
10. In the event of any Business Combination in which the
Corporation survives, the phrase "consideration other than cash to be received"
as used in Subparagraphs (a) and (b) of Paragraph 2 of Section B of this Article
EIGHTH shall include the shares of Common Stock and/or the shares of any other
class of outstanding Voting Stock retained by the holders of such shares.
D. A majority of the Disinterested Directors of the Corporation
shall have the power and duty to determine for the purposes of this Article
EIGHTH, on the basis of information known to them after reasonable inquiry, (a)
whether a person is an
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Interested Stockholder; (b) the number of shares of Voting Stock
beneficially owned by any person; (c) whether a person is an Affiliate or
Associate of another; and (d) whether the assets which are the subject of any
Business Combination have, or the consideration to be received for the issuance
or transfer of securities by the Corporation or any Subsidiary in any Business
Combination has an aggregate Fair Market Value equaling or exceeding 25% of the
combined assets of the Corporation and its Subsidiaries. A majority of the
Disinterested Directors shall have the further power to interpret all of the
terms and provisions of this Article EIGHTH.
E. Nothing contained in this Article EIGHTH shall be construed to
relieve any Interested Stockholder from any fiduciary obligation imposed by law.
F. Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the Voting Stock required by law, this Certificate
of Incorporation or any Preferred Stock Designation, the affirmative vote of the
holders of at least 80% of the voting power of all of the then-outstanding
shares of the Voting Stock, voting together as a single class, shall be required
to alter, amend or repeal this Article EIGHTH.
NINTH: The Board of Directors of the Corporation, when evaluating any
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offer of another Person (as defined in Article EIGHTH hereof) to (A) make a
tender or exchange offer for any equity security of the Corporation, (B) merge
or consolidate the Corporation with another corporation or entity or (C)
purchase or otherwise acquire all or substantially all of the properties and
assets of the Corporation, may, in connection with the exercise of its judgment
in determining what is in the best interest of the Corporation and its
stockholders, give due consideration to all relevant factors, including, without
limitation, the social and economic effect of acceptance of such offer on the
Corporation's present and future customers and employees and those of its
Subsidiaries (as defined in Article EIGHTH hereof); on the communities in which
the Corporation and its Subsidiaries operate or are located; on the ability of
the Corporation to fulfill its corporate objectives as a financial institution
holding company and on the ability of its subsidiary financial institution to
fulfill
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the objectives of a federally insured financial institution under applicable
statutes and regulations.
TENTH:
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A. Except as set forth in Section B of this Article TENTH, in addition to
any affirmative vote of stockholders required by law or this Certificate of
Incorporation, any direct or indirect purchase or other acquisition by the
Corporation of any Equity Security (as hereinafter defined) of any class from
any Interested Person (as hereinafter defined) shall require the affirmative
vote of the holders of at least 80% of the Voting Stock of the Corporation that
is not beneficially owned (for purposes of this Article TENTH beneficial
ownership shall be determined in accordance with Section C.2(b) of Article
FOURTH hereof) by such Interested Person, voting together as a single class.
Such affirmative vote shall be required notwithstanding the fact that no vote
may be required, or that a lesser percentage may be specified, by law or by any
other provisions of this Certificate of Incorporation or any Preferred Stock
Designation or in any agreement with any national securities exchange or
quotation system, or otherwise. Certain defined terms used in this Article
TENTH are as set forth in Section C below.
B. The provisions of Section A of this Article TENTH shall not be
applicable with respect to:
(1) any purchase or other acquisition of securities made as part of a
tender or exchange offer by the Corporation or a Subsidiary (which term, as
used in this Article TENTH, is as defined in the first clause of Section
C.6 of Article EIGHTH hereof) of the Corporation to purchase securities of
the same class made on the same terms to all holders of such securities and
complying with the applicable requirements of the Securities Exchange Act
of 1934 and the rules and regulations thereunder (or any subsequent
provision replacing such Act, rules or regulations);
(2) any purchase or acquisition made pursuant to an open market
purchase program approved by a majority of the Board of Directors,
including a majority of the Disinterested Directors (which term, as used in
this Article TENTH, is as defined in Article EIGHTH hereof); or
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(3) any purchase or acquisition which is approved by a majority of
the Board of Directors, including a majority of the Disinterested
Directors, and which is made at no more than the Market Price (as
hereinafter defined), on the date that the understanding between the
Corporation and the Interested Person is reached with respect to such
purchase (whether or not such purchase is made or a written agreement
relating to such purchase is executed on such date), of shares of the class
of Equity Security to be purchased.
C. For the purposes of this Article TENTH:
(i) The term Interested Person shall mean any Person (other than
the Corporation, Subsidiaries of the Corporation, pension, profit sharing,
employee stock ownership or other employee benefit plans of the Corporation
and its Subsidiaries, entities organized or established by the Corporation
or any of its Subsidiaries pursuant to the terms of such plans and trustees
and fiduciaries with respect to any such plan acting in such capacity) that
is the direct or indirect beneficial owner of 5% or more of the Voting
Stock of the Corporation, and any Affiliate or Associate of any such
person.
(ii) The Market Price of shares of a class of Equity Security on any
day shall mean the highest sale price of shares of such class of Equity
Security on such day, or, if that day is not a trading day, on the trading
day immediately preceding such day, on the national securities exchange or
the NASDAQ System or any other system then in use on which such class of
Equity Security is traded.
(iii) The term Equity Security shall mean any security described in
Section 3(a)(11) of the Securities Exchange Act of 1934, as in effect on
September 30, 1993, which is traded on a national securities exchange or
the NASDAQ System or any other system then in use.
(iv) For purposes of this Article TENTH, all references to the term
Interested Stockholder in the definition of Disinterested Director shall be
deemed to refer to the term Interested Person.
ELEVENTH:
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A. Each person who was or is made a party or is threatened to be made a
party to or is otherwise involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (hereinafter a "proceeding"),
by reason of the fact that he or she is or was a director or an officer of the
Corporation or is or was serving at the request of the Corporation as a director
or officer of another corporation, including, without limitation, any Subsidiary
(as defined in Article EIGHTH herein), 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 or officer or in any other capacity
while serving as a director or officer, 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,
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except as provided in Section C hereof with respect to proceedings to enforce
rights to indemnification, the Corporation shall indemnify any such indemnitee
in connection with a proceeding (or part thereof) initiated by such indemnitee
only if such proceeding (or part thereof) was authorized by the Board of
Directors of the Corporation.
B. The right to indemnification conferred in Section A of this Article
shall include the right to be paid by the Corporation the expenses incurred in
defending any such proceeding in advance of its final disposition (hereinafter
an "advancement of expenses"); provided, however, that, if the Delaware General
-------- -------
Corporation Law requires, an advancement of expenses incurred by an indemnitee
in his or her capacity as a director or officer (and not in any other capacity
in which service was or is rendered by such indemnitee, including, without
limitation, service to an employee benefit plan) shall be made only upon
delivery to the Corporation of an undertaking (hereinafter an "undertaking"), by
or on behalf of such indemnitee, to repay all amounts so advanced if it shall
ultimately be determined by final judicial decision from which there is no
further right to appeal (hereinafter a "final
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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 shall
be contract rights and such rights shall continue as to an indemnitee who has
ceased to be a director or officer 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 is not paid in full by
the Corporation within sixty days after a written claim has been received by the
Corporation, except in the case of a claim for an advancement of expenses, in
which case the applicable period shall be twenty days, the indemnitee may at any
time thereafter bring suit against the Corporation to recover the unpaid amount
of the claim. If successful in whole or in part in any such suit, or in a suit
brought by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the indemnitee shall also be entitled to be paid the
expense of prosecuting or defending such suit. In (i) any suit brought by the
indemnitee to enforce a right to indemnification hereunder (but not in a suit
brought by the indemnitee to enforce a right to an advancement of expenses) it
shall be a defense that, and (ii) in any suit by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking the Corporation
shall be entitled to recover such expenses upon a final adjudication that, the
indemnitee has not met any applicable standard for indemnification set forth in
the Delaware General Corporation Law. Neither the failure of the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
suit that indemnification of the indemnitee is proper in the circumstances
because the indemnitee has met the applicable standard of conduct set forth in
the Delaware General Corporation Law, nor an actual determination by the
Corporation (including its Board of Directors, independent legal counsel, or its
stockholders) that the indemnitee has not met such applicable standard of
conduct, shall create a presumption that the indemnitee has not met the
applicable standard of conduct or, in the case of such a suit brought by the
indemnitee, be a defense to such suit. In any suit brought by the indemnitee to
enforce a right to indemnification or to an advancement of expenses hereunder,
or by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the burden of proving that the indemnitee is not
entitled to be
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<PAGE>
indemnified, or to such advancement of expenses, under this Article or otherwise
shall be on the Corporation.
D. The rights to indemnification and to the advancement of expenses
conferred in this Article 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, By-laws, agreement, vote of stockholders or
Disinterested Directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to protect
itself and any director, officer, employee or agent of the Corporation or
another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the Corporation would
have the power to indemnify such person against such expense, liability or loss
under the Delaware General Corporation Law.
F. The Corporation may, to the extent authorized from time
to time by a majority vote of the disinterested directors, grant rights to
indemnification and to the advancement of expenses to any employee or agent of
the Corporation to the fullest extent of the provisions of this Article with
respect to the indemnification and advancement of expenses of directors and
officers of the Corporation.
TWELFTH: 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 hereafter amended
to further eliminate or limit 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
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<PAGE>
right or protection of a director of the Corporation existing at the time of
such repeal or modification.
THIRTEENTH: The Corporation reserves the right to amend or repeal any
----------
provision contained in this Certificate of Incorporation in the manner
prescribed by the laws of the State of Delaware and all rights conferred upon
stockholders are granted subject to this reservation; provided, however, that,
-------- -------
notwithstanding any other provision of this Certificate of Incorporation or any
provision of law which might otherwise permit a lesser vote or no vote, but in
addition to any vote of the holders of any class or series of the stock of this
Corporation required by law or by this Certificate of Incorporation, the
affirmative vote of the holders of at least 80% of the voting power of all of
the then-outstanding shares of the capital stock of the Corporation entitled to
vote generally in the election of directors (after giving effect to the
provisions of Article FOURTH), voting together as a single class, shall be
required to amend or repeal this Article THIRTEENTH, Clause C. of Article
FOURTH, paragraph C. of Article FOURTH, clauses (c) or (d) of Article FIFTH,
Article SIXTH, Article SEVENTH, Article EIGHTH, Article TENTH or Article
ELEVENTH.
FOURTEENTH: The name and mailing address of the sole incorporator is as
----------
follows:
NAME MAILING ADDRESS
---- ---------------
LeRoy E. Meredith Grinnell Federal Savings Bank
1025 Main Street
Grinnell, Iowa 50112
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<PAGE>
I, THE UNDERSIGNED, being the incorporator, for the purpose of forming a
corporation under the laws of the State of Delaware, do make, file and record
this Certificate of Incorporation, do certify that the facts herein stated are
true, and, accordingly, have hereto set my hand this ______ day of
_____________________, 1993.
___________________________________
LeRoy E. Meredith, Incorporator
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<PAGE>
GFS BANCORP, INC.
BY-LAWS
ARTICLE I
STOCKHOLDERS
Section 1. Annual Meeting.
--------------
An annual meeting of the stockholders, for the election of directors to
succeed those whose terms expire and for the transaction of such other business
as may properly come before the meeting, shall be held at such place, on such
date, and at such time as the Board of Directors shall each year fix, which date
shall be within thirteen (13) months subsequent to the later of the date of
incorporation or the last annual meeting of stockholders.
Section 2. Special Meetings.
----------------
Subject to the rights of the holders of any class or series of preferred
stock of the Corporation, special meetings of stockholders of the Corporation
may be called only by the Board of Directors pursuant to a resolution adopted by
a majority of the total number of directors which the Corporation would have if
there were no vacancies on the Board of Directors (hereinafter the "Whole
Board").
Section 3. Notice of Meetings.
------------------
Written notice of the place, date, and time of all meetings of the
stockholders shall be given, not less than ten (10) nor more than sixty (60)
days before the date on which the meeting is to be held, to each stockholder
entitled to vote at such meeting, except as otherwise provided herein or
required by law (meaning, here and hereinafter, as required from time to time,
by the Delaware General Corporation Law or the Certificate of Incorporation of
the Corporation).
When a meeting is adjourned to another place, date or time, written notice
need not be given of the adjourned meeting if the place, date and time thereof
are announced at the meeting at which the adjournment is taken; provided,
however, that if the date of any adjourned meeting is more than thirty (30) days
after the date for which the meeting was originally noticed, or if a new record
date is fixed for the adjourned meeting, written notice of the place, date and
time of the adjourned meeting shall be given in
<PAGE>
conformity herewith. At any adjourned meeting, any business may be transacted
which might have been transacted at the original meeting.
Section 4. Quorum.
------
At any meeting of the stockholders, the holders of at least one-third of
all of the shares of the stock entitled to vote at the meeting, present in
person or by proxy, shall constitute a quorum for all purposes, unless or except
to the extent that the presence of a larger number may be required by law.
If a quorum shall fail to attend any meeting, the chairman of the meeting
or the holders of a majority of the shares of stock entitled to vote who are
present, in person or by proxy, may adjourn the meeting to another place, date
or time.
If a notice of any adjourned special meeting of stockholders is sent to all
stockholders entitled to vote thereat, stating that it will be held with those
present constituting a quorum, then except as otherwise required by law, those
present at such adjourned meeting shall constitute a quorum, and all matters
shall be determined by a majority of the votes cast at such meeting.
Section 5. Organization.
------------
Such person as the Board of Directors may have designated or, in the
absence of such a person, the Chairman of the Board of the Corporation or, in
his or her absence, such person as may be chosen by the holders of a majority of
the shares entitled to vote who are present, in person or by proxy, shall call
to order any meeting of the stockholders and act as chairman of the meeting. In
the absence of the Secretary of the Corporation, the secretary of the meeting
shall be such person as the chairman appoints.
Section 6. Conduct of Business.
-------------------
(a) The chairman of any meeting of stockholders shall determine the order
of business and the procedure at the meeting, including such regulation of the
manner of voting and the conduct of discussion as seem to him or her in order.
The polls for each matter upon which the stockholders will vote at the meeting
will be opened and closed in accordance with law.
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<PAGE>
(b) At any annual meeting of the stockholders, only such business shall be
conducted as shall have been brought before the meeting (i) by or at the
direction of the Board of Directors, or (ii) by any stockholder of the
Corporation who is entitled to vote with respect thereto and who complies with
the notice procedures set forth in this Section 6(b). For business to be
properly brought before an annual meeting by a stockholder, the business must
relate to a proper subject matter for stockholder action and the stockholder
must have given timely notice thereof in writing to the Secretary of the
Corporation. To be timely, a stockholder's notice must be delivered or mailed
to and received at the principal executive offices of the Corporation not less
than thirty (30) days prior to the date of the annual meeting; provided,
however, that in the event that less than forty (40) days' notice or prior
public disclosure of the date of the meeting is given or made to stockholders,
notice by the stockholder must be received not later than the close of business
on the 10th day following the day on which such notice of the date of the annual
meeting was mailed or such public disclosure was made. A stockholder's notice
to the Secretary shall set forth as to each matter such stockholder proposes to
bring before the annual meeting (i) a brief description of the business desired
to be brought before the annual meeting and the reasons for conducting such
business at the annual meeting, (ii) the name and address, as they appear on the
Corporation's books, of the stockholder who proposed such business, (iii) the
class and number of shares of the Corporation's capital stock that are
beneficially owned by such stockholder, and (iv) any material interest of such
stockholder in such business. Notwithstanding anything in these By-laws to the
contrary, no business shall be brought before or conducted at an annual meeting
except in accordance with the provisions of this Section 6(b). The officer of
the Corporation or other person presiding over the annual meeting shall, if the
facts so warrant, determine and declare to the meeting that business was not
properly brought before the meeting in accordance with the provisions of this
Section 6(b) and, if he should so determine, he shall so declare to the meeting
and any such business so determined to be not properly brought before the
meeting shall not be transacted.
At any special meeting of the stockholders, only such business shall be
conducted as shall have been brought before the meeting by or at the direction
of the Board of Directors or by or at the direction of the holders of not less
than one-tenth of all the outstanding capital stock of the Corporation entitled
to vote at whose instance the special meeting is called.
3
<PAGE>
(c) Only persons who are nominated in accordance with the procedures and
requirements set forth in these By-laws shall be eligible for election as
directors. Nominations of persons for election to the Board of Directors of the
Corporation may be made at a meeting of stockholders at which directors are to
be elected only (i) by or at the direction of the Board of Directors or (ii) by
any stockholder of the Corporation entitled to vote for the election of
directors at the meeting who complies with the notice procedures set forth in
this Section 6(c). Such nominations, other than those made by or at the
direction of the Board of Directors, shall be made by timely notice in writing
to the Secretary of the Corporation. To be timely, a stockholder's notice shall
be delivered or mailed to and received at the principal executive offices of the
Corporation not less than thirty (30) days prior to the date of the meeting;
provided, however, that in the event that less than forty (40) days' notice or
prior disclosure of the date of the meeting is given or made to stockholders, to
be timely, notice by the stockholder must be so received not later than
the close of business on the 10th day following the day on which such notice of
the date of the meeting was mailed or such public disclosure was made. Such
stockholder's notice shall set forth (i) as to each person whom such stockholder
proposes to nominate for election or re-election as a director, all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(including such person's written consent to being named in the proxy statement
as a nominee and to serving as a director if elected); and (ii) as to the
stockholder giving the notice, (x) the name and address, as they appear on the
Corporation's books, of such stockholder, and (y) the class and number of shares
of the Corporation's capital stock that are beneficially owned by such
stockholder. At the request of the Board of Directors, any person nominated by
the Board of Directors for election as a director shall furnish to the Secretary
of the Corporation that information required to be set forth in a stockholder's
notice of nomination which pertains to the nominee. No person shall be eligible
for election as a director of the Corporation unless nominated in accordance
with the provisions of this Section 6(c). The officer of the Corporation or
other person presiding at the meeting shall, if the facts so warrant, determine
that a nomination was not made in accordance with such provisions and, if he or
she should so determine, he or she shall so declare to the meeting and the
defective nomination shall be disregarded.
4
<PAGE>
(d) No person of an age 70 years or older shall be eligible for
nomination, election, reelection, appointment, or reappointment to the board of
directors of the Corporation.
Section 7. Proxies and Voting.
------------------
At all meetings of stockholders, every stockholder entitled to vote
may vote in person or by proxy executed in writing (or as otherwise permitted
under applicable law) by the stockholder or his duly authorized attorney-in-fact
in accordance with the procedures established for the meeting. Proxies
solicited on behalf of the management shall be voted as directed by the
stockholder or, in the absence of such direction, as determined by a majority of
the Board of Directors. No proxy shall be valid after eleven months from the
date of its execution except for a proxy coupled with an interest.
Each stockholder shall have one (1) vote for every share of stock entitled
to vote which is registered in his or her name on the record date for the
meeting, except as otherwise provided herein or in the Certificate of
Incorporation of the Corporation or as required by law.
All voting, including the election of directors but excepting where
otherwise required by law, may be by a voice vote; provided, however, that the
Board of Directors, in its discretion, or the officer of the Corporation
presiding at the meeting of stockholders, in his discretion, may require that
any votes cast at such meeting shall be cast pursuant to a roll call. Every
vote taken by ballot shall be counted by an inspector or inspectors appointed by
the Board of Directors in advance of the meeting of stockholders and such
inspector or inspectors shall act at the meeting or any adjournment thereof and
make a written report thereof, in accordance with law.
All elections shall be determined by a plurality of the votes cast, and
except as otherwise required by law or as provided in the Certificate of
Incorporation, all other matters shall be determined by a majority of the votes
cast.
Section 8. Stock List.
----------
The officer who has charge of the stock transfer books of the Corporation
shall prepare and make, in the time and manner required by applicable law, a
list of stockholders entitled to vote and shall make such list available for
such purposes, at such places,
5
<PAGE>
at such times and to such persons as required by law. The stock transfer books
shall be the only evidence as to the identity of the stockholders entitled to
examine the stock transfer books or to vote in person or by proxy at any meeting
of stockholders.
Section 9. Consent of Stockholders in Lieu of Meeting.
------------------------------------------
Subject to the rights of the holders of any class or series of preferred
stock of the Corporation, any action required or permitted to be taken by the
stockholders of the Corporation must be effected at a duly called annual or
special meeting of stockholders of the Corporation and may not be effected by
any consent in writing by such stockholders.
Section 10. Inspectors of Election.
----------------------
The Board of Directors shall, in advance of any meeting of stockholders,
appoint one or more persons as inspectors of election to act at the meeting or
any adjournment thereof and make a written report thereof in accordance with
law.
ARTICLE II
BOARD OF DIRECTORS
Section 1. General Powers, Number and Term of Office.
-----------------------------------------
The business and affairs of the Corporation shall be managed by or under
the direction of the Board of Directors. The number of directors shall be set
as provided for in the Certificate of Incorporation. The number of directors
who shall constitute the Whole Board shall be such number as the Board of
Directors shall from time to time have designated except that in the absence of
any such designation, such number shall be seven (7). The Board of Directors
shall annually elect a Chairman of the Board and a President from among its
members and shall designate, when present, either the Chairman of the Board or
the President to preside at its meetings.
The directors, other than those who may be elected by the holders of any
class or series of preferred stock, shall be divided into three classes, as
nearly equal in number as reasonably possible, with the term of office of the
first class to expire at the conclusion of the first annual meeting of
stockholders, the term of office of the second class to expire at the conclusion
of
6
<PAGE>
the annual meeting of stockholders one year thereafter and the term of office of
the third class to expire at the conclusion of the annual meeting of
stockholders two years thereafter, with each director to hold office until his
or her successor shall have been duly elected and qualified. At each annual
meeting of stockholders, commencing with the first annual meeting, directors
elected to succeed those directors whose terms expire shall be elected for a
term of office to expire at the conclusion of the third succeeding annual
meeting of stockholders after their election, with each director to hold office
until his or her successor shall have been duly elected and qualified.
Section 2. Vacancies and Newly Created Directorships.
-----------------------------------------
Subject to the rights of the holders of any class or series of preferred
stock then outstanding, and unless the Board of Directors otherwise determines,
newly created directorships resulting from any increase in the authorized number
of directors or any vacancies in the Board of Directors resulting from death,
resignation, retirement, disqualification, removal from office or other cause
may be filled only by a majority vote of the directors then in office, though
less than a quorum, and each director so chosen shall hold office for a term
expiring at the annual meeting of stockholders at which the term of office of
the class to which he or she has been elected expires, and until such director's
successor shall have been duly elected and qualified. No decrease in the number
of authorized directors constituting the Board shall shorten the term of any
incumbent director.
Section 3. Regular Meetings.
----------------
Regular meetings of the Board of Directors shall be held at such place or
places, on such date or dates, and at such time or times as shall have been
established by the Board of Directors and publicized among all directors. A
notice of each regular meeting shall not be required.
Section 4. Special Meetings.
----------------
Special meetings of the Board of Directors may be called by one-third (1/3)
of the directors then in office (rounded up to the nearest whole number) or by
the Chairman of the Board and shall be held at such place, on such date, and at
such time as they or he or she shall fix. Notice of the place, date, and time
of each such special meeting shall be given to each director by whom it is not
7
<PAGE>
waived by mailing written notice not less than five (5) days before the meeting
or by telegraphing or telexing or by facsimile transmission of the same not less
than twenty-four (24) hours before the meeting. Unless otherwise indicated in
the notice thereof, any and all business may be transacted at a special meeting.
Section 5. Quorum.
------
At any meeting of the Board of Directors, a majority of the authorized
number of directors then constituting the Board shall constitute a quorum for
all purposes. If a quorum shall fail to attend any meeting, a majority of those
present may adjourn the meeting to another place, date, or time, without further
notice or waiver thereof. Notwithstanding the above, at any adjourned meeting
of the Board of Directors, at least one-third of the authorized number of
directors then constituting the Board shall constitute a quorum for all
purposes.
Section 6. Participation in Meetings By Conference Telephone.
-------------------------------------------------
Members of the Board of Directors, or of any committee thereof, may
participate in a meeting of such Board or committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other and such participation shall
constitute presence in person at such meeting.
Section 7. Conduct of Business.
-------------------
At any meeting of the Board of Directors, business shall be transacted in
such order and manner as the Board may from time to time determine, and all
matters shall be determined by the vote of a majority of the directors present,
except as otherwise provided herein or required by law. Action may be taken by
the Board of Directors without a meeting if all members thereof consent thereto
in writing, and the writing or writings are filed with the minutes of
proceedings of the Board of Directors.
Section 8. Powers.
------
The Board of Directors may, except as otherwise required by law, exercise
all such powers and do all such acts and things as may be exercised or done by
the Corporation, including, without limiting the generality of the foregoing,
the unqualified power:
8
<PAGE>
(1) To declare dividends from time to time in accordance with law;
(2) To purchase or otherwise acquire any property, rights or privileges
on such terms as it shall determine;
(3) To authorize the creation, making and issuance, in such form as it
may determine, of written obligations of every kind, negotiable or non-
negotiable, secured or unsecured, and to do all things necessary in connection
therewith;
(4) To remove any officer of the Corporation with or without cause, and
from time to time to devolve the powers and duties of any officer upon any other
person for the time being;
(5) To confer upon any officer of the Corporation the power to appoint,
remove and suspend subordinate officers, employees and agents;
(6) To adopt from time to time such stock, option, stock purchase,
bonus or other compensation plans for directors, officers, employees and agents
of the Corporation and its subsidiaries as it may determine;
(7) To adopt from time to time such insurance, retirement, and other
benefit plans for directors, officers, employees and agents of the Corporation
and its subsidiaries as it may determine; and,
(8) To adopt from time to time regulations, not inconsistent with these
By-laws, for the management of the Corporation's business and affairs.
Section 9. Compensation of Directors.
-------------------------
Directors, as such, may receive, pursuant to resolution of the Board of
Directors, fixed fees and other compensation for their services as directors,
including, without limitation, their services as members of committees of the
Board of Directors.
9
<PAGE>
ARTICLE III
COMMITTEES
Section 1. Committees of the Board of Directors.
------------------------------------
The Board of Directors, by a vote of a majority of the Whole Board of
Directors, may from time to time designate committees of the Board, with such
lawfully delegable powers and duties as it thereby confers, to serve at the
pleasure of the Board and shall, for those committees and any others provided
for herein, elect a director or directors to serve as the member or members,
designating, if it desires, other directors as alternate members who may replace
any absent or disqualified member at any meeting of the committee. Any
committee so designated may exercise the power and authority of the Board of
Directors to declare a dividend, to authorize the issuance of stock or to adopt
a certificate of ownership and merger pursuant to Section 253 of the Delaware
General Corporation Law if the resolution which designated the committee or a
supplemental resolution of the Board of Directors shall so provide. In the
absence or disqualification of any member of any committee and any alternate
member in his or her place, the member or members of the committee present at
the meeting and not disqualified from voting, whether or not he or she or they
constitute a quorum, may by unanimous vote appoint another member of the Board
of Directors to act at the meeting in the place of the absent or disqualified
member.
Section 2. Conduct of Business.
-------------------
Each committee may determine the procedural rules for meeting and
conducting its business and shall act in accordance therewith, except as
otherwise provided herein or required by law. Adequate provision shall be made
for notice to members of all meetings; one-third (1/3) of the members shall
constitute a quorum unless the committee shall consist of one (1) or two (2)
members, in which event one (1) member shall constitute a quorum; and all
matters shall be determined by a majority vote of the members present. Action
may be taken by any committee without a meeting if all members thereof consent
thereto in writing and the writing or writings are filed with the minutes
of the proceedings of such committee.
Section 3. Nominating Committee.
--------------------
10
<PAGE>
The Board of Directors shall appoint a Nominating Committee of the Board,
consisting of not less than three (3) members, one of which shall be the
Chairman of the Board. The Nominating Committee shall have authority (a) to
review any nominations for election to the Board of Directors made by a
stockholder of the Corporation pursuant to Section 6(c)(ii) of Article I of
these By-laws in order to determine compliance with such By-law, and (b) to
recommend to the Whole Board nominees for election to the Board of Directors to
replace those directors whose terms expire at the annual meeting of stockholders
next ensuing.
ARTICLE IV
OFFICERS
Section 1. Generally.
---------
(a) As soon as may be practicable after the annual meeting of
stockholders, the Board of Directors shall choose a Chairman of the Board, a
President, one or more Vice Presidents, a Secretary and a Chief Financial
Officer and from time to time may choose such other officers as it may deem
proper. The Chairman of the Board and the President shall be chosen from among
the directors. Any number of offices may be held by the same person.
(b) The term of office of all officers shall be until the next annual
election of officers and until their respective successors are chosen, but any
officer may be removed from office at any time by the affirmative vote of a
majority of the authorized number of directors then constituting the Board of
Directors.
(c) All officers chosen by the Board of Directors shall each have such
powers and duties as generally pertain to their respective offices, subject to
the specific provisions of this Article IV. Such officers shall also have such
powers and duties as from time to time may be conferred by the Board of
Directors or by any committee thereof.
Section 2. Chairman of the Board of Directors.
----------------------------------
The Chairman of the Board of Directors of the Corporation shall have
general responsibility for the conduct of meetings of the Board of Directors,
subject to the direction of the Board of Directors, Section 3 herein and to
Article I, Section 6.
11
<PAGE>
Section 3. President.
---------
The President shall be the chief executive officer and, subject to the
control of the Board of Directors, shall have general power over the management
and oversight of the administra tion and operation of the Corporation's business
and general super visory power and authority over its policies and affairs. He
shall see that all orders and resolutions of the Board of Directors and of any
committee thereof are carried into effect.
Each meeting of the stockholders and of the Board of Directors shall be
presided over by the Chairman of the Board, or, in his absence, the President,
or, in his absence, by such officer as has been designated by the Board of
Directors or, in his absence, by such officer or other person as is chosen at
the meeting. The Secretary or, in his absence, the General Counsel of the
Corporation or such officer as has been designated by the Board of Directors or,
in his absence, such officer or other person as is chosen by the person
presiding, shall act as secretary of each such meeting.
Section 4. Vice President.
--------------
The Vice President or Vice Presidents, if any, shall perform the duties of
the President in his absence or during his disability to act. In addition, the
Vice Presidents shall perform the duties and exercise the powers usually
incident to their respective offices and/or such other duties and powers as may
be properly assigned to them from time to time by the Board of Directors, the
Chairman of the Board or the President.
Section 5. Secretary.
---------
The Secretary or an Assistant Secretary shall issue notices of meetings,
shall keep their minutes, shall have charge of the seal and the corporate books,
shall perform such other duties and exercise such other powers as are usually
incident to such offices and/or such other duties and powers as are properly
assigned thereto by the Board of Directors, the Chairman of the Board or the
President.
12
<PAGE>
Section 6. Chief Financial Officer.
-----------------------
The Chief Financial Officer shall have charge of all monies and securities
of the Corporation, other than monies and securities of any division of the
Corporation which has a treasurer or financial officer appointed by the Board of
Directors, and shall keep regular books of account. The funds of the
Corporation shall be deposited in the name of the Corporation by the Chief
Financial Officer with such banks or trust companies as the Board of Directors
from time to time shall designate. He or she shall sign or countersign such
instruments as require his or her signature, shall perform all such duties and
have all such powers as are usually incident to such office and/or such other
duties and powers as are properly assigned to him or her by the Board of
Directors, the Chairman of the Board or the President, and may be required to
give bond for the faithful performance of his or her duties in such sum and with
such surety as may be required by the Board of Directors.
Section 7. Assistant Secretaries and Other Officers.
----------------------------------------
The Board of Directors may appoint one or more assistant secretaries and
one or more assistants to the Chief Financial Officer, or one appointee to both
such positions, which officers shall have such powers and shall perform such
duties as are provided in these By-laws or as may be assigned to them by the
Board of Directors, the Chairman of the Board or the President.
Section 8. Action with Respect to Securities of Other Corporations.
-------------------------------------------------------
Unless otherwise directed by the Board of Directors, the President or any
officer of the Corporation authorized by the President shall have power to vote
and otherwise act on behalf of the Corporation, in person or by proxy, at any
meeting of stockholders of or with respect to any action of stockholders of any
other corporation in which this Corporation may hold securities and otherwise to
exercise any and all rights and powers which this Corporation may possess by
reason of its ownership of securities in such other corporation.
ARTICLE V
STOCK
13
<PAGE>
Section 1. Certificates of Stock.
---------------------
Each stockholder shall be entitled to a certificate signed by, or in the
name of the Corporation by, the President or a Vice President, and by the
Secretary or an Assistant Secretary, or the Chief Financial Officer or an
assistant to the Chief Financial Officer, certifying the number of shares owned
by him or her. Any or all of the signatures on the certificate may be by
facsimile.
Section 2. Transfers of Stock.
------------------
Transfers of stock shall be made only upon the transfer books of the
Corporation kept at an office of the Corporation or by transfer agents
designated to transfer shares of the stock of the Corporation. Except where a
certificate is issued in accordance with Section 4 of Article V of these By-
laws, an outstanding certificate for the number of shares involved shall be
surrendered for cancellation before a new certificate is issued therefor.
Section 3. Record Date.
-----------
In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders, or to receive payment of
any dividend or other distribution or allotment of any rights or to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board of Directors may fix a record
date, which record date shall not precede the date on which the resolution
fixing the record date is adopted and which record date shall not be more than
sixty (60) nor less than ten (10) days before the date of any meeting of
stockholders, nor more than sixty (60) days prior to the time for such other
action as hereinbefore described; provided, however, that if no record date is
fixed by the Board of Directors, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day on which notice is given or,
if notice is waived, at the close of business on the day next preceding the day
on which the meeting is held, and, for determining stockholders entitled to
receive payment of any dividend or other distribution or allotment of rights or
to exercise any rights of change, conversion or exchange of stock or for any
other purpose, the record date shall be at the close of business on the day on
which the Board of Directors adopts a resolution relating thereto.
14
<PAGE>
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
Section 4. Lost, Stolen or Destroyed Certificates.
--------------------------------------
In the event of the loss, theft or destruction of any certificate of stock,
another may be issued in its place pursuant to such regulations as the Board of
Directors may establish concerning proof of such loss, theft or destruction and
concerning the giving of a satisfactory bond or bonds of indemnity.
Section 5. Regulations.
-----------
The issue, transfer, conversion and registration of certificates of stock
shall be governed by such other regulations as the Board of Directors may
establish.
ARTICLE VI
NOTICES
Section 1. Notices.
-------
Except as otherwise specifically provided herein or required by law, all
notices required to be given to any stockholder, director, officer, employee or
agent shall be in writing and may in every instance be given effectively by hand
delivery to the recipient thereof, by depositing such notice in the mail,
postage paid, by sending such notice by prepaid telegram or mailgram or by
sending such notice by facsimile machine or other electronic transmission. Any
such notice shall be addressed to such stockholder, director, officer, employee
or agent at his or her last known address as the same appears on the books of
the Corporation. The time when such notice is received, if hand delivered, or
dispatched, if delivered through the mail, by telegram or mailgram or by
facsimile machine or other electronic transmission, shall be the time of the
giving of the notice.
Section 2. Waivers.
-------
A written waiver of any notice, signed by a stockholder, director, officer,
employee or agent, whether before or after the time of the event for which
notice is to be given, shall be deemed
15
<PAGE>
equivalent to the notice required to be given to such stockholder, director,
officer, employee or agent. Neither the business nor the purpose of any meeting
need be specified in such a waiver.
ARTICLE VII
MISCELLANEOUS
Section 1. Facsimile Signatures.
--------------------
In addition to the provisions for use of facsimile signatures elsewhere
specifically authorized in these By-laws, facsimile signatures of any officer or
officers of the Corporation may be used whenever and as authorized by the Board
of Directors or a committee thereof.
Section 2. Corporate Seal.
--------------
The Board of Directors may provide a suitable seal, containing the name of
the Corporation, which seal shall be in the charge of the Secretary. If and
when so directed by the Board of Directors or a committee thereof, duplicates of
the seal may be kept and used by the Chief Financial Officer or by an Assistant
Secretary or an assistant to the Chief Financial Officer.
Section 3. Reliance upon Books, Reports and Records.
----------------------------------------
Each director, each member of any committee designated by the Board of
Directors, and each officer of the Corporation shall, in the performance of his
or her duties, be fully protected in relying in good faith upon the books of
account or other records of the Corporation and upon such information, opinions,
reports or statements presented to the Corporation by any of its officers or
employees, or committees of the Board of Directors so designated, or by any
other person as to matters which such director or committee member reasonably
believes are within such other person's professional or expert competence and
who has been selected with reasonable care by or on behalf of the Corporation.
Section 4. Fiscal Year.
-----------
The fiscal year of the Corporation shall begin on July 1 of each year.
Section 5. Time Periods.
------------
16
<PAGE>
In applying any provision of these By-laws which requires that an act be
done or not be done a specified number of days prior to an event or that an act
be done during a period of a specified number of days prior to an event,
calendar days shall be used, the day of the doing of the act shall be excluded
and the day of the event shall be included.
ARTICLE VIII
AMENDMENTS
The By-laws of the Corporation may be adopted, amended or repealed as
provided in Article SEVENTH of the Certificate of Incorporation of the
Corporation.
17
<PAGE>
Exhibit 4
Instruments defining the rights of security holders,
including debentures
<PAGE>
COMMON STOCK COMMON STOCK
<LOGO>
GFS BANCORP, INC.
NUMBER (Holding company for SHARES
Grinnell Federal Savings Bank)
A Delaware Corporation
CUSIP 361694 10 2
SEE REVERSE FOR
CERTAIN DEFINITIONS
This certifies
Is the owner of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE OF
GFS BANCORP, INC.
that "Corporation", a Delaware corporation. The shares represented by this
certificate and transferable only on the stock transfer books of the Corporation
by the holder of record hereof, or by his duly authorized attorney or legal
representative, upon the surrender of this certificate properly endorsed. This
certificate is not valid until signed and registered by the Corporation's
transfer agent and registrar. This security is not a deposit or account and is
not federally insured or guaranteed.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be executed
by the facsimile signatures of its duly authorized officers and has caused a
facsimile of its corporate seal to be hereunto affixed.
Dated:
- - --------------------------- ---------------------------
Ginger L. Sterk LeRoy E. Meredith
Secretary (SEAL) President
<PAGE>
GFS BANCORP, INC.
The shares represented by this certificate are issued subject to all
the provisions of the certificate of incorporation and bylaws of GFS Bancorp,
Inc. (the "Corporation") as from time to time amended (copies of which are on
file at the principal executive offices of the Corporation).
The Corporation's certificate of incorporation provides that no
"person" (as defined in the certificate of incorporation) who "beneficially
owns" (as defined in the certificate of incorporation) in excess of 10% of the
outstanding shares of the Corporation shall be entitled to vote any shares held
in excess of such limit. This provision of the certificate of incorporation
shall not apply to an acquisition of securities of the Corporation by an
employee stock purchase plan or other employee benefit plan of the Corporation
or any of its subsidiaries.
The Corporation's certificate of incorporation also includes a
provision the general effect of which is to require the affirmative vote of the
holders of 80% of the outstanding voting shares of the Corporation to approve
certain business combinations (as defined in the certificate of incorporation)
between the Corporation and a 10% or more stockholder. However, only the
affirmative vote of a majority of the outstanding shares or such vote as is
otherwise required by law (rather than the 80% voting requirement) is applicable
to the particular transaction if it approved by a majority of the "disinterested
directors" (as defined in the certificate of incorporation), or, alternatively,
the transaction satisfies certain minimum price and procedural requirements.
The Corporation will furnish to any stockholder upon request and
without charge a full statement of the powers, designations, preferences and
relative, participating, optional or other special rights of each authorized
class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights, to the extent that the same have
been fixed, and of the authority of the board of directors to designate the same
with respect to other series. Such request may be made to the Corporation or to
its transfer agent and registrar.
-------------------------------
ABBREVIATIONS
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C>
TEN COM - as tenants in common TRANS MINOR LAW -- .............Custodian............
TEN ENT - as tenants by the entities (Cust) (Minor)
JT TEN - as joint tenants with right of Under Transfers to Minors Law
survivorship and not Act..........................
as tenants in common (State)
UNIF GIFT MIN ACT - ............ Custodian...........
(Cust) (Minor)
under Uniform Gifts to Minors
Act..........................
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFICATION NUMBER OF ASSIGNEE
--------------------------
--------------------------
- - --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
Shares
- - --------------------------------------------------------------------------
of Common Stock, represented by the within certificate, and do hereby
Attorney
- - ------------------------------------------------------------------------
irrevocably constitute and appoint to transfer the said shares on the books of
- - --------------------------------------------------------------------------------
the within named Corporation with full power or substitution in the premises.
Date:
--------------
<TABLE>
<CAPTION>
<C> <S>
THE SIGNATURE TO THE ASSIGNMENT MUST CORRESPOND WITH THE
NOTICE NAMES AS WRITTEN UPON FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY
CHANGE WHATEVER.
</TABLE>
<PAGE>
Exhibit 10
Material Contracts
(a) Employment Contracts between the bank and Messrs.
Meredith, Opsal, Nassif, and Ms. Rose
(b) 1993 Stock Option and Incentive Plan
(c) Recognition and Retention Plan
(d) Salary Continuation Plan
<PAGE>
EMPLOYMENT AGREEMENT, AS AMENDED AND RESTATED
---------------------------------------------
THIS EMPLOYMENT AGREEMENT ("Agreement"), originally made and entered into
as of the 5th day of January, 1994 and subsequently amended and restated as of
the 19th day of January, 1996, by and between GRINNELL FEDERAL SAVINGS BANK,
Grinnell, Iowa (hereinafter referred to as the "Bank") and LeRoy E. Meredith
(the "Employee");
WHEREAS, the Employee is currently serving as Chairman of the Board of the
Bank; and
WHEREAS, the Board of Directors of the Bank recognizes that, as is the case
with publicly held corporations generally, the possibility of a change in
control of the Bank and/or its holding company, GFS Bancorp, Inc. (the "Holding
Company") may exist and that such possibility, and the uncertainty and questions
which it may raise among management, may result in the departure or distraction
of key management personnel to the detriment of the Bank, the Holding Company
and its stockholders; and
WHEREAS, the Board of Directors of the Bank believes it is in the best
interests of the Bank to enter into this Agreement with the Employee in order to
assure continuity of management of the Bank and to reinforce and encourage the
continued attention and dedication of the Employee to his assigned duties
without distraction in the face of potentially disruptive circumstances arising
from the possibility of a change in control of the Holding Company, although no
such change is now contemplated; and
WHEREAS, the Board of Directors of the Bank has approved and authorized the
execution of this Agreement with the Employee to take effect as stated in
Section 4 hereof;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein contained, it is AGREED as
follows:
1. Employment. The Employee will be employed as Chairman of the Board of
----------
the Bank. As Chairman of the Board, Employee shall render administrative and
management services as are customarily performed by persons situated in similar
executive capacities, and shall have other powers and duties as may from time to
time be prescribed by the Board, provided that such duties are consistent with
the Employee's position as Chairman of the Board. The Employee shall continue
to devote his best efforts and substantially all his business time and attention
to the business and affairs of the Bank and its subsidiaries and affiliated
companies.
2. Compensation.
------------
(a) Salary. The Bank agrees to pay the Employee during the term of
------
this Agreement a salary established by the Board of Directors. The salary
hereunder as of the Commencement Date (as defined in Section 4 hereof) shall be
at least equal to the Employee's salary in effect immediately prior to the
Commencement Date. The salary provided for herein shall be payable not less
frequently than bi-monthly in accordance with the practices of the Bank,
provided, however, that no such salary is required to be paid by the terms of
this Agreement in respect of any month or portion thereof subsequent to the
termination of this Agreement and provided further, that the amount of such
salary shall be reviewed by the Board of Directors not less often than annually
and may be increased (but not decreased) from time to time in such amounts as
the Board of Directors in its discretion may decide, subject to the customary
withholding tax and other employee taxes as required with respect to
compensation paid by a corporation to an employee.
(b) Discretionary Bonuses. The Employee shall be entitled to
---------------------
participate in an equitable manner with all other executive officers of the Bank
in discretionary bonuses as authorized and declared by the Board of Directors of
the Bank to its executive employees. No other compensation provided for in this
Agreement shall be deemed a substitute for the Employee's right to participate
in such bonuses when and as declared by the Board of Directors.
(c) Expenses. During the term of his employment hereunder, the
--------
Employee shall be entitled to receive prompt reimbursement for all reasonable
expenses incurred by him (in accordance with policies and procedures at least as
favorable to the Employee as those presently applicable to the senior executive
<PAGE>
officers of the Bank) in performing services hereunder, provided that the
Employee properly accounts therefor in accordance with Bank policy.
(d) Salary and Bonuses Following Change in Control. Notwithstanding
----------------------------------------------
any other provisions of this Agreement to the contrary, in the event of the
Employee's continued employment with the Bank or a successor following a change
in control as defined in Section 8(c) of this Agreement, the Employee shall be
entitled to receive salary and discretionary bonuses at least equal to the
average salary and bonuses received by him for the three years preceding the
change in control.
3. Benefits.
--------
(a) Participation in Retirement and Employee Benefit Plans. The
------------------------------------------------------
Employee shall be entitled while employed hereunder to participate in, and
receive benefits under, all plans relating to stock options, stock purchases,
pension, thrift, profit-sharing, group life insurance, medical coverage,
education, cash or stock bonuses, and other retirement or employee benefits or
combinations thereof, that are now or hereafter maintained for the benefit of
the Bank's executive employees or for its employees generally.
(b) Fringe Benefits. The Employee shall be eligible while employed
---------------
hereunder to participate in, and receive benefits under, any other fringe
benefits which are or may become applicable to the Bank's executive employees or
to its employees generally.
4. Term. The term of employment under this Agreement shall be a period of
----
three (3) years commencing on the date of completion of the conversion (the
"Conversion") of the Bank from mutual to stock form (the "Commencement Date"),
subject to earlier termination as provided herein. Beginning on the first
anniversary of the Commencement Date, and on each anniversary thereafter, the
term of employment under this Agreement shall be extended for a period of one
year unless either the Bank or the Employee gives contrary written notice to the
other not less than 90 days in advance of the date on which the term of
employment under this Agreement would otherwise be extended, provided that such
--------
term will not be automatically extended unless, prior thereto, such extension is
approved by the Board of Directors following the Board's review of a formal
performance evaluation of the Employee performed by the disinterested members of
the Board of Directors of the Bank and reflected in the minutes of the Board of
Directors. Reference herein to the term of employment under this Agreement
shall refer to both such initial term and such extended terms.
5. Vacations. The Employee shall be entitled, without loss of pay, to
---------
absent himself voluntarily from the performance of his employment under this
Agreement, all such voluntary absences to count as vacation time, provided that:
(a) the Employee shall be entitled to an annual vacation of not less
than four (4) weeks per year;
(b) the timing of vacations shall be scheduled in a reasonable manner
by the Employee; and
(c) solely at the Employee's request, the Board of Directors shall be
entitled to grant to the Employee a leave or leaves of absence with or without
pay at such time or times and upon such terms and conditions as the Board, in
its discretion, may determine.
6. Termination of Employment; Death.
--------------------------------
(a) The Board of Directors may terminate the Employee's employment at
any time, but any termination by the Bank's Board of Directors, other than
termination for cause, shall not prejudice the Employee's right to compensation
or other benefits under the Agreement. If the employment of the Employee is
involuntarily terminated, other than for "cause" as provided in this Section
6(a) or pursuant to any of Sections 6(d) through 6(g), or by reason of death or
disability as provided in Sections 6(c) or 7, or in connection with or following
a change in control as provided in Section 8(a) (in which event the benefits and
compensation provided for in Section 8(a) shall apply), the Employee shall be
entitled to receive, (i) his then applicable salary for the
2
<PAGE>
then-remaining term of the Agreement as calculated in accordance with Section 4
hereof (including any renewal term), plus such salary for an additional 12-month
period, payable in such manner and at such times as such salary would have been
payable to the Employee under Section 2 had he remained in the employ of the
Bank, and (ii) health insurance benefits as maintained by the Bank for the
benefit of its senior executive employees generally over the then-remaining term
of the Agreement as calculated in accordance with Section 4 hereof.
Notwithstanding the foregoing, but only to the extent required under federal
banking law, the amount payable under this Section 6(a) shall be reduced to the
extent that on the date of the Employee's termination of employment, the present
value of the benefits payable under clauses (a)(i) and (ii) hereof exceeds the
limitation on benefits that is set forth in Regulatory Bulletin 27a of the
Office of Thrift Supervision ("OTS"), as in effect on the date of the
restatement of this Agreement.
The terms "termination" or involuntarily terminated" in this Agreement
shall refer to the termination of the employment of Employee without his express
written consent. The Employee shall be considered to be involuntarily
terminated (1) if the employment of the Employee is involuntarily terminated for
any reason other than for "cause" as provided in this Section 6(a), pursuant to
any of Sections 6(d) through 6(g) or by reason of death or disability as
provided in Sections 6(c) and 7; or (2) there occurs a material diminution of or
interference with the Employee's duties, responsibilities and benefits as
Chairman of the Board of the Bank. By way of example and not by way of
limitation, any of the following actions, if unreasonable or materially adverse
to the Employee, shall constitute such diminution or interference unless
consented to in writing by the Employee: (i) a change in the principal workplace
of the Employee, to a location more than 30 miles from the Bank's main office;
(ii) a material demotion of the Employee, a reduction in the number or seniority
of other Bank personnel reporting to the Employee, or a reduction in the
frequency with which, or in the nature of the matters with respect to which,
such personnel are to report to the Employee, other than as part of a Bank or
Holding Company-wide reduction in staff; (iii) a reduction or adverse change in
the salary, perquisites, benefits, contingent benefits or vacation time which
had theretofore been provided to the Employee, other than as part of an overall
program applied uniformly and with equitable effect to all members of the senior
management of the Bank or the Holding Company; or (iv) a failure to elect or
reelect the Employee to the Board of Directors of the Bank or the Holding
Company.
In case of termination of the Employee's employment for cause, the Bank
shall pay the Employee his salary through the date of termination, and the Bank
shall have no further obligation to the Employee under this Agreement. The
Employee shall have no right to receive compensation or other benefits for any
period after termination for cause. For purposes of this Agreement, termination
for "cause" shall include termination because of the Employee's personal
dishonesty, incompetence, willful misconduct, breach of a fiduciary duty
involving personal profit, intentional failure to perform stated duties, willful
violation of any law, rule, or regulation (other than traffic violations or
similar offenses) or final cease-and-desist order, or material breach of any
provision of this Agreement. Notwithstanding the foregoing, the Employee shall
not be deemed to have been terminated for cause unless and until there shall
have been delivered to the Employee a copy of a resolution, duly adopted by the
affirmative vote of not less than a majority of the disinterested members of the
Board of Directors of the Bank at a meeting of the Board called and held for
such purpose (after reasonable notice to the Employee and an opportunity for the
Employee, together with the Employee's counsel, to be heard before the Board),
such meeting and the opportunity to be heard to be held prior to, or as soon as
practicable following, termination, but in no event later than 60 days following
such termination, stating that in the good faith opinion of the Board the
Employee was guilty of conduct constituting "cause" as set forth above and
specifying the particulars thereof in detail.
(b) The Employee's employment may be voluntarily terminated by the
Employee at any time upon 90 days written notice to the Bank or upon such
shorter period as may be agreed upon between the Employee and the Board of
Directors of the Bank. In the event of such voluntary termination, the Bank
shall be obligated to continue to pay the Employee his salary only through the
date of termination, at the time such payments are due, and the Bank shall have
no further obligation to the Employee under this Agreement. The provisions of
this Section 6(b) shall not apply to the Employee's voluntary termination of
employment within 30 days following a change in control under Section 8(b) of
this Agreement; voluntary termination of employment in such circumstances shall
be governed by Section 8(b).
3
<PAGE>
(c) In the event of the death of the Employee during the term of
employment under this Agreement and prior to any termination hereunder, the
Employee's estate, or such person as the Employee may have previously designated
in writing, shall be entitled to receive from the Bank the salary of the
Employee through the last day of the calendar month in which his death shall
have occurred, and the term of employment under this Agreement shall end on such
last day of the month.
(d) If the Employee is suspended from office and/or temporarily
prohibited from participating in the conduct of the Bank's affairs by a notice
served under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act
("FDIA"), 12 U.S.C. (S) 1818(e)(3); (g)(1), the Bank's obligations under this
Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the Bank
may in its discretion (i) pay the Employee all or part of the compensation
withheld while its obligations under this Agreement were suspended and (ii)
reinstate in whole or in part any of the obligations which were suspended.
(e) If the Employee is removed from office and/or permanently
prohibited from participating in the conduct of the Bank's affairs by an order
issued under Section 8(e)(4) or (g)(1) of the FDIA, 12 U.S.C. (S) 1818(e)(4);
(g)(1), all obligations of the Bank under this Agreement shall terminate, as of
the effective date of the order, but vested rights of the parties shall not be
affected.
(f) If the Bank becomes in default (as defined in Section 3(x)(1) of
the FDIA, 12 U.S.C. (S) 1813(x)(1)), all obligations under this Agreement shall
terminate as of the date of default, but this provision shall not affect any
vested rights of the parties.
(g) All obligations under this Agreement shall be terminated, except to
the extent determined that continuation of this Agreement is necessary for the
continued operation of the Bank: (i) by the Director of the OTS or his or her
designee at the time the Federal Deposit Insurance Corporation or the Resolution
Trust Corporation enters into an agreement to provide assistance to or on behalf
of the Bank under the authority contained in Section 13(c) of the FDIA, 12
U.S.C. (S) 1823(c); or (ii) by the Director of the OTS or his or her designee at
the time the Director of the OTS or his or her designee approves a supervisory
merger to resolve problems related to operation of the Bank or when the Bank is
determined by the Director of the OTS to be in an unsafe or unsound condition.
Any rights of the parties that have already vested, however, shall not
be affected by any such action.
(h) In the event the Bank purports to terminate the Employee for cause,
but it is determined by a court of competent jurisdiction or by an arbitrator
pursuant to Section 16 that cause did not exist for such termination, or if in
any event it is determined by any such court or arbitrator that the Bank has
failed to make timely payment of any amounts owed to the Employee under this
Agreement, the Employee shall be entitled to reimbursement for all reasonable
costs, including attorneys' fees, incurred in challenging such termination or
collecting such amounts. Such reimbursement shall be in addition to all rights
to which the Employee is otherwise entitled under this Agreement.
7. Disability. If during the term of employment hereunder the Employee
----------
shall become disabled or incapacitated to the extent that he is unable to
perform the duties of the Chairman of the Board, he shall be entitled to receive
disability benefits of the type provided for other senior executive employees of
the Bank.
8. Change in Control.
-----------------
(a) Involuntary Termination. Notwithstanding any provision herein to
-----------------------
the contrary, if the Employee's employment is involuntarily terminated (other
than for cause or pursuant to any of Sections 6(c) through 6(g) or Section 7 of
this Agreement) in connection with or within 12 months after a change in control
which occurs at any time during the term of employment under this Agreement, the
Bank shall pay to the Employee in a lump sum in cash within 10 business days
after the Date of Termination (as hereinafter defined) of employment an amount
equal to 299% of the Employee's "base amount" of compensation, as defined in
Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended (the
"Code").
4
<PAGE>
(b) Voluntary Termination. If the Employee voluntarily terminates his
---------------------
employment hereunder in connection with or within 30 days following a change in
control which occurs at any time during the term of employment under this
Agreement, the Employee shall be entitled to receive the payment provided by
Section 8(a) hereof in the manner provided by Section 8(a) hereof.
(c) Definitions. For purposes of Sections 8, 9 and 11 of this
-----------
Agreement, "Date of Termination" means the earlier of (i) the date upon which
the Bank gives notice to the Employee of the termination of his employment with
the Bank, or (ii) the date upon which the Employee ceases to serve as an
Employee of the Bank; and "change in control" shall mean any one of the
following events: (1) the acquisition of ownership, holding or power to vote
more than 25% of the Bank's or the Holding Company's voting stock, (2) the
acquisition of the ability to control the election of a majority of the Bank's
or the Holding Company's directors, (3) the acquisition of a controlling
influence over the management or policies of the Bank or the Holding Company by
any person or by persons acting as a "group" (within the meaning of Section
13(d) of the Securities Exchange Act of 1934), (4) the acquisition of control of
the Bank or the Holding Company within the meaning of 12 C.F.R. Part 574 or its
applicable equivalent (except in the case of (1), (2), (3) and (4) hereof,
ownership or control of the Bank by the Holding Company itself shall not
constitute a "change in control"), or (5) during any period of two consecutive
years, individuals who at the beginning of such period constitute the Board of
Directors of the Holding Company or the Bank (the "Existing Board") (the
"Continuing Directors") cease for any reason to constitute at least a majority
thereof, provided that any individual whose election or nomination for election
as a member of the Existing Board was approved by a vote of at least a majority
of the Continuing Directors then in office shall be considered a Continuing
Director. For purposes of this subparagraph only, the term "person" refers to an
individual or a corporation, partnership, trust, association, joint venture,
pool, syndicate, sole proprietorship, unincorporated organization or any other
form of entity not specifically listed herein.
Notwithstanding the foregoing, but only to the extent required under
federal banking law, the amount payable under this Section 8 shall be reduced to
the extent that on the date of the Employee's termination of employment, the
amount payable under Subsection (a) or (b) of this Section 8 exceeds the
limitation on severance benefits that is set forth in Regulatory Bulletin 27a of
the OTS, as in effect on the date of the restatement of this Agreement.
9. Certain Reduction of Payments by the Bank. (a) Anything in this
-----------------------------------------
Agreement to the contrary notwithstanding, in the event it shall be determined
that any payment or distribution by the Bank to or for the benefit of the
Employee (whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise) (a "Payment") would be nondeductible
(in whole or part) by the Bank for Federal income tax purposes because of
Section 280G of the Code, then the aggregate present value of amounts payable or
distributable to or for the benefit of the Employee pursuant to this Agreement
(such amounts payable or distributable pursuant to this Agreement are
hereinafter referred to as "Agreement Payments") shall be reduced to the Reduced
Amount. The "Reduced Amount" shall be an amount, not less than zero, expressed
in present value which maximizes the aggregate present value of Agreement
Payments without causing any Payment to be nondeductible by the Bank because of
Section 280G of the Code. For purposes of this Section 9, present value shall be
determined in accordance with Section 280G(d)(4) of the Code.
(b) All determinations required to be made under this Section 9 shall
be made by the Bank's independent auditors, or at the election of such auditors
by such other firm or individuals or recognized expertise as such auditors may
select (such auditors or, if applicable, such other firm or individual, are
hereinafter referred to as the "Advisory Firm"). The Advisory Firm shall within
ten business days of the Date of Termination, or at such earlier time as is
requested by the Bank, provide to both the Bank and the Employee an opinion (and
detailed supporting calculations) that the Bank has substantial authority to
deduct for federal income tax purposes the full amount of the Agreement Payments
and that the Employee has substantial authority to deduct for federal income tax
purposes the full amount of the Agreement Payments and that the Employee has
substantial authority not to report on his federal income tax return any excise
tax imposed by Section 4999 of the Code with respect to the Agreement Payments.
Any such determination and opinion by the Advisory Firm shall be binding upon
the Bank and the Employee. The Employee shall determine which and how much, if
any, of the Agreement Payments shall be eliminated or reduced consistent with
the requirements of this Section 9, provided that, if the Employee does not make
such determination within ten business days of the receipt of the
5
<PAGE>
calculations made by the Advisory Firm, the Bank shall elect which and how much,
if any, of the Agreement Payments shall be eliminated or reduced consistent with
the requirements of this Section 9 and shall notify the Employee promptly of
such election. Within five business days of the earlier of (i) the Bank's
receipt of the Employee's determination pursuant to the immediately preceding
sentence of this Agreement or (ii) the Bank's election in lieu of such
determination, the Bank shall pay to or distribute to or for the benefit of the
Employee such amounts as are then due the Employee under this Agreement. The
Bank and the Employee shall cooperate fully with the Advisory Firm, including
without limitation providing to the Advisory Firm all information and materials
reasonably requested by it, in connection with the making of the determinations
required under this Section 9.
(c) As a result of uncertainty in application of Section 280G of the
Code at the time of the initial determination by the Advisory Firm hereunder, it
is possible that Agreement Payments will have been made by the Bank which should
not have been made ("Overpayment") or that additional Agreement Payments will
not have been made by the Bank which should have been made ("Underpayment"), in
each case, consistent with the calculations required to be made hereunder. In
the event that the Advisory Firm, based upon the assertion by the Internal
Revenue Service against the Employee of a deficiency which the Advisory Firm
believes has a high probability of success determines that an Overpayment has
been made, any such Overpayment paid or distributed by the Bank to or for the
benefit of Employee shall be treated for all purposes as a loan ab initio which
-- ------
the Employee shall repay to the Bank together with interest at the applicable
federal rate provided for in Section 7872(f)(2) of the Code; provided, however,
that no such loan shall be deemed to have been made and no amount shall be
payable by the Employee to the Bank if and to the extent such deemed loan and
payment would not either reduce the amount on which the Employee is subject to
tax under Section 1 and Section 4999 of the Code or generate a refund of such
taxes. In the event that the Advisory Firm, based upon controlling preceding or
other substantial authority, determines that an Underpayment has occurred, any
such Underpayment shall be promptly paid by the Bank to or for the benefit of
the Employee together with interest at the applicable federal rate provided for
in Section 7872(f)(2) of the Code.
(d) The total of payments to the Employee in the event of involuntary
termination of employment under Section 6(a) and Section 8(a) shall not exceed
three times his average annual compensation from the Bank over the five most
recent taxable years (or, if employed by the Bank for a shorter period, over the
period of his employment by the Bank).
(e) Any payments made to the Employee pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance with 12 U.S.C.
1828(k) and any regulations promulgated thereunder.
(f) (1) Within five business days before or after a change in control
as defined in Section 8(c) of this Agreement which was not approved in advance
by a resolution of a majority of the Continuing Directors of the Bank, the Bank
shall (i) deposit, or cause to be deposited, in a grantor trust (the "Trust)
substantially in the form described in Revenue Procedure 92-64, as issued by the
Internal Revenue Service and as amended or superseded thereby, an amount equal
to 299% of the Employee's "base amount" as defined in Section 280G(b)(3) of the
Code, and (ii) provide the trustee of the Trust with a written direction to hold
said amount and any investment return thereon in a segregated account for the
benefit of the Employee, and to follow the procedures set forth in the next
paragraph as to the payment of such amounts from the Trust.
(2) During the twelve (12) consecutive month period following the
date on which the Bank makes the deposit referred to in the preceding paragraph,
the Employee may provide the trustee of the Trust with a written notice
requesting that the trustee pay to the Employee an amount designated in the
notice as being payable pursuant to Section 8(a) or (b). Within three business
days after receiving said notice, the trustee of the Trust shall send a copy of
the notice to the Bank via overnight and registered mail return receipt
requested. On the tenth (10th) business day after mailing said notice to the
Bank, the trustee of the Trust shall pay the Employee the amount designated
therein in immediately available funds, unless prior thereto the Bank provides
the trustee with a written notice directing the trustee to withhold such
payment. In the latter event, the trustee shall submit the dispute to non-
appealable binding arbitration for a determination of the amount payable to the
Employee pursuant to Section 8(a) or (b) hereof, and the party responsible for
the payment of the costs of such arbitration (which may include any reasonable
legal fees and expenses incurred by the Employee) shall
6
<PAGE>
be determined by the arbitrator. The trustee shall choose the arbitrator to
settle the dispute, and such arbitrator shall be bound by the rules of the
American Arbitration Association in making her determination. The parties and
the trustee shall be bound by the results of the arbitration and, within 3 days
of the determination by the arbitrator, the trustee shall pay from the Trust the
amounts required to be paid to the Employee and/or the Bank, and in no event
shall the trustee be liable to either party for making the payments as
determined by the arbitrator.
(3) Upon the earlier of (i) any payment from the Trust to the
Employee, or (ii) the date twelve (12) months after the date on which the Bank
makes the deposit referred to in the first paragraph of this subsection (d)(1),
the trustee of the Trust shall pay to the Bank the entire balance remaining in
the segregated account maintained for the benefit of the Employee. The Employee
shall thereafter have no further interest in the Trust pursuant to this
Agreement.
(g) In the event that any dispute arises between the Employee and the
Bank as to the terms or interpretation of this Agreement, including this Section
8, whether instituted by formal legal proceedings or otherwise, including any
action that the Employee takes to enforce the terms of this Section 8 or to
defend against any action taken by the Bank, the Employee shall be reimbursed
for all costs and expenses, including reasonable attorneys' fees, arising from
such dispute, proceedings or actions, provided that the Employee shall obtain a
final judgement by a court of competent jurisdiction in favor of the Employee.
Such reimbursement shall be paid within ten (10) days of Employee's furnishing
to the Bank written evidence, which may be in the form, among other things, of a
cancelled check or receipt, of any costs or expenses incurred by the Employee.
10. No Assignments.
--------------
(a) This Agreement is personal to each of the parties hereto, and
neither party may assign or delegate any of its rights or obligations hereunder
without first obtaining the written consent of the other party; provided,
however, that the Bank will require any successor or assign (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Bank, by an assumption
agreement in form and substance satisfactory to the Employee, to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Bank would be required to perform it if no such succession or
assignment had taken place. Failure of the Bank to obtain such an assumption
agreement prior to the effectiveness of any such succession or assignment shall
be a breach of this Agreement and shall entitle the Employee to compensation
from the Bank in the same amount and on the same terms as the compensation
pursuant to Section 8(a) hereof. For purposes of implementing the provisions of
this Section 10(a), the date on which any such succession becomes effective
shall be deemed the Date of Termination.
(b) This Agreement and all rights of the Employee hereunder shall inure
to the benefit of and be enforceable by the Employee's personal and legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If the Employee should die while any amounts would still
be payable to the Employee hereunder if the Employee had continued to live, all
such amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to the Employee's devisee, legatee or other designee
or if there is no such designee, to the Employee's estate.
11. Notice. For the purposes of this Agreement, notices and all other
------
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, addressed to the Bank, to the
attention of the Board of Directors of the Bank with a copy to the Secretary of
the Bank), or, in the case of the Employee, to the home address most recently
provided to the Bank by the Employee.
12. Amendments. No amendments or additions to this Agreement shall be
----------
binding unless in writing and signed by both parties, except as herein otherwise
provided.
13. Paragraph Headings. The paragraph headings used in this Agreement are
------------------
included solely for convenience and shall not affect, or be used in connection
with, the interpretation of this Agreement.
7
<PAGE>
14. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
15. Governing Law. This Agreement shall be governed by the laws of the
-------------
United States to the extent applicable and otherwise by the laws of the State of
Iowa.
16. Arbitration. Any dispute or controversy arising under or in
-----------
connection with this Agreement shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and the year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
GRINNELL FEDERAL SAVINGS BANK
By: -------------------------------------
EMPLOYEE
-------------------------------------
LeRoy E. Meredith
8
<PAGE>
EMPLOYMENT AGREEMENT, AS AMENDED AND RESTATED
---------------------------------------------
THIS EMPLOYMENT AGREEMENT ("Agreement"), originally made and entered into
as of the 5th day of January, 1994 and subsequently amended and restated as of
the 19th day of January, 1996, by and between GRINNELL FEDERAL SAVINGS BANK,
Grinnell, Iowa (hereinafter referred to as the "Bank") and Steven L. Opsal (the
"Employee");
WHEREAS, the Employee is currently serving as President and Chief Executive
Officer of the Bank; and
WHEREAS, the Board of Directors of the Bank recognizes that, as is the case
with publicly held corporations generally, the possibility of a change in
control of the Bank and/or its holding company, GFS Bancorp, Inc. (the "Holding
Company") may exist and that such possibility, and the uncertainty and questions
which it may raise among management, may result in the departure or distraction
of key management personnel to the detriment of the Bank, the Holding Company
and its stockholders; and
WHEREAS, the Board of Directors of the Bank believes it is in the best
interests of the Bank to enter into this Agreement with the Employee in order to
assure continuity of management of the Bank and to reinforce and encourage the
continued attention and dedication of the Employee to his assigned duties
without distraction in the face of potentially disruptive circumstances arising
from the possibility of a change in control of the Holding Company, although no
such change is now contemplated; and
WHEREAS, the Board of Directors of the Bank has approved and authorized the
execution of this Agreement with the Employee to take effect as stated in
Section 4 hereof;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein contained, it is AGREED as
follows:
1. Employment. The Employee will be employed as President and Chief
----------
Executive Officer of the Bank. As President and Chief Executive Officer,
Employee shall render administrative and management services as are customarily
performed by persons situated in similar executive capacities, and shall have
other powers and duties as may from time to time be prescribed by the Board,
provided that such duties are consistent with the Employee's position as
President and Chief Executive Officer. The Employee shall continue to devote
his best efforts and substantially all his business time and attention to the
business and affairs of the Bank and its subsidiaries and affiliated companies.
2. Compensation.
------------
(a) Salary. The Bank agrees to pay the Employee during the term of
------
this Agreement a salary established by the Board of Directors. The salary
hereunder as of the Commencement Date (as defined in Section 4 hereof) shall be
at least equal to the Employee's salary in effect immediately prior to the
Commencement Date. The salary provided for herein shall be payable not less
frequently than bi-monthly in accordance with the practices of the Bank,
provided, however, that no such salary is required to be paid by the terms of
this Agreement in respect of any month or portion thereof subsequent to the
termination of this Agreement and provided further, that the amount of such
salary shall be reviewed by the Board of Directors not less often than annually
and may be increased (but not decreased) from time to time in such amounts as
the Board of Directors in its discretion may decide, subject to the customary
withholding tax and other employee taxes as required with respect to
compensation paid by a corporation to an employee.
(b) Discretionary Bonuses. The Employee shall be entitled to
---------------------
participate in an equitable manner with all other executive officers of the Bank
in discretionary bonuses as authorized and declared by the Board of Directors of
the Bank to its executive employees. No other compensation provided for in this
Agreement shall be deemed a substitute for the Employee's right to participate
in such bonuses when and as declared by the Board of Directors.
(c) Expenses. During the term of his employment hereunder, the
--------
Employee shall be entitled to receive prompt reimbursement for all reasonable
expenses incurred by him (in accordance with
<PAGE>
policies and procedures at least as favorable to the Employee as those presently
applicable to the senior executive officers of the Bank) in performing services
hereunder, provided that the Employee properly accounts therefor in accordance
with Bank policy.
(d) Salary and Bonuses Following Change in Control. Notwithstanding any
----------------------------------------------
other provisions of this Agreement to the contrary, in the event of the
Employee's continued employment with the Bank or a successor following a change
in control as defined in Section 8(c) of this Agreement, the Employee shall be
entitled to receive salary and discretionary bonuses at least equal to the
average salary and bonuses received by him for the three years preceding the
change in control.
3. Benefits.
--------
(a) Participation in Retirement and Employee Benefit Plans. The
------------------------------------------------------
Employee shall be entitled while employed hereunder to participate in, and
receive benefits under, all plans relating to stock options, stock purchases,
pension, thrift, profit-sharing, group life insurance, medical coverage,
education, cash or stock bonuses, and other retirement or employee benefits or
combinations thereof, that are now or hereafter maintained for the benefit of
the Bank's executive employees or for its employees generally.
(b) Fringe Benefits. The Employee shall be eligible while employed
---------------
hereunder to participate in, and receive benefits under, any other fringe
benefits which are or may become applicable to the Bank's executive employees or
to its employees generally.
4. Term. The term of employment under this Agreement shall be a period of
----
three (3) years commencing on the date of completion of the conversion (the
"Conversion") of the Bank from mutual to stock form (the "Commencement Date"),
subject to earlier termination as provided herein. Beginning on the first
anniversary of the Commencement Date, and on each anniversary thereafter, the
term of employment under this Agreement shall be extended for a period of one
year unless either the Bank or the Employee gives contrary written notice to the
other not less than 90 days in advance of the date on which the term of
employment under this Agreement would otherwise be extended, provided that such
--------
term will not be automatically extended unless, prior thereto, such extension is
approved by the Board of Directors following the Board's review of a formal
performance evaluation of the Employee performed by the disinterested members of
the Board of Directors of the Bank and reflected in the minutes of the Board of
Directors. Reference herein to the term of employment under this Agreement
shall refer to both such initial term and such extended terms.
5. Vacations. The Employee shall be entitled, without loss of pay, to
---------
absent himself voluntarily from the performance of his employment under this
Agreement, all such voluntary absences to count as vacation time, provided that:
(a) the Employee shall be entitled to an annual vacation of not less
than four (4) weeks per year;
(b) the timing of vacations shall be scheduled in a reasonable manner
by the Employee; and
(c) solely at the Employee's request, the Board of Directors shall be
entitled to grant to the Employee a leave or leaves of absence with or without
pay at such time or times and upon such terms and conditions as the Board, in
its discretion, may determine.
6. Termination of Employment; Death.
--------------------------------
(a) The Board of Directors may terminate the Employee's employment at
any time, but any termination by the Bank's Board of Directors, other than
termination for cause, shall not prejudice the Employee's right to compensation
or other benefits under the Agreement. If the employment of the Employee is
involuntarily terminated, other than for "cause" as provided in this Section
6(a) or pursuant to any of Sections 6(d) through 6(g), or by reason of death or
disability as provided in Sections 6(c) or 7, or in connection with or following
a change in control as provided in Section 8(a) (in which event the benefits and
compensation provided
2
<PAGE>
for in Section 8(a) shall apply), the Employee shall be entitled to receive, (i)
his then applicable salary for the then-remaining term of the Agreement as
calculated in accordance with Section 4 hereof (including any renewal term),
plus such salary for an additional 12-month period, payable in such manner and
at such times as such salary would have been payable to the Employee under
Section 2 had he remained in the employ of the Bank, and (ii) health insurance
benefits as maintained by the Bank for the benefit of its senior executive
employees generally over the then-remaining term of the Agreement as calculated
in accordance with Section 4 hereof. Notwithstanding the foregoing, but only to
the extent required under federal banking law, the amount payable under this
Section 6(a) shall be reduced to the extent that on the date of the Employee's
termination of employment, the present value of the benefits payable under
clauses (a)(i) and (ii) hereof exceeds the limitation on benefits that is set
forth in Regulatory Bulletin 27a of the Office of Thrift Supervision ("OTS"), as
in effect on the date of the restatement of this Agreement.
The terms "termination" or involuntarily terminated" in this Agreement
shall refer to the termination of the employment of Employee without his express
written consent. The Employee shall be considered to be involuntarily
terminated (1) if the employment of the Employee is involuntarily terminated for
any reason other than for "cause" as provided in this Section 6(a), pursuant to
any of Sections 6(d) through 6(g) or by reason of death or disability as
provided in Sections 6(c) and 7; or (2) there occurs a material diminution of or
interference with the Employee's duties, responsibilities and benefits as
President and Chief Executive Officer of the Bank. By way of example and not by
way of limitation, any of the following actions, if unreasonable or materially
adverse to the Employee, shall constitute such diminution or interference unless
consented to in writing by the Employee: (i) a change in the principal workplace
of the Employee, to a location more than 30 miles from the Bank's main office;
(ii) a material demotion of the Employee, a reduction in the number or seniority
of other Bank personnel reporting to the Employee, or a reduction in the
frequency with which, or in the nature of the matters with respect to which,
such personnel are to report to the Employee, other than as part of a Bank or
Holding Company-wide reduction in staff; (iii) a reduction or adverse change in
the salary, perquisites, benefits, contingent benefits or vacation time which
had theretofore been provided to the Employee, other than as part of an overall
program applied uniformly and with equitable effect to all members of the senior
management of the Bank or the Holding Company; or (iv) a failure to elect or
reelect the Employee to the Board of Directors of the Bank or the Holding
Company.
In case of termination of the Employee's employment for cause, the Bank
shall pay the Employee his salary through the date of termination, and the Bank
shall have no further obligation to the Employee under this Agreement. The
Employee shall have no right to receive compensation or other benefits for any
period after termination for cause. For purposes of this Agreement, termination
for "cause" shall include termination because of the Employee's personal
dishonesty, incompetence, willful misconduct, breach of a fiduciary duty
involving personal profit, intentional failure to perform stated duties, willful
violation of any law, rule, or regulation (other than traffic violations or
similar offenses) or final cease-and-desist order, or material breach of any
provision of this Agreement. Notwithstanding the foregoing, the Employee shall
not be deemed to have been terminated for cause unless and until there shall
have been delivered to the Employee a copy of a resolution, duly adopted by the
affirmative vote of not less than a majority of the disinterested members of the
Board of Directors of the Bank at a meeting of the Board called and held for
such purpose (after reasonable notice to the Employee and an opportunity for the
Employee, together with the Employee's counsel, to be heard before the Board),
such meeting and the opportunity to be heard to be held prior to, or as soon as
practicable following, termination, but in no event later than 60 days following
such termination, stating that in the good faith opinion of the Board the
Employee was guilty of conduct constituting "cause" as set forth above and
specifying the particulars thereof in detail.
(b) The Employee's employment may be voluntarily terminated by the Employee
at any time upon 90 days written notice to the Bank or upon such shorter period
as may be agreed upon between the Employee and the Board of Directors of the
Bank. In the event of such voluntary termination, the Bank shall be obligated
to continue to pay the Employee his salary only through the date of termination,
at the time such payments are due, and the Bank shall have no further obligation
to the Employee under this Agreement. The provisions of this Section 6(b) shall
not apply to the Employee's voluntary termination of employment within 30 days
following a change in control under Section 8(b) of this Agreement; voluntary
termination of employment in such circumstances shall be governed by Section
8(b).
3
<PAGE>
(c) In the event of the death of the Employee during the term of
employment under this Agreement and prior to any termination hereunder, the
Employee's estate, or such person as the Employee may have previously designated
in writing, shall be entitled to receive from the Bank the salary of the
Employee through the last day of the calendar month in which his death shall
have occurred, and the term of employment under this Agreement shall end on such
last day of the month.
(d) If the Employee is suspended from office and/or temporarily
prohibited from participating in the conduct of the Bank's affairs by a notice
served under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act
("FDIA"), 12 U.S.C. (S) 1818(e)(3); (g)(1), the Bank's obligations under this
Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the Bank
may in its discretion (i) pay the Employee all or part of the compensation
withheld while its obligations under this Agreement were suspended and (ii)
reinstate in whole or in part any of the obligations which were suspended.
(e) If the Employee is removed from office and/or permanently
prohibited from participating in the conduct of the Bank's affairs by an order
issued under Section 8(e)(4) or (g)(1) of the FDIA, 12 U.S.C. (S) 1818(e)(4);
(g)(1), all obligations of the Bank under this Agreement shall terminate, as of
the effective date of the order, but vested rights of the parties shall not be
affected.
(f) If the Bank becomes in default (as defined in Section 3(x)(1) of
the FDIA, 12 U.S.C. (S) 1813(x)(1)), all obligations under this Agreement shall
terminate as of the date of default, but this provision shall not affect any
vested rights of the parties.
(g) All obligations under this Agreement shall be terminated, except to
the extent determined that continuation of this Agreement is necessary for the
continued operation of the Bank: (i) by the Director of the OTS or his or her
designee at the time the Federal Deposit Insurance Corporation or the Resolution
Trust Corporation enters into an agreement to provide assistance to or on behalf
of the Bank under the authority contained in Section 13(c) of the FDIA, 12
U.S.C. (S) 1823(c); or (ii) by the Director of the OTS or his or her designee at
the time the Director of the OTS or his or her designee approves a supervisory
merger to resolve problems related to operation of the Bank or when the Bank is
determined by the Director of the OTS to be in an unsafe or unsound condition.
Any rights of the parties that have already vested, however, shall not
be affected by any such action.
(h) In the event the Bank purports to terminate the Employee for cause,
but it is determined by a court of competent jurisdiction or by an arbitrator
pursuant to Section 16 that cause did not exist for such termination, or if in
any event it is determined by any such court or arbitrator that the Bank has
failed to make timely payment of any amounts owed to the Employee under this
Agreement, the Employee shall be entitled to reimbursement for all reasonable
costs, including attorneys' fees, incurred in challenging such termination or
collecting such amounts. Such reimbursement shall be in addition to all rights
to which the Employee is otherwise entitled under this Agreement.
7. Disability. If during the term of employment hereunder the Employee
----------
shall become disabled or incapacitated to the extent that he is unable to
perform the duties of the President and Chief Executive Officer, he shall be
entitled to receive disability benefits of the type provided for other senior
executive employees of the Bank.
8. Change in Control.
-----------------
(a) Involuntary Termination. Notwithstanding any provision herein to
-----------------------
the contrary, if the Employee's employment is involuntarily terminated (other
than for cause or pursuant to any of Sections 6(c) through 6(g) or Section 7 of
this Agreement) in connection with or within 12 months after a change in control
which occurs at any time during the term of employment under this Agreement, the
Bank shall pay to the Employee in a lump sum in cash within 10 business days
after the Date of Termination (as hereinafter defined)
4
<PAGE>
of employment an amount equal to 299% of the Employee's "base amount" of
compensation, as defined in Section 280G(b)(3) of the Internal Revenue Code of
1986, as amended (the "Code").
(b) Voluntary Termination. If the Employee voluntarily terminates his
---------------------
employment hereunder in connection with or within 30 days following a change in
control which occurs at any time during the term of employment under this
Agreement, the Employee shall be entitled to receive the payment provided by
Section 8(a) hereof in the manner provided by Section 8(a) hereof.
(c) Definitions. For purposes of Sections 8, 9 and 11 of this
-----------
Agreement, "Date of Termination" means the earlier of (i) the date upon which
the Bank gives notice to the Employee of the termination of his employment with
the Bank, or (ii) the date upon which the Employee ceases to serve as an
Employee of the Bank; and "change in control" shall mean any one of the
following events: (1) the acquisition of ownership, holding or power to vote
more than 25% of the Bank's or the Holding Company's voting stock, (2) the
acquisition of the ability to control the election of a majority of the Bank's
or the Holding Company's directors, (3) the acquisition of a controlling
influence over the management or policies of the Bank or the Holding Company by
any person or by persons acting as a "group" (within the meaning of Section
13(d) of the Securities Exchange Act of 1934), (4) the acquisition of control of
the Bank or the Holding Company within the meaning of 12 C.F.R. Part 574 or its
applicable equivalent (except in the case of (1), (2), (3) and (4) hereof,
ownership or control of the Bank by the Holding Company itself shall not
constitute a "change in control"), or (5) during any period of two consecutive
years, individuals who at the beginning of such period constitute the Board of
Directors of the Holding Company or the Bank (the "Existing Board") (the
"Continuing Directors") cease for any reason to constitute at least a majority
thereof, provided that any individual whose election or nomination for election
as a member of the Existing Board was approved by a vote of at least a majority
of the Continuing Directors then in office shall be considered a Continuing
Director. For purposes of this subparagraph only, the term "person" refers to an
individual or a corporation, partnership, trust, association, joint venture,
pool, syndicate, sole proprietorship, unincorporated organization or any other
form of entity not specifically listed herein.
Notwithstanding the foregoing, but only to the extent required under
federal banking law, the amount payable under this Section 8 shall be reduced to
the extent that on the date of the Employee's termination of employment, the
amount payable under Subsection (a) or (b) of this Section 8 exceeds the
limitation on severance benefits that is set forth in Regulatory Bulletin 27a of
the OTS, as in effect on the date of the restatement of this Agreement.
9. Certain Reduction of Payments by the Bank. (a) Anything in this
-----------------------------------------
Agreement to the contrary notwithstanding, in the event it shall be determined
that any payment or distribution by the Bank to or for the benefit of the
Employee (whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise) (a "Payment") would be nondeductible
(in whole or part) by the Bank for Federal income tax purposes because of
Section 280G of the Code, then the aggregate present value of amounts payable or
distributable to or for the benefit of the Employee pursuant to this Agreement
(such amounts payable or distributable pursuant to this Agreement are
hereinafter referred to as "Agreement Payments") shall be reduced to the Reduced
Amount. The "Reduced Amount" shall be an amount, not less than zero, expressed
in present value which maximizes the aggregate present value of Agreement
Payments without causing any Payment to be nondeductible by the Bank because of
Section 280G of the Code. For purposes of this Section 9, present value shall be
determined in accordance with Section 280G(d)(4) of the Code.
(b) All determinations required to be made under this Section 9 shall
be made by the Bank's independent auditors, or at the election of such auditors
by such other firm or individuals or recognized expertise as such auditors may
select (such auditors or, if applicable, such other firm or individual, are
hereinafter referred to as the "Advisory Firm"). The Advisory Firm shall within
ten business days of the Date of Termination, or at such earlier time as is
requested by the Bank, provide to both the Bank and the Employee an opinion (and
detailed supporting calculations) that the Bank has substantial authority to
deduct for federal income tax purposes the full amount of the Agreement Payments
and that the Employee has substantial authority to deduct for federal income tax
purposes the full amount of the Agreement Payments and that the Employee has
substantial authority not to report on his federal income tax return any excise
tax imposed by Section 4999 of the Code with respect to the Agreement Payments.
Any such determination and opinion by the Advisory Firm
5
<PAGE>
shall be binding upon the Bank and the Employee. The Employee shall determine
which and how much, if any, of the Agreement Payments shall be eliminated or
reduced consistent with the requirements of this Section 9, provided that, if
the Employee does not make such determination within ten business days of the
receipt of the calculations made by the Advisory Firm, the Bank shall elect
which and how much, if any, of the Agreement Payments shall be eliminated or
reduced consistent with the requirements of this Section 9 and shall notify the
Employee promptly of such election. Within five business days of the earlier of
(i) the Bank's receipt of the Employee's determination pursuant to the
immediately preceding sentence of this Agreement or (ii) the Bank's election in
lieu of such determination, the Bank shall pay to or distribute to or for the
benefit of the Employee such amounts as are then due the Employee under this
Agreement. The Bank and the Employee shall cooperate fully with the Advisory
Firm, including without limitation providing to the Advisory Firm all
information and materials reasonably requested by it, in connection with the
making of the determinations required under this Section 9.
(c) As a result of uncertainty in application of Section 280G of the
Code at the time of the initial determination by the Advisory Firm hereunder, it
is possible that Agreement Payments will have been made by the Bank which should
not have been made ("Overpayment") or that additional Agreement Payments will
not have been made by the Bank which should have been made ("Underpayment"), in
each case, consistent with the calculations required to be made hereunder. In
the event that the Advisory Firm, based upon the assertion by the Internal
Revenue Service against the Employee of a deficiency which the Advisory Firm
believes has a high probability of success determines that an Overpayment has
been made, any such Overpayment paid or distributed by the Bank to or for the
benefit of Employee shall be treated for all purposes as a loan ab initio which
-- ------
the Employee shall repay to the Bank together with interest at the applicable
federal rate provided for in Section 7872(f)(2) of the Code; provided, however,
that no such loan shall be deemed to have been made and no amount shall be
payable by the Employee to the Bank if and to the extent such deemed loan and
payment would not either reduce the amount on which the Employee is subject to
tax under Section 1 and Section 4999 of the Code or generate a refund of such
taxes. In the event that the Advisory Firm, based upon controlling preceding or
other substantial authority, determines that an Underpayment has occurred, any
such Underpayment shall be promptly paid by the Bank to or for the benefit of
the Employee together with interest at the applicable federal rate provided for
in Section 7872(f)(2) of the Code.
(d) The total of payments to the Employee in the event of involuntary
termination of employment under Section 6(a) and Section 8(a) shall not exceed
three times his average annual compensation from the Bank over the five most
recent taxable years (or, if employed by the Bank for a shorter period, over the
period of his employment by the Bank).
(e) Any payments made to the Employee pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance with 12 U.S.C.
1828(k) and any regulations promulgated thereunder.
(f) (1) Within five business days before or after a change in control
as defined in Section 8(c) of this Agreement which was not approved in advance
by a resolution of a majority of the Continuing Directors of the Bank, the Bank
shall (i) deposit, or cause to be deposited, in a grantor trust (the "Trust)
substantially in the form described in Revenue Procedure 92-64, as issued by the
Internal Revenue Service and as amended or superseded thereby, an amount equal
to 299% of the Employee's "base amount" as defined in Section 280G(b)(3) of the
Code, and (ii) provide the trustee of the Trust with a written direction to hold
said amount and any investment return thereon in a segregated account for the
benefit of the Employee, and to follow the procedures set forth in the next
paragraph as to the payment of such amounts from the Trust.
(2) During the twelve (12) consecutive month period following the
date on which the Bank makes the deposit referred to in the preceding paragraph,
the Employee may provide the trustee of the Trust with a written notice
requesting that the trustee pay to the Employee an amount designated in the
notice as being payable pursuant to Section 8(a) or (b). Within three business
days after receiving said notice, the trustee of the Trust shall send a copy of
the notice to the Bank via overnight and registered mail return receipt
requested. On the tenth (10th) business day after mailing said notice to the
Bank, the trustee of the Trust shall pay the Employee the amount designated
therein in immediately available funds, unless prior thereto the Bank provides
the trustee with a written notice directing the trustee to withhold such
payment. In the latter event, the
6
<PAGE>
trustee shall submit the dispute to non-appealable binding arbitration for a
determination of the amount payable to the Employee pursuant to Section 8(a) or
(b) hereof, and the party responsible for the payment of the costs of such
arbitration (which may include any reasonable legal fees and expenses incurred
by the Employee) shall be determined by the arbitrator. The trustee shall choose
the arbitrator to settle the dispute, and such arbitrator shall be bound by the
rules of the American Arbitration Association in making her determination. The
parties and the trustee shall be bound by the results of the arbitration and,
within 3 days of the determination by the arbitrator, the trustee shall pay from
the Trust the amounts required to be paid to the Employee and/or the Bank, and
in no event shall the trustee be liable to either party for making the payments
as determined by the arbitrator.
(3) Upon the earlier of (i) any payment from the Trust to the
Employee, or (ii) the date twelve (12) months after the date on which the Bank
makes the deposit referred to in the first paragraph of this subsection (d)(1),
the trustee of the Trust shall pay to the Bank the entire balance remaining in
the segregated account maintained for the benefit of the Employee. The Employee
shall thereafter have no further interest in the Trust pursuant to this
Agreement .
(g) In the event that any dispute arises between the Employee and the
Bank as to the terms or interpretation of this Agreement, including this Section
8, whether instituted by formal legal proceedings or otherwise, including any
action that the Employee takes to enforce the terms of this Section 8 or to
defend against any action taken by the Bank, the Employee shall be reimbursed
for all costs and expenses, including reasonable attorneys' fees, arising from
such dispute, proceedings or actions, provided that the Employee shall obtain a
final judgement by a court of competent jurisdiction in favor of the Employee.
Such reimbursement shall be paid within ten (10) days of Employee's furnishing
to the Bank written evidence, which may be in the form, among other things, of a
cancelled check or receipt, of any costs or expenses incurred by the Employee.
10. No Assignments.
--------------
(a) This Agreement is personal to each of the parties hereto, and
neither party may assign or delegate any of its rights or obligations hereunder
without first obtaining the written consent of the other party; provided,
however, that the Bank will require any successor or assign (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Bank, by an assumption
agreement in form and substance satisfactory to the Employee, to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Bank would be required to perform it if no such succession or
assignment had taken place. Failure of the Bank to obtain such an assumption
agreement prior to the effectiveness of any such succession or assignment shall
be a breach of this Agreement and shall entitle the Employee to compensation
from the Bank in the same amount and on the same terms as the compensation
pursuant to Section 8(a) hereof. For purposes of implementing the provisions of
this Section 10(a), the date on which any such succession becomes effective
shall be deemed the Date of Termination.
(b) This Agreement and all rights of the Employee hereunder shall inure
to the benefit of and be enforceable by the Employee's personal and legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If the Employee should die while any amounts would still
be payable to the Employee hereunder if the Employee had continued to live, all
such amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to the Employee's devisee, legatee or other designee
or if there is no such designee, to the Employee's estate.
11. Notice. For the purposes of this Agreement, notices and all other
------
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, addressed to the Bank, to the
attention of the Board of Directors of the Bank with a copy to the Secretary of
the Bank), or, in the case of the Employee, to the home address most recently
provided to the Bank by the Employee.
12. Amendments. No amendments or additions to this Agreement shall be
----------
binding unless in writing and signed by both parties, except as herein otherwise
provided.
7
<PAGE>
13. Paragraph Headings. The paragraph headings used in this Agreement are
------------------
included solely for convenience and shall not affect, or be used in connection
with, the interpretation of this Agreement.
14. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
15. Governing Law. This Agreement shall be governed by the laws of the
-------------
United States to the extent applicable and otherwise by the laws of the State of
Iowa.
16. Arbitration. Any dispute or controversy arising under or in
-----------
connection with this Agreement shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and the year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
GRINNELL FEDERAL SAVINGS BANK
By: ______________________________________
EMPLOYEE
______________________________________
Steven L. Opsal
8
<PAGE>
EMPLOYMENT AGREEMENT, AS AMENDED AND RESTATED
---------------------------------------------
THIS EMPLOYMENT AGREEMENT ("Agreement"), originally made and entered into
as of the 5th day of January, 1994 and subsequently amended and restated as of
the 19th day of January, 1996, by and between GRINNELL FEDERAL SAVINGS BANK,
Grinnell, Iowa (hereinafter referred to as the "Bank") and Katherine A. Rose
(the "Employee");
WHEREAS, the Employee is currently serving as Senior Vice President,
Treasurer and Chief Financial Officer of the Bank; and
WHEREAS, the Board of Directors of the Bank recognizes that, as is the case
with publicly held corporations generally, the possibility of a change in
control of the Bank and/or its holding company, GFS Bancorp, Inc. (the "Holding
Company") may exist and that such possibility, and the uncertainty and questions
which it may raise among management, may result in the departure or distraction
of key management personnel to the detriment of the Bank, the Holding Company
and its stockholders; and
WHEREAS, the Board of Directors of the Bank believes it is in the best
interests of the Bank to enter into this Agreement with the Employee in order to
assure continuity of management of the Bank and to reinforce and encourage the
continued attention and dedication of the Employee to his assigned duties
without distraction in the face of potentially disruptive circumstances arising
from the possibility of a change in control of the Holding Company, although no
such change is now contemplated; and
WHEREAS, the Board of Directors of the Bank has approved and authorized the
execution of this Agreement with the Employee to take effect as stated in
Section 4 hereof;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein contained, it is AGREED as
follows:
1. Employment. The Employee will be employed as Senior Vice President,
----------
Treasurer and Chief Financial Officer of the Bank. As Senior Vice President,
Treasurer and Chief Financial Officer, Employee shall render administrative and
management services as are customarily performed by persons situated in similar
executive capacities, and shall have other powers and duties as may from time to
time be prescribed by the Board, provided that such duties are consistent with
the Employee's position as Senior Vice President, Treasurer and Chief Financial
Officer. The Employee shall continue to devote his best efforts and
substantially all his business time and attention to the business and affairs of
the Bank and its subsidiaries and affiliated companies.
2. Compensation.
------------
(a) Salary. The Bank agrees to pay the Employee during the term of
------
this Agreement a salary established by the Board of Directors. The salary
hereunder as of the Commencement Date (as defined in Section 4 hereof) shall be
at least equal to the Employee's salary in effect immediately prior to the
Commencement Date. The salary provided for herein shall be payable not less
frequently than bi-monthly in accordance with the practices of the Bank,
provided, however, that no such salary is required to be paid by the terms of
this Agreement in respect of any month or portion thereof subsequent to the
termination of this Agreement and provided further, that the amount of such
salary shall be reviewed by the Board of Directors not less often than annually
and may be increased (but not decreased) from time to time in such amounts as
the Board of Directors in its discretion may decide, subject to the customary
withholding tax and other employee taxes as required with respect to
compensation paid by a corporation to an employee.
(b) Discretionary Bonuses. The Employee shall be entitled to
---------------------
participate in an equitable manner with all other executive officers of the Bank
in discretionary bonuses as authorized and declared by the Board of Directors of
the Bank to its executive employees. No other compensation provided for in this
Agreement shall be deemed a substitute for the Employee's right to participate
in such bonuses when and as declared by the Board of Directors.
(c) Expenses. During the term of his employment hereunder, the
--------
Employee shall be entitled to receive prompt reimbursement for all reasonable
expenses incurred by him (in accordance with
<PAGE>
policies and procedures at least as favorable to the Employee as those presently
applicable to the senior executive officers of the Bank) in performing services
hereunder, provided that the Employee properly accounts therefor in accordance
with Bank policy.
(d) Salary and Bonuses Following Change in Control. Notwithstanding
----------------------------------------------
any other provisions of this Agreement to the contrary, in the event of the
Employee's continued employment with the Bank or a successor following a change
in control as defined in Section 8(c) of this Agreement, the Employee shall be
entitled to receive salary and discretionary bonuses at least equal to the
average salary and bonuses received by him for the three years preceding the
change in control.
3. Benefits.
--------
(a) Participation in Retirement and Employee Benefit Plans. The
------------------------------------------------------
Employee shall be entitled while employed hereunder to participate in, and
receive benefits under, all plans relating to stock options, stock purchases,
pension, thrift, profit-sharing, group life insurance, medical coverage,
education, cash or stock bonuses, and other retirement or employee benefits or
combinations thereof, that are now or hereafter maintained for the benefit of
the Bank's executive employees or for its employees generally.
(b) Fringe Benefits. The Employee shall be eligible while employed
---------------
hereunder to participate in, and receive benefits under, any other fringe
benefits which are or may become applicable to the Bank's executive employees or
to its employees generally.
4. Term. The term of employment under this Agreement shall be a period of
----
three (3) years commencing on the date of completion of the conversion (the
"Conversion") of the Bank from mutual to stock form (the "Commencement Date"),
subject to earlier termination as provided herein. Beginning on the first
anniversary of the Commencement Date, and on each anniversary thereafter, the
term of employment under this Agreement shall be extended for a period of one
year unless either the Bank or the Employee gives contrary written notice to the
other not less than 90 days in advance of the date on which the term of
employment under this Agreement would otherwise be extended, provided that such
--------
term will not be automatically extended unless, prior thereto, such extension is
approved by the Board of Directors following the Board's review of a formal
performance evaluation of the Employee performed by the disinterested members of
the Board of Directors of the Bank and reflected in the minutes of the Board of
Directors. Reference herein to the term of employment under this Agreement
shall refer to both such initial term and such extended terms.
5. Vacations. The Employee shall be entitled, without loss of pay, to
---------
absent himself voluntarily from the performance of his employment under this
Agreement, all such voluntary absences to count as vacation time, provided that:
(a) the Employee shall be entitled to an annual vacation of not less
than four (4) weeks per year;
(b) the timing of vacations shall be scheduled in a reasonable manner
by the Employee; and
(c) solely at the Employee's request, the Board of Directors shall be
entitled to grant to the Employee a leave or leaves of absence with or without
pay at such time or times and upon such terms and conditions as the Board, in
its discretion, may determine.
6. Termination of Employment; Death.
--------------------------------
(a) The Board of Directors may terminate the Employee's employment at
any time, but any termination by the Bank's Board of Directors, other than
termination for cause, shall not prejudice the Employee's right to compensation
or other benefits under the Agreement. If the employment of the Employee is
involuntarily terminated, other than for "cause" as provided in this Section
6(a) or pursuant to any of Sections 6(d) through 6(g), or by reason of death or
disability as provided in Sections 6(c) or 7, or in connection with or following
a change in control as provided in Section 8(a) (in which event the benefits and
compensation provided
2
<PAGE>
for in Section 8(a) shall apply), the Employee shall be entitled to receive, (i)
his then applicable salary for the then-remaining term of the Agreement as
calculated in accordance with Section 4 hereof (including any renewal term),
plus such salary for an additional 12-month period, payable in such manner and
at such times as such salary would have been payable to the Employee under
Section 2 had he remained in the employ of the Bank, and (ii) health insurance
benefits as maintained by the Bank for the benefit of its senior executive
employees generally over the then-remaining term of the Agreement as calculated
in accordance with Section 4 hereof. Notwithstanding the foregoing, but only to
the extent required under federal banking law, the amount payable under this
Section 6(a) shall be reduced to the extent that on the date of the Employee's
termination of employment, the present value of the benefits payable under
clauses (a)(i) and (ii) hereof exceeds the limitation on benefits that is set
forth in Regulatory Bulletin 27a of the Office of Thrift Supervision ("OTS"), as
in effect on the date of the restatement of this Agreement.
The terms "termination" or involuntarily terminated" in this Agreement
shall refer to the termination of the employment of Employee without his express
written consent. The Employee shall be considered to be involuntarily
terminated (1) if the employment of the Employee is involuntarily terminated for
any reason other than for "cause" as provided in this Section 6(a), pursuant to
any of Sections 6(d) through 6(g) or by reason of death or disability as
provided in Sections 6(c) and 7; or (2) there occurs a material diminution of or
interference with the Employee's duties, responsibilities and benefits as Senior
Vice President, Treasurer and Chief Financial Officer of the Bank. By way of
example and not by way of limitation, any of the following actions, if
unreasonable or materially adverse to the Employee, shall constitute such
diminution or interference unless consented to in writing by the Employee: (i) a
change in the principal workplace of the Employee, to a location more than 30
miles from the Bank's main office; (ii) a material demotion of the Employee, a
reduction in the number or seniority of other Bank personnel reporting to the
Employee, or a reduction in the frequency with which, or in the nature of the
matters with respect to which, such personnel are to report to the Employee,
other than as part of a Bank or Holding Company-wide reduction in staff; (iii) a
reduction or adverse change in the salary, perquisites, benefits, contingent
benefits or vacation time which had theretofore been provided to the Employee,
other than as part of an overall program applied uniformly and with equitable
effect to all members of the senior management of the Bank or the Holding
Company; or (iv) a failure to elect or reelect the Employee to the Board of
Directors of the Bank or the Holding Company.
In case of termination of the Employee's employment for cause, the Bank
shall pay the Employee his salary through the date of termination, and the Bank
shall have no further obligation to the Employee under this Agreement. The
Employee shall have no right to receive compensation or other benefits for any
period after termination for cause. For purposes of this Agreement, termination
for "cause" shall include termination because of the Employee's personal
dishonesty, incompetence, willful misconduct, breach of a fiduciary duty
involving personal profit, intentional failure to perform stated duties, willful
violation of any law, rule, or regulation (other than traffic violations or
similar offenses) or final cease-and-desist order, or material breach of any
provision of this Agreement. Notwithstanding the foregoing, the Employee shall
not be deemed to have been terminated for cause unless and until there shall
have been delivered to the Employee a copy of a resolution, duly adopted by the
affirmative vote of not less than a majority of the disinterested members of the
Board of Directors of the Bank at a meeting of the Board called and held for
such purpose (after reasonable notice to the Employee and an opportunity for the
Employee, together with the Employee's counsel, to be heard before the Board),
such meeting and the opportunity to be heard to be held prior to, or as soon as
practicable following, termination, but in no event later than 60 days following
such termination, stating that in the good faith opinion of the Board the
Employee was guilty of conduct constituting "cause" as set forth above and
specifying the particulars thereof in detail.
(b) The Employee's employment may be voluntarily terminated by the Employee
at any time upon 90 days written notice to the Bank or upon such shorter period
as may be agreed upon between the Employee and the Board of Directors of the
Bank. In the event of such voluntary termination, the Bank shall be obligated
to continue to pay the Employee his salary only through the date of termination,
at the time such payments are due, and the Bank shall have no further obligation
to the Employee under this Agreement. The provisions of this Section 6(b) shall
not apply to the Employee's voluntary termination of employment within 30 days
following a change in control under Section 8(b) of this Agreement; voluntary
termination of employment in such circumstances shall be governed by Section
8(b).
3
<PAGE>
(c) In the event of the death of the Employee during the term of
employment under this Agreement and prior to any termination hereunder, the
Employee's estate, or such person as the Employee may have previously designated
in writing, shall be entitled to receive from the Bank the salary of the
Employee through the last day of the calendar month in which his death shall
have occurred, and the term of employment under this Agreement shall end on such
last day of the month.
(d) If the Employee is suspended from office and/or temporarily
prohibited from participating in the conduct of the Bank's affairs by a notice
served under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act
("FDIA"), 12 U.S.C. (S) 1818(e)(3); (g)(1), the Bank's obligations under this
Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the Bank
may in its discretion (i) pay the Employee all or part of the compensation
withheld while its obligations under this Agreement were suspended and (ii)
reinstate in whole or in part any of the obligations which were suspended.
(e) If the Employee is removed from office and/or permanently
prohibited from participating in the conduct of the Bank's affairs by an order
issued under Section 8(e)(4) or (g)(1) of the FDIA, 12 U.S.C. (S) 1818(e)(4);
(g)(1), all obligations of the Bank under this Agreement shall terminate, as of
the effective date of the order, but vested rights of the parties shall not be
affected.
(f) If the Bank becomes in default (as defined in Section 3(x)(1) of
the FDIA, 12 U.S.C. (S) 1813(x)(1)), all obligations under this Agreement shall
terminate as of the date of default, but this provision shall not affect any
vested rights of the parties.
(g) All obligations under this Agreement shall be terminated, except to
the extent determined that continuation of this Agreement is necessary for the
continued operation of the Bank: (i) by the Director of the OTS or his or her
designee at the time the Federal Deposit Insurance Corporation or the Resolution
Trust Corporation enters into an agreement to provide assistance to or on behalf
of the Bank under the authority contained in Section 13(c) of the FDIA, 12
U.S.C. (S) 1823(c); or (ii) by the Director of the OTS or his or her designee at
the time the Director of the OTS or his or her designee approves a supervisory
merger to resolve problems related to operation of the Bank or when the Bank is
determined by the Director of the OTS to be in an unsafe or unsound condition.
Any rights of the parties that have already vested, however, shall not
be affected by any such action.
(h) In the event the Bank purports to terminate the Employee for cause,
but it is determined by a court of competent jurisdiction or by an arbitrator
pursuant to Section 16 that cause did not exist for such termination, or if in
any event it is determined by any such court or arbitrator that the Bank has
failed to make timely payment of any amounts owed to the Employee under this
Agreement, the Employee shall be entitled to reimbursement for all reasonable
costs, including attorneys' fees, incurred in challenging such termination or
collecting such amounts. Such reimbursement shall be in addition to all rights
to which the Employee is otherwise entitled under this Agreement.
7. Disability. If during the term of employment hereunder the Employee
----------
shall become disabled or incapacitated to the extent that he is unable to
perform the duties of the Senior Vice President, Treasurer and Chief Financial
Officer, he shall be entitled to receive disability benefits of the type
provided for other senior executive employees of the Bank.
8. Change in Control.
-----------------
(a) Involuntary Termination. Notwithstanding any provision herein to
-----------------------
the contrary, if the Employee's employment is involuntarily terminated (other
than for cause or pursuant to any of Sections 6(c) through 6(g) or Section 7 of
this Agreement) in connection with or within 12 months after a change in control
which occurs at any time during the term of employment under this Agreement, the
Bank shall pay to the Employee in a lump sum in cash within 10 business days
after the Date of Termination (as hereinafter defined)
4
<PAGE>
of employment an amount equal to 299% of the Employee's "base amount" of
compensation, as defined in Section 280G(b)(3) of the Internal Revenue Code of
1986, as amended (the "Code").
(b) Voluntary Termination. If the Employee voluntarily terminates his
---------------------
employment hereunder in connection with or within 30 days following a change in
control which occurs at any time during the term of employment under this
Agreement, the Employee shall be entitled to receive the payment provided by
Section 8(a) hereof in the manner provided by Section 8(a) hereof.
(c) Definitions. For purposes of Sections 8, 9 and 11 of this
-----------
Agreement, "Date of Termination" means the earlier of (i) the date upon which
the Bank gives notice to the Employee of the termination of his employment with
the Bank, or (ii) the date upon which the Employee ceases to serve as an
Employee of the Bank; and "change in control" shall mean any one of the
following events: (1) the acquisition of ownership, holding or power to vote
more than 25% of the Bank's or the Holding Company's voting stock, (2) the
acquisition of the ability to control the election of a majority of the Bank's
or the Holding Company's directors, (3) the acquisition of a controlling
influence over the management or policies of the Bank or the Holding Company by
any person or by persons acting as a "group" (within the meaning of Section
13(d) of the Securities Exchange Act of 1934), (4) the acquisition of control of
the Bank or the Holding Company within the meaning of 12 C.F.R. Part 574 or its
applicable equivalent (except in the case of (1), (2), (3) and (4) hereof,
ownership or control of the Bank by the Holding Company itself shall not
constitute a "change in control"), or (5) during any period of two consecutive
years, individuals who at the beginning of such period constitute the Board of
Directors of the Holding Company or the Bank (the "Existing Board") (the
"Continuing Directors") cease for any reason to constitute at least a majority
thereof, provided that any individual whose election or nomination for election
as a member of the Existing Board was approved by a vote of at least a majority
of the Continuing Directors then in office shall be considered a Continuing
Director. For purposes of this subparagraph only, the term "person" refers to an
individual or a corporation, partnership, trust, association, joint venture,
pool, syndicate, sole proprietorship, unincorporated organization or any other
form of entity not specifically listed herein.
Notwithstanding the foregoing, but only to the extent required under
federal banking law, the amount payable under this Section 8 shall be reduced to
the extent that on the date of the Employee's termination of employment, the
amount payable under Subsection (a) or (b) of this Section 8 exceeds the
limitation on severance benefits that is set forth in Regulatory Bulletin 27a of
the OTS, as in effect on the date of the restatement of this Agreement.
9. Certain Reduction of Payments by the Bank. (a) Anything in this
-----------------------------------------
Agreement to the contrary notwithstanding, in the event it shall be determined
that any payment or distribution by the Bank to or for the benefit of the
Employee (whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise) (a "Payment") would be nondeductible
(in whole or part) by the Bank for Federal income tax purposes because of
Section 280G of the Code, then the aggregate present value of amounts payable or
distributable to or for the benefit of the Employee pursuant to this Agreement
(such amounts payable or distributable pursuant to this Agreement are
hereinafter referred to as "Agreement Payments") shall be reduced to the Reduced
Amount. The "Reduced Amount" shall be an amount, not less than zero, expressed
in present value which maximizes the aggregate present value of Agreement
Payments without causing any Payment to be nondeductible by the Bank because of
Section 280G of the Code. For purposes of this Section 9, present value shall be
determined in accordance with Section 280G(d)(4) of the Code.
(b) All determinations required to be made under this Section 9 shall
be made by the Bank's independent auditors, or at the election of such auditors
by such other firm or individuals or recognized expertise as such auditors may
select (such auditors or, if applicable, such other firm or individual, are
hereinafter referred to as the "Advisory Firm"). The Advisory Firm shall within
ten business days of the Date of Termination, or at such earlier time as is
requested by the Bank, provide to both the Bank and the Employee an opinion (and
detailed supporting calculations) that the Bank has substantial authority to
deduct for federal income tax purposes the full amount of the Agreement Payments
and that the Employee has substantial authority to deduct for federal income tax
purposes the full amount of the Agreement Payments and that the Employee has
substantial authority not to report on his federal income tax return any excise
tax imposed by Section 4999 of the Code with respect to the Agreement Payments.
Any such determination and opinion by the Advisory Firm
5
<PAGE>
shall be binding upon the Bank and the Employee. The Employee shall determine
which and how much, if any, of the Agreement Payments shall be eliminated or
reduced consistent with the requirements of this Section 9, provided that, if
the Employee does not make such determination within ten business days of the
receipt of the calculations made by the Advisory Firm, the Bank shall elect
which and how much, if any, of the Agreement Payments shall be eliminated or
reduced consistent with the requirements of this Section 9 and shall notify the
Employee promptly of such election. Within five business days of the earlier of
(i) the Bank's receipt of the Employee's determination pursuant to the
immediately preceding sentence of this Agreement or (ii) the Bank's election in
lieu of such determination, the Bank shall pay to or distribute to or for the
benefit of the Employee such amounts as are then due the Employee under this
Agreement. The Bank and the Employee shall cooperate fully with the Advisory
Firm, including without limitation providing to the Advisory Firm all
information and materials reasonably requested by it, in connection with the
making of the determinations required under this Section 9.
(c) As a result of uncertainty in application of Section 280G of the
Code at the time of the initial determination by the Advisory Firm hereunder, it
is possible that Agreement Payments will have been made by the Bank which should
not have been made ("Overpayment") or that additional Agreement Payments will
not have been made by the Bank which should have been made ("Underpayment"), in
each case, consistent with the calculations required to be made hereunder. In
the event that the Advisory Firm, based upon the assertion by the Internal
Revenue Service against the Employee of a deficiency which the Advisory Firm
believes has a high probability of success determines that an Overpayment has
been made, any such Overpayment paid or distributed by the Bank to or for the
benefit of Employee shall be treated for all purposes as a loan ab initio which
-- ------
the Employee shall repay to the Bank together with interest at the applicable
federal rate provided for in Section 7872(f)(2) of the Code; provided, however,
that no such loan shall be deemed to have been made and no amount shall be
payable by the Employee to the Bank if and to the extent such deemed loan and
payment would not either reduce the amount on which the Employee is subject to
tax under Section 1 and Section 4999 of the Code or generate a refund of such
taxes. In the event that the Advisory Firm, based upon controlling preceding or
other substantial authority, determines that an Underpayment has occurred, any
such Underpayment shall be promptly paid by the Bank to or for the benefit of
the Employee together with interest at the applicable federal rate provided for
in Section 7872(f)(2) of the Code.
(d) The total of payments to the Employee in the event of involuntary
termination of employment under Section 6(a) and Section 8(a) shall not exceed
three times his average annual compensation from the Bank over the five most
recent taxable years (or, if employed by the Bank for a shorter period, over the
period of his employment by the Bank).
(e) Any payments made to the Employee pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance with 12 U.S.C.
1828(k) and any regulations promulgated thereunder.
(f) (1) Within five business days before or after a change in control
as defined in Section 8(c) of this Agreement which was not approved in advance
by a resolution of a majority of the Continuing Directors of the Bank, the Bank
shall (i) deposit, or cause to be deposited, in a grantor trust (the "Trust)
substantially in the form described in Revenue Procedure 92-64, as issued by the
Internal Revenue Service and as amended or superseded thereby, an amount equal
to 299% of the Employee's "base amount" as defined in Section 280G(b)(3) of the
Code, and (ii) provide the trustee of the Trust with a written direction to hold
said amount and any investment return thereon in a segregated account for the
benefit of the Employee, and to follow the procedures set forth in the next
paragraph as to the payment of such amounts from the Trust.
(2) During the twelve (12) consecutive month period following the
date on which the Bank makes the deposit referred to in the preceding paragraph,
the Employee may provide the trustee of the Trust with a written notice
requesting that the trustee pay to the Employee an amount designated in the
notice as being payable pursuant to Section 8(a) or (b). Within three business
days after receiving said notice, the trustee of the Trust shall send a copy of
the notice to the Bank via overnight and registered mail return receipt
requested. On the tenth (10th) business day after mailing said notice to the
Bank, the trustee of the Trust shall pay the Employee the amount designated
therein in immediately available funds, unless prior thereto the Bank provides
the trustee with a written notice directing the trustee to withhold such
payment. In the latter event, the
6
<PAGE>
trustee shall submit the dispute to non-appealable binding arbitration for a
determination of the amount payable to the Employee pursuant to Section 8(a) or
(b) hereof, and the party responsible for the payment of the costs of such
arbitration (which may include any reasonable legal fees and expenses incurred
by the Employee) shall be determined by the arbitrator. The trustee shall choose
the arbitrator to settle the dispute, and such arbitrator shall be bound by the
rules of the American Arbitration Association in making her determination. The
parties and the trustee shall be bound by the results of the arbitration and,
within 3 days of the determination by the arbitrator, the trustee shall pay from
the Trust the amounts required to be paid to the Employee and/or the Bank, and
in no event shall the trustee be liable to either party for making the payments
as determined by the arbitrator.
(3) Upon the earlier of (i) any payment from the Trust to the
Employee, or (ii) the date twelve (12) months after the date on which the Bank
makes the deposit referred to in the first paragraph of this subsection (d)(1),
the trustee of the Trust shall pay to the Bank the entire balance remaining in
the segregated account maintained for the benefit of the Employee. The Employee
shall thereafter have no further interest in the Trust pursuant to this
Agreement.
(g) In the event that any dispute arises between the Employee and the
Bank as to the terms or interpretation of this Agreement, including this Section
8, whether instituted by formal legal proceedings or otherwise, including any
action that the Employee takes to enforce the terms of this Section 8 or to
defend against any action taken by the Bank, the Employee shall be reimbursed
for all costs and expenses, including reasonable attorneys' fees, arising from
such dispute, proceedings or actions, provided that the Employee shall obtain a
final judgement by a court of competent jurisdiction in favor of the Employee.
Such reimbursement shall be paid within ten (10) days of Employee's furnishing
to the Bank written evidence, which may be in the form, among other things, of a
cancelled check or receipt, of any costs or expenses incurred by the Employee.
10. No Assignments.
--------------
(a) This Agreement is personal to each of the parties hereto, and
neither party may assign or delegate any of its rights or obligations hereunder
without first obtaining the written consent of the other party; provided,
however, that the Bank will require any successor or assign (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Bank, by an assumption
agreement in form and substance satisfactory to the Employee, to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Bank would be required to perform it if no such succession or
assignment had taken place. Failure of the Bank to obtain such an assumption
agreement prior to the effectiveness of any such succession or assignment shall
be a breach of this Agreement and shall entitle the Employee to compensation
from the Bank in the same amount and on the same terms as the compensation
pursuant to Section 8(a) hereof. For purposes of implementing the provisions of
this Section 10(a), the date on which any such succession becomes effective
shall be deemed the Date of Termination.
(b) This Agreement and all rights of the Employee hereunder shall
inure to the benefit of and be enforceable by the Employee's personal and legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If the Employee should die while any amounts would still
be payable to the Employee hereunder if the Employee had continued to live, all
such amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to the Employee's devisee, legatee or other designee
or if there is no such designee, to the Employee's estate.
11. Notice. For the purposes of this Agreement, notices and all other
------
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, addressed to the Bank, to the
attention of the Board of Directors of the Bank with a copy to the Secretary of
the Bank), or, in the case of the Employee, to the home address most recently
provided to the Bank by the Employee.
12. Amendments. No amendments or additions to this Agreement shall be
----------
binding unless in writing and signed by both parties, except as herein otherwise
provided.
7
<PAGE>
13. Paragraph Headings. The paragraph headings used in this Agreement are
------------------
included solely for convenience and shall not affect, or be used in connection
with, the interpretation of this Agreement.
14. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
15. Governing Law. This Agreement shall be governed by the laws of the
-------------
United States to the extent applicable and otherwise by the laws of the State of
Iowa.
16. Arbitration. Any dispute or controversy arising under or in
-----------
connection with this Agreement shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and the year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
GRINNELL FEDERAL SAVINGS BANK
By: ______________________________________
EMPLOYEE
______________________________________
Katherine A. Rose
8
<PAGE>
EMPLOYMENT AGREEMENT, AS AMENDED AND RESTATED
---------------------------------------------
THIS EMPLOYMENT AGREEMENT ("Agreement"), originally made and entered into
as of the 15th day of April, 1994 and subsequently amended and restated as of
the 19th day of January, 1996, by and between GRINNELL FEDERAL SAVINGS BANK,
Grinnell, Iowa (hereinafter referred to as the "Bank") and William T. Nassif
(the "Employee");
WHEREAS, the Employee is currently serving as Senior Vice President and
Chief Operating Officer of the Bank; and
WHEREAS, the Board of Directors of the Bank recognizes that, as is the case
with publicly held corporations generally, the possibility of a change in
control of the Bank and/or its holding company, GFS Bancorp, Inc. (the "Holding
Company") may exist and that such possibility, and the uncertainty and questions
which it may raise among management, may result in the departure or distraction
of key management personnel to the detriment of the Bank, the Holding Company
and its stockholders; and
WHEREAS, the Board of Directors of the Bank believes it is in the best
interests of the Bank to enter into this Agreement with the Employee in order to
assure continuity of management of the Bank and to reinforce and encourage the
continued attention and dedication of the Employee to his assigned duties
without distraction in the face of potentially disruptive circumstances arising
from the possibility of a change in control of the Holding Company, although no
such change is now contemplated; and
WHEREAS, the Board of Directors of the Bank has approved and authorized the
execution of this Agreement with the Employee to take effect as stated in
Section 4 hereof;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein contained, it is AGREED as
follows:
1. Employment. The Employee will be employed as Senior Vice President and
----------
Chief Operating Officer of the Bank. As Senior Vice President and Chief
Operating Officer, Employee shall render administrative and management services
as are customarily performed by persons situated in similar executive
capacities, and shall have other powers and duties as may from time to time be
prescribed by the Board, provided that such duties are consistent with the
Employee's position as Senior Vice President and Chief Operating Officer. The
Employee shall continue to devote his best efforts and substantially all his
business time and attention to the business and affairs of the Bank and its
subsidiaries and affiliated companies.
2. Compensation.
------------
(a) Salary. The Bank agrees to pay the Employee during the term of
------
this Agreement a salary established by the Board of Directors. The salary
hereunder as of the Commencement Date (as defined in Section 4 hereof) shall be
at least equal to the Employee's salary in effect immediately prior to the
Commencement Date. The salary provided for herein shall be payable not less
frequently than bi-monthly in accordance with the practices of the Bank,
provided, however, that no such salary is required to be paid by the terms of
this Agreement in respect of any month or portion thereof subsequent to the
termination of this Agreement and provided further, that the amount of such
salary shall be reviewed by the Board of Directors not less often than annually
and may be increased (but not decreased) from time to time in such amounts as
the Board of Directors in its discretion may decide, subject to the customary
withholding tax and other employee taxes as required with respect to
compensation paid by a corporation to an employee.
(b) Discretionary Bonuses. The Employee shall be entitled to
---------------------
participate in an equitable manner with all other executive officers of the Bank
in discretionary bonuses as authorized and declared by the Board of Directors of
the Bank to its executive employees. No other compensation provided for in this
Agreement shall be deemed a substitute for the Employee's right to participate
in such bonuses when and as declared by the Board of Directors.
(c) Expenses. During the term of his employment hereunder, the
--------
Employee shall be entitled to receive prompt reimbursement for all reasonable
expenses incurred by him (in accordance with
<PAGE>
policies and procedures at least as favorable to the Employee as those presently
applicable to the senior executive officers of the Bank) in performing services
hereunder, provided that the Employee properly accounts therefor in accordance
with Bank policy.
(d) Salary and Bonuses Following Change in Control. Notwithstanding
----------------------------------------------
any other provisions of this Agreement to the contrary, in the event of the
Employee's continued employment with the Bank or a successor following a change
in control as defined in Section 8(c) of this Agreement, the Employee shall be
entitled to receive salary and discretionary bonuses at least equal to the
average salary and bonuses received by him for the three years preceding the
change in control.
3. Benefits.
--------
(a) Participation in Retirement and Employee Benefit Plans. The
------------------------------------------------------
Employee shall be entitled while employed hereunder to participate in, and
receive benefits under, all plans relating to stock options, stock purchases,
pension, thrift, profit-sharing, group life insurance, medical coverage,
education, cash or stock bonuses, and other retirement or employee benefits or
combinations thereof, that are now or hereafter maintained for the benefit of
the Bank's executive employees or for its employees generally.
(b) Fringe Benefits. The Employee shall be eligible while employed
---------------
hereunder to participate in, and receive benefits under, any other fringe
benefits which are or may become applicable to the Bank's executive employees or
to its employees generally.
4. Term. The term of employment under this Agreement shall be a period of
----
three (3) years commencing on the date of completion of the conversion (the
"Conversion") of the Bank from mutual to stock form (the "Commencement Date"),
subject to earlier termination as provided herein. Beginning on the first
anniversary of the Commencement Date, and on each anniversary thereafter, the
term of employment under this Agreement shall be extended for a period of one
year unless either the Bank or the Employee gives contrary written notice to the
other not less than 90 days in advance of the date on which the term of
employment under this Agreement would otherwise be extended, provided that such
--------
term will not be automatically extended unless, prior thereto, such extension is
approved by the Board of Directors following the Board's review of a formal
performance evaluation of the Employee performed by the disinterested members of
the Board of Directors of the Bank and reflected in the minutes of the Board of
Directors. Reference herein to the term of employment under this Agreement
shall refer to both such initial term and such extended terms.
5. Vacations. The Employee shall be entitled, without loss of pay, to
---------
absent himself voluntarily from the performance of his employment under this
Agreement, all such voluntary absences to count as vacation time, provided that:
(a) the Employee shall be entitled to an annual vacation of not less
than four (4) weeks per year;
(b) the timing of vacations shall be scheduled in a reasonable manner
by the Employee; and
(c) solely at the Employee's request, the Board of Directors shall be
entitled to grant to the Employee a leave or leaves of absence with or without
pay at such time or times and upon such terms and conditions as the Board, in
its discretion, may determine.
6. Termination of Employment; Death.
--------------------------------
(a) The Board of Directors may terminate the Employee's employment at
any time, but any termination by the Bank's Board of Directors, other than
termination for cause, shall not prejudice the Employee's right to compensation
or other benefits under the Agreement. If the employment of the Employee is
involuntarily terminated, other than for "cause" as provided in this Section
6(a) or pursuant to any of Sections 6(d) through 6(g), or by reason of death or
disability as provided in Sections 6(c) or 7, or in connection with or following
a change in control as provided in Section 8(a) (in which event the benefits and
compensation provided
2
<PAGE>
for in Section 8(a) shall apply), the Employee shall be entitled to receive, (i)
his then applicable salary for the then-remaining term of the Agreement as
calculated in accordance with Section 4 hereof (including any renewal term),
plus such salary for an additional 12-month period, payable in such manner and
at such times as such salary would have been payable to the Employee under
Section 2 had he remained in the employ of the Bank, and (ii) health insurance
benefits as maintained by the Bank for the benefit of its senior executive
employees generally over the then-remaining term of the Agreement as calculated
in accordance with Section 4 hereof. Notwithstanding the foregoing, but only to
the extent required under federal banking law, the amount payable under this
Section 6(a) shall be reduced to the extent that on the date of the Employee's
termination of employment, the present value of the benefits payable under
clauses (a)(i) and (ii) hereof exceeds the limitation on benefits that is set
forth in Regulatory Bulletin 27a of the Office of Thrift Supervision ("OTS"), as
in effect on the date of the restatement of this Agreement.
The terms "termination" or involuntarily terminated" in this Agreement
shall refer to the termination of the employment of Employee without his express
written consent. The Employee shall be considered to be involuntarily
terminated (1) if the employment of the Employee is involuntarily terminated for
any reason other than for "cause" as provided in this Section 6(a), pursuant to
any of Sections 6(d) through 6(g) or by reason of death or disability as
provided in Sections 6(c) and 7; or (2) there occurs a material diminution of or
interference with the Employee's duties, responsibilities and benefits as Senior
Vice President and Chief Operating Officer of the Bank. By way of example and
not by way of limitation, any of the following actions, if unreasonable or
materially adverse to the Employee, shall constitute such diminution or
interference unless consented to in writing by the Employee: (i) a change in the
principal workplace of the Employee, to a location more than 30 miles from the
Bank's main office; (ii) a material demotion of the Employee, a reduction in the
number or seniority of other Bank personnel reporting to the Employee, or a
reduction in the frequency with which, or in the nature of the matters with
respect to which, such personnel are to report to the Employee, other than as
part of a Bank or Holding Company-wide reduction in staff; or (iii) a reduction
or adverse change in the salary, perquisites, benefits, contingent benefits or
vacation time which had theretofore been provided to the Employee, other than as
part of an overall program applied uniformly and with equitable effect to all
members of the senior management of the Bank or the Holding Company.
In case of termination of the Employee's employment for cause, the Bank
shall pay the Employee his salary through the date of termination, and the Bank
shall have no further obligation to the Employee under this Agreement. The
Employee shall have no right to receive compensation or other benefits for any
period after termination for cause. For purposes of this Agreement, termination
for "cause" shall include termination because of the Employee's personal
dishonesty, incompetence, willful misconduct, breach of a fiduciary duty
involving personal profit, intentional failure to perform stated duties, willful
violation of any law, rule, or regulation (other than traffic violations or
similar offenses) or final cease-and-desist order, or material breach of any
provision of this Agreement. Notwithstanding the foregoing, the Employee shall
not be deemed to have been terminated for cause unless and until there shall
have been delivered to the Employee a copy of a resolution, duly adopted by the
affirmative vote of not less than a majority of the disinterested members of the
Board of Directors of the Bank at a meeting of the Board called and held for
such purpose (after reasonable notice to the Employee and an opportunity for the
Employee, together with the Employee's counsel, to be heard before the Board),
such meeting and the opportunity to be heard to be held prior to, or as soon as
practicable following, termination, but in no event later than 60 days following
such termination, stating that in the good faith opinion of the Board the
Employee was guilty of conduct constituting "cause" as set forth above and
specifying the particulars thereof in detail.
(b) The Employee's employment may be voluntarily terminated by the
Employee at any time upon 90 days written notice to the Bank or upon such
shorter period as may be agreed upon between the Employee and the Board of
Directors of the Bank. In the event of such voluntary termination, the Bank
shall be obligated to continue to pay the Employee his salary only through the
date of termination, at the time such payments are due, and the Bank shall have
no further obligation to the Employee under this Agreement. The provisions of
this Section 6(b) shall not apply to the Employee's voluntary termination of
employment within 30 days following a change in control under Section 8(b) of
this Agreement; voluntary termination of employment in such circumstances shall
be governed by Section 8(b).
3
<PAGE>
(c) In the event of the death of the Employee during the term of
employment under this Agreement and prior to any termination hereunder, the
Employee's estate, or such person as the Employee may have previously designated
in writing, shall be entitled to receive from the Bank the salary of the
Employee through the last day of the calendar month in which his death shall
have occurred, and the term of employment under this Agreement shall end on such
last day of the month.
(d) If the Employee is suspended from office and/or temporarily
prohibited from participating in the conduct of the Bank's affairs by a notice
served under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act
("FDIA"), 12 U.S.C. (S) 1818(e)(3); (g)(1), the Bank's obligations under this
Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the Bank
may in its discretion (i) pay the Employee all or part of the compensation
withheld while its obligations under this Agreement were suspended and (ii)
reinstate in whole or in part any of the obligations which were suspended.
(e) If the Employee is removed from office and/or permanently
prohibited from participating in the conduct of the Bank's affairs by an order
issued under Section 8(e)(4) or (g)(1) of the FDIA, 12 U.S.C. (S) 1818(e)(4);
(g)(1), all obligations of the Bank under this Agreement shall terminate, as of
the effective date of the order, but vested rights of the parties shall not be
affected.
(f) If the Bank becomes in default (as defined in Section 3(x)(1) of
the FDIA, 12 U.S.C. (S) 1813(x)(1)), all obligations under this Agreement shall
terminate as of the date of default, but this provision shall not affect any
vested rights of the parties.
(g) All obligations under this Agreement shall be terminated, except to
the extent determined that continuation of this Agreement is necessary for the
continued operation of the Bank: (i) by the Director of the OTS or his or her
designee at the time the Federal Deposit Insurance Corporation or the Resolution
Trust Corporation enters into an agreement to provide assistance to or on behalf
of the Bank under the authority contained in Section 13(c) of the FDIA, 12
U.S.C. (S) 1823(c); or (ii) by the Director of the OTS or his or her designee at
the time the Director of the OTS or his or her designee approves a supervisory
merger to resolve problems related to operation of the Bank or when the Bank is
determined by the Director of the OTS to be in an unsafe or unsound condition.
Any rights of the parties that have already vested, however, shall not
be affected by any such action.
(h) In the event the Bank purports to terminate the Employee for cause,
but it is determined by a court of competent jurisdiction or by an arbitrator
pursuant to Section 16 that cause did not exist for such termination, or if in
any event it is determined by any such court or arbitrator that the Bank has
failed to make timely payment of any amounts owed to the Employee under this
Agreement, the Employee shall be entitled to reimbursement for all reasonable
costs, including attorneys' fees, incurred in challenging such termination or
collecting such amounts. Such reimbursement shall be in addition to all rights
to which the Employee is otherwise entitled under this Agreement.
7. Disability. If during the term of employment hereunder the Employee
----------
shall become disabled or incapacitated to the extent that he is unable to
perform the duties of the Senior Vice President and Chief Operating Officer, he
shall be entitled to receive disability benefits of the type provided for other
senior executive employees of the Bank.
8. Change in Control.
-----------------
(a) Involuntary Termination. Notwithstanding any provision herein to
-----------------------
the contrary, if the Employee's employment is involuntarily terminated (other
than for cause or pursuant to any of Sections 6(c) through 6(g) or Section 7 of
this Agreement) in connection with or within 12 months after a change in control
which occurs at any time during the term of employment under this Agreement, the
Bank shall pay to the Employee in a lump sum in cash within 10 business days
after the Date of Termination (as hereinafter defined)
4
<PAGE>
of employment an amount equal to 299% of the Employee's "base amount" of
compensation, as defined in Section 280G(b)(3) of the Internal Revenue Code of
1986, as amended (the "Code").
(b) Voluntary Termination. If the Employee voluntarily terminates his
---------------------
employment hereunder in connection with or within 30 days following a change in
control which occurs at any time during the term of employment under this
Agreement, the Employee shall be entitled to receive the payment provided by
Section 8(a) hereof in the manner provided by Section 8(a) hereof.
(c) Definitions. For purposes of Sections 8, 9 and 11 of this
-----------
Agreement, "Date of Termination" means the earlier of (i) the date upon which
the Bank gives notice to the Employee of the termination of his employment with
the Bank, or (ii) the date upon which the Employee ceases to serve as an
Employee of the Bank; and "change in control" shall mean any one of the
following events: (1) the acquisition of ownership, holding or power to vote
more than 25% of the Bank's or the Holding Company's voting stock, (2) the
acquisition of the ability to control the election of a majority of the Bank's
or the Holding Company's directors, (3) the acquisition of a controlling
influence over the management or policies of the Bank or the Holding Company by
any person or by persons acting as a "group" (within the meaning of Section
13(d) of the Securities Exchange Act of 1934), (4) the acquisition of control of
the Bank or the Holding Company within the meaning of 12 C.F.R. Part 574 or its
applicable equivalent (except in the case of (1), (2), (3) and (4) hereof,
ownership or control of the Bank by the Holding Company itself shall not
constitute a "change in control"), or (5) during any period of two consecutive
years, individuals who at the beginning of such period constitute the Board of
Directors of the Holding Company or the Bank (the "Existing Board") (the
"Continuing Directors") cease for any reason to constitute at least a majority
thereof, provided that any individual whose election or nomination for election
as a member of the Existing Board was approved by a vote of at least a majority
of the Continuing Directors then in office shall be considered a Continuing
Director. For purposes of this subparagraph only, the term "person" refers to an
individual or a corporation, partnership, trust, association, joint venture,
pool, syndicate, sole proprietorship, unincorporated organization or any other
form of entity not specifically listed herein.
Notwithstanding the foregoing, but only to the extent required under
federal banking law, the amount payable under this Section 8 shall be reduced to
the extent that on the date of the Employee's termination of employment, the
amount payable under Subsection (a) or (b) of this Section 8 exceeds the
limitation on severance benefits that is set forth in Regulatory Bulletin 27a of
the OTS, as in effect on the date of the restatement of this Agreement.
9. Certain Reduction of Payments by the Bank. (a) Anything in this
-----------------------------------------
Agreement to the contrary notwithstanding, in the event it shall be determined
that any payment or distribution by the Bank to or for the benefit of the
Employee (whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise) (a "Payment") would be nondeductible
(in whole or part) by the Bank for Federal income tax purposes because of
Section 280G of the Code, then the aggregate present value of amounts payable or
distributable to or for the benefit of the Employee pursuant to this Agreement
(such amounts payable or distributable pursuant to this Agreement are
hereinafter referred to as "Agreement Payments") shall be reduced to the Reduced
Amount. The "Reduced Amount" shall be an amount, not less than zero, expressed
in present value which maximizes the aggregate present value of Agreement
Payments without causing any Payment to be nondeductible by the Bank because of
Section 280G of the Code. For purposes of this Section 9, present value shall be
determined in accordance with Section 280G(d)(4) of the Code.
(b) All determinations required to be made under this Section 9 shall be
made by the Bank's independent auditors, or at the election of such auditors by
such other firm or individuals or recognized expertise as such auditors may
select (such auditors or, if applicable, such other firm or individual, are
hereinafter referred to as the "Advisory Firm"). The Advisory Firm shall within
ten business days of the Date of Termination, or at such earlier time as is
requested by the Bank, provide to both the Bank and the Employee an opinion (and
detailed supporting calculations) that the Bank has substantial authority to
deduct for federal income tax purposes the full amount of the Agreement Payments
and that the Employee has substantial authority to deduct for federal income tax
purposes the full amount of the Agreement Payments and that the Employee has
substantial authority not to report on his federal income tax return any excise
tax imposed by Section 4999 of the Code with respect to the Agreement Payments.
Any such determination and opinion by the Advisory Firm
5
<PAGE>
shall be binding upon the Bank and the Employee. The Employee shall determine
which and how much, if any, of the Agreement Payments shall be eliminated or
reduced consistent with the requirements of this Section 9, provided that, if
the Employee does not make such determination within ten business days of the
receipt of the calculations made by the Advisory Firm, the Bank shall elect
which and how much, if any, of the Agreement Payments shall be eliminated or
reduced consistent with the requirements of this Section 9 and shall notify the
Employee promptly of such election. Within five business days of the earlier of
(i) the Bank's receipt of the Employee's determination pursuant to the
immediately preceding sentence of this Agreement or (ii) the Bank's election in
lieu of such determination, the Bank shall pay to or distribute to or for the
benefit of the Employee such amounts as are then due the Employee under this
Agreement. The Bank and the Employee shall cooperate fully with the Advisory
Firm, including without limitation providing to the Advisory Firm all
information and materials reasonably requested by it, in connection with the
making of the determinations required under this Section 9.
(c) As a result of uncertainty in application of Section 280G of the
Code at the time of the initial determination by the Advisory Firm hereunder, it
is possible that Agreement Payments will have been made by the Bank which should
not have been made ("Overpayment") or that additional Agreement Payments will
not have been made by the Bank which should have been made ("Underpayment"), in
each case, consistent with the calculations required to be made hereunder. In
the event that the Advisory Firm, based upon the assertion by the Internal
Revenue Service against the Employee of a deficiency which the Advisory Firm
believes has a high probability of success determines that an Overpayment has
been made, any such Overpayment paid or distributed by the Bank to or for the
benefit of Employee shall be treated for all purposes as a loan ab initio which
-- ------
the Employee shall repay to the Bank together with interest at the applicable
federal rate provided for in Section 7872(f)(2) of the Code; provided, however,
that no such loan shall be deemed to have been made and no amount shall be
payable by the Employee to the Bank if and to the extent such deemed loan and
payment would not either reduce the amount on which the Employee is subject to
tax under Section 1 and Section 4999 of the Code or generate a refund of such
taxes. In the event that the Advisory Firm, based upon controlling preceding or
other substantial authority, determines that an Underpayment has occurred, any
such Underpayment shall be promptly paid by the Bank to or for the benefit of
the Employee together with interest at the applicable federal rate provided for
in Section 7872(f)(2) of the Code.
(d) The total of payments to the Employee in the event of involuntary
termination of employment under Section 6(a) and Section 8(a) shall not exceed
three times his average annual compensation from the Bank over the five most
recent taxable years (or, if employed by the Bank for a shorter period, over the
period of his employment by the Bank).
(e) Any payments made to the Employee pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance with 12 U.S.C.
1828(k) and any regulations promulgated thereunder.
(f) (1) Within five business days before or after a change in control
as defined in Section 8(c) of this Agreement which was not approved in advance
by a resolution of a majority of the Continuing Directors of the Bank, the Bank
shall (i) deposit, or cause to be deposited, in a grantor trust (the "Trust")
substantially in the form of the trust described in Revenue Procedure 92-64, as
issued by the Internal Revenue Service and as amended or superseded thereby, an
amount equal to 299% of the Employee's "base amount" as defined in Section
280G(b)(3) of the Code, and (ii) provide the trustee of the Trust with a written
direction to hold said amount and any investment return thereon in a segregated
account for the benefit of the Employee, and to follow the procedures set forth
in the next paragraph as to the payment of such amounts from the Trust.
(2) During the twelve (12) consecutive month period following the
date on which the Bank makes the deposit referred to in the preceding paragraph,
the Employee may provide the trustee of the Trust with a written notice
requesting that the trustee pay to the Employee an amount designated in the
notice as being payable pursuant to Section 8(a) or (b). Within three business
days after receiving said notice, the trustee of the Trust shall send a copy of
the notice to the Bank via overnight and registered mail return receipt
requested. On the tenth (10th) business day after mailing said notice to the
Bank, the trustee of the Trust shall pay the Employee the amount designated
therein in immediately available funds, unless prior thereto the Bank provides
the trustee with a written notice directing the trustee to withhold such
payment. In the latter event, the
6
<PAGE>
trustee shall submit the dispute to non-appealable binding arbitration for a
determination of the amount payable to the Employee pursuant to Section 8(a) or
(b) hereof, and the party responsible for the payment of the costs of such
arbitration (which may include any reasonable legal fees and expenses incurred
by the Employee) shall be determined by the arbitrator. The trustee shall choose
the arbitrator to settle the dispute, and such arbitrator shall be bound by the
rules of the American Arbitration Association in making her determination. The
parties and the trustee shall be bound by the results of the arbitration and,
within 3 days of the determination by the arbitrator, the trustee shall pay from
the Trust the amounts required to be paid to the Employee and/or the Bank, and
in no event shall the trustee be liable to either party for making the payments
as determined by the arbitrator.
(3) Upon the earlier of (i) any payment from the Trust to the
Employee, or (ii) the date twelve (12) months after the date on which the Bank
makes the deposit referred to in the first paragraph of this subsection (d)(1),
the trustee of the Trust shall pay to the Bank the entire balance remaining in
the segregated account maintained for the benefit of the Employee. The Employee
shall thereafter have no further interest in the Trust pursuant to this
Agreement.
(g) In the event that any dispute arises between the Employee and the
Bank as to the terms or interpretation of this Agreement, including this Section
8, whether instituted by formal legal proceedings or otherwise, including any
action that the Employee takes to enforce the terms of this Section 8 or to
defend against any action taken by the Bank, the Employee shall be reimbursed
for all costs and expenses, including reasonable attorneys' fees, arising from
such dispute, proceedings or actions, provided that the Employee shall obtain a
final judgement by a court of competent jurisdiction in favor of the Employee.
Such reimbursement shall be paid within ten (10) days of Employee's furnishing
to the Bank written evidence, which may be in the form, among other things, of a
cancelled check or receipt, of any costs or expenses incurred by the Employee.
10. No Assignments.
--------------
(a) This Agreement is personal to each of the parties hereto, and
neither party may assign or delegate any of its rights or obligations hereunder
without first obtaining the written consent of the other party; provided,
however, that the Bank will require any successor or assign (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Bank, by an assumption
agreement in form and substance satisfactory to the Employee, to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Bank would be required to perform it if no such succession or
assignment had taken place. Failure of the Bank to obtain such an assumption
agreement prior to the effectiveness of any such succession or assignment shall
be a breach of this Agreement and shall entitle the Employee to compensation
from the Bank in the same amount and on the same terms as the compensation
pursuant to Section 8(a) hereof. For purposes of implementing the provisions of
this Section 10(a), the date on which any such succession becomes effective
shall be deemed the Date of Termination.
(b) This Agreement and all rights of the Employee hereunder shall
inure to the benefit of and be enforceable by the Employee's personal and legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If the Employee should die while any amounts would still
be payable to the Employee hereunder if the Employee had continued to live, all
such amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to the Employee's devisee, legatee or other designee
or if there is no such designee, to the Employee's estate.
11. Notice. For the purposes of this Agreement, notices and all other
------
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, addressed to the Bank, to the
attention of the Board of Directors of the Bank with a copy to the Secretary of
the Bank), or, in the case of the Employee, to the home address most recently
provided to the Bank by the Employee.
12. Amendments. No amendments or additions to this Agreement shall be
----------
binding unless in writing and signed by both parties, except as herein otherwise
provided.
7
<PAGE>
13. Paragraph Headings. The paragraph headings used in this Agreement are
------------------
included solely for convenience and shall not affect, or be used in connection
with, the interpretation of this Agreement.
14. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
15. Governing Law. This Agreement shall be governed by the laws of the
-------------
United States to the extent applicable and otherwise by the laws of the State of
Iowa.
16. Arbitration. Any dispute or controversy arising under or in
-----------
connection with this Agreement shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and the year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
GRINNELL FEDERAL SAVINGS BANK
By: -----------------------------
EMPLOYEE
-----------------------------
William T. Nassif
8
<PAGE>
GFS BANCORP, INC.
1993 Stock Option and Incentive Plan
1. Plan Purpose. The purpose of the Plan is to promote the long-term
------------
interests of the Corporation and its stockholders by providing a means for
attracting and retaining directors, directors emeritus, officers and employees
of the Corporation and its Affiliates. It is intended that designated Options
granted pursuant to the provisions of this Plan to persons employed by the
Corporation or its Affiliates will qualify as Incentive Stock Options. Options
granted to persons who are not employees will be Non-Qualified Stock Options.
2. Definitions. The following definitions are applicable to the Plan:
-----------
"Affiliate"- means any "parent corporation" or "subsidiary corporation" of the
Corporation, as such terms are defined in Section 424(e) and (f), respectively,
of the Code.
"Award"- means the grant of an Incentive Stock Option, a Non-Qualified Stock
Option, a Stock Appreciation Right, a Limited Stock Appreciation Right, or of
Restricted Stock, or any combination thereof, as provided in the Plan.
"Bank"- means Grinnell Federal Savings Bank and any successor entity.
"Code"- means the Internal Revenue Code of 1986, as amended.
"Committee"- means the Committee referred to in Section 3 hereof.
"Continuous Service"- means the absence of any interruption or termination of
service as a director, director emeritus, advisory director, officer or employee
of the Corporation or an Affiliate, except that when used with respect to
persons granted an Incentive Option means the absence of any interruption or
termination of service as an employee of the Corporation or an Affiliate.
Service shall not be considered interrupted in the case of sick leave, military
leave or any other leave of absence approved by the Corporation or in the case
of transfers between payroll locations of the Corporation or between the
Corporation, its parent, its subsidiaries or its successor. With respect to any
advisory director or director emeritus, continuous service shall mean
availability to perform such functions as may be required of the Bank's advisory
directors.
"Corporation"- means GFS Bancorp, Inc., a Delaware corporation.
"Disinterested Person"- means any member of the Board of Directors of the
Corporation who within the prior year has not been, and is not being, granted
any awards related to the Shares under this Plan or any other plan of the
Corporation or any of its Affiliates except for awards which (i) are calculated
in accordance with a formula as contemplated in paragraph (c)(ii) of Rule 16b-3
("Rule 16b-3") under the Securities Exchange Act of 1934; (ii) result from
participation in an ongoing securities acquisition plan meeting the conditions
of paragraph (d)(2) of Rule 16b-3; or, (iii) arise from an election by a
director to receive all or part of his board fees in securities. No recipient of
a stock award granted pursuant to Section 21 hereof shall be deemed not to be a
Disinterested Person solely by reason of such grant.
"Employee"- means any person, including an officer or director, who is employed
by the Corporation or any Affiliate.
"ERISA"- means the Employee Retirement Income Security Act of 1974, as amended.
"Exercise Price"- means (i) in the case of an Option, the price per Share at
which the Shares subject to such Option may be purchased upon exercise of such
Option and (ii) in the case of a Right, the price per Share (other than the
Market Value per Share on the date of exercise and the Offer Price per Share as
defined in Section 10 hereof) which, upon grant, the Committee determines shall
be utilized in calculating the aggregate
<PAGE>
value which a Participant shall be entitled to receive pursuant to Sections 9,
10 or 13 hereof upon exercise of such Right.
"Incentive Stock Option" - means an option to purchase Shares granted by the
Committee pursuant to Section 6 hereof which is subject to the limitations and
restrictions of Section 8 hereof and is intended to qualify under Section 422 of
the Code.
"Limited Stock Appreciation Right" - means a stock appreciation right with
respect to Shares granted by the Committee pursuant to Sections 6 and 10 hereof.
"Market Value" - means the average of the high and low quoted sales price on the
date in question (or, if there is no reported sale on such date, on the last
preceding date on which any reported sale occurred) of a Share on the Composite
Tape for the New York Stock Exchange-Listed Stocks, or, if on such date the
Shares are not quoted on the Composite Tape, on the New York Stock Exchange, or,
if the Shares are not listed or admitted to trading on such Exchange, on the
principal United States securities exchange registered under the Securities
Exchange Act of 1934 on which the Shares are listed or admitted to trading, or,
if the Shares are not listed or admitted to trading on any such exchange, the
mean between the closing high bid and low asked quotations with respect to a
Share on such date on the National Association of Securities Dealers, Inc.,
Automated Quotations System, or any similar system then in use, or, if no such
quotations are available, the fair market value on such date of a Share as the
Committee shall determine.
"Non-Qualified Stock Option" - means an option to purchase Shares granted by the
Committee pursuant to Section 6 hereof, which option is not intended to qualify
under Section 422(b) of the Code.
"Option" - means an Incentive Stock Option or a Non-Qualified Stock Option.
"Participant" - means any officer or employee of the Corporation or any
Affiliate who is selected by the Committee to receive an Award and any director
or director emeritus of the Corporation or the Bank who is granted an Award
pursuant to Section 21 hereof.
"Plan" - means the 1993 Stock Option and Incentive Plan of the Corporation.
"Related" - means (i) in the case of a Right, a Right which is granted in
connection with, and to the extent exercisable, in whole or in part, in lieu of,
an Option or another Right and (ii) in the case of an Option, an Option with
respect to which and to the extent a Right is exercisable, in whole or in part,
in lieu thereof has been granted.
"Restricted Period" - means the period of time selected by the Committee for the
purpose of determining when restrictions are in effect under Section 11 hereof
with respect to Restricted Stock awarded under the Plan.
"Restricted Stock" - means Shares which have been contingently awarded to a
Participant by the Committee subject to the restrictions referred to in Section
11 hereof, so long as such restrictions are in effect.
"Right" - means a Limited Stock Appreciation Right or a Stock Appreciation
Right.
"Shares" - means the shares of common stock of the Corporation.
"Senior Officer" - means the Corporation's president, principal financial
officer, or principal accounting officer, any vice president of the Corporation
in charge of a principal business unit, division or function (such as lending,
administration or finance), any other officer who performs a policy-making
function, or any other person who performs similar policy-making functions for
the Corporation. Officers of the Corporation's
2
<PAGE>
Affiliates shall be deemed Senior Officers of the Corporation if they perform
such policy-making functions for the Corporation.
"Stock Appreciation Right"-means a stock appreciation right with respect to
Shares granted by the Committee pursuant to Section 6 and 9 hereof.
"Ten Percent Beneficial Owner"-means the beneficial owner of more than ten
percent of any class of the Corporation's equity securities registered pursuant
to Section 12 of the Securities Exchange Act of 1934.
3. Administration. The Plan shall be administered by a Committee
--------------
consisting of two or more members, each of whom shall be a Disinterested Person.
The members of the Committee shall be appointed by the Board of Directors of the
Corporation. Except as limited by the express provisions of the Plan, the
Committee shall have sole and complete authority and discretion to (i) select
Participants and grant Awards; (ii) determine the number of Shares to be subject
to types of Awards generally, as well as to individual Awards granted under the
Plan; (iii) determine the terms and conditions upon which Awards shall be
granted under the Plan; (iv) prescribe the form and terms of instruments
evidencing such grants; and (v) establish from time to time regulations for the
administration of the Plan, interpret the Plan, and make all determinations
deemed necessary or advisable for the administration of the Plan. The Committee
may maintain,and update from time to time as appropriate, a list designating
selected directors as Disinterested Persons. The purpose of such list shall be
to evidence the status of such individuals as Disinterested Persons, and the
Board of Directors may appoint to the Committee any individual actually
qualifying as a Disinterested Person, regardless of whether identified as such
on said list.
A majority of the Committee shall constitute a quorum, and the acts of a
majority of the members present at any meeting at which a quorum is present, or
acts approved in writing by a majority of the Committee without a meeting, shall
be acts of the Committee.
4. Participation in Committee Awards. The Committee may select from time
---------------------------------
to time Participants in the Plan from those directors, officers and employees
(other than Disinterested Persons), of the Corporation or its Affiliates who, in
the opinion of the Committee, have the capacity for contributing to the
successful performance of the Corporation or its Affiliates.
5. Shares Subject to Plan. Subject to adjustment by the operation of
----------------------
Section 12 hereof, the maximum number of Shares with respect to which Awards may
be made under the Plan is 10% of the total Shares sold in the Bank's conversion
to the capital stock form. The Shares with respect to which Awards may be made
under the Plan may be either authorized and unissued shares or issued shares
heretofore or hereafter reacquired and held as treasury shares. Shares which
are subject to Related Rights and Related Options shall be counted only once in
determining whether the maximum number of Shares with respect to which Awards
may be granted under the Plan has been exceeded. An Award shall not be
considered to have been made under the Plan with respect to any Option or Right
which terminates or with respect to Restricted Stock which is forfeited, and new
Awards may be granted under the Plan with respect to the number of Shares as to
which such termination of forfeiture has occurred.
6. General Terms and Conditions of Options and Rights. The Committee
--------------------------------------------------
shall have full and complete authority and discretion, except as expressly
limited by the Plan, to grant Options and/or Rights and to provide the terms and
conditions (which need not be identical among Participants) thereof. In
particular, the Committee shall prescribe the following terms and conditions:
(i) the Exercise Price of any Option or Right, which shall not be less than the
Market Value per Share at the date of grant of such Option or Right, (ii) the
number of Shares subject to, and the expiration date of, any Option or Right
which expiration date shall not exceed ten years from the date of grant, (iii)
the manner, time and rate (cumulative or otherwise) of exercise of such Option
or Right, and (iv) the restrictions, if any, to be placed upon such Option or
Right or upon Shares which may be issued upon exercise of such Option or Right.
The Committee may, as a condition of granting any
-3-
<PAGE>
Option or Right, require that a Participant agree not to thereafter exercise one
or more Options or Rights previously granted to such Participant.
7. Exercise of Options or Rights.
-----------------------------
(a) Except as provide herein, an Option or Right granted under the
Plan shall be exercisable during the lifetime of the Participant to whom such
Option or Right was granted only by such Participant and, except as provided in
paragraphs (c) and (d) of this Section 7, no such Option or Right may be
exercised unless at the time such Participant exercises such Option or Right,
such Participant has maintained Continuous Service since the date of grant of
such Option or Right. Cash settlements of Rights may be made only in accordance
with any applicable restrictions pursuant to Rule 16b-3(e) under the Securities
Exchange Act of 1934 or any similar or successor provision.
(b) To exercise an Option or Right under the Plan, the Participant to
whom such Option or Right was granted shall give written notice to the
Corporation in form satisfactory to the Committee (and, if partial exercises
have been permitted by the Committee, by specifying the number of Shares with
respect to which such Participant elects to exercise such Option or Right)
together with full payment of the Exercise Price, if any and to the extent
required. The date of exercise shall be the date on which such notice is
received by the Corporation. Payment, if any is required, shall be made either
(i) in cash (including check, bank draft or money order) or (ii) if permitted by
the Committee by delivering (A) Shares already owned by the Participant and
having a fair market value equal to the applicable exercise price, such fair
market value to be determined in such appropriate manner as may be provided by
the Committee or as may be required in order to comply with or to conform to
requirements of any applicable laws or regulations, or (B) a combination of cash
and such Shares.
(c) If a Participant to whom an Option or Right was granted shall
cease to maintain Continuous Service for any reason (including total or partial
disability and normal or early retirement, but excluding death and termination
of employment by the Corporation or any Affiliate for cause), such Participant
may, but only within the period of three months immediately succeeding such
cessation of Continuous Service and in no event after the expiration date of
such Option or Right, exercise such Option or Right to the extent that such
Participant was entitled to exercise such Option or Right at the date of such
cessation, provided, however, that such right of exercise after cessation of
Continuous Service shall not be available to a Participant if the Committee
otherwise determines and so provides in the applicable instrument or instruments
evidencing the grant of such Option or Right. Notwithstanding the foregoing, if
a Participant to whom an Option or Right was granted shall cease to maintain
Continuous Service due to normal retirement, and such Participant has served the
Corporation or the Bank for at least ten years, the Option or Right granted to
such Participant shall become immediately exercisable, and the Participant may
exercise such Option or Right only during the shortest of the following periods
(i) the five-year period immediately succeeding such cessation of Continuous
Service, or (ii) the period remaining until the expiration of such Option or
Right. If the Continuous Service of a Participant to whom an Option or Right was
granted by the Corporation is terminated for cause, all rights under any Option
or Right of such Participant shall expire immediately upon the giving to the
Participant of notice of such termination.
(d) In the event of the death of a Participant while in the
Continuous Service of the Corporation or an Affiliate or within the three month
or five-year periods referred to in paragraph (c) of this Section 7, the person
to whom any Option or Right held by the Participant at the time of his death is
transferred by will or the laws of descent and distribution, or in the case of
an Award other than an Incentive Stock Option, pursuant to a qualified domestic
relations order, as defined in the Code or Title I of ERISA or the rules
thereunder may, but only to the extent such Participant was entitled to exercise
such Option or Right immediately prior to his death, exercise such Option or
Right at any time within a period of one year succeeding the date of death of
such Participant, but in no event later than ten years from the date of grant of
such Option or Right. Following the death of any Participant to whom an Option
was granted under the Plan,
-4-
<PAGE>
irrespective of whether any Related Right shall have theretofore been granted to
the Participant or whether the person entitled to exercise such Related Right
desires to do so, the Committee may, as an alternative means of settlement of
such Option, elect to pay to the person to whom such Option is transferred by
will or by the laws of descent and distribution, or in the case of an Option
other than an Incentive Stock Option, pursuant to a qualified domestic relations
order, as defined in the Code or Title I of ERISA of the rules thereunder, the
amount by which the Market Value per Share on the date of exercise of such
Option shall exceed the Exercise Price of such Option, multiplied by the number
of Shares with respect to which such Option is properly exercised. Any such
settlement of an Option shall be considered an exercise of such Option for all
purposes of the Plan.
8. Incentive Stock Options. Incentive Stock Options may be granted only
-----------------------
to Participants who are Employees. Any provision of the Plan to the contrary
notwithstanding, (i) no Incentive Stock Option shall be granted more than ten
years from the date the Plan is adopted by the Board of Directors of the
Corporation and no Incentive Stock Option shall be exercisable more than ten
years from the date such Incentive Stock Option is granted, (ii) the Exercise
Price of any Incentive Stock Option shall not be less than the Market Value per
Share on the date such Incentive Stock Option is granted, (iii) any Incentive
Stock Option shall not be transferable by the Participant to whom such Incentive
Stock Option is granted other than by will or the laws of descent and
distribution, and shall be exercisable during such Participant's lifetime only
by such Participant, (iv) no Incentive Stock Option shall be granted to any
individual who, at the time such Incentive Stock Option is granted, owns stock
possessing more than ten percent of the total combined voting power of all
classes of stock of the Corporation or any Affiliate unless the Exercise Price
of such Incentive Stock Option is at least 110 percent of the Market Value per
Share at the date of grant and such Incentive Stock Option is not exercisable
after the expiration of five years from the date such Incentive Stock Option is
granted, and (v) the aggregate Market Value (determined as of the time any
Incentive Stock Option is granted) of the Shares with respect to which Incentive
Stock Options are exercisable for the first time by a Participant in any
calendar year shall not exceed $100,000.
9. Stock Appreciation Rights. A Stock Appreciation Right shall, upon its
-------------------------
exercise, entitle the Participant to whom such Stock Appreciation Right was
granted to receive a number of Shares or cash or combination thereof, as the
Committee in its discretion shall determine, the aggregate value of which (i.e.,
the sum of the amount of cash and/or Market Value of such Shares on date of
exercise) shall equal (as nearly as possible, it being understood that the
Corporation shall not issue any fractional shares) the amount by which the
Market Value per Share on the date of such exercise shall exceed the Exercise
Price of such Stock Appreciation Right, multiplied by the number of Shares with
respect of which such Stock Appreciation Right shall have been exercised. A
Stock Appreciation Right may be Related to an Option or may be granted
independently of any Option as the Committee shall from time to time in each
case determine. At the time of grant of an Option the Committee shall determine
whether and to what extent a Related Stock Appreciation Right shall be granted
with respect thereto; provided, however, and notwithstanding any other provision
of the Plan, that if the Related Option is an Incentive Stock Option, the
Related Stock Appreciation Right shall satisfy all the restrictions and
limitations of Section 8 hereof as if such Related Stock Appreciation Right were
an Incentive Stock Option and as if other rights which are Related to Incentive
Stock Options were Incentive Stock Options. In the case of a Related Option,
such Related Option shall cease to be exercisable to the extent of the Shares
with respect to which the Related Stock Appreciation Right was exercised. Upon
the exercise or termination of a Related Option, any Related Stock Appreciation
Right shall terminate to the extent of the Shares with respect to which the
Related Option was exercised or terminated. Notwithstanding the foregoing, no
Stock Appreciation Right shall be exercisable by a director, Senior Officer or
Ten Percent Beneficial Owner of the Corporation within six months of the date of
its grant.
10. Limited Stock Appreciation Rights. At the time of grant of an Option
---------------------------------
or Stock Appreciation Right to any Participant, the Committee shall have full
and complete authority and discretion to also grant to such Participant a
Limited Stock Appreciation Right which is Related to such Option or Stock
Appreciation Right; provided, however and notwithstanding any other provision
of the Plan, that if the Related Option is an
<PAGE>
Incentive Stock Option, the Related Limited Stock Appreciation Right shall
satisfy all the restrictions and limitations of Section 8 hereof as if such
Related Limited Stock Appreciation Right were an Incentive Stock Option and as
if all other Rights which are Related to Incentive Stock Options were Incentive
Stock Options. Notwithstanding any other provision of the Plan, a Limited
Stock Appreciation Right shall be exercisable only during the period beginning
on the first day following the date of expiration of any "offer" (as such term
is hereinafter defined) and ending on the forty-fifth day following such date,
provided, however, that no Limited Stock Appreciation Right shall be exercisable
by a director, Senior Officer or Ten Percent Beneficial Owner within six months
of the date of its grant.
A Limited Stock Appreciation Right shall, upon its exercise, entitle the
Participant to whom such Limited Stock Appreciation Right was granted to receive
an amount of cash equal to the amount by which the "Offer Price per Share" (as
such term is hereinafter defined) or the Market Value on the date of such
exercise, as shall have been provided by the Committee in its discretion at the
time of grant, shall exceed the Exercise Price of such Limited Stock
Appreciation Right, multiplied by the number of Shares with respect to which
such Limited Stock Appreciation Right shall have been exercised. Upon the
exercise of a Limited Stock Appreciation Right, any Related Option and/or
Related Stock Appreciation Right shall cease to be exercisable to the extent of
the Shares with respect to which such Limited Stock Appreciation Right was
exercised. Upon the exercise or termination of a Related Option or Related
Stock Appreciation Right, any Related Limited Stock Appreciation Right shall
terminate to the extent of the Shares with respect to which such Related Option
or Related Stock Appreciation Right was exercised or terminated.
For the purposes of this Section 10, the term "Offer" shall mean any tender
offer or exchange offer for Shares other than one made by the Corporation,
provided that the corporation, person or other entity making the offer acquires
pursuant to such offer either (i) 25% of the Shares outstanding immediately
prior to the commencement of such offer or (ii) a number of Shares which,
together with all other Shares acquired in any tender offer or exchange offer
(other than one made by the Corporation) which expired within sixty days of the
expiration date of the offer in question, equals 25% of the Shares outstanding
immediately prior to the commencement of the offer in question. The term "Offer
Price per Share" as used in this Section 10 shall mean the highest price per
Share paid in any Offer which Offer is in effect any time during the period
beginning on the sixtieth day prior to the date on which a Limited Stock
Appreciation Right is exercised and ending on the date on which such Limited
Stock Appreciation Right is exercised. Any securities or property which are
part or all of the consideration paid for Shares in the Offer shall be valued in
determining the Offer Price per Share at the higher of (A) the valuation placed
on such securities or property by the corporation, person or other entity making
such Offer or (B) the valuation placed on such securities or property by the
Committee.
11. Terms and Conditions of Restricted Stock. The Committee shall have
----------------------------------------
full and complete authority subject to the limitations of the Plan, to grant
awards of Restricted Stock and, in addition to the terms and conditions
contained in paragraphs (a) through (f) of this Section 11, to provide such
other terms and conditions (which need not be identical among Participants) in
respect of such Awards, and the vesting thereof, as the Committee shall
determine and provide in the agreement referred to in paragraph (d) of this
Section 11.
(a) At the time of an award of Restricted Stock, the Committee shall
establish for each Participant a Restricted Period of not less than six months
during which or at the expiration of which, as the Committee shall determine and
provide in the agreement referred to in paragraph (d) of this Section 11, the
Shares awarded as Restricted Stock shall vest. Subject to any such other terms
and conditions as the Committee shall provide, shares of Restricted Stock may
not be sold, assigned, transferred, pledged or otherwise encumbered by the
Participant, except as hereinafter provided, during the Restricted Period.
Except for such restrictions, and subject to paragraphs (c), (d) and (e) of this
Section 11 and Section 12 hereof, the Participant as owner of such shares shall
have all the rights of a stockholder, including but not limited to the right to
receive all dividends paid on such shares and the right to vote such shares.
The Committee shall have the authority, in its discretion, to accelerate the
time at which any or all of the restrictions shall lapse with
<PAGE>
respect to any shares of Restricted Stock prior to the expiration of the
Restricted Period with respect thereto, or to remove any or all of such
restrictions, whenever it may determine that such action is appropriate by
reason of changes in applicable tax or other laws or other changes in
circumstances occurring after the commencement of such Restricted Period.
(b) Except as provided in Section 14 hereof, if a Participant ceases
to maintain Continuous Service for any reason (other than death, total or
partial disability or normal or early retirement) unless the Committee shall
otherwise determine, all shares of Restricted Stock theretofore awarded to such
Participant and which at the time of such termination of Continuous Service are
subject to the restrictions imposed by paragraph (a) of this Section 11 shall
upon such termination of Continuous Service be forfeited and returned to the
Corporation. Unless the Committee shall otherwise have provided in the
agreement referred to in paragraph (d) of this Section 11 for the lapse of
restrictions with respect to an award of shares of Restricted Stock during the
Restricted Period, if a Participant ceases to maintain Continuous Service by
reason of death, total or partial disability or normal or early retirement, such
portion of such shares of Restricted Stock awarded to such Participant which at
the time of such termination of Continuous Service are subject to the
restrictions imposed by paragraph (a) of this Section 11 as shall be equal to
the portion of the Restricted Period with respect to such shares which shall
have elapsed at the time of such termination of Continuous Service shall be free
of restrictions and shall not be forfeited.
(c) Each certificate in respect of shares of Restricted Stock awarded
under the Plan shall be registered in the name of the Participant and deposited
by the Participant, together with a stock power endorsed in blank, with the
Corporation and shall bear the following (or a similar) legend:
"The transferability of this certificate and the shares of stock
represented hereby are subject to the terms and conditions (including
forfeiture) contained in the 1993 Stock Option and Incentive Plan of
GFS Bancorp, Inc. and an Agreement entered into between the registered
owner and GFS Bancorp, Inc. Copies of such Plan and Agreement are on
file in the offices of the Secretary of GFS Bancorp, Inc., 1025 Main
Street, Grinnell, IA 50112."
(d) At the time of an award of shares of Restricted Stock, the
Participant shall enter into an Agreement with the Corporation in a form
specified by the Committee, agreeing to the terms and conditions of the award
and such other matters as the Committee shall in its sole discretion determine.
(e) At the time of an award of shares of Restricted Stock, the
Committee may, in its discretion, determine that the payment to the Participant
of dividends declared or paid on such shares, or specified portion thereof, by
the Corporation shall be deferred until the earlier to occur of (i) the lapsing
of the restrictions imposed under paragraph (a) of this Section 11 or (ii) the
forfeiture of such shares under paragraph (b) of this Section 11, and shall be
held by the Corporation for the account of the Participant until such time. In
the event of such deferral, there shall be credited at the end of each year (or
portion thereof) interest on the amount of the account at the beginning of
the year at a rate per annum as the Committee, in its discretion, may determine.
Payment of deferred dividends, together with interest accrued thereon as
aforesaid, shall be made upon the earlier to occur of the events specified in
(i) and (ii) of the immediately preceding sentence.
(f) At the expiration or lapse of the restrictions imposed by
paragraph (a) of this Section 11, the Corporation shall redeliver to the
Participant (or where the relevant provision of paragraph (b) of this Section 11
applies in the case of a deceased Participant, to his legal representative,
beneficiary or heir) the certificate(s) and stock power deposited with it
pursuant to paragraph (c) of this Section 11 and the Shares represented by such
certificate(s) shall be free of the restrictions referred to in paragraph (a)
of this Section 11.
12. Adjustments Upon Changes in Capitalization. In the event of any
------------------------------------------
change in the outstanding Shares subsequent to the effective date of the Plant
by reason of any reorganization, recapitalization, stock split, stock dividend,
combination or exchange of shares, merger, consolidation or any change in the
corporate
<PAGE>
structure or Shares of the corporation, the maximum aggregate number and class
of shares as to which Awards may be granted under the Plan and the number and
class of shares with respect to which Awards theretofore have been granted under
the Plan shall be appropriately adjusted by the Committee, whose determination
shall be conclusive. Any shares of stock or other securities received, as a
result of any of the foregoing, by a Participant with respect to Restricted
Stock shall be subject to the same restrictions and the certificate(s) or other
instruments representing or evidencing such shares or securities shall be
legended and deposited with the Corporation in the manner provided in Section 11
hereof.
13. Effect of Merger. In the event of any merger, consolidated or
----------------
combination of the Corporation (other than a merger, consolidation or
combination in which the Corporation is the continuing entity and which does not
result in the outstanding Shares being converted into or exchanged for different
securities, cash or other property, or any combination thereof) pursuant to a
plan or agreement the terms of which are binding upon all stockholders of the
Corporation (except to the extent that dissenting stockholders may be entitled,
under statutory provisions or provisions contained in the certificate of
incorporation, to receive the appraised or fair value of their holdings), any
Participant to whom an Option or Right has been granted at least six months
prior to such event shall have the right (subject to the provisions of the Plan
and any limitation applicable to such Option or Right), thereafter and during
the term of each such Option or Right, to receive upon exercise of any such
Option or Right an amount equal to the excess of the fair market value on the
date of such exercise of the securities, cash or other property, or combination
thereof, receivable upon such merger, consolidation or combination in respect of
a Share over the Exercise Price of such Right or Option, multiplied by the
number of Shares with respect to which such Option or Right shall have been
exercised. Such amount may be payable fully in cash, fully in one or more of the
kind or kinds of property payable in such merger, consolidation or combination,
or partly in cash and partly in one or more of such kind or kinds of property,
all in the discretion of the Committee. Unless the Committee shall have provided
otherwise in the agreement referred to in paragraph (d) of Section 11 hereof, in
the event of any such merger, consolidation or combination any Restricted Period
shall lapse with respect to Shares of Restricted Stock awarded at least six
months prior to such event, all such Shares shall be fully vested in the
Participants to whom such Shares were awarded, and the holders of such Shares
shall be eligible to receive in respect thereof the full amount receivable per
Share in such merger, consolidation or combination.
14. Effect of Change in Control. Each of the events specified in the
---------------------------
following clauses (i) through (iii) of this Section 14 shall be deemed a "change
of control": (i) any third person, including a "group" as defined in Section
13(d)(3) of the Securities Exchange Act of 1934, shall become the beneficial
owner of shares of the Corporation with respect to which 25% or more of the
total number of votes for the election of the Board of Directors of the
Corporation may be cast, (ii) as a result of, or in connection with, any cash
tender offer, exchange offer, merger other business combination, sale of assets
or contested election, or combination of the foregoing, the persons who were
directors of the Corporation shall cease to constitute a majority of the Board
of Directors of the Corporation or (iii) the shareholders of the Corporation
shall approve an agreement providing either for a transaction in which the
Corporation will cease to be an independent publicly owned entity or for a sale
or other disposition of all or substantially all the assets of the Corporation;
provided, however, that the occurrence of any such events shall not be deemed a
"change in control" if, prior to such occurrence, a resolution specifically
approving such occurrence shall have been adopted by at least a majority of the
Board of Directors of the Corporation. If the Continuous Service of any
Participant of the Corporation or any Affiliate is involuntarily terminated for
whatever reason, at any time within eighteen months after a change in control,
unless the Committee shall have otherwise provided in the agreement referred to
in paragraph (d) of Section 11 hereof, any Restricted Period with respect to
Restricted Period with respect to Restricted Stock theretofore awarded to such
Participant shall lapse upon such termination and all Shares awarded as
Restricted Stock shall become fully vested in the Participant to whom such
Shares were awarded. If a tender offer or exchange offer for Shares (other
than such an offer by the Corporation) is commenced, or if the event specified
in clause (iii) above shall occur, unless the Committee shall have otherwise
provided in the instrument evidencing the grant of an Option or Stock
Appreciation Right, all Options and Stock Appreciation Rights theretofore
granted and not fully exercisable shall become exercisable in full upon the
happening of such event and shall remain so
-8-
<PAGE>
exercisable for a period of sixty days following such date, after which they
shall revert to being exercisable in accordance with their terms; provided,
however, that no Option or Stock Appreciation Right shall be exercisable by a
director, Senior Officer or Ten Percent Beneficial Owner of the Corporation
within six months of the date of grant of such Option or Stock Appreciation
Right and no Option or Stock Appreciation Right which has previously been
exercised or otherwise terminated shall become exercisable.
15. Assignments and Transfers. No Award nor any right or interest of a
-------------------------
Participant under the Plan in any instrument evidencing any Award under the Plan
may be assigned, encumbered or transferred except, in the event of the death of
a Participant, by will or the laws of descent and distribution or, in the case
of Awards other than Incentive Stock Options, pursuant to a qualified domestic
relations order, as defined in the Code or Title I of ERISA or the rules
thereunder.
16. Employee Rights Under the Plan. No director, officer or employee shall
------------------------------
have a right to be selected as a Participant nor, having been so selected, to be
selected again as a Participant and no director, officer, employee or other
person shall have any claim or right to be granted an Award under the Plan or
under any other incentive or similar plan of the Corporation or any Affiliate.
Neither the Plan nor any action taken thereunder shall be construed as giving
any employee any right to be retained in the employ of the Corporation or any
Affiliate.
17. Delivery and Registration of Stock. The Corporation's obligation to
----------------------------------
deliver Shares with respect to an Award shall, if the Committee so requests, be
conditioned upon the receipt of a representation as to the investment intention
of the Participant to whom such Shares are to be delivered, in such form as the
Committee shall determine to be necessary or advisable to comply with the
provisions of the Securities Act of 1933, as amended, or any other Federal,
state or local securities legislation or regulation. It may be provided that any
representation requirement shall become inoperative upon a registration of the
Shares or other action eliminating the necessity of such representation under
such securities act or other securities legislation. The Corporation shall not
be required to deliver any Shares under the Plan prior to (i) the admission of
such shares to listing on any stock exchange on which Shares may then be listed,
and (ii) the completion of such registration or other qualification of such
Shares under any state or Federal law, rule or regulation, as the Committee
shall determine to be necessary or advisable.
This Plan is intended to comply with Rule 16b-3 under the Securities
Exchange Act of 1934. Any provision of the Plan which is inconsistent with said
Rule shall, to the extent of such inconsistency, be inoperative and shall not
affect the validity of the remaining provisions of the Plan.
18. Withholding Tax. Upon the termination of the Restricted Period with
---------------
respect to any shares of Restricted Stock (or at any such earlier time, if any,
that an election is made by the Participant under Section 83(b) of the Code, or
any successor provision thereto, to include the value of such shares in taxable
income), the Corporation shall retain a sufficient number of shares held by it
to cover the amount required to be withheld. The Corporation shall have the
right to deduct from all dividends paid with respect to shares of Restricted
Stock the amount of any taxes which the Corporation is required to withhold with
respect to such dividend payments.
The Corporation shall have the right to deduct from all amounts paid in cash
with respect to the exercise of a Right under the Plan any taxes required by law
to be withheld with respect to such cash payments. Where a Participant or other
person is entitled to receive Shares pursuant to the exercise of an Option or
Right pursuant to the Plan, the Corporation shall have the right to require the
Participant or such other person to pay the Corporation the amount of any taxes
which the Corporation is required to withhold with respect to such Shares.
No discretion or choice shall be conferred upon any Participant, or other
Person entitled to receive Shares, with respect to the form, timing or method of
any such tax withholding.
-9-
<PAGE>
19. Amendment or Termination. The Board of Directors of the Corporation
------------------------
may amend, suspend or terminate the Plan or any portion thereof at any time, but
(except as provided in Section 12 hereof) no amendment shall be made without
approval of the stockholders of the Corporation which shall (i) increase the
aggregate number of Shares with respect to which Awards may be made under the
Plan (except pursuant to Section 12), (ii) materially increase the benefits
accruing to Participants, (iii) materially change the requirements as to
eligibility for participation in the Plan or (iv) change the class of persons
eligible to participate in the Plan, provided, however, that no such amendment,
suspension or termination shall impair the rights of any Participant, without
his consent, in any Award theretofore made pursuant to the Plan.
20. Effective Date and Term of Plan. The Plan shall become effective upon
-------------------------------
its adoption by the Board of Directors of the Corporation, subject to the Bank
converting to a stock institution and approval of the Plan by stockholders of
the Corporation. It shall continue in effect for a term of ten years unless
sooner terminated under Section 19 hereof.
21. Initial Grant. By, and simultaneously with, the adoption of this Plan,
-------------
each non-employee member of the Board of Directors with over 25 years of service
to the Bank, each non-employee member of the Board of Directors with 10 to 25
years of service to the Bank, each director emeritus of the Bank, each non-
employee member of the Board of Directors of the Bank with over three but less
than 10 years of service to the Bank and each other non-employee member of the
Board of Directors of the Bank at the time of the Bank's conversion to stock
form is hereby granted a ten-year, Non-Qualified Stock Option to purchase a
number of shares equal to .63%, .45%, .45%, .36% and .27%, respectively, of the
shares issued in the Bank's conversion to stock form at an Exercise Price per
share equal to the per share price at which Shares are sold in the conversion.
In addition, each director of the Bank who is not a full-time employee elected
after the completion of the Bank's conversion to stock form is hereby granted as
of the date he or she is elected and qualified ("election date") a ten-year Non-
Qualified Stock Option to purchase a number of shares equal to .27% of the
shares sold in the Bank's conversion at the applicable market price on the
election date. Each such Option shall be evidenced by a Non-Qualified Stock
Option Agreement in a form approved by the Board of Directors and shall be
subject in all respects to the terms and conditions of this Plan, which are
controlling. All options granted pursuant to this Section 21 shall be rounded
down to the nearest whole share to the extent necessary to ensure that no
options to purchase stock representing fractional shares are granted.
22. Notwithstanding anything else in this Plan to the contrary, to the
extent that the Plan provides for formula awards, as defined in Rule
16b-3(c)(2)(ii) under the Securities Exchange Act of 1934, such provisions may
not be amended more than once every six months, other than to comport with
changes in the Code, ERISA or the rules thereunder.
-10-
<PAGE>
GFS BANCORP, INC.
RECOGNITION AND RETENTION PLAN
1. Plan Purpose. The purpose of the Plan is to promote the long-term
------------
interests of the Corporation and its stockholders by providing a means for
attracting and retaining executive officers of the Corporation and its
Affiliates.
2. Definitions. The following definitions are applicable to the Plan:
-----------
"Award"-means the grant by the Committee of Restricted Stock, as provided in the
Plan.
"Affiliate"-means any "parent corporation" or "subsidiary corporation" of the
Corporation, as such terms are defined in Section 424(c) and (f), respectively,
of the Code.
"Code"-means the Internal Revenue Code of 1986, as amended.
"Committee"-means the Committee referred to in Section 7 hereof.
"Continuous Service"-means the absence of any interruption or termination of
service as an executive officer or employee of the Corporation or any Affiliate.
Service shall not be considered interrupted in the case of sick leave, military
leave or any other leave of absence approved by the Corporation or any Affiliate
or in the case of transfers between payroll locations of the Corporation or
between the Corporation, its parent, its subsidiaries or its successor. With
respect to a director emeritus, continuous service shall mean availability to
perform such functions as may be required of the Corporation's or the
Institution's directors emeriti.
"Corporation"-means GFS Bancorp, Inc., a Delaware corporation.
"Disinterested Person"-means any members of the Board of Directors of the
Corporation who within the prior year has not been, and is not being, granted
any awards related to the shares under this Plan or any other plan of the
Corporation or any of its Affiliates except for awards which (i) are calculated
in accordance with a formula as contemplated in paragraph (c)(ii) of Rule 16b-3
("Rule 16b-3") under the Securities Exchange Act of 1934, as amended; (ii)
result from participation in an ongoing securities acquisition plan meeting the
conditions of paragraph (d)(2) of Rule 16b-3; or (iii) arise from an election by
a director to receive all or part of his board fees in securities.
"ERISA"-means the Employee Retirement Income Security Act of 1974, as amended.
"Institution"-means Grinnell Federal Savings Bank, a savings institution and its
predecessors and successors.
"Participant"-means any director or director emeritus of the Corporation or any
affiliate who is granted an award pursuant to Section 9 or any executive officer
or employee of the Corporation of any Affiliate who is selected by the Committee
to receive an Award.
"Plan"-means the Recognition and Retention Plan of the Corporation.
"Restricted Period"-means the period of time selected by the Committee for the
purpose of determining when restrictions are in effect under Section 3 hereof
with respect to Restricted Stock awarded under the Plan.
"Restricted Stock"-means Shares which have been contingently awarded to a
Participant by the Committee subject to the restrictions referred to in Section
3 hereof, so long as such restrictions are in effect.
"Shares"-means the common stock, par value $0.01 per share, of the Corporation.
<PAGE>
3. Terms and Conditions of Restricted Stock. The Committee shall have
----------------------------------------
full and complete authority, subject to the limitations of the Plan, to grant
awards of Restricted Stock and, in addition to the terms and conditions
contained in paragraphs (a) through (e) of this Section 3, to provide such other
terms and conditions (which need not be identical among Participants) in respect
of such Awards, and the vesting thereof, as the Committee shall determine.
(a) At the time of an award of Restricted Stock, the Committee shall
establish for each Participant a Restricted Period, which shall not be less than
six months, during which or at the expiration of which, as the Committee shall
determine and provide in the agreement referred to in paragraph (d) of this
Section 3, the Shares awarded as Restricted Stock shall vest, and subject to any
such other terms and conditions as the Committee shall provide, shares of
Restricted Stock may not be sold, assigned, transferred, pledged or otherwise
encumbered by the Participant, except as hereinafter provided, during the
Restricted Period. Except for such restrictions, and subject to paragraphs (c)
and (d) of this Section 3 and Section 4 hereof, the Participant as owner of such
shares shall have all the rights of a stockholder, including but not limited to
the right to receive all dividends paid on such shares and the right to vote
such shares. The Committee shall have the authority, in its discretion, to
accelerate the time at which any or all of the restrictions shall lapse with
respect thereto, or to remove any or all of such restrictions, whenever it may
determine that such action is appropriate by reason of changes in applicable tax
or other laws or other changes in circumstances occurring after the commencement
of such Restricted Period.
(b) Except as provided in Section 5 hereof, if a Participant ceases to
maintain Continuous Service for any reason (other than death, total or partial
disability or normal or early retirement), unless the Committee shall otherwise
determine, all Shares of Restricted Stock theretofore awarded to such
Participant and which at the time of such termination of Continuous Service are
subject to the restrictions imposed by paragraph (a) of this Section 3 shall
upon such termination of Continuous Service be forfeited and returned to the
Corporation. If a Participant ceases to maintain Continuous Service by reason of
death, total or partial disability or normal or early retirement, Restricted
Stock then still subject to restrictions imposed by paragraph (a) of this
Section 3 will be free of those restrictions and shall not be forfeited.
(c) Each certificate in respect of Shares of Restricted Stock awarded
under the Plan shall be registered in the name of the Participant and deposited
by the Participant, together with a stock power endorsed in blank, with the
Corporation and shall bear the following (or a similar) legend:
"The transferability of this certificate and the shares of stock
represented hereby are subject to the terms and conditions (including
forfeiture) contained in the Recognition and Retention Plan of GFS Bancorp,
Inc. Copies of such Plan are on file in the offices of the Secretary of GFS
Bancorp, Inc., 1025 Main Street, Grinnell, IA 50112."
(d) At the time of an award of shares of Restricted Stock, the Committee
may, in its discretion, determine that the payment to the Participant of
dividends declared or paid on such shares, or specified portion thereof, by the
Corporation shall be deferred until the earlier to occur of (i) the lapsing of
the restrictions imposed under paragraph (a) of this Section 3 or (ii) the
forfeiture of such shares under paragraph (b) of this Section 3, and shall be
held by the Corporation for the account of the Participant until such time. In
the event of such deferral, there shall be credited at the end of each year (or
portion thereof) interest on the amount of the account at the beginning of the
year at a rate per annum as the Committee, in its discretion, may determine.
Payment of deferred dividends, together with interest accrued thereon, shall be
made upon the earlier to occur of the events specified in (i) and (ii) of the
immediately preceding sentence.
(e) At the expiration of the restrictions imposed by paragraph (a) of this
Section 3, the Corporation shall redeliver to the Participant (or where the
relevant provision of paragraph (b) of this Section 3 applies in the case of a
deceased Participant, to his legal representative, beneficiary or heir) the
certificate(s) and stock power deposited with it pursuant to paragraph (c) of
this Section 3 and the Shares represented by such certificate(s) shall be free
of the restrictions referred to in paragraph (a) of this Section 3.
2
<PAGE>
4. Adjustments Upon Changes in Capitalization. In the event of any
------------------------------------------
change in the outstanding Shares subsequent to the effective date of the Plan by
reason of any reorganization, recapitalization, stock split, stock dividend,
combination or exchange of shares, merger, consolidation or any change in the
corporate structure or Shares of the Corporation, the maximum aggregate number
and class of shares as to which Awards may be granted under the Plan and the
number and class of shares with respect to which Awards theretofore have been
granted under the Plan shall be appropriately adjusted by the Committee, whose
determination shall be conclusive. Any shares of stock or other securities
received, as a result of any of the foregoing, by a Participant with respect to
Restricted Stock shall be subject to the same restrictions and the
certificate(s) or other instruments representing or evidencing such shares or
securities shall be legended and deposited with the Corporation in the manner
provided in Section 3 hereof.
5. Effect of Change in Control. Each of the events specified in the
---------------------------
following clauses (i) through (iii) of this Section 5 shall be deemed a "change
of control": (i) any third person, including a "group" as defined in Section
13(d)(3) of the Securities Exchange Act of 1934, shall become the beneficial
owner of shares of the Corporation with respect to which 25% or more of the
total number of votes which may be cast for the election of the Board of
Directors of the Corporation, (ii) as a result of, or in connection with, any
cash tender offer, merger or other business combination, sale of assets or
contested election, or combination of the foregoing, the persons who were
directors of the Corporation shall cease to constitute a majority of the Board
of Directors of the Corporation, or (iii) the shareholders of the Corporation
shall approve an agreement providing either for a transaction in which the
Corporation will cease to be an independent publicly owned entity or for a sale
or other disposition of all or substantially all the assets of the Corporation;
provided, however, that the occurrence of any such events shall not be deemed a
"change in control" if, prior to such occurrence, a resolution specifically
approving such occurrence shall have been adopted by at least a majority of the
"Disinterested Directors" (as that term is defined in the Corporation's
Certificate of Incorporation) of the Corporation. If the Continuous Service of
any Participant of the Corporation is involuntarily terminated for whatever
reason, at any time within twelve months after a change in control, unless the
Committee shall have otherwise provided, any Restricted Period with respect to
Restricted Stock theretofore awarded to such Participant shall lapse upon such
termination and all Shares awarded as Restricted Stock shall become fully vested
in the Participant to whom such Shares were awarded.
6. Assignments and Transfers. No Award nor any right or interest of a
-------------------------
Participant under the Plan in any instrument evidencing any Award under the Plan
may be assigned, encumbered or transferred except, in the event of the death of
a Participant, by will or the laws of descent and distribution or pursuant to a
qualified domestic relations order as defined in the Code or Title I of ERISA or
the rules thereunder.
7. Administration. The Plan shall be administered by a Committee
--------------
consisting of two or more members, each of whom shall be a Disinterested Person.
The members of the Committee shall be appointed by the Board of Directors of the
Corporation. Except as limited by the express provisions of the Plan, the
Committee shall have sole and complete authority and discretion to (i) select
Participants and grant Awards; (ii) determine the number of shares to be subject
to types of Awards generally, as well as to individual Awards granted under the
Plan; (iii) determine the terms and conditions upon which Awards shall be
granted under the Plan; (iv) prescribe the form and terms of instruments
evidencing such grants; and (v) establish from time to time regulations for the
administration of the Plan, interpret the Plan, and make all determinations
deemed necessary or advisable for the administration of the Plan. The Committee
may maintain, and update from time to time as appropriate, a list designating
selected directors as Disinterested Persons. The purpose of such list shall be
to evidence the status of such individuals as Disinterested Persons, and the
Board of Directors may appoint to the Committee any individual actually
qualifying as a Disinterested Person, regardless of whether identified as such
on said list.
A majority of the Committee shall constitute a quorum, and the acts of a
majority of the members present at any meeting at which a quorum is present, or
acts approved in writing by a majority of the Committee without a meeting, shall
be acts of the Committee.
8. Shares Subject to Plan. Subject to adjustment by the operation of
----------------------
Section 4 hereof, the maximum number of Shares with respect to which Awards may
be made under the Plan is 4% of the total Shares sold in the Institution's
conversion to stock form. The shares with respect to which Awards may be made
under the Plan may
3
<PAGE>
be either authorized and unissued shares or issued shares heretofore or
hereafter reacquired and held as treasury shares. An Award shall not be
considered to have been made under the Plan with respect to Restricted Stock
which is forfeited and new Awards may be granted under the Plan with respect to
the number of Shares as to which such forfeiture has occurred.
9. Director Awards. By, and simultaneously with the adoption of this Plan,
---------------
each member of the Board of Directors of the Institution or director emeritus at
the time of the Institution's conversion to stock form who is not a full-time
employee, is hereby granted an Award of Restricted Stock equal to .13% of the
shares issued in connection with the Institution's conversion to stock form. In
addition, subject to availability, each non-employee director of the Institution
elected after the completion of the Institution's conversion to stock form is
hereby granted (as of the date he or she is elected and qualified) an Award of
Restricted Stock equal to the dollar value of the Award (as determined on the
date of the conversion) granted to each director at the time of the conversion
who was not a full-time employee, at the then applicable market price. No Award
granted pursuant to this section shall vest in any year in which the Institution
is not in compliance with its capital requirements. The Awards granted pursuant
to this section shall vest at a rate of one third of the Award per year
commencing on the one year anniversary from the date of grant. All Awards
granted pursuant to this Section 9 shall be rounded down to the nearest whole
share to the extent necessary to ensure that no fractional shares are issued.
10. Employee Rights Under the Plan. No officer or employee shall have a
------------------------------
right to be selected as a Participant nor, having been so selected, to be
selected again as a Participant and no officer, employee or other person shall
have any claim or right to be granted an Award under the Plan or under any other
incentive or similar plan of the Corporation or an Affiliate. Neither the Plan
nor any action taken thereunder shall be construed as giving any employee any
right to be retained in the employ of the Corporation, the Institution or any
Affiliate.
11. Withholding Tax. Upon the termination of the Restricted Period with
---------------
respect to any shares of Restricted Stock (or at any such earlier time, if any,
that an election is made by the Participant under Section 83(b) of the Code, or
any successor provision thereto, to include the value of such shares in taxable
income), the Corporation shall have the right to require the Participant or
other person receiving such shares to pay the Corporation the amount of any
taxes which the Corporation is required to withhold with respect to such shares,
or, in lieu thereof, to retain or sell without notice, a sufficient number of
shares held by it to cover the amount required to be withheld. The Corporation
shall have the right to deduct from all dividends paid with respect to shares of
Restricted Stock the amount of any taxes which the Corporation is required to
withhold with respect to such dividend payments. No discretion or choice shall
be conferred upon any Participant with respect to the form, timing or method of
any such tax withholding.
12. Amendment or Termination. The Board of Directors of the Corporation may
------------------------
amend, suspend or terminate the Plan or any portion thereof at any time,
provided however, that no such amendment, suspension or termination shall impair
the rights of any Participant, without his consent, in any Award theretofore
made pursuant to the Plan.
Notwithstanding anything in this Plan to the contrary, to the extent that
the Plan provides for formula awards, as defined in Rule 16b-3(c)(2)(ii) under
the Securities Exchange Act of 1934, as amended, such provisions may not be
amended more than once every six months, other than to compare with changes in
the Code, ERISA or the rules thereunder.
13. Term of Plan. The Plan shall become effective upon the adoption by the
------------
Boards of Directors of the Corporation, subject to the Institution's completion
of the conversion to stock form. It shall continue in effect for a term of ten
years unless sooner terminated under Section 2 hereof.
<PAGE>
[LETTERHEAD OF BANK
COMPENSATION
STRATEGIES GROUP
APPEARS HERE]
GRINNELL FEDERAL SAVINGS BANK
GRINNELL, IOWA
Bank Plan(TM)
Owner's Manual
Salary Continuation Plan
March 18, 1993
Copyright (C) 1989 by Bank Compensation Strategies, Inc.
3600 West 60th Steet, Suite 200
Minneapolis, MN 55431
(612)893-6767 Fax: (612) 893-6797
<PAGE>
Table of Contents
Introduction............................................................1
Summary of Your Bank Plan /TM/..........................................2
Accounting Guidelines...................................................4
Accounting for the Insurance Policies...........................4
Subsidiary Accounts.....................................5
Surrender Charges.......................................5
Income Taxes and Deferred Income Taxes..................6
Call Report Treatment...................................6
Accounting for the Salary Continuation Plans....................7
Subsidiary Accounts.....................................8
Income Taxes and Deferred Income Taxes..................8
Call Report Treatment...................................8
Documentation and Approval of Your Bank Plan/TM/........................8
Bank Regulatory Issues..................................................8
Contact People in our Company...........................................9
<PAGE>
Introduction
Your bank has purchased an executive compensation plan designed by Bank
Compensation Strategies Group through our Executive Benefits Consultants, Rich
Chapman and Wally Hilgenberg of Chapman and Hilgenberg, Inc, in Bloomington,
Minnesota.
Bank Compensation Strategies Group is a Minneapolis, Minnesota based company.
Our business is designing and marketing non-qualified executive compensation
products for executives of banks and other financial institutions. This is our
only business and our objective is to provide you with high quality products and
superior advice and service. We operate through a network of executive benefits
consultants throughout the midwestern and western United States.
Our products are endorsed and recommended by the American Bankers Association,
the California Bankers Association, the Colorado Bankers Association, the
Connecticut Bankers Association, the Georgia Bankers Association, the Community
Bankers Association of Illinois, the Indiana Bankers Association, the Iowa
Independent Bankers Association, the Iowa League of Savings Institutions, the
Kansas Bankers Association, the Louisiana Bankers Association, the Minnesota
Bankers Association, the Mississippi Bankers Association, the Montana Bankers
Association, the Nebraska Bankers Association, the Missouri League of Savings
Institutions, the New Mexico Bankers Association, the North Dakota Bankers
Association, the Oklahoma Bankers Association, the Pennsylvania Bankers
Association, the Savings League of Minnesota, the South Carolina Bankers
Association, the South Dakota Bankers Association, the Tennessee Bankers
Association, the Texas Bankers Association, the Utah Bankers Association, the
Vermont Bankers Association, the Independent Bankers Association of Wisconsin,
and the Wyoming Bankers Association.
We have prepared this Owners' Manual to provide you with a "plain English"
description of the plan which you have purchased, provide you with information
concerning records you would maintain concerning the plan at your bank, provide
guidance concerning the accounting procedures and issues concerning your plan,
describe the type and frequency of correspondence you should expect to receive
in the future and provide you with the names of experienced contact people at
our offices should you have any questions or if you need assistance. Please do
not hesitate to telephone us if we can be of assistance.
<PAGE>
Summary of Your Bank Plan /TM/
------------------------------
Salary Continuation Plan
The proposals prepared for your bank contemplated the establishment of Salary
Continuation Plans to provide retirement income for the following individuals:
<TABLE>
<CAPTION>
Annual Duration of
Retirement Retirement Retirement
Name Birthdate Age Benefit Benefit
- - --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LeRoy Meredith 10-11-42 55 30,000 7 years
</TABLE>
A Salary Continuation Plan (SCP) is a non-qualified, executive benefit plan in
which the bank agrees to pay the executive additional benefits in the future,
usually at retirement, in return for continued current satisfactory performance
by the executive, One of the primary reasons for a bank to use this type of
fringe benefit is to attract and keep valuable employees. Because the SCP is a
non-qualified plan, unlike a 401(k) plan or a pension plan, which are qualified
plans under the Internal Revenue Service guidelines, the bank can selectively
reward certain key executives without regard to the non-discrimination
requirements of qualified plans. Through the use of non-qualified plans, a bank
can selectively reward its key executives in a manner which encourages longevity
and loyalty.
The SCP is embodied in a written agreement between the bank and the executive(s)
selected to participate in the Plan. The SCP is an unfunded plan, which means
that the executive has no rights under the agreement beyond those of a general
creditor of the bank, and there are no specific assets set aside by the bank in
connection with the establishment of the Plan. The SCP is not an employment
contract and, if the covered executive leaves the bank's employ, either
voluntarily or involuntarily, the agreement terminates and the executive
receives no benefits, except for vesting, which may or may not be provided for
in the agreements.
The accounting rules concerning deferred compensation plans, including Salary
Continuation Plans, require that the bank accrue sufficient expenses so that the
present value of the benefits to be paid to the executive at retirement is
reflected as a liability on the bank's books by the time of retirement. The SCP
typically provides that, if the covered executive dies prior to or during
retirement, the bank will pay the benefits set forth in the agreement to the
deceased executive's beneficiary or estate.
The Salary Continuation Plans proposed by BCS are typically informally linked
with a single premium universal life insurance policy, which is purchased by the
bank in connection with its implementation of the salary continuation agreement.
The executive is the insured under the policy, but the bank is the owner and
the beneficiary of the policy. The executive has no claim on the insurance
policy, its cash value or the proceeds thereof. Our company uses single
premium insurance policies because this type of policy is the most efficient way
for a financial institution to purchase life insurance on its officers and
directors. While the insurance contract is generally established simultaneously
with the execution of a salary continuation agreement, there is no direct
linkage between the two.
-2-
<PAGE>
The insurance purchased by your bank in connection with the SCP is as follows:
Name of Insurer and Single Premium Initial Net
Insured Policy No. Insurance Deposit Insurance
================================================================================
LeRoy Meredith A. Hamilton 8531623 85,000 125,000
LeRoy Meredith TMG Life 536405 85,000 126,000
The cash surrender value of the single premium insurance policy(ies) is carried
on the bank's books in "other assets" consistent with generally accepted
accounting principles and the instructions for the regulatory Reports of Income
and Condition.
During the pre-retirement period, there are no tax consequences to the covered
executive with respect to the salary continuation agreement and there are no tax
deductions to the bank in connection with the Plan. The cash value of the
insurance policy increases through interest credited by the insurance company,
and the policy earnings are often sufficient to cover the mortality costs of the
insurance and the expense accruals for the SCP retirement benefits. The
increase in the Insurance cash value is not taxable income.
After retirement, the benefit payments to the executive are taxable income and
are tax deductible expenses to the bank as they are paid. If the executive were
to die, either prior to or during retirement, the bank would receive the
insurance proceeds from the policy tax free, except for possible alternative
minimum taxes, and the payments made by the bank to the executive's beneficiary
or estate would be tax-deductible expenses to the bank. Since the present value
of the bank's obligation to the executive has been booked as of the retirement
date, the impact on the bank's income statement after retirement is minimal.
The combination of tax-preferred income generated by the cash value of the
insurance policy, the tax-free insurance death benefit proceeds to the bank and
fully tax-deductible benefit payments by the bank are the economic reasons that
a bank can often provide this significant fringe benefit to its executives at
little or no cost to the bank. The Salary Continuation Plan is often designed
as a "golden handcuff" arrangement, providing incentive for an executive to
remain with the bank until retirement.
The policies purchased by your bank are a form of flexible payment universal
life insurance which is paid for in a single premium at the inception of the
policy.
The policy cash value is an earning asset for the bank which earns interest at a
rate that is linked to an index of Interest rates of U.S. Treasury obligations.
The policy interest rate may be adjusted by the insurance company each year.
The policy interest rates will generally rise and fall with the general level of
interest rates in the economy, much the same as your bank's cost of funds may
fluctuate. Each month the income is credited to the policy value and the
insurance mortality cost is charged against the policy value. The policy income
typically exceeds the mortality costs and the policy equity value increases each
month.
The insurance policy can be redeemed at any time for the net cash surrender
value. However, because of the particular characteristics of the type of
insurance policy your bank has purchased, there may be income tax consequences
associated with redeeming the policy prior to death of the insured or borrowing
against the policy cash surrender value. Given the nature of a bank's assets,
it would appear that access to the policy values for liquidity purposes would be
most unlikely in the ordinary course of business. We recommend that
-3-
<PAGE>
you contact us or consult with your tax advisor prior to any cash withdrawals
or policy loans.
Should an individual covered by insurance leave the bank's employ, the insurance
need not be surrendered. A policy on one individual can be transferred to one or
more of the bank's other executives for a nominal cost, however, there would be
an adjustment to the mortality costs of the policy, depending on the age and
insurability of the new insured person. By taking advantage of this feature, the
bank can avoid any policy surrender charges.
The insurance policies purchased by your bank were issued by high quality, well
capitalized insurance companies and you will receive periodic financial data on
the insurer to enable you to monitor the insurer's financial condition and
performance. In order to minimize credit risk and achieve diversification, the
insurance policies purchased by your bank may have been issued by more than one
insurance company. In the event that you desire to reduce the bank's financial
exposure to a particular insurer, an existing policy can be exchanged for a new
policy with another insurer on a tax free basis by way of an exchange under
Section 1035 of the Internal Revenue Code,, which is similar in concept to an
Individual Retirement Account (IRA) roll over. This type of transaction would be
subject to the underwriting requirements of the new insurer and there would be
additional policy load charges on the new policy.
Report to the Department of Labor
Because the Employee Retirement Income Security Act (ERISA) has an impact on
executive benefit plans other than qualified retirement plans, your bank must
comply with the reporting requirements of ERISA. The Secretary of Labor has
established a simplified reporting format to satisfy this requirement. The
Department of Labor must be notified that the plan was adopted, that a copy of
the plan will be provided upon request, and that the plan covers only highly
compensated executives. The notice must be filed with the Secretary of Labor
within 120 days after the inception of the plan. A letter which satisfies this
requirement was provided to you shortly after the adoption of the plan for
filing with the Department of Labor. Please contact us if you did not receive
this letter and we will provide an additional copy.
Accounting Guidelines
---------------------
When your bank made the wire transfer of funds to purchase the insurance
policies to commence the plan, we sent a letter to you which provided the
initial accounting entries necessary to account for the plan on the bank's
books. This section of the manual will provide you with a general discussion of
the accounting principles concerning the single premium insurance policies and
the Salary Continuation Plan (SCP). The two elements of the plan, the key
executive insurance and the SCP should be accounted for separately.
Accounting for the Insurance Policies
- - -------------------------------------
The accounting rules, Financial Accounting Standard Board Technical Bulletin No.
85-4, Accounting for Purchases of Life Insurance, provide that the amount that
could be realized under the insurance contract should be reported as an asset.
When your bank wire transferred funds for the purchase of the insurance
policy(ies), a cash surrender value asset should have been recorded for the
amount of the single premium deposit, less the 2 percent policy load which was
written off as an expense. Each month thereafter, the insurance mortality costs
should be reported as an expense which reduces the cash surrender value and the
policy earning should be recorded as income, which in-
- 4 -
<PAGE>
creases the cash surrender value asset. The mortality costs and the policy
income are recorded at the end of each month.
At the end of the calendar year, you will receive a year-end statement on each
individual insurance policy directly from the insurance company. The annual
statement will detail the income and expenses associated with each policy and
the year-end cash surrender value. You should use the year-end statements to
assure that your books balance to the insurance company's cash value figures.
Usually there are minor adjustments that have to be made.
Each July you will receive a letter from our office which will be accompanied by
an individual letter from the insurance company for each policy. This letter
will advise you of any change in the policy interest rate and will contain a
forecast of the income and expenses and policy equity values for the next
12-month period (July to June). You should use the projections to adjust your
monthly entries for mortality costs and policy earnings for the next 12 month
period.
At each annual anniversary of the insurance policy(ies), you will receive a
statement of activity for each policy from the insurance company. This statement
can also be used to assure that your records are in balance with the insurance
company's records.
Subsidiary Accounts
-------------------
We recommend that you establish a subsidiary record for each individual
insurance policy to assure that your records properly reflect the carrying value
of each individual policy and to facilitate balancing your books with the
periodic correspondence form the insurance company.
Surrender Charges
-----------------
The insurance contracts contain a surrender charge of 2 percent of the original
single premium deposit which is imposed at the beginning of year 2 and again at
the beginning of year 3. From year 3 through year 10, the total 4 percent
surrender charge remains in effect. You will not actually incur this charge
unless you turn the policy in; however, because the accounting rules (Financial
Accounting Standards Board Technical Bulletin No. 85-4, Accounting for Purchases
of Life Insurance) require that insurance be carried on your books at the cash
surrender value, we recommend that you record the surrender charges and reduce
the cash value on your books in years 2 and 3. This accounting entry on your
books does not affect the actual "equity" value of the policy and there is no
reduction in the policy income. In the materials and statements from the
insurance company, the "surrender value" is the difference between the policy
equity value and the surrender charge.
Another way to handle the bookkeeping for the surrender charges is to establish
a separate general ledger or subsidiary account to record the surrender charges.
Rather than credit the cash surrender value asset account directly to reflect
the surrender charges, credit the separate surrender charge account. The credit
balance surrender charge account would be carried on the asset side of the
balance sheet, and netted out against the cash surrender value asset account
similar to the balance sheet handling of the allowance for loan losses account.
Since the periodic account statements and projections from the insurance
companies reflect gross policy "equity" values, carrying the surrender charges
separately should facilitate periodic balancing of the bank's books to the
statements from the insurance company.
After year 10, the surrender charges no longer apply and the cash value of the
policy will be equal to the equity value of the policy. At this point, your cash
surrender value asset
-5-
<PAGE>
account can be increased by the amount of the surrender charge with a
corresponding credit to income.
Although the accounting guidelines for life insurance policies are as outlined
above, many CPAs have taken the position that the surrender charge need not be
booked because it is not a material item with respect to an institution's
overall financial position. Please feel free to consult your independent
accountant concerning accounting for the surrender charge or any other
accounting matter concerning this plan.
Income Taxes and Deferred Income Taxes
--------------------------------------
The insurance premiums paid are not tax deductible and the death benefits are
received tax free except for possible alternative minimum taxes.
The annual increase in the insurance policy cash surrender value is not included
in taxable income unless the insurance policies are cashed in or surrendered.
Depending on the date of the policy, a cash distribution or withdrawal from an
insurance policy may result in taxable income.
With respect to alternative minimum taxes, a portion of the annual net increase
in the policy cash surrender value will be included in "adjusted current
earnings" when calculating alternative minimum taxes. If the alternative
minimum tax is greater than the regular income tax, the taxpayer must pay the
alternative tax; however, the difference between the alternative tax and the
regular tax becomes a minimum tax credit that can be carried forward
indefinitely to future years as a tax credit against regular income tax. This
discussion of alternative minimum taxes is based on proposed regulations issued
by the Internal Revenue Service on May 2, 1990.
With respect to deferred taxes, in connection with its implementation of
Financial Accounting Standard No. 96, Accounting for Income Taxes, on
August 3, 1988, the Financial Accounting Standards Board issued an "action
alert" which indicated that "...[a] tax planning strategy to hold a life
insurance policy until the death of the insured would eliminate a deferred tax
liability for the excess of cash surrender value over premiums paid if the
second criteria for tax strategies is met, that is, if no significant future
cash payments for premiums or interest would be required to keep the policy in
force until the death of the insured." Since the insurance policies used in
your benefit plan are single premium policies, no further payments are required
to keep the insurance in force and it is unlikely that a financial institution
would have to borrow against the policy cash value. Provided that your tax
planning strategy is to hold the policy until the death of the insured, there is
no need to record deferred taxes against the policy income.
Call Report Treatment
---------------------
The instructions for the Consolidated Reports of Income and Condition ("Call
Reports") indicate with respect to Schedule RC -- Balance Sheet, that the cash
surrender value of life insurance policies be reported in Other Assets.
With respect to Schedule RI -- Income Statement, the insurance policy income
should be included in "Other non-interest income." Expenses associated with the
insurance policies (load, mortality and surrender charges) should be included in
"Other non-interest expense."
-6-
<PAGE>
Accounting for the Salary Continuation Plans
- - --------------------------------------------
By establishing a salary continuation plan, your bank has agreed to pay the
covered executive a future benefit beginning at a specific date in the future.
As of the date of retirement, the bank must have accrued a liability equal to
the then present value of the payments to be made during the post retirement
period. To provide for this liability, an amount is accrued and expensed each
year of active employment that results in the present value of the retirement
benefits. In our proposals, the interest method is used in determining the
annual accrual amounts.
The entries provided to you by letter at the inception of the plan listed the
amounts that should be accrued each month for the first year of the plan,
beginning with the date that the salary continuation plan was established. To
determine the amounts to be accrued in the second and subsequent years of the
plan, you need to refer to the final proposal that was provided to you by our
executive benefits consultant. In our current proposals, the information you
need is contained in the section titled "Detailed Benefit Plan Financial Data",
on the page headed "Participant Balance Sheet and Policy Data". The second
column from the left on that page is headed "Accrued Salary Continuation
Liability". The figures in this column are the balances that should be accrued
at each anniversary of the plan. To determine the monthly accruals for year 2
of the plan, subtract the year end accrued balance at the end of year 1 from the
amount indicated as the accrued balance for year two and divide by 12. To
determine the monthly accruals for year three, perform the same calculation
using the year 2 balance subtracted from the year three balance and divide
by 12. For example, if the figures were as follows:
<TABLE>
<CAPTION>
Plan Year Accrued Salary Continuation Liability
--------- -------------------------------------
<S> <C>
1 -22,627
2 47,624
3 75,238
4 105,743
The monthly accrual for year two would be computed as follows:
Year 2 ending balance $47,624
Year 1 ending balance 22,627
-------
Amount to be accrued during
year 2 24,997
Divided by 12 $24,997
-------
12
Monthly accrual year 2 = $2,083
</TABLE>
If the salary continuation plan was established effective, for example,
March 15, 1989, as of March 15, 1991 (two years later) your bank's books should
reflect a liability account with a balance of $47,624, using the figures from
our example above.
If your plan was purchased prior to April 1990, the proposal format used by our
executive benefits consultants was a computer printout entitled "Summary of Plan
Benefits". On page six of that document, called the Pre-Retirement Summary, the
figures referred to above are in the column "Accrued Salary Continuation
Liability".
Because the interest method is used in determining the salary continuation
accrual schedule, the accruals in the later years are higher than in the early
years. The plan was designed in
-7-
<PAGE>
such a manner to minimize the impact of the accruals on your income statement.
The insurance policy income is projected to increase significantly in later
years because of compounding, so the higher expense accruals will be matched
with higher insurance policy income. The accrual schedules in our proposals are
generally based on a 10 percent interest or discount rate.
Subsidiary Accounts
-------------------
We recommend that you establish a separate subsidiary liability account for each
executive who is covered by a salary continuation plan at your bank. Unless the
terms of the salary continuation plan agreements are revised or amended, the
accrual schedules illustrated in the final proposal to your bank will not change
and can be used for each year of the plan as discussed in the preceding section
of this manual.
Income Taxes and Deferred Income Taxes
--------------------------------------
The establishment of a salary continuation plan may affect your bank's deferred
taxes because you may be able to record a credit in the income statement against
the expense accruals for the SCP. The calculations concerning deferred taxes
are complex and unique to each individual bank's tax situation and we recommend
that you consult with your CPA concerning deferred taxes.
The accruals for The SCP are not tax deductible expenses to the bank and are not
taxable income to the bank executive. When the payments are actually made to
the executive after retirement, those cash payments are tax deductible expenses
to the bank and taxable income to the recipient.
Call Report Treatment
---------------------
The accrued expenses for the SCP should be included in Non-interest expenses,
specifically, salaries and employee benefits, in Schedule RI -- Income
Statement.
With respect to Schedule RC -- Balance Sheet, the balance of the liability
account for amounts accrued for the SCP should be reported in Other liabilities.
Documentation and Approval of Your Bank Plan /TM/
- - -------------------------------------------------
The establishment of the Salary Continuation Plan(s) and the purchase of
insurance on the lives of the bank's executives should have been approved by
your bank's board of directors or by an appropriate committee thereof.
The salary continuation plans established by your bank should be in writing and
should contain all of the terms of the agreement between the bank and the
covered executive.
Our executive benefits consultant may have provided you courtesy copies of
sample agreements for the salary continuation plans. We recommend that your
bank's attorney either prepare or review the agreements prior to their
execution.
Bank Regulatory Issues
- - ----------------------
Bank examiners and the various bank regulatory agencies will expect: that your
bank account for the benefit plans and the related insurance policies consistent
with generally accepted accounting principles; that the benefit plans are
covered by written agreements between the bank and the covered executives; that
the benefit plan and related insurance be
-8-
<PAGE>
properly approved by your board of directors; that you are dealing with a high
quality insurance company; that you maintain current financial data on the
insurance comapny(ies) and that the amount of cash surrender value of insurance
with any one company is reasonable in relation to your bank's capital and
reserves.
We are familiar with expectations of the bank regulatory agencies and your Bank
Plan (TM) has been designed accordingly.
Please feel free to refer any questions from bank examiners to us.
Contact People in our Company
- - -----------------------------
Kevin Murphy, Compliance and Banker Service
Kathy Cooper, Broker and Policy Service
Bank Compensation Strategies Group
3600 West 80th Street, Suite 200
Minneapolis, MN 55431
612-893-6767
-9-
<PAGE>
Exhibit 13
Annual Report to Security Holders
<PAGE>
- - -------------------------------------------------------------------------------
TABLE OF CONTENTS
- - --------------------------------------------------------------------------------
President's Letter to Shareholder.................................. 1
Selected Consolidated Financial Information........................ 2
Management's Discussion and Analysis of Financial
Condition and Results of Operation................................ 4
Consolidated Financial Statements.................................. 19
Stockholder Information............................................ 66
Corporate Information.............................................. 67
<PAGE>
A MESSAGE FROM THE PRESIDENT
Dear Fellow Stockholder:
It was another exciting year!
We are proud to announce that, due to the hard work of an experienced and
dedicated board and staff as well as the tremendous support of the people in
Grinnell and the surrounding communities, GFS Bancorp, Inc. again earned record
profits. Specifically, the Company produced a net income of $895,000 for the
fiscal year ended June 30, 1996. This equated to a return on equity of 9.25%
and earnings per share of $1.72. It represents an earnings increase of 42
percent when compared to the year earlier period.
This earnings increase was largely fueled by growth in Grinnell Federal Savings
Bank, the wholly-owned subsidiary of the Company. Net loans receivable
increased by 30 percent to nearly $72,000,000 and savings deposits ended the
fiscal year at over $53,000,000 up 15 percent.
One of the year's highlights occurred in October, 1995 when the Bank entered
into an exclusive agreement with Bache Funding Corp. of Wisconsin, a mortgage
banking firm headquartered in Madison, Wisconsin. Under the agreement, the Bank
has the right of first refusal on any real estate loans generated by Bache. The
Bank, in turn, sells majority participation interests in these loans to other
financial institutions. This relationship, along with strong local lending,
provides the Bank a greater opportunity to continue to grow and diversify the
loan portfolio. It also creates additional loan fee and loan servicing income.
The board of directors remains intent on providing a solid return to
stockholders via stock appreciation and dividends. We believe that stock
appreciation can best be achieved by focusing on increasing earnings per share.
With respect to dividends, the board was pleased to increase the quarterly
dividend from $0.075 to $0.10 per share in June, 1996.
In closing, we want to express our gratitude to our stockholders. The business
you place with us and the referrals you make to your friends and relatives are
important to our growth and profitability. Thank you!
Sincerely,
Steven L. Opsal
President
1
<PAGE>
GFS BANCORP, INC.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------
1996 1995 1994 1993 1992
-------- --------- --------- -------- --------
(In Thousands)
Selected Financial Condition Data:
- - ----------------------------------
<S> <C> <C> <C> <C> <C>
Total assets....................................... $83,305 $ 70,950 $57,179 $51,213 $48,549
Cash and cash equivalents.......................... 2,271 4,107 968 4,923 3,883
Mortgage-backed securities, net.................... 3,435 3,950 4,237 5,716 3,484
Investment securities.............................. 3,255 6,078 6,690 5,001 2,096
FHLB stock......................................... 1,159 832 832 832 765
Loans receivable, net.............................. 71,773 54,999 43,682 33,898 36,955
Deposits........................................... 53,122 46,082 42,016 43,249 41,147
FHLB advances...................................... 19,318 14,578 5,870 3,500 3,500
Stockholders' equity............................... 9,945 9,540 8,811 4,042 3,592
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------
1996 1995 1994 1993 1992
------- -------- -------- ------- -------
(Dollars In Thousands Except per Share Data)
Selected Operations Data:
- - -------------------------
<S> <C> <C> <C> <C> <C>
Total interest income.............................. $ 6,245 $ 4,778 $ 4,013 $ 4,098 $ 4,431
Total interest expense............................. 3,720 2,638 2,228 2,547 3,107
------- -------- ------- ------- -------
Net interest income.............................. 2,525 2,140 1,785 1,551 1,324
Provision (credit) for loan losses................. 249 --- 20 (4) (1)
------- -------- ------- ------- -------
Net interest income after provision
for losses on loans............................. 2,276 2,140 1,765 1,555 1,325
Non-interest income:
Gain on sale of investments...................... (48) 36 --- --- ---
Gains on sale of real estate..................... -- 11 34 5 ---
Other non-interest income........................ 186 81 79 47 83
------- -------- ------- ------- -------
Total non-interest income.......................... 138 128 113 52 83
Total non-interest expense......................... 1,335 1,321 1,061 856 878
------- -------- ------- ------- -------
Income before income taxes....................... 1,079 947 817 751 530
Income tax expense................................. 184 316 281 237 181
------- -------- ------- ------- -------
Net income before accounting change.............. 895 631 536 514 349
Accounting change for income taxes................. --- --- --- (64) ---
------- -------- ------- ------- -------
Income before extraordinary item................. 895 631 536 450 349
Extraordinary item - penalty for early
extinguishment of debt, net of income
tax benefit...................................... --- --- 51 --- ---
------- -------- ------- ------- -------
Net income....................................... $ 895 $ 631 $ 485 $ 450 $ 349
======= ======== ======= ======= =======
Per common share data/(1)/:
Net income per common share...................... $ 1.72 $ 1.20 $ .52 N/A N/A
Cash dividends declared per share................ $ .325 $ .075 --- N/A N/A
Dividend payout ratio............................ .19 .06
- - ------------------
</TABLE>
/(1)/ Subsequent to the conversion of Grinnell Federal Savings Bank to the stock
form, effective January 5, 1994. See Notes to Consolidated Financial
Statements for additional information regarding earnings per common share
data.
2
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------
1996 1995 1994 1993 1992
------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
- - -----------------------------------------
Performance Ratios:
Return on assets (ratio of net income to
average total assets)........................... 1.15% 1.01% .89% .90% .72%
Interest rate spread information:
Average during year............................. 2.56 2.70 2.81 2.76 2.46
End of year..................................... 2.51 2.14 2.84 2.60 2.28
Net interest margin/(1)/......................... 3.30 3.48 3.34 3.15 2.83
Ratio of operating expense to average total
assets.......................................... 1.72 2.10 1.91 1.66 1.60
Return on equity (ratio of net income to
average equity)................................. 9.25 6.89 7.76 11.79 10.21
Quality Ratios:
Non-performing assets to total assets at end
of year/(2)/................................... 1.15 .02 .44 .56 2.16
Allowance for loan losses to non-performing
loans/(3)/..................................... 87.24 2857.43 1290.32 6198.4 273.74
Capital Ratios:
Equity to total assets at end of year............ 11.94 13.45 15.41 7.89 7.40
Average equity to average assets................. 12.43 14.70 11.50 7.65 7.08
Average interest-earning assets to average
interest-bearing liabilities................... 115.34 118.24 112.66 107.50 105.50
Number of full-service offices..................... 1 1 1 1 1
</TABLE>
- - ------------------
/(1)/ Net interest income divided by average interest earning assets.
/(2)/ Non-performing assets consist of non-accruing loans, accruing loans past
due 90 or more days and real estate owned.
/(3)/ Excludes real estate owned.
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Business
GFS Bancorp, Inc. (the "Company") was formed to be the holding company
for Grinnell Federal Savings Bank ("Grinnell Federal" or the "Bank") in
connection with the Bank's conversion to stock form. The Company completed its
initial public offering on January 5, 1994 with the sale of 529,000 shares at
$10.00 per share. The primary activity of the Company is to act as a holding
company for the Bank. As a result, unless otherwise noted, the following
discussion relates primarily to the Bank. The primary business of savings banks,
including Grinnell Federal, has historically consisted of attracting deposits
from the general public and providing financing for the purchase of residential
properties. The operations of the Bank are significantly affected by prevailing
economic conditions as well as by government policies and regulations relating
to monetary and fiscal affairs, housing and financial institutions.
Net income is primarily dependent upon the difference (or "spread")
between the average yield earned on loans, mortgage-backed and related
securities and investments, and the average rate paid on deposits and
borrowings, as well as the relative amounts of such assets and liabilities. The
interest rate spread is affected by regulatory, economic and competitive factors
that influence interest rates, loan demand and deposit flows. The Bank, like
other thrift institutions, is subject to interest rate risk to the degree that
its interest-bearing liabilities mature or reprice at different times, or on a
different basis, than its interest-earning assets.
Net income is also affected by, among other things, gains and losses on
sales of real estate and investments, mortgage-backed and related securities,
investment securities and foreclosed assets, provisions for loan losses, service
charges and other fees, operating expenses and income taxes.
SAIF Assessments
The Bank's savings deposits are insured by the SAIF, which is administered
by the FDIC. The assessment rate currently ranges from 0.23% of deposits for
well capitalized institutions to 0.31% of deposits for undercapitalized
institutions. The FDIC also administers the Bank Insurance Fund ("BIF"), which
has the same designated reserve ratio as the SAIF. On August 8, 1995, the FDIC
adopted an amendment to the BIF risk-based assessment schedule which lowered the
deposit insurance assessment rate for most commercial banks and other depository
institutions with deposits insured by the BIF to a range of from 0.31% of
insured deposits for undercapitalized BIF-insured institutions to 0.04% of
deposits for well-capitalized institutions, which constitute over 90% of BIF-
insured institutions. The FDIC amendment became effective for the quarter ended
September 30, 1995. Subsequently, the BIF assessment rate has been lowered to
the statutory minimum of $2,000 per year. The amendments created a substantial
disparity in the deposit insurance premiums paid by BIF and SAIF members and
could place SAIF-insured savings institutions at a significant competitive
disadvantage to BIF-insured institutions.
The House of Representatives and the Senate of the United States provided
for a resolution of the recapitalization of the SAIF in the Balanced Budget Act
of 1995 (the "Reconciliation Bill") which was vetoed by the President in
December 1995 for reasons unrelated to the recapitalization of the SAIF. The
Reconciliation Bill provided that all SAIF member institutions would pay a
special assessment recently estimated to be a one-time charge of 0.85% of the
Company's total SAIF-assessable deposits as of June 30, 1996, or approximately
$284,000 after tax. Such special assessment would be in addition to the
Company's annual deposit insurance premium. However, it is anticipated that
after the recapitalization of the SAIF, the premiums of SAIF-insured
institutions would be reduced to a level comparable to those
4
<PAGE>
currently being assessed BIF-insured commercial banks. A balanced budget bill
subsequently was enacted and signed by the President in April 1996. That bill
did not provide for the recapitalization of the SAIF, and there can be no
assurance whether the SAIF will be recapitalized, whether the premium disparity
between SAIF and BIF insured institutions will be reduced or eliminated or
whether a special assessment will be charged.
Legislation has also been introduced in Congress that provided for the
elimination of the distinctions between banks and thrifts under federal law. In
its current form, the legislation would require the automatic conversion of all
federally chartered savings associations such as the Bank into national banks
effective January 1, 1998. It would impose activities restrictions and
restrictions on branches, and it would also compel the holding companies of such
institutions to be subject to the more restrictive regulations that govern
holding companies of banks rather than thrifts. If enacted in its present form,
this legislation could restrict the current or contemplated activities of the
Bank and the Company, and it could also increase regulatory compliance costs
because of the new regulatory structure to which the Bank and the Company would
be subject.
Financial Condition
June 30, 1996 compared to June 30, 1995. Total assets increased $12.3
million from $71.0 million at June 30, 1995 to $83.3 million at June 30, 1996
primarily due to an increase in loans receivable which more than offset declines
in cash and cash equivalents, investment securities and mortgage backed
securities.
Cash and amounts due from depository institutions decreased $1.8 million
from $4.1 million at June 30, 1995 to $2.3 million at June 30, 1996. This
reduction was primarily attributable to funding the Bank's increased loan
portfolio. Investment securities decreased $2.8 million, or 45.9%, from $6.1
million at June 30, 1995 to $3.3 million at June 30, 1996 due to reinvestment of
proceeds from sales of investment securities and maturing investment securities
in mortgage loans. Mortgage-backed securities decreased $515,000 from $3.9
million at June 30, 1995 to $3.4 million at June 30, 1996 as a result of
repayments and prepayments.
Net loans receivable increased $16.8 million, or 30.5%, from $55.0 million
at June 30, 1995 to $71.8 million at June 30, 1996. Mortgage loans originated
during fiscal 1996 totalled $12.5 million, including $11.8 million secured by
one-to-four family dwellings in the Bank's market area and $711,000 secured by
commercial real estate, of which $548,000 was located in the Des Moines, Iowa
metropolitan area. During this period, the Bank also purchased (i) $3.0 million
in loans secured by real estate located in the Des Moines, Iowa metropolitan
area, including $2.5 million secured by single family dwellings and a $509,000
loan secured by commercial real estate, and (ii) $19.9 million in loans secured
by real estate located in the Madison, Wisconsin area, including $6.0 million of
loans secured by single family dwellings, $10.8 million secured by multi-family
dwellings, $2.1 million secured by commercial real estate and $1.0 million
secured by residential land development. Of the $22.9 million in loans purchased
during the 1996 fiscal year, $9.3 million in participation interests were sold
to other financial institutions with the Bank retaining the servicing.
On October 5, 1995, the Bank entered into an exclusive agreement effective
November 1, 1995 ("Agreement") with Bache Funding Corp. of Wisconsin ("Bache"),
a mortgage banking firm headquartered in Madison, Wisconsin. Under the
Agreement, the Bank has a right of first refusal on any real estate loans
generated by Bache, including one-to-four family, multi-family, commercial real
estate, and land development loans secured by properties located primarily in
the Madison, Wisconsin metropolitan area. The Bank anticipates that it will
sell majority participation interests in these loans to
5
<PAGE>
financial institutions located in Iowa and contiguous states. The Bank has had
experience with Bache originated loans prior to November 1995. During fiscal
1994 and 1995, the Bank purchased participation interests totalling
approximately $8.8 million in Bache originated loans from another financial
institution. Although these purchased loans are subject to the same underwriting
guidelines as loans originated, they entail a certain amount of added risk. In
addition to the risks associated with the specific type of loan purchased, loans
purchased outside the Bank's market carry a greater degree of risk than those
loans originated by the Bank since the origination function is performed by
third parties and the property is located outside the Bank's normal lending
territory.
Since entering into the Agreement with Bache, the Bank purchased $6.0
million one-to-four family, $8.1 million multi-family, $2.1 million commercial,
and $1.0 million residential land development loans from Bache. The dollar
volume of loans for the purpose of land development is not expected to be a
material percentage of Bache originations in future periods. Of the $17.2
million in one-to-four family, commercial, multi-family, and land development
loans purchased from Bache during the period November 1, 1995 through June 30,
1996, $9.3 million in participation interests were sold to other financial
institutions with the Bank retaining the servicing.
Total deposits of the Bank increased by $7.0 million to $53.1 million at
June 30, 1996 from $46.1 at June 30, 1995. This increase primarily consisted of
$2.6 million in demand and negotiable order of withdrawal accounts and $3.5
million in money market savings accounts. Management believes that this increase
was primarily due to increased marketing efforts.
The increase in loans receivable was funded by loan repayments and
prepayments, increased deposits and an increase in advances from the Federal
Home Loan Bank ("FHLB") of Des Moines. FHLB advances increased $4.7 million
from $14.6 million at June 30, 1995 to $19.3 million at June 30, 1996. This
increase in borrowings was due to management's decision to utilize FHLB advances
to partially fund its origination and purchase of loans. Management attempts
to use borrowings to maintain the Bank's current spread and provide a stable
source of funding for loans. During fiscal 1996, management utilized a
combination of fixed-rate FHLB advances with maturities of 1 to 5 years. At
June 30, 1996, approximately 72% of borrowings carried maturities greater than
one year. Although this strategy could reduce the short-term impact of an
increase in interest rates, the Bank may be exposed to an increase in interest
rate risk in future periods to the extent the actual repricing of assets differs
from management's assumptions.
Stockholders' equity increased $405,000 from $9.5 million at June 30, 1995
to $9.9 million at June 30, 1996. This increase was due to net income of
$895,000, amortization of Recognition and Retention Plan ("RRP") awards,
allocations to the Employee Stock Ownership Plan ("ESOP"), and a decrease in
unrealized loss on decline in value of investments available for sale. The
increase in stockholders equity was partially offset by the Company's
repurchase of 33,012 shares of its stock and the declaration of $.325 dividends
per share for the 1996 fiscal year.
Results of Operations
The Company's results of operations depend primarily on the level of its
net interest income and non-interest income and the level of its operating
expenses. Net interest income depends upon the volume of interest-earning
assets and interest-bearing liabilities and interest rates earned or paid.
Comparison of Fiscal Years Ended June 30, 1996 and June 30, 1995
6
<PAGE>
General. The Company's net income increased by $264,000, or 41.8%, to
$895,000 in fiscal 1996 from net income of $631,000 in fiscal 1995. As
discussed in more detail below, the primary reason for this increase was the
$385,000 increase in net interest income, a $10,000 increase in non-interest
income and a $132,000 decrease in provision for income taxes, which together
more than offset the $249,000 and $14,000 increases in provision for loan losses
and non-interest expense, respectively, over the year earlier period.
Interest Income. Interest income increased $1.4 million to $6.2 million in
fiscal 1996 from $4.8 million in fiscal 1995 primarily as a result of an
increase in the volume of interest-earning assets and, to a lesser extent, the
average rates earned on interest earning assets. The average balance of
interest-earning assets increased $15.1 million, or 24.6%, to $76.6 million in
fiscal 1996 from $61.5 million in fiscal 1995 primarily due to an increase in
the average balances of loans resulting from increased loan originations and
purchases. The average yield on interest earning assets increased from 7.77% for
1995 to 8.16% in 1996.
Interest Expense. Interest expense increased $1.1 million to $3.7 million
in fiscal 1996 from $2.6 million in fiscal 1995 due primarily to an increase in
the volume of interest-bearing liabilities and, to a lesser extent, the average
rates paid on interest-bearing liabilities. The average balance of interest-
bearing liabilities increased $14.4 million from $52.0 million in fiscal 1995 to
$66.4 million in fiscal 1996 primarily as a result of an increase in FHLB
advances and to a lesser extent NOW accounts, money market accounts, and
certificate of deposit accounts. The average rates paid on interest-bearing
liabilities increased 53 basis points from 5.07% during fiscal 1995 to 5.60%
during fiscal 1996 due to an overall increase in rates paid to attract deposits.
Net Interest Income. Net interest income increased $384,000 to $2.5
million in fiscal 1996 as compared to $2.1 million in fiscal 1995. The
Company's average spread decreased from 2.70% for the fiscal year ended June 30,
1995 to 2.56% for the fiscal year ended June 30, 1996 due to the fact that rates
paid on interest costing liabilities increased more than yields on interest
earning assets. Net interest margin decreased from 3.48% for the fiscal year
ended June 30, 1995 to 3.30% for the fiscal year ended June 30, 1996. The ratio
of average interest-earning assets to average interest-bearing liabilities
decreased to 115.3% during fiscal 1996 from 118.2% during fiscal 1995.
Provision for Loan Losses. The provision for loan losses is determined by
management as the amount to be added to the allowance for loan losses after net
charge-offs have been deducted to bring the allowance to a level which is
considered adequate to absorb losses inherent in the loan portfolio in
accordance with generally accepted accounting principles. A $249,000 provision
for loan losses was made for fiscal 1996, as compared to no provision in fiscal
1995. It is management's opinion that the allowance is adequate as non-
performing assets (defined as non-accruing loans for which payments have been
due and uncollected for a period in excess of 90 days plus foreclosed assets)
totalled $962,000 or 1.15% of total assets at June 30, 1996. The allowance for
loan losses at June 30, 1996 increased $241,000 to $641,000 from $400,000 at
June 30, 1995. The ratio of the allowance for loan losses to total loans was
0.9% at June 30, 1996 as compared to 0.7% at June 30, 1995. This increase
resulted from the $241,000 net addition to provision for loan losses during the
1996 fiscal year. Management believes these increases were prudent due to the
level of non-performing assets at June 30, 1996 and the increase in the loan
portfolio. (See discussion of Asset Quality below). Future additions to the
allowance for loan losses are dependent upon the performance and composition of
the loan portfolio, the economy, changes in real estate values and interest
rates, the view of the regulatory authorities toward adequate reserve levels and
inflation.
7
<PAGE>
Non-interest Income. Non-interest income increased by $10,000 to $138,000
in fiscal 1996 from $128,000 in fiscal 1995. This increase was primarily due to
$87,000 in interest on refunds of prior years income taxes recognized in fiscal
1996, which was partially offset by a $48,000 loss on investment securities in
1996, as compared to a $36,000 gain in fiscal 1995.
Non-interest Expense. Non-interest expense for fiscal 1996 at
$1.3 million was unchanged from fiscal 1995 levels.
Income Tax Expense. Income tax expense was $184,000 in fiscal 1996
compared to $316,000 in fiscal 1995, a decrease of $132,000, or 41.8%. This
decrease was primarily due to a $137,000 resolution of a tax contingency and
$30,000 in income tax credits on an investment in a low and moderate income
multi-family housing development.
Comparison of Fiscal Years Ended June 30, 1995 and June 30, 1994
General. The Company's net income increased by $146,000, or 30.1%, to
$631,000 in fiscal 1995 from net income of $485,000 in fiscal 1994. As discussed
in more detail below, the primary reason for this increase was the $375,000
increase in net interest income after provision for loan losses and a $15,000
increase in non-interest income, which more than offset the $260,000 increase in
non-interest expense over the year earlier period, a $35,000 increase in income
tax expense over the year earlier period and the absence of a $51,000 prepayment
penalty on an advance from the FHLB of Des Moines incurred during the year
earlier period.
Interest Income. Interest income increased $765,000 to $4.8 million in
fiscal 1995 from $4.0 million in fiscal 1994 primarily as a result of an
increase in the volume of interest-earning assets. The average balance of
interest-earning assets increased $8.0 million, or 14.9%, to $61.5 million in
fiscal 1995 from $53.5 million in fiscal 1994 due to an increase in the average
balances of loans resulting from increased loan originations and purchases. The
average rates paid on interest earning assets increased from 7.50% for 1994 to
7.77% in 1995 despite a decline in average yield on loans from 8.41% in fiscal
year 1994 to 8.13% in fiscal 1995. The decline in average yield on loans was
more than offset by the substantial increase in loan volume previously
discussed. This decline in average yield was primarily due to the ongoing impact
of declining rates during the 1994 fiscal year and continuing into the early
part of the 1995 fiscal year.
Interest Expense. Interest expense increased $410,000 to $2.6 million in
fiscal 1995 from $2.2 million in fiscal 1994 due primarily to an increase in
volume of interest-bearing liabilities and, to a lesser extent, the average
rates paid on interest-bearing liabilities. The average rates paid on interest-
bearing liabilities increased 38 basis points from 4.69% during fiscal 1994 to
5.07% during fiscal 1995 due to overall increase in market rates. The average
balance on interest-bearing liabilities increased $4.5 million from $47.5
million in fiscal 1994 to $52.0 million in fiscal 1995 as a result of an
increase in FHLB advances and certificate of deposit accounts.
Net Interest Income. Net interest income increased $355,000 to $2.1
million in fiscal 1995 as compared to $1.8 million in fiscal 1994. The
Company's average spread decreased from 2.81% for the fiscal year ended June 30,
1994 to 2.70% for the fiscal year ended June 30, 1995 due to the fact that rates
paid on interest costing liabilities increased more than yields on interest
earning assets. This, in turn, resulted from a rising interest rate environment
over roughly the latter half of fiscal 1995 during which interest-bearing
liabilities were repricing more rapidly than interest earning assets. Net
interest margin increased from 3.34% for the fiscal year ended June 30, 1994 to
3.48% for the fiscal year ended June 30,
8
<PAGE>
1995. The ratio of average interest-earning assets to average interest-bearing
liabilities increased to 118.2% during fiscal 1995 from 112.7% during fiscal
1994.
Provision for Loan Losses. The provision for loan losses is determined by
management as the amount to be added to the allowance for loan losses after net
charge-offs have been deducted to bring the allowance to a level which is
considered adequate to absorb losses inherent in the loan portfolio in
accordance with generally accepted accounting principles. No provision for loan
losses was made for fiscal 1995, as compared to the $20,000 addition in fiscal
1994. It was management's opinion that the allowance was adequate as non-
performing assets (defined as non-accruing loans for which payments have been
due and uncollected for a period in excess of 90 days plus foreclosed assets)
totalled $14,000 or 0.02% of total assets at June 30, 1995. The allowance for
loan losses at June 30, 1995 remained unchanged from $400,000 at June 30, 1994.
The ratio of the allowance for loan losses to total loans was 0.7% at June 30,
1995 as compared to 0.9% at June 30, 1994. This decrease resulted from an
increase in loans receivable.
Non-interest Income. Non-interest income increased by $15,000 to $128,000
in fiscal 1995 from $113,000 in fiscal 1994. This increase was primarily due to
a gain on the sale of investments, which was partially offset by a decrease in
gain on sale of real estate.
Non-interest Expense. Non-interest expense increased $260,000 to $1.3
million in fiscal 1995 from $1.1 million in fiscal 1994. The primary reason for
the change was a $171,000 increase in compensation and benefits due to staff
increases and establishment of new employee benefit plans in conjunction with
the stock conversion. Contributing to the increase was a $95,000 increase in
other expense consisting primarily of expense associated with preparation of SEC
reports and filings, conduct of annual meetings, Delaware franchise tax and
other miscellaneous expenses associated with being a public company.
Income Tax Expense. Income tax expense was $316,000 in fiscal 1995
compared to $281,000 in fiscal 1994, an increase of $35,000, or 12.5%. Income
tax expense increased primarily as a result of increased earnings before taxes.
Asset Quality
Total non-performing assets (defined as non-accruing loans for which
payments have been due and uncollected for a period in excess of 90 days plus
foreclosed assets) increased $948,000 to $962,000, or 1.15% of total assets at
June 30, 1996, from $14,000, or 0.02% of total assets at June 30, 1995. This
increase reflects the addition of a $286,000 single family home loan in
Houston, Texas, a $227,000 commercial real estate parcel in the Madison,
Wisconsin metropolitan area and a $437,000 package of equipment leases owned by
the Bank. The single family home loan was recently brought current. The
commercial real estate parcel consists of a combination retail and four (4) unit
apartment located in Madison, Wisconsin. A lake lot provides additional
collateral. The collateral property was placed in judgement in April 1996.
Management expects no loss on disposition of the property as the borrower has
accepted a purchase offer which is expected to result in a full payoff by
September 30, 1996. The referenced equipment leases were sold and serviced by
Bennett Funding Group and its affiliates (the "Bennett Group"), certain of which
companies have been charged by the Securities and Exchange Commission with,
among other things, the illegal sale of fictitious equipment leases. On April 1,
1996, the Bennett Group filed for Chapter 11 Bankruptcy, resulting in the
suspension of payments on the Bank's leases. On June 27, 1996, the Company
learned that approximately half of the leases may have been pledged more than
once, thus raising a question as to the priority of the Bank's security
interest. Based on the facts available at this time and the Bank's level of
provisions for loan losses, management does not currently expect these events
to have a material adverse effect on the Company's earnings or financial
9
<PAGE>
condition. This conclusion, however, may be altered by future developments in
this matter. Write-downs of this asset may be necessary, though the size of any
such write-downs cannot be predicted with accuracy at this time.
In addition, at June 30, 1996, other assets of concern totaled $1.5
million and included eleven loans totaling $231,000 secured by single-family
residences, one loan totaling $234,000 secured by commercial real estate
located in Colorado, one loan totaling $254,000 secured by commercial real
estate located in Grinnell, Iowa, which was paid off in August 1996, and three
loans totaling $751,000 secured by multi-family real estate located in Madison,
Wisconsin. While these loans raise concerns as to timely collectibility, based
upon information currently available, management does not anticipate any
material loss on these assets.
Assets classified pursuant to the Office of Thrift Supervision ("OTS")
regulations and assets designated special mention totaled $2.5 million at June
30,1996 as compared to $418,000 at June 30, 1995. The increase in classified
assets reflects the addition of the non-performing and other assets of concern
described above. At June 30, 1996, all classified assets were included in non-
performing assets or other assets of concern.
Average Balances, Interest Rates and Yields
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
and the resultant costs, expressed both in dollars and rates. No tax equivalent
adjustments were made. All average balances are monthly average balances.
Interest on non-accruing loans has been included in the table to the extent
received.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------- ------------------------------- -------------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
----------- --------- ------- ----------- --------- ------- ----------- --------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Interest-earning bank
accounts................... $ 2,641 $ 122 4.61% $ 1,320 $ 58 4.39% $ 4,962 $ 143 2.89%
Investments and other
securities................. 5,078 325 5.94 6,461 384 5.94 5,508 296 5.38
Mortgage-backed securities.. 3,660 272 7.44 4,074 303 7.44 5,001 380 7.59
Loans receivable/(1)/....... 64,140 5,451 8.13 48,789 3,968 8.13 37,186 3,126 8.41
FHLB stock.................. 1,046 75 7.21 832 65 7.81 832 68 8.14
------- ------- ------- ------- ------- -------
Total interest-earning
assets.................... $76,565 $ 6,245 8.16 $61,476 $ 4,778 7.77 $53,489 $ 4,013 7.50
------- ------- ------- ------- ------- -------
Interest-Bearing Liabilities:
Passbook accounts........... $ 3,504 $ 88 2.51 $ 3,756 $ 95 2.53 $ 4,702 $ 117 2.48
NOW accounts................ 2,005 64 3.18 1,598 34 2.12 1,716 37 2.18
Money market accounts....... 4,399 214 4.86 1,776 67 3.77 1,688 38 2.26
Certificates of deposit..... 37,764 1,883 5.77 36,011 1,883 5.23 35,246 1,786 5.06
FHLB advances............... 18,711 559 6.28 8,851 559 6.32 4,128 251 6.07
------- ------- ------- ------- ------- -------
Total interest-bearing
liabilities.............. $66,383 $ 2,638 5.60 $51,992 $ 2,638 5.07 $47,480 $ 2,229 4.69
------- ------- ---- ------- ------- ---- ------- ------- ----
Net interest income.......... $ 2,525 $ 2,140 $ 1,784
======= ======= =======
Net interest rate spread..... 2.56% 2.70% 2.81%
Net earning assets........... $10,182 $ 9,484 $ 6,009
======= ======= =======
Net interest margin.......... 3.30% 3.48% 3.34%
Average interest-earning
assets to average interest-
bearing liabilities 115.34% 118.24% 112.66%
</TABLE>
- - -------------------------------
/(1)/ Calculated net of deferred loan fees, loan discounts, loans in process
and loss reserves.
10
<PAGE>
Rate/Volume Analysis of the Net Interest Income
The following schedule presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the increase related to
higher outstanding balances and that due to the levels and volatility of
interest rates. For each category of interest-earning assets and interest-
bearing liabilities, information is provided on changes attributable to (i)
changes in volume (i.e., changes in volume multiplied by old rate) and (ii)
changes in rate (i.e., changes in rate multiplied by old volume). For purposes
of this table, changes attributable to both rate and volume, which cannot be
segregated have been allocated proportionately to the change due to volume and
the change due to rate.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------
1996 vs. 1995 1995 vs. 1994
-------------------------- --------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
-------------- Increase ---------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------- ----- ---------- ------- ------ ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning bank accounts......... $ 61 $ 3 $ 64 $(137) $ 52 $(85)
Investments and other securities....... (87) 28 88 55 33 88
Mortgage-backed securities............. (31) 0 (77) (69) (8) (77)
Loans receivable....................... 1,296 187 1,483 946 (105) 841
FHLB stock............................. 15 (10) 10 --- (3) (3)
------ ---- ------ ----- ----- ----
Total interest-earning assets........ $1,254 $213 $1,467 $ 795 $ (31) $764
====== ==== ------ ===== ===== ----
Interest-bearing liabilities:
Passbook accounts...................... (24) 2 (22) (24) 2 (22)
NOW accounts........................... 10 20 30 (2) (1) (3)
Money market accounts.................. 123 24 147 2 27 29
Certificates of deposit................ 95 201 296 39 58 97
FHLB advances.......................... 619 10 616 298 10 308
------ ---- ------ ----- ----- ----
Total interest-bearing liabilities... $ 841 $241 $1,082 $ 313 $ 96 $409
====== ==== ------ ===== ===== ----
Net interest income..................... $ 385 $355
====== ====
</TABLE>
11
<PAGE>
The following table sets forth the weighted average yields on the Company's
interest-earning assets, the weighted average interest rates on interest-bearing
liabilities and the interest rate spread between weighted average yields and
rates for the Company at the dates indicated. Non-accruing loans have been
included in the table as carrying a zero yield.
<TABLE>
<CAPTION>
At June 30,
-------------------
1996 1995 1994
----- ----- -----
Weighted average yield on:
--------------------------
<S> <C> <C> <C>
Interest-earning bank accounts............... 4.89% 5.74% 3.89%
Investment and other securities.............. 6.51 6.01 5.58
Mortgage-backed securities................... 7.37 7.42 7.44
Loans receivable............................. 8.23 8.15 7.88
FHLB stock................................... 7.00 7.00 8.25
Combined weighted average yield on interest-
earning assets.............................. 8.03 7.78 7.52
Weighted average rate paid on:
------------------------------
Passbook accounts............................ 2.57 2.57 2.59
NOW Accounts................................. 3.93 2.10 2.28
Money market accounts........................ 4.79 4.88 2.60
Certificates of deposit...................... 5.87 5.84 4.96
FHLB advances liabilities.................... 5.98 6.34 5.63
Combined weighted average rate paid on
interest-bearing liabilities................ 5.52 5.64 4.68
Spread........................................ 2.51 2.14 2.84
</TABLE>
Asset/Liability Management
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of interest-
earning assets anticipated, based upon certain assumptions, to mature or reprice
within a specific time period and the amount of interest-bearing liabilities
anticipated, based upon certain assumptions, to mature or reprice within that
time period. A gap is considered positive when the amount of interest rate
sensitive assets exceed the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. During a
period of rising interest rates, a negative gap would tend to adversely affect
operations while a positive gap would tend to benefit operations. During a
period of falling interest rates, a negative gap would tend to benefit
operations while a positive gap would tend to adversely affect operations.
Since the early 1980's, the Bank's asset/liability management strategy has
been directed toward reducing and controlling the Bank's exposure to
fluctuations in interest rates. In order to properly monitor interest rate
risk, the Board of Directors in 1990 created an Asset/Liability Committee. The
committee is currently composed of the Chairman of the Board, the President,
two Senior Vice Presidents, and Commercial Loan Officer, which meet quarterly to
review the Bank's interest rate risk position. The
12
<PAGE>
principal responsibilities of this Committee are to assess the Bank's
asset/liability mix and recommend strategies to the Board that will enhance
income while managing the Bank's vulnerability to changes in interest rates.
The Bank's asset/liability management strategy emphasizes the origination
or purchase of mortgages with adjustable rates. The Bank's ARM's adjust based
upon various indices. The Bank monitors the mix of indices on its adjustable-
rate assets and seeks, consistent with market conditions and a degree of risk
deemed acceptable to management, to achieve a relative balance in repricing
characteristics of its assets and liabilities. In the future, the Bank intends,
subject to market conditions, to continue to stress the origination or purchase
of adjustable-rate mortgage loans, including commercial and multi-family real
estate loans. In response to customer demand, however, the Bank continues to
originate and purchase for its loan portfolio fixed-rate mortgages with terms
not greater than 30 years.
As part of its asset/liability management strategy, the Bank has also
emphasized core deposits. Consumer savings accounts, demand accounts, money
market deposit accounts and NOW accounts amounted to $14.8 million, or 27.8% of
the Bank's total deposits, as of June 30, 1996. Although at June 30, 1996
approximately 61.4% of the Bank's certificates of deposit were scheduled to
mature during the next year, management believes that this reflects current
consumer preference for short-term investments as a result of the current
interest rate environment. Over 76.4% and 13.4% of the Bank's total
certificates of deposit at June 30, 1996 had an original term of more than one
and three years, respectively. Based on its experience, the Bank's certificates
of deposit have been a relatively stable source of long-term funds as such
certificates are generally renewed upon maturity since the Bank has established
long-term banking relationships with its customers. In addition, in recent
years, the Bank has increased its use of borrowings in an effort to maintain
current spreads in a rising rate environment and to reduce the short-term impact
of increases in interest rates.
In managing its asset/liability mix, Grinnell Federal may, at times,
depending on the relationship between long- and short-term interest rates,
market conditions and consumer preference, place greater emphasis on maximizing
its net interest margin than on better matching the interest rate sensitivity of
its assets and liabilities in an effort to improve its spread. Management
believes that the increased net income resulting from a mismatch in the maturity
of its asset and liability portfolios can provide high enough returns to justify
the increased vulnerability to sudden and unexpected increases in interest
rates.
13
<PAGE>
The following table sets forth the repricing dates of the Bank's interest-
earning assets and interest-bearing liabilities at June 30, 1996 and the Bank's
interest rate sensitivity "gap", which is defined as the amount by which assets
repricing within the respective periods exceed liabilities repricing within such
periods. All prepayment and liability repricing assumptions are those used by
the FHLB of Des Moines at such date for the purpose of assessing the interest
rate sensitivity of member thrift institutions and are set forth in detail
following the table.
<TABLE>
<CAPTION>
Maturing or Repricing
---------------------------------------------------
Less than 6-12 Over 1-3
6 Months Months Years
--------------- -------------- --------------
(Dollars in Thousands)
<S> <C> <C> <C>
Fixed-rate one- to four-family loans (including
mortgage-backed securities)............................... $ 2,206 $ 2,035 $ 6,696
Adjustable-rate one- to four-family loans.................. 10,962 9,695 3,011
Fixed- and adjustable-rate construction loans, multi-
family, commercial real estate and second mortgages....... 11,229 7,933 1,484
Commercial business loans.................................. 665 58 137
Consumer loans............................................. 224 216 573
Investment securities and other............................ 3,062 --- ---
------- ------- -------
Total interest-earning assets.......................... 28,348 19,937 11,901
------- ------- -------
Money market............................................... 5,952 --- ---
Passbook accounts.......................................... 371 338 1,077
Demand and NOW accounts.................................... 758 602 1,397
Certificates............................................... 12,061 11,484 13,858
FHLB advances & Other Borrowings........................... 1,029 4,300 4,500
------- ------- -------
Total interest-bearing liabilities...................... 20,171 16,724 20,832
------- ------- -------
Interest-earning assets less interest-bearing liabilities.. $ 8,177 $ 3,213 $(8,931)
======= ======= =======
Cumulative interest rate sensitivity gap................... $ 8,177 $11,390 $ 2,459
sensitivity gap ======= ======= =======
Cumulative interest rate gap as a percentage of assets..... 9.99% 13.91% 3.00%
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Maturing or Repricing
-------------------------------------------------
Over 3-5 Over
Years 5 Years Total
-------------- -------------- --------------
<S> <C> <C> <C>
Fixed-rate one- to four-family loans (including
mortgage-backed securities)............................... $ 4,888 $10,333 $26,158
Adjustable-rate one- to four-family loans.................. 898 --- 24,566
Fixed- and adjustable-rate construction loans, multi-
family, commercial real estate and second mortgages....... 764 2,058 23,468
Commercial business loans.................................. --- --- 860
Consumer loans............................................. --- --- 1,013
Investment securities and other............................ 1,497 --- 4,559
------- ------- -------
Total interest-earning assets.......................... 8,047 12,391 80,624
------- ------- -------
Money market............................................... --- --- 5,952
Passbook accounts.......................................... 742 1,643 4,171
Demand and NOW accounts.................................... 555 365 3,677
Certificates............................................... 927 --- 38,330
FHLB advances & Other Borrowings........................... 8,693 1,068 19,590
------- ------- -------
Total interest-bearing liabilities...................... 10,917 3,076 71,720
------- ------- -------
Interest-earning assets less interest-bearing liabilities.. (2,870) $ 9,315 $ 8,904
======= ======= =======
Cumulative interest rate sensitivity gap................... $ (411) $ 8,904 $ 8,904
sensitivity gap ======= ======= =======
Cumulative interest rate gap as a percentage of assets..... (.50%) 10.88% 10.88%
======= ======= =======
</TABLE>
In preparing the table above, it has been assumed, with the assumptions
used by the FHLB of Des Moines at June 30, 1996, that (i) adjustable-rate
mortgage loans on one- to four-family residential properties prepay at the rate
of 8% per year; (ii) first mortgage loans on residential properties of five or
more units and non-residential properties will prepay at the rate of 8% per
year; (iii) fixed-rate construction loans, commercial loans and consumer loans
are assumed to prepay at annual rate of 5%, 8% and 8%, respectively; (iv) one-
to four-family fixed-rate mortgage loans and mortgage-backed securities will
prepay annually as follows:
<TABLE>
<CAPTION>
Annual
Loan Rate Prepayment Rate
----------- ------------------------
15-year 30-year
------- -------
<S> <C> <C>
Less than 8.0% 6.00% 6.00%
8.00% to 8.99% 10.00 8.00
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
9.0% to 9.99% 14.00 15.00
10.0% to 10.99% 21.00 15.00
11.0% or more 12.00 15.00
</TABLE>
In addition, it is assumed that fixed maturity deposits are not withdrawn
prior to maturity, and that passbook accounts and NOW accounts reprice at annual
rates of 17% and 37%, respectively. The effect of these assumptions is to
quantify the dollar amount of items that are interest-sensitive and can be
repriced within each of the periods specified. Such repricing can occur in one
of three ways: (1) the rate of interest to be paid on an asset or liability may
adjust periodically on the basis of an index; (2) an asset or liability such as
a mortgage loan may amortize, permitting reinvestment of cash flows at the then-
prevailing interest rates; or (3) an asset or liability may mature, at which
time the proceeds can be reinvested at current market rates.
Certain shortcomings are inherent in the method of analysis presented in
the foregoing tables. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as ARM loans, have features
which restrict changes in interest rates on a short-term basis and over the life
of the asset. Further, in the event of change in interest rates, prepayments and
early withdrawal levels would likely deviate significantly from those assumed in
calculating the table. Finally, the ability of many borrowers to service their
debt may decrease in the event of an interest rate increase.
In addition, the previous table does not necessarily indicate the impact
of general interest rate movement on the Bank's net interest income because the
repricing of certain categories of assets and liabilities is subject to
competitive and other pressures beyond the Bank's control. As a result, certain
assets and liabilities indicated as maturing or otherwise repricing within a
stated period may, in fact, mature or reprice at different times and at
different volumes.
Liquidity and Capital Resources
The OTS requires minimum levels of liquid assets. OTS regulations
presently require Grinnell Federal to maintain an average daily balance of
liquid assets (United State Treasury, federal agency and other investments
having maturities of five years or less) equal to at least 5.0% of the sum of
its average daily balance of net withdrawable deposit accounts and borrowings
payable in one year or less. Such requirements may be changed from time to time
by the OTS to reflect changing economic conditions. Such investments are
intended to provide a source of relatively liquid funds upon which Grinnell
Federal may rely, if necessary, to fund deposit withdrawals and other short-term
funding needs. The Bank has historically maintained its liquidity ratio in
excess of that required. At June 30, 1996, the amount of the Bank's liquidity
was $3.7 million, resulting in a liquidity ratio of 6.7%.
Liquidity management is both a daily and long-term responsibility of
management. The Company adjusts its investments in liquid assets based upon
management's assessment of (i) expected loan demand, (ii) expected deposit
flows, (iii) yields available on interest-bearing deposits and (iv) the
objectives of its asset/liability management program. Excess liquidity generally
is invested in interest-bearing overnight deposits and other short-term
government and agency obligations. If the Bank requires additional funds, beyond
its internal ability to generate, it has additional borrowing capacity with the
FHLB of Des Moines and collateral eligible for repurchase agreements.
15
<PAGE>
The Company's liquidity, represented by cash and cash equivalents, is
a combination of its operating, investing and financing activities. These
activities are summarized below for the years ended June 30, 1995 and 1996.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------
1996 1995
---------- ---------
<S> <C> <C>
(In Thousands)
Net income.............................................. $ 895 $ 631
Adjustments to reconcile net income to net
cash provided by operating activities.............. 343 293
-------- --------
Net cash provided by operating activities............... 1,238 924
Net cash provided by (used in investment activities).... (14,438) (10,466)
Net cash provided by financing activities............... 11,274 12,681
-------- --------
Net increase (decrease) in cash and cash equivalents.... (1,836) 3,139
Cash and cash equivalents at beginning of year.......... 4,107 968
-------- --------
Cash and cash equivalents at end of year................ $ 2,271 $ 4,107
======== ========
</TABLE>
The Company principally uses its liquidity resources to meet ongoing
commitments, to fund maturing certificates of deposit and deposit withdrawals,
to invest, to fund existing and future loan commitments, to maintain liquidity,
and to meet operating expenses. At June 30, 1996, there were loans in process
totaling $2.5 million and loan commitments totalling $620,000. The Company
anticipates that it will have sufficient funds available to meet current
commitments.
Certificates of deposit scheduled to mature in a year or less at June 30,
1996 totaled $23.5 million. Based on historical experience, management
believes that a significant portion of such deposits will remain with the Bank;
however, there can be no assurance that the Bank can retain all such deposits.
Management believes that loan repayments and other sources of funds
will be adequate to meet and exceed the Bank's foreseeable short- and long-term
liquidity needs.
The primary investing activities of the Company include investing in
loans, mortgage-backed securities, agency bonds, Treasury Securities, corporate
stocks and mutual funds. At June 30, 1996, these assets accounted for over 94%
of the Company's total assets. The purchases are funded primarily from loan
repayments, maturities of securities, FHLB advances and increases in deposits
and net income.
The Bank has utilized borrowings to offset reductions in other sources
of funds and to assist in asset/liability management objectives. At June 30,
1996, the Bank had outstanding borrowings of $19.3 million from the FHLB of Des
Moines.
16
<PAGE>
Capital Requirements
OTS regulations establish three capital requirements for savings
banks. The following table sets forth Grinnell Federal's compliance with its
capital requirements at June 30, 1996.
<TABLE>
<CAPTION>
At June 30, 1996
--------------------------
Amount/(1)/ Percent
----------- -------
(Dollars in Thousands)
Tangible Capital:
<S> <C> <C>
Capital level........... $8,376 10.22%
Requirement............. 1,229 1.50
------ -----
Excess.................. $7,147 8.72%
====== =====
Core Capital:
Capital level/(2)/...... $8,376 10.22%
Requirement............. 2,458 3.00
------ -----
Excess.................. $5,918 7.22%
====== =====
Fully Phased-In Risk-Based
Capital:
Capital level/(3)/...... $8,962 19.15%
Requirement............. 3,744 8.00
------ -----
Excess.................. $5,218 11.15%
====== =====
</TABLE>
- - ------------------------
/(1)/ Tangible and core capital levels are shown as a percentage of adjusted
total assets; risk-based capital levels are shown as a percentage of
risk-weighted assets.
/(2)/ Under current regulatory capital regulations, the Bank must have:
(a) core capital equal to 3% of adjusted total assets, (b) tangible
capital equal to 1.5% of adjusted assets, and (c) total capital equal
to 8.0% of risk-weighted assets. Risk-weighted assets are comprised of
both on- and off-balance sheet items and are assigned a risk weight
ranging from 0-100% based on their relative risk.
/(3)/ Includes $586,000 of general valuation allowances.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and results of operations in terms
of historical dollars without considering changes in the relative purchasing
power of money over time because of inflation.
Unlike most industrial companies, virtually all of the assets and
liabilities of the Company are monetary in nature. As a result, interest rates
have a more significant impact on the Company's performance than the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services. In the
present interest rate environment, the liquidity, maturity structure and quality
of the Company's assets and liabilities are important factors in the maintenance
of acceptable performance levels.
17
<PAGE>
Effect of New Accounting Standards
The Financial Accounting Standard Board has approved, effective for years
beginning after December 15, 1995, Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
Statement No. 122, Accounting for Mortgage Servicing Rights and Statement No.
123 Accounting for Stock-Based Compensation and for transactions after December
31, 1996, Statement No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities. FASB Statements No. 121, 122, 123 and
125 are not expected to have a material effect on the Company's financial
statements when adopted.
Recent Developments
On August 20, 1996, the President signed into law the Small Business Jobs
Protection Act. Included within this act were provisions repealing the
percentage of taxable income method of calculating a thrift's bad debt reserve
for tax purposes. This method had permitted thrift institutions, such as the
Bank, who satisfied certain definitional tests and other conditions prescribed
by the Internal Revenue Code to deduct an annual addition to their bad debt
reserve calculated as a percentage of taxable income. Other financial
institutions generally were required to calculate their bad debt deduction based
upon actual loss experience (the "experience method"). As a result of the
elimination of the percentage of taxable income method, institutions that have
utilized such method will be required to recapture into taxable income post-1987
reserves in excess of the reserves calculated under the experience method, over
a period of six years commencing in the first taxable year beginning after
December 31, 1995. An institution will be able to defer recapture until up to
the third taxable year after December 31, 1995 if the dollar amount of the
institution's residential loan originations in each year is not less than the
average dollar amount of residential loan originations originated in each of the
six most recent years disregarding the years with the highest and lowest
originations during such period. For purposes of this test, residential loan
originations would not include refinancing and home equity loans.
Beginning with the first taxable year beginning after December 31, 1995,
savings institutions, such as the Bank, will be treated the same as commercial
banks. Institutions with $500 million or more in assets will only be able to
take a tax deduction when a loan is actually charged off. Institutions with less
than $500 million in assets will still be permitted to make deductible bad debt
additions to reserves, but only using the experience method. Management believes
that there will be no material impact on earnings due to the recapture.
DIVIDENDS
The Company declared $0.325 in dividends during fiscal 1996, including an
increase to a $0.10 quarterly cash dividend on June 21, 1996, payable on July
26, 1996 to stockholders of record on July 12, 1996. The Company intends to
continue to pay quarterly cash dividends in the future, dependent on the results
of operations and financial condition of the Bank, tax considerations, industry
standards, economic conditions, general business practices and other factors.
The Company's ability to pay dividends is dependent on the dividend payments it
receives from its subsidiary, the Bank, which are subject to regulations and the
Bank's continued compliance with all regulatory capital requirements.
18
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
GFS Bancorp, Inc.
Grinnell, Iowa
We have audited the accompanying consolidated balance sheet of GFS Bancorp, Inc.
and subsidiaries as of June 30, 1996, and the related consolidated statements of
income, stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The consolidated balance sheet of GFS Bancorp, Inc. and subsidiaries
as of June 30, 1995 and the related consolidated statements of income,
stockholders' equity and cash flows for the years ended June 30, 1995 and 1994
were audited by other auditors whose report, dated July 19, 1995, expressed an
unqualified opinion on those statements.
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 1996 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of GFS
Bancorp, Inc. and subsidiaries as of June 30, 1996, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
Des Moines, Iowa
/s/ McGladrey & Pallen, LLP July 24, 1996
19
<PAGE>
GFS Bancorp, Inc. AND SUBSIDIARIES
consolidated Balance Sheets
June 30, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
- - -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and amounts due from depository institutions:
Noninterest bearing $ 222,461.00 $ 99,963.00
Interest bearing 2,048,671.00 4,007,383.00
Securities available for sale (Note 2) 1,672,763.00 4,526,000.00
Securities held to maturity (Note 2) 1,582,188.00 1,551,800.00
Mortgage-backed securities held to maturity (Note 2) 3,435,254.00 3,950,389.00
Stock in Federal Home Loan Bank, at cost (approximates fair
value) (Note 7) 1,159,000.00 832,200.00
Loans receivable, net (Notes 3 and 7) 71,772,896.00 54,999,105.00
Real estate acquired in settlement of loans, net 226,616.00
Premises and equipment, net (Note 4) 234,415.00 196,270.00
Accrued interest receivable (Note 5) 439,392.00 318,250.00
Other assets 510,960.00 468,623.00
------------------------------------
Total assets $ 83,304,616.00 $70,949,983.00
====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits (Note 6):
Demand $ 4,651,689.00 $ 2,037,045.00
Savings and money market 10,140,487.00 5,980,549.00
Certificates of deposit 38,330,207.00 38,064,351.00
------------------------------------
</TABLE>
20
<PAGE>
<TABLE>
<S> <C> <C>
Total deposits 53,122,383.00 46,081,945.00
------------------------------------
Advances from Federal Home Loan Bank (Note 7) 19,317,997.00 14,577,952.00
Advances from borrowers for taxes and insurance 432,970.00 192,132.00
Income taxes (Note 8):
Current 90,994.00 17,001.00
Deferred 8,000.00 90,000.00
Dividends payable 51,460.00 40,592.00
Other liabilities 335,921.00 410,774.00
------------------------------------
Total liabilities 73,359,725.00 61,410,396.00
------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTE 14)
STOCKHOLDERS' EQUITY (Notes 10 and 11)
Preferred stock, $.01 par value, authorized 500,000 shares, issued none
Common stock, $.01 par value, authorized 2,000,000 shares;
issued 1996 550,160 shares; 1995 549,732 shares 5,501.00 5,497.00
Additional paid-in capital 5,138,066.00 5,075,728.00
Retained earnings, substantially restricted (Note 8) 5,856,546.00 5,117,067.00
Less: (Note 9)
Unearned employee stock ownership plan (259,781.00) (325,011.00)
Unearned retention and recognition plan (32,659.00) (71,802.00)
Treasury stock, at cost 1996 40,560 shares; 1995 8,500 shares (728,800.00) (131,313.00)
Unrealized loss on securities available for sale, net (Note 2) (33,982.00) (130,579.00)
------------------------------------
Total stockholders' equity 9,944,891.00 9,539,587.00
------------------------------------
Total liabilities and stockholders' equity $ 83,304,616.00 $ 70,949,983.00
------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
21
<PAGE>
GFS Bancorp, Inc. AND SUBSIDIARIES
consolidated Statements of Income
Years Ended June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans receivable $ 5,449,941.00 $ 3,968,174.00 $ 3,126,298.00
Mortgage-backed securities 272,367.00 303,401.00 379,739.00
Other securities and interest-bearing cash accounts 522,332.00 506,547.00 507,138.00
---------------------------------------------------
6,244,640.00 4,778,122.00 4,013,175.00
---------------------------------------------------
Interest expense:
Deposits (Note 6) 2,545,116.00 2,078,795.00 1,977,667.00
Advances from Federal Home Loan Bank 1,174,763.00 559,007.00 250,725.00
---------------------------------------------------
3,719,879.00 2,637,802.00 2,228,392.00
---------------------------------------------------
Net interest income 2,524,761.00 2,140,320.00 1,784,783.00
Provision for loan losses (Note 3) 249,000.00 20,000.00
---------------------------------------------------
Net interest income after provision for loan losses 2,275,761.00 2,140,320.00 1,764,783.00
Noninterest income:
Gain (loss) on sale of securities
available for sale (Note 2) (47,750.00) 36,250.00
Real estate operations 10,036.00 25,258.00
Gain on sale of real estate 11,388.00 34,085.00
Other 186,175.00 69,876.00 54,358.00
---------------------------------------------------
138,425.00 127,550.00 113,701.00
---------------------------------------------------
</TABLE>
22
<PAGE>
<TABLE>
<S> <C> <C> <C>
Noninterest expenses:
Salaries and employee benefits (Note 9) 791,912.00 756,480.00 585,574.00
Real estate operations 214.00 11,068.00 21,881.00
Occupancy expenses 73,457.00 59,124.00 50,395.00
Federal deposit insurance premiums 105,530.00 97,078.00 98,587.00
Data processing services 63,213.00 64,368.00 66,354.00
Other 301,503.00 333,216.00 238,173.00
------------------------------------------------
1,335,829.00 1,321,334.00 1,060,964.00
------------------------------------------------
Income before provision for income taxes
and extraordinary item 1,078,357.00 946,536.00 817,520.00
Provision for income taxes (Note 8) 183,517.00 315,650.00 281,300.00
------------------------------------------------
Income before extraordinary item 894,840.00 630,886.00 536,220.00
Extraordinary item - penalty for early extinguishment
of debt, net of $30,000 income tax benefit 51,243.00
------------------------------------------------
Net income $ 894,840.00 $ 630,886.00 $ 484,977.00
------------------------------------------------
Earnings per common share
(subsequent to conversion for 1994) $ 1.72 $ 1.20 $ 0.52
===============================================
</TABLE>
See Notes to Consolidated Financial Statements.
23
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
- - ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 894,840.00 $ 630,886.00 $ 484,977.00
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 30,396.00 19,291.00 13,380.00
(Gain) loss on sale of securities available for sale 47,750.00 (36,250.00)
Gain on sale of real estate (11,388.00) (34,085.00)
Stock dividend on FHLB stock (20,800.00)
ESOP and RRP expense 172,161.00 184,935.00 84,237.00
Deferred loan fees, net 40,201.00 67,087.00 72,311.00
Provision for loan losses 249,000.00 20,000.00
Deferred taxes (61,000.00) (12,935.00) 1,000.00
Change in:
Accrued interest receivable (121,142.00) (98,714.00) (25,332.00)
Other assets 7,663.00 (21,336.00) 19,639.00
Income taxes payable 73,993.00 17,001.00 (39,515.00)
Other liabilities (74,853.00) 185,521.00 53,030.00
------------- -------------- --------------
Net cash provided by operating activities 1,238,209.00 924,098.00 649,642.00
------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturity of securities held to maturity 1,551,800.00 1,490,000.00 1,000,000.00
Maturity of securities available for sale 150,000.00 225,000.00
Proceeds from sales of securities
</TABLE>
24
<PAGE>
<TABLE>
<S> <C> <C> <C>
available for sale 2,912,584.00 113,750.00
Purchase of securities held to maturity (1,582,188.00) (994,769.00) (1,544,798.00)
Purchase of securities available for sale (181,500.00) (101,610.00) (1,351,098.00)
Purchase of FHLB stock (306,000.00)
Principal payments received on mortgage-backed
securities 515,135.00 286,986.00 1,478,320.00
Net (increase) in loans outstanding (17,289,608.00) (11,384,267.00) (9,838,862.00)
Proceeds from sale of real estate 234,778.00 77,710.00
Purchase of premises and equipment (68,541.00) (85,369.00) (15,905.00)
Investment in other assets (50,000.00) (250,000.00)
-------------- -------------- --------------
Net cash (used by) investing activities (14,348,318.00) (10,465,501.00) (10,194,633.00)
-------------- -------------- --------------
</TABLE>
(Continued)
25
<PAGE>
GFS Bancorp, Inc. AND SUBSIDIARIES
consolidated Statements of Cash Flows (Continued)
Years Ended June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits $ 7,040,438.00 $ 4,066,421.00 $ (1,233,292.00)
Advances from the Federal Home Loan Bank 9,500,000.00 15,600,000.00 4,900,000.00
Repayment of advances from the Federal Home
Loan Bank (4,759,955.00) (6,892,025.00) (2,530,023.00)
Net increase in advances from borrowers for
taxes and insurance 240,838.00 37,790.00 38,280.00
Proceeds from stock issue, net of conversion costs
and stock acquired by ESOP 4,415,240.00
Net proceeds from reissuance of treasury stock 9,520.00
Purchase of treasury stock (612,453.00) (131,313.00)
Dividends paid (144,493.00)
--------------------------------------------------
Net cash provided by financing activities 11,273,895.00 12,680,873.00 5,590,205.00
--------------------------------------------------
Net increase (decrease) in cash and
cash equivalents (1,836,214.00) 3,139,470.00 (3,954,786.00)
CASH AND CASH EQUIVALENTS
Beginning 4,107,346.00 967,876.00 4,922,662.00
--------------------------------------------------
</TABLE>
26
<PAGE>
<TABLE>
<S> <C> <C> <C>
End $ 2,271,132.00 $ 4,107,346.00 $ 967,876.00
----------------- ---------------- --------------
SUPPLEMENTAL DISCLOSURES OF CASH I
FLOW INFORMATION N
C
Cash payments for: O
M
Income taxes E $ 170,523.00 $ 323,000.00 $ 299,734.00
T
A
X
E
S
Interest on deposits and advances from
Federal Home Loan Bank 3,718,737.00 2,637,802.00 2,228,392.00
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Real estate acquired in settlement of loans $ 226,616.00 $ $
</TABLE>
See Notes to Consolidated Financial Statements.
27
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Unaudited
Common Common Loss on
Additional Stock Stock Securities
Common Paid-In Retained Acquired By Acquired By Treasury Available for
Stock Capital Earnings ESOP RRP Stock Sale,Net Total
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1993 $ - $ - $ 4,041,796 $ - $ - $ - $ (7,615) $ 4,034,181
Net income - - 484,977 - - - - 484,977
Issuance of 549,732 shares
of common stock in conversion
(Note 11) 5,497 5,045,663 - (423,200) (212,720) - - 4,415,240
Amortization of ESOP and RRP
contributions - - - 30,229 54,008 - - 84,237
Net change in unrealized
loss on securities
available for sale, net - - - - - - (207,207) (207,207)
-----------------------------------------------------------------------------------------------------
Balance, June 30, 1994 5,497 5,045,663 4,526,773 (392,971) (158,712) - (214,822) 8,811,428
Net income - - 630,886 - - - - 630,886
Dividends on common stock
$.075 per share - - (40,592) - - - - (40,592)
ESOP common stock released
for allocation - 30,065 - 67,960 - - - 98,025
Amortization of RRP
contributions - - - - 86,910 - - 86,910
Purchase of 8,500 shares of
treasury stock - - - - - (131,313) - (131,313)
Net change in unrealized loss
on securities available for
sale, net (Note 2) - - - - - - 84,243 84,243
-----------------------------------------------------------------------------------------------------
Balance, June 30, 1995 5,497 5,075,728 5,117,067 (325,011) (71,802) (131,313) (130,579) 9,539,587
Net income - - 894,840 - - - - 894,840
Dividends on common stock,
$.325 per share - - (155,361) - - - - (155,361)
ESOP common stock released for
allocation - 59,442 - 65,230 - - - 124,672
Amortization of RRP
contribution - - - - 47,489 - - 47,489
Purchase of 33,012 shares of
treasury stock - - - - - (612,453) - (612,453)
Treasury stock released to
fund stock options exercised
(952 shares) (Note 9) - (5,446) - - - 14,966 - 9,520
Issuance of common stock (428
RRP shares) 4 8,342 - - (8,346) - - -
Net change in unrealized less
on securities available
for sale, net (Note 2) - - - - - - 96,597 96,597
-----------------------------------------------------------------------------------------------------
Balance, June 30, 1996 $5,501 $ 5,138,066 $ 5,856,546 $ (259,781) $ (32,699) $ (728,800) $ (33,982) $ 9,944,891
=====================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Business: GFS Bancorp, Inc. (the Company) located in Grinnell, Iowa,
--------
owns 100% of the outstanding capital stock issued by Grinnell
Federal Savings Bank (the Bank), in connection with its conversion
from a federally chartered mutual institution to a federally
chartered stock institution (see Note 11). The only significant
assets of the Company are investment securities and stock of the
Bank. Its business consists primarily of the operation of the Bank.
The Bank provides a full range of banking services to individual and
corporate customers from its office located in Grinnell, Iowa. The
Bank's wholly-owned subsidiary, Grinnell Service Corporation, had no
significant operations during 1996, 1995 or 1994.
Principles of consolidation: The consolidated financial statements
---------------------------
include the accounts of GFS Bancorp, Inc., Grinnell Federal Savings
Bank and its wholly-owned subsidiary, Grinnell Service Corporation.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
Accounting estimates and assumptions: The consolidated financial
------------------------------------
statements have been prepared in conformity with generally accepted
accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosures
of contingent assets and liabilities as of the date of the financial
statements and revenues and expenses for the period. Actual results
could differ from those estimates.
Securities: Securities which management has the intent and the
----------
Company has the ability to hold to maturity are carried at cost,
adjusted for purchase premiums or discounts. Purchase premiums or
discounts are recognized in interest income using the interest
method over the period to maturity.
Securities to be held for indefinite periods of time, including debt
securities that management intends to use as part of its
asset/liability strategy, or that may be sold in response to changes
in interest rates, changes in prepayment risk, the need to increase
regulatory capital or other similar factors, are classified as
available for sale. Securities available for sale are carried at
fair value. Unrealized gains or losses, net of the related deferred
tax effect, are reported as increases or decreases in stockholders'
equity. Realized gains and losses are determined using the specific
identification method of specific securities sold and are included
in earnings.
Loans receivable: Loans are stated at unpaid principal balances,
----------------
less the allowance for loan losses, deferred loan origination fees
and discounts.
28
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A valuation allowance is provided for estimated losses on loans when a
probable and reasonably estimable loss or decline in value occurs. Major
loans are reviewed periodically to determine potential problems at an early
date. The Company's experience has shown that foreclosures on loans can
result in some loss. Therefore, in addition to an allowance for specific
loans, the Company makes a provision for losses based in part on experience
and part on prevailing market conditions. Additions to the allowance are
charged to earnings. Management uses the best information available to make
its evaluation, future adjustments to the allowance may be necessary if
there are significant changes in economic conditions.
29
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Uncollectible interest on loans that are contractually past due is
charged off, or an allowance is established based on management's
periodic evaluation. The allowance is established by a charge to
interest income equal to all interest previously accrued, and income
is subsequently recognized only to the extent that cash payments are
received until, in management's judgment, the borrower's ability to
make periodic interest and principal payments returns to normal, in
which case the loan is returned to accrual status.
Real estate acquired in settlement of loans: Real estate acquired in
-------------------------------------------
the settlement of loans, or where the loan is in-substance
foreclosed, is initially recorded at the lower of fair value (less
estimated costs to sell the real estate) or the loan balance. Costs
relating to improvement of the property are capitalized, whereas
costs relating to the holding of the property are expensed.
Valuation allowances are established and adjusted periodically by
management if the carrying value of the property exceeds its fair
value, less estimated costs to sell the property.
Premises and equipment: Premises and equipment are carried at cost,
----------------------
less accumulated depreciation. Buildings and furniture, fixtures and
equipment are depreciated using the straight-line method over the
estimated useful lives of the assets, which range from 5 to 50
years.
Income taxes: Deferred taxes are provided on an asset and liability
------------
method whereby deferred tax assets are recognized for deductible
temporary differences, and operating loss or tax credit
carryforwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the
differences between the amount of assets and liabilities recorded
for income tax and financial reporting purposes. Deferred tax assets
are reduced by a valuation allowance when management determines that
it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities
are adjusted for the effects of changes in tax laws and rates on the
date of enactment.
The Company and its wholly-owned subsidiary file a consolidated
federal income tax return and separate state returns.
Earnings per share: Earnings per share for the years ended June 30,
------------------
1996 and 1995 is based on the weighted average number of shares
outstanding during the period, plus the shares that would be issued
assuming the conversion of dilutive stock options. The weighted
average number of common and common stock equivalents for the years
ended June 30, 1996 and 1995 was 518,965 and 524,361 shares,
respectively. The amount set forth above includes restricted stock
issued in accordance with the recognition and retention plan
established by the Company. In addition, in accordance with American
Institute of Certified Public Accountants Accounting Standards
Division Statement of Position 93-6 on "Employers Accounting for
30
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Employee Stock Ownership Plans," ESOP shares that have not been
committed to be released are not considered outstanding for the
purpose of computing earnings per share.
Earnings per common share for the year ended June 30, 1994 were
computed by dividing net income subsequent to the conversion date by
the weighted average number of shares of common stock outstanding
subsequent to the conversion. The weighted average number of shares
outstanding subsequent to the conversion, for the calculation of
earnings per share, was 548,682.
31
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair value of financial instruments: Financial Accounting Standards
-----------------------------------
Board (FASB) Statement No. 107, "Disclosures About Fair Value of
Financial Instruments," requires disclosure of fair value
information about financial instruments, whether or not recognized
in the balance sheet, for which it is practicable to estimate that
value. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value estimates
cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the
instruments. Statement No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
The following methods and assumptions were used by Company in
estimating the fair value of its financial instruments:
Cash and amounts due from depositing institutions: The carrying amount
-------------------------------------------------
reported in the consolidated balance sheets for cash approximates fair value.
Securities: Fair values for all securities are based on quoted market prices,
----------
where available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments.
Loans receivable, net: For variable-rate loans that reprice frequently and
---------------------
that have experienced no significant change in credit risk, fair values are
based on carrying values. Fair values for all other loans are estimated based
on discounted cash flows, using interest rates currently being offered for
loans with similar terms to borrowers with similar credit quality.
Accrued interest receivable: The fair value of accrued interest receivable
---------------------------
approximates its carrying amount.
Off-balance sheet instruments: Fair values for off-balance sheet instruments
-----------------------------
(guarantees, letters of credit, and lending commitments) are based on quoted
fees currently charged to enter into similar agreements, taking into account
the remaining terms of the agreements and the counterparties' credit
standing.
Deposits: Fair values disclosed for demand savings and money market deposits
--------
equal their carrying amounts, which represent the amount payable on demand.
Fair values for certificates of deposit are
32
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
estimated using a discounted cash flow calculation that applies interest
rates currently being offered on certificates to a schedule of aggregate
expected monthly maturities on time deposits.
Short-term borrowings: The fair values of all short-term borrowings
---------------------
approximate their carrying amounts.
33
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Securities
Securities are summarized below:
<TABLE>
<CAPTION>
June 30, 1996
-------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains (Losses) Value
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities held to maturity:
U.S. agency securities $ 1,497,188.00 $ $ (25,313.00) $ 1,471,875.00
Certificate of deposit 85,000.00 85,000.00
--------------------------------------------------------------
$ 1,582,188.00 $ $ (25,313.00) $ 1,556,875.00
--------------------------------------------------------------
Mortgage-backed securities $ 3,435,254.00 $ 44,597.00 $ (74,927.00) $ 3,404,924.00
--------------------------------------------------------------
June 30, 1996
---------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains (Losses) Value
---------------------------------------------------------------
Securities available for sale:
Mutual funds $ 832,245.00 $ $ (75,645.00) $ 756,600.00
Corporate stock 895,500.00 49,500.00 (28,837.00) 916,163.00
--------------------------------------------------------------
</TABLE>
34
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$ 1,727,745.00 $ 49,500.00 $ (104,482.00) $ 1,672,763.00
--------------------------------------------------------------
35
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
June 30, 1995
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains (Losses) Value
----------------------------------------------------------
<S> <C> <C> <C> <C>
Securities held to maturity:
U.S. agency securities $1,551,800.00 $ 4,121.00 $ (23,437.00) $1,532,484.00
----------------------------------------------------------
Mortgage-backed securities $3,950,389.00 $ 68,987.00 $ (34,966.00) $3,984,410.00
----------------------------------------------------------
June 30, 1995
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains (Losses) Value
----------------------------------------------------------
Securities available for sale:
Municipal securities $1,777,939.00 $ 3,510.00 $ (32,246.00) $1,749,203.00
Mutual funds 2,012,640.00 (143,101.00) 1,869,539.00
Corporate stock 866,000.00 55,420.00 (14,162.00) 907,258.00
---------------------------------------------------------
$4,656,579.00 $ 58,930.00 $ (189,509.00) $4,526,000.00
----------------------------------------------------------
</TABLE>
36
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The contractual maturities as of June 30, 1996 of debt securities are shown
below. Maturities will differ from contractual maturities in mortgage backed
securities because mortgages underlying the securities may be called or repaid
without call or prepayment penalties. Therefore, these securities are not
included in the maturity categories in the following maturity summary.
<TABLE>
<CAPTION>
Securities Held to Maturity
--------------------------------
Amortized Estimated
Cost Market
Value
--------------------------------
<S> <C> <C>
Due in one year or less $ 85,000.00 $ 85,000.00
Due after one year through five years 1,497,188.00 1,471,875.00
--------------------------------
$ 1,582,188.00 $ 1,556,875.00
--------------------------------
</TABLE>
Gross realized gains and gross realized losses on sales of available for sale
securities were $43,999 and $91,749, respectively, in 1996 and $36,250 and none,
respectively, in 1995. There were no sales of investment securities during the
fiscal year ended June 30, 1994 and therefore no realized gains or losses.
Mortgage-backed securities with a market value of approximately $3,122,000 as
of June 30, 1996 were pledged as collateral to secure certain deposits.
37
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Loans Receivable
Loans receivable consisted of the following:
<TABLE>
<CAPTION>
June 30,
------------------------------------
1996 1995
------------------------------------
<S> <C> <C>
Real estate mortgage loans:
Secured by one to four family residences $ 49,015,217.00 $ 38,336,845.00
Secured by multi-family real estate 11,589,593.00 7,117,537.00
Secured by commercial real estate 8,183,912.00 6,946,373.00
Construction loans and land loans 3,720,627.00 3,222,085.00
------------------------------------
Total real estate mortgage loans 72,509,349.00 55,622,840.00
------------------------------------
Consumer and other loans:
Secured by deposit accounts 41,899.00 95,996.00
Automobile loans 669,000.00 412,160.00
Home improvement loans 7,337.00 5,758.00
Home equity line-of-credit loans 274,145.00 41,057.00
Commercial loans 1,297,422.00 560,670.00
Other loans 295,125.00 132,926.00
------------------------------------
Total consumer and other loans 2,584,928.00 1,248,567.00
------------------------------------
</TABLE>
38
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C> <C>
Total loans 75,094,277.00 56,871,407.00
Less:
Allowance for loan losses (641,205.00) (399,705.00)
Undisbursed portion of mortgage loans (2,473,287.00) (1,307,909.00)
Deferred loan fees (206,889.00) (164,688.00)
--------------------------------
$ 71,772,896.00 $54,999,105.00
--------------------------------
</TABLE>
The Company's lending activity consists primarily of first mortgage real estate
loans made to individuals and businesses in the Grinnell, Iowa area.
Approximately 50.7% of the Company's real estate mortgage loans consists of
loans purchased outside of the Company's primary lending area. These loans are
secured by the underlying properties and are subject to the same underwriting
guidelines as loans originated internally. The concentration of these out of
lending area real estate mortgage loans are as follows:
<TABLE>
<CAPTION>
One-to- Multi-
four family family Commercial Total
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Wisconsin $ 5,198,745.00 $ 8,550,728.00 $ 4,835,454.00 $18,584,927.00
Texas 1,020,780.00 1,020,780.00
</TABLE>
39
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Colorado 80,264.00 464,189.00 544,453.00
Central Iowa 12,016,170.00 1,784,450.00 1,066,138.00 14,866,758.00
Other areas 737,001.00 455,287.00 569,917.00 1,762,205.00
----------------------------------------------------------------
$19,052,960.00 $10,790,465.00 $6,935,698.00 $36,779,123.00
----------------------------------------------------------------
</TABLE>
40
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The above table includes loans purchased from a mortgage banking firm
headquartered in Madison, Wisconsin. During the year ended June 30, 1996, the
Company entered into an exclusive agreement with this firm in which the Company
has first refusal on any real estate loans generated, including one-to-four
family, multi-family, commercial real estate and land development loans secured
by properties located primarily in the Madison, Wisconsin metropolitan area. The
Company has sold, and anticipates that it will continue to sell, a majority
participation interest in these loans to financial institutions located in Iowa
and contiguous states. The Company's net investment in loans generated under
this agreement as of June 30, 1996 is as follows:
<TABLE>
<CAPTION>
Under the
above
agreement Others Total
-----------------------------------------------
<S> <C> <C> <C>
Outstanding principal balance
of loans purchased and serviced
by the Company $17,528,669.00 $ 825,289.00 $18,353,958.00
Partial interest sold to other
financial institutions 7,779,891.00 412,644.00 8,192,535.00
-----------------------------------------------
Net investment $ 9,748,778.00 $ 412,645.00 $10,161,423.00
-----------------------------------------------
</TABLE>
Loan customers of the Company include certain executive officers, directors, and
their related interests. All loans to this group were made in the ordinary
course of business at prevailing terms and conditions. Such loans at June 30,
1996 and 1995, totaled approximately $736,000 and $651,000, respectively. During
the year ended June 30, 1996, new loans to this group totaled $102,000 while
repayments totaled $133,000. Additional changes in loan balances represent prior
balances of a new director.
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Years ended June 30,
---------------------------------------------
1996 1995 1994
---------------------------------------------
<S> <C> <C> <C>
</TABLE>
41
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Balance, beginning of year $ 399,705.00 $ 399,705.00 $ 371,905.00
Provision charged to income 249,000.00 20,000.00
Charge-offs (7,500.00)
Recoveries 7,800.00
-----------------------------------------------
Balance, end of year $ 641,205.00 $ 399,705.00 $ 399,705.00
-----------------------------------------------
</TABLE>
The Company has an investment of approximately $437,000 in loans secured by
equipment leases which are considered impaired loans as of June 30, 1996. The
allowance for loan losses contains approximately $109,000 specifically relating
to this impaired loan and no cash payments have been received or interest income
recorded since this investment was deemed impaired in March, 1996.
Excluding the impaired loan referred to above, impaired loans as of June 30,
1996 and 1995 totaled approximately $298,000 and $14,000, respectively. The
amount of interest related to nonaccrual loans is insignificant.
42
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Premises and Equipment
Premises and equipment consisted of the following:
<TABLE>
<CAPTION>
June 30,
--------------------------------
1996 1995
--------------------------------
<S> <C> <C>
Land $ 17,483.00 $ 17,483.00
Bank building 240,256.00 263,690.00
Furniture, fixtures and equipment 167,050.00 254,389.00
-------------------------------
424,789.00 535,562.00
Less accumulated depreciation (190,374.00) (339,292.00)
-------------------------------
$ 234,415.00 $ 196,270.00
--------------------------------
</TABLE>
5. Accrued Interest Receivable
Accrued interest receivable consisted of the following:
<TABLE>
<CAPTION>
June 30,
--------------------------------
1996 1995
--------------------------------
<S> <C> <C>
Securities $ 25,526.00 $ 51,499.00
Loans receivable 387,643.00 236,688.00
Mortgage-backed securities 26,223.00 30,063.00
-------------------------------
</TABLE>
43
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
$ 439,392.00 $ 318,250.00
-------------------------------
</TABLE>
6. Deposits
The scheduled maturities of certificate accounts are as follows as of June 30,
1996:
<TABLE>
<S> <C>
1997 $ 23,544,313.00
1998 11,278,670.00
1999 2,579,819.00
2000 514,526.00
2001 312,879.00
Thereafter 100,000.00
---------------
$ 38,330,207.00
---------------
</TABLE>
Certificate of deposit accounts with balances of $100,000 and above totaled
$3,812,515 and $5,346,635 at June 30, 1996 and 1995, respectively. These
certificates, at June 30, 1996, have scheduled maturities of $102,853 in 3
months or less, $915,732 from 3 to 6 months, $1,085,094 from 6 to 12 months
and $1,708,836 beyond 12 months.
44
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
Years ended June 30,
-----------------------------------------------
1996 1995 1994
-----------------------------------------------
<S> <C> <C> <C>
NOW accounts $ 63,698.00 $ 34,290.00 $ 37,332.00
Money market deposit accounts 213,988.00 67,300.00 38,068.00
Passbook savings accounts 87,891.00 95,112.00 116,716.00
Certificates of deposit 2,181,293.00 1,887,548.00 1,792,108.00
-----------------------------------------------
2,546,870.00 2,084,250.00 1,984,224.00
Less penalties for early withdrawals (1,754.00) (5,455.00) (6,557.00)
-----------------------------------------------
Interest on deposits $ 2,545,116.00 $ 2,078,795.00 $ 1,977,667.00
-----------------------------------------------
</TABLE>
Noninterest bearing deposit accounts approximately $1,026,000 and $555,000 as of
June 30, 1996 and 1995, respectively.
7. Advances from Federal Home Loan Bank
At June 30, 1996, advances from the Federal Home Loan Bank of Des Moines
consisted of various fixed rate advances with interest rates ranging from 5.33%
to 6.58%. These advances are due at various dates from October 1996 through
March 2001. The advances are secured by the FHLB stock and real estate loans at
least equal to 150% of the total advances outstanding. Certain advances are
subject to repayment penalties. During the year ended June 30, 1996, the maximum
advances outstanding at a month end were $22,748,691.
Following is a summary of future maturities of advances from the Federal Home
Loan Bank of Des Moines:
45
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
June 30, 1996
-----------------------------
Weighted
Amount Rate
-----------------------------
<S> <C> <C>
Year ending June 30:
1997 $ 5,356,530.00 5.68
1998 3,560,588.00 6.10
1999 1,064,943.00 5.98
2000 69,619.00 5.99
2001 8,524,639.00 6.12
Thereafter 741,678.00 5.96
---------------
$ 19,317,997.00
---------------
</TABLE>
46
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Income Taxes and Retained Earnings
Under existing provisions of the Internal Revenue code and similar sections of
the Iowa income tax law, the Bank is allowed a special bad debt deduction which
is based on a percentage of otherwise taxable income, and is net of the
applicable preference tax. If the amounts that qualify as deductions for income
tax purposes are used for a purpose other than to absorb bad debt losses, they
will be subject to income taxes at the then corporate rate.
Retained earnings at June 30, 1996 and 1995 include approximately $1,350,000 for
which no deferred federal income tax liability has been recognized. These
amounts represent an allocation of income to bad-debt deductions for tax
purposes only. Reduction of amounts so allocated for purposes other than tax
bad-debt losses or adjustments arising from carryback of net operating losses
would create income for tax purposes only, which would be subject to the then
current corporate income tax rate. The unrecorded deferred tax liability on the
above amount for financial statement purposes was approximately $500,000 at June
30, 1996 and 1995.
Taxes on income are comprised as follows:
<TABLE>
<CAPTION>
Years ended June 30,
------------------------------------------------
1996 1995 1994
-----------------------------------------------
<S> <C> <C> <C>
Current $ 244,517.00 $ 328,585.00 $ 280,300.00
Deferred (61,000.00) (12,935.00) 1,000.00
-----------------------------------------------
$ 183,517.00 $ 315,650.00 $ 281,300.00
-----------------------------------------------
</TABLE>
Taxes on income differ from the "expected" amounts computed by applying the
federal income tax rate of 34 percent to income before taxes for the following
reasons:
June 30,
----------------------------------------------------------------
1996 1996 1995 1995 1994 1994
----------------------------------------------------------------
47
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Percent Percent Percent
of of of
Amount Pretax Amount Pretax Amount Pretax
Income Income Income
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Computed "expected"
taxes on income $366,600.00 34.0 $321,800.00 34.0 $277,957.00 34.0
State taxes, net of federal
benefit 31,700.00 2.90 28,600.00 3.0 27,000.00 3.30
Tax-exempt interest and
dividends (27,000.00) (2.50) (26,100.00) (2.80) (28,440.00) (3.50)
Resolution of tax contingency (137,000.00) (12.70)
ESOP 20,200.00 1.90 10,200.00 1.10
Low income housing credit (30,500.00) (2.80)
Other (40,483.00) (3.80) (18,850.00) (2.00) 4,783.00 0.60
-------------------------------------------------------------------
Provision for
income taxes $183,517.00 17.0 $315,650.00 33.3 $281,300.00 34.4
-------------------------------------------------------------------
</TABLE>
48
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Temporary differences between the financial statements carrying amounts and
the tax basis of assets and liabilities that give rise to the deferred tax
liability at June 30, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------------------
<S> <C> <C>
Federal Home Loan Bank stock $ 181,700.00 $ 184,100.00
Office property and equipment 16,900.00 10,800.00
Deferred compensation agreements (54,000.00) (52,200.00)
Loan fees deferred for financial reporting purposes (9,000.00) (36,200.00)
Allowance for loan losses (204,400.00) 33,400.00
ESOP and RRP plan (19,800.00) (17,400.00)
Other 96,600.00 (32,500.00)
--------------------------------
Deferred income tax liability $ 8,000.00 $ 90,000.00
</TABLE>
9. Employee Benefits
Employee pension plan: The Bank participates in a multi-employer defined benefit
- - ---------------------
pension plan covering substantially all employees. There was no pension expense
for the years ended June 30, 1996, 1995 and 1994.
Recognition and retention plan (RRP): In conjunction with the stock conversion,
- - ------------------------------------
the Company has established a Recognition and Retention Plan as a method of
providing directors, officers and other key employees of the Company with a
proprietary interest in the Company in a manner designed to encourage such
persons to remain with the Company. Eligible officers and other key employees of
the Company earn (i.e., become vested in) shares of common stock covered by the
award at a rate of 25% per year starting one year from the date of the grant.
Nonemployee directors vest at a rate of 33% per year. Under the RRP, 21,160
shares had been awarded to directors, officers and other key employees as
49
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of June 30, 1996. Expense of approximately $47,000, $87,000 and $54,000 was
recorded for the RRP for the years ended June 30, 1996, 1995 and 1994,
respectively.
50
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Employee stock ownership plan (ESOP): In conjunction with the stock conversion,
- - ------------------------------------
the Company established an ESOP for eligible employees. Employees with at least
1,000 hours of annual service with the Company and who have attained age 21 are
eligible to participate. The ESOP borrowed $423,200 from the Company to purchase
up to 8% of the common stock issued in the conversion or 42,320 shares.
Collateral for the loan is the common stock purchased by the ESOP. The loan will
be repaid principally from the Bank's discretionary contributions to the ESOP
over a period of seven years. The interest rate for the loan is 6%. Shares
purchased by the ESOP will be held in a suspense account for allocation among
participants as the loan is repaid. Expense of $124,672, $98,025 and $30,299 was
recorded relative to the ESOP for the years ended June 30, 1996, 1995 and 1994,
respectively.
Contributions to the ESOP and shares released from the suspense account in an
amount proportional to the repayment of the ESOP loan will be allocated among
ESOP participants on the basis of compensation in the year of allocation.
Benefits generally become 100% vested after five years of credited service.
Credit for vesting purposes is given for years of service prior to the effective
date of the ESOP (July 1, 1993). Prior to the completion of five years of
credited service, a participant who terminates employment for reasons other than
death, normal retirement, or disability will not receive any benefit under the
ESOP. Forfeitures will be reallocated among remaining participating employees,
in the same proportion as contributions. Benefits may be payable in the form of
stock or cash upon termination of employment. The Company's contributions to the
ESOP are not fixed, as benefits payable under the ESOP cannot be estimated.
As shares are released from collateral, the Company reports compensation expense
equal to the current market price of the shares, and the shares become
outstanding for earnings per share calculations. Dividends on the allocated ESOP
shares are recorded as a reduction of retained earnings; dividends on
unallocated ESOP shares are recorded as a reduction of debt and accrued
interest. ESOP shares as of June 30 were as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------------------
<S> <C> <C>
Allocated shares 10,559.00 3,798.00
Shares released for allocation 6,523.00 6,761.00
Unreleased shares 25,238.00 31,761.00
---------------- --------------
Total ESOP shares 42,320.00 42,320.00
---------------- --------------
</TABLE>
51
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair value of unreleased shares at June 30 $ 511,000.00 $ 492,000.00
52
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock option plan: The Board of Directors of the Company has adopted the GFS
- - -----------------
Bancorp, Inc. 1993 Stock Option and Incentive Plan (the "Plan"). The number of
options authorized under the plan is 10% of the common stock issued in the
conversion (52,900 shares). Officers, directors and employees of the Company and
its subsidiaries are eligible to participate in the Plan. The option exercise
price must be at least 100% of the market value (as defined in the Plan) of the
common stock on the date of the grant, and the option term cannot exceed 10
years. The Company's Compensation Committee has granted options for 52,900
shares to certain officers, directors and employees, primarily at an exercise
price of $10 per share. The stock options are exercisable through January 5,
2004. Options for 952 shares were exercised during the year ended June 30, 1996
and no options were exercised during 1995 or 1994, leaving 51,948 options
outstanding.
Salary continuation plan: The Company has a nonqualified deferred
- - ------------------------
compensation plan for the benefit of its Chairman of the Board of Directors. The
nonqualified plan provides for annual retirement benefits equal to $30,000 per
year for a period of seven years, provided he meets certain employment and
length of service requirements. The Company recognized plan expenses of $22,256
and $30,240 for the years ending June 30, 1996 and 1995, respectively.
Employment agreements: The Company has entered into certain employment
- - ---------------------
agreements with key officers. Under the terms of the agreements, the employees
are entitled to additional compensation in the event of a change in control of
the Company and the employees are involuntarily terminated within twelve months
of the change in control. A change in control is generally triggered by the
acquisition or control of 10% of more of the common stock.
10. 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 possible 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 classification 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, Tier I capital (as defined in the regulations) to risk-weighted
assets (as defined), of Tier I capital (as defined) to average assets (as
defined) and tangible capital to adjusted assets. Management believes, as of
June 30, 1996, the Bank meets all capital adequacy requirements to which it is
subject.
53
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
54
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bank's actual capital amounts and ratios are also presented in the table.
<TABLE>
<CAPTION>
To Be Well
Minimum For Capitalized Under
Captial Adequacy Prompt Corrective
Actual Purposes Action Provisions
---------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------------------
(000's) (000's) (000's)
As of June 30, 1996:
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk
weighted assets) $ 8962.00 19.1 $ 3744.00 8.0 $ 4680.00 10.0
Tier 1 Capital (to risk
weighted assets) 8376.00 17.9 1872.00 4.0 2808.00 6.0
Tier 1 (Core) Capital
(to average assets) 8376.00 10.2 2458.00 3.0 4096.00 5.0
Tangible capital (to
adjusted assets) 8376.00 10.2 1229.00 1.5
As of June 30, 1995:
Total capital (to risk
weighted assets) 7729.00 20.7 2989.00 8.0 3736.00 10.0
Tier 1 Capital (to risk
weighted assets) 7329.00 19.6 2070.00 3.0 2241.00 6.0
Tier 1 (Core) Capital
(to average assets) 7329.00 10.6 2760.00 4.0 3450.00 5.0
</TABLE>
55
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Tangible capital (to
adjusted assets) 7329.00 10.6 1035.00 1.5
</TABLE>
The Bank is subject to certain restrictions on the amount of dividends that may
be paid without prior regulatory approval.
11. Conversion to Stock Savings Bank
On June 30, 1993, the Board of Directors of the Bank adopted a plan of
conversion to convert from a federally chartered mutual savings bank to a
federally chartered stock savings bank. Simultaneously, the Company was
established to purchase all outstanding stock of the Bank. The Company's stock
charter authorized 2,000,000 shares of $.01 par value common stock and 500,000
shares of $.01 par value preferred stock. A subscription of the Company's common
stock was offered initially to the Bank's depositors, then to other members and
directors, officers and employees of the Bank. The conversion was consummated on
January 5, 1994. Proceeds of $4,415,000, which is net of conversion costs of
$451,800 and $423,200 ESOP loan, were received from the sale of 549,732 common
shares.
56
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At the time of the conversion, the Bank established a liquidation account in an
amount equal to its net worth as of the date of the latest consolidated
financial statements contained in the final prospectus used to sell the common
stock at June 30, 1993. The liquidation account will be maintained for the
benefit of depositors with deposits as of the March 31, 1993 eligibility record
date, who continue to maintain their deposits in the Bank after conversion. In
the event of a complete liquidation (and only in such an event), each eligible
depositor will be entitled to receive a liquidation distribution from the
liquidation account in the proportionate amount of the then current adjusted
balance for deposits then held, before any liquidation distribution may be made
with respect to the stockholders. Except for the repurchase of stock and payment
of dividends by the Bank, the existence of the liquidation account will not
restrict the use or application of retained earnings.
12. Parent Company Financial Statements
Presented below are condensed financial statements for the parent company, GFS,
Bancorp, Inc.:
<TABLE>
<CAPTION>
Condensed Balance Sheet
June 30, 1996 and 1995
1996 1995
-------------------------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 277,808.00 $ 401,247.00
Investment in subsidiary 8,328,948.00 7,223,340.00
Securities available for sale, net 916,163.00 1,382,823.00
ESOP note receivable 272,057.00 332,514.00
Other assets 280,050.00 252,000.00
-------------------------------
Total assets $ 10,075,026.00 $ 9,591,924.00
-------------------------------
</TABLE>
57
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C> <C>
LIABILITIES, accrued expenses $ 130,135.00 $ 52,337.00
--------------------------------
STOCKHOLDERS' EQUITY
Common stock 5,501.00 5,497.00
Additional paid-in capital 5,138,066.00 5,075,728.00
Retained earnings 5,856,546.00 5,117,067.00
Less common stock acquired by:
Employee stock ownership plan (259,781.00) (325,011.00)
Retention and recognition plan (32,659.00) (71,802.00)
Treasury stock, at cost (728,800.00) (131,313.00)
Net unrealized losses on investments - subsidiary (47,645.00) (134,762.00)
Net unrealized gains on investments - parent company 13,663.00 4,183.00
--------------------------------
Total stockholders' equity 9,944,891.00 9,539,587.00
--------------------------------
Total liabilities and stockholders' equity $ 10,075,026.00 $ 9,591,924.00
--------------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Condensed Statements of Income
Years Ended June 30, 1996, 1995 and 1994
1996 1995
----------------------------
</TABLE>
58
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C> <C>
Interest and other income $ 105,770.00 $ 187,345.00
Operating expenses 97,391.00 101,739.00
----------------------------
Income before equity in net income
of subsidiary 8,379.00 85,606.00
Equity in net income of subsidiary 846,330.00 573,230.00
----------------------------
Income before income taxes 854,709.00 658,836.00
Provision for income taxes (credits) (40,131.00) 27,950.00
----------------------------
Net income $ 894,840.00 $ 630,886.00
----------------------------
</TABLE>
59
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Condensed Statement of Cash Flows
Years Ended June 30, 1996, 1995 and 1994
1996 1995 1994
------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 894,840.00 $ 630,886.00 $ 283,648.00
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in net income of subsidiary (846,330.00) (573,230.00) (273,595.00)
(Gain) loss on sale of securities available for sale 11,956.00 (36,250.00)
(Increase) decrease in other assets 21,950.00 10,000.00 (12,000.00)
Increase in other liabilities 59,930.00 7,782.00 4,026.00
Other (5,897.00)
------------------------------------------
Net cash provided by operating activities 142,346.00 33,291.00 2,079.00
------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available for sale (181,500.00) (541,299.00) (1,899,034.00)
Proceeds from maturity and sales of securities
available for sale 652,684.00 1,103,750.00
</TABLE>
60
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Investment in Bank (2,422,153.00)
Increase in other assets (50,000.00) (250,000.00)
Payments received on ESOP debt 60,457.00 60,457.00 30,229.00
------------------------------------------
Net cash provided by (used in)
investing activities 481,641.00 372,908.00 (4,290,958.00)
------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock issue, net of conversion
costs and stock acquired by ESOP 4,415,240.00
Net proceeds from reissuance of treasury stock 9,520.00
Purchase of treasury stock (612,453.00) (131,313.00)
Dividends paid (144,493.00)
------------------------------------------
Net cash provided by (used in)
financing activities (747,426.00) (131,313.00) 4,415,240.00
------------------------------------------
Net increase (decrease) in cash and
cash equivalents (123,439.00) 274,886.00 126,361.00
CASH AND CASH EQUIVALENTS
</TABLE>
61
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C> <C>
Beginning 401,247.00 126,361.00
---------------------------------------------
Ending $ 277,808.00 $ 401,247.00 $ 126,361.00
---------------------------------------------
</TABLE>
62
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Fair Values of Financial Instruments
The carrying amount and fair value of the Company's financial instruments as of
June 30, 1996 are as follows:
<TABLE>
<CAPTION>
Carrying
Amount Fair Value
------------------------------------
(nearest 000) (nearest 000)
Financial assets:
<S> <C> <C>
Cash and amounts due from depository institutions $ 2,271.00 $ 2,271.00
Securities 6,690.00 6,635.00
Stock in FHLB 1,159.00 1,159.00
Loans receivable, net 71,773.00 71,824.00
Accrued interest receivable 439.00 439.00
Financial liabilities:
Deposits 53,122.00 53,330.00
Advances from FHLB 19,318.00 19,318.00
Off balance sheet financial instruments:
Commitments to extend credit 971.00 971.00
</TABLE>
14. Financial Instruments With Off-Statement of Financial Condition Risk
The Company is a party to financial instruments with off-statement of financial
condition risk in the normal course of business to meet the financing needs of
its customers. These financial instruments consist primarily of commitments to
extend credit. Those instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the statement of
financial condition. The contract or notional amounts of those instruments
reflect the extent of involvement the Company has in particular classes of
financial instruments.
63
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company uses the same credit policies in making commitments and conditional
obligations as they do for on-statement of financial condition instruments. The
Company requires collateral or other security to support financial instruments
with credit risk.
At June 30, 1996 the Company had outstanding loan commitments totaling $620,000.
The outstanding loan commitments consisted of $236,000 of fixed rate loan
commitments and $384,000 of adjustable rate loan commitments. The Company had
$351,000 commitments for unused lines of credit.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitments are expected to expire
without being drawn upon, the total commitment amounts above do not necessarily
represent future cash requirements. The Company evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company, upon extension of credit, is based on management's
credit evaluation of the counterparty. Collateral held varies but normally
includes real estate and personal property.
64
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. Pending Accounting Pronouncements and Regulations
Accounting Pronouncements The Financial Accounting Standards Board has approved,
- - -------------------------
effective for years beginning after December 15, 1995, Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, Statement No. 122, Accounting for Mortgage Servicing Rights and
Statement No. 123, Accounting for Stock-Based Compensation and for transactions
after December 31, 1996, Statement No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. FASB
Statements No. 121, 122, 123 and 125 are not expected to have a material effect
on the Company's financial statements when adopted.
Recapitalization of SAIF The proposed Balanced Budget Act of 1995, which was
- - ------------------------
vetoed by the President, included provisions that focused on a resolution of the
financial problems of the SAIF Fund, of which the Bank is a member. Under the
provisions of the Budget Act, all SAIF member institutions would pay a special
assessment to recapitalize the SAIF. The amount of the assessment has been
estimated to be approximately 85 basis points of the SAIF-assessable deposits
and would have been payable in 1996. If this 85 basis point assessment were
assessed against the Bank's deposits at June 30, 1996, the assessment would be
approximately $284,000, after-tax. The above described provisions of the Budget
Act were not the basis for the President's veto and Congressional leaders have
indicated that these provisions will be the basis for future legislation to
recapitalize the SAIF. If enacted by Congress, this legislation would have the
effect of reducing the Bank's capital by the after-tax cost of the special
assessment.
65
<PAGE>
STOCKHOLDER INFORMATION
Executive Offices
1025 Main Street
Grinnell, IA 50112
Annual Meeting
The Annual Meeting of Stockholders will be held at 9:30 a.m., Grinnell,
Iowa time on October 23, 1996 at the main office of Grinnell Federal Savings
Bank, 1025 Main Street, Grinnell, Iowa.
Annual Report on Form 10-KSB
A copy of GFS Bancorp, Inc.'s Annual Report on Form 10-KSB as filed
with the Securities and Exchange Commission may be obtained without charge upon
written request to Steven L. Opsal, President and Chief Executive Officer, or by
calling (515) 236-3121.
<TABLE>
<CAPTION>
Registrar/Transfer Agent Market Makers Special Counsel
<S> <C> <C>
First Bankers Trust Company, N.A. Everen Securities, Housley, Kantarian &
1201 Broadway Suite 700 Inc. Bronstein,P.C.
Quincy, IL 62301 1220 19th Street, NW
Washington DC 20036
Howe, Barnes Investments Herzog, Heine, Robert W. Baird & Co.
Geduld, Inc.
</TABLE>
Stock Listing
GFS Bancorp, Inc. common stock is traded over the counter and is listed on
the NASDAQ "Small Cap" Market under the symbol "GFSB." At September 3, 1996,
there were 502,600 shares of GFS Bancorp, Inc. common stock issued and
outstanding and there were approximately 255 holders of record and approximately
537 beneficial holders. The price range of the common stock for each quarter of
fiscal 1995 and 1996 was as follows:
<TABLE>
<CAPTION>
DIVIDENDS
FISCAL 1995 HIGH LOW DECLARED
- - ----------- ------ ----- -----------
<S> <C> <C> <C>
First Quarter ............ $13.75 $12.00 $---
Second Quarter ............ $16.25 $12.625 $---
Third Quarter ............. $15.25 $14.50 $---
Fourth Quarter ............ $15.75 $14.75 $0.075
FISCAL 1996
- - -----------
First Quarter ............ $19.25 $15.25 $0.075
Second Quarter ............ $20.00 $18.50 $0.075
Third Quarter ............. $20.75 $19.25 $0.075
</TABLE>
66
<PAGE>
<TABLE>
<S> <C> <C> <C>
Fourth Quarter ............ $20.75 $20.00 $0.10
</TABLE>
The stock price information set forth in the table above was provided by the
NASD, Inc. High, low and closing prices and daily trading volume are reported in
most major newspapers. The above quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission, and may not represent actual
transactions.
GFS BANCORP, INC.
Directors Executive Officers
LeRoy E. Meredith LeRoy E. Meredith
Chairman of the Board Chairman of the Board
GFS Bancorp, Inc. and
Grinnell Federal Steven L. Opsal
Savings Bank President and Chief Executive
Officer
Theodore Mokricky
Vice Chairman of the Board Katherine A. Rose
Executive Director of Continuing Senior Vice President and Chief
Care Facility Financial Officer
David S. Clay William T. Nassif
Vice President and Treasurer of Senior Vice President and Chief
Grinnell College Operating Officer
Albert C. Eisenman
Retired Former President of Grinnell
Federal Savings Bank
Donald H. Howig
President of Athletic Equipment
Company
Scott A. Jensen
Optometrist and part-owner of Jensen
Optometrists
Thomas M. Groth
District Sales Representative
Steven L. Opsal
President and Chief Executive Officer
of GFS Bancorp, Inc. and Grinnell
Federal Savings Bank
Katherine A. Rose
Senior Vice President and Chief
Financial Officer of GFS Bancorp, Inc.
and Grinnell Federal Savings Bank
GRINNELL FEDERAL SAVINGS BANK
Executive Officers
LeRoy E. Meredith
Chairman of the Board
67
<PAGE>
Steven L. Opsal
President and Chief Executive Officer
Katherine A. Rose
Senior Vice President, Treasurer and
Chief Financial Officer
William T. Nassif
Senior Vice President and Chief Operating Officer
- - --------------------------------------------------------------------------------
TABLE OF CONTENTS
- - --------------------------------------------------------------------------------
<TABLE>
<S> <C>
President's Letter to Shareholders ........................ 1
Selected Consolidated Financial Information................ 2
Management's Discussion and Analysis of Financial
Condition and Results of Operation...................... 4
Consolidated Financial Statements.......................... 19
Stockholder Information.................................... 66
Corporate Information...................................... 67
</TABLE>
68
<PAGE>
Exhibit 21
Subsidiaries of Registrant
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
------------------------------
<TABLE>
<CAPTION>
Percent State of
of Incorporation
Parent Subsidiary Ownership or Organization
- - --------------------------- ---------------------- ---------- ---------------
<S> <C> <C> <C>
GFS Bancorp, Inc. Grinnell Federal 100% Federal
Savings Bank
Grinnell Federal Savings Grinnell Service 100% Iowa
Bank Corporation, Inc.
</TABLE>
<PAGE>
Exhibit 23
Consent of McGladrey & Pullen, LLP
<PAGE>
[LETTERHEAD OF MCGLADREY & PULLEN, LLP APPEARS HERE]
To the Board of Directors
GFS Bancorp, Inc.
Grinnell, Iowa 50112
We consent to the incorporation by reference in the GFS Bancorp, Inc.
Registration Statement on Form S-8 (No. 33-84814) of GFS Bancorp, Inc.,
pertaining to the GFS Bancorp, Inc. 1993 Stock Option and Incentive Plan,
of our report dated July 24, 1996, which appears on page 19 of the annual
report on Form 10-KSB of GFS Bancorp, Inc. and subsidiaries for the year
ended June 30, 1996.
/s/ McGladrey & Pullen, LLP
McGLADREY & PULLEN, LLP
Des Moines, Iowa
September 25, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 222,461
<INT-BEARING-DEPOSITS> 2,048,671
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,672,763
<INVESTMENTS-CARRYING> 5,017,442
<INVESTMENTS-MARKET> 0
<LOANS> 71,772,896
<ALLOWANCE> 641,205
<TOTAL-ASSETS> 83,304,616
<DEPOSITS> 53,122,383
<SHORT-TERM> 5,356,530
<LIABILITIES-OTHER> 919,345
<LONG-TERM> 13,961,467
0
0
<COMMON> 5,501
<OTHER-SE> 9,939,390
<TOTAL-LIABILITIES-AND-EQUITY> 83,304,616
<INTEREST-LOAN> 5,449,941
<INTEREST-INVEST> 794,699
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 6,244,640
<INTEREST-DEPOSIT> 2,545,116
<INTEREST-EXPENSE> 3,719,879
<INTEREST-INCOME-NET> 2,524,761
<LOAN-LOSSES> 249,000
<SECURITIES-GAINS> (47,750)
<EXPENSE-OTHER> 1,335,829
<INCOME-PRETAX> 1,078,357
<INCOME-PRE-EXTRAORDINARY> 1,078,357
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 894,840
<EPS-PRIMARY> 1.72
<EPS-DILUTED> 1.72
<YIELD-ACTUAL> 8.16
<LOANS-NON> 735,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,500,000
<ALLOWANCE-OPEN> 399,705
<CHARGE-OFFS> 7,500
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 641,205
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 160,000
</TABLE>
