<PAGE>
<PAGE>
SCHEDULE 14A INFORMATION
------------------------
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [] Confidential, for Use of the
[x] Definitive Proxy Statement Commission Only (as per-
[ ] Definitive Additional Materials mitted by Rule 14a-6(e)(2))
[ ] Soliciting Material Pursuant to
Rule 14a-11(c) or Rule 14a-12
GFS BANCORP, INC.
-----------------
(Name of Registrant as Specified in its Charter)
------------------------------------------
(Name of Person(s) Filing Proxy Statement,
if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules
14a-6(i)(1) and 0-11.
1. Title of each class of securities to which transaction
applies:
---------------------------------------
2. Aggregate number of securities to which transaction
applies:
---------------------------------------
3. Per unit price or other underlying value of
transaction computed pursuant to Exchange Act Rule
0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
---------------------------------------
4. Proposed maximum aggregate value of transaction:
---------------------------------------
5. Total fee paid:
---------------------------------------
[X] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for
which the offsetting fee was paid previously. Identify
the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
1. Amount Previously Paid:
______________________
2. Form, Schedule or Registration Statement No.:
______________________
3 Filing Party:
______________________
4. Date Filed:
______________________<PAGE>
<PAGE>
February 4, 1998
Dear Stockholder:
You are cordially invited to attend a special meeting of
stockholders (the "Special Meeting") of GFS Bancorp, Inc. (the
"Company") to be held at the main office of the Company at 1025
Main Street, Grinnell, Iowa, on Thursday, March 12, 1998 at 9:30
a.m. Notice of the Special Meeting, Proxy Statement and Proxy
Card are enclosed.
As described in the enclosed Proxy Statement, at the Special
Meeting, the stockholders of the Company will be asked to
approve an Agreement and Plan of Reorganization, dated as of
October 16, 1997 (the "Agreement") which provides for the
acquisition of the Company by First Federal Savings Bank of
Siouxland ("First Federal"), for a per share cash purchase price
of $17.65 as well as a proposal to adjourn the Special Meeting
in the event an insufficient number of shares is present in
person or by proxy at the Special Meeting to approve the
Agreement. Further information concerning the proposed
acquisition and the other proposal is contained in the
accompanying Notice of Special Meeting and Proxy Statement.
The Board of Directors has unanimously approved the proposed
acquisition and recommends that you vote FOR Proposal I in the
enclosed Proxy Statement. AN ABSTENTION OR FAILURE TO VOTE IS
THE EQUIVALENT OF VOTING AGAINST THE PROPOSAL. The Board of
Directors also recommends that you vote FOR the proposal to
adjourn the Special Meeting under the circumstances described
herein.
Your vote is important, regardless of the number of shares
you own. ON BEHALF OF THE BOARD OF DIRECTORS, WE URGE YOU TO
SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD AS SOON AS
POSSIBLE, EVEN IF YOU CURRENTLY PLAN TO ATTEND THE SPECIAL
MEETING. This will NOT prevent you from voting in person but
will assure that your vote is counted if you are unable to
attend the Special Meeting.
Sincerely,
/s/ Steven L. Opsal
Steven L. Opsal
President and Chief
Executive Officer
** PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME **<PAGE>
<PAGE>
GFS BANCORP, INC.
1025 Main Street
Grinnell, Iowa 50112
(515) 236-3121
________________________________________________________________
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH 12, 1998
________________________________________________________________
NOTICE IS HEREBY GIVEN that a special meeting of stock
holders (including any adjournment or postponement, the "Special
Meeting") of GFS Bancorp, Inc. (the "Company") will be held at
the main office of the Company at 1025 Main Street, Grinnell,
Iowa, on Thursday, March 12, 1998 at 9:30 a.m., local time for
the purpose of considering and acting upon the proposals
described below.
A PROXY CARD AND A PROXY STATEMENT FOR THE SPECIAL MEETING
ARE ENCLOSED.
The Special Meeting is for the purpose of considering and
voting upon (i) an Agreement and Plan of Reorganization (the
"Agreement") which provides for the acquisition of the Company
by First Federal Savings Bank of Siouxland for a per share cash
purchase price of $17.65, (ii) the adjournment of the Special
Meeting to a later date in the event an insufficient number of
shares is present in person or by proxy at the Special Meeting
to approve the Agreement, and (iii) any other business which may
properly come before the Special Meeting or any adjournment
thereof.
Any action may be taken on the foregoing proposals at the
Special Meeting or any adjournment thereof. Stockholders of
record at the close of business on January 28, 1998, are the
stockholders entitled to notice of and to vote at the Special
Meeting and any adjournment thereof.
You are requested to fill in and sign the enclosed form of
proxy which is solicited by the Board of Directors and to mail
it promptly in the enclosed envelope. The proxy will not be
used if you attend and vote at the Special Meeting in person.
BY ORDER OF THE BOARD OF DIRECTORS
Leroy E. Meredith
Chairman of the Board
Grinnell, Iowa
February 4, 1998
IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE YOUR
CORPORATION THE EXPENSE OF FURTHER REQUESTS FOR PROXIES IN ORDER
TO INSURE A QUORUM. AN ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR
CONVENIENCE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED
STATES.
**PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME.**<PAGE>
<PAGE>
GFS BANCORP, INC.
1025 MAIN STREET
GRINNELL, IOWA 50112
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH 12, 1998
PROXY STATEMENT
________________________
INTRODUCTION
This Proxy Statement is furnished in connection with the
solicitation of proxies by the Board of Directors of GFS
Bancorp, Inc. (the "Company") to be used at a special meeting of
stockholders (the "Special Meeting") to be held on Thursday,
March 12, 1998 at 9:30 a.m., and at any adjournment or post-
ponement thereof. The Special Meeting will be held at the main
office of the Company at 1025 Main Street, Grinnell, Iowa. The
accompanying Notice of Special Meeting and this Proxy Statement,
together with the enclosed proxy card, are being mailed to
stockholders of the Company on or about February 4, 1998.
At the Special Meeting, stockholders will be asked to
consider and vote upon a proposal to approve the Agreement and
Plan of Reorganization (the "Agreement") providing for the
acquisition of the Company by First Federal Bank of Siouxland
("First Federal") by means of a merger of a to-be-formed
Delaware Corporation (wholly owned by First Federal) with and
into the Company (the "Company Merger). Immediately following
the Company Merger, the Company will liquidate with and into
First Federal with the result that First Federal will acquire
all of the assets and liabilities of the Company and the Company
will cease to exist. Subsequent to the liquidation of the
Company, Grinnell Federal Savings Bank (the "Bank") will be
liquidated into First Federal with the result that First Federal
will acquire all of the assets and liabilities of the Bank and
the Bank will cease to exist. The foregoing transactions are
referred to collectively herein as the "Merger." At the
effective time of the Merger (the "Effective Time"), each share
of the Company's common stock, par value $.01 per share (the
"Common Stock") outstanding immediately prior thereto, except
for shares held by dissenting stockholders, would be canceled
and converted into the right to receive a cash payment from
First Federal equal to $17.65, subject to possible adjustment as
provided in the Agreement. See "PROPOSAL I -- APPROVAL OF THE
AGREEMENT -- Description of the Merger." Also, at the Special
Meeting, stockholders may be asked to consider a second proposal
to adjourn the Special Meeting in the event an insufficient
number of shares is present in person or by proxy at the Special
Meeting to approve the agreement. See "PROPOSAL II --ADJOURNMENT
OF THE SPECIAL MEETING."
For a more complete description of the Agreement and the
terms of the Merger, see "PROPOSAL I -- APPROVAL OF THE
AGREEMENT."
VOTING RIGHTS AND PROXY INFORMATION
Stockholders of record as of the close of business on
January 28, 1998 are entitled to one vote for each share then
held. As of January 28, 1998 the Company had 996,242 shares of
Common Stock issued and outstanding.
Shares of the Common Stock represented by properly executed
proxies will be voted in accordance with the instructions
indicated on the proxies or, if no instructions are indicated,
will be voted FOR the proposal to approve the Agreement and the
proposal to adjourn the Special Meeting under the circumstances
described herein. Properly executed proxies will be voted in
accordance with the determination of a majority of the Board of
Directors as to any other matter which may properly come before
the Special Meeting or any adjournment or postponement thereof.
Stockholders who execute proxies retain the right to revoke them
at any time. Proxies may be revoked by written notice to the
Secretary of the Company or by the filing of a later dated proxy
prior to a vote being taken on a particular proposal at the
Special Meeting. A proxy will not be voted if a stockholder
attends the Special Meeting and votes in person, after notifying
the Secretary at the Special Meeting of his intention to do so.<PAGE>
<PAGE>
SOLICITATION OF PROXIES
The cost of solicitation of proxies will be borne by the
Company. In addition to solicitations by mail, directors,
officers and regular employees of the Company may solicit
proxies personally or by telegraph or telephone without
additional compensation. The Company will reimburse banks,
brokerage firms and other custodians, nominees and fiduciaries
for reasonable expenses incurred by them in sending proxy
soliciting material to the beneficial owners of shares of Common
Stock. In addition, the Company has engaged the firm of D.F.
King & Co., Inc. to act as a proxy solicitor in connection with
the Special Meeting. The agreement provides that the Company
will pay the solicitor $3,500 plus reasonable out-of-pocket
expenses for soliciting proxies on behalf of the Board of
Directors.
(ii)
<PAGE>
<PAGE>
TABLE OF CONTENTS
Page
----
SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . (iv)
SELECTED CONSOLIDATED FINANCIAL DATA . . . . . . . . . . .(viii)
PROPOSAL I -- APPROVAL OF THE AGREEMENT. . . . . . . . . . . 1
General. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Parties to the Agreement. . . . . . . . . . . . . . 1
Background of the Merger. . . . . . . . . . . . . . . . 2
Recommendation of the Board of Directors;
Reasons for the Merger . . . . . . . . . . . . . . . 3
Opinion of Financial Advisor. . . . . . . . . . . . . . 4
Vote Required . . . . . . . . . . . . . . . . . . . . . 7
Dissenters' Rights. . . . . . . . . . . . . . . . . . . 7
Description of the Merger . . . . . . . . . . . . . . . 8
Treatment of Outstanding Stock Options. . . . . . . . . 8
Exchange of Stock Certificates. . . . . . . . . . . . . 9
Effective Time. . . . . . . . . . . . . . . . . . . . . 9
Conditions to the Merger. . . . . . . . . . . . . . . . 9
Conduct of Business Pending the Merger. . . . . . . . 11
No Solicitation . . . . . . . . . . . . . . . . . . . 14
Representations and Warranties of the
Company and the Bank . . . . . . . . . . . . . . . 14
Representations and Warranties and Covenants
of First Federal . . . . . . . . . . . . . . . . . 14
Termination of the Agreement. . . . . . . . . . . . . 15
Additional Agreements of the Parties. . . . . . . . . 17
Waiver and Amendment. . . . . . . . . . . . . . . . . 18
Expenses. . . . . . . . . . . . . . . . . . . . . . . 18
Termination Fee . . . . . . . . . . . . . . . . . . . 19
Effect on Employees and Certain
Employee Benefit Plans . . . . . . . . . . . . . . 19
Interests of Certain Persons in the Merger. . . . . . 20
Certain Material Federal Income Tax Consequences . . 22
Accounting Treatment. . . . . . . . . . . . . . . . . 23
Regulatory Approvals. . . . . . . . . . . . . . . . . 23
PROPOSAL II -- ADJOURNMENT OF THE SPECIAL MEETING . . . . 23
STOCK OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL
OWNERS . . . . . . . . . . . . . . . . . . . . . . . . . 24
MARKET FOR THE COMMON STOCK . . . . . . . . . . . . . . . 25
INDEPENDENT ACCOUNTANTS. . . . . . . . . . . . . . . . . . 25
STOCKHOLDER PROPOSALS . . . . . . . . . . . . . . . . . . 25
MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . 25
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE. . . . . . 25
APPENDICES
Appendix A - Agreement and Plan of Reorganization . . . A-1
Appendix B - Opinion of Professional Bank Services . . . B-1
Appendix C - Section 262 of the Delaware General
Corporation Law . . . . . . . . . . . . . . . . . . . C-1
Appendix D - GFS Bancorp, Inc.
1997 Annual Report . . . . . . . . .(Furnished separately)
Appendix E - Form 10-QSB for Quarter Ended
September 30, 1997 . . . . . . . . .(Furnished separately)
(iii)<PAGE>
<PAGE>
SUMMARY
The following is a brief summary of certain information
regarding the Merger contained in this Proxy Statement, the
Appendices hereto and the documents incorporated herein by
reference. This summary does not contain a complete statement
of all material information relating to the proposed acquisition
of GFS Bancorp, Inc. ("GFS" or the "Company") and is subject to
and qualified in its entirety by reference to the more detailed
information contained elsewhere in this Proxy Statement,
including the Appendices and documents incorporated in this
Proxy Statement by reference. Each stockholder is urged to give
careful consideration to all of the information contained herein
before casting his or her vote.
INFORMATION RELATING TO THE SPECIAL MEETING
The Special Meeting of Stockholders of the Company (the
"Special Meeting") will be held on Thursday, March 12, 1998 at
9:30 a.m., local time, at the main office of the Company, 1025
Main Street, Grinnell, Iowa. At the Special Meeting,
stockholders will be asked to consider and vote upon proposals
to: (i) approve an Agreement and Plan of Reorganization (the
"Agreement"), dated October 16, 1997 by and between GFS and
Grinnell Federal Savings Bank (the "Bank") on the one hand and
First Federal Savings Bank of Siouxland ("First Federal") on the
other hand, and (ii) the adjournment of the Special Meeting to a
later date in the event an insufficient number of shares is
present in person or by proxy at the Special Meeting to approve
the Agreement. A copy of the Agreement is attached to this
Proxy Statement as Appendix A. Only stockholders of record as
of the close of business on January 28, 1998 (the "Record Date")
are entitled to notice of and to vote at the Special Meeting.
See "VOTING RIGHTS AND PROXY INFORMATION."
APPROVAL OF THE AGREEMENT WILL REQUIRE THE AFFIRMATIVE VOTE
OF AT LEAST A MAJORITY OF ALL VOTES ENTITLED TO BE CAST BY THE
HOLDERS OF THE COMPANY'S COMMON STOCK, $0.01 PAR VALUE PER SHARE
(THE "COMMON STOCK").
THE MERGER
The Agreement provides for the acquisition of the Company by
First Federal by means of merger of a to-be-formed Delaware
Corporation (wholly owned by First Federal) with and into the
Company (the "Company Merger"). Immediately following the
Company Merger, the Company will liquidate with and into First
Federal with the result that First Federal will acquire all of
the assets and liabilities of the Company and the Company will
cease to exist. Subsequent to the liquidation of the Company,
the Bank will be liquidated into First Federal with the result
that First Federal will acquire all of the assets and
liabilities of the Bank and the Bank will cease to exist. The
foregoing transactions are referred to collectively herein as
the "Merger." As a result of the Merger, stockholders of the
Company will no longer have an equity interest in the Company,
and the separate existence of the Company and the Bank shall
cease with First Federal continuing as the surviving
institution. The Agreement has been approved and adopted by the
Board of Directors of the Company and the Bank and by First
Federal. At the effective time of the Company Merger (the
"Effective Time"), each share of Common Stock outstanding
immediately prior thereto, other than dissenting shares, will be
canceled and converted into the right to receive a cash payment
from First Federal equal to $17.65, subject to possible
adjustment as provided in the Agreement (the "Merger
Consideration"). See "PROPOSAL I -- APPROVAL OF THE AGREEMENT
- -- Description of the Merger." <PAGE>
The Merger Consideration was
determined in negotiations
between the Company and First Federal with the assistance of the
Company's financial advisor. For a general discussion of these
negotiations, the factors considered by the Board of Directors
of the Company in evaluating the Merger and the basis for the
opinion of the Company's financial advisor that the Merger
Consideration is fair to Company stockholders from a financial
point of view, see "PROPOSAL I -- APPROVAL OF THE AGREEMENT --
Background of the Merger," " -- Recommendation of the Board of
Directors; Reasons for the Merger" and " -- Opinion of Financial
Advisor."
(iv)<PAGE>
<PAGE>
THE PARTIES TO THE AGREEMENT
GFS Bancorp, Inc. The Company was incorporated under the
laws of the State of Delaware in September 1993 to become a
savings and loan holding company for the Bank, which is its sole
subsidiary. The Company acquired all of the capital stock of
the Bank issued in connection with the Bank's conversion from
mutual to stock form on January 5, 1994. The Company's
principal business is the business of the Bank and its
subsidiary. The Company is classified as a unitary savings and
loan holding company subject to regulation by the Office of
Thrift Supervision ("OTS").
Grinnell Federal Savings Bank. The Bank is a federally
chartered stock savings bank which was organized in 1935 and
operates through one office in Grinnell, Iowa. The Bank is
primarily engaged in the business of attracting deposits from
the general public and originating permanent loans secured by
one-to four-family residential properties in its primary market
area of Jasper, Marshall and Poweshiek Counties, Iowa. To a
lesser extent, the Bank originates multi-family, construction,
consumer and commercial business loans. The Bank also purchases
whole loans and participation interests in loans in the Des
Moines, Iowa and the Madison and Milwaukee, Wisconsin
metropolitan areas. The Bank also invests in U.S. Government
and agency securities and other investment securities. See " --
Investment Activities."
First Federal Savings Bank of Siouxland. First Federal is a
federally chartered stock savings bank headquartered in Sioux
City, Iowa. First Federal is a community oriented financial
institution offering traditional financial services to its local
community. Its primary lending area includes the Sioux City
metropolitan area and adjacent counties which include parts of
Nebraska and South Dakota. First Federal's primary lending
activity involves the origination of fixed rate and adjustable
rate mortgage loans secured by single family residential real
estate. To a lesser extent, First Federal makes second mortgage
loans secured by the borrower's principal residence and other
types of consumer loans such as auto loans, home improvement
loans and commercial loans. First Federal is organized as a
subsidiary of First Federal Bankshares, M.H.C., a federal mutual
holding company. At September 30, 1997, First Federal had total
assets of $456.8 million, total deposits of $324.7 million and
stockholders' equity of $39.9 million.
The executive offices of First Federal are located at 329
Pierce Street, Sioux City, Iowa 51102 and its main telephone
number is (712) 272-0200.
RECOMMENDATION OF THE BOARD OF DIRECTORS; VOTE REQUIRED
The Board of Directors of the Company has unanimously
approved the Agreement and determined that the Merger is in the
best interests of the Company and its stockholders. THE BOARD
OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR
APPROVAL OF THE AGREEMENT. See "PROPOSAL I -- APPROVAL OF THE
AGREEMENT -- Recommendation of the Board of Directors; Reasons
for the Merger." Approval of the Agreement requires the
affirmative vote of at least a majority of the shares of Common
Stock outstanding. As of the Record Date, directors and
executive officers of the Company and their affiliates were the
beneficial owners of 147,573 shares, or 14.8%, excluding
options, of the Common Stock outstanding at that date. As of
the date hereof, the Company believes that directors and
executive officers and their affiliates will vote all their
shares FOR approval of the Agreement. See "PROPOSAL I --
APPROVAL OF THE AGREEMENT -- Vote Required."<PAGE>
CONDITIONS TO THE MERGER
The Agreement sets forth a number of conditions which must
be satisfied before the Merger may be consummated, including the
approval of the Agreement by the requisite vote of the
stockholders of the Company and the receipt of all governmental
approvals required by the Agreement. An application for
approval of the Merger has been submitted to the OTS. No
assurance can be given that such application will be approved or
that it will not be approved on terms or conditions that may
require an amendment to the Agreement. No amendment to the
Agreement may be made after the Company's stockholders have
approved the Agreement unless, in the opinion of the Company's
(v)<PAGE>
<PAGE>
Board of Directors, the amendment will not have a material
adverse effect on the benefits intended under the Agreement for
the Company's shareholders and will not require resolicitation
of proxies from such shareholders.
If stockholder approval of the Agreement is not obtained,
none of the transactions contemplated thereby, including the
Merger, will be consummated. While no definitive plans have
been formulated as to what course of action would be pursued in
this event, the Board of Directors presently believes that it
would continue the operation of the Company as an independent
entity.
The Merger is also subject to a number of other conditions
set forth in the Agreement. See "PROPOSAL I -- APPROVAL OF THE
AGREEMENT -- Conditions to the Merger."
EXCHANGE OF STOCK CERTIFICATES
As soon as practicable after the Effective Time, First
Federal will appoint an Exchange Agent (the "Exchange Agent")
who will send a notice and a form of letter of transmittal to
each holder of certificate(s) which immediately prior to the
Effective Time represented shares of Common Stock, advising the
holders of the terms of the exchange and the procedure for
surrendering such certificate(s) in exchange for the Merger
Consideration. Upon receipt of the certificate(s) and properly
completed transmittal forms or letters, the Exchange Agent will
make the appropriate cash payment. See "PROPOSAL I -- APPROVAL
OF THE AGREEMENT -- Exchange of Stock Certificates."
PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME.
---
OPINION OF FINANCIAL ADVISOR
The Board of Directors retained Professional Bank Services
("PBS") to render financial advisory services to the Company and
requested that PBS render its opinion with respect to the
fairness of the consideration, from a financial perspective, to
be paid by First Federal to the Company's stockholders in the
Merger. PBS rendered its opinion to the Board as of October 16,
1997, that, from a financial perspective, the consideration to
be offered in the Merger was fair to the stockholders of the
Company. This opinion has been updated and confirmed as of the
date of this Proxy Statement. (Such opinion, as updated, is
hereinafter referred to as the "Opinion"). The Opinion sets
forth a description of the assumptions made and matters
considered by PBS and contains certain limitations and
qualifications. A copy of the Opinion is attached as Appendix B
hereto, and the description set forth herein is qualified in its
entirety by reference to the attached Opinion. For additional
information, see "PROPOSAL I -- APPROVAL OF THE AGREEMENT --
Opinion of Financial Advisor" and the Opinion attached hereto as
Appendix B.
NO SOLICITATION
The Agreement provides that the Company and the Bank will
not initiate, solicit, or encourage, or take any other action to
facilitate any inquiries or the making of any proposal which
constitutes a "Superior Proposal," as defined in the Agreement,
except with respect to negotiations regarding, and the
endorsement of a Superior Proposal, as legally required by the
fiduciary duties of the Company's Board of Directors under
applicable law and as advised by counsel to the Company's Board
of Directors. The Company must promptly notify First Federal of
all the relevant details relating to all inquiries or proposals
received by, or any such negotiations or discussions are sought
to be initiated with, the Company or any subsidiary. These
provisions will have the effect of discouraging competing offers
to acquire or merge with the Company. See "PROPOSAL I --
APPROVAL OF THE AGREEMENT -- No Solicitation."
TERMINATION OF THE AGREEMENT; TERMINATION FEE
The Agreement is subject to termination by the mutual
agreement of the parties thereto or, in case of certain breaches
of the representations, warranties, covenants and agreements
contained in the Agreement, by notice of termination given by
the non-breaching party. In addition, the Agreement may be
terminated if stockholders of the
(vi)<PAGE>
<PAGE>
Corporation fail to approve the Agreement, if all regulatory
approvals required for consummation of the Merger are not
received and, under certain circumstances, if the Merger is not
consummated by June 30, 1998.
Upon termination under certain circumstances, including
those involving the Company's receipt of a Superior Proposal,
the Company entering into an agreement to be acquired by another
entity and the Company's failure to receive shareholder approval
of the Agreement under certain facts, First Federal shall be
entitled to a termination fee of $900,000. See "PROPOSAL I --
APPROVAL OF THE AGREEMENT -- Termination of the Agreement" and "
- -- Termination Fee."
DISSENTERS' RIGHTS
Under Delaware law, dissenters' rights of appraisal are
available to stockholders of the Company who comply with the
statutory procedures for requesting appraisal in connection with
the Merger. AMONG OTHER REQUIREMENTS, STOCKHOLDERS WISHING TO
EXERCISE THEIR RIGHTS OF APPRAISAL MUST MAKE A WRITTEN DEMAND
FOR APPRAISAL BEFORE THE TAKING OF A VOTE ON THE MERGER. A VOTE
AGAINST THE MERGER DOES NOT CONSTITUTE SUCH A WRITTEN DEMAND.
STOCKHOLDERS WHO RETURN AN EXECUTED BLANK PROXY WILL BE DEEMED
TO HAVE VOTED IN FAVOR OF THE MERGER AND THEREBY TO HAVE WAIVED
THEIR DISSENTERS' RIGHTS OF APPRAISAL. See "PROPOSAL I --
APPROVAL OF THE AGREEMENT -- Dissenters' Rights" and the copy of
Section 262 of the Delaware General Business Corporation Law
("DGCL") attached as Appendix C hereto.
CERTAIN MATERIAL FEDERAL INCOME TAX CONSEQUENCES
All stockholders should read carefully the discussion in
"PROPOSAL I -- APPROVAL OF THE AGREEMENT -- Certain Material
Federal Income Tax Consequences" and other sections of this
Proxy Statement. Stockholders are urged to consult their own
tax advisors as to the specific consequences to them of the
Merger under applicable tax laws.
The receipt of cash by a stockholder of the Company in
exchange for shares of the Common Stock pursuant to the Merger
will be a taxable transaction to such stockholder for federal
income tax purposes. In general, a stockholder who receives
cash in the Merger in exchange for such stockholder's shares of
Common Stock will recognize gain or loss equal to the
difference, if any, between (i) the sum of the cash payment of
$17.65 per share, subject to a possible adjust in the Agreement,
received from First Federal in exchange for the shares of the
Common Stock and (ii) the stockholder's tax basis in such shares
of Common Stock. See "PROPOSAL I -- APPROVAL OF THE AGREEMENT
- -- Certain Material Federal Income Tax Consequences."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of the Company's and the Bank's Boards of
Directors and their officers and employees have interests in the
Merger in addition to their interests as stockholders of the
Company generally. These interests include, among others,
provisions in the Agreement relating to liability insurance and
indemnification, the accelerated vesting of benefits under
certain compensation plans and arrangements, a severance payment
for two executive officers, employment agreements for other
executive officers and other employee benefit matters. It is
also currently anticipated that two directors of the Company,
one of whom is Mr. Steven L. Opsal, President of the Company and
the Bank, will serve on First Federal's Board of Directors and
that the remaining members of the Company's Board will become
entitled to serve as advisory directors for at least one year.
See "PROPOSAL I -- APPROVAL OF THE AGREEMENT -- Effect on
Employees and Certain Employee Benefit Plans" and " -- Interests
of Certain Persons in the Merger."
(vii)<PAGE>
<PAGE>
GFS BANCORP, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables present selected consolidated financial
information for the Company at the dates and for the periods
indicated. This information is derived from and should be read
in conjunction with the Company's consolidated financial
statements and the notes thereto contained in the Company's 1997
Annual Report to Stockholders (the "Annual Report") and the
Company's Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1997 (the "Form 10-QSB"), which accompany this
Proxy Statement, and are incorporated herein by reference.
Selected financial information at September 30, 1997 and for the
three months ended September 30, 1997 and 1996 have been derived
from unaudited financial statements. In the opinion of
management of the Company, such information reflects all
adjustments (which consist only of normal recurring adjustments)
necessary for a fair presentation of the selected financial
information and other data. The results of operations for the
three months ended September 30, 1997 are not necessarily
indicative of the results which may be expected for any other
period.
<TABLE>
<CAPTION> At At
September June 30,
Selected Financial Condition Data: 30, 1997 1997 1996
- ---------------------------------- --------- -------- --------
<S> <C> <C> <C>
Total assets . . . . . . . . . . . . $ 94,496 $ 92,063 $ 83,305
Cash and cash equivalents. . . . . . 5,408 4,643 2,271
Mortgage-backed securities, net. . . 3,109 3,146 3,435
Investment securities. . . . . . . . 3,263 3,407 3,255
FHLB stock . . . . . . . . . . . . . 1,159 1,159 1,159
Loans receivable, net. . . . . . . . 80,054 78,475 71,773
Deposits . . . . . . . . . . . . . . 61,746 59,551 53,122
FHLB advances. . . . . . . . . . . . 20,447 20,961 19,318
Stockholders' equity . . . . . . . . 10,879 10,537 9,945
<CAPTION> At
June 30,
Selected Financial Condition Data: 1995 1994 1993
- ---------------------------------- -------- -------- --------
<S> <C> <C> <C>
Total assets . . . . . . . . . . . . $ 70,950 $ 57,179 $ 51,213
Cash and cash equivalents. . . . . . 4,107 968 4,923
Mortgage-backed securities, net. . . 3,950 4,237 5,716
Investment securities. . . . . . . . 6,078 6,690 5,001
FHLB stock . . . . . . . . . . . . . 832 832 832
Loans receivable, net. . . . . . . . 54,999 43,682 33,898
Deposits . . . . . . . . . . . . . . 46,082 42,016 43,249
FHLB advances. . . . . . . . . . . . 14,578 5,870 3,500
Stockholders' equity . . . . . . . . 9,540 8,811 4,042
</TABLE>
(viii)<PAGE>
<PAGE>
<TABLE>
<CAPTION> Three Months Ended Years Ended
September 30, June 30,
------------------ ------------------
1997 1996 1997 1996
------ ------ ------ ------
(Dollars in Thousands Except per Share Data)
Selected Operations Data:
- -------------------------
<S> <C> <C> <C> <C>
Total interest income . . . . . . . . . . $ 1,904 $ 1,759 $ 7,139 $ 6,245
Total interest expense . . . . . . . . . 1,090 1,005 4,092 3,720
-------- -------- -------- --------
Net interest income . . . . . . . . . 814 754 3,047 2,525
Provision (credit) for
loan losses . . . . . . . . . . . . . . 24 49 121 249
-------- -------- -------- --------
Net interest income after
provision for losses on loans . . . 790 705 2,926 2,276
Non-interest income:
Gain (loss) on sale of investments. . (3) (2) (3) (48)
Gains on sale of real estate . . . . -- -- 4 --
Other non-interest income . . . . . . 49 35 149 186
-------- -------- -------- --------
Total non-interest income . . . . . . . . 46 33 150 138
Total non-interest expense . . . . . . . 390 646 1,828 1,335
-------- -------- -------- --------
Income before income taxes . . . . . 446 92 1,248 1,079
Income tax expense . . . . . . . . . . . 148 56 377 184
-------- -------- -------- --------
Net income before accounting change . 298 36 871 895
Accounting change for income taxes . . . -- -- -- --
-------- -------- -------- --------
Income before extraordinary item . . 298 36 871 895
Extraordinary item - penalty for early
extinguishment of debt, net of income
tax benefit . . . . . . . . . . . . . . -- -- -- --
-------- -------- -------- --------
Net income . . . . . . . . . . . . . $ 298 $ 36 $ 871 $ 895
======== ======== ======== ========
Per common share data after giving
retroactive effect for the 2 for
1 stock split(1):
Net income per common share . . . . . $ .29 $ .04 $ .85 $ .86
Cash dividends declared per share . . $ .0650 $ .0500 $ .2150 $ .1625
Dividend payout ratio . . . . . . . . . . .22 1.25 .25 .19
<CAPTION> Years Ended June 30,
------------------------------
1995 1994 1993
------ ------ ------
(Dollars in Thousands Except per Share Data)
Selected Operations Data:
- -------------------------
<S> <C> <C> <C>
Total interest income . . . . . . . . . . $ 4,778 $ 4,013 $ 4,098
Total interest expense . . . . . . . . . 2,638 2,228 2,547
-------- -------- --------
Net interest income . . . . . . . . . . 2,140 1,785 1,551
Provision (credit) for loan losses . . . -- 20 (4)
-------- -------- --------
Net interest income after provision
for losses on loans . . . . . . . . . 2,140 1,765 1,555
Non-interest income:
Gain (loss) on sale of investments. . 36 -- --
Gains on sale of real estate . . . . 11 34 5
Other non-interest income . . . . . . 81 79 47
-------- -------- --------
Total non-interest income . . . . . . . . 128 113 52
Total non-interest expense . . . . . . . 1,321 1,061 856
-------- -------- --------
Income before income taxes . . . . . 947 817 751
Income tax expense . . . . . . . . . . . 316 281 237
-------- -------- --------
Net income before accounting change . 631 536 514
Accounting change for income taxes . . . -- -- (64)
-------- -------- --------
Income before extraordinary item 631 536 450
Extraordinary item - penalty for early
extinguishment of debt, net of income
tax benefit . . . . . . . . . . . . . . -- 51 --
-------- -------- --------
Net income . . . . . . . . . . . . . $ 631 $ 485 $ 450
======== ======== ========<PAGE>
Per common share data after giving
retroactive effect for the 2 for
1 stock split(1):
Net income per common share . . . . . $ .60 $ .26 $ N/A
Cash dividends declared per share . . $ .0375 -- N/A
Dividend payout ratio. . . . . . . . . . . .06 -- --
<FN>
_______________
(1) Subsequent to the conversion of the Bank to stock form,
effective January 5, 1994. See Notes to Consolidated
Financial Statements in the Annual Report for additional
information regarding earnings per common share data.
</FN>
</TABLE>
(ix)<PAGE>
<PAGE>
<TABLE>
<CAPTION> Three Months Ended Years Ended
September 30, June 30,
------------------ ------------------
1997 1996 1997 1996
------ ------ ------ ------
(Dollars in Thousands Except per Share Data)
Selected Financial Ratios
and Other Data:
- -------------------------
<S> <C> <C> <C> <C>
Performance Ratios:
Return on assets (ratio of net income
to average total assets). . . . . . . . . 1.19% (4) .16% (5) .99% 1.15%
Interest rate spread information:
Average during period . . . . . . . . . . 2.77 2.65 2.85 2.56
End of period . . . . . . . . . . . . . . 2.63 2.62 2.64 2.51
Net interest margin(1) . . . . . . . . . . 3.46 3.32 3.52 3.30
Ratio of operating expense to average
total assets. . . . . . . . . . . . . . . 1.67 (4) 3.03 (5) 2.07 1.72
Return on equity (ratio of net income
to average equity) . . . . . . . . . . . 10.39 .43 8.63 9.25
Quality Ratios:
Non-performing assets to total assets
at end of period (2) . . . . . . . . . . .98 1.63 (5) 1.00 1.15
Allowance for loan losses to
non-performing loans(3). . . . . . . . . 87.83 49.75 70.03 87.24
Capital Ratios:
Equity to total assets at end of period . 11.51 11.57 11.45 11.94
Average equity to average assets . . . . . 11.44 11.65 11.47 12.43
Average interest-earning assets to
average interest-bearing liabilities . . 114.45 114.22 114.36 115.34
Number of full-service offices . . . . . . . 1 1 1 1
<CAPTION> Years Ended June 30,
----------------------------------
1995 1994 1993
------ ------ ------
(Dollars in Thousands Except per Share Data)
Selected Financial Ratios
and Other Data:
- -------------------------
<S> <C> <C> <C>
Performance Ratios:
Return on assets (ratio of net income
to average total assets). . . . . . . . . 1.01% .89% .90%
Interest rate spread information:
Average during period . . . . . . . . . . 2.70 2.81 2.76
End of period . . . . . . . . . . . . . . 2.14 2.84 2.60
Net interest margin(1) . . . . . . . . . . 3.48 3.34 3.15
Ratio of operating expense to average
total assets. . . . . . . . . . . . . . . 2.10 1.91 1.66
Return on equity (ratio of net income
to average equity) . . . . . . . . . . . 6.89 7.76 11.79
Quality Ratios:
Non-performing assets to total assets
at end of period (2) . . . . . . . . . . .02 .44 .56
Allowance for loan losses to
non-performing loans (3). . . . . . . . . 2,857.43 1,290.32 6,198.40
Capital Ratios:
Equity to total assets at end of period. . 13.45 15.41 7.89
Average equity to average assets . . . . . 14.70 11.50 7.65
Average interest-earning assets to
average interest-bearing liabilities . . 118.24 112.66 107.50
Number of full-service offices . . . . . . . 1 1 1
<PAGE>
<FN>
_______________
(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.
(4) Reflects an annualized ratio.
(5) Reflects the effect of a $287,568 one time special
assessment to recapitalize the Savings Association
Insurance Fund.
</FN>
</TABLE>
(x)<PAGE>
<PAGE>
PROPOSAL I -- APPROVAL OF THE AGREEMENT
The following description of the Merger does not purport to
be complete and is qualified in its entirety by reference to the
Agreement attached hereto as Appendix A. Stockholders are urged
to read this document carefully.
GENERAL
On October 16, 1997, the Company, the Bank and First Federal
entered into the Agreement, which provides for the acquisition
of the Company and the Bank by First Federal by means of the
Merger, with First Federal surviving the Merger. The Agreement
provides that the Merger is subject to the receipt of all
required regulatory approvals, the approval by the holders of
the Common Stock and the satisfaction or waiver of a number of
other conditions and that each outstanding share of the Common
Stock, by virtue of the Merger and without any further action by
the holder thereof, will be converted into the right to receive
$17.65 in cash. See " -- Description of the Merger."
The aggregate purchase price to be paid by First Federal for
the Common Stock in the Merger is approximately $19.2 million
(including payment for issued options). First Federal has
represented that it will have sufficient funds at the Effective
Time of the Merger (the "Effective Time") to pay for shares of
the Common Stock pursuant to the Agreement.
APPROVAL OF THE AGREEMENT REQUIRES THE AFFIRMATIVE VOTE OF
AT LEAST A MAJORITY OF ALL VOTES ENTITLED TO BE CAST BY THE
HOLDERS OF THE COMMON STOCK.
THE PARTIES TO THE AGREEMENT
GFS Bancorp, Inc. The Company was incorporated under the
laws of the State of Delaware in September 1993 to become a
savings and loan holding company with the Bank as its sole
subsidiary. The Company's principal business is to act as the
holding company of the Bank.
The Company is classified as a unitary savings and loan
holding company subject to regulation by the OTS. Prior to its
acquisition of the capital stock of the Bank, the Company had no
assets and no liabilities and engaged in no business activities.
Since the acquisition of the Bank's capital stock, the primary
business activities of the Company has been acting as the
holding company of the Bank, and investing in U.S. Government
obligations, common and preferred stock and mutual funds.
Grinnell Federal Savings Bank. The Bank is a federally
chartered stock savings bank which was organized in 1935 and
operates through one office in Grinnell, Iowa. The Bank
converted to a stock savings bank in January 1994. The Bank is
a member of the Federal Home Loan Bank ("FHLB") System and its
deposits are federally insured.
The Bank is primarily engaged in the business of attracting
deposits from the general public and originating permanent loans
secured by one-to four-family residential properties in its
primary market area of Jasper, Marshall and Poweshiek Counties,
Iowa. To a lesser extent, the Bank originates multi-family,
construction, consumer and commercial business loans. In
addition, in order to supplement loan demand in its market area,
the Bank 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 and other investment
securities.
First Federal Savings Bank of Siouxland. First Federal
is a federally chartered stock savings bank headquartered in
Sioux City, Iowa. First Federal is a community oriented
financial institution offering traditional financial services to
its local community. Its primary lending area includes the
Sioux City metropolitan area and adjacent counties which include
parts of Nebraska and South Dakota. First Federal's primary
lending activity involves
1<PAGE>
<PAGE>
the origination of fixed rate and adjustable rate mortgage loans
secured by single family residential real estate. To a lesser
extent, First Federal makes second mortgage loans secured by the
borrower's principal residence and other types of consumer loans
such as auto loans, home improvement loans and commercial
loans. First Federal is organized as a subsidiary of First
Federal Bankshares, M.H.C., a federal mutual holding company.
At September 30, 1997, First Federal had total assets of $456.8
million, total deposits of $324.7 million and stockholders'
equity of $39.9 million.
BACKGROUND OF THE MERGER
The first contact between Grinnell and First Federal in
which possible interest in a merger transaction was discussed
was on June 26, 1997, at a meeting attended by Mr. Barry
Backhaus, President and Chief Executive Officer of First
Federal, and Mr. Leroy E. Meredith, Chairman of the Company and
the Bank and Mr. Steven L. Opsal, President and Chief Executive
Officer of the Company and the Bank. At the meeting, the parties
discussed the histories, management philosophies, business
strategies and objectives of the two institutions and Mr.
Backhaus indicated in very general terms First Federal's
interest in the Company. Mr. Opsal indicated, on behalf of the
Company's Board, that the Company's strategy was to remain
independent but that the Company's Board would be receptive to
any discussions that might ultimately benefit the Company's
shareholders. In a subsequent meeting held on July 22, 1997,
Mr. Backhaus reiterated his interest in a possible acquisition
of the Company by First Federal and the parties discussed some
of the possible terms of such an acquisition. Messrs. Opsal and
Meredith informed the Company's Board of these discussions at a
meeting on July 31, 1997, and the Board affirmed its prior
position that while the Company was not actively seeking to be
acquired, it was appropriate and in the shareholders' best
interests that the Board keep fully informed as to transactions
that could maximize shareholder value. Accordingly, the Board
authorized Messrs. Opsal and Meredith to engage in further
discussions with First Federal. In the course of those
discussions, First Federal indicated a preliminary price of
approximately $17.00 per share.
At a Board meeting held on August 21, 1997, Messrs. Meredith
and Opsal related the substance of their continued discussions
with management of First Federal regarding the terms of a
possible merger transaction. The Board engaged in detailed
discussions in this regard, including the advantages and
disadvantages of the Company's continued independence versus a
combination with First Federal. The Board then determined that
an independent financial advisor should be retained to assist
the Board in evaluating whether the First Federal indication of
interest was in the best interests of the Company's
shareholders, and accordingly authorized the engagement of PBS
as financial advisor to the Company.
At a special meeting of the Company's Board of Directors on
September 2, 1997, attended by Mr. Barry Backhaus, Mr. Backhaus
gave a detailed presentation describing First Federal's history
and operations and explained in general terms how the Bank's
operations would be run in the event of a sale to First Federal.
Mr. Backhaus indicated that the Bank would retain its name and
be run as a separate division of First Federal, and that the
impact on the Bank's personnel would be minimal. The Company's
directors then questioned Mr. Backhaus on several matters,
including the basis for First Federal's interest and the terms
of a possible merger transaction.
In a telephone call to Mr. Opsal on September 5, 1997, Mr.
Backhaus indicated that, subject to First Federal Board
approval, the results of a due diligence review of the Company's
and Bank's business and operations and further discussions
between the parties regarding other terms, First Federal would
be willing to acquire the Company for a per share cash purchase
price of $17.65.
On September 11, 1997, at a special meeting of the Board
attended by a representative of PBS and (telephonically) by the
Company's legal counsel, the Board reviewed and discussed the
preliminary price indicated by First Federal. The Company's
legal counsel discussed with the Board its fiduciary duties to
the Company and its shareholders in evaluating the First Federal
indication of interest and explained generally the procedures
that the Company would follow in the event the Board authorized
a sale of the Company to First Federal.
The PBS representative then made a detailed presentation to
the Board of Directors regarding the range of valuation of the
Company's stock in the context of a possible sale, and furnished
the Board with a report to this effect
2<PAGE>
<PAGE>
for the Board's review. The PBS representative then reviewed
and discussed the preliminary price indicated in First Federal's
indication of interest, comparing it to, among other things,
values received by shareholders in recent acquisitions of
comparable thrift institutions. The PBS representative also
reviewed the capacity of other financial institutions to acquire
the Company at a price similar to that expressed in First
Federal's indication of interest, and presented an analysis of
the Company's strategic alternatives for enhancing shareholder
value. On the basis of these alternatives and other
considerations, PBS concluded that First Federal's price
indication (1) produced a greater shareholder value than that
possible given the Company's continued independence and
(2)represented a compelling price which could not be matched by
another bidder. On this basis, the Board concluded that a sale
of the Company to First Federal on the terms expressed in First
Federal's indication of interest would be in the best long term
interests of the Company's shareholders, and authorized
management of the Company to proceed to negotiate a sale of the
Company with First Federal on those terms.
During the period September 19 through 21, 1997, First
Federal conducted a due diligence examination of the Company's
and the Bank's business and operations. During the period
following this examination through October 15, 1997, extensive
negotiations ensued regarding the terms of the potential
acquisition.
On October 16, 1997, the Board of Directors of the Company
held a special meeting attended by representatives of PBS and
the Company's legal counsel. The PBS representative provided
detailed information concerning the financial terms of the
Merger. After reviewing the information and certain other data
regarding, among other things, the valuation of the Company and
the values received in comparable transactions, the PBS
representative responded to questions from the directors. The
PBS representative then advised the Board that it was the
opinion of PBS that the proposed Merger was fair to holders of
the Company's common stock from a financial point of view.
Following such presentation, legal counsel provided an overview
of the proposed Merger and furnished each director with an
updated draft of the Merger Agreement. Legal counsel then
conducted a detailed analysis of the updated draft, responded to
numerous questions concerning the terms of the proposal, and
discussed certain procedural aspects of the Merger. After
discussion and further questions and answers, the Merger
Agreement was unanimously approved by the Board of Directors.
RECOMMENDATION OF THE BOARD OF DIRECTORS; REASONS FOR THE MERGER
The Board of Directors of the Company considered a variety
of factors in evaluating the Merger, including (i) the value
being offered the Company's stockholders by First Federal in
relation to the market value, book value, and earnings per share
of the Company's common stock; (ii) information concerning the
financial condition, results of operations and prospects of
First Federal and the Company; (iii) the competitive environment
for financial institutions generally; (iv) the compatibility of
the respective business management philosophies of the Company
and First Federal; (v) the ability of First Federal to provide
comprehensive financial services in relevant markets; (vi) the
financial terms of other recent business combinations in the
local financial services industry; (vii) the fact that First
Federal has the financial resources to serve the lending and
deposit needs of the Company's customer base; (viii) the opinion
of the Company's financial advisor, PBS, that the consideration
to be received by the Company's stockholders is fair to such
stockholders from a financial point of view; and (ix) the
financial effect of the Company's continued operation as an
independent financial institution on stockholders' value.
<PAGE>
In its deliberations, the Board of Directors discussed a
variety of other matters related to the Merger, but believes
that the foregoing factors represent the material factors
considered in the Board's collective determination that the
Merger is in the best interests of stockholders. The Board of
Directors did not quantify or otherwise attempt to assign
relative weights to the factors considered in making its
determination and does not believe that any single factor
discussed above was given greater weight than any other factor.
Having considered all of the foregoing, however, the Board of
Directors determined that the Merger is in the best interest of
stockholders and unanimously recommends that stockholders vote
for the Merger.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE
STOCKHOLDERS OF THE COMPANY VOTE FOR APPROVAL OF THE AGREEMENT.
---
3<PAGE>
<PAGE>
OPINION OF FINANCIAL ADVISOR
PBS was engaged by the Company to advise the Company's Board
of Directors as to the fairness of the consideration, from a
financial perspective, to be paid by First Federal to the
Company's shareholders as set forth in the Agreement by and
between the Company and First Federal.
PBS is a bank consulting firm with offices in Louisville,
Atlanta, Chicago, Nashville and Washington, D.C. As part of its
investment banking business, PBS is regularly engaged in
reviewing the fairness of financial institution acquisition
transactions from a financial perspective and in the valuation
of financial institutions and other businesses and their
securities in connection with mergers, acquisitions, estate
settlements, and other transactions. Neither PBS nor any of its
affiliates has a material financial interest in the Company or
First Federal. PBS was selected to advise the Company's Board of
Directors based upon their familiarity with Iowa financial
institutions and knowledge of the banking industry as a whole.
PBS performed certain analyses described herein and
presented the range of values for the Company resulting from
such analyses to the Board of Directors of the Company in
connection with its advice as to the fairness of the
consideration to be paid by First Federal.
The preliminary fairness opinion of PBS was delivered to the
Board of Directors of the Company on October 16, 1997, at a
special meeting of the Board of Directors and has been updated
as of the date of this Proxy Statement. A copy of the Opinion,
which includes a summary of the assumptions made and information
analyzed in deriving the Opinion, is attached as Appendix B to
this Proxy Statement and should be read in its entirety.
In arriving at the Opinion, PBS reviewed certain publicly
available business and financial information relating to the
Company and First Federal. PBS considered certain financial and
stock market data of the Company and First Federal, compared
that data with similar data for certain other publicly-held
thrift holding companies and considered the financial terms of
certain other comparable thrift transactions in the states of
Iowa, Nebraska, Missouri, Wisconsin, South Dakota, North Dakota,
Ohio, Kansas, Minnesota, Indiana, Illinois, Kentucky and
Michigan (the "Regional Area") that had recently been effected.
PBS also considered such other information, financial studies,
analyses and investigations and financial, economic and market
criteria that it deemed relevant. In connection with its review,
PBS did not independently verify the foregoing information and
relied on such information as being complete and accurate in all
material respects. Financial forecasts prepared by PBS were
based on assumptions believed by PBS to be reasonable and to
reflect currently available information. PBS did not make an
independent evaluation or appraisal of the assets of the Company
or First Federal.
PBS reviewed and analyzed the historical performance of the
Company and the Bank contained in: audited Annual Reports and
financial statements dated June 30, 1995 and 1996 of the
Company; June 30, 1996, September 30, 1996, December 31, 1996,
March 31, 1997 and June 30, 1997 Consolidated Reports of
Condition and Income filed by the Bank with the Office of Thrift
Supervision; preliminary September 30, 1997 internal financial
reports; the historical common stock trading activity of the
Company; and the premises and other fixed assets. PBS reviewed
and tabulated statistical data regarding the loan portfolio,
securities portfolio and other performance ratios and
statistics. Financial projections were prepared and analyzed as
well as other financial studies, analyses and investigations as
deemed relevant for the purposes of the Opinion. In review of
the aforementioned information, PBS took into account its
assessment of general market and financial conditions, its
experience in other similar transactions, and its knowledge of
the banking industry generally.
In connection with rendering the Opinion and preparing its
written and oral presentation to the Company's Board of
Directors, PBS performed a variety of financial analyses,
including those summarized herein. The summary does not purport
to be a complete description of the analyses performed by PBS in
this regard. The preparation of a Fairness Opinion involves
various determinations as to the most appropriate and relevant
methods of financial analysis and the application of these
methods to the particular circumstances and therefore, such an
opinion is not readily susceptible to summary description.
Accordingly, notwithstanding the separate factors summarized
below, PBS believes
4<PAGE>
<PAGE>
that its analyses must be considered as a whole and that
selecting portions of its analyses and of the factors considered
by it, without considering all analyses and factors, could
create an incomplete view of the evaluation process underlying
its opinion. In performing its analyses, PBS made numerous
assumptions with respect to industry performance, business and
economic conditions and other matters, many of which are beyond
the Company's or First Federal's control. The analyses performed
by PBS are not necessarily indicative of actual values or future
results, which may be significantly more or less favorable than
suggested by such analyses. In addition, analyses relating to
the values of businesses do not purport to be appraisals or to
reflect the process by which businesses actually may be sold.
Acquisition Comparison Analysis. In performing this
analysis, PBS reviewed all thrift acquisition transactions in
the states of Iowa, Nebraska, Missouri, Wisconsin, South Dakota,
North Dakota, Ohio, Kansas, Minnesota, Indiana, Illinois,
Kentucky and Michigan (the "Regional Area") since 1990. There
were 185 thrift acquisition transactions in the Regional Area
announced since 1990 for which detailed financial information
was available. The purpose of the analysis was to obtain an
evaluation range based on these Regional Area thrift acquisition
transactions. Median multiples of earnings and book value
implied by the comparable transactions were utilized in
obtaining a range for the acquisition value of the Company. In
addition to reviewing recent Regional Area thrift transactions,
PBS performed separate comparable analyses for acquisitions of
thrifts which, like the Company, had an equity-to-asset ratio
between 10.00% and 12.00%, had total assets between $50.0 -
$150.0 million, and those transactions in which the acquired
institutions were located in the state of Iowa. Median values
for the 185 Regional Area acquisitions expressed as multiples of
both book value and earnings were 1.34X and 16.42X,
respectively. The median multiples of book value and earnings
for acquisitions of Regional Area thrifts which, like the
Company, had an equity-to-asset ratio between 10.00% and 12.00%
were 1.34X and 17.22X, respectively. For acquisitions of
Regional Area thrifts with assets between $50.0 - $150.0 million
the median multiples were 1.33X and 14.18X. The median multiples
of book value and earnings for acquisitions of thrifts located
in the state of Iowa were 1.41X and 14.67X, respectively.
In the proposed transaction, Company shareholders will
receive $17.65 in cash for each outstanding share of Common
Stock, as further defined in the Agreement. The $17.65 per share
of Company Common Stock represents a multiple of the Company's
September 30, 1997 stated book value and a multiple of the
Company's September 30, 1997 last twelve month earnings of 1.60X
and 15.41X respectively. Including the dilutive effects of the
Company's stock options, the $17.65 per Company common share
represents a multiple of September 30, 1997 adjusted book value
and adjusted last twelve month earnings of 1.69X and 17.21X,
respectively.
The market value of the proposed transaction's percentile
ranking was prepared and analyzed with respect to the above
Regional Area comparable group without considering the dilutive
effect of the Company's options. Compared to all Regional Area
thrift transactions, the acquisition value ranked in the 71st
percentile as a multiple of book value and in the 39th
percentile as a multiple of earnings. Compared to Regional Area
thrift transactions where the acquired institution had an
equity-to-asset ratio between 10.00% and 12.00%, the acquisition
value ranked in the 71st percentile as a multiple of book value
and the 31st percentile as a multiple of earnings. For Regional
Area thrift acquisitions where the acquired institution had
between $50.0 - $150.0 million in assets, the acquisition value
ranked in the 73rd percentile as a multiple of book value and
40th percentile as a multiple of earnings. For thrift
transactions in the State of Iowa, the acquisition value ranked
in the 90th percentile as a multiple of book value and in the
44th percentile as a multiple of earnings.
Taking the dilutive effect of the Company's options into
consideration, the market value of the proposed transaction's
percentile ranking was again prepared and analyzed with respect
to the above Regional Area comparable group. Compared to all
Regional Area thrift transactions, the acquisition value ranked
in the 81st percentile as a multiple of adjusted book value and
in the 48th percentile as a multiple of adjusted earnings.
Compared to Regional Area thrift transactions where the acquired
institution had an equity-to-asset ratio between 10.00% and
12.00%, the acquisition value ranked in the 87th percentile as a
multiple of adjusted book value and the 39th percentile as a
multiple of adjusted earnings. For Regional Area thrift
acquisitions where the acquired institution had between $50.0 -
$150.0 million in assets, the acquisition value ranked in the
91st percentile as a multiple of adjusted book value and 49th
percentile as a multiple of adjusted earnings. For thrift
transactions in the State of Iowa, the acquisition value ranked
in the 97th percentile as a multiple of adjusted book value and
in the 64th percentile as a multiple of adjusted earnings.
5<PAGE>
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Adjusted Net Asset Value Analysis. PBS reviewed the
Company's balance sheet data to determine the amount of material
adjustments required to be made to the stockholders' equity of
the Company based on differences between the market value of the
Company's assets and their value reflected on the Company's
financial statements. PBS determined that three adjustments were
warranted. Equity was increased $187,000 for the elimination of
the Company's ESOP and MRP contra equity accounts. Equity was
increased $60,000 to reflect the after tax appreciation in the
Company's held to maturity securities portfolio. In addition,
PBS also reflected a value of the non-interest bearing demand
deposits of approximately $1,470,000. The aggregate adjusted net
asset value of the Company was determined to be $12,596,000 or
$12.75 per Company common share. PBS also performed a similar
analysis taking into consideration the Company's common stock
options. Under this analysis equity was increased $1,154,000 to
reflect the exercise of the Company's 163,512 stock options. The
aggregate value of the Company under this analysis was
determined to be $13,750,000 or $11.94 per Company common share.
Discounted Earnings Analysis. A dividend discount analysis
was performed by PBS pursuant to which a range of stand-alone
values of the Company was determined by adding (i) the present
value of estimated future dividend streams that the Company
could generate over a five-year period and (ii) the present
value of the "terminal value" of the Company's earnings at the
end of the fifth year. The "terminal value" of the Company's
earnings at the end of the five-year period was determined by
applying a multiple of 16.42 times the projected terminal year's
earnings. The 16.42 multiple represents the median price paid as
a multiple of earnings for all thrift transactions in the
Regional Area since 1990.
Dividend streams and terminal values were discounted to
present values using a discount rate of 12%. This rate reflects
assumptions regarding the required rate of return of holders or
buyers of the Company's common stock. The aggregate value of the
Company, determined by adding the present value of the total
cash flows, was $16,715,000 or $16.91 per share. In addition,
using the five-year projection as a base, a twenty-year
projection was prepared assuming an annual growth rate of 5.0%
and the Company's return on assets increasing to 1.60% by year
ten. Dividends were assumed to increase from 30.0% of income in
years one through five to 60% of income for years six through
twenty. This long-term projection resulted in a aggregate value
of $14,305,000 or $14.47 per Company common share. This same
analysis was repeated assuming the exercise of the Company's
stock options. Under this scenario, the five year short term
value was determined to equal $17,584,000 or $15.27 per Company
common share and the twenty year long term projection resulted
in an aggregate value of $14,640,000 or $12.71 per Company
common share.
Specific Acquisition Analysis. PBS valued the Company based
on an acquisition analysis assuming a "break-even" earnings
scenario to an acquiror as to price, current interest rates and
amortization of the premium paid. Based on this analysis, an
acquiring institution would pay in aggregate $17,937,000, or
$18.15 per share, assuming they were willing to accept no impact
to their net income in the initial year. This analysis was based
on a funding cost of 6.75% adjusted for taxes, amortization of
the acquisition premium over 15 years and a September 30, 1997
last twelve month earnings level of $1,245,000. This analysis
was repeated assuming a potential acquiror would attain
non-interest expense reductions of 10% in the transaction. Based
on this analysis an acquiring institution would pay in aggregate
$18,759,000 or $18.98 per Company share. PBS repeated this
analysis taking into consideration the dilutive effects of the
Company's stock options. Under this scenario an acquiring
institution would pay in aggregate $19,074,000, or $16.56 per
share, assuming they were willing to accept no impact to their
net income in the initial year. This analysis was based on a
funding cost of 6.75% adjusted for taxes, amortization of the
acquisition premium over 15 years and a September 30, 1997 last
twelve month adjusted earnings level of $1,294,000. This
analysis was repeated assuming a potential acquiror would attain
non- interest expense reductions of 10% in the transaction.
Based on this analysis an acquiring institution would pay in
aggregate $19,886,000 or $17.27 per Company share.
The Opinion is directed only to the question of whether the
consideration to be received by the Company's shareholders under
the Agreement is fair and equitable from a financial perspective
and does not constitute a recommendation to any Company
shareholder to vote in favor of the affiliation. No limitations
were imposed on PBS regarding the scope of its investigation or
otherwise by the Company.
6<PAGE>
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Based on the results of the various analyses described
above, PBS concluded that the consideration to be received by
the Company's shareholders under the Agreement is fair and
equitable from a financial perspective to the shareholders of
the Company.
PBS will receive fees in the amount of $100,000 for all
services performed in connection with the rendering of the
Opinion. In addition, the Company has agreed to indemnify PBS
and its directors, officers and employees, from liability in
connection with the transaction, and to hold PBS harmless from
any losses, actions, claims, damages, expenses or liabilities
related to any of PBS' acts or decisions made in good faith and
in the best interest of the Company.
VOTE REQUIRED
Under Delaware law and the Company's Certificate of
Incorporation, approval of the Agreement requires the
affirmative vote of at least a majority of the outstanding
shares of Common Stock of the Company. As of the Record Date,
directors and executive officers of the Company and their
affiliates were the beneficial owners of 249,595 shares, or
22.7% of the Common Stock outstanding at that date, including
147,573 shares, or 14.8%, of the Common Stock outstanding, which
directors of the Company had the power to vote. As of the date
hereof, the Company believes that directors and executive
officers and their affiliates will vote all their shares FOR
approval of the Agreement.
DISSENTERS' RIGHTS
Section 262 of the DGCL (the "Appraisal Statute") entitles
any stockholder of record of the Company to an appraisal by the
Delaware Court of Chancery of the fair value of his or her
shares of Common Stock if he or she: (i) held shares of Common
Stock on the date of his or her demand for appraisal rights;
(ii) continuously held the shares through the effective date of
the Merger; (iii) has complied with all of the requirements to
obtain appraisal rights under the statute; and (iv) has not
voted in favor of the Merger nor consented to the Merger in
writing. A person having a beneficial interest in shares of the
Common Stock held of record in the name of another person, such
as a broker or nominee, must act promptly to cause the record
holder to follow the steps summarized below properly and in a
timely manner to perfect whatever appraisal rights the
beneficial owner may have. The following is not a complete
statement of the law pertaining to appraisal rights and is
qualified in its entirety by the full text of Section 262 which
is reprinted in its entirety as Appendix C to this Proxy
Statement.
A DISSENTING STOCKHOLDER ELECTING TO DEMAND THE APPRAISAL OF
HIS OR HER SHARES MUST DELIVER TO GINGER L. STERK, SECRETARY OF
THE COMPANY, BEFORE THE TAKING OF THE VOTE ON THE MERGER, A
WRITTEN DEMAND FOR APPRAISAL OF HIS OR HER SHARES. The demand
must reasonably inform the Company of the identity of the
stockholder and that the stockholder intends to demand the
appraisal of his or her shares. In addition, the stockholder
must be the record holder of those shares on the date the
written demand is made and must hold the shares continuously
through the Effective Time and must not vote in favor of the
Agreement. A STOCKHOLDER WHO RETURNS AN EXECUTED BLANK PROXY
WILL BE DEEMED TO HAVE VOTE IN FAVOR OF THE MERGER AND,
THEREFORE, TO HAVE WAIVED HIS OR HER DISSENTER'S RIGHTS OF
APPRAISAL. A proxy or vote against the Merger does not
constitute the written demand. Within 10 days after the
Effective Time of the Merger, the Company must notify each
stockholder who has complied with the provisions of the
Appraisal Statute and has not voted in favor of or consented to
the Merger that the Merger has become effective.
Within 120 days after the Effective Time, the Company or any
stockholder who has complied with the above requirements may
file a petition in the Delaware Court of Chancery demanding a
determination of the value of the stock. At any time within 60
days after the Effective Time, any stockholder has the right to
withdraw his demand for appraisal and accept the offer in the
Agreement. Within 120 days after the Effective Time, any
stockholder who has complied with the above requirements, upon
written request, will be entitled to receive from the Company,
within 10 days of receipt of this request, a statement setting
forth the aggregate number of shares not voted in favor of the
Merger and with respect to which demands for appraisal have been
received and the aggregate number of holders of such shares.
7<PAGE>
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At the hearing on a petition by a stockholder to determine
the value of the stock, the Delaware Court of Chancery will
determine the stockholders who have complied with the above
provisions and who have become entitled to appraisal rights.
The Delaware Court of Chancery may require the stockholders who
have demanded an appraisal for their shares and who hold stock
represented by certificates to submit their certificates of
stock to the Register in Chancery for notation of the pendency
of the appraisal proceedings; and if any stockholder fails to
comply with such direction, the Court may dismiss the
proceedings as to such stockholder.
After determining the stockholders entitled to an appraisal,
the Court will appraise the shares, determining their fair value
exclusive of any element of value arising out of the Merger,
together with a rate of interest. In determining fair value,
the Court of Chancery will take into account all relevant
factors. The fair value determined by the Court of Chancery may
be more or less than the Merger Consideration. Any stockholder
whose name appears on a list containing the names and addresses
of all stockholders who have demanded payment for their shares,
which must be filed by the Company in the office of the Register
in Chancery, may participate fully in all proceedings until it
is finally determined that he is not entitled to appraisal
rights.
The Court will direct payment of the fair value of the
shares, together with interest, if any, by the Company to the
stockholder entitled thereto. The costs of the proceeding may
be determined by the Court and taxed upon the parties as the
Court deems equitable. Upon application of a stockholder, the
Court may order all or a portion of the expenses incurred by any
stockholder in connection with the appraisal proceedings,
including, without limitation, reasonable attorney's fees and
the fees and expenses of experts, to be charged pro rata against
the value of all shares entitled to an appraisal.
From and after the Effective Time, no stockholder who has
demanded appraisal rights is entitled to vote such stock for any
purpose or to receive payment of any dividends or other
distributions on the stock; provided, however, that if no
petition for an appraisal is filed with the allotted time or if
such stockholder withdraws his demand for appraisal within 60
days of the Effective Time or, thereafter, with written approval
of the Company, then the right of appraisal shall cease.
DESCRIPTION OF THE MERGER
Subject to the terms of the Agreement, First Federal will
acquire the Company through the Merger in accordance with the
Agreement and applicable provisions of Delaware law. First
Federal shall be the surviving entity resulting from the Merger.
The Merger will become effective and the separate corporate
existence of the Company shall cease at the Effective Time.
Each share of the Common Stock outstanding immediately prior to
the Effective Time shall, by virtue of the Merger and without
any further action by the holder thereof, be canceled and
converted into and represent the right to receive $17.65 in
cash, subject to a possible increase in the event the closing of
the Merger ( the "Closing") does not occur on or before April
30, 1998 (the "Merger Consideration"). The possible increase in
the Merger Consideration will be equal to $1,900 for each day
from May 1, 1998 until the date of the Closing, divided by the
number of shares of Company Common Stock outstanding. Following
the Effective Time, there shall be no further registration or
transfer on the records of the Company of shares of Common Stock
which were outstanding immediately prior to the Effective Time.
TREATMENT OF OUTSTANDING STOCK OPTIONS
The Agreement provides that at the Effective Time, First
Federal will issue stock appreciation rights on First Federal
common stock for each Company stock option outstanding at the
Effective Time so that the recipients of such stock appreciation
rights obtain equivalent value for their Company stock options.
If, in the reasonable judgment of First Federal, the issuance of
stock appreciation rights will impede, delay or hinder the
consummation of the transactions contemplated by the Agreement
because of regulatory questions, the Company will, immediately
prior to the Effective Time, pay cash to the holders of then
outstanding Company stock options so that such holders obtain
equivalent value for such stock options.
8<PAGE>
EXCHANGE OF STOCK CERTIFICATES
At least twenty (20) days before the Effective Time, First
Federal will appoint an exchange agent (the "Exchange Agent"),
to make payment of the Merger Consideration to each holder of
shares of Common Stock who surrenders the certificate or
certificates representing such shares to the Exchange Agent,
together with a duly executed letter of transmittal (which the
Exchange Agent will mail not later than ten (10) business days
after the Effective Time to each holder of record of a
certificate or certificates which, immediately prior to the
Effective Time, represented issued and outstanding shares of
Common Stock). At the Effective Time, First Federal shall cause
to be deposited with the Exchange Agent an amount of immediately
available funds equal to the aggregate total Merger
Consideration.
Any shares of Common Stock as to which the holder has duly
demanded payment of the fair value pursuant to Section 262 of
the DGCL shall not be converted into the right to receive the
Merger Consideration, unless and until such stockholders shall
have failed to perfect or shall have effectively withdrawn or
lost their right of appraisal. See " -- Dissenters' Rights."
However, any shares of Common Stock held by a stockholder who
subsequently fails to perfect or withdraws or otherwise loses
such right of appraisal, shall thereafter be deemed to have been
converted into the right to receive and become exchangeable for,
at the Effective Time, the Merger Consideration.
After the Effective Time, there shall be no further
registration of transfers on the stock transfer books of the
Company of the shares of Common Stock outstanding immediately
prior to the Effective Time and any such shares presented for
transfer after the Effective Time shall be canceled and
exchanged for the Merger Consideration. No interest shall
accrue on the Merger Consideration for the benefit of any holder
of shares of Common Stock after the Effective Time. In
addition, all shares of Common Stock which are held in the
treasury of the Company or the Bank by any direct or indirect
wholly-owned subsidiary of the Company and any shares of Common
Stock owned by First Federal or any direct or indirect
wholly-owned subsidiary or parent of First Federal shall be
canceled and no consideration shall be paid or delivered in
exchange.
PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME.
---
EFFECTIVE TIME
The Effective Time shall be on the date and at the time when
the articles of combination of the Merger are endorsed by the
OTS pursuant to applicable regulations. Assuming that the
Agreement is approved by the Company's stockholders, the Merger
will remain subject to a number of conditions, including the
receipt of required regulatory approvals. See " -- Regulatory
Approvals."
CONDITIONS TO THE MERGER
The obligations of the Company and the Bank and First
Federal to consummate the Merger are subject to the satisfaction
of a number of conditions on or before the Closing, including
the following (as used herein, the term "Party" shall mean the
Company and the Bank on the one hand and First Federal on the
other hand, and the term "Parties" shall mean the Company, the
Bank and First Federal): (i) the approval and adoption of the
Agreement by the stockholders of the Company; (ii) the approval
of the OTS and any other regulatory agency having authority to
review and approve the transactions contemplated by the
Agreement to the Merger and the transactions contemplated by the
Agreement, the expiration of all mandatory waiting periods, and
the receipt of all appropriate orders, consents, approvals and
clearances required by law for the consummation of the
transactions contemplated by the Agreement in form and substance
reasonably satisfactory to First Federal and the Company, the
terms of which permit the effectuation of the Merger; (iii) no
suit, action or proceeding shall be pending or overtly
threatened before any court or other governmental agency by the
federal or any state government in which it is sought to
restrain or prohibit the consummation of the Merger and no
temporary restraining order, preliminary or permanent injunction
or other order issued by any court of competent jurisdiction or
other legal restraint or prohibition preventing the consummation
of the Merger shall be in effect; (iv) the representations and
warranties of each Party as set forth in the Agreement shall
have been true as of the
9<PAGE>
<PAGE>
date of the Agreement and, with certain exceptions, as of the
closing of the Merger (the "Closing") except to the extent of
changes permitted by the Agreement; (v) prior to or on the date
of the Closing, each Party shall have in all material respects
performed all material obligations and complied with all
material covenants required to be performed by it by the Closing
and each Party shall have delivered to the other certificates,
signed by each party's Chief Executive Officer and Chief
Financial Officer, dated as of the Closing; and (vi) each Party
shall have received from counsel for the other Party the
required legal opinion in the form specified in the Agreement.
All action required to be taken by, or on the part of the
Parties to the Agreement, and the consummation of the
transactions contemplated thereby, shall have been duly and
validly taken by the Parties.
In addition, the obligations of the Company are contingent
on: (i) each of the representations and warranties of First
Federal contained in this Agreement shall be true and correct in
all material respects (or where any statement in a
representation or warranty expressly contains a standard of
materiality, such statement shall be true and correct in all
respects taking into consideration the standard of materiality
contained therein) at, or as of, the date of the Agreement and
(except to the extent such representation speaks as of an
earlier date) and as of any date subsequent, until and including
the Closing date, except as otherwise contemplated or permitted
by the Agreement); and (ii) all action required to be taken by,
or on the part of First Federal and its holding company to
authorize the execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated
by this Agreement shall have been duly and validly taken by
them.
The obligations of First Federal are contingent upon: (i)
each of the representations and warranties of the Company
contained in this Agreement shall be true and correct in all
material respects (or where any statement in a representation or
warranty expressly contains a standard of materiality, such
statement shall be true and correct in all respects taking into
consideration the standard of materiality contained therein) at,
or as of, the date of the Agreement and (except to the extent
such representation speaks as of an earlier date) and as of any
date subsequent, until and including the Closing date, except as
otherwise contemplated or permitted by the Agreement); (ii) the
absence of any material adverse change in the financial
condition, results of operations, or business of the Company or
the Bank and the Company's subsidiaries, taken as a whole, from
June 30, 1997, to the Closing date of the Merger, except for
general changes in generally accepted accounting principles;
changes in economic, financial, or market conditions, changes in
market interest rates; payments due under any employment
agreements or benefit plans; and the transactions contemplated
by the Agreement, costs and expenses relating to and
contemplated by the Agreement; (iii) on the Closing date, no
suit, action or proceeding shall be pending or overtly
threatened, and no liability or claim shall have been asserted
against the Company, Grinnell or any Company Subsidiary
involving any of the assets, properties, business or operations
of the Company, Grinnell or any Company Subsidiary that would
reasonably be expected to have a material adverse effect; (iv)
First Federal shall have received the consent or approval of
each person or entity whose consent or approval shall be
required in order to permit consummation of the Merger under any
loan or credit agreement, note, mortgage, indenture, lease or
other agreement or instrument to which the Company or the Bank
is a party or to which its respective property is subject,
except those for which failure to obtain such consents and
approvals would not, individually or in the aggregate, have a
material adverse effect on First Federal, whether prior to (if
applicable) or following the consummation of the transactions
contemplated by the Agreement; (v) neither the Board of
Directors of the Company nor the Bank nor any committee thereof
shall have amended, modified, rescinded or repealed the
resolutions adopted by such Board of Directors with respect to
this Agreement or shall have adopted any other resolutions in
connection with the Agreement and the transactions contemplated
thereby which are inconsistent with such resolutions, except
resolutions adopted consistent with the express rights of the
Bank under the Agreement; and (vi) immediately prior to the
Closing, the Company's total stockholders' equity account
determined in accordance with generally accepted accounting
principles on a basis consistent with the Company's audited
financial statements, shall not be less than $10.4 million, as
reasonably determined by First Federal's independent public
accountant, in consultation with the Company's independent
public accountant; provided, however, that for purposes of
calculating total stockholders' equity, the Company's expense
associated with the issuance of stock appreciation rights, if
applicable, and with the severance payments due under the
employment agreement between the Bank and William T. Nassif
dated as of January 19, 1996, will not be counted.
10<PAGE>
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CONDUCT OF BUSINESS PENDING THE MERGER
Under the Agreement, the Company and the Bank have agreed
that unless the prior written consent of First Federal shall
have been obtained (which First Federal may not unreasonably
withhold) and except as otherwise contemplated by the Agreement,
the Company and Grinnell will:
(a) operate their business in the ordinary course in
accordance with past business practices;
(b) use their best efforts to (i) preserve intact
their business organization and assets, maintain their rights
and franchises, retain the services of their officers and key
employees (except that they shall have the right to terminate
the employment of any officer or key employee in accordance with
established employment procedures) and (ii) maintain their
relationships with customers;
(c) maintain their corporate existence in good
standing and file all reports required with regulatory
authorities;
(d) use their best efforts to maintain and keep their
properties in as good repair and condition as at present, except
for ordinary wear and tear;
(e) use their best efforts to keep in full force and
effect insurance and bonds comparable in amount and scope of
coverage to that now maintained by them and, in the event that
the Bank is unable to keep such insurance and bonds in full
force and effect, to provide prompt notice of such failure to
First Federal;
(f) perform all obligations required to be performed
by them under all material contracts, leases, and documents
relating to or materially affecting their assets, properties,
and business;
(g) use their best efforts to comply with and perform
in all material respects all obligations and duties imposed upon
them by all applicable laws and regulations; and
(h) as soon as reasonably practicable, furnish First
Federal copies of all of reports and documents provided to
Company stockholders or filed with the OTS subsequent to the
date of the Agreement.
The Agreement also provides that except as specifically
contemplated thereby, from the date of the Agreement until the
Effective Time, neither the Company nor the Bank nor any Company
subsidiary shall, without the prior written consent of First
Federal (which may not be unreasonably withheld), do any of the
following:
(a) incur any material liabilities or material
obligations, whether directly or by way of guaranty, including
any obligation for borrowed money whether or not evidenced by a
note, bond, debenture or similar instrument or enter into or
extend any material agreement or lease, except in the ordinary
course of business consistent with past business practices or in
connection with the transactions contemplated and permitted by
the Agreement;
(b) (i) except as disclosed by the Company in the
disclosure schedule accompanying the Agreement, grant any bonus
or increase in compensation to its directors or grant any bonus
or any increase in compensation to its officers and employees,
(ii) effect any change in retirement benefits to any class of
employees or officers (unless any such change is required by
applicable law) that would increase its retirement benefit
liabilities, (iii) adopt, enter into, amend or modify any
benefit plan except as required by law, (iv) enter into or amend
any employment, severance or similar agreements or arrangements
with any directors or officers (exclusive of renewals in the
ordinary course of business), (v) make any additional awards
under any stock bonus plan or stock option plan, or (vi) make
any additional contributions to the Company's Employee Stock
Ownership Plan;
11<PAGE>
<PAGE>
(c) declare or pay any dividend on, or make any other
distribution in respect of, its outstanding shares of capital
stock, except for regular, quarterly cash dividends, paid on
normal dividend payment dates, in an amount no greater than the
dividend rate as of the date of the Agreement;
(d) (i) redeem, purchase or otherwise acquire any
shares of its capital stock or any securities or obligations
convertible into or exchangeable for any shares of its capital
stock, or any options, warrants, conversion or other rights to
acquire any shares of its capital stock or any such securities
or obligations; (ii) merge with or into any other corporation,
savings institution or bank, permit any other corporation,
savings institution or bank to merge into it or consolidate with
any other corporation or bank, or effect any reorganization or
recapitalization; (iii) purchase or otherwise acquire any
assets, or shares of any class of stock, of any corporation,
savings institution, bank or other business; (iv) liquidate,
sell, dispose of, or encumber any assets or acquire any assets,
other than in the ordinary course of its business consistent
with past practices; or (v) split, combine or reclassify any of
its capital stock or issue or authorize or propose the issuance
of any other securities in respect of, in lieu of or in
substitution for, shares of its capital stock;
(e) except pursuant to the exercise of outstanding
stock options, issue, deliver, award, grant or sell, or
authorize or propose the issuance, delivery, award, grant or
sale of, any shares of its capital stock of any class (including
shares held in treasury), any debt instrument having a right to
vote or any securities convertible into, or any rights, warrants
or options to acquire, any such shares, voting debt or
convertible securities;
(f) initiate, solicit or encourage, or take any other
action to facilitate, any inquiries or the making of any
proposal which constitutes a Superior Proposal, as defined in
the Agreement, take any action in furtherance of such inquiries
or to obtain a Superior Proposal, or negotiate with any person
in, or agree to or endorse any Superior Proposal, or authorize
or permit any of its officers, directors or employees or any
investment banker, financial advisor, accountant or other
representative retained by it or any Company Subsidiary to take
any such action, except with respect to negotiations regarding,
and the endorsement of a Superior Proposal, as legally required
by the fiduciary duties of the Company's Board of Directors
under applicable law and as advised by counsel to the Company's
Board of Directors, and the Company shall promptly notify First
Federal orally and in writing of all of the relevant details
relating to all inquiries and proposals which it may receive
relating to any of such matters;
(g) propose or adopt any amendments to its charter or
by-laws, except such amendments as may be required to consummate
the transactions contemplated by the Agreement;
(h) enter into an agreement in principle with respect
to any acquisition of a material amount of assets or securities
or any release or relinquishment of any material contract rights
not in the ordinary course of business;
(i) except in its fiduciary capacity, purchase any
shares of capital stock of First Federal;
(j) subject to the provisions of paragraph (f) above
regarding a Superior Proposal, willfully take action which would
or is reasonably likely to (i) adversely affect the ability of
either of First Federal, the Company or the Bank to obtain any
necessary approvals of governmental authorities required for the
transactions contemplated by the Agreement; (ii) adversely
affect the Bank's or the Company's ability to perform its
covenants and agreements under the Agreement; or (iii) result in
any of the conditions to the Merger not being satisfied;
(k) change in any material respect the lending,
investment, deposit, asset and liability management and other
material policies concerning the business of the Bank or the
Company, unless required by law or regulation or, with respect
to lending or depository activities;
(l) file any applications or make any contract with
respect to branching by the Bank (whether de novo or by
purchase, sale or relocation);
12<PAGE>
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(m) form any new subsidiary or cause or permit a
material change in the activities presently conducted by any
Company subsidiary or make additional material investments in
subsidiaries or enter into or invest in any partnership, joint
venture or other business enterprise;
(n) purchase any debt securities or derivative
securities including CMO or REMIC products;
(o) purchase any equity securities other than Federal
Home Loan Bank Stock;
(p) discharge or satisfy any lien or encumbrance or
pay any material obligation or liability (absolute or
contingent) other than at scheduled maturity or in the ordinary
course of business;
(q) sell or otherwise dispose of any loan,
mortgage-backed security or investment security except in the
ordinary course of business consistent with past practices and
policies;
(r) modify or restructure the terms of any loan except
in the ordinary course of business consistent with prudent
banking practices and policies;
(s) make any capital expenditures in excess of $10,000
individually or $25,000 in the aggregate, other than pursuant to
binding commitments existing on the date hereof and other than
expenditures necessary to maintain existing assets in good
repair;
(t) change its method of accounting in effect prior to
the Effective Time, except as required by changes in laws or
regulations or generally accepted accounting principles
concurred in by its and the Company's independent certified
public accountants, or change any of its methods of reporting
income and deductions for federal income tax purposes from those
employed in the preparation of its federal income tax returns
for the Company's last full taxable year, except as required by
changes in laws or regulations;
(u) acquire in any manner whatsoever (other than to
realize upon collateral for a defaulted loan) any business or
entity;
(v) except for loans secured by commercial real estate
or multifamily real estate and originated as part of the Bank's
Bache Funding, Inc. program, for which the net amount retained
by the Bank shall be limited to $500,000, make, renew, increase,
extend or purchase any loan secured by commercial real estate or
multifamily real estate, any land acquisition or development
loan, any commercial business loan, or any residential loan in
an amount in excess of $200,000, except to the extent that the
Bank is contractually obligated to do so as of the date of the
Agreement;
(w) fail to keep in full force and effect its
insurance and bonds as now carried;
(x) fail to notify First Federal promptly of its
receipt of any letter, notice or other communication, whether
written or oral, from any regulatory authority advising that it
is contemplating issuing, requiring or requesting any agreement,
memoranda, understanding or similar undertaking, or order,
directive, or extraordinary supervisory letter;
(y) agree in writing or otherwise to do any of the
foregoing.
For purposes of the Agreement, "Superior Proposal" is
defined as a bona fide proposal to acquire the entire equity
interest in the Company or the Bank or substantially all of the
assets of the Company or the Bank, which is expressly
conditioned upon the termination of the Agreement and is made by
a third party on terms which a majority of the disinterested
members of the Board of Directors of the Company determines
pursuant to the exercise of its fiduciary duty after
consultation with legal counsel, to be more favorable (from a
financial point of view) to the holders of Company Common Stock
than the Merger and for which financing is either then committed
or not a condition precedent to the consummation thereof.
13<PAGE>
<PAGE>
The Company and the Bank have also agreed: (a) to use their
best efforts to keep First Federal fully informed concerning all
developments of which they become aware that may have a material
effect upon the business, any properties or condition (either
financial or otherwise) of the Company (other than developments
affecting financial institutions generally); (b) in the event
they become aware of the impending or threatened occurrence of
any event or condition which would cause or constitute a
material breach (or would have caused or constituted a breach
had such event occurred or been known prior to the date of the
Agreement) of any of their representations or agreements
contained or referred to in the Agreement, give prompt written
notice thereof to First Federal and use their best efforts to
prevent or promptly remedy the same; (c) to promptly supplement
or amend the Company disclosure schedule with respect to any
matter hereafter arising after the date of the Agreement that,
if existing or occurring at the date of the Agreement, would
have been required to be set forth or described in such
disclosure schedule; (d) use their best efforts to assist First
Federal in obtaining the consents and approvals necessary to
complete the Merger; (e) to pay the expenses of First Federal
under the circumstances enumerated in the Agreement. See " --
Expenses" and " -- Termination Fee."
NO SOLICITATION
By the terms of the Agreement, the Company and the Bank may
not initiate, solicit or encourage, or take any other action to
facilitate, any inquiries or the making of any proposal which
constitutes a Superior Proposal, take any action in furtherance
of such inquiries or to obtain a Superior Proposal, or negotiate
with any person in, or agree to or endorse any Superior
Proposal, or authorize or permit any of its officers, directors
or employees or any investment banker, financial advisor,
accountant or other representative retained by it or any Company
subsidiary to take any such action, except with respect to
negotiations regarding, and the endorsement of a Superior
Proposal, as legally required by the fiduciary duties of the
Company's Board of Directors under applicable law and as advised
by counsel to the Company's Board of Directors, and the Company
shall promptly notify First Federal orally and in writing of all
of the relevant details relating to all inquiries and proposals
which it may receive relating to any of such matters.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE BANK
The Company and the Bank have made certain representations
and warranties to First Federal with respect to, among other
things, their organization and qualification, capitalization,
authority with respect to the Agreement, reports and financial
statements, the absence of certain changes or events, taxes,
properties and assets, environmental hazards, litigation,
pending proceedings and compliance with laws, regulatory
compliance, employee benefit plans, insurance policies, material
agreements, breaches of agreements, allowances for loan losses
and real estate owned, agreements with insiders, affiliated
persons and affiliates, full disclosure and absence of
misrepresentations and information with respect to the Company
and the Bank contained in this Proxy Statement.
REPRESENTATIONS AND WARRANTIES AND COVENANTS OF FIRST FEDERAL
First Federal has made certain representations and
warranties to the Company and the Bank with respect to, among
other things, its organization and qualification, authority with
respect to the Agreement, regulatory approvals, the absence of
certain material adverse changes in the financial condition,
results of operations, business or capitalization of First
Federal, First Federal's possession of sufficient funds to pay
the Merger Consideration; and the truth and accuracy of its
representations and warranties and the information and documents
furnished or to be furnished to the Company by First Federal in
connection with the Agreement and for inclusion in this Proxy
Statement.
First Federal has also agreed that it will:
(a) from the date of the Agreement until the Effective
Time, furnish the Bank with copies of all of First Federal's
periodic reports on Forms 10-K, 10-Q and 8-K, all proxy
statements and all call reports filed with the OTS, or provided
to the stockholders of First Federal, subsequent to the date of
the Agreement;
14<PAGE>
<PAGE>
(b) in the event it becomes aware of the impending or
threatened occurrence of any event or condition which would
cause or constitute a material breach (or would have caused or
constituted a breach had such event occurred or been known prior
to the date of the Agreement) of any of its representations or
agreements contained or referred to herein, give prompt written
notice thereof to the Company and use its best efforts to
prevent or promptly remedy the same;
(c) use its best efforts promptly to and, in any
event, no later than 90 days after the date of the Agreement,
prepare, submit, publish and file (i) an application to the OTS
seeking approval for its acquisition of the Company and the Bank
in connection with the Merger; and (ii) any other applications,
notices or statements required to be filed in connection with
the transactions contemplated hereby;
(d) promptly supplement or amend its disclosure
schedule with respect to any matter hereafter arising after the
date of the Agreement that, if existing or occurring at the date
of the Agreement, would have been required to be set forth or
described in such disclosure schedule; and
(e) pay the expenses of the Company and the Bank
under the circumstances enumerated in the Agreement (see " --
Expenses" and " -- Termination Fee").
Further, First Federal has agreed that except as
specifically contemplated by the Agreement, it will not, and
will not agree to, without the prior written consent of the
Bank, take action which would or is reasonably likely to (i)
adversely affect the ability of either First Federal or the
Company and the Bank to obtain any necessary approvals of
governmental authorities required for the transactions
contemplated by the Agreement; (ii) adversely affect First
Federal's ability to perform its covenants and agreements under
the Agreement; or (iii) result in any of the conditions to the
Merger not being satisfied.
TERMINATION OF THE AGREEMENT
The Agreement will terminate on June 30, 1998 if the Merger
has not been consummated on or before that date, and may be
terminated at any time prior to the earlier of that date or the
Effective Time:
(a) by mutual written consent of the Board of
Directors of First Federal and the Board of Directors of the
Company;
(b) by written notice from First Federal to the
Company if:
(i) any condition to First Federal's obligations
under the Agreement shall have become impossible to
substantially satisfy at any time or has not been substantially
satisfied or waived in writing; or
(ii) any condition to all Parties' obligations
under the Agreement shall have become impossible to
substantially satisfy at any time or has not been substantially
satisfied or waived in writing, provided, however, First Federal
shall not have the right to terminate the Agreement on this
basis if any such condition was not met due to the failure of
First Federal to perform or observe the covenants and agreements
set forth in the Agreement; or
(iii) any warranty or representation made by the
Company or the Bank shall be discovered to be or to have become
untrue or incorrect in any material respect, or where any
statement in a representation or warranty expressly includes a
standard of materiality, such statement shall be discovered to
be or to have become untrue or incorrect in any respect taking
into consideration the standard of materiality contained
therein, in either case where any such breach has not been cured
within thirty (30) days following receipt by the Company or the
Bank of notice of such discovery; or
15<PAGE>
<PAGE>
(iv) the Company or the Bank shall have breached
one or more provisions of the Agreement in any material respect
considering all such breaches in the aggregate, where such
breach has not been cured within thirty (30) days following
receipt by the Company or the Bank of notice of such breach; or
(c) by written notice from the Company to First
Federal, if:
(i) any condition to the Company's obligations
under the Agreement shall have become impossible to
substantially satisfy at any time or has not been substantially
satisfied or waived in writing; or
(ii) any condition to all Parties' obligations
under the Agreement shall have become impossible to
substantially satisfy at any time or has not been substantially
satisfied or waived in writing; provided, however, the Company
shall not have the right to terminate the Agreement on this
basis if any such condition was not met due to the failure of
the Company or the Bank to perform or observe the covenants and
agreements set forth in the Agreement; or
(iii) any warranty or representation made by
First Federal shall be discovered to be or to have become untrue
or incorrect in any material respect, or where any statement in
a representation or warranty expressly includes a standard of
materiality, such statement shall be discovered to be or to have
become untrue or incorrect in any respect taking into
consideration the standard of materiality contained therein, in
either case where any such breach has not been cured within
thirty (30) days following receipt by First Federal of notice of
such discovery; or
(iv) First Federal shall have breached one or
more provisions of the Agreement in any material respect
considering all such breaches in the aggregate, where such
breach has not been cured within thirty (30) days following
receipt by First Federal of notice of such breach.
(d) by the Board of Directors of the Company if all of
the following conditions are met: (i) a person (including a
company or any other entity) makes a Superior Proposal; (ii)
within seven (7) business days after First Federal receives
written notice from the Company of such Superior Proposal, First
Federal does not increase the consideration to be paid to the
holders of Common Stock in the Merger so that it is at least as
favorable to the holders of Common Stock as the Superior
Proposal; (iii) the Board of Directors of the Company, to the
extent permitted by the Agreement, shall have failed to
recommend to stockholders, or shall have withdrawn or shall have
modified in a manner adverse to First Federal its recommendation
of, the Agreement or the Merger in order to permit the Bank to
enter into a definitive written agreement providing for the
transactions contemplated by such Superior Proposal; and (iv)
the Company or the person or entity making the Superior Proposal
shall have paid to First Federal the $900,000 termination fee,
to the extent such fee is payable pursuant to the provisions of
the Agreement, and the expenses of First Federal (including, but
not limited to, the fees and expenses of attorneys) incurred in
connection with negotiating the Agreement and effectuating the
consummation of the transactions contemplated thereby;
(e) by the Board of Directors of First Federal if the
Board of Directors of the Company shall not recommend, or shall
withdraw or modify in a manner adverse to First Federal, its
recommendation to the holders of Common Stock to approve the
Agreement;
(f) by the Board of Directors of First Federal or the
Company at any time after the Special Meeting if the
stockholders of the Company have not approved the Agreement by
the requisite affirmative vote;
(g) by the Board of Directors of First Federal or the
Company if the Merger has not been consummated on or before June
30, 1998.
In the event of termination of the Agreement, the Agreement
will become void and have no further effect except for certain
specified sections of the Agreement dealing with expenses,
access to records and confidentiality, and
16<PAGE>
<PAGE>
payment of termination fees. Upon termination, there shall be
no further liability by reason of the Agreement, or the
termination thereof, on the part of any of the Parties or their
respective directors, officers, employees, agents or
stockholders except that: (i) the obligation of the Company and
the Bank to pay to First Federal certain specified expenses and
damages under the circumstances described in " -- Expenses" and
" -- Termination Fee" herein will survive the termination of the
Agreement; and (ii) the mutual covenants with respect to the
confidentiality and use of non-public information will survive
the termination of the Agreement.
ADDITIONAL AGREEMENTS OF THE PARTIES
The Parties have also agreed that
(i) the Company shall call the Special Meeting and
take certain actions in connection therewith, including using
its best efforts to obtain stockholder approval of the
Agreement;
(ii) the Company will prepare a proxy statement
satisfying all requirements under the federal securities laws;
(iii) each Party will cooperate in the preparation and
submission of such applications, petitions, and other documents
and materials as either Party deem necessary or desirable to the
OTS, the FDIC, the Department of Justice, other regulatory
authorities, and other persons for purposes of obtaining
approvals or consents necessary to consummate the Agreement, as
well as each Party having the right to review and comment and
receive a copy of such applications, petitions and other filings
of the other Party;
(iv) the Company and the Bank, prior to the Effective
Time of the Merger, will prepare and file all required Bank's
regulatory reports, that will comply with all applicable
statutes, rules, and regulatory requirements, with such report
containing the Company Financial Statements which are prepared
in accordance with generally accepted accounting principals and
practices utilized by the Company on a consistent basis, and the
reports fairly present the consolidated financial condition and
the consolidated results of operations and cash flows for the
specified periods; and in the case of interim fiscal periods,
all adjustments consisting of only normal recurring items;
(v) all of the Parties agree to use all reasonable
efforts to take, or cause to be taken, all action necessary,
proper, or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by
the Agreement, including the period of time following the
Effective Date if any further action is necessary or desirable
to carry out the purposes of the Agreement or to vest First
Federal with full title to all properties, assets, rights,
approvals, immunities, and franchises of the Company or the
Bank;
(vi) each Party will consult with the other prior to
making any public announcement with respect to the transactions
contemplated by the Agreement, and will use its best efforts to
either agree upon the text of a proposed joint announcement by
both parties or to obtain the other's approval (not unreasonably
withheld) of the text of an announcement to be made solely on
behalf of such party;
(vii) First Federal will appoint Steven L. Opsal and
one additional individual to the First Federal Board of
Directors and to the Board of Directors of First Federal's
holding company, and First Federal will also appoint the other
members of the Board of Directors of the Bank, as of October 16,
1997, to serve as members of an advisory board to the Board of
Directors of First Federal for a period of one year following
the Effective Time, subject to reappointment at the discretion
of First Federal;
(viii) the Company and the Bank will permit First
Federal and its representatives, including its financial
advisors, reasonable access to properties, and will disclose and
make available to them all necessary documentation as indicated
in the Agreement;
17<PAGE>
<PAGE>
(ix) the Company will permit a representative of First
Federal to attend board meetings, including, without limitation,
the loan committee or asset/liability committee meetings;
(x) all information furnished in connection with the
transactions contemplated by the Agreement will be treated as
the sole property of the Party furnishing the information until
consummation of the Merger, and if the Merger does not occur,
the Party receiving the information shall, upon request, return
to the other Party which furnished the information all
documentation and other materials; then, each Party will use its
best efforts to keep confidential and not take competitive or
commercial advantage of all such information for a period of one
year from the date the Merger was abandoned, except for (A) that
information already in possession of the Party before it was
furnished, information generally known to the public or became
known to the public by no fault of the receiving party; and (B)
any disclosures pursuant to legal requirement or in accordance
with a court order of competent jurisdiction; and
(xi) at the request of First Federal and prior to the
Effective Time, the Company shall, (A) establish and take such
reserves and accruals as First Federal shall reasonably request
to conform, on a mutually satisfactory basis, the Company's
loan, real estate, accrual and reserve policies to First
Federal's policies, and (B) establish and take such accruals,
reserves and charges in order to implement such policies in
respect of severance costs, write-off or write-down of various
assets and other appropriate accounting adjustments, and to
recognize for financial accounting purposes such expenses
incurred in connection with the Reorganization, provided that
such action by the Bank shall not be taken until First Federal
specifies its request in writing delivered to the Company , and
acknowledges that all conditions to the obligations of First
Federal to consummate the Reorganization set forth in the
Agreement have been waived or satisfied and the Company and the
Bank acknowledge that the conditions to its obligation to
consummate the Merger set forth in the Agreement have been
waived or satisfied (the representations, warranties and
covenants of the Company and the Bank contained the Agreement
shall not be deemed to be untrue or breached in any respect for
any purpose as a consequence of any action undertaken on account
of this provision of the Agreement and shall not constitute
grounds for termination of the Agreement by First Federal).
WAIVER AND AMENDMENT
Each Party to the Agreement may in writing waive the
obligations to it of any other Party under the Agreement. In
addition, the Agreement may be amended by a written document
signed by all parties to the Agreement. However, after the
Company's shareholders have approved the Agreement, the
Agreement may only be amended if, in the opinion of the
Company's Board of Directors, such amendment would not have a
material adverse effect on the benefits intended to be conferred
under the Agreement for the Company's shareholders and would not
require resolicitation of the proxies sought thereby.
EXPENSES
Generally, all expenses incurred by First Federal and the
Company in connection with or related to the authorization,
preparation and execution of the Agreement, the solicitation of
stockholder approvals and all other matters related to the
closing of the transactions contemplated thereby will be borne
by the Party that has incurred them. The Parties have agreed,
however, to pay the other Party's reasonable out-of-pocket
expenses, in an amount not to exceed $300,000, in the event the
Agreement is terminated as a result of a willful breach in which
(i) any warranty or representation of the breaching Party
becomes untrue or incorrect in any material respect and such
breach is not cured within thirty (30) days following receipt of
notice of the breach, or (ii) one or more provisions of the
Agreement is breached in any material respect considering all
such breaches in the aggregate, where such breach has not been
cured within thirty (30) days following receipt of notice of the
breach.
18<PAGE>
<PAGE>
TERMINATION FEE
In order to induce First Federal to enter into the Agreement
and as a means of compensating First Federal for the substantial
direct and indirect monetary and other costs incurred and to be
incurred in connection with the Agreement and the transactions
contemplated thereby, the Company and the Bank have agreed
pursuant to the Agreement that the Bank shall pay to First
Federal a fee of $900,000, upon the occurrence of any of the
following events on or before the earlier of the date the
Agreement is terminated or June 30, 1998:
(i) if the Board of Directors of the Company
recommends a Superior Proposal and thereafter (A) the Special
Meeting shall not have been held or shall have been postponed,
delayed or enjoined prior to termination of the Agreement or (B)
the Company's shareholders do not approve the Agreement;
(ii) if the Board of Directors of the Company
withdraws or modifies its recommendation of approval of the
Agreement, and thereafter (A) the Special Meeting shall not have
been held or shall have been postponed, delayed or enjoined
prior to termination of the Agreement or (B) the Company's
shareholders do not approve the Agreement;
(iii) if the Company's shareholders do not approve
the Agreement after a Superior Proposal is made and within
twelve (12) months thereafter the Company enters into a
definitive agreement to be merged into or acquired by another
entity (provided, however, that the Bank shall pay all
reasonable out- of-pocket expenses of First Federal incurred by
it in connection with the Agreement, in an amount not to exceed
$300,000, within five business days following rejection of the
Agreement by Company shareholders);
(iv) if the Company or the Bank enters into an
agreement to be acquired by any other party; or
(v) if the Company both (1) fails to receive the
opinion of its financial advisor that the Merger is fair to the
Company's shareholders from a financial point of view, and such
failure occurs after a Superior Proposal is made, and (2) the
Merger is not consummated.
With the exception of the payment under subparagraph (iii)
above, which shall be paid within five business days following
the Company's execution of a definitive agreement of merger or
acquisition (except that the expenses of First Federal shall be
paid as provided in (iii) above), such payment shall be made to
First Federal in immediately available funds within five
business days after the occurrence of an event set forth above.
EFFECT ON EMPLOYEES AND CERTAIN EMPLOYEE BENEFIT PLANS
Employment Arrangements. The Agreement states that it is
First Federal's intention to offer continued employment to
employees of the Bank as of the Effective Time at the base
salary levels in effect at the Effective Time (provided that the
Agreement shall not, except as otherwise provided therein,
provide any contractual right to employees of such employment).
Employee Benefit Plans. Employees of the Bank who continue
employment with First Federal on or after the Effective Time
("Continuing Employees") shall be eligible to participate in
such employee benefit plans as may be in effect generally for
employees of First Federal from time to time (the "First Federal
Plans"), if such Continuing Employee shall be eligible or
selected for participation therein. Generally, Continuing
Employees will be entitled to participate on the same basis as
similarly situated employees of First Federal, except that
Continuing Employees shall be entitled to full credit for each
year of prior service (in which 1,000 hours of service are
performed) with the Bank for purposes of determining eligibility
for participation and vesting, but not for benefit accruals, in
the First Federal Plans, subject to applicable break in service
rules. Participation by Continuing Employees in employee
benefit plans
19<PAGE>
<PAGE>
of First Federal with respect to which eligibility and
participation is at the discretion of the employer, such as
non-qualified deferred compensation plans, stock option plans,
stock bonus plans, restricted stock plans, and other such
similar plans, (but not including employee benefit plans
generally available to all full-time employees of First Federal)
shall be discretionary with First Federal.
At or immediately following the Effective Time, the
Financial Institutions Retirement Plan, as adopted by the Bank,
will be merged with a comparable plan of First Federal. Future
benefit accruals shall be made in accordance with the adoption
agreement that relates to the retirement plan adopted by First
Federal. Any benefits accrued by participants in the retirement
plan adopted by the Bank attributable to service before the
Effective Time shall not be reduced. Under the terms of the
Agreement, the Bank is permitted to, and intends to, amend the
Bank's retirement plan to assure that a portion of the excess
funding in such plan as of June 30, 1997 (determined in
accordance with a formula set forth in the Agreement) inures
solely to the benefit of individuals who have become
participants in such plan.
Under the Agreement, the Bank's Employee Stock Ownership
Plan ("ESOP") will automatically terminate as of the Effective
Time. Thereafter, the outstanding balance of the ESOP loan
shall be repaid from the cash proceeds in the ESOP suspense
account and the remainder shall be allocated to participants of
the plan, in accordance with applicable law and the rules and
regulations of the Internal Revenue Service ("IRS"). In
connection with the termination of the ESOP, the Bank has
applied to the IRS for a favorable determination letter on the
tax-qualified status of the ESOP on termination and on any
amendments made to the ESOP in connection with its termination
or otherwise. Any and all distributions from the ESOP after its
termination shall be made consistent with such determination
letter. As of the Effective Time, the administrative authority
over the ESOP, including the authority to appoint and remove
trustees of the ESOP trustees, shall be exercised by a committee
consisting of Steven L. Opsal and another individual to be
selected by the Bank prior to the Effective Time.
Under the Agreement, Grinnell has agreed to amend its
tax-qualified 401(k) Plan to disallow further employee elective
deferrals to such plan and will further amend its 401(k) Plan to
provide for the return of employee elective deferrals if annual
additions (i.e., generally, employer contributions and employee
elective deferrals) have been made in excess of the amounts
permitted under the tax laws.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of the Board of Directors and management of
the Company and the Bank may be deemed to have certain interests
in the Merger in addition to their interests as stockholders of
the Company generally. The Board of Directors of the Company
was aware of these interests and considered them, among other
matters, in unanimously approving the Agreement and the
transactions contemplated thereby. See " -- Recommendation of
the Board of Directors; Reasons for the Merger."
Change in Control Payment. Mr. William T. Nassif and Mr.
Dale Nelson are parties to employment agreements with the Bank
that provide for severance upon the occurrence of certain
events, including termination of their employment under such
agreements following a change in control of the Company or the
Bank. It is currently anticipated that in connection with the
Merger, Messrs. Nassif and Nelson will receive approximately
$259,000 and $152,000, respectively, as of the Effective Time
pursuant to these employment agreements.
<PAGE>
Employment Agreements. In order to maintain the continuity
of the Company's and the Bank's business operations after the
Effective Time, First Federal has entered into employment
agreements with Officers Leroy Meredith, Steven Opsal, Katherine
Rose, Glenyce Conway, Chris Christinson and Ginger Sterk. The
employment agreements provide for continued employment of these
individuals with First Federal under the terms and conditions
which are consistent with each individual's past position with
the Bank, with the exception that Mr. Opsal's base salary is
expected to increase from $90,000 to $110,000.
20<PAGE>
<PAGE>
Stock Options. For a discussion of the treatment of
outstanding Company stock options under the Agreement, see " --
Treatment of Outstanding Stock Options." Set forth below are
the number and value of stock options currently held by the
Company's executive officers and directors.
<TABLE>
<CAPTION>
Number of Net Realizable
Shares Underlying Value of
Name Position Issued Options Issued Options
- ---- -------- -------------- --------------
<S> <C> <C> <C>
LeRoy E. Meredith Director, Chairman of the Board 26,406 $ 259,454
Steven L. Opsal President, Chief Executive Officer
and Director 26,406 $ 259,454
Katherine A. Rose Sr. Vice President, Chief Financial
Officer and Director 17,522 $ 178,133
William T. Nassif Senior Vice President and Chief
Operating Officer 8,000 $ 74,440
Donald H. Howig Director 5,760 $ 67,424
Scott A. Jensen Director 3,856 $ 43,338
David S. Clay Director 4,456 $ 33,477
Thomas M. Groth Director 4,808 $ 55,381
Theodore Mokricky Director 4,808 $ 55,381
</TABLE>
Restricted Stock Awards. The Company has previously issued
shares of Common Stock pursuant to the Company's Recognition and
Retention Plan (the "RRP") to directors, officers and employees
of the Company and the Bank. Pursuant to the terms of the RRPs,
vesting is accelerated in the event of a change in control of
the Company. As a result of the change in control of the
Company due to the Merger, at the Effective Time, Director David
S. Clay and Officer William T. Nassif will become immediately
fully vested in 286 and 900 shares of Common Stock,
respectively, with an approximate aggregate value (based on a
per share price of $17.65) of $5,047 and $15,885, respectively.
Employee Stock Ownership Plan. As noted above, on or before
the Effective Time, the Bank will cause the ESOP to be
terminated as of the Effective Time. Upon its termination, the
assets of the ESOP will be distributed to its participants in
accordance with the terms of such plan. Based on their current
interests in the ESOP, Messrs. Opsal, Nassif, Meredith and Rose
are expected to receive ESOP distributions of approximately
$72,400, $41,400, $64,800 and $51,300, respectively.
Insurance; Indemnification. First Federal has agreed that,
for a period of four (4) years following the Effective Time, it
will indemnify the employees, agents, directors or officers of
the Company and the Bank to the extent they are indemnified
under the Company's Certificate of Incorporation and Bylaws in
the form in effect at the date of the Agreement or arising by
operation of law. First Federal has also agreed to use its best
efforts to cause the Company's directors and officers to be
covered under individual directors' and officers' liability
insurance policies for the duration of any applicable statute of
limitations, provided the cost of such coverage shall not exceed
$7,500.
21<PAGE>
<PAGE>
Advisory Board. Pursuant to the Agreement, First Federal
has agreed to appoint Mr. Opsal and one additional individual to
the First Federal Board of Directors and to the Board of First
Federal's holding company as of the Effective Time, and to
permit the remaining members of the Bank's Board of Directors to
serve on an advisory board to First Federal for a period of one
year following the Effective Time, subject to reappointment at
the sole discretion of First Federal. Such advisory board
members are expected to receive an annual fee of at least $2,000
plus $200 per meeting attended; provided, that Mr. Meredith's
compensation is expected to be $9,000. Such appointments will
be effective as of the Effective Time.
Deferred Compensation Plan for Company Chairman. The
Agreement provides that the deferred compensation plan
maintained by the Bank for the benefit of Mr. Leroy Meredith,
Chairman of the Company and the Bank, shall be terminated as of
the Effective Time, and all benefits under the plan shall be
paid out in a lump sum to Mr. Meredith. Alternatively, the Bank
in its sole discretion may establish an irrevocable trust and
deposit therein guaranteed investment contracts in amounts
sufficient to provide the monthly benefits specified in
accordance with the deferred compensation plan for Mr. Meredith.
To the extent that a lump sum is not paid as of the Effective
Time, First Federal shall assume the payment of the liabilities
in such plan thereafter. The amount of the obligation of such
plan that was accrued as of September 30, 1997 was $132,677 and
the amount estimated to be necessary to complete the funding of
such plan is $77,323.
CERTAIN MATERIAL FEDERAL INCOME TAX CONSEQUENCES
THE FOLLOWING IS A SUMMARY OF THE MATERIAL FEDERAL INCOME
TAX CONSEQUENCES OF THE MERGER TO STOCKHOLDERS OF THE COMPANY.
THE TAX DISCUSSION SET FORTH BELOW DOES NOT CONSIDER THE FACTS
AND CIRCUMSTANCES OF THE SITUATION OF EACH OF THE COMPANY'S
STOCKHOLDERS. EACH STOCKHOLDER OF THE COMPANY IS URGED TO
CONSULT HIS OR HER OWN TAX AND FINANCIAL ADVISORS AS TO THE
MATTERS DESCRIBED HEREIN AND ALSO AS TO ANY STATE, LOCAL,
FOREIGN OR OTHER TAX CONSEQUENCES ARISING OUT OF THE MERGER.
For federal income tax purposes, the receipt of cash by a
stockholder of the Company in exchange for shares of the Common
Stock pursuant to the Merger will constitute a taxable
transaction to such stockholder. In general, a stockholder who
receives cash in the Merger in exchange for such stockholder's
shares of Common Stock will recognize gain or loss equal to the
difference, if any, between (i) the sum of the cash payment of
$17.65 per share received from First Federal in exchange for the
shares of the Common Stock and (ii) the stockholder's tax basis
in such Common Stock. Any gain or loss will be treated as
capital gain or loss if the Common Stock exchanged was held as a
capital asset in the hands of the stockholder.
The cash payments due to the holders of the Common Stock
upon the exchange thereof pursuant to the Merger (other than
certain exempt entities and persons), will be subject to a
backup withholding tax at the rate of 31% unless certain
requirements are met. Generally, the Exchange Agent will be
required to deduct and withhold the tax if: (i) the stockholder
fails to furnish a taxpayer identification number ("TIN") to the
Exchange Agent or fails to certify under penalty of perjury that
such TIN is correct; (ii) the Internal Revenue Service ("IRS")
notifies the Exchange Agent that the TIN furnished by the
stockholder is incorrect; (iii) the IRS notifies the Exchange
Agent that the stockholder has failed to report interest,
dividends or original issue discount in the past; or (iv) there
has been a failure by the stockholder to certify under penalty
of perjury that such stockholder is not subject to the backup
withholding tax. Any amounts withheld by the Exchange Agent in
collection of the backup withholding tax will reduce the federal
income tax liability of the stockholders from whom such tax was
withheld. The TIN of an individual stockholder is that
stockholder's Social Security number.
No ruling has been or will be requested from the IRS as to
any of the tax effects of any of the transactions discussed in
this Proxy Statement to stockholders of the Company, and no
opinion of counsel has been or will be rendered to the Company's
stockholders with respect to any of the tax effects of the
Merger to the Company's stockholders.
22<PAGE>
<PAGE>
ACCOUNTING TREATMENT
The Company has been advised by First Federal that the
transaction will be accounted for utilizing purchase accounting
as required by Accounting Principles Board Opinion No. 16
Business Combinations.
REGULATORY APPROVALS
The Merger is subject to the approval of the OTS. First
Federal has filed an application with the OTS for approval of
the Merger. As of the date of this Proxy Statement, the
approval of the OTS has not been received. There can be no
assurance as to the timing of such approval, if given, or as to
the conditions, if any, on which approval will be given. In
addition, the approval, if and when granted, may contain
conditions which First Federal may find unduly burdensome. When
such approval is received, material changes to the Agreement,
material conditions, or other changes of a material nature may
be imposed by regulatory authorities in connection therewith
which could require a resolicitation of the Company's
stockholders for approval. Following OTS approval of the
Merger, the U.S. Department of Justice may review the Merger and
raise objections on antitrust grounds, though objections on such
grounds are not expected. If the required regulatory approvals
are not obtained, the Agreement will be terminated, and the
Merger will not occur.
PROPOSAL II - ADJOURNMENT OF THE SPECIAL MEETING
Approval of the Agreement requires the affirmative vote of
at least a majority of the votes entitled to be cast by the
holders of the Common Stock. In the event there is an
insufficient number of shares present in person or by proxy at
the Special Meeting to approve the Agreement, the Board of
Directors intends to adjourn the Special Meeting to a later
date. The place and date to which the Special Meeting would be
adjourned would be announced at the Special Meeting, but would
in no event be more than 30 days after the date of the Special
Meeting.
The effect of any such adjournment would be to permit the
Company to solicit additional proxies for approval of the
Agreement. While such an adjournment would not invalidate any
proxies previously filed, including those filed by stockholders
voting against the Agreement, it would give the Company the
opportunity to solicit additional proxies in favor of the
Agreement.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF
THE ADJOURNMENT UNDER THE CIRCUMSTANCES DESCRIBED HEREIN.
APPROVAL OF THE ADJOURNMENT REQUIRES THE AFFIRMATIVE VOTE OF THE
HOLDERS OF A MAJORITY OF THE SHARES OF COMMON STOCK PRESENT IN
PERSON OR BY PROXY AT THE SPECIAL MEETING.
23<PAGE>
<PAGE>
STOCK OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table sets forth, as of the Record Date,
certain information as to those persons who were beneficial
owners of more than five percent (5%) of the Common Stock and as
to the shares of the Common Stock beneficially owned by each of
the Company's directors and executive officers required to be
named in a summary compensation table and by all executive
officers and directors of the Company as a group. Persons and
groups owning in excess of 5% of the Common Stock are required
to file certain reports regarding such ownership pursuant to the
Exchange Act. Based upon such reports, management knows of no
persons, other than those set forth below, who owned more than
5% of the outstanding shares of the Common Stock as of the
Record Date.
<TABLE>
<CAPTION>
Percentage of
Amount and Nature Shares of
of Beneficial Common Stock
Ownership (1) Outstanding
----------------- -------------
<S> <C> <C>
Manatt Enterprises Limited
Box 535
Brooklyn, Iowa 52211 73,500 7.4%
GFS Bancorp, Inc.
Employee Stock Ownership Plan
1025 Main Street
Grinnell, Iowa 50112 (2) 84,640 8.5%
Steven L. Opsal, President
and Chief Executive Officer (3) 58,815 5.8%
All directors and executive
officers of the Company
as a group (9 persons) (4) 249,595 22.7%
<FN>
_______________
(1) In accordance with Rule 13d-3 under the Exchange Act, a
person is deemed to be the beneficial owner, for purposes
of this table, of any shares of the Common Stock if he or
she has sole or shared voting or investment power with
respect to such shares, or has a right to acquire
beneficial ownership at any time within 60 days from the
Record Date. As used herein, "voting power" is the power
to vote or direct the voting of shares and "investment
power" is the power to dispose or direct the disposition
of shares. Except as otherwise noted, ownership is direct
and the individuals in the group exercise sole voting
and investment power over the shares of the Common Stock.
(2) The amount reported represents shares held by the
Company's ESOP, 46,351 shares of which were allocated to
accounts of participants. First Bankers Trust Company,
N.A., the trustee of the ESOP, may be deemed to
beneficially own the shares held by the ESOP which have
not been allocated to the accounts of participants or are
not voted by participants. Pursuant to the terms of the
ESOP, participants in the ESOP have the right to direct
the voting of shares allocated to participant accounts.
(3) Includes 16,016 shares held directly, 5,520 shares held by
Mr. Opsal's spouse, 3,522 shares held by Mr. Opsal's minor
children, 7,351 shares allocated to Mr. Opsal's account
under the ESOP and 26,406 shares subject to option.
(4) Includes shares held directly, as well as jointly with
family members, and shares held in retirement accounts in
a fiduciary capacity or by certain family members, with
respect to which shares the listed individuals or group
members may be deemed to have sole or shared voting and/or
investment power. This table also includes 22,675 shares
allocated to the accounts of executive officers under the
ESOP, options to purchase 102,022 shares of Common Stock
granted to directors and executive officers and 1,186
shares of restricted Common Stock awarded pursuant to the
RRP.
</FN>
</TABLE>
24<PAGE>
<PAGE>
MARKET FOR THE COMMON STOCK
The Common Stock is traded over-the-counter and is listed
on the Nasdaq "Small Cap" Market under the symbol "GFSB." At
January 13, 1998, there were 996,242 shares of Common Stock
issued and outstanding and there were approximately 247 holders
of record and approximately 505 beneficial holders. The high
and low sales prices of the Common Stock on October 10, 1997,
the last trading date on which the Common Stock was traded
before the Agreement was signed, were $16 7/16 and $16.00,
respectively. Upon consummation of the Merger, the Common Stock
will no longer be traded over-the-counter market or quoted on
Nasdaq.
INDEPENDENT ACCOUNTANTS
Representatives of McGladrey & Pullen LLP, the Company's
independent accountants, are expected to be present at the
Special Meeting. They will be afforded the opportunity to make
a statement if they desire to do so and will be available to
respond to appropriate questions.
STOCKHOLDER PROPOSALS
In the event the Merger is not consummated and the 1998
Annual Meeting of Stockholders is held, any stockholder proposal
intended for inclusion in the Company's proxy statement and
proxy relating to the 1998 Annual Meeting of Stockholders must
be received at the Company's main office at 1025 Main Street,
Grinnell, Iowa, no later than May 28, 1998. Any such proposal
shall be subject to the requirements of the proxy rules adopted
under the Exchange Act.
MISCELLANEOUS
The Board of Directors is not aware of any business to come
before the Special Meeting other than those matters described
above in this Proxy Statement and matters incident to the
conduct of the Special Meeting. However, if any other matters
should properly come before the Meeting, it is intended that
proxies in the accompanying form will be voted in respect
thereof in accordance with the determination of the Board of
Directors.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-KSB for the fiscal
year ended June 30, 1997, as amended, previously filed with the
Securities and Exchange Commission, is hereby incorporated by
reference in this Proxy Statement. A copy of the Annual Report
on Form 10-KSB, as amended, will be furnished by first class
mail (or other equally prompt means) without charge to
stockholders, as of the record date upon oral or written request
to: GFS Bancorp, Inc., Investor Relations Department, 1025 Main
Street, Grinnell, Iowa (telephone (515) 236-3121). In addition,
the Form 10-QSB and the Annual Report accompany this Proxy
Statement and are also hereby incorporated by reference herein.
All documents filed by the Company pursuant to Sections
13(a) or 15(d) of the Exchange Act since 1997 are deemed to be
incorporated herein by reference to this Proxy Statement and are
deemed to be a part hereof from the date of filing of such
documents. Any such documents will be furnished without charge
to stockholders as of the record date upon oral or written
request directed to the Company as described above.
25<PAGE>
<PAGE>
Any statement contained in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Proxy Statement
to the extent that a statement contained herein or in any
subsequently filed document which also is or is deemed to be
incorporated herein modified or supersedes such statement. Any
statement so modified or superseded shall not be deemed to
constitute a part of this Proxy Statement, except as so modified
or superseded.
All information contained in this proxy statement with
respect to First Federal has been supplied by First Federal and
all information with respect to the Company and the Bank has
been supplied by the Company.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Ginger L. Sterk
Ginger L. Sterk
Secretary
Grinnell, Iowa
February 4, 1998
<PAGE>
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
BY AND BETWEEN
FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
GFS BANCORP, INC.
AND
GRINNELL FEDERAL SAVINGS BANK
Dated: October 16, 1997
<PAGE>
<PAGE>
TABLE OF CONTENTS
Page No.
ARTICLE I. . . . . . . . . . . . . . . . . . . . . . . . . . .2
THE REORGANIZATION . . . . . . . . . . . . . . . . . . . . .2
1.1. The Reorganization . . . . . . . . . . . . . . . . .2
1.2 Adoption and Execution and Delivery of Documents
providing for the Reorganization. . . . . . . . . . .3
1.3. Effective Time and Closing of the Reorganization. . .3
1.4 Modification of Structure . . . . . . . . . . . . . .3
ARTICLE II.. . . . . . . . . . . . . . . . . . . . . . . . . .4
EFFECT OF THE REORGANIZATION; CERTAIN ACTIONS IN
CONNECTION THEREWITH. . . . . . . . . . . . . . . . . . .4
2.1. Effect of the Reorganization.. . . . . . . . . . . .4
2.2. Effect on Common Stock of the Company and First
Federal. . . . . . . . . . . . . . . . . . . . . . .4
2.3. First Federal to Make Cash Available . . . . . . . .5
2.4. Payment of Cash. . . . . . . . . . . . . . . . . . .5
2.5. Recapitalization or Stock Dividends. . . . . . . . .6
ARTICLE III. . . . . . . . . . . . . . . . . . . . . . . . . .6
REPRESENTATIONS AND WARRANTIES OF GRINNELL. . . . . . . .6
3.1. Corporate Organization.. . . . . . . . . . . . . . .7
3.2. Capitalization.. . . . . . . . . . . . . . . . . . .8
3.3. Authorization. . . . . . . . . . . . . . . . . . . .9
3.4. No Violation.. . . . . . . . . . . . . . . . . . . .9
3.5. Reports and Consolidated Financial Statements. . . 10
3.6. Consents and Approvals.. . . . . . . . . . . . . . 10
3.7. Absence of Certain Changes.. . . . . . . . . . . . 11
3.8. Employee and Employee Benefits Matters.. . . . . . 11
3.9. Litigation.. . . . . . . . . . . . . . . . . . . . 14
3.10.Tax Matters .. . . . . . . . . . . . . . . . . . . 14
3.11.Information in the Company Proxy Statement . . . . 15
3.12.Environmental Matters .. . . . . . . . . . . . . . 15
3.13.Insurance. . . . . . . . . . . . . . . . . . . . . 17
3.14.Compliance with Laws and Orders. . . . . . . . . . 17
3.15.Governmental Regulation. . . . . . . . . . . . . . 18
3.16.Contracts and Commitments. . . . . . . . . . . . . 18
3.17.Agreements with Directors, Officers and
Stockholders . . . . . . . . . . . . . . . . . . . 18
3.18.Accuracy of Information. . . . . . . . . . . . . . 19
3.19 [Reserved] . . . . . . . . . . . . . . . . . . . . 19
3.20 Allowances for Losses and Real Estate Owned. . . . 19
3.21 Title to Assets; Leases. . . . . . . . . . . . . . 19
3.22.Business of Grinnell . . . . . . . . . . . . . . . 20
3.23.Tax Matters. . . . . . . . . . . . . . . . . . . . 20
<PAGE>
<PAGE>
ARTICLE IV.. . . . . . . . . . . . . . . . . . . . . . . . . 20
REPRESENTATIONS AND WARRANTIES OF FIRST FEDERAL . . . . 20
4.1. Corporate Organization.. . . . . . . . . . . . . . 20
4.2. Authorization. . . . . . . . . . . . . . . . . . . 21
4.3. No Violation.. . . . . . . . . . . . . . . . . . . 21
4.4. Consents and Approvals.. . . . . . . . . . . . . . 21
4.5. Information Supplied for Inclusion in the
Company Proxy Statement. . . . . . . . . . . . . . 21
4.6. Cash Payment.. . . . . . . . . . . . . . . . . . . 22
4.7. Accuracy of Information. . . . . . . . . . . . . . 22
4.8. Regulatory Approvals and No Adverse Change.. . . . 22
ARTICLE V. . . . . . . . . . . . . . . . . . . . . . . . . . 22
COVENANTS OF FIRST FEDERAL. . . . . . . . . . . . . . . 22
5.1. Affirmative Covenants. . . . . . . . . . . . . . . 22
5.2. Negative Covenants.. . . . . . . . . . . . . . . . 22
5.3. Breaches.. . . . . . . . . . . . . . . . . . . . . 23
5.4. Filing of Applications . . . . . . . . . . . . . . 23
5.5. Supplement to First Federal Disclosure Schedule. . 23
5.6. Expenses.. . . . . . . . . . . . . . . . . . . . . 23
ARTICLE VI.. . . . . . . . . . . . . . . . . . . . . . . . . 23
COVENANTS OF THE COMPANY AND GRINNELL . . . . . . . . . 23
6.1. Affirmative Covenants. . . . . . . . . . . . . . . 24
6.2. Negative Covenants.. . . . . . . . . . . . . . . . 24
6.3. Report to First Federal. . . . . . . . . . . . . . 27
6.4. Breaches.. . . . . . . . . . . . . . . . . . . . . 27
6.5. Supplement to Disclosure Schedule. . . . . . . . . 28
6.6. Consents and Approvals.. . . . . . . . . . . . . . 28
6.7. Expenses.. . . . . . . . . . . . . . . . . . . . . 28
ARTICLE VII. . . . . . . . . . . . . . . . . . . . . . . . . 28
ADDITIONAL AGREEMENTS . . . . . . . . . . . . . . . . . 28
7.1. Company Shareholders' Meeting. . . . . . . . . . . 28
7.2. Proxy Statement for Company Shareholders' Meeting. 29
7.3. Cooperation; Regulatory Approvals. . . . . . . . . 29
7.4. Reports. . . . . . . . . . . . . . . . . . . . . . 29
7.5. Brokers or Finders.. . . . . . . . . . . . . . . . 30
7.6. Additional Agreements; Reasonable Efforts. . . . . 30
7.7. Release of Information.. . . . . . . . . . . . . . 30
7.8. Directors and Advisory Directors.. . . . . . . . . 30
7.9. Access to Properties and Records; Confidentiality. 30
7.10.Certain Policies . . . . . . . . . . . . . . . . . 31
7.11.Employee Benefit Plans; Employment Arrangements. . 32
7.12.Company Stock Options. . . . . . . . . . . . . . . 34
7.13.D&O Indemnification and Insurance. . . . . . . . . 35
<PAGE>
<PAGE>
ARTICLE VIII.. . . . . . . . . . . . . . . . . . . . . . . . 36
CONDITIONS TO THE OBLIGATIONS OF FIRST FEDERAL. . . . . 36
8.1. No Material Adverse Change.. . . . . . . . . . . . 36
8.2. Representations and Warranties.. . . . . . . . . . 36
8.3. Performance and Compliance.. . . . . . . . . . . . 36
8.4. No Proceeding or Litigation. . . . . . . . . . . . 36
8.5. Consents Under Agreements. . . . . . . . . . . . . 36
8.6. No Amendments to Resolutions.. . . . . . . . . . . 37
8.7. Certificate of Grinnell Officers.. . . . . . . . . 37
8.8. Corporate Proceedings.. . . . . . . . . . . . . . 37
8.9. Legal Opinion. . . . . . . . . . . . . . . . . . . 37
8.10. Closing Book Value. . . . . . . . . . . . . . 37
ARTICLE IX.. . . . . . . . . . . . . . . . . . . . . . . . . 38
CONDITIONS TO THE OBLIGATIONS OF THE COMPANY AND
GRINNELL. . . . . . . . . . . . . . . . . . . . . . . . 38
9.1. Representations and Warranties.. . . . . . . . . . 38
9.2. Performance and Compliance.. . . . . . . . . . . . 38
9.3 Corporate Proceedings. . . . . . . . . . . . . . . 38
9.4. Certificate of First Federal Officers. . . . . . . 38
9.5. Legal Opinion. . . . . . . . . . . . . . . . . . . 38
9.6. Opinion of Financial Advisor . . . . . . . . . . . 38
ARTICLE X. . . . . . . . . . . . . . . . . . . . . . . . . . 39
CONDITIONS TO THE OBLIGATIONS OF ALL PARTIES. . . . . . 39
10.1.Governmental Approvals . . . . . . . . . . . . . . 39
10.2.No Injunctions or Restraints . . . . . . . . . . . 39
10.3.Stockholder Approval . . . . . . . . . . . . . . . 39
10.4 Corporate Proceedings. . . . . . . . . . . . . . . 39
ARTICLE XI.. . . . . . . . . . . . . . . . . . . . . . . . . 40
TERMINATION . . . . . . . . . . . . . . . . . . . . . . 40
11.1.Reasons for Termination. . . . . . . . . . . . . . 40
11.2.Effect of Termination. . . . . . . . . . . . . . . 42
ARTICLE XII. . . . . . . . . . . . . . . . . . . . . . . . . 42
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . 42
12.1. Nonsurvival of Representations, Warranties
and Agreements . . . . . . . . . . . . . . . . . 42
12.2. Expenses and Termination Fee . . . . . . . . . . 42
12.3. Waivers; Amendments. . . . . . . . . . . . . . . 43
12.4. Assignment; Parties in Interest. . . . . . . . . 43
12.5. Entire Agreement . . . . . . . . . . . . . . . . 43
12.6. Captions and Counterparts. . . . . . . . . . . . 44
12.7. Certain Definitions. . . . . . . . . . . . . . . 44
12.8. Enforcement of this Agreement. . . . . . . . . . 44<PAGE>
<PAGE>
12.9. Governing Law. . . . . . . . . . . . . . . . . . 44
12.10. Notices . . . . . . . . . . . . . . . . . . . . 45
SCHEDULES
Schedule 3.1(a)
Schedule 3.2
Schedule 3.5
Schedule 3.6
Schedule 3.7
Schedule 3.8(a)
Schedule 3.8(b)
Schedule 3.9
Schedule 3.10
Schedule 3.12(f)
Schedule 3.13
Schedule 3.14
Schedule 3.15
Schedule 3.16
Schedule 3.17
Schedule 3.21(b)
Schedule 7.5
Schedule 7.11(c)
Schedule 7.11(f)
<PAGE>
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization, dated as of
October 16, 1997 (the "Agreement"), is entered into by and
between First Federal Savings Bank of Siouxland ("First
Federal"), GFS Bancorp, Inc. (the "Company" or "GFS") and
Grinnell Federal Savings Bank ("Grinnell").
R E C I T A L S:
1. First Federal is a federally-chartered stock savings
bank headquartered in Sioux City, Iowa, 53.8% of the
issued and outstanding capital stock of which is owned
by First Federal Bankshares, M.H.C. ("Bancorp"), a
federally-chartered mutual holding company.
2. GFS is a company organized under the laws of the State
of Delaware, is registered with the Office of Thrift
Supervision as a unitary savings and loan holding
company, and owns 100% of the issued and outstanding
common stock of Grinnell.
3. Grinnell is a federally-chartered savings bank
headquartered in Grinnell, Iowa.
4. The parties desire to provide for First Federal's
acquisition of Grinnell pursuant to the transactions
set forth in this Agreement on or after the Effective
Time (as defined in Section 1.3 hereof).
5. In connection with the Reorganization, as defined
herein, the outstanding capital stock of the Company
will be converted into the right to receive cash and,
subject to certain regulatory conditions or approvals,
if applicable, the outstanding stock options of the
Company will be converted into First Federal stock
options.
6. It is intended that First Federal and Grinnell will be
merged such that First Federal will be the surviving
bank and that the resulting savings institution will
expand its market area and achieve certain economies
of scale and efficiencies as a result of the
Reorganization, as defined herein.
In consideration of the premises and the mutual covenants,
representations, warranties, and agreements herein contained,
and in order to set forth the conditions upon which the
foregoing Reorganization, as defined herein, will be carried
out, the parties, intending to be legally bound, hereby
agree as follows:<PAGE>
<PAGE>
ARTICLE I.
THE REORGANIZATION
1.1. The Reorganization. Subject to the terms and
conditions of this Agreement, and in accordance with the
provisions of Section 18(c) of the Federal Deposit Insurance Act
(12 U.S.C. 1828(c)), as amended (the "Bank Merger Act"), the
Home Owners' Loan Act (the "HOLA"), and the rules and
regulations promulgated thereunder including 12 C.F.R. 563.22
and 574.3(a) (the "Thrift Regulations"), at the Effective Time,
the parties hereby agree that the following corporate
transactions (collectively referred to herein as the
"Reorganization") shall occur substantially concurrently in the
order set forth below in accordance with applicable laws and
regulations and the provisions of this Agreement:
(a) Pursuant to the Agreement of Merger, attached hereto
as Exhibit A, among First Federal, the Company, and a
to-be-formed Delaware corporation which is to be wholly owned by
First Federal, such to-be-formed corporation shall be merged
with and into the Company (the "Company Merger") and, in
connection therewith, and subject to the rights of dissenting
stockholders which have been asserted and duly perfected in
accordance with the provisions of Section 262 of the Delaware
General Corporation Law, each share of common stock, $.01 par
value per share, of the Company ("Common Stock") outstanding
immediately prior to the effective time of the Company Merger
shall be canceled in exchange for the right to receive the cash
payments specified in such Agreement of Merger, with the
result that the Company will become a wholly owned subsidiary of
First Federal.
(b) Pursuant to the Agreement of Merger, attached hereto
as Exhibit B, between Grinnell and First Federal, Grinnell shall
merge with and into First Federal (the "Bank Merger")
immediately following consummation of the transactions referred
to in Section 1.1(a) hereof, with the result that First Federal
will acquire all of the assets and liabilities of Grinnell and
Grinnell shall cease to exist.
(c) Pursuant to the Plan of Complete Liquidation and
Dissolution (the "Plan"), attached hereto as Exhibit C, the
Company shall be liquidated into First Federal simultaneously
with consummation of the transaction referred to in Sections 1.1
(b) hereof, with the result that First Federal will acquire all
of the assets and liabilities of the Company and the Company
shall cease to exist.
(d) Upon the consummation of the Reorganization, the
separate existence of the Company and Grinnell shall cease, and
First Federal shall continue as the surviving institution in the
Bank Merger.
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1.2 ADOPTION AND EXECUTION AND DELIVERY OF DOCUMENTS
PROVIDING FOR THE REORGANIZATION. Promptly following the
formation of the to-be-formed corporation referred to in
Section 1.1(a) hereof, the Company shall execute and deliver the
Agreement of Merger included as Exhibit A hereto and First
Federal and such to-be-formed corporation shall execute and
deliver such Agreement of Merger, as applicable. Promptly upon
consummation of the transactions contemplated by Section 1.1(a)
hereof, First Federal and Grinnell shall execute and deliver the
Agreement of Merger included as Exhibit B hereto and the Company
shall adopt such agreement in its capacity as the sole
stockholder of Grinnell. Promptly upon consummation of the
transactions contemplated in Sections 1.1(a) and (b) hereof,
First Federal shall adopt the Plan in its capacity as sole
stockholder of the Company.
1.3. EFFECTIVE TIME AND CLOSING OF THE REORGANIZATION.
As soon as practicable after each of the conditions set forth in
Articles VIII, IX and X hereof have been satisfied or waived,
First Federal and Grinnell will file, or cause to be filed,
articles of combination with the Office of Thrift Supervision
(the "OTS"), which articles of combination shall be in the form
required by and executed in accordance with the Thrift
Regulations. The Bank Merger shall become effective at the time
the articles of combination for such merger are endorsed by the
OTS pursuant to Section 552.13(k) of the Thrift Regulations (the
"Effective Time"). If (a) this Agreement and the transactions
contemplated hereby have been duly approved as required by the
stockholders of the Company, and (b) all relevant conditions of
this Agreement have been satisfied or waived and all applicable
waiting periods have expired, the closing (the "Closing") shall
take place within thirty (30) business days thereafter, on such
date as First Federal and Grinnell shall agree, at the executive
offices of First Federal or at such other location mutually
acceptable to First Federal and Grinnell. At the Closing, the
parties hereto will exchange certificates, letters and other
documents as required hereby and will cause the filing described
in this Section 1.3 with respect to the Bank Merger to be made.
The date on which the Closing occurs is hereinafter referred to
as the "Closing Date."
1.4 MODIFICATION OF STRUCTURE. Notwithstanding any
provision of this Agreement to the contrary, First Federal may
elect, subject to the filing of all necessary applications and
the receipt of all required regulatory approvals, to modify the
structure of the transactions contemplated hereby so long as (i)
there are no adverse federal income tax consequences to the
stockholders of the Company as a result of such modification,
(ii) the consideration to be paid to holders of Company Common
Stock under this Agreement is not thereby changed in kind or
reduced in amount because of such modification, and (iii) such
modification will not be likely to materially delay or
jeopardize receipt of any required regulatory approvals required
hereunder, or otherwise impede the consummation of the
transactions contemplated hereby.
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ARTICLE II.
EFFECT OF THE REORGANIZATION; CERTAIN ACTIONS IN CONNECTION
THEREWITH
2.1. EFFECT OF THE REORGANIZATION.
(a) First Federal, as the surviving institution in
the Bank Merger, shall possess all of the properties and rights
and be subject to all of the liabilities and obligations of
Grinnell, all as more fully described in the Merger Agreement
and the Thrift Regulations. The name of First Federal, as the
surviving institution in the Bank Merger, shall remain "First
Federal Savings Bank of Siouxland."
(b) At the Effective Time, each share of capital
stock of GFS issued and outstanding immediately prior thereto
(except shares as to which the holders have perfected
dissenters' rights in accordance with Section 262 of the
Delaware General Corporation Law) shall, by virtue of the
Reorganization, be canceled. No new shares of the capital stock
or other securities or obligations of First Federal shall be
issued or be deemed issued with respect to or in exchange for
such canceled shares, and such canceled shares of capital stock
shall not be converted into any shares or other securities or
obligations of First Federal.
(c) The Charter and Bylaws of First Federal, as in
effect immediately prior to the Effective Time, shall be the
Charter and Bylaws of First Federal, as the surviving
institution of the Bank Merger.
(d) Except as otherwise contemplated hereby, the
directors and officers of First Federal immediately prior to the
Effective Time shall be the directors and officers of First
Federal, as the surviving institution of the Bank Merger, and
shall continue in office until their successors are duly
elected or otherwise duly selected.
(e) All deposit accounts of Grinnell existing
immediately prior to the Bank Merger shall, upon consummation of
the Bank Merger, remain insured by the Federal Deposit Insurance
Corporation ("FDIC") to the fullest extent permitted by law and
regulation.
2.2. EFFECT ON COMMON STOCK OF THE COMPANY AND FIRST
FEDERAL.
(a) As of the Effective Time, by virtue of the
Reorganization and without any action except as specified herein
on the part of the holders of shares of common stock, $.01 par
value, of the Company ("Company Common Stock"), each issued and
outstanding share of Company Common Stock (except with respect
to the rights of dissenting shareholders of GFS) shall be
converted into the right to receive $17.65 in cash (the
"Purchase Price"), and all outstanding certificates representing
Company Common Stock shall thereafter represent solely the right
to receive the Purchase Price. Any holders of dissenting shares
shall be entitled to payment for such shares only to the extent
permitted by and in accordance with the provisions of Section
262 of the Delaware General Corporation Law,
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with funds provided by First Federal. The Company shall give
First Federal prompt notice of any written demand for the
payment of the fair value of any shares of Company Common Stock,
withdrawals of such demands, and any other instruments served
pursuant to the Delaware General Corporation Law and received
by the Company. The Company shall give First Federal the
opportunity to participate in all negotiations and proceedings
with respect to such demands, and shall not voluntarily
make any payment with respect to any demands for payment of fair
value or settle or offer to settle any such demands. All shares
of Company Common Stock which are held in the treasury of the
Company or Grinnell or by any direct or indirect wholly-owned
subsidiary of the Company and any shares of Company Common Stock
owned by First Federal or any direct or indirect wholly-owned
subsidiary or parent of First Federal shall be canceled and no
consideration shall be paid or delivered in exchange therefor.
At the Effective Time, the stock transfer books of the Company
shall be closed and no transfer of Company Common Stock by any
holder thereof shall thereafter be made or recognized.
(b) The aggregate purchase price payable under
Section 2.2(a) hereof shall be increased by $1,900 per day for
each day from May 1, 1998 to the date of Closing (the "Purchase
Price Adjustment"). The per share purchase price shall be
increased by an amount equal to the Purchase Price Adjustment
divided by the number of shares of Company Common Stock
outstanding, excluding stock options and treasury shares,
rounded to the nearest $.01.
2.3. FIRST FEDERAL TO MAKE CASH AVAILABLE. At the
Effective Time, First Federal shall make available to the
Exchange Agent (as defined in Section 2.4(a) hereof) hereof, the
amount of cash payable pursuant to Section 2.2 hereof.
2.4. PAYMENT OF CASH.
(a) At least twenty (20) days before the Effective
Time, First Federal shall designate an exchange agent (the
"Exchange Agent") in connection with the Reorganization. As
soon as practicable after the Effective Time, but in no event
later than ten (10) days thereafter, the Exchange Agent shall
send a notice and form of letter of transmittal to each holder
of record of Company Common Stock at the Effective Time advising
such stockholder of the effectiveness of the Reorganization and
the procedures for surrendering to the Exchange Agent
outstanding certificates formerly evidencing shares of Company
Common Stock. Each holder of shares of Company Common
Stock who thereafter delivers his or her certificate or
certificates representing such shares to the Exchange Agent
shall be mailed a check for an amount, without interest, equal
to the number of shares represented by the certificate or
certificates so surrendered to the Exchange Agent multiplied by
the Purchase Price. Upon surrender, each certificate evidencing
Company Common Stock shall be canceled. Until so surrendered,
each outstanding certificate which prior to the Effective Time
evidenced shares of Company Common Stock will be deemed for all
purposes (except as otherwise provided in Section 2.2 hereof) to
evidence the right to receive cash, without interest, equal to
number of shares represented by the certificate or certificates
multiplied by the Purchase Price. After the Effective Time,
there shall be no further registration of transfers on the
records of the Company of shares of Company Common Stock and, if
a certificate evidencing such shares is presented for transfer,
it shall be canceled in exchange for a check (except as
otherwise provided in Section 2.2 hereof) in the
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appropriate amount as calculated above. Notwithstanding any
provision of this Agreement, neither the Exchange Agent nor any
person, firm or entity shall be liable or obligated to any
former holder of any share of Company Common Stock (or to anyone
claiming through any such former holder) with respect
to amounts to which any such holder would have been entitled as
a consequence of the Reorganization, if such amounts have been
paid, or are payable, to any public official pursuant to any
abandoned property, escheat or similar laws.
(b) If delivery of all or any part of the cash to be
paid in connection with the Reorganization is to be paid to a
person other than the person in whose name the certificate
surrendered in exchange therefor is registered, it shall be a
condition to such delivery that the certificate surrendered
in exchange shall be properly endorsed and otherwise in proper
form for transfer and that the person requesting such a delivery
pay to the Exchange Agent any transfer or other taxes required
by reason of such delivery in any name other than that of the
registered holder of the certificate surrendered or establish to
the satisfaction of the Exchange Agent that such tax has been
paid or is not payable.
(c) In the event any certificate for Company Common
Stock shall have been lost, stolen or destroyed, the Exchange
Agent shall deliver (except as otherwise provided in Section 2.2
hereof) in exchange for such lost, stolen or destroyed
certificate, upon the making of an affidavit of that fact by the
holder thereof, the cash to be paid in the Reorganization as
provided for herein; provided, however, that First Federal may,
in its sole discretion and as a condition precedent to the
delivery thereof, require the owner of such lost, stolen or
destroyed certificate to deliver a bond in such reasonable sum
as First Federal may direct as indemnity against any claim that
may be made against First Federal, the Company, the Exchange
Agent or any other party with respect to the certificate
alleged to have been lost, stolen or destroyed.
2.5. RECAPITALIZATION OR STOCK DIVIDENDS. If between
the date of this Agreement and the Effective Time, a share of
Company Common Stock shall be changed into a different number
of shares of Company Common Stock or a different class of shares
by reason of reclassification, recapitalization, split-up,
exchange of shares or readjustment, or if a stock dividend shall
be declared with a record date within such period, then the
Purchase Price shall be appropriately and proportionately
adjusted.
6<PAGE>
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ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF GRINNELL AND THE COMPANY
Grinnell and the Company hereby represent and warrant
to First Federal as follows:
3.1. CORPORATE ORGANIZATION.
(a) The Company is duly organized, validly existing and in
good standing under the laws of the State of Delaware. The
Company has the full corporate power and authority to own or
lease all of its properties and assets and to carry on its
business as it is now being conducted, and is duly licensed
or qualified to do business and is in good standing in each
jurisdiction in which the nature of the business conducted by it
or the character or location of the properties and assets owned
or leased by it makes such licensing or qualification necessary,
except where the failure to be so licensed, qualified or in good
standing would not have a material adverse effect on the
operations, assets, or financial condition of the Company and
its subsidiaries taken as a whole. The Company is duly
registered with the OTS under the HOLA as a unitary savings and
loan holding company. Other than as set forth in Company
Disclosure Schedule 3.1(a) and shares of capital stock in
Grinnell and its subsidiaries, as identified below
(collectively, the "Company Subsidiaries") the Company does not
own or control or have the right to acquire, directly or
indirectly, an equity interest in any corporation, company,
association, partnership, joint venture or other entity.
(b) Grinnell is a stock savings bank organized, validly
existing and in good standing under the laws of the United
States, has the full corporate power and authority to own or
lease all of its properties and assets and to carry on its
business as it is now being conducted, and is duly licensed or
qualified to do business and is in good standing in each
jurisdiction in which the nature of the business conducted by it
or the character or location of the properties and assets owned
or leased by it makes such licensing or qualification necessary,
except where the failure to be so licensed, qualified or in good
standing would not have a material adverse effect on the
operations, assets, or financial condition of the Company and
the Company Subsidiaries taken as a whole. All eligible
accounts of depositors in Grinnell are insured by the Savings
Association Insurance Fund ("SAIF") administered by the FDIC
to the fullest extent permitted by law. Grinnell is a member of
the Federal Home Loan Bank of Des Moines.
(c) The Company has heretofore delivered to First Federal
true and complete copies of the certificate of incorporation,
charter, organization certificate or other chartering instrument
and bylaws of the Company, Grinnell, and each Company Subsidiary
in effect on the date hereof. The minute books of the Company
and each Company Subsidiary contain accurate minutes of all
meetings and accurate consents in lieu of meetings of the board
of directors (and any committee thereof) and of the
stockholder(s) of the Company and each Company Subsidiary
recorded therein, and as of the Effective Time such minute books
will contain accurate minutes of all such meetings and such
consents in lieu of meetings respectively held or executed prior
thereto. These minute books accurately reflect all
7<PAGE>
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transactions referred to in such minutes and consents in lieu of
meetings and disclose all material corporate actions of the
stockholder(s) and boards of directors of the Company and the
Company Subsidiaries and all committees thereof. Except as
reflected in such minute books, there are no minutes of meetings
or consents in lieu of meetings of the boards of directors (or
any committee thereof) or of the stockholder(s) of the Company
or any Company Subsidiary.
3.2. CAPITALIZATION.
(a) The authorized capital stock of the Company
consists of 2,000,000 shares of Company Common Stock, par value
$.01 per share and 500,000 shares of preferred stock, par value
$.01 per share. As of the date of this Agreement, there were
issued and outstanding 988,242 shares of Company Common Stock
and no shares of preferred stock. On such date, there were
112,478 shares of Company Common Stock held by the Company as
treasury stock. All of such issued and outstanding shares of
Company Common Stock are validly issued, fully paid and
nonassessable and not issued in violation of any preemptive
rights. As of the date hereof, no shares of serial preferred
stock were issued and outstanding. Except pursuant to its stock
option plans, the Company does not have any arrangements or
commitments obligating it to issue or sell or otherwise dispose
of, or to purchase or redeem, shares of its capital stock or any
securities convertible into or having the right to purchase
shares of its capital stock. There are no agreements,
understandings or commitments relating to the right of the
Company to vote or to dispose of shares of the capital stock or
other ownership interests of any subsidiary of the Company.
(b) All of the outstanding shares of capital stock
or other ownership interests of each Company Subsidiary have
been duly authorized and validly issued, are fully paid and
nonassessable and are owned, directly or indirectly, by the
Company or Grinnell, as the case may be, free and clear
of any liens, encumbrances, charges, restrictions or rights of
third parties of any kind whatsoever. Grinnell does not have
any arrangements or commitments obligating it to issue or sell
or otherwise dispose of, or to purchase or redeem, shares of its
capital stock or any securities convertible into or having the
right to purchase shares of its capital stock. There are no
agreements, understandings or commitments relating to the right
or obligation of Grinnell to issue, to vote or to dispose of
shares of its capital stock or the share of capital stock of any
Company Subsidiary.
(c) Schedule 3.2(c) of the Company Disclosure
Schedule sets forth a complete and accurate list of all options
to purchase Company Common Stock that have been granted and
which remain unexercised, including the dates of grant, exercise
prices, dates of vesting, dates of termination and shares
subject to option for each grant.
(d) To the best of the Company's knowledge, no person
or group (as that term is used in Section 13(d)(3) of the
Securities Exchange Act of 1934 (the "Exchange Act"), other than
as set forth at Schedule 3.2(d) of the Company Disclosure
Schedule, is the beneficial owner of more than 5% of the
outstanding Company Common Stock.
8<PAGE>
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3.3. AUTHORIZATION.
(a) The Company has full corporate power and authority to
execute and deliver this Agreement and the Agreement of Merger
included as Exhibit A hereto and, subject to the consents and
approvals of federal and state regulatory authorities referred
to in Section 3.6 hereof and the approval of the stockholders of
the Company, to consummate the Company Merger and to carry out
its obligations hereunder and thereunder. The execution and
delivery of this Agreement and the Agreement of Merger included
as Exhibit A hereto and the consummation of the Reorganization
by the Company have been duly authorized by the board of
directors of the Company and, except for the approval of the
stockholders of the Company and the Company's adoption of an
amendment to the Grinnell charter to permit the acquisition of
more than 10% of the Grinnell common stock in connection
with the Bank Merger (the "Charter Amendment"), no other
corporate proceedings on the part of the Company are necessary
to consummate the transactions so contemplated. This Agreement
has been duly and validly executed and delivered by the Company
and constitutes a valid and legally binding obligation of the
Company enforceable in accordance with its terms, except as may
be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting creditors'
rights generally, and except that the availability of equitable
remedies (including, without limitation, specific performance)
is within the discretion of the appropriate court.
(b) Promptly following formation of the to-be-formed
corporation referred to in Section 1.1(a) hereof, the Agreement
of Merger included as Exhibit A hereto will be duly and validly
executed by the Company and, upon such execution and delivery
and the execution and delivery thereof by the other parties
thereto, will constitute a valid and legally binding obligation
of the Company enforceable in accordance with its terms, except
as may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting
creditors' rights generally, and except that the availability of
equitable remedies (including, without limitation, specific
performance) is within the discretion of the appropriate court.
3.4. NO VIOLATION. Subject to the adoption and
effectiveness of the Charter Amendment, none of the execution
and delivery of this Agreement and the agreements included as
Exhibits A and B hereto by the Company and Grinnell, as
applicable, nor the consummation by the Company and Grinnell of
the transactions contemplated hereby and thereby and the Plan in
accordance with their respective terms, as applicable, nor
compliance by the Company or Grinnell with any of their
respective terms, as applicable, will (i) violate any provision
of the Company's or Grinnell's certificate of incorporation,
charter or other chartering instrument or bylaws, (ii) violate
any statute, code, ordinance, rule, regulation, judgment, order,
writ, decree or injunction applicable to the Company,
Grinnell, or any Company Subsidiary or any of their properties
or assets, or (iii) violate, conflict with, result in a breach
of any provisions of, constitute a default (or an event which,
with notice or lapse of time, or both, would constitute a
default), under, result in the termination or cancellation of,
accelerate the performance required by, or result in the
creation of any lien, security interest, charge or other
encumbrance upon any of the respective properties or assets of
the Company, Grinnell, or any Company Subsidiary under the
terms, conditions or provisions of any note, bond, mortgage,
indenture, deed of trust, license, lease, agreement or other
instrument or obligation to which the Company, Grinnell, or
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any Company Subsidiary is a party, or by which they or any of
their respective properties or assets may be bound or affected,
except, with respect to clause (iii) above, such as individually
or in the aggregate will not have a material adverse effect on
the operations, assets, or financial condition of the Company
and the Company Subsidiaries taken as a whole and which will not
prevent or delay the consummation of the transactions
contemplated by this Agreement.
3.5. REPORTS AND CONSOLIDATED FINANCIAL STATEMENTS.
(a) The Company and Grinnell have previously furnished First
Federal with true and complete copies of (a) all annual reports,
quarterly reports, proxy statements, financial statements, or
any other documents or material provided by the Company to its
stockholders since January 1, 1994, (b) all call reports and
other reports filed by Grinnell with the OTS since January 1,
1994, and (c) the audited financial statements of the Company
for the fiscal years ended June 30, 1995, 1996 and 1997. As of
their respective dates, such reports and statements did not
contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances
under which they were made, not misleading. The audited
consolidated financial statements and unaudited interim
financial statements of the Company, including any financial
statements included in such reports or otherwise delivered to
First Federal (collectively referred to herein as the "Company
Financial Statements") have been prepared in accordance with
generally accepted accounting principles applied on a consistent
basis (except as may be indicated therein or in the notes
thereto) and fairly present the financial position of the
Company or Grinnell, as the case may be, as of the dates thereof
and the results of their operations and changes in financial
position for the periods then ended, subject, in the case of the
unaudited interim financial statements, to normal year-end audit
adjustments, any other adjustments described therein, and the
absence of certain footnotes. Except as set forth in
Schedule 3.5 to the Company Disclosure Schedule, since June 30,
1997 neither the Company or Grinnell, or any Company Subsidiary,
has suffered a Material Adverse Effect (as that term is defined
in Section 12.7 hereof) and the Company is not aware of any
event or circumstance, or series of events and circumstances,
which is reasonably likely to result in a Material Adverse
Effect to the Company or Grinnell. The books and records of the
Company and Grinnell have been, and are being, maintained
in accordance with applicable legal and accounting requirements
and reflect only actual transactions. Except and to the extent
reflected, disclosed or provided for in the Company Financial
Statements, neither the Company, nor Grinnell nor any Company
Subsidiary had, as of the date of the Company Financial
Statements, any liabilities, whether absolute, accrued,
contingent or otherwise, material to the business, operations,
assets or financial condition of the Company.
(b) Grinnell has filed all reports, together with any
amendments required to be made with respect thereto, that were
required to be filed since January 1, 1994 to the date of this
Agreement with (i) the OTS; (ii) the FDIC; and (iii) any state
banking commission or other banking authority, and has
paid all fees and assessments due and payable in connection
therewith.
3.6. CONSENTS AND APPROVALS. Other than as set forth
in Schedule 3.6 to the Company Disclosure Schedule and other
than the receipt of approvals required by the HOLA, the Bank
Merger Act, the Thrift Regulations, and applicable federal
securities and state laws, and the approval of the holders of
Company Common Stock as described in Section 7.1 hereof, no
filing or registration
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with, no notice to and no permit, authorization, consent or
approval of any third party or any public or governmental body
or authority is necessary for the consummation by the Company or
Grinnell of the transactions contemplated by this Agreement,
except where the failure to make such filing or obtain
such permit, authorization, consent or approval will not in the
aggregate have a Material Adverse Effect. The Company knows of
no reason (including those relating to fair lending laws or
other laws relating to discrimination, including, without
limitation, the Equal Credit Opportunity Act, the Fair
Housing Act, the Community Reinvestment Act and the Home
Mortgage Disclosure Act, and anti-trust or consumer disclosure
laws and regulations) why the regulatory approvals should not be
obtained, and is aware of no reason to believe that such
approvals would include any term, condition or requirement
that, individually or in the aggregate, would have a Material
Adverse Effect on the results, business, operations, assets, or
financial condition of the Company.
3.7. ABSENCE OF CERTAIN CHANGES. Since June 30, 1997,
and except as otherwise permitted by this Agreement, neither the
Company, Grinnell or any Company Subsidiary has, except as set
forth in Schedule 3.7 to the Company Disclosure Schedule, (a)
issued or sold any corporate debt securities; (b) granted any
option for the purchase of its capital stock; (c) declared or
set aside or paid any dividend or other distribution in respect
of its capital stock; (d) incurred any material obligation or
liability (absolute or contingent), except obligations or
liabilities incurred in the ordinary course of business
consistent with past practices; (e) mortgaged, pledged or
subjected to lien or encumbrance (other than statutory liens for
taxes not yet delinquent and landlord liens) any of its material
assets or properties except pledges to secure government
deposits and in connection with repurchase or reverse
repurchase agreements; (f) discharged or satisfied any material
lien or encumbrance or paid any obligation or liability
(absolute or contingent), other than current liabilities
included in the Company's consolidated balance sheet as of June
30, 1997, and current liabilities incurred since the date
thereof in the ordinary course of business consistent with past
practices; (g) sold, exchanged or otherwise disposed of any of
its material capital assets other than in the ordinary course of
business consistent with past practices; (h) made any wage or
salary increase or entered into or modified any employment
contract with any officer or salaried employee or instituted any
employee welfare, bonus, stock option, profit sharing,
retirement or similar plan or arrangement, whether tax-qualified
or non tax-qualified; (i) suffered any damage, destruction or
loss, whether or not covered by insurance, materially and
adversely affecting its business, property or assets or waived
any rights of value that are material in the aggregate,
considering its business taken as a whole; (j) except in the
ordinary course of business consistent with past practices,
entered, or agreed to enter, into any agreement or arrangement
granting any preferential right to purchase any of its assets,
properties or rights or requiring the consent of any party to
the transfer and assignment of any such assets, properties or
rights; (k) entered into any material transaction outside the
ordinary course of its business consistent with past practices,
except as expressly contemplated by this Agreement; or (1)
except in the ordinary course of business consistent with past
practices or as reflected in the Company Financial Statements,
sold or otherwise disposed of any of its material investment
securities.
3.8. EMPLOYEE AND EMPLOYEE BENEFITS MATTERS. (a)
Schedule 3.8(a) to the Company Disclosure Schedule lists (i)
each pension, profit sharing, stock bonus, thrift, savings,
employee stock ownership or other plan, program or arrangement,
which constitutes an "employee
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pension plan" within the meaning of Section 3(2) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"),
which is maintained by the Company, Grinnell or any Company
Subsidiary or to which the Company, Grinnell or any Company
Subsidiary contributes or is maintained for the benefit of any
current or former employee, officer, director, consultant or
agent; (ii) each plan, program or arrangement for the provision
of medical, surgical, or hospital care or benefits, benefits in
the event of sickness, accident, disability, death,
unemployment, severance, vacation, apprenticeship,
day care, scholarship, prepaid legal services or other benefits
which constitute an "employee welfare benefit plan" within the
meaning of Section 3(1) of ERISA, which is maintained by the
Company, Grinnell or any Company Subsidiary or to which the
Company or any Company Subsidiary contributes for the benefit of
any current or former employee, officer, director, consultant or
agent; and (iii) every other retirement or deferred compensation
plan, bonus or incentive compensation plan or arrangement,
stock option plan, stock purchase plan, stock bonus plan or
stock grant plan, severance or vacation pay arrangement, or
other fringe benefit plan, program or arrangement through which
the Company, Grinnell or any Company Subsidiary provides
benefits for or on behalf of any current or former employee,
officer, director, consultant or agent. The plans, programs or
arrangements described in this Section 3.8 or listed in Schedule
3.8(a) of the Company Disclosure Schedule are hereinafter
referred to as the "Grinnell Benefit Plans." Grinnell has
delivered or made available to First Federal a true and
correct copy of (a) each Grinnell Benefit Plan, (b) the most
recent annual report (Form 5500) filed with the Internal Revenue
Service ("IRS") with respect to each Grinnell Benefit Plan, if
applicable, (c) each trust agreement and group annuity contract,
if any, relating to such Grinnell Benefit Plan, (d) the most
recent actuarial report or valuation relating to a Grinnell
Benefit Plan subject to Title IV of ERISA and (e) all rulings
and determination letters and any open requests for rulings or
letters that pertain to any Grinnell Benefit Plan.
(b) All of the Grinnell Benefit Plans that are
subject to ERISA and the Internal Revenue Code (the "Code") are
in compliance with all applicable requirements of ERISA and the
Code and all other applicable federal and state laws, including,
without limitation, the reporting and disclosure requirements of
Part I of Title I of ERISA. Each of the Grinnell Benefit Plans
that is intended to be a pension, profit sharing, stock bonus,
thrift, savings or employee stock ownership plan that is
qualified under Section 401(a) of the Code satisfies the
applicable requirements of such provision and there exist no
circumstances that would adversely affect the qualified status
of any such plan under that section, except with respect to any
required retroactive amendment for which the remedial
amendment period has not yet expired. Except as set forth in
Schedule 3.8(b) to the Company Disclosure Schedule, there is no
pending or, to the best knowledge of Grinnell, threatened
litigation, claim, action, governmental proceeding or
investigation against or relating to any Grinnell Benefit Plan
which could give rise to any material liability, and there is no
reasonable basis for any material litigation, claims, actions or
proceedings against any such Grinnell Benefit Plan, and there
are not any facts that could give rise to any material liability
in the event of such litigation, claim, action, investigation,
or proceeding. No Grinnell Benefit Plan (or Grinnell Benefit
Plan fiduciary) has engaged in a non-exempt "Prohibited
Transaction" (as defined in Section 406 of ERISA and Section
4975(c) of the Code) since the date on which said sections
became applicable to such plan. There have been no acts or
omissions by the Company, Grinnell or any Company Subsidiary
that have given rise to any fines, penalties, taxes or related
charges under Sections 502(c), 502(i) or 4071 of ERISA or
Chapter 43
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of the Code, or that may give rise to any material fines,
penalties, taxes or related damages under such laws for which
the Company, Grinnell or any Company Subsidiary may be liable.
No liability under Title IV of ERISA has been incurred by the
Company, Grinnell, any Company Subsidiary, any former
Affiliate (as such term is defined in Section 12.7 hereof) of
the Company, Grinnell or the Grinnell Benefit Plans since the
effective date of ERISA that has not been satisfied in full, and
no condition exists that presents a material risk of incurring a
liability under such Title, other than liability for premiums
due the Pension Benefit Guaranty Corporation ("PBGC"), which
payments have been made or will be made when due. With respect
to each of the Grinnell Benefit Plans which is subject to Title
IV of ERISA, the present value of accrued benefits under such
plan or Plans, based upon the actuarial assumptions used for
funding purposes in the most recent actuarial report prepared by
such plan's actuary with respect to such plan, did not, as of
its latest valuation date, exceed the then current value
of the assets of such plan allocable to such accrued benefits
and Grinnell is not aware of any facts or circumstances that
would materially change the funded status of any such ERISA
plan. None of the Grinnell Benefit Plans is a "multiemployer
pension plan" as such term is defined in section 3(37) of
ERISA. Except as listed on Schedule 3.8(b) to the Company
Disclosure Schedule, no employee of the Company, Grinnell or any
Company Subsidiary will be entitled to any additional benefits
or any acceleration of the time of payment or vesting of any
benefits under any Grinnell Benefit Plan as a result of the
transactions contemplated by this Agreement. Other than current
or contingent liabilities previously disclosed on Schedule
3.8(b) to the Company Disclosure Schedule, neither the Company,
Grinnell or any Company Subsidiary or any Grinnell Benefit Plan
will have any material current or contingent liability with
respect to any plan. All group health plans of the Company,
Grinnell and any Company Subsidiary, including any plans of
current and former Affiliates of the Company, Grinnell
or any Company Subsidiary that must be taken into account under
Section 4980B of the Code or Section 601 of ERISA or the
requirements of any similar state law regarding insurance
continuation, have been operated in material compliance with the
group health plan continuation coverage requirements of Section
4980B of the Code and Section 601 of ERISA to the extent such
requirements are applicable. All payments due from any Grinnell
Benefit Plan (or from the Company, Grinnell or any Company
Subsidiary with respect to any Grinnell Benefit Plan) have been
made, and all amounts properly accrued to date as liabilities of
the Company, Grinnell or any Company Subsidiary that have
not yet been paid have been properly recorded on the books of
the Company, Grinnell or any Company Subsidiary.
(c) No amounts payable under the Grinnell Benefit
Plans, or any employment, severance or termination agreement
between or among the Company, Grinnell, any Company
Subsidiary and any employee, officer or shareholder will fail to
be deductible for federal income tax purposes by virtue of
section 280G of the Code. No compensation payable by the
Company, Grinnell or any Company Subsidiary to any of their
employees under any existing contract, plan or other
employment arrangement (including by reason of the transactions
contemplated hereby) will be subject to disallowance under
section 162(m) of the Code.
(d) In the event of the withdrawal of Grinnell from
the Financial Institutions Retirement Plan adopted by Grinnell
(the "Retirement Plan") or in the event of the consolidation of
the interests of Grinnell and First Federal under the Retirement
Plan after the Effective Time, neither
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Grinnell, the Company or First Federal will have a funding
obligation for benefits that have accrued up to the Effective
Time for the benefit of Grinnell employees.
(e) Except as set forth in Schedule 3.8(e) to the
Company Disclosure Schedule, from July 1, 1997 to the date
hereof, neither Grinnell nor the Company have made contributions
to the Grinnell employee stock ownership plan ("Grinnell ESOP")
for the plan year commencing July 1, 1997.
3.9. LITIGATION. Except as set forth in Schedule 3.9
to the Company Disclosure Schedule, no claims have been asserted
and no relief has been sought against the Company, Grinnell
or any Company Subsidiary in any pending litigation or
governmental proceedings or otherwise that would be reasonably
expected to result in damages or other relief which would have a
Material Adverse Effect on the Company and Grinnell, taken as a
whole. To the best knowledge of the Company and Grinnell, there
are no circumstances, conditions, events or arrangements,
contractual or otherwise, which may hereafter give rise to any
proceedings, claims, actions or government investigations
involving the Company, Grinnell or any Company Subsidiary that
would reasonably be expected to result in damages or other
relief that would have a Material Adverse Effect, nor, to the
knowledge of the Company and Grinnell, are any such proceedings,
claims, actions or government investigations threatened. Except
as set forth in Schedule 3.9 to the Company Disclosure Schedule,
neither the Company, Grinnell or any Company Subsidiary is a
party to any order, judgment or decree that would reasonably be
expected to have a Material Adverse Effect on the Company and
Grinnell, taken as a whole, and neither the Company, Grinnell or
any Company Subsidiary (a) is the subject of any cease
and desist order, or other formal or informal enforcement action
by any regulatory authority or (b) has made any commitment to or
entered into any agreement with any regulatory authority that
restricts or adversely affects its operations or financial
condition.
3.10. TAX MATTERS. The Company, Grinnell and the
Company Subsidiaries have timely filed (inclusive of applicable
extension periods) with the appropriate governmental agencies
all material federal, state and local income, employment,
franchise, excise, sales, use, real and personal property and
other tax returns and reports (including information returns and
reports) that are required to be filed, and neither the Company,
Grinnell or any Company Subsidiary is materially delinquent in
the payment of any taxes shown on such returns or reports or on
any assessments for any such taxes received by the Company,
Grinnell or any Company Subsidiary. There are included in the
Company Financial Statements adequate reserves for the payment
of all accrued but unpaid federal, state and local taxes of the
Company, Grinnell and each Company Subsidiary, including
interest and penalties, whether or not disputed for such fiscal
years as reflected therein and all fiscal years prior thereto.
Neither the Company, Grinnell or any Company Subsidiary has
executed or filed with the Internal Revenue Service ("IRS") or
any state tax authority any agreement extending the period for
assessment and collection of any federal or state tax, nor is
the Company, Grinnell or any Company Subsidiary a party to any
action or proceeding by any governmental authority for
assessment or collection of taxes, except tax liens or
levies against customers of any Company Subsidiary. There is no
outstanding material assessment or claim for collection of taxes
against the Company, Grinnell or any Company Subsidiary. Except
as set forth in Schedule 3.10 to the Company Disclosure
Schedule, the federal income tax returns of the Company,
Grinnell and each Company Subsidiary have been examined by the
IRS (or are closed to
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examination due to the expiration of the applicable statute of
limitations) and no deficiencies were asserted as a result of
such examinations that have not been resolved and paid in full
or for which adequate reserves or accruals established in
accordance with generally accepted accounting principles
have been taken with respect thereto.
Neither the Company, Grinnell or any Company
Subsidiary has, during the past five (5) years, except as
disclosed in Schedule 3.10 to the Company Disclosure Schedule,
received any notice of deficiency, proposed deficiency or
assessment from the IRS or any other governmental agency, with
respect to any federal, state, county or local taxes. No
federal or state tax return of the Company, Grinnell or any
Company Subsidiary is currently the subject of any audit by the
IRS or any other governmental agency. During the past five (5)
years, no material deficiencies have been asserted in
connection with the federal and state income tax returns of each
of the Company, Grinnell and the Company Subsidiaries and the
Company has no reason to believe that any material deficiency
would be asserted relating thereto. Except as disclosed in
Schedule 3.10 to the Company Disclosure Schedule,
neither the Company, Grinnell or any Company Subsidiary is a
party to any agreement providing for allocation or sharing of
taxes. Neither the Company, Grinnell or any Company Subsidiary
has ever been a member of an "affiliated group of corporations"
(within the meaning of Section 1504(a) of the Code) filing
consolidated returns, other than the affiliated group of which
the Company is or was the common parent.
3.11. INFORMATION IN THE COMPANY PROXY STATEMENT.
The Company represents and warrants that the Company Proxy
Statement (as defined in Section 7.2 hereof) will not, either at
the time it is mailed to the stockholders of the Company in
connection with the Company Shareholders' Meeting (as defined in
Section 7.1 hereof) or at the time of the Company Shareholders'
Meeting, contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading; provided,
however, that none of the representations and warranties in this
Section 3.11 shall apply to statements in or omissions from the
Company Proxy Statement made in reliance upon and in conformity
with information about or furnished by Bancorp or First Federal
for use in the Company Proxy Statement.
3.12. ENVIRONMENTAL MATTERS. For purposes of this
Section 3.12, the following terms shall have the indicated
meaning:
"Environmental Law" means any federal, state or local law,
statute, ordinance, rule, regulation, code, license, permit,
authorization, approval, consent, order, judgment, decree,
injunction or agreement with any governmental entity relating to
(1) the protection, preservation or restoration of the
environment (including, without limitation, air, water vapor,
surface water, groundwater, drinking water supply, surface soil,
subsurface soil, plant and animal life or any other natural
resource), and/or (2) the use, storage, recycling, treatment,
generation, transportation, processing, handling, labeling,
production, release or disposal of Materials of Environmental
Concern. The term Environmental Law includes without limitation
(1) the Comprehensive Environmental Response, Compensation and
Liability Act, as amended, 42 U.S.C. Subsection 9601, et seq;
the Resource Conservation and Recovery Act, as amended, 42
U.S.C. Subsection 6901, et seq; the Clean Air Act, as amended,
42
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U.S.C. Subsection 7401, et seq; the Federal Water Pollution
Control Act, as amended, 33 U.S.C. Subsection 1251, et seq; the
Toxic Substances Control Act, as amended, 15 U.S.C. Subsection
9601, et seq; the Emergency Planning and Community Right to Know
Act, 42 U.S.C. Subsection 11001, et seq; the Safe Drinking Water
Act, 42 U.S.C. Subsection 300f, et seq; and all comparable state
and local laws, and (2) any common law (including without
limitation common law that may impose strict liability) that may
impose liability or obligations for injuries or damages due to,
or threatened as a result of, the presence of or exposure to any
Materials of Environmental Concern.
"Environmental Claim" means any written notice from any
governmental authority or third party alleging potential
liability (including, without limitation, potential liability
for investigatory costs, cleanup costs, governmental response
costs, natural resources damages, property damages, personal
injuries or penalties) arising out of, based on, or resulting
from the presence, or release into the environment, of any
Materials of Environmental Concern.
"Materials of Environmental Concern" means pollutants,
contaminants, wastes, toxic substances, petroleum and petroleum
products and any other materials regulated under Environmental
Laws.
"Loan Portfolio Properties and Other Properties Owned"
means those properties owned, leased or operated by the Company,
Grinnell or any Company Subsidiary, including those properties
serving as collateral for any loans made and retained by
Grinnell or any Company Subsidiary or for which Grinnell or any
Company Subsidiary serves in a trust relationship for the loans
retained in portfolio.
(a) To the knowledge of the Company and Grinnell and
each Company Subsidiary, the Company, Grinnell and each Company
Subsidiary is in compliance with all Environmental Laws,
except for any violations of any Environmental Law which would
not, singly or in the aggregate, have a material adverse effect
on the operations, assets, or financial condition of the Company
and the Company Subsidiaries taken as a whole. Neither the
Company, Grinnell or any Company Subsidiary has received any
communication alleging that the Company, Grinnell or any Company
Subsidiary is not in such compliance and, to the knowledge of
the Company and Grinnell, there are no present circumstances
that would prevent or interfere with the continuation of such
compliance.
(b) To the knowledge of the Company and Grinnell and
each Company Subsidiary, neither the Company, Grinnell or any
Company Subsidiary has been or is in violation of or liable
under any Environmental Law, except any such violations or
liabilities that would not singly or in the aggregate have a
material adverse effect on the business, operations, assets or
financial condition of the Company and the Company Subsidiaries
taken as a whole.
(c) To the knowledge of the Company, Grinnell and
each Company Subsidiary, none of the Loan Portfolio Properties
and Other Properties Owned by them has been or is in violation
of or liable under any Environmental Law, except any such
violations or liabilities that singly or in the aggregate would
not have a material adverse effect on the business, operations,
assets or financial condition of the Company and the Company
Subsidiaries taken as a whole.
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(d) To the knowledge of the Company, Grinnell and
each Company Subsidiary, there are no actions, suits, demands,
notices, claims, investigations or proceedings pending or
threatened relating to the liability of the Loan Portfolio
Properties and Other Properties Owned under any
Environmental Law, including without limitation any notices,
demand letters or requests for information from any federal or
state environmental agency relating to any such liabilities
under or violations of Environmental Law, except such which
would not have or result in a material adverse effect on the
business, operations, assets or financial condition of the
Company and the Company Subsidiaries taken as a whole.
(e) To the knowledge of the Company, Grinnell and
each Company Subsidiary, there are no past or present actions,
activities, circumstances, conditions, events or incidents that
could reasonably form the basis of any Environmental Claim or
other claim or action or governmental investigation that could
result in the imposition of any liability arising under any
Environmental Law against the Company, Grinnell or any Company
Subsidiary or against any person or entity whose liability for
any Environmental Claim the Company, Grinnell or any Company
Subsidiary has or may have retained or assumed either
contractually or by operation of law, except such which would
not have a material adverse effect on the operations, assets, or
financial condition of the Company and the Company Subsidiaries
taken as a whole.
(f) The Company has set forth on Schedule 3.12(f) any
environmental studies conducted by it, Grinnell or any Company
Subsidiary during the past five years with respect to any
properties owned by it as of the date hereof.
3.13. INSURANCE. Grinnell or the Company has
delivered to First Federal as part of Schedule 3.13 to the
Company Disclosure Schedule true, accurate and complete copies
of all insurance policies and fidelity bonds of the Company,
Grinnell and the Company Subsidiaries. Each such policy
is in full force and effect, with all premiums due thereon on or
prior to the Closing Date having been paid as and when due. The
Company, Grinnell and the Company Subsidiaries have not been
notified that their fidelity or insurance coverage will not be
renewed by their carrier(s) on substantially the same
terms as their existing coverage. All such policies (i) are
sufficient for compliance by the Company, Grinnell and each
Company Subsidiary with all requirements of law and all
agreements to which the Company, Grinnell or any Company
Subsidiary is a party, and (ii) will not, due to action or
inaction by the Company or Grinnell, terminate or lapse prior to
the Effective Time without similar policies being obtained that
would continue until the Effective Time.
3.14. COMPLIANCE WITH LAWS AND ORDERS. Except as
set forth in Schedule 3.14 to the Company Disclosure Schedule,
neither the Company, Grinnell or any Company Subsidiary has
received notice of any violation or alleged material violation
of, or, to the knowledge of the Company or Grinnell, is subject
to any liability (whether accrued, absolute, contingent, direct
or indirect) for past or continuing material violations of, any
law, statute or regulation. Neither the Company, Grinnell or
any Company Subsidiary is in default under, and no event has
occurred that, with the lapse of time or the giving of notice by
a third party or both, could result in a default under the terms
of any judgment, decree, order, writ, rule or regulation of any
governmental authority or court, whether federal, state or
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local and whether at law or in equity, where the failure to be
in full compliance would reasonably be expected to result alone
or in the aggregate in damages, which would be reasonably likely
to have a Material Adverse Effect.
3.15. GOVERNMENTAL REGULATION. Each of the
Company, Grinnell and the Company Subsidiaries holds all
material licenses, certificates, permits, franchises and rights
from all appropriate federal, state and other public authorities
necessary for the conduct of its business; and, between the
date hereof and the Closing Date, the Company and Grinnell will,
and the Company will cause each Company Subsidiary to maintain
all such licenses, certificates, permits, franchises and rights
in effect. Except as set forth in Schedule 3.15 to the Company
Disclosure Schedule, neither the Company, Grinnell or any
Company Subsidiary is a party or subject to any agreements,
directives, orders or similar arrangements between or involving
the Company, Grinnell or any Company Subsidiary and any
federal savings institution regulatory authority.
3.16. CONTRACTS AND COMMITMENTS. Except as set
forth in Schedule 3.16 to the Company Disclosure Schedule,
neither the Company, Grinnell or any Company Subsidiary is a
party to or bound by any (a) material lease or license with
respect to any property, real or personal; (b) material contract
or commitment for capital expenditures; (c) material contract or
commitment for total expenses for the purchase of materials,
supplies or for the performance of services by third parties for
a period of more than 60 days from the date of this Agreement;
(d) material contract or option for the purchase or sale of any
real or personal property other than in the ordinary course of
business; (e) agreement, arrangement or understanding relating
to the employment, election, retention in office or severance of
any present or former director or officer of the Company,
Grinnell or any Company Subsidiary; or (f) interest-rate swaps,
caps, floors, and option agreements, or other similar interest
rate risk management agreements. To their knowledge, the
Company, Grinnell and the Company Subsidiaries have performed in
all material respects all obligations required to be performed
by them to date and are not in default under, and no event has
occurred which, with the lapse of time or action by a third
party or both, could result in a default resulting in material
damages or other material default under any outstanding
mortgage, lease, contract, commitment or agreement to which the
Company, Grinnell or any Company Subsidiary is a party or by
which the Company, Grinnell or any Company Subsidiary is bound
or under any provision of their respective charters or bylaws.
Each such outstanding material mortgage, lease, contract,
commitment or agreement is a valid and legally binding
obligation of the Company, Grinnell or the Company Subsidiary
subject to (x) all applicable bankruptcy, insolvency, moratorium
or other similar laws affecting the enforcement of creditors
rights generally or the rights of creditors of savings
institutions the accounts of which are insured by the FDIC, and
(y) the application of equitable principles if equitable
remedies are sought.
3.17. AGREEMENTS WITH DIRECTORS, OFFICERS AND
STOCKHOLDERS. Except as set forth in Schedule 3.17 to the
Company Disclosure Schedule, no director, executive officer, or
beneficial owner of five percent (5.0%) or more of the
outstanding capital stock of GFS or any associate of any
such person (hereinafter sometimes referred to as a "Company
Principal") (a) is or has during the period subsequent to June
30, 1997, been a party (other than as a depositor) to any
transaction with the Company or Grinnell, whether as a borrower
or otherwise, that (i) was made other than in the ordinary
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course of business, (ii) was made on other than substantially
the same terms, including interest rate and collateral, as those
prevailing at the time for comparable transactions with other
persons, or (iii) involves more than the normal risk of
collectability or presents other unfavorable features; or (b) is
a party to any material loan or loan commitment, whether written
or oral. Except as disclosed in Schedule 3.17 to the Company
Disclosure Schedule, no director, executive officer (or any
associate of such person) and, to the knowledge of the Company,
no beneficial owner of five percent (5.0%) or more of the
outstanding capital stock of GFS or any associate of such person
holds any position with or owns more than five percent (5.0%) of
the outstanding shares of any class of voting stock of any
depository organization, or holding company therefor, other than
the Company. For the purposes of this Section 3.17, the term
"depository organization" means a commercial bank (including a
private bank), a savings bank, a trust company, a savings and
loan association, a homestead association, a cooperative bank,
an industrial bank, a credit union, or a depository holding
company.
3.18. ACCURACY OF INFORMATION. The statements
made by the Company and Grinnell in this Agreement and in any
other written documents executed and/or delivered by or on
behalf of the Company or Grinnell pursuant to the terms of this
Agreement are true and correct in all material respects. The
statements contained in such other documents specifically
referred to in this Agreement will be deemed to constitute
representations and warranties of the Company and Grinnell under
this Agreement to the same extent as if set forth herein in
full.
3.19 [RESERVED]
3.20 ALLOWANCES FOR LOSSES AND REAL ESTATE OWNED.
Each of the allowance for loan losses, and the reserve for
losses on Real Estate Owned reflected on the consolidated
balance sheets included in the Company's Financial Statements
referred to in Section 3.5 hereof is, or will be in the
case of subsequently delivered Company Financial Statements, as
the case may be, adequate in all material respects as of their
respective dates under the requirements of generally accepted
accounting principles to provide for reasonably anticipated
losses on outstanding loans net of recoveries and foreclosed
real estate, respectively.
3.21 TITLE TO ASSETS; LEASES
(a) Except for (i) liens and encumbrances
specifically disclosed in any of the Company Financial
Statements referred to in Section 3.5 hereof, (ii) landlords' or
statutory liens or other liens incurred in the ordinary course
of business and not securing indebtedness for borrowed
money and not yet delinquent, and (iii) liens and encumbrances
which are not material in amount and do not materially impair
the value of any property subject thereto or the use of such
property for the purposes for which it is presently used or
intended to be used, the Company, Grinnell and each Company
Subsidiary has good and marketable title, free and clear of all
security interests, encumbrances, trust agreements, liens or
other adverse claims, to all its assets and property, real and
personal, reflected in the Company Financial Statements referred
to in Section 3.5 hereof or acquired thereafter, which includes
all property and assets used by the Company, Grinnell and each
Company
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Subsidiary that are material to the conduct of their respective
businesses, except for assets and property
disposed of in the ordinary course of business after June 30,
1997.
(b) The Company, Grinnell and each Company Subsidiary
as lessee has the right under valid and existing leases to
occupy, use, and possess all property leased by it in all
material respects as presently occupied, used, and possessed by
the Company, Grinnell or any Company Subsidiary and such leases
will not terminate or lapse prior to the Effective Time or be
affected in any material respect by consummation of the
transactions contemplated hereby. Schedule 3.21(b) contains
an accurate listing of each lease pursuant to which the Company,
Grinnell or any Company Subsidiary acts as lessor or lessee,
including the expiration date and the terms of any renewal
options which relate to the same, as well as a listing of each
material real property owned by the Company, Grinnell or any
Company Subsidiary and used in the conduct of its respective
business.
(c) All material real and personal property owned by
the Company, Grinnell or any Company Subsidiary or presently
used by any of them are in an adequate condition (ordinary wear
and tear excepted) and are in all material respects sufficient
to carry on the business of the Company, Grinnell and each
Company Subsidiary in the manner conducted currently by them.
3.22. BUSINESS OF GRINNELL. Since June 30, 1997,
Grinnell has conducted its business in the ordinary course. For
purposes of the foregoing, Grinnell has not, since June 30,
1997, controlled expenses through the (i) elimination of
employee benefits; (ii) deferral of routine maintenance of real
property or leased premises; (iii) elimination of reserves where
the liability related to such reserve has remained; (iv)
reduction of capital improvements from previous levels; (v)
failure to depreciate capital assets in accordance with past
practice or to eliminate capital assets no longer used in
Grinnell's business; (vi) capitalization of loan production
expenses other than in accordance with SFAS No. 91,
or (vii) extraordinary reduction or deferral of ordinary or
necessary expenses.
3.23. TAX MATTERS. Neither the Company or any
Company Subsidiary has taken or agreed to take any action or has
any knowledge of any fact or circumstance that would (i) prevent
the transactions contemplated hereby from qualifying as a
reorganization within the meaning of Section 368 of the Code, or
(ii) materially impede or delay receipt of any approval from any
regulatory authority or the consummation of the transactions
contemplated by this Agreement.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF FIRST FEDERAL
First Federal hereby represents and warrants to the
Company and Grinnell as follows:
4.1. CORPORATE ORGANIZATION. First Federal is a stock
savings bank duly organized, validly existing and in good
standing under the laws of the United States. Bancorp is a
mutual holding company duly organized, validly existing and in
good standing under the laws of the United States.
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All eligible accounts issued by First Federal are insured by the
FDIC to the maximum extent permitted under applicable law. Each
of First Federal and Bancorp has all requisite corporate power
and authority to own, operate and lease its properties as
presently owned, operated and leased and to engage in the
activities and business now being conducted by it.
4.2. AUTHORIZATION. The Board of Directors of First
Federal has approved this Agreement and the transactions
contemplated hereby and has authorized the execution, delivery
and performance by First Federal of this Agreement. No
corporate proceeding on the part of First Federal is necessary
to authorize this Agreement or to consummate the transactions
contemplated hereby, and First Federal has full corporate power
and authority to enter into this Agreement and to consummate
the transactions contemplated hereby subject to the consents and
approvals of federal and state regulatory authorities referred
to in Section 4.4 hereof. This Agreement has been duly and
validly executed and delivered by First Federal and constitutes
the valid and binding obligation of First Federal, enforceable
against it in accordance with its terms, subject to (a) all
applicable bankruptcy, insolvency, moratorium or other similar
laws affecting the enforcement of creditors' rights generally,
and (b) the application of equitable principles if equitable
remedies are sought.
4.3. NO VIOLATION. Neither the execution and delivery
of this Agreement or, subject to the receipt of the consents and
approvals contemplated by Section 4.4 hereof, the consummation
of the transactions contemplated herein will, (a) conflict with,
result in the breach of, constitute a violation of, constitute a
default under or accelerate the performance of the terms of any
government regulation, judgment, order or decree of any court or
other governmental agency to which First Federal or Bancorp
may be subject, or any contract, agreement or instrument to
which First Federal or Bancorp is a party or by which First
Federal or Bancorp are bound or committed, or the Charter or
Bylaws of First Federal or Bancorp, or any law, or any rule or
regulation of any governmental agency or authority, or (b)
constitute an event that with the lapse of time or action by a
third party could result in a default under any of the
foregoing, or (c) result in the creation of any lien, charge or
encumbrance upon any of the assets or properties of First
Federal or Bancorp.
4.4. CONSENTS AND APPROVALS. Other than the receipt
of approvals required by the HOLA, the Thrift Regulations, and
the Bank Merger Act, no filing or registration with, no notice
to and no permit, authorization, consent or approval of any
public or governmental body or authority is necessary for the
consummation by First Federal of the transactions contemplated
by this Agreement. First Federal knows of no reason (including
those relating to fair lending laws or other laws relating
to discrimination, including, without limitation, the Equal
Credit Opportunity Act, the Fair Housing Act, the Community
Reinvestment Act and the Home Mortgage Disclosure Act, and
anti-trust or consumer disclosure laws and regulations) why the
regulatory approvals should not be obtained in a reasonably
timely manner.
4.5. INFORMATION SUPPLIED FOR INCLUSION IN THE COMPANY
PROXY STATEMENT. Any information regarding First Federal,
Bancorp or any subsidiary of First Federal supplied by First
Federal or Bancorp to the Company specifically for inclusion in
the Company Proxy Statement (as defined in Section 7.2 hereof)
will not contain any untrue statement of a material fact or omit
to state
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a material fact necessary to make the statements therein, in
light of the circumstances in which they were made, not
misleading.
4.6. CASH PAYMENT. First Federal has sufficient funds
to pay the cash payment required under Sections 2.3 and 2.4,
hereof and such payment will not cause it to fail to meet any
regulatory capital requirements to which it is subject.
4.7. ACCURACY OF INFORMATION. The statements made by
First Federal and with respect to Bancorp in this Agreement and
in any other written documents executed and/or delivered by
or on behalf of Bancorp and First Federal pursuant to the terms
of this Agreement are true and correct in all material respects.
The statements contained in such other documents specifically
referred to in this Agreement will be deemed to constitute
representations and warranties of First Federal under this
Agreement to the same extent as if set forth herein in full.
4.8. REGULATORY APPROVALS AND NO ADVERSE CHANGE.
First Federal is aware of no reason that it cannot obtain any of
the approvals of regulatory authorities necessary to consummate
the Merger and First Federal has received no advice or
information from any regulatory authority indicating that such
approvals will be denied or are doubtful. There has not been
any adverse change in the business or financial condition,
operations, properties or capitalization of First Federal since
the end of its most recently completed fiscal year that is
reasonably likely to have a material adverse effect upon
its ability to consummate the transactions contemplated by this
Agreement and as of the date of this Agreement, no event,
occurrence or development of any nature is existing or, to the
knowledge of First Federal, threatened, which would reasonably
be expected to have such an effect on First Federal's ability to
consummate such transactions.
ARTICLE V.
COVENANTS OF FIRST FEDERAL
First Federal hereby agree that from the date of this
Agreement until the Effective Time:
5.1. AFFIRMATIVE COVENANTS. As soon as reasonably
practicable, First Federal shall furnish Grinnell with copies of
all of First Federal's periodic reports on Forms 10-K, 10-Q and
8-K, all proxy statements and all call reports filed with the
OTS, or provided to the stockholders of First Federal,
subsequent to the date hereof.
5.2. NEGATIVE COVENANTS. Except as specifically
contemplated by this Agreement, First Federal shall not do, or
agree or commit to do, without the prior written consent of
Grinnell any of the following:
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(a) take action which would or is reasonably likely
to (i) adversely affect the ability of either First Federal or
the Company and Grinnell to obtain any necessary approvals of
governmental authorities required for the transactions
contemplated hereby; (ii) adversely affect First Federal's
ability to perform its covenants and agreements under this
Agreement; or (iii) result in any of the conditions to the
Reorganization set forth in Articles IX and X not being
satisfied; or
(b) agree in writing or otherwise to do any of the
foregoing.
5.3. BREACHES. First Federal shall, in the event it
becomes aware of the impending or threatened occurrence of any
event or condition which would cause or constitute a material
breach (or would have caused or constituted a breach had such
event occurred or been known prior to the date hereof) of any of
its representations or agreements contained or referred to
herein, give prompt written notice thereof to the Company and
use its best efforts to prevent or promptly remedy the same.
5.4. FILING OF APPLICATIONS. First Federal shall use
its best efforts promptly to and, in any event, no later than 90
days after the date hereof shall, prepare, submit, publish and
file (a) an application to the OTS pursuant to 12 C.F.R. Part
574; and (b) any other applications, notices or statements
required to be filed in connection with the transactions
contemplated hereby.
5.5. SUPPLEMENT TO FIRST FEDERAL DISCLOSURE SCHEDULE.
First Federal will promptly supplement or amend the First
Federal Disclosure Schedule with respect to any matter hereafter
arising that, if existing or occurring at the date of this
Agreement, would have been required to be set forth or described
in the First Federal Disclosure Schedule. No supplement or
amendment to the First Federal Disclosure Schedule will have any
effect for the purpose of determining satisfaction of the
condition set forth in Section 9.1 hereof as to the accuracy of
representations made as of the date of this Agreement.
5.6. EXPENSES. First Federal hereby agrees that if
this Agreement or the transactions contemplated hereby are
terminated pursuant to Sections 11.1 (c)(iii) or 11.1 (c)(iv) as
a result of a willful breach by First Federal, First Federal
shall promptly (and in any event within ten (10) business
days after such termination) pay all reasonable Expenses of
Grinnell in an amount not to exceed $300,000. For purposes of
this Section 5.6, the "Expenses of Grinnell" shall include all
reasonable out-of-pocket expenses of Grinnell (including all
fees and expenses of counsel, accountants, financial advisors,
experts and consultants to Grinnell and its Affiliates) incurred
by it or on its behalf in connection with the consummation of
the transactions contemplated by this Agreement.
ARTICLE VI.
COVENANTS OF THE COMPANY AND GRINNELL
The Company and Grinnell hereby agree that from the
date of this Agreement until the Effective Time:
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6.1. AFFIRMATIVE COVENANTS. Unless the prior written
consent of First Federal shall have been obtained (which shall
not be unreasonably withheld) and except as otherwise
contemplated herein, the Company and Grinnell will:
(a) operate their business in the ordinary course in
accordance with past business practices;
(b) use their best efforts to (i) preserve intact
their business organization and assets, maintain their rights
and franchises, retain the services of their officers and key
employees (except that they shall have the right to terminate
the employment of any officer or key employee in accordance
with established employment procedures) and (ii) maintain their
relationships with customers:
(c) maintain their corporate existence in good
standing and file all required Grinnell Reports (as defined in
such Section 12.7(c) hereof);
(d) use their best efforts to maintain and keep their
properties in as good repair and condition as at present, except
for ordinary wear and tear;
(e) use their best efforts to keep in full force and
effect insurance and bonds comparable in amount and scope of
coverage to that now maintained by them and, in the event that
Grinnell is unable to keep such insurance and bonds in full
force and effect, to provide prompt notice of such failure to
First Federal;
(f) perform all obligations required to be performed
by them under all material contracts, leases, and documents
relating to or materially affecting their assets, properties,
and business;
(g) use their best efforts to comply with and perform
in all material respects all obligations and duties imposed upon
them by all applicable laws and regulations; and
(h) as soon as reasonably practicable, furnish First
Federal copies of all of Grinnell's reports and documents
provided to Company stockholders or filed with the OTS
subsequent to the date hereof.
6.2. NEGATIVE COVENANTS. Except as specifically
contemplated by this Agreement, from the date hereof until the
Effective Time, neither the Company nor Grinnell shall, or shall
any Company Subsidiary be permitted to, without the prior
written consent of First Federal (which shall not be
unreasonably withheld), do any of the following:
(a) incur any material liabilities or material
obligations, whether directly or by way of guaranty, including
any obligation for borrowed money whether or not evidenced by a
note, bond, debenture or similar instrument or enter into or
extend any material agreement or lease, except in the
ordinary course of business consistent with past business
practices or in connection with the transactions contemplated
and permitted by this Agreement;
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(b) (i) Except as set forth on Schedule 6.2(b) of the
Company Disclosure Schedule, grant any bonus or increase in
compensation to its directors or grant any bonus or any increase
in compensation to its officers and employees, (ii) effect any
change in retirement benefits to any class of employees or
officers (unless any such change shall be required by applicable
law) that would increase its retirement benefit liabilities,
(iii) adopt, enter into, amend or modify any Grinnell Benefit
Plan except as required by law, (iv) enter into or amend any
employment, severance or similar agreements or arrangements with
any directors or officers (exclusive of renewals in the ordinary
course of business), (v) make any additional awards under any
Grinnell stock bonus plan or Grinnell stock option plan, or (vi)
make any additional contributions to the Grinnell ESOP;
(c) declare or pay any dividend on, or make any other
distribution in respect of, its outstanding shares of capital
stock, except for regular, quarterly cash dividends, paid on
normal dividend payment dates, in an amount no greater than the
dividend rate as of the date hereof.
(d) (i) redeem, purchase or otherwise acquire any
shares of its capital stock or any securities or obligations
convertible into or exchangeable for any shares of its capital
stock, or any options, warrants, conversion or other rights to
acquire any shares of its capital stock or any such securities
or obligations; (ii) merge with or into any other corporation,
savings institution or bank, permit any other corporation,
savings institution or bank to merge into it or consolidate with
any other corporation or bank, or effect any reorganization or
recapitalization; (iii) purchase or otherwise acquire any
assets, or shares of any class of stock, of any corporation,
savings institution, bank or other business; (iv) liquidate,
sell, dispose of, or encumber any assets or acquire any assets,
other than in the ordinary course of its business consistent
with past practices; or (v) split, combine or reclassify any of
its capital stock or issue or authorize or propose the issuance
of any other securities in respect of, in lieu of or in
substitution for, shares of its capital stock;
(e) except pursuant to the exercise of outstanding
stock options, issue, deliver, award, grant or sell, or
authorize or propose the issuance, delivery, award, grant or
sale of, any shares of its capital stock of any class (including
shares held in treasury), any debt instrument having a right
to vote or any securities convertible into, or any rights,
warrants or options to acquire, any such shares, voting debt or
convertible securities;
(f) initiate, solicit or encourage, or take any other
action to facilitate, any inquiries or the making of any
proposal which constitutes a Superior Proposal (as defined in
Section 7.1 hereof), take any action in furtherance of such
inquiries or to obtain a Superior Proposal, or negotiate with
any person in, or agree to or endorse any Superior Proposal, or
authorize or permit any of its officers, directors or employees
or any investment banker, financial advisor, accountant or other
representative retained by it or any Company Subsidiary to take
any such action, except with respect to negotiations regarding,
and the endorsement of a Superior Proposal, as legally required
by the fiduciary duties of the Company's Board of Directors
under applicable law and as advised by counsel to the Company's
Board of Directors, and the Company shall promptly notify First
Federal orally and in writing of all of the relevant details
relating to all inquiries and proposals which it may receive
relating to any of such matters;
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(g) propose or adopt any amendments to its charter or
by-laws, except such amendments as may be required to consummate
the transactions contemplated by this Agreement;
(h) enter into an agreement in principle with respect
to any acquisition of a material amount of assets or securities
or any release or relinquishment of any material contract rights
not in the ordinary course of business;
(i) except in its fiduciary capacity, purchase any
shares of capital stock of First Federal;
(j) [RESERVED]
(k) subject to the provisions of Section 7.1 hereof
(and provisions of this Agreement related thereto) regarding a
Superior Proposal, willfully take action which would or is
reasonably likely to (i) adversely affect the ability of either
of First Federal, the Company or Grinnell to obtain any
necessary approvals of governmental authorities required for the
transactions contemplated hereby; (ii) adversely affect
Grinnell's or the Company's ability to perform its covenants and
agreements under this Agreement; or (iii) result in any of the
conditions to the Reorganization set forth in Articles VIII and
X not being satisfied;
(l) change in any material respect the lending,
investment, deposit, asset and liability management and other
material policies concerning the business of Grinnell or the
Company, unless required by law or regulation or, with respect
to lending or depository activities;
(m) file any applications or make any contract with
respect to branching by Grinnell (whether de novo or by
purchase, sale or relocation);
(n) form any new subsidiary or cause or permit a
material change in the activities presently conducted by any
Company Subsidiary or make additional material investments in
subsidiaries or enter into or invest in any partnership, joint
venture or other business enterprise;
(o) purchase any debt securities or derivative
securities including CMO or REMIC products;
(p) purchase any equity securities other than Federal
Home Loan Bank Stock;
(q) discharge or satisfy any lien or encumbrance or
pay any material obligation or liability (absolute or
contingent) other than at scheduled maturity or in the ordinary
course of business;
(r) sell or otherwise dispose of any loan,
mortgage-backed security or investment security except in the
ordinary course of business consistent with past practices and
policies;
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(s) modify or restructure the terms of any loan
except in the ordinary course of business consistent with
prudent banking practices and policies;
(t) make any capital expenditures in excess of
$10,000 individually or $25,000 in the aggregate, other than
pursuant to binding commitments existing on the date hereof and
other than expenditures necessary to maintain existing assets in
good repair;
(u) change its method of accounting in effect prior
to the Effective Time, except as required by changes in laws or
regulations or generally accepted accounting principles
concurred in by its and the Company's independent certified
public accountants, or change any of its methods of reporting
income and deductions for federal income tax purposes from those
employed in the preparation of its federal income tax returns
for the Company's last full taxable year, except as required
by changes in laws or regulations;
(v) acquire in any manner whatsoever (other than to
realize upon collateral for a defaulted loan) any business or
entity; or
(w) except for loans secured by commercial real
estate or multifamily real estate and originated as part of the
Bache Funding, Inc. program, for which the net amount retained
by Grinnell shall be limited to $500,000, make, renew, increase,
extend or purchase any loan secured by commercial real estate or
multifamily real estate, any land acquisition or development
loan, any commercial business loan, or any residential loan in
an amount in excess of $200,000, except to the extent that
Grinnell is contractually obligated to do so as of the date
hereof;
(x) fail to keep in full force and effect its
insurance and bonds as now carried;
(y) fail to notify First Federal promptly of its
receipt of any letter, notice or other communication, whether
written or oral, from any regulatory authority advising that it
is contemplating issuing, requiring or requesting any agreement,
memoranda, understanding or similar undertaking, or order,
directive, or extraordinary supervisory letter;
(z ) agree in writing or otherwise to do any of the
foregoing.
6.3. REPORT TO FIRST FEDERAL. The Company and
Grinnell will use its best efforts to keep First Federal fully
informed concerning all developments of which it becomes aware
that may have a material effect upon the business, any
properties or condition (either financial or otherwise) of
the Company (other than developments affecting financial
institutions generally).
6.4. BREACHES. The Company and Grinnell shall, in the
event they become aware of the impending or threatened
occurrence of any event or condition which would cause or
constitute a material breach (or would have caused or
constituted a breach had such event occurred or been known
prior to the date hereof) of any of their representations or
agreements contained or referred to herein,
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give prompt written notice thereof to First Federal and use
their best efforts to prevent or promptly remedy the same.
6.5. SUPPLEMENT TO DISCLOSURE SCHEDULE. The Company
will promptly supplement or amend the Company Disclosure
Schedule with respect to any matter hereafter arising that, if
existing or occurring at the date of this Agreement, would have
been required to be set forth or described in the Company
Disclosure Schedule. No supplement or amendment to the Company
Disclosure Schedule will have any effect for the purpose of
determining satisfaction of the condition set forth in Section
8.2 hereof as to the accuracy of representations made as of the
date of this Agreement.
6.6. CONSENTS AND APPROVALS. The Company and Grinnell
shall use their best efforts to assist First Federal in
obtaining the consents and approvals referenced in Section 8.5
hereof.
6.7. EXPENSES. Grinnell hereby agrees that if this
Agreement or the transactions contemplated hereby are terminated
pursuant to Sections 11.1 (b)(iii) or 11.1 (b)(iv) as a result
of a willful breach by Grinnell or the Company, Grinnell shall
promptly (and in any event within ten (10) business days after
such termination) pay all reasonable Expenses of First Federal
in an amount not to exceed $300,000. For purposes of this
Section 6.7, the "Expenses of First Federal" shall include all
reasonable out-of-pocket expenses of First Federal (including
all fees and expenses of counsel, accountants, financial
advisors, experts and consultants to First Federal and its
Affiliates) incurred by it or on its behalf in connection with
the consummation of the transactions contemplated by this
Agreement.
ARTICLE VII.
ADDITIONAL AGREEMENTS
7.1. COMPANY SHAREHOLDERS' MEETING. The Company
shall, as soon as is reasonably practicable, call and hold a
meeting of its stockholders (the "Company Shareholders'
Meeting") to submit for stockholder approval this Agreement.
Subject to receipt of a fairness opinion from Professional Bank
Services updated as of a date within five days of mailing of the
Company Proxy Statement, the Board of Directors of the Company
will recommend that holders of Company Common Stock vote in
favor of and approve this Agreement at the Company Shareholders'
Meeting; provided, however, that nothing contained in this
Section 7.1 shall prohibit the Board of Directors of the Company
from failing to recommend approval of the transactions
contemplated hereby, if necessary to comply with its fiduciary
duties as determined in consultation with legal counsel in the
context of a Superior Proposal (as hereinafter defined). For
purposes of this Agreement, "Superior Proposal" means a bona
fide proposal to acquire the entire equity interest in the
Company or Grinnell or substantially all of the assets of the
Company or Grinnell, which is expressly conditioned upon the
termination of this Agreement and is made by a third party on
terms which a majority of the disinterested members of the Board
of Directors of the Company determines pursuant to the exercise
of its fiduciary duty after consultation with legal counsel, to
be more favorable (from a financial point
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of view) to the holders of Company Common Stock than the
Reorganization and for which financing is either then committed
or not a condition precedent to the consummation thereof.
7.2. PROXY STATEMENT FOR COMPANY SHAREHOLDERS'
MEETING. For the purposes of holding the Company Shareholders'
Meeting, the Company shall prepare a proxy statement satisfying
all requirements under applicable securities laws (said proxy
statement, together with any and all amendments or supplements
thereto, being herein referred to as the "Company Proxy
Statement"). First Federal shall review and comment on the
Company Proxy Statement prior to its distribution to the
Company's stockholders.
7.3. COOPERATION; REGULATORY APPROVALS. The parties
shall cooperate, and shall cause each of their affiliates and
subsidiaries to cooperate, in the preparation and submission by
them, as promptly as reasonably practicable, of such
applications, petitions, and other documents and materials as
any of them may reasonably deem necessary or desirable to the
OTS, the FDIC, the Department of Justice, other regulatory
authorities, and any other persons for the purpose of obtaining
any approvals or consents necessary to consummate the
transactions contemplated by this Agreement. Each party will
have the right to review and comment on such applications,
petitions and other documents and materials and shall furnish to
the other copies thereof promptly after filing or submission
thereof. At the date hereof, none of the parties is aware of
any reason that the regulatory approvals required to be obtained
by it would not be obtained. The obligation to take action as
provided in this Section 7.3 shall not be construed as including
an obligation to accept any terms of or conditions to a consent,
authorization, order or approval of, or any exemption by, any
party that are unduly burdensome as reasonably determined by the
Boards of Directors of First Federal or Grinnell. In the event
of a restraining order or injunction which prevents the Closing
by reason of the operation of Section 10.2 hereof, each of the
parties hereto shall use its respective best efforts to cause
such order or injunction to be lifted and the Closing to be
consummated as soon as reasonably practicable.
7.4. REPORTS. Prior to the Effective Time, the
Company and Grinnell shall prepare and file as and when required
all Grinnell Reports. Grinnell shall prepare such Grinnell
Reports so that (a) they comply in all material respects with
all of the statutes, rules and regulations enforced or
promulgated by the regulatory authority with which they are
filed and do not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading,
and (b) with respect to any Grinnell Reports containing Company
Financial Statements, the financial information (i) is prepared
in accordance with generally accepted accounting principles
and practices as utilized in the Company Financial Statements
applied on a consistent basis, (ii) presents fairly the
consolidated financial condition of Grinnell at the dates, and
the consolidated results of operations and cash flows for the
periods, stated therein and (iii) in the case of interim fiscal
periods, reflects all adjustments, consisting only of normal
recurring items, subject to year-end audit adjustments. All
Grinnell Reports shall be provided to First Federal promptly
following the filing of such reports with the respective
regulatory authority.
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7.5. BROKERS OR FINDERS. Except as set forth on
Schedule 7.5, each of First Federal, the Company and Grinnell
represents that no agent, broker, investment banker, financial
advisor or other firm or person is or will be entitled to any
broker's or finder's fee or any other commission or similar fee
in connection with any of the transactions contemplated by this
Agreement.
7.6. ADDITIONAL AGREEMENTS; REASONABLE EFFORTS.
Subject to the terms and conditions of this Agreement, each of
the parties hereto agrees to use all reasonable efforts to take,
or cause to be taken, all action and to do, or cause to be done,
all things necessary, proper or advisable under applicable laws
and regulations to consummate and make effective the
transactions contemplated by this Agreement, subject to the
appropriate vote of the stockholders of the Company described in
Section 7.1 hereof, including cooperating fully with the other
party. In case at any time after the Effective Time any further
action is necessary or desirable to carry out the purposes of
this Agreement or to vest First Federal with full title to all
properties, assets, rights, approvals, immunities and
franchises of the Company, Grinnell or the Company Subsidiaries,
the proper officers and directors of each party to this
Agreement shall take all such necessary action.
7.7. RELEASE OF INFORMATION. The Company, Grinnell
and First Federal agree that prior to making any public
announcement with respect to the transactions contemplated by
this Agreement, each party will consult with the other and will
use its best efforts either to agree upon the text of the
proposed joint announcement to be made by both parties or to
obtain the other's approval (which approval shall not be
unreasonably withheld) of the text of an announcement to be made
solely on behalf of such party. In the event that the parties
do not ultimately agree on the text of any proposed public
announcement, no such disclosure shall be made unless the party
seeking to make an announcement is advised by counsel that its
failure to do so would be reasonably likely to constitute
a violation of law.
7.8. DIRECTORS AND ADVISORY DIRECTORS. At the
Effective Time, First Federal shall appoint Steven L. Opsal and
one additional individual to the First Federal Board of
Directors and to the Bancorp Board of Directors. Each of the
members of the Board of Directors of Grinnell as of the
date of this Agreement (other than the directors referred to in
the preceding sentence) shall be entitled to serve on an
Advisory Board to the Board of Directors of First Federal, for a
period of one year following the Effective Time, subject to
reappointment at the sole discretion of First Federal and such
Advisory Board members shall meet monthly during the first year
following the Effective Time. Thereafter, to the extent such
Advisory Board is continued, such Advisory Board members will
meet as frequently as requested by the Board of Directors of
First Federal, but no less frequently than quarterly. Such
Advisory Board members shall receive an annual fee of at least
$2,000 plus $200 per meeting attended; provided, however, with
respect to Grinnell Director LeRoy Meredith, the compensation
this Advisory Board member shall be as set forth in that certain
Employment Agreement of even date herewith between Mr. Meredith
and First Federal.
7.9. ACCESS TO PROPERTIES AND RECORDS;
CONFIDENTIALITY. (a) Each of the Company, Grinnell and each
Company Subsidiary shall permit First Federal and its
representatives, including financial advisors, reasonable access
to its properties, and shall disclose and make available to them
all
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books, papers and records relating to the assets, stock
ownership, properties, operations, obligations and liabilities
of the Company, Grinnell and each Company Subsidiary, including,
but not limited to, all books of account (including the general
ledger), tax records, minute books of meetings of boards of
directors (and any committees thereof) (except portions thereof
relating to this Agreement, the Reorganization and matters
relating thereto, including competing transactions) and
stockholders, organizational documents, bylaws, material
contracts and agreements, filings with any regulatory authority,
accountants' work papers, litigation files (other than attorney
work product or materials protected by any attorney-client
privilege), plans affecting employees, and any other business
activities or prospects in which the Company or Grinnell may
have a reasonable interest. The Company and Grinnell and each
Company Subsidiary shall make their respective officers,
employees and agents and authorized representatives (including
counsel and independent public accountants) available to confer
with First Federal and its representatives. The Company and
Grinnell shall permit a representative of First Federal to
attend meetings of their Board of Directors, including, without
limitation, the loan committee or asset/liability committee
meetings.
(b) All information furnished previously in
connection with the transactions contemplated by this Agreement
or pursuant hereto shall be treated as the sole property of the
party furnishing the information until consummation of the
transactions contemplated hereby and, if such transactions shall
not occur, the party receiving the information shall, upon
request, return to the party which furnished such information
all documents or other materials containing, reflecting or
referring to such information, shall use its best efforts to
keep confidential all such information, and shall not
directly or indirectly use such information for any competitive
or other commercial purposes. The obligation to keep such
information confidential shall continue for one year from the
date the proposed transactions are abandoned but shall not apply
to (i) any information which (x) the party receiving the
information can establish by convincing evidence was already in
its possession prior to the disclosure thereof by the party
furnishing the information; (y) was then generally known to the
public; or (z) became known to the public through no fault of
the party receiving the information; or (ii) disclosures
pursuant to a legal requirement or in accordance with an order
of a court of competent jurisdiction, provided that the party
which is the subject of any such legal requirement or order
shall use its best efforts to give the other party at least ten
business days prior notice thereof.
7.10. CERTAIN POLICIES. At the request of First
Federal, the Company shall, prior to the Effective Time, (i)
establish and take such reserves and accruals as First Federal
shall reasonably request to conform, on a mutually satisfactory
basis, the Company's loan, real estate, accrual and reserve
policies to First Federal's policies and (ii) establish and take
such accruals, reserves and charges in order to implement such
policies in respect of severance costs, write-off or write-down
of various assets and other appropriate accounting adjustments,
and to recognize for financial accounting purposes such expenses
incurred in connection with the Reorganization, provided,
however, that Grinnell shall not be obligated to take any such
action pursuant to this Section 7.10 unless and until (x) First
Federal specifies its request in a writing delivered to the
Company, and acknowledges that all conditions to the
obligations of First Federal to consummate the Reorganization
set forth in Articles VIII and X have been waived (if available)
or satisfied and (y) the Company and Grinnell acknowledge that
the conditions to its obligation to consummate the
Reorganization set forth in Articles IX and X have been
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waived (if available) or satisfied. The Company and Grinnell
shall not be required to take any such action that is not
consistent with generally accepted accounting principles or any
requirement applicable to either of them by any bank regulatory
agency. The representations, warranties and covenants of the
Company and Grinnell contained in this Agreement shall not be
deemed to be untrue or breached in any respect for any purpose
as a consequence of any action undertaken on account of this
Section 7.10 and shall not constitute grounds for termination of
this Agreement by First Federal.
7.11. EMPLOYEE BENEFIT PLANS; EMPLOYMENT
ARRANGEMENTS.
(a) First Federal intends to offer continued
employment to employees of Grinnell as of the Effective Time at
the base salary levels in effect at the Effective Time, subject
to the provisions in this Section 7.11 and provided that this
Agreement shall not, except as otherwise provided herein,
provide any contractual right to such employees of such
employment. Employees of Grinnell who continue employment with
First Federal on or after the Effective Time (all such persons
are referred to herein as "Continuing Employees") shall be
eligible to participate in such employee benefit plans as may be
in effect generally for employees of First Federal from time to
time (the "First Federal Plans"), if such Continuing Employee
shall be eligible or selected for participation therein. Except
as specifically set forth in this Section 7.11, Continuing
Employees shall be entitled to participate on the same basis as
similarly situated employees of First Federal, except that
Continuing Employees shall be entitled to full credit for each
year of prior service (in which 1,000 hours of service are
performed) with Grinnell for purposes of determining eligibility
for participation and vesting, but not for benefit accruals, in
the First Federal Plans, subject to applicable break in service
rules. Notwithstanding anything in this Section 7.11(a) to the
contrary, participation by Continuing Employees in employee
benefit plans of First Federal with respect to which eligibility
and participation is at the discretion of the employer, such as
non-qualified deferred compensation plans, stock option plans,
stock bonus plans, restricted stock plans, and other such
similar plans, (but not including employee benefit plans
generally available to all full-time employees of First Federal)
shall be discretionary with First Federal.
(b) In connection with the execution of this
Agreement, GFS and Grinnell shall amend the Grinnell ESOP loan
documents to cause the loan to be repaid on an annual rather
than a quarterly basis. Such annual payment shall be due and
payable at the end of the Grinnell ESOP plan year. In
connection with the execution of this Agreement, and pursuant to
amendments made by Grinnell to the Grinnell ESOP, the Grinnell
ESOP shall automatically terminate, effective at the Effective
Time. Following the termination of the Grinnell ESOP, the
outstanding balance of the Grinnell ESOP loan shall be repaid
from the cash proceeds in the Grinnell ESOP suspense account and
the remainder shall be allocated to participants of the plan, in
accordance with ERISA, the rules and regulations promulgated
thereunder, the Code, and the rules, regulations promulgated
thereunder, and any precedential rulings issued by the Internal
Revenue Service ("IRS"). In connection with the termination of
the Grinnell ESOP, Grinnell shall promptly apply to the IRS for
a favorable determination letter on the tax-qualified status of
the ESOP on termination and on any amendments made to the
Grinnell ESOP in connection with its termination or otherwise,
if said amendments have not previously received a favorable
determination letter from the IRS with respect to their
qualification under Code Section 401(a). Any and all
distributions from the ESOP after its termination shall be made
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consistent with the aforementioned determination letter issued
by the IRS relating to such termination and amendments. As of
the Effective Time, the administrative authority over the
Grinnell ESOP, which shall include the authority to appoint and
remove trustees of the Grinnell ESOP, shall be exercised by
a committee consisting of Steven L. Opsal and another individual
to be selected by Grinnell prior to the Effective Time.
(c) At or prior to the Effective Time, Grinnell shall
take all actions necessary to terminate the non-qualified
deferred compensation plan for the benefit of its Chairman of
the Board of Directors, and all benefits under this plan shall
be paid out in a lump sum to such participant; or alternatively,
on or before the Closing Date, Grinnell in its sole discretion
may establish an irrevocable grantor trust or trusts and deposit
therein guaranteed investment contracts in amounts sufficient to
provide the monthly benefits specified in accordance with the
plan for such participant. To the extent that a lump sum
payment is not made as of the Closing Date, First Federal shall
assume the payment of the liabilities of such plan thereafter.
The amount of the obligation of such plan that was accrued
for as of September 30, 1997, and the amount necessary to
complete the funding of such plan is set forth in Disclosure
Schedule 7.11(c).
(d) With respect to Continuing Employees and
dependents covered under the Iowa Bankers' Group Health Plan
maintained by Grinnell, which plan is concurrently maintained by
First Federal, there shall be no waiting period or preexisting
condition exclusions applicable to such persons, amounts
previously paid by such persons towards satisfaction of the
required deductible will count towards satisfaction of the
deductible under the plan maintained by First Federal and the
benefits previously received by such persons will count toward
the maximum benefit coverages provided by First Federal.
(e) As of the date hereof, Grinnell has entered into
employment agreements with each of the individual employees
listed in Schedule 7.11 (e) to the Company Disclosure Schedule.
Each of such employees who have agreed as of the date hereof to
continue employment with First Federal (the "Continuing
Executives") have been identified on Schedule 7.11(e) to the
Company Disclosure Schedule. Each of the Continuing Executives
shall enter into an employment agreement with First Federal in
the form set forth on Exhibit D, with such employment agreements
to take effect upon the Effective Time. The employment
agreements to which the Continuing Executives are party as of
the date hereof will terminate as of the Effective Time.
(f) Following the Effective Time, First Federal shall
honor in accordance with their terms the employment, severance
and other compensation contracts set forth on Schedule
7.11(f)between the Company, any of the Company Subsidiaries, and
any current or former director, officer or employee thereof, and
all provisions for vested benefits or other vested amounts
earned or accrued through the Effective Time under the Company
employee benefit plans.
(g) The Company shall, by amendment or resolution, as
appropriate, ensure that all awards under the Company's
Recognition and Retention Plan shall accelerate, become vested
and be paid out to the award recipient immediately prior to the
Effective Time.
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(h) At the Effective Time, the separate interests of
Grinnell and Siouxland in the Retirement Plan shall be combined.
Future benefit accruals shall be made in accordance with the
adoption agreement that relates to the Retirement Plan adopted
by Siouxland. Any benefits accrued by participants in the
Retirement Plan adopted by Grinnell attributable to service
before the Effective Time shall not be reduced. Grinnell may
amend the Grinnell Retirement Plan in any manner permitted
under the Code and Treasury Regulations to assure that a portion
of the dollar amount of excess funding in such plan as of June
30, 1997 (the "Determination Date"), determined in accordance
with the formula set forth below, inures solely to the benefit
of individuals who have become participants in such plan
prior to the Effective Time. In providing for such amendment,
it is the intent of the parties hereto that the amount of excess
funding remaining in the Grinnell Retirement Plan at the
Effective Time is proportionally equivalent to the amount of
excess funding in the Siouxland Retirement Plan, relative
to the number of participants in each plan. For these
purposes, said portion shall be determined as follows: the
excess funding under the Siouxland Retirement Plan at the
Determination Date shall be divided by the number of active
participants in the Siouxland Retirement Plan on said date, and
this quotient shall be multiplied by the number of active
participants in the Grinnell Retirement Plan on the
Determination Date. This product shall be subtracted from the
excess funding dollar amount in the Grinnell Retirement Plan on
the Determination Date. The remainder is the amount that
Grinnell shall be entitled to use to increase its benefit
formula for the period from July 1, 1997 through the date of
closing, to the extent permitted under the Code and Treasury
Regulations.
(i) As soon as practicable after the date hereof,
Grinnell shall amend its tax-qualified 401(k) Plan ("Grinnell
401(k) Plan"), effective for the current Plan Year, to provide
for the return of elective deferrals if annual additions to the
tax-qualified defined contribution plans of Grinnell have
been made in excess of the amounts permitted under Section 415
of the Code. At the time of such amendment, Grinnell will
further amend the Grinnell 401(k) Plan to disallow further
elective deferrals to the Grinnell 401(k) Plan.
7.12. COMPANY STOCK OPTIONS.
(a) At the Effective Time, all Company stock options
that are then outstanding and exercisable in accordance with
their terms (all of which are listed on Schedule 3.2(c) of the
Company Disclosure Schedule) shall be exchanged for First
Federal stock options. It is intended that the foregoing
exchange shall be undertaken in a manner that will not
constitute a "modification" (as defined in the Code) as to any
Company stock option that is an "incentive stock option" (as
defined in the Code); the number of First Federal stock options
to be exchanged for each Company stock option (the "Exchange
Ratio") as well as the exercise price (the "Exercise Price") for
each such First Federal stock option to be so exchanged shall be
fixed so as to preserve the First Federal stock options to be so
exchanged as "incentive stock options" (as defined in the Code),
and the parties hereby agree to develop a mutually acceptable
formula in conformity with applicable law and regulations for
determining the Exchange Ratio. The Exercise Price and the
Exchange Ratio as fixed in the preceding sentence shall
be applied to all Company stock options, whether such options
are incentive stock options or non-incentive stock options. The
Exchange Ratio and the Exercise Price shall be adjusted as
appropriate to reflect any stock split, stock dividend,
recapitalization, exchange of shares or other similar
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transaction involving either Company Common Stock or First
Federal common stock if such event occurs prior to the Effective
Time.
(b) The shares of First Federal common stock covered
by the stock options to be issued by First Federal pursuant to
Section 7.12 (a) hereof shall be covered by an effective
registration statement filed on with the OTS, which shall be
filed by First Federal as soon as practicable after the
Closing Date and shall be duly authorized, validly issued and in
compliance with all applicable federal and state securities
laws, fully paid and nonassessable and not subject to or in
violation of any preemptive rights. First Federal shall also
take any action reasonably required to be taken under any
applicable state blue sky or securities laws in connection with
the issuance of such shares.
(c) The Company and First Federal acknowledge that
the exchange contemplated by Section 7.12 (a) and (b) hereof is
subject to OTS approval. First Federal will make all reasonable
efforts from and after the date hereof through the Effective
Date to secure all necessary regulatory approvals to effect the
exchange contemplated; however, the parties hereto acknowledge
and agree that efforts to obtain OTS approval of the exchange
shall not hinder, delay or impede the Reorganization
contemplated by this Agreement. The parties hereto further
acknowledge and agree that under no circumstances will First
Federal (i) be obliged to grant subscription rights for its
common stock; (ii) be obliged to issue shares of its common
stock to Bancorp; or (iii) be obliged to form a "mid-tier" stock
holding company or repurchase shares of its common stock for the
purpose of facilitating or effecting the exchange contemplated
by Section 7.12(a) and (b) hereof. If, in the reasonable
judgement of First Federal, OTS approval of the exchange will
not be forthcoming, or will hinder, delay or impede the
Reorganization, the exchange contemplated by Section 7.12 (a)
and (b) hereof will be canceled. In lieu of such exchange, the
Company will issue stock appreciation rights on First Federal
common stock for each Company stock option outstanding at the
Effective Time so that the recipients of such stock
appreciation rights obtain equivalent value for their Company
stock options.
(d) If, in the reasonable judgment of First Federal,
the issuance of stock appreciation rights contemplated by
Section 7.12(c) hereof will impede, delay or hinder the
consummation of the transactions contemplated hereby because of
regulatory questions, the Company will, immediately prior
to the Effective Date, pay cash to the holders of Company stock
options that are then outstanding and exercisable in accordance
with their terms so that such holders obtain equivalent value
for such stock options.
7.13. D&O INDEMNIFICATION AND INSURANCE. For a
period of four (4) years following the Effective Time, First
Federal shall indemnify the employees, agents, directors or
officers of the Company and Grinnell to the extent they are
indemnified under the Company's Certificate of Incorporation and
Bylaws in the form in effect at the date of this Agreement or
arising by operation of law. First Federal shall use its best
efforts to cause the directors and officers listed in Schedule
7.13 of the Company Disclosure Schedule to be covered under
individual directors' and officers' liability insurance
policies, which coverage is available in the form of tail
coverage under the Company's existing directors' and officers'
liability policy for the duration of any applicable statute of
limitations, provided the cost of such coverage shall not exceed
$7,500.
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ARTICLE VIII.
CONDITIONS TO THE OBLIGATIONS OF FIRST FEDERAL
The obligations of First Federal under this Agreement
to cause the transactions contemplated herein to be consummated
shall be subject to the satisfaction or written waiver by First
Federal of the following conditions:
8.1. NO MATERIAL ADVERSE CHANGE. Except as disclosed
in Schedule 3.5 to the Company Disclosure Schedule and except
for general changes in generally accepted accounting principles,
changes in economic, financial or market conditions, changes in
market interest rates, payments due under any employment
agreements or benefit plans and the transactions contemplated
hereby, costs and expenses relating to this Agreement (including
those resulting from actions or inactions pursuant to the
covenants of the Company and Grinnell under this Agreement) and
the transactions contemplated hereby, there shall not have been
any material adverse change in the financial condition, results
of operations or business of the Company, Grinnell, and the
Company's Subsidiaries, taken as a whole, from June 30, 1997 to
the Closing Date.
8.2. REPRESENTATIONS AND WARRANTIES. Each of the
representations and warranties by the Company and Grinnell
contained in this Agreement shall be true and correct in all
material respects (or where any statement in a representation or
warranty expressly contains a standard of materiality, such
statement shall be true and correct in all respects taking into
consideration the standard of materiality contained therein) at,
or as of, the date of this Agreement and (except to the extent
such representation speaks as of an earlier date) and as of any
date subsequent, until and including the Closing Date (except as
otherwise contemplated or permitted by this Agreement) as though
such representations and warranties were made on and as of said
date. Any information provided by the Company and Grinnell
pursuant to Section 6.5 hereof as a supplement to the Company
Disclosure Schedule shall be true and correct in all material
respects as of the date such information is supplied to First
Federal.
8.3. PERFORMANCE AND COMPLIANCE. The Company and
Grinnell shall have performed or complied in all material
respects with all covenants and agreements required by this
Agreement to be performed and satisfied by it on or prior to the
Closing Date.
8.4. NO PROCEEDING OR LITIGATION. On the Closing
Date, no suit, action or proceeding shall be pending or overtly
threatened, and no liability or claim shall have been asserted
against the Company, Grinnell or any Company Subsidiary
involving any of the assets, properties, business or operations
of the Company, Grinnell or any Company Subsidiary that would
reasonably be expected to have a Material Adverse Effect.
8.5. CONSENTS UNDER AGREEMENTS. First Federal shall
have received the consent or approval of each person or entity
whose consent or approval shall be required in order to permit
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consummation of the Reorganization under any loan or credit
agreement, note, mortgage, indenture, lease or other agreement
or instrument to which the Company, Grinnell or any Company
Subsidiary is a party or to which its respective property is
subject, except those for which failure to obtain such
consents and approvals would not, individually or in the
aggregate, have a Material Adverse Effect on First Federal,
whether prior to (if applicable) or following the consummation
of the transactions contemplated hereby.
8.6. NO AMENDMENTS TO RESOLUTIONS. Neither the Board
of Directors of the Company or Grinnell nor any committee
thereof shall have amended, modified, rescinded or repealed
the resolutions adopted by such Board of Directors with respect
to this Agreement or shall have adopted any other resolutions in
connection with this Agreement and the transactions contemplated
hereby which are inconsistent with such resolutions, except
resolutions adopted consistent with the express rights of
Grinnell under this Agreement.
8.7. CERTIFICATE OF GRINNELL OFFICERS. The Company
shall have furnished First Federal a certificate, signed by its
Chief Executive Officer and its Chief Financial Officer, dated
the Closing Date, to the effect, based on his knowledge, that
the conditions described in Sections 8.1 through 8.6, and
Section 8.8, of this Agreement have been fully satisfied.
8.8. CORPORATE PROCEEDINGS. All action required to be
taken by, or on the part of the Company and Grinnell to
authorize the execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated
by this Agreement shall have been duly and validly taken by the
Company and Grinnell.
8.9. LEGAL OPINION. First Federal shall have received
an opinion, dated the Closing Date, from legal counsel to
Grinnell, in the form specified on Exhibit E.
8.10.CLOSING BOOK VALUE. Immediately prior to the
Closing, the total stockholders' equity account determined in
accordance with generally accepted accounting principles on a
basis consistent with the Company Financial Statements, of the
Company shall not be less than $10.4 million, as reasonably
determined by First Federal's independent public accountant, in
consultation with the Company's independent public accountant;
provided, however, that for purposes of calculating total
stockholders' equity, the Company's expense associated with the
issuance of stock appreciation rights (as contemplated by
Section 7.12(c) hereof), and with the severance payments due
under the employment agreement between Grinnell and William T.
Nassif dated as of January 19, 1996, will not be counted.
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ARTICLE IX.
CONDITIONS TO THE OBLIGATIONS OF THE COMPANY AND GRINNELL
The obligations of the Company and Grinnell under this
Agreement to cause the transactions contemplated herein to be
consummated shall be subject to the satisfaction or written
wavier by the Company or Grinnell of the following conditions:
9.1. REPRESENTATIONS AND WARRANTIES. Each of the
representations and warranties of First Federal contained in
this Agreement shall be true and correct in all material
respects (or where any statement in a representation or warranty
expressly contains a standard of materiality, such statement
shall be true and correct in all respects taking into
consideration the standard of materiality contained therein) at,
or as of, the date of this Agreement and (except to the extent
such representation speaks as of an earlier date) and as of any
date subsequent, until and including the Closing Date (except
as otherwise contemplated or permitted by this Agreement) as
though such representations were made on and as of said date.
Any information provided by First Federal pursuant to Section
5.5 hereof as a supplement to the First Federal Disclosure
Schedule shall be true and correct in all material respects
as of the date such information is supplied to the Company or
Grinnell.
9.2. PERFORMANCE AND COMPLIANCE. First Federal shall
have performed or complied in all material respects with all
covenants and agreements required by this Agreement to be
performed and satisfied by it on or prior to the Closing Date.
9.3 CORPORATE PROCEEDINGS. All action required to be
taken by, or on the part of Bancorp and First Federal to
authorize the execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated
by this Agreement shall have been duly and validly taken by
Bancorp and First Federal.
9.4. CERTIFICATE OF FIRST FEDERAL OFFICERS. First
Federal shall have furnished to Grinnell a certificate, signed
by its Chief Executive Officer and its Chief Financial Officer
and dated the Closing Date, to the effect, based on their best
knowledge, that the conditions described in Sections 9.1, 9.2
and 9.3 of this Agreement have been satisfied.
9.5. LEGAL OPINION. Grinnell shall have received an
opinion, dated as of the Closing Date, from Luse Lehman Gorman
Pomerenk & Schick, P.C., counsel for First Federal, in the form
specified on Exhibit F.
9.6. OPINION OF FINANCIAL ADVISOR. The Company shall
have received on or before the date on which the Company Proxy
Statement or other similar document is to be mailed to holders
of Company Common Stock the written opinion of its investment or
financial advisor to the effect that the merger consideration
payable to the Company's stockholders pursuant to the
Reorganization is fair from a financial point of view to the
stockholders of the Company.
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ARTICLE X.
CONDITIONS TO THE OBLIGATIONS OF ALL PARTIES
In addition to the provisions of Articles VIII and IX
hereof, the obligations of First Federal, the Company and
Grinnell to cause the transactions contemplated herein to be
consummated, shall be subject to the satisfaction or written
waiver by both First Federal and the Company of the following
conditions:
10.1. GOVERNMENTAL APPROVALS. The parties hereto
shall have received all necessary approvals of the transactions
contemplated by this Agreement from governmental agencies and
authorities, including, without limitation, those of the OTS and
the FDIC, and each of such approvals shall remain in full force
and effect and all statutory waiting periods in connection
therewith shall have expired at the Closing Date and such
approvals and the transactions contemplated thereby shall not
have been contested by any federal or state governmental
authority nor by any other third party by formal proceeding.
Provided, however, that no approval or consent referred to in
this Section 10.1 shall be deemed to have been received by First
Federal if it shall include any non-standard term, condition or
requirement that, individually or in the aggregate (i) would
have a Material Adverse Effect on the business, results of
operations, assets, or financial condition of First Federal on a
consolidated basis, or (ii) would reduce the economic or
business benefits of the transactions contemplated by this
Agreement to First Federal in so significant a manner that First
Federal, in its reasonable judgment, would not have entered into
this Agreement.
10.2. NO INJUNCTIONS OR RESTRAINTS. No suit, action
or proceeding shall be pending or overtly threatened before any
court or other governmental agency by the federal or any state
government in which it is sought to restrain or prohibit the
consummation of the Reorganization and no temporary restraining
order, preliminary or permanent injunction or other order issued
by any court of competent jurisdiction or other legal restraint
or prohibition preventing the consummation of the Reorganization
shall be in effect.
10.3. STOCKHOLDER APPROVAL. This Agreement shall
have been duly approved by the requisite affirmative vote of the
stockholders of the Company as contemplated by Section 7.1
hereof.
10.4. CORPORATE PROCEEDINGS. The obligations of the
parties to this Agreement required to be performed at or prior
to the Closing Date shall have been duly performed and complied
with in all material respects. All action required to be taken
by, or on the part of, the parties to this Agreement to
authorize the execution, delivery and performance of this
Agreement, and the consummation of the transactions contemplated
hereby, shall have been duly and validly taken by the parties
hereto.
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ARTICLE XI.
TERMINATION
11.1. REASONS FOR TERMINATION. This Agreement may be
terminated and the Reorganization abandoned at any time before
the Closing Date, whether before or after the approval
or adoption of this Agreement by the stockholders of the
Company:
(a) By mutual written consent of the Board of
Directors of First Federal and the Board of Directors of the
Company;
(b) By written notice from First Federal to the
Company if:
(i) any condition set forth in Article VIII of
this Agreement shall have become impossible to substantially
satisfy at any time or has not been substantially satisfied or
waived in writing; or
(ii) any condition set forth in Article X of
this Agreement shall have become impossible to substantially
satisfy at any time or has not been substantially satisfied or
waived in writing, provided, however, First Federal shall not
have the right to terminate this Agreement pursuant to this
Section 11.1(b)(ii) if any condition imposed by Section 10.1
hereof was not met due to the failure of First Federal to
perform or observe the covenants and agreements set forth in
this Agreement; or
(iii) any warranty or representation as set
forth in Article III hereof made by the Company or Grinnell
shall be discovered to be or to have become untrue or incorrect
in any material respect, or where any statement in a
representation or warranty expressly includes a standard of
materiality, such statement shall be discovered to be or to have
become untrue or incorrect in any respect taking into
consideration the standard of materiality contained therein, in
either case where any such breach has not been cured within
thirty (30) days following receipt by the Company or Grinnell
of notice of such discovery; or
(iv) The Company or Grinnell shall have breached
one or more provisions of this Agreement in any material respect
considering all such breaches in the aggregate, where such
breach has not been cured within thirty (30) days following
receipt by the Company or Grinnell of notice of such breach; or
(c) By written notice from the Company to First
Federal, if
(i) any condition set forth in Article IX of
this Agreement shall have become impossible to substantially
satisfy at any time or has not been substantially satisfied or
waived in writing; or
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(ii) any condition set forth in Article X of
this Agreement shall have become impossible to substantially
satisfy at any time or has not been substantially satisfied or
waived in writing; provided, however, the Company shall not have
the right to terminate this Agreement pursuant to this Section
11.1(c)(ii) if any condition imposed by Section 10.1 hereof was
not met due to the failure of the Company or Grinnell to perform
or observe the covenants and agreements set forth in this
Agreement; or
(iii) any warranty or representation as set
forth in Article IV hereof made by First Federal shall be
discovered to be or to have become untrue or incorrect in any
material respect, or where any statement in a representation or
warranty expressly includes a standard of materiality, such
statement shall be discovered to be or to have become untrue or
incorrect in any respect taking into consideration the standard
of materiality contained therein, in either case where any such
breach has not been cured within thirty (30) days following
receipt by First Federal of notice of such discovery; or
(iv) First Federal shall have breached one or
more provisions of this Agreement in any material respect
considering all such breaches in the aggregate, where such
breach has not been cured within thirty (30) days following
receipt by First Federal of notice of such breach.
(d) By the Board of Directors of the Company if all
of the following conditions are met: (i) a person (including a
company or any other entity) makes a Superior Proposal; (ii)
within seven (7) business days after First Federal receives
written notice from the Company of such Superior Proposal, First
Federal does not increase the consideration to be paid to the
holders of Company Common Stock in the Reorganization so that it
is at least as favorable to the holders of Company Common Stock
as the Superior Proposal (such increase in the consideration to
be paid by First Federal, an "First Federal Superior Proposal");
(iii) the Board of Directors of the Company, to the extent
permitted by Section 7.1 hereof, shall have failed to recommend
to stockholders, or shall have withdrawn or shall have modified
in a manner adverse to First Federal its recommendation of, this
Agreement or the Reorganization in order to permit Grinnell to
enter into a definitive written agreement providing for the
transactions contemplated by such Superior Proposal; and (iv)
the Company or the person or entity making the Superior Proposal
shall have paid to First Federal the Fee (as defined in
Section 12.2(b) hereof), to the extent such Fee is payable
pursuant to Section 12.2(b) hereof, and the expenses of First
Federal (including, but not limited to, the fees and expenses of
attorneys) incurred in connection with negotiating this
Agreement and effectuating the consummation of the transactions
contemplated hereby.
(e) By the Board of Directors of First Federal if the
Board of Directors of the Company shall not recommend, or shall
withdraw or modify in a manner adverse to First Federal, its
recommendation to the holders of Company Common Stock to approve
this Agreement.
(f) By the Board of Directors of First Federal or the
Company at any time after the Company Shareholders' Meeting as
contemplated in Section 7.1 if the stockholders of the Company
have not approved this Agreement by the requisite affirmative
vote.
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(g) By the Board of Directors of First Federal or the
Company if the Reorganization has not been consummated on or
before June 30, 1998.
11.2. EFFECT OF TERMINATION. In the event of
termination of this Agreement by either the Company or First
Federal as provided in Section 11.1 hereof, this Agreement shall
forthwith become void, and there shall be no liability or
obligation on the part of First Federal or the Company or their
respective officers or directors except with respect to Sections
6.7, 7.9, 11.1(d) and 12.2 hereof.
ARTICLE XII.
MISCELLANEOUS
12.1. NONSURVIVAL OF REPRESENTATIONS, WARRANTIES AND
AGREEMENTS. None of the representations, warranties, covenants
and agreements in this Agreement or in any instrument delivered
pursuant to this Agreement shall survive the Effective Time,
except for the covenants and agreements which by their terms are
contemplated to be performed after the Effective Time.
12.2. EXPENSES AND TERMINATION FEE. (a) Except as
otherwise provided herein, all expenses incurred by First
Federal and the Company in connection with or related to the
authorization, preparation and execution of this Agreement, the
solicitation of stockholder approvals and all other matters
related to the closing of the transactions contemplated thereby,
including, without limitation of the generality of the
foregoing, all fees and expenses of agents, financial advisors,
representatives, counsel and accountants employed by either such
party or its Affiliates, shall be borne solely and entirely by
the party that has incurred the same.
(b) Grinnell also hereby agrees to pay First Federal,
and First Federal shall be entitled to payment of, a fee (the
"Fee") of $900,000, upon the occurrence of any of the following
events on or before the earlier of the date this Agreement is
terminated or June 30, 1998:
(i) if the Board of Directors of the Company
recommends a Superior Proposal and thereafter (A) the Company
Shareholders' Meeting shall not have been held or shall have
been postponed, delayed or enjoined prior to termination of this
Agreement or (B) the Company's shareholders do not approve this
Agreement;
(ii) if the Board of Directors of the Company
withdraws or modifies its recommendation of approval of this
Agreement, and thereafter (A) the Company Shareholders' Meeting
shall not have been held or shall have been postponed, delayed
or enjoined prior to termination of this Agreement or (B) the
Company's shareholders do not approve this Agreement;
(iii) if the Company's shareholders do not approve
this Agreement after a Superior Proposal is made and within
twelve (12) months thereafter the Company enters into a
definitive agreement to be merged into or acquired by another
entity (provided, however, that Grinnell shall pay
42<PAGE>
<PAGE>
all Expenses of First Federal, as defined in Section 6.7.
hereof, in an amount not to exceed $300,000, within five
business days following rejection of this Agreement by Company
shareholders);
(iv) if the Company or Grinnell enters into an
agreement to be acquired by any other party; or
(v) if the Company both (1) fails to receive the
opinion of its financial advisor that the Merger is fair to the
Company's shareholders from a financial point of view, and such
failure occurs after a Superior Proposal is made, and (2) the
Reorganization is not consummated.
With the exception of the payment under subparagraph
(iii) above, which shall be paid within five business days
following the Company's execution of a definitive agreement of
merger or acquisition (except that the Expenses of First Federal
shall be paid as provided in (iii) above), such payment shall be
made to First Federal in immediately available funds within five
business days after the occurrence of an event set forth above.
12.3. WAIVERS; AMENDMENTS. At any time prior to the
Closing Date, either First Federal, by action taken by its Board
of Directors, or any committee or officers thereunto authorized,
or the Company or Grinnell, by action taken by its Board of
Directors, or any committee or officers thereunto authorized,
may waive the performance of any of the obligations of the other
or waive compliance by the other with any of the covenants or
conditions contained in this Agreement or agree
to the amendment or modification of this Agreement by an
agreement in writing executed in the same manner as this
Agreement; provided, however, that after the favorable vote by
the stockholders of the Company pursuant to Section 7.1 of this
Agreement any such action shall be taken only if, in the
opinion of the Company's Board of Directors, such waiver,
amendment or modification will not have a material adverse
effect on the benefits intended under this Agreement for the
shareholders of the Company and will not require resolicitation
of any proxies from such shareholders.
12.4. ASSIGNMENT; PARTIES IN INTEREST. This
Agreement shall be binding upon and inure solely to the benefit
of the parties hereto and their respective successors and
assigns, but shall not be assigned by the parties hereto, by
operation of law or otherwise, without the prior written consent
of the other parties. Except with respect to the payment of
benefits pursuant to Section 7.12 and the obligation of First
Federal contained in Section 7.8, nothing in this Agreement,
express or implied, is intended to confer upon any third party
any rights or remedies of any nature whatsoever under or by
reason of this Agreement.
12.5. ENTIRE AGREEMENT. This Agreement supersedes
any other agreement, whether written or oral, that may have been
made or entered into by the Company, Grinnell or First Federal
or by any officer or officers of such parties relating to the
acquisition of the business or the capital stock of the Company
or Grinnell by First Federal, except for the Confidentiality
Agreement dated September __, 1997, which shall remain in full
force and affect. This Agreement and such Confidentiality
Agreement constitute the entire agreement by the respective
parties, and there are no agreements or commitments except as
set forth herein and therein.
43<PAGE>
<PAGE>
12.6. CAPTIONS AND COUNTERPARTS. The captions in
this Agreement are for convenience only and shall not be
considered a part of or affect the construction or
interpretation of any provision of this Agreement. This
Agreement may be executed in several counterparts, each of which
shall constitute one and the same instrument.
12.7. CERTAIN DEFINITIONS. For purposes of this
Agreement, the term:
(a) "Affiliate" means a person that directly or
indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with, another person;
(b) "Material Adverse Effect" shall mean a material
adverse effect on the operations, assets, or financial condition
of the parties to this Agreement other than the effects of any
such change attributable to or resulting from any change in law,
regulation or generally accepted accounting principles or
regulatory accounting principles and other than the effects of
any change attributable to or resulting from changes in economic
conditions applicable to depository institutions generally or in
general levels of interest rates.
(c) "Grinnell Reports" shall mean all reports,
registrations and statements, together with any amendments
required to be made with respect thereto, that were and are
required by applicable law to be filed with the OTS, the FDIC,
and any other applicable state securities or bank regulatory
authorities by either Grinnell or the Company; and
(d) "to the knowledge of First Federal" or "to the
best knowledge of First Federal" shall mean the actual knowledge
of any member of the Board of Directors or of any senior officer
of First Federal.
(e) "to the knowledge of the Company or Grinnell" or
"to the best knowledge of the Company or Grinnell" shall mean
the actual knowledge of any member of the Board of Directors or
of any senior officer of the Company or Grinnell.
12.8. ENFORCEMENT OF THIS AGREEMENT. The parties
hereto agree that irreparable damage would occur in the event
that any of the provisions of this Agreement were not performed
in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that the parties hereto will
be entitled to an injunction or injunctions to prevent breaches
of this Agreement and to enforce specifically the terms and
provisions hereof in any court of the United States or any state
having jurisdiction, this being in addition to any other remedy
to which they are entitled at law or in equity.
12.9. GOVERNING LAW. This Agreement shall be
construed and interpreted in accordance with the laws of the
State of Iowa, except to the effect that Federal Law applies,
without regard to the conflicts of laws rules.
44<PAGE>
<PAGE>
12.10. NOTICES. All notices given hereunder shall be
in writing and shall be hand delivered, sent by facsimile
transmission or sent by a nationally recognized overnight
delivery service, addressed as follows:
(a) If to First Federal to:
First Federal Savings Bank of Siouxland
329 Pierce Street
Sioux City, Iowa 51102
Attention: Barry E. Backhaus, President
and Chief Executive Officer
With A Copy To:
Luse Lehman Gorman Pomerenk & Schick
5335 Wisconsin Avenue, N.W.
Suite 400
Washington, D.C. 20015
Attention: Robert B. Pomerenk, Esq.
(b) If to Grinnell to:
GFS Bancorp, Inc.
1025 Main Street
Grinnell, Iowa 50112-0030
Attention: Steven L. Opsal, President and
Chief Executive Officer
with a copy to:
Housley Kantarian & Bronstein, P.C.
Suite 700
1220 19th Street, N.W.
Washington, D.C. 20036
Attention: Gary R. Bronstein, Esq.
Any notice provided hereunder shall be effective upon
receipt thereof.
45<PAGE>
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused
this Agreement to be duly executed as of the date first above
written.
ATTEST: FIRST FEDERAL SAVINGS BANK OF SIOUXLAND
By: By: ________________________________
Barry E. Backhaus, President
ATTEST: GRINNELL FEDERAL SAVINGS BANK
By: By: ________________________________
Steven L. Opsal, President
ATTEST: GFS BANCORP, INC.
By: By: ________________________________
Steven L. Opsal
46
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APPENDIX B
Opinion of Financial Advisor to GFS Bancorp
- -------------------------------------------
Professional Bank Services, Inc. ("PBS") was engaged by the
Company)to advise the Company's Board of Directors as to the
fairness of the consideration, from a financial perspective, to
be paid by First Federal to the Company shareholders as set
forth in the Agreement by and between the Company and First
Federal.
PBS is a bank consulting firm with offices in Louisville,
Atlanta, Chicago, Nashville and Washington, D.C. As part of its
investment banking business, PBS is regularly engaged in
reviewing the fairness of financial institution acquisition
transactions from a financial perspective and in the valuation
of financial institutions and other businesses and their
securities in connection with mergers, acquisitions, estate
settlements, and other transactions. Neither PBS nor any of its
affiliates has a material financial interest in the Company or
First Federal. PBS was selected to advise the Company's Board of
Directors based upon their familiarity with Iowa financial
institutions and knowledge of the banking industry as a whole.
PBS performed certain analyses described herein and
presented the range of values for the Company resulting from
such analyses to the Board of Directors of the Company in
connection with its advice as to the fairness of the
consideration to be paid by First Federal.
A Fairness Opinion of PBS was delivered to the Board of
Directors of the Company on October 16, 1997, at a regular
meeting of the Board of Directors and has been updated as of the
date of this Prospectus/Proxy Statement. A copy of the Fairness
Opinion, which includes a summary of the assumptions made and
information analyzed in deriving the Fairness Opinion, is
attached as Appendix B to this Proxy Statement-Prospectus and
should be read in its entirety.
In arriving at its Fairness Opinion, PBS reviewed certain
publicly available business and financial information relating
to the Company and First Federal. PBS considered certain
financial and stock market data of the Company and First
Federal, compared that data with similar data for certain other
publicly-held thrift holding companies and considered the
financial terms of certain other comparable thrift transactions
in the states of Iowa, Nebraska, Missouri, Wisconsin, South
Dakota, North Dakota, Ohio, Kansas, Minnesota, Indiana,
Illinois, Kentucky and Michigan (the "Regional Area") that had
recently been effected. PBS also considered such other
information, financial studies, analyses and investigations and
financial, economic and market criteria that it deemed relevant.
In connection with its review, PBS did not independently verify
the foregoing information and relied on such information as
being complete and accurate in all material respects. Financial
forecasts prepared by PBS were based on assumptions believed by
PBS to be reasonable and to reflect currently available
information. PBS did not make an independent evaluation or
appraisal of the assets of the Company or First Federal.
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PBS reviewed and analyzed the historical performance of the
Company and the Bank contained in: audited Annual Reports and
financial statements dated June 30, 1995 and 1996 of the
Company; June 30, 1996, September 30, 1996, December 31, 1996,
March 31, 1997 and June 30, 1997 Consolidated Reports of
Condition and Income filed by the Bank with the Office of Thrift
Supervision; preliminary September 30, 1997 internal financial
reports; the historical common stock trading activity of the
Company; and the premises and other fixed assets. PBS reviewed
and tabulated statistical data regarding the loan portfolio,
securities portfolio and other performance ratios and
statistics. Financial projections were prepared and analyzed as
well as other financial studies, analyses and investigations as
deemed relevant for the purposes of this opinion. In review of
the aforementioned information, PBS took into account its
assessment of general market and financial conditions, its
experience in other similar transactions, and its knowledge of
the banking industry generally.
In connection with rendering the Fairness Opinion and
preparing its written and oral presentation to the Company's
Board of Directors, PBS performed a variety of financial
analyses, including those summarized herein. The summary does
not purport to be a complete description of the analyses
performed by PBS in this regard. The preparation of a Fairness
Opinion involves various determinations as to the most
appropriate and relevant methods of financial analysis and the
application of these methods to the particular circumstances and
therefore, such an opinion is not readily susceptible to summary
description. Accordingly, notwithstanding the separate factors
summarized below, PBS believes that its analyses must be
considered as a whole and that selecting portions of its
analyses and of the factors considered by it, without
considering all analyses and factors, could create an incomplete
view of the evaluation process underlying its opinion. In
performing its analyses, PBS made numerous assumptions with
respect to industry performance, business and economic
conditions and other matters, many of which are beyond the
Company's or First Federal's control. The analyses performed by
PBS are not necessarily indicative of actual values or future
results, which may be significantly more or less favorable than
suggested by such analyses. In addition, analyses relating to
the values of businesses do not purport to be appraisals or to
reflect the process by which businesses actually may be sold.
Acquisition Comparison Analysis: In performing this
analysis, PBS reviewed all thrift acquisition transactions in
the states of Iowa, Nebraska, Missouri, Wisconsin, South Dakota,
North Dakota, Ohio, Kansas, Minnesota, Indiana, Illinois,
Kentucky and Michigan (the "Regional Area") since 1990. There
were 185 thrift acquisition transactions in the Regional Area
announced since 1990 for which detailed financial information
was available. The purpose of the analysis was to obtain an
evaluation range based on these Regional Area thrift acquisition
transactions. Median multiples of earnings and book value
implied by the comparable transactions were utilized in
obtaining a range for the acquisition value of the Company.
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<PAGE>
In addition to reviewing recent Regional Area thrift
transactions, PBS performed separate comparable analyses for
acquisitions of thrifts which, like the Company, had an
equity-to-asset ratio between 10.00% and 12.00%, had total
assets between $50.0 - $150.0 million, and those transactions in
which the acquired institutions were located in the state of
Iowa. Median values for the 185 Regional Area acquisitions
expressed as multiples of both book value and earnings were
1.34X and 16.42X, respectively. The median multiples of book
value and earnings for acquisitions of Regional Area thrifts
which, like the Company, had an equity-to-asset ratio between
10.00% and 12.00% were 1.34X and 17.22X, respectively. For
acquisitions of Regional Area thrifts with assets between $50.0
- - $150.0 million the median multiples were 1.33X and 14.18X. The
median multiples of book value and earnings for acquisitions of
thrifts located in the state of Iowa were 1.41X and 14.67X,
respectively.
In the proposed transaction, Company shareholders will
receive $17.65 in cash for each outstanding Company common
share, as further defined in the Agreement. The $17.65 per
Company common share represents a multiple of the Company's
September 30, 1997 stated book value and a multiple of the
Company's September 30, 1997 last twelve month earnings of 1.60X
and 15.41X respectively. Including the dilutive effects of the
Company's stock options, the $17.65 per Company common share
represents a multiple of September 30, 1997 adjusted book value
and adjusted last twelve month earnings of 1.69X and 17.21X,
respectively.
The market value of the proposed transaction's percentile
ranking was prepared and analyzed with respect to the above
Regional Area comparable group without considering the dilutive
effect of the Company's options. Compared to all Regional Area
thrift transactions, the acquisition value ranked in the 71st
percentile as a multiple of book value and in the 39th
percentile as a multiple of earnings. Compared to Regional Area
thrift transactions where the acquired institution had an
equity-to-asset ratio between 10.00% and 12.00%, the acquisition
value ranked in the 71st percentile as a multiple of book value
and the 31st percentile as a multiple of earnings. For Regional
Area thrift acquisitions where the acquired institution had
between $50.0 - $150.0 million in assets, the acquisition value
ranked in the 73rd percentile as a multiple of book value and
40th percentile as a multiple of earnings. For thrift
transactions in the State of Iowa, the acquisition value ranked
in the 90th percentile as a multiple of book value and in the
44th percentile as a multiple of earnings.
Taking the dilutive effect of the Company's options into
consideration, the market value of the proposed transaction's
percentile ranking was again prepared and analyzed with respect
to the above Regional Area comparable group. Compared to all
Regional Area thrift transactions, the acquisition value ranked
in the 81st percentile as a multiple of adjusted book value and
in the 48th percentile as a multiple of adjusted earnings.
Compared to Regional Area thrift transactions where the acquired
institution had an equity-to-asset ratio between 10.00% and
12.00%, the acquisition value ranked in the 87th percentile as a
multiple of adjusted book value and the 39th percentile as a
multiple of adjusted earnings.
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For Regional Area thrift acquisitions where the acquired
institution had between $50.0 - $150.0 million in assets, the
acquisition value ranked in the 91st percentile as a multiple of
adjusted book value and 49th percentile as a multiple of
adjusted earnings. For thrift transactions in the State of Iowa,
the acquisition value ranked in the 97th percentile as a
multiple of adjusted book value and in the 64th percentile as a
multiple of adjusted earnings.
Adjusted Net Asset Value Analysis: PBS reviewed the
Company's balance sheet data to determine the amount of material
adjustments required to be made to the stockholders' equity of
the Company based on differences between the market value of the
Company's assets and their value reflected on the Company's
financial statements. PBS determined that three adjustments were
warranted. Equity was increased $187,000 for the elimination of
the Company's ESOP and MRP contra equity accounts. Equity was
increased $60,000 to reflect the after tax appreciation in the
Company's held to maturity securities portfolio. In addition,
PBS also reflected a value of the non-interest bearing demand
deposits of approximately $1,470,000. The aggregate adjusted net
asset value of the Company was determined to be $12,596,000 or
$12.75 per Company common share. PBS also performed a similar
analysis taking into consideration the Company's common stock
options. Under this analysis equity was increased $1,154,000 to
reflect the exercise of the Company's 163,512 stock options. The
aggregate value of the Company under this analysis was
determined to be $13,750,000 or $11.94 per Company common share.
Discounted Earnings Analysis: A dividend discount analysis
was performed by PBS pursuant to which a range of stand-alone
values of the Company was determined by adding (i) the present
value of estimated future dividend streams that the Company
could generate over a five-year period and (ii) the present
value of the "terminal value" of the Company's earnings at the
end of the fifth year. The "terminal value" of the Company's
earnings at the end of the five-year period was determined by
applying a multiple of 16.42 times the projected terminal year's
earnings. The 16.42 multiple represents the median price paid as
a multiple of earnings for all thrift transactions in the
Regional Area since 1990.
Dividend streams and terminal values were discounted to
present values using a discount rate of 12%. This rate reflects
assumptions regarding the required rate of return of holders or
buyers of the Company's common stock. The aggregate value of the
Company, determined by adding the present value of the total
cash flows, was $16,715,000 or $16.91 per share. In addition,
using the five-year projection as a base, a twenty-year
projection was prepared assuming an annual growth rate of 5.0%
and the Company's return on assets increasing to 1.60% by year
ten. Dividends were assumed to increase from 30.0% of income in
years one through five to 60% of income for years six through
twenty. This long-term projection resulted in a aggregate value
of $14,305,000 or $14.47 per Company common share. This same
analysis was repeated assuming the exercise of the Company's
stock options. Under this scenario, the five year short term
value was determined to equal $17,584,000 or $15.27 per
Company common share and the twenty year long term projection
resulted in an aggregate value of $14,640,000 or $12.71 per
Company common share.
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<PAGE>
Specific Acquisition Analysis: PBS valued the Company based
on an acquisition analysis assuming a "break-even" earnings
scenario to an acquiror as to price, current interest rates and
amortization of the premium paid. Based on this analysis, an
acquiring institution would pay in aggregate $17,937,000, or
$18.15 per share, assuming they were willing to accept no impact
to their net income in the initial year. This analysis was based
on a funding cost of 6.75% adjusted for taxes, amortization of
the acquisition premium over 15 years and a September 30, 1997
last twelve month earnings level of $1,245,000. This analysis
was repeated assuming a potential acquiror would attain
non-interest expense reductions of 10% in the transaction. Based
on this analysis an acquiring institution would pay in aggregate
$18,759,000 or $18.98 per Company share. PBS repeated this
analysis taking into consideration the dilutive effects of the
Company's stock options. Under this scenario an acquiring
institution would pay in aggregate $19,074,000, or $16.56 per
share, assuming they were willing to accept no impact to their
net income in the initial year. This analysis was based on a
funding cost of 6.75% adjusted for taxes, amortization of the
acquisition premium over 15 years and a September 30, 1997 last
twelve month adjusted earnings level of $1,294,000. This
analysis was repeated assuming a potential acquiror would attain
non-interest expense reductions of 10% in the transaction. Based
on this analysis an acquiring institution would pay in aggregate
$19,886,000 or $17.27 per Company share.
The Fairness Opinion is directed only to the question of
whether the consideration to be received by the Company's
shareholders under the Agreement is fair and equitable from a
financial perspective and does not constitute a recommendation
to any Company shareholder to vote in favor of the affiliation.
No limitations were imposed on PBS regarding the scope of its
investigation or otherwise by the Company.
Based on the results of the various analyses described
above, PBS concluded that the consideration to be received by
the Company's shareholders under the Agreement is fair and
equitable from a financial perspective to the shareholders of
the Company.
PBS will receive fees in the amount of $100,000 for all
services performed in connection with the rendering of the
Fairness Opinion. In addition, the Company has agreed to
indemnify PBS and its directors, officers and employees, from
liability in connection with the transaction, and to hold PBS
harmless from any losses, actions, claims, damages, expenses or
liabilities related to any of PBS' acts or decisions made in
good faith and in the best interest of the Company.
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APPENDIX C
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
262 APPRAISAL RIGHTS. -- (a) Any stockholder of a
corporation of this State who holds shares of stock on the date
of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such
shares through the effective date of the merger or
consolidation, who has otherwise complied with subsection (d) of
this section and who has neither voted in favor of the merger or
consolidation nor consented thereto in writing pursuant to
Subsection 228 of this title shall be entitled to an appraisal
by the Court of Chancery of the fair value of the stockholder's
shares of stock under the circumstances described in subsections
(b) and (c) of this section. As used in this section, the word
"stockholder" means a holder of record of stock in a stock
corporation and also a member of record of a nonstock
corporation; the words "stock" and "share" mean and include what
is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and
the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in
one or more shares, or fractions thereof, solely of stock of a
corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of
any class or series of stock of a constituent corporation in a
merger or consolidation to be effected pursuant to Subsections
251 (other than a merger effected pursuant to Subsection 251(g)
of this title), 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under
this section shall be available for the shares of any class or
series of stock, which stock, or depository receipts in respect
thereof, at the record date fixed to determine the stockholders
entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities
exchange or designated as a national market system security on
an interdealer quotation system by the National Association of
Securities Dealers, Inc. or (ii) held of record by more than
2,000 holders; and further provided that no appraisal rights
shall be available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require for
its approval the vote of the stockholders of the surviving
corporation as provided in subsections (f) or (g) of Subsection
251 of this title.
(2) Notwithstanding paragraph (1) of this subsection,
appraisal rights under this section shall be available for the
shares of any class or series of stock of a constituent
corporation if the holders thereof are required by the terms of
an agreement of merger or consolidation pursuant to Subsections
251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving
or resulting from such merger or consolidation, or depository
receipts in respect thereof;
b. Shares of stock of any other corporation, or
depository receipts in respect thereof, which shares of stock
(or depository receipts in respect thereof) or depository
receipts at the effective date of the merger or consolidation
will be either listed on a national securities exchange or
designated as a national market system security on an
interdealer quotation system by the National Association of
Securities Dealers, Inc. or held of record by more than 2,000
holders.
c. Cash in lieu of fractional shares or
fractional depository receipts described in the foregoing
subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock,
depository receipts and cash in lieu of fractional shares or
fractional depository receipts described in the foregoing
subparagraphs a., b. and c. of this paragraph.
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(3) In the event all of the stock of a subsidiary
Delaware corporation party to a merger effected under Subsection
253 of this title is not owned by the parent corporation
immediately prior to the merger, appraisal rights shall be
available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of
incorporation that appraisal rights under this section shall be
available for the shares of any class or series of its stock as
a result of an amendment to its certificate of incorporation,
any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially
all of the assets of the corporation. If the certificate of
incorporation contains such a provision, the procedures of this
section, including those set forth in subsections (d) and (e) of
this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which
appraisal rights are provided under this section is to be
submitted for approval at a meeting of stockholders, the
corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date
for such meeting with respect to shares for which appraisal
rights are available pursuant to subsections (b) or (c) hereof
that appraisal rights are available for any or all of the shares
of the constituent corporations, and shall include in such
notice a copy of this section. Each stockholder electing to
demand the appraisal of his shares shall deliver to the
corporation, before the taking of the vote on the merger or
consolidation, a written demand for appraisal of his shares.
Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of his
shares. A proxy or vote against the merger or consolidation
shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as
herein provided. Within 10 days after the effective date of
such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not
voted in favor of or consented to the merger or consolidation of
the date that the merger or consolidation has become effective;
or
(2) If the merger or consolidation was approved
pursuant to Subsection 228 or 253 of this title, each
constituent corporation, either before the effective date of the
merger or consolidation or within ten days thereafter, shall
notify each of the holders of any class or series of stock of
such constituent corporation who are entitled to appraisal
rights of the approval of the merger or consideration and that
appraisal rights are available for any or all shares of such
class or series of stock of such constituent corporation, and
shall include in such notice a copy of this section; provided
that, if the notice is given on or after the effective date of
the merger or consolidation, such notice shall be given by the
surviving or resulting corporation to all such holders of any
class or series of stock of a constituent corporation that are
entitled to appraisal rights. Such notice may, and, if given on
or after the effective date of the merger or consolidation,
shall, also notify such stockholders of the effective date of
the merger or consolidation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or
resulting corporation the appraisal of such holder's shares.
Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such
holder's shares. If such notice did not notify stockholders of
the effective date of the merger or consolidation, either (i)
each such constituent corporation shall send a second notice
before the effective date of the merger or consolidation
notifying each of the holders of any class or series of stock of
such constituent corporation that are entitled to appraisal
rights of the effective date of the merger or consolidation or
(ii) the surviving or resulting corporation shall send such a
second notice to all such holders on or within 10 days after
such effective date; provided, however, that if such second
notice is sent more than 20 days following the sending of the
first notice, such second notice need only be sent to each
stockholders who is entitled to appraisal rights and who has
demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant
secretary or of the transfer agent of the corporation that is
required to give either notice that such notice has been given
shall, in the absence of fraud, be prima facie evidence of the
facts stated therein. For purposes of determining the
stockholders entitled to receive either notice, each constituent
corporation may fix, in advance, a record date that shall be not
more than 10 days prior to the date the notice is given,
provided, that if the notice
C-2<PAGE>
<PAGE>
is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If
no record date is fixed and the notice is given prior to the
effective date, the record date shall be the close of business
on the day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger
or consolidation, the surviving or resulting corporation or any
stockholder who has complied with subsections (a) and (d) hereof
and who is otherwise entitled to appraisal rights, may file a
petition in the Court of Chancery demanding a determination of
the value of the stock of all such stockholders. Notwithstanding
the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have
the right to withdraw his demand for appraisal and to accept the
terms offered upon the merger or consolidation. Within 120 days
after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or
resulting from the consolidation a statement setting forth the
aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal
have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the
stockholder within 10 days after his written request for such a
statement is received by the surviving or resulting corporation
or within 10 days after expiration of the period for delivery of
demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder,
service of a copy thereof shall be made upon the surviving or
resulting corporation, which shall within 20 days after such
service file in the office of the Register in Chancery in which
the petition was filed a duly verified list containing the names
and addresses of all stockholders who have demanded payment for
their shares and with whom agreements as to the value of their
shares have not been reached by the surviving or resulting
corporation. If the petition shall be filed by the surviving or
resulting corporation, the petition shall be accompanied by such
as duly verified list. The Register in Chancery, if so ordered
by the Court, shall give notice of the time and place fixed for
the hearing of such petition by registered or certified mail to
the surviving or resulting corporation and to the stockholders
shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week
before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or
such publication as the Court deems advisable. The forms of the
notices by mail and by publication shall be approved by the
Court, and the costs thereof shall be borne by the surviving or
resulting corporation.
(g) At the hearing on such petition, the Court shall
determine the stockholders who have complied with this section
and who have become entitled to appraisal rights. The Court may
require the stockholders who have demanded an appraisal for
their shares and who hold stock represented by certificates
to submit their certificates of stock to the Register in
Chancery for notation thereon of the pendency of the appraisal
proceedings; and if any stockholder fails to comply with such
direction, the Court may dismiss the proceedings as to such
stockholder.
(h) After determining the stockholders entitled to an
appraisal, the Court shall appraise the shares, determining
their fair value exclusive of any element of value arising from
the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to
be paid upon the amount determined to be the fair value. In
determining such fair value, the Court shall take into account
all relevant factors. In determining the fair rate of interest,
the Court may consider all relevant factors, including the rate
of interest which the surviving or resulting corporation would
have had to pay to borrow money during the pendency of the
proceeding. Upon application by the surviving or resulting
corporation or by any stockholder entitled to participate in the
appraisal proceeding, the Court may, in its discretion, permit
discovery or other pretrial proceedings and may proceed to trial
upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose
name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who
has submitted his certificates of stock to the Register of
Chancery, if such is required, may participate fully in all
proceedings until it is finally determined that he is not
entitled to appraisal rights under this section.
C-3<PAGE>
<PAGE>
(i) The Court shall direct the payment of the fair value
of the shares, together with interest, if any, by the surviving
or resulting corporation to the stockholders entitled thereto.
Interest may be simple or compound, as the Court may direct.
Payment shall be so made to each such stockholder, in the case
of holders of uncertificated stock forthwith, and the case of
holders of shares represented by certificates upon the surrender
to the corporation of the certificates representing such stock.
The Court's decree may be enforced as other decrees in the Court
of Chancery may be enforced, whether such surviving or resulting
corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the
Court and taxed upon the parties as the Court deems equitable in
the circumstances. Upon application of a stockholder, the Court
may order all or a portion of the expenses incurred by any
stockholder in connection with the appraisal proceeding,
including, without limitation, reasonable attorney's fees and
the fees and expenses of experts, to be charged pro rata against
the value of all the shares entitled to an appraisal.
(k) From and after the effective date of the merger or
consolidation, no stockholder who has demanded his appraisal
rights as provided in subsection (d) of this section shall be
entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of
record at a date which is prior to the effective date of the
merger or consolidation); provided, however, that if no petition
for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder
shall deliver to the surviving or resulting corporation a
written withdrawal of his demand for an appraisal and an
acceptance of the merger or consolidation, either within 60 days
after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with
the written approval of the corporation, then the right of such
stockholder to an appraisal shall cease. Notwithstanding the
foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of
the Court, and such approval may be conditioned upon such terms
as the Court deems just.
(l) The shares of the surviving or resulting corporation
to which the shares of such objecting stockholders would have
been converted had they assented to the merger or consolidation
shall have the status of authorized and unissued shares of the
surviving or resulting corporation.
C-4<PAGE>
<PAGE>
APPENDIX D
================================================================
GFS BANCORP, INC.
[LOGO]
1997 ANNUAL REPORT
================================================================
<PAGE>
<PAGE>
A MESSAGE FROM THE PRESIDENT
Dear Fellow Stockholder:
Our balance sheet once again reflects solid growth with respect
to total assets (up 10.6%), loans receivable (up 9.3%) and
deposits (up 12.1%). More importantly, this was not simply
"growth for growth's sake", but was profitable growth.
Excluding the one-time BIF/SAIF assessment paid by all thrift
institutions in the September 1996 quarter, GFS Bancorp's
earnings would have been another record high at $1,052,000, a
17.5% increase over last year. Even including the
aforementioned assessment, the Bancorp still produced very
respectable earnings of $871,000, or about the same as last
year's $895,000. We were particularly pleased about the fact
that $588,000 of net income was generated in the last half of
the fiscal year.
Net interest income, the main driver of our earnings, increased
to more than $3 million, up 20.7%. This substantial increase
was fueled by a combination of record local lending volume and
the continuation of our relationship with Bache Funding Corp. of
Wisconsin, a mortgage banking firm headquartered in Madison.
These two sources provided over $20 million for our loan
portfolio and nearly $27 million in related servicing.
Other highlights for the year included another increase in our
cash dividend, a 100% stock dividend, the unveiling of our
Hometown Checking program, on-site banking service for residents
of the Mayflower Home (a senior care facility), and securing a
long term lease on property adjacent to our office which will
allow for a planned expansion of our facility.
We pledge to continue our focus on earnings per share. To this
end, we will strive to increase market share by providing
attractive and reasonably priced banking products and services.
You, our investors, can help us by using our services and
recommending us to your family and friends.
As always, we are indebted to our valued customers, dedicated
staff and loyal stockholders. Thank you!
Sincerely,
Steven L. Opsal
President<PAGE>
<PAGE>
________________________________________________________________
TABLE OF CONTENTS
________________________________________________________________
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 . . . . . . . . . . . . . . 18
Stockholder Information . . . . . . . . . . . . . . . . . . . 45
Corporate Information . . . . . . . . . . . . . . . . . . . . 46
<PAGE>
<PAGE>
GFS BANCORP, INC.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
June 30,
------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
- ---------------------------------
Total assets. . . . . . . . . . . . . . $92,063 $83,305 $70,950 $57,179 $51,213
Cash and cash equivalents . . . . . . . 4,643 2,271 4,107 968 4,923
Mortgage-backed securities, net . . . . 3,146 3,435 3,950 4,237 5,716
Investment securities . . . . . . . . . 3,407 3,255 6,078 6,690 5,001
FHLB stock. . . . . . . . . . . . . . . 1,159 1,159 832 832 832
Loans receivable, net . . . . . . . . . 78,475 71,773 54,999 43,682 33,898
Deposits. . . . . . . . . . . . . . . . 59,551 53,122 46,082 42,016 43,249
FHLB advances . . . . . . . . . . . . . 20,961 19,318 14,578 5,870 3,500
Stockholders' equity. . . . . . . . . . 10,537 9,945 9,540 8,811 4,042
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------
(Dollars in Thousands Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
- ------------------------
Total interest income . . . . . . . . . $7,139 $ 6,245 $ 4,778 $ 4,013 $ 4,098
Total interest expense. . . . . . . . . 4,092 3,720 2,638 2,228 2,547
------ ------- ------- ------- -------
Net interest income . . . . . . . . . 3,047 2,525 2,140 1,785 1,551
Provision (credit) for loan losses. . . 121 249 --- 20 (4)
------ ------- ------- ------- -------
Net interest income after provision
for losses on loans. . . . . . . . . 2,926 2,276 2,140 1,765 1,555
Non-interest income:
Gain (loss) on sale of investments. . (3) (48) 36 --- ---
Gains on sale of real estate. . . . . 4 --- 11 34 5
Other non-interest income . . . . . . 149 186 81 79 47
------ ------- ------- ------- -------
Total non-interest income . . . . . . . 150 138 128 113 52
Total non-interest expense. . . . . . . 1,828 1,335 1,321 1,061 856
------ ------- ------- ------- -------
Income before income taxes. . . . . . 1,248 1,079 947 817 751
Income tax expense. . . . . . . . . . . 377 184 316 281 237
------ ------- ------- ------- -------
Net income before accounting change . 871 895 631 536 514
Accounting change for income taxes. . . --- --- --- --- (64)
------ ------- ------- ------- -------
Income before extraordinary item. . . 871 895 631 536 450
Extraordinary item - penalty for early
extinguishment of debt, net of income
tax benefit . . . . . . . . . . . . . --- --- --- 51 ---
------ ------- ------- ------- -------
Net income . . . . . . . . . . . . . $ 871 $ 895 $ 631 $ 485 $ 450
====== ======= ======= ======= =======
Per common share data after giving
retroactive effect for the 2 for 1
stock split(1):
Net income per common share. . . . . $ .85 $ .86 $ .60 $ .26 N/A
Cash dividends declared per share. . $.2150 $ .1625 $ .0375 --- N/A
Dividend payout ratio . . . . . . . .25 .19 .06
<PAGE>
<FN>
____________
(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.
</FN>
</TABLE>
2<PAGE>
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------
<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). . . . . . . . 0.99% 1.15% 1.01% .89% .90%
Interest rate spread information:
Average during year. . . . . . . . . . 2.85 2.56 2.70 2.81 2.76
End of year. . . . . . . . . . . . . . 2.64 2.51 2.14 2.84 2.60
Net interest margin(1). . . . . . . . . 3.52 3.30 3.48 3.34 3.15
Ratio of operating expense to average
total assets . . . . . . . . . . . . . 2.07 1.72 2.10 1.91 1.66
Return on equity (ratio of net income
to average equity) . . . . . . . . . . 8.63 9.25 6.89 7.76 11.79
Quality Ratios:
Non-performing assets to total assets
at end of year(2) . . . . . . . . . . 1.00 1.15 .02 .44 .56
Allowance for loan losses to non-
performing loans(3) . . . . . . . . . 70.03 87.24 2857.43 1290.32 6198.40
Capital Ratios:
Equity to total assets at end of
year . . . . . . . . . . . . . . . . 11.45 11.94 13.45 15.41 7.89
Average equity to average assets . . . 11.47 12.43 14.70 11.50 7.65
Average interest-earning assets to
average interest-bearing
liabilities. . . . . . . . . . . . . 114.36 115.34 118.24 112.66 107.50
Number of full-service offices . . . . . 1 1 1 1 1
<FN>
_______________
(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.
</FN>
</TABLE>
3
<PAGE>
<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 1,058,000 shares at
$5.00 per share after giving retroactive effect for the 2
for 1 stock split. 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.
FINANCIAL CONDITION
June 30, 1997 compared to June 30, 1996. Total assets
increased $8.8 million, or 10.6%, from $83.3 million at
June 30, 1996 to $92.1 million at June 30, 1997. This increase
was due primarily to increases in loans receivable, cash and
cash equivalents and investment securities, which increases were
partially offset by decreases in mortgage backed securities and
the disposition of real estate acquired in settlement of loans.
Cash and amounts due from depository institutions increased
$2.3 million from $2.3 million at June 30, 1996 to $4.6 million
at June 30, 1997. Investment securities increased $100,000, or
3.0%, from $3.3 million at June 30, 1996 to $3.4 million at
June 30, 1997. At June 30, 1997, the investment portfolio
consisted primarily of $1.5 million in U.S. agency obligations,
$770,000 in mutual funds, and $1.1 million in equity securities
consisting of common stocks of one bank holding company and one
thrift holding company, and preferred stocks of a life insurance
company, a bank holding company, two power companies and an
automobile manufacturer.
Total mortgage-backed securities decreased $290,000, or
8.5%, from $3.4 million at June 30, 1996 to $3.1 million at
June 30, 1997. The decrease in mortgage-backed securities was
due to repayments and prepayments.
Net loans receivable increased $6.7 million, or 9.3%, from
$71.8 million at June 30, 1996 to $78.5 million at June 30,
1997. Mortgage loans originated during fiscal 1997 totaled
$11.4 million and were secured primarily by one-to-four family
dwellings in the Bank's market area. During this period, the
Bank
4
<PAGE>
<PAGE>
also purchased $35.4 million in loans secured by real estate
located primarily in the Madison, Wisconsin area, including
$7.3 million of loans secured by one-to-four family dwellings,
$24.3 million secured by multi-family dwellings, $3.5 million
secured by commercial real estate and $316,000 secured by
residential land development. Of the $35.4 million in loans
purchased during the 1997 fiscal year, $26.9 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 normally sells majority
participation interests in these loans to financial institutions
located in Iowa and contiguous states. 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. The Company's net investment as of June 30, 1997 in
loans generated under this Agreement totaled $13.2 million.
Such net investment reflects an outstanding principal balance of
$46.4 million in loans purchased and serviced by the Company,
less interests sold to other financial institutions of $33.2
million.
Total deposits of the Bank increased by $6.4 million, or
12.1%, from $53.1 million at June 30, 1996 to $59.5 million at
June 30, 1997. This increase was primarily due to growth of
$1.6 million in demand and negotiable order of withdrawal
accounts, $1.5 million in money market savings accounts and $3.3
million in certificates of deposit. Management believes that
this increase was primarily attributable to successful marketing
initiatives and competitive pricing.
Total borrowed funds consisted of advances from the Federal
Home Loan Bank ("FHLB") of Des Moines. FHLB advances increased
by $1.7 million, or 8.8%, from $19.3 million at June 30, 1996
to $21.0 million at June 30, 1997. This increase in borrowing
was due to the utilization of FHLB advances to partially fund
the origination and purchase of loans. Management attempts to
use borrowing to maintain the Bank's current spread and provide
a stable source of funding for loans. During fiscal 1997,
management utilized a combination of fixed-rate FHLB advances
with maturities of 30 days to 3 years. At June 30, 1997,
approximately 71% of borrowing 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 $592,000 from $9.9 million
at June 30, 1996 to $10.5 million at June 30, 1997. This
increase was due to net income of $871,000, 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 33,262 shares of its stock
and the declaration of $0.215 dividends per share for the 1997
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.
5
<PAGE>
COMPARISON OF FISCAL YEARS ENDED JUNE 30, 1997 AND JUNE 30, 1996
General. The Company's net income decreased by $24,000, or
2.7%, from $895,000 for fiscal 1996 to $871,000 for fiscal 1997.
As discussed in more detail below, the primary reasons for this
decrease were the one time after-tax special assessment of
$181,000 ($287,568 before the effect of federal and state income
taxes) levied by the Federal Deposit Insurance Corporation (the
"FDIC") in order to capitalize the Savings Association Insurance
Fund, and increases in non-interest expense and provision for
income taxes. The increase in expenses was largely offset by
increases in net interest income and non-interest income and a
reduction in provision for loan losses.
Interest Income. Interest income increased by $900,000 to
$7.1 million in fiscal 1997 from $6.2 million in fiscal 1996
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 $9.9 million, or 12.9%, to $86.5
million in fiscal 1997 from $76.6 million in fiscal 1996
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 8.16%
for 1996 to 8.26% in 1997.
Interest Expense. Interest expense increased $400,000 to
$4.1 million in fiscal 1997 from $3.7 million in fiscal 1996 due
primarily to an increase in the volume of interest-bearing
liabilities which was partially offset by a decrease in the
average rates paid on interest-bearing liabilities. The average
balance of interest-bearing liabilities increased $9.2 million
from $66.4 million in fiscal 1996 to $75.6 million in fiscal
1997 primarily as a result of an increase in certificates of
deposit and, to a lesser extent, savings and NOW accounts, money
market accounts, and FHLB advances. The average rates paid on
interest-bearing liabilities decreased from 5.60% during fiscal
1996 to 5.41% during fiscal 1997.
Net Interest Income. Net interest income increased
$500,000 to $3.0 million in fiscal 1997 as compared to $2.5
million in fiscal 1996. The Company's average spread increased
from 2.56% for the fiscal year ended June 30, 1996 to 2.85% for
the fiscal year ended June 30, 1997 due to the increased yields
on interest earning assets and a decline in rates paid on
interest costing liabilities. Net interest margin increased
from 3.30% for the fiscal year ended June 30, 1996 to 3.52% for
the fiscal year ended June 30, 1997. The ratio of average
interest-earning assets to average interest-bearing liabilities
decreased from 115.3% during fiscal 1996 to 114.4% during
fiscal 1997.
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
$121,000 provision for loan losses was made for fiscal 1997, as
compared to $249,000 in fiscal 1996. The allowance for loan
losses at June 30, 1997 increased $5,000 to $646,000 from
$641,000 at June 30, 1996. This $5,000 increase reflects the
net effect of the $121,000 provision for loan losses referenced
above as offset by a $115,000 charge-off on equipment leases
during the 1997 fiscal year.
Management believes that the current allowance for loan
losses is adequate. 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)
totaled $922,000, or 1.00% of total assets at June 30, 1997 as
compared to $962,000, or 1.15%at June 30, 1996. The ratio of
the allowance for loan losses to non-performing assets increased
from 67% of non-performing assets at June 30, 1996 to 70% of
non-performing assets at June 30, 1997, due to a
6
<PAGE>
<PAGE>
$40,000 decrease in nonperforming assets coupled with the $5,000
increase in allowance for loan losses referenced above. The
ratio of the allowance for loan losses to total loans was 0.8%
at June 30, 1997 as compared to 0.9% at June 30, 1996. (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.
Non-interest Income. Non-interest income increased by
$12,000 to $150,000 in fiscal 1997 from $138,000 in fiscal 1996.
Non-interest Expense. Non-interest expense increased by
$500,000 to $1.8 million in fiscal 1997 from $1.3 million in
fiscal 1996. This increase was primarily due to: (i) a one time
special assessment of $287,568 ($181,000 after the effect of
federal and state income taxes) levied by the FDIC in order to
capitalize the Savings Association Insurance Fund, (ii) a
$126,000 increase in salaries and employee benefits resulting
from staff additions, fiscal year-end salary increases and
increased expenses associated with higher market values of
allocated ESOP shares, and (iii) an $84,000 increase in other
non-interest expense.
Income Tax Expense. Income tax expense increased by
$193,000, to $377,000 in fiscal 1997 as compared to $184,000 in
fiscal 1996. This increase was primarily attributable to
resolution of a $137,000 tax contingency during fiscal 1996
and, to a lessor extent, the amount of income subject to income
taxes.
COMPARISON OF FISCAL YEARS ENDED JUNE 30, 1996 AND JUNE 30, 1995
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 from 5.07% during fiscal 1995 to 5.60%
during fiscal 1996 due to an overall increase in rates paid to
attract deposits.
<PAGE>
Net Interest Income. Net interest income increased
$385,000 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
7
<PAGE>
<PAGE>
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. A $249,000 provision for loan
losses was made for fiscal 1996, as compared to no provision in
fiscal 1995. The allowance for loan losses at June 30, 1996
increased $241,000 to $641,000 from $400,000 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.
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) totaled $962,000 or
1.15% of total assets at June 30, 1996 as compared to $14,000 at
June 30, 1995 or .02% of total assets. 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.
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.
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) decreased $40,000 to
$922,000, or 1.00% of total assets at June 30, 1997, from
$962,000, or 1.15% of total assets at June 30, 1996. This
$922,000 consisted primarily of seven loans totaling $136,000
secured by single-family homes, three loans totaling $750,000
secured by multi-family real estate located in Madison,
Wisconsin, and four consumer loans totaling $36,000. All loans
for which payments have been due and uncollected for a period in
excess of 90 days are placed on non-accrual status.
The decrease in non-performing assets primarily reflects
the net effect of the addition of the three loans totaling
$750,000 secured by multi-family real estate located in Madison,
Wisconsin, the redemption of a $227,000 parcel of real estate
in judgment, which had been non-performing at June 30, 1996, the
settlement of a claim against a bankruptcy trustee concerning a
$437,000 package of equipment leases and the return of a
$286,000 single family home loan in Houston, Texas to performing
status.
In connection with the settlement of the referenced
bankruptcy claim involving equipment leases, management entered
into an agreement on February 5, 1997, whereby the Company is
receiving a pre-determined percentage of all amounts collected
up to 80% of the then outstanding balance. The balance of the
equipment packages at June 30, 1997 was $165,000, reflecting
payments of $157,000 and a $115,000 charge-off against the
allowance for loan losses.
8
<PAGE>
<PAGE>
In addition, at June 30, 1997, other assets of concern
totaled $1.1 million and included nine loans totaling $240,000
secured by single-family residences in the Bank's local lending
area, one $275,000 loan secured by a single family residence
located in Houston, Texas, one $537,000 loan secured by
commercial real estate located in Grinnell, Iowa, and one
$56,000 commercial business loan. 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 $2.0 million at June 30,1997 as compared to $2.5
million at June 30, 1996. The decrease in classified assets
reflects the changes in composition of the non-performing and
other assets of concern described above. At June 30, 1997, 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,
---------------------------------------------------------------------------------
1997 1996 1995
---------------------------------------------------------------------------------
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 $ 2,955 $ 90 3.05% $ 2,641 $ 122 4.61% $ 1,320 $ 58 4.39%
Investments and other securities 3,244 211 6.50 5,078 325 6.40 6,461 384 5.94
Mortgage-backed securities 3,256 241 7.40 3,660 272 7.44 4,074 303 7.44
Loans receivable(1) 75,848 6,516 8.59 64,140 5,450 8.50 48,789 3,968 8.13
FHLB stock 1,159 81 6.99 1,046 76 7.26 832 65 7.81
------- ------ ------- ------ ------- ------
Total interest-earning assets $86,462 $7,139 8.26 $76,565 $6,245 8.16 $61,476 $4,778 7.77
------- ------ ------- ------ ------- ------
Interest-Bearing Liabilities:
Passbook accounts $ 3,731 $ 98 2.63 $ 3,504 $ 88 2.51 $ 3,756 $ 95 2.53
NOW accounts 4,455 183 4.11 2,005 64 3.18 1,598 34 2.12
Money market accounts 6,952 328 4.72 4,399 214 4.86 1,776 67 3.77
Certificates of deposit 41,228 2,319 5.62 37,764 2,179 5.77 36,011 1,883 5.23
FHLB advances 19,236 1,165 6.06 18,711 1,175 6.28 8,851 559 6.32
------- ------ ------- ------ ------- ------
Total interest-bearing
liabilities $75,602 $4,093 5.41 $66,383 $3,720 5.60 $51,992 $2,638 5.07
------- ------ ------- ------ ------- ------
Net interest income $3,046 $2,525 $2,140
====== ====== ======
Net interest rate spread 2.85% 2.56% 2.70%
Net earning assets $10,860 $10,182 $ 9,484
======= ======= =======
Net interest margin 3.52% 3.30% 3.48%
Average interest-earning assets
to average interest-bearing
liabilities 114.36% 115.34% 118.24%
====== ====== ======
<FN>
__________
(1) Calculated net of deferred loan fees, loan discounts, loans in process and loss reserves.
</FN>
</TABLE>
9<PAGE>
<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,
-----------------------------------------------------
1997 vs. 1996 1996 vs.1995
------------------------- ------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
------------- Increase ------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning bank accounts $ 13 $(45) $ (32) $ 61 $ 3 $ 64
Investments and other securities (119) 5 (114) (87) 28 (59)
Mortgage-backed securities (30) (1) (31) (31) 0 (31)
Loans receivable 1,009 57 1,066 1,295 187 1,482
FHLB stock 6 (1) 5 16 (5) 11
------ ---- ------ ------ ---- ------
Total interest-earning assets $ 879 $ 15 $ 894 $1,254 $213 $1,467
====== ==== ====== ====== ==== ======
Interest-bearing liabilities:
Passbook accounts 6 4 10 (6) (1) (7)
NOW accounts 96 23 119 10 20 30
Money market accounts 121 (7) 114 123 24 147
Certificates of deposit 196 (56) 140 95 201 296
FHLB advances 32 (42) (10) 619 (3) 616
------ ---- ------ ------ ---- ------
Total interest-bearing
liabilities $ 451 $(78) $ 373 $ 841 $241 $1,082
====== ==== ====== ====== ==== ======
Net interest income $ 521 $ 385
====== ======
</TABLE>
10<PAGE>
<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.
<TABLE>
<CAPTION>
At June 30,
-----------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Weighted average yield on:
- -------------------------
Interest-earning bank accounts 5.21% 4.89% 5.74%
Investment and other securities 6.53 6.51 6.01
Mortgage-backed securities 7.38 7.37 7.42
Loans receivable 8.41 8.23 8.15
FHLB stock 7.00 7.00 7.00
Combined weighted average yield on interest-
earning assets 8.14 8.03 7.78
Weighted average rate paid on:
- -----------------------------
Passbook accounts 2.57 2.57 2.57
NOW Accounts 4.29 3.93 2.10
Money market accounts 4.76 4.79 4.88
Certificates of deposit 5.73 5.87 5.84
FHLB advances liabilities 6.12 5.98 6.34
Combined weighted average rate paid on
interest-bearing liabilities 5.50 5.52 5.64
Spread 2.64 2.51 2.14
</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 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.
11<PAGE>
<PAGE>
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 $17.9 million, or 30% of the Bank's total
deposits, as of June 30, 1997. Although at June 30, 1997
approximately 66.6% 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 65.4% and 10.9% of the Bank's total
certificates of deposit at June 30, 1997 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.
12<PAGE>
<PAGE>
The following table sets forth the repricing dates of the
Bank's interest-earning assets and interest-bearing liabilities
at June 30, 1997 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 Over 3-5 Over
6-Months Months Years Years 5 Years Total
--------- ------ -------- --------- ------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed-rate one- to four-family loans
(including mortgage-backed
securities) $ 3,017 $ 2,739 $ 8,656 $ 5,911 $ 9,768 $30,091
Adjustable-rate one- to four-family
loans 10,999 9,458 3,030 747 --- 24,234
Fixed- and adjustable-rate construction
loans, multi-family, commercial real
estate and second mortgages 12,614 9,314 998 839 2,204 25,969
Commercial business loans 630 95 342 103 --- 1,170
Consumer loans 238 230 575 --- --- 1,043
Investment securities and other 5,393 --- --- 1,498 --- 6,891
------- ------- ------- ------- ------ -------
Total interest-earning assets 32,891 21,836 13,601 9,098 11,972 89,398
------- ------- ------- ------- ------ -------
Money market 8,056 --- --- --- --- 8,056
Passbook accounts 308 281 894 616 1,364 3,463
Demand and NOW accounts 1,057 839 1,946 773 508 5,123
Certificates 16,408 11,334 12,756 1,162 --- 41,660
FHLB advances & Other Borrowings 1,500 4,500 5,500 8,662 1,011 21,173
------- ------- ------- ------- ------ -------
Total interest-bearing liabilities 27,329 16,954 21,096 11,213 2,883 79,475
------- ------- ------- ------- ------ -------
Interest-earning assets less interest-
bearing liabilities $ 5,562 $ 4,882 $(7,495) $(2,115) $9,089 $ 9,923
======= ======= ======= ======= ====== =======
Cumulative interest rate sensitivity
gap $ 5,562 $10,444 $ 2,949 $ 834 $9,923 $ 9,923
======= ======= ======= ======= ====== =======
Cumulative interest rate gap as a
percentage of assets 6.14% 11.53% 3.26% 0.92% 10.96% 10.96%
======= ======= ======= ======= ====== =======
</TABLE>
In preparing the table above, it has been assumed, with the assumptions
used by the FHLB of Des Moines at June 30, 1997, 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
Prepayment Rate
---------------------
15-year 30-year
------- -------
<S> <C> <C>
Less than 8.00% 7.00% 6.00%
8.00% to 8.99% 13.00 14.00
9.00% to 9.99% 16.00 18.00
10.00% to 10.99% 12.00 14.00
11.00% or more 11.00 12.00
</TABLE>
13<PAGE>
<PAGE>
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.
The following table, as of June 30, 1997, is an analysis of the Bank's
interest rate risk as measured by changes in the Bank's market value of
portfolio equity ("MVPE"), the market value of total assets less the market
value of total liabilities, for instantaneous and sustained parallel shifts in
the yield curve, in 100 basis point increments, up and down 300 basis points
and compared to Board policy limits. Assumptions used in calculating the
amounts in this table are FHLB assumptions.
<TABLE>
<CAPTION>
Change in At June 30, 1997
Interest Rate Board Limit ----------------------
(Basis Points) % Change $Change % Change
-------------- ----------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C>
+300 (35)% $(1,713) (17.7)%
+200 (25) (1,013) (10.5)
+100 (15) (358) (3.7)
0 0 --- ---
-100 10 115 1.2
-200 15 (68) (0.7)
-300 20 (121) (1.2)
</TABLE>
As indicated in the table above, management has structured its assets and
liabilities to minimize its exposure to interest rate risk. In the event of a
200 basis point change in interest rates, the Bank would experience a 0.7%
decrease in MVPE in a declining rate environment and a 10.5% decrease in a
rising rate environment.
In evaluating the Bank's exposure to interest rate risk, certain
shortcomings inherent in the method of analysis presented in the foregoing
table must be considered. For example, although certain assets and
14<PAGE>
<PAGE>
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. Further, in the event of a
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. As a result, the actual effect of changing
interest rates may differ from that presented in the foregoing table.
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, 1997, the amount of the Bank's
liquidity was $4.6 million, resulting in a liquidity ratio of 7.3%.
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.
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, 1996 and 1997.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------
1997 1996
------ ------
(In Thousands)
<S> <C> <C>
Net income $ 871 $ 895
Adjustments to reconcile net income to net
cash provided by operating activities 39 343
------- --------
Net cash provided by operating activities 910 1,238
Net cash provided by (used in) investing activities (6,367) (14,348)
Net cash provided by financing activities 7,829 11,274
------- --------
Net increase (decrease) in cash and cash equivalents 2,372 (1,836)
Cash and cash equivalents at beginning of year 2,271 4,107
------- --------
Cash and cash equivalents at end of year $ 4,643 $ 2,271
======= ========
</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, 1997, there were loans
in process totaling $1.1
15<PAGE>
<PAGE>
million, loan commitments totaling $893,000 and commitments for unused line of
credit loans totaling $529,000. 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,
1997 totaled $27.8 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, 1997, these assets accounted
for over 92% 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 borrowing to offset reductions in other sources of
funds and to assist in asset/liability management objectives. At June 30,
1997, the Bank had outstanding borrowing of $21.0 million from the FHLB of Des
Moines.
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, 1997.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------
Amount Percent
------ -------
(Dollars in Thousands)
<S> <C> <C>
Tangible Capital:
Capital level $8,880 9.80%
Requirement 1,360 1.50
------ ----
Excess $7,520 8.30%
====== ====
Core Capital:
Capital level(2) $8,880 9.80%
Requirement 2,719 3.00
------ ----
Excess $6,161 6.80%
====== ====
Fully Phased-In Risk-Based Capital:
Capital level(3) $9,526 18.31%
Requirement 4,162 8.00
------ -----
Excess $5,364 10.31%
====== =====
<FN>
_____________
(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 $646,000 of general valuation allowances.
</FN>
</TABLE>
16<PAGE>
<PAGE>
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.
EFFECT OF NEW ACCOUNTING STANDARDS
The Financial Accounting Standard Board issued in February,
1997, Statement No.128, Earnings Per Share. The Financial
Accounting Standard Board has approved, effective for years
beginning after December 15, 1997, Statement No. 129, Disclosure
of Information About Capital Structure, Statement No. 130,
Reporting Comprehensive Income and Statement No. 131, Disclosure
About Segments of an Enterprise and Related Information. FASB
Statements No.128, 129, 130, and 131 are expected to have no
impact on the Company's financial statements when adopted. For
additional information, see Note 14 of the Notes to Consolidated
Financial Statements.
RECENT DEVELOPMENTS - PENDING FINANCIAL SERVICES MODERNIZATION
LEGISLATION
Legislation currently under consideration by Congress would
repeal the federal thrift charter and require federal
associations like the Bank to convert to national banks two
years after the enactment of the bill. The bill, in its current
form, would permit federal thrifts that converted to national
banks to exercise any authority which they were legally entitled
to exercise immediately prior to such conversion and would not
be required to divest any branches. Further, these institutions
could continue to branch in any state in which they were located
to the same extent as national banks. Unitary savings and loan
holding companies, like the Company, could continue to exercise
any powers they had prior to their subsidiary becoming a bank by
operation of law as long as they did not acquire another bank.
Powers of those unitary savings and loan holding companies that
were grandfathered, however, could not be transferred to another
company which acquires control of the unitary holding company
after the effective date of the law. There can be no assurance
that this legislation will be passed in its current form. At
this time, the Company is unable to predict whether such
legislation would significantly impact its operation.
DIVIDENDS
The Company declared $0.215 in dividends during fiscal
1997, including an increase to a $0.065 quarterly cash dividend
on June 20, 1997, payable on July 25, 1997 to stockholders of
record on July 11, 1997. 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.
17<PAGE>
<PAGE>
McGLADREY & PULLEN, LLP
-----------------------
Certified Public Accountants and Consultants
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
GFS Bancorp, Inc.
Grinnell, Iowa
We have audited the accompanying consolidated balance sheets of
GFS Bancorp, Inc. and subsidiaries as of June 30, 1997 and
1996, and the related consolidated statements of income,
stockholders' equity and cash flows for the years 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 audits. 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 year ended June 30, 1995 were audited by other auditors
whose report, dated July 19, 1995, expressed an unqualified
opinion on those statements.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the 1997 and 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, 1997 and 1996, and the results of
their operations and their cash flows for the years then ended
in conformity with generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
Des Moines, Iowa
July 30, 1997
18<PAGE>
<PAGE>
Vroman, McGowen, Hurst, Clark & Smith, P.C.
-------------------------------------------
Certified Public Accountants and Business Advisors
INDEPENDENT AUDITOR'S REPORT
----------------------------
Board of Directors
GFS Bancorp, Inc.
Grinnell, Iowa
We have audited the accompanying consolidated balance sheets of
GFS Bancorp, Inc. and subsidiary as of June 30, 1995 and 1994,
and the related consolidated statements of income, changes in
stockholders' equity and cash flows for the years ended June 30,
1995, 1994 and 1993. 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 audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of GFS Bancorp, Inc. and its
subsidiary as of June 30, 1995 and 1994 and the consolidated
results of their operations and their cash flows for the years
ended June 30, 1995, 1994 and 1993, in conformity with generally
accepted accounting principles.
/s/ Vroman, McGowen, Hurst, Clark & Smith, P.C.
Des Moines, Iowa
July 19, 1995
18.1
<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C>
Cash and amounts due from depository institutions:
Noninterest bearing $ 334,287 $ 222,461
Interest bearing 4,308,632 2,048,671
Securities available for sale (Note 2) 1,909,490 1,672,763
Securities held to maturity (Note 2) 1,497,785 1,582,188
Mortgage-backed securities held to maturity (Note 2) 3,145,696 3,435,254
Stock in Federal Home Loan Bank (Note 7) 1,159,000 1,159,000
Loans receivable, net (Notes 3 and 7) 78,474,914 71,772,896
Real estate acquired in settlement of loans, net -- 226,616
Premises and equipment, net (Note 4) 223,236 234,415
Accrued interest receivable (Note 5) 520,661 439,392
Other assets 489,552 510,960
----------- -----------
TOTAL ASSETS $92,063,253 $83,304,616
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits (Note 6):
Demand $ 6,273,344 $ 4,651,689
Savings and money market 11,617,756 10,140,487
Certificates of deposit 41,659,676 38,330,207
----------- -----------
TOTAL DEPOSITS 59,550,776 53,122,383
=========== ===========
Advances from Federal Home Loan Bank (Note 7) 20,961,466 19,317,997
Advances from borrowers for taxes and insurance 713,593 432,970
Income taxes (Note 8):
Current -- 90,994
Deferred 73,500 8,000
Dividends payable 64,235 51,460
Other liabilities 162,505 335,921
----------- -----------
TOTAL LIABILITIES 81,526,075 73,359,725
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTE 14)
STOCKHOLDERS' EQUITY (Note 10)
Preferred stock, $.01 par value, authorized 500,000
shares, issued none - -
Common stock, $.01 par value, authorized
2,000,000 shares; issued 1997 1,100,720 shares;
1996 1,100,320 shares 11,007 5,501
Additional paid-in capital 5,202,310 5,138,066
Retained earnings, substantially restricted (Note 8) 6,523,527 5,856,546
Less: (Note 9)
Unearned employee stock ownership plan (197,631) (259,781)
Unearned recognition and retention plan (7,225) (32,659)
Treasury stock, at cost 1997 112,478 shares;
1996 81,120 shares (1,055,302) (728,800)
Unrealized gain (loss) on securities available
for sale, net (Note 2) 60,492 (33,982)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 10,537,178 9,944,891
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $92,063,253 $83,304,616
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
19<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans receivable $6,515,512 $5,449,941 $3,968,174
Mortgage-backed securities 241,445 272,367 303,401
Other securities and interest-bearing
cash accounts 382,413 522,332 506,547
---------- ---------- ----------
7,139,370 6,244,640 4,778,122
Interest expense:
Deposits (Note 6) 2,927,257 2,545,116 2,078,795
Advances from Federal Home Loan Bank 1,165,397 1,174,763 559,007
---------- ---------- ----------
4,092,654 3,719,879 2,637,802
---------- ---------- ----------
NET INTEREST INCOME 3,046,716 2,524,761 2,140,320
Provision for loan losses (Note 3) 121,000 249,000 --
---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,925,716 2,275,761 2,140,320
---------- ---------- ----------
Noninterest income:
Gain (loss) on sale of securities
available for sale (Note 2) (2,525) (47,750) 36,250
Real estate operations -- -- 10,036
Gain on sale of real estate (3,623) -- 11,388
Other 149,100 186,175 69,876
---------- ---------- ----------
150,198 138,425 127,550
---------- ---------- ----------
Noninterest expenses:
Salaries and employee benefits (Note 9) 917,752 791,912 756,480
Real estate operations 4,043 214 11,068
Occupancy expenses 86,157 73,457 59,124
Federal deposit insurance premiums 71,553 105,530 97,078
Federal deposit insurance special assessment 287,568 -- --
Data processing services 75,094 63,213 64,368
Other 385,409 301,503 333,216
---------- ---------- ----------
1,827,576 1,335,829 1,321,334
---------- ---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,248,338 1,078,357 946,536
Provision for income taxes (Note 8) 377,180 183,517 315,650
---------- ---------- ----------
NET INCOME $ 871,158 $ 894,840 $ 630,886
========== ========== ==========
Earnings per common share $ 0.85 $ 0.86 $ 0.60
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
20<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Common
Additional Stock
Common Paid-in Retained Acquired by
Stock Capital Earnings ESOP
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, June 30, 1994 $ 5,497 $5,045,663 $4,526,773 $(392,971)
Net income -- -- 630,886 --
Dividends on common stock, $.15
per share -- -- (40,592) --
ESOP common stock released for
allocation -- 30,065 -- 67,960
Amortization of RRP contributions -- -- -- --
Purchase of 17,000 shares of
treasury stock -- -- -- --
Net change in unrealized (loss) on
securities available for sale, net
(Note 2) -- -- -- --
-----------------------------------------------
Balance, June 30, 1995 5,497 5,075,728 5,117,067 (325,011)
Net income -- -- 894,840 --
Dividends on common stock, $.65 per
share -- -- (155,361) --
ESOP common stock released for
allocation -- 59,442 -- 65,230
Amortization of RRP contributions -- -- -- --
Purchase of 66,024 shares of treasury
stock -- -- -- --
Treasury stock reissued to fund stock
options exercised (1,904 shares)
(Note 9) -- (5,446) -- --
Issuance of common stock (856 RRP
shares) 4 8,342 -- --
Net change in unrealized (loss) on
securities available for sale,
net (Note 2) -- -- -- --
-----------------------------------------------
Balance, June 30, 1996 5,501 5,138,066 5,856,546 (259,781)
Net income
Dividends on common stock, $.215
per share -- -- 871,158 --
ESOP common stock released for
allocation -- -- (204,177) --
Amortization of RRP contributions -- 75,813 -- 62,150
Purchase of 33,262 shares of
treasury stock -- -- -- --
Treasury stock reissued to fund
stock options exercised (1,904
shares) (Note 9) -- (8,063) -- --
Additional shares issued in two-for-
one stock split effected in the
form of a stock dividend 5,502 (5,502) -- --
Common stock issued to fund stock
options exercised (400 shares)
(Note 9) 4 1,996 -- --
Net change in unrealized gain (loss)
on securities available for
sale, net (Note 2) -- -- -- --
-----------------------------------------------
BALANCE, JUNE 30, 1997 $11,007 $5,202,310 $6,523,527 $(197,631)
===============================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Unrealized
Common Gain (Loss) on
Stock Securities
Acquired by Treasury Available for
RRP Stock Sale, Net Total
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, June 30, 1994 $(158,712) $ -- $(214,822) $ 8,811,428
Net income -- -- -- 630,886
Dividends on common stock, $.15
per share -- -- -- (40,592)
ESOP common stock released for
allocation -- -- -- 98,025
Amortization of RRP contributions 86,910 -- -- 86,910
Purchase of 17,000 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 (71,802) (131,313) (130,579) 9,539,587
Net income -- -- -- 894,840
Dividends on common stock, $.65 per
share -- -- -- (155,361)
ESOP common stock released for
allocation -- -- -- 124,672
Amortization of RRP contributions 47,489 -- -- 47,489
Purchase of 66,024 shares of treasury
stock -- (612,453) -- (612,453)
Treasury stock reissued to fund stock
options exercised (1,904 shares) -- 14,966 -- 9,520
(Note 9)
Issuance of common stock (856 RRP (8,346) -- -- --
shares)
Net change in unrealized (loss) on
securities available for sale,
net (Note 2) -- -- 96,597 96,597
------------------------------------------------
Balance, June 30, 1996 (32,659) (728,800) (33,982) 9,944,891
Net income -- -- -- 871,158
Dividends on common stock, $.215
per share -- -- -- (204,177)
ESOP common stock released for
allocation -- -- -- 137,963
Amortization of RRP contributions 25,434 -- -- 25,434
Purchase of 33,262 shares of
treasury stock -- (344,085) -- (344,085)
Treasury stock reissued to fund
stock options exercised (1,904
shares) (Note 9) -- 17,583 -- 9,520
Additional shares issued in two-for-
one stock split effected in the
form of a stock dividend -- -- -- --
Common stock issued to fund stock
options exercised (400 shares)
(Note 9) -- -- -- 2,000
Net change in unrealized gain (loss)
on securities available for
sale, net (Note 2) -- -- 94,474 94,474
------------------------------------------------
Balance, June 30, 1997 $(7,225) $(1,055,302) $60,492 10,537,178
================================================
</TABLE>
See Notes to Consolidated Financial Statements.
21 <PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 871,158 $ 894,840 $ 630,886
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 37,235 30,396 19,291
(Gain) loss on sale of securities available
for sale 2,525 47,750 (36,250)
(Gain) on sale of real estate (3,624) -- (11,388)
Stock dividend on FHLB stock -- (20,800) --
ESOP and RRP expense 163,397 172,161 184,935
Deferred loan fees, net 28,762 40,201 67,087
Provision for loan losses 121,000 249,000 --
Purchases of loans for resale (26,875,167) (9,299,768) --
Proceeds from the sale of loans 26,875,167 9,299,768 --
Deferred taxes 14,000 (61,000) (12,935)
Change in:
Accrued interest receivable (81,269) (121,142) (98,714)
Other assets 21,408 7,663 (21,336)
Income taxes payable (90,994) 73,993 17,001
Other liabilities (173,416) (74,853) 185,521
------------ ----------- ----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 910,182 1,238,209 924,098
------------ ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturity of securities held to maturity 84,403 1,551,800 1,490,000
Maturity of securities available for sale -- 150,000 225,000
Proceeds from sales of securities
available for sale 147,425 2,912,584 113,750
Purchase of securities held to maturity -- (1,582,188) (994,769)
Purchase of securities available for sale (240,703) (181,500) (101,610)
Purchase of FHLB stock -- (306,000) --
Principal payments received on mortgage-
backed securities 289,558 515,135 286,986
Net (increase) decrease in loans
outstanding 1,705,318 (3,699,752) 367,469
Purchase of loans to be held in portfolio (8,557,098) (13,589,856) (11,751,736)
Proceeds from sale of real estate 230,240 -- 234,778
Purchase of premises and equipment (26,056) (68,541) (85,369)
Investment in other assets -- (50,000) (250,000)
------------ ----------- ----------
NET CASH (USED BY) INVESTING
ACTIVITIES (6,366,913) (14,348,318) (10,465,501)
------------ ----------- ----------
</TABLE>
(Continued)
22<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits $ 6,428,393 $ 7,040,438 $ 4,066,421
Advances from the Federal Home Loan
Bank 13,500,000 9,500,000 15,600,000
Repayment of advances from the
Federal Home Loan Bank (11,856,531) (4,759,955) (6,892,025)
Net increase in advances from
borrowers for taxes and insurance 280,623 240,838 37,790
Proceeds from the issuance of common
stock for stock options exercised 2,000 -- --
Net proceeds from reissuance of treasury
stock 9,520 9,520 --
Purchase of treasury stock (344,085) (612,453) (131,313)
Dividends paid (191,402) (144,493) --
------------ ----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 7,828,518 11,273,895 12,680,873
------------ ----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 2,371,787 (1,836,214) 3,139,470
CASH AND CASH EQUIVALENTS
Beginning 2,271,132 4,107,346 967,876
------------ ----------- -----------
End $ 4,642,919 $ 2,271,132 $ 4,107,346
============ =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash payments for:
Income taxes $ 454,174 $ 170,523 $ 323,000
Interest on deposits and advances
from Federal Home Loan Bank 4,093,029 3,718,737 2,637,802
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Real estate acquired in settlement
of loans $ -- $ 226,616 $ --
</TABLE>
See Notes to Consolidated Financial Statements.
23<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
NOTE 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). 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 1997, 1996 or
1995.
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.
24<PAGE>
<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. Although 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. Impaired loans are
measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's desirable market price or the
fair value of the collateral if the loan is collateral
dependent. A loan is impaired when it is probable the creditor
will be unable to collect all principal and interest payments
due in accordance with the terms of the loan agreement.
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.
25<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
Earnings per share: Earnings per share for the years ended June
30, 1997, 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, 1997, 1996 and 1995 was
1,030,266, 1,037,930 and 1,048,722 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
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.
Common stock split: On April 11, 1997, the Board of Directors
declared a two-for-one stock split on the Company's common stock
effected in the form of a stock dividend to holders of record on
April 25, 1997. Common stock issued and additional paid-in
capital as of June 30, 1996 have been restated to reflect this
split.
All share and per share data, including stock option
information, is stated to reflect the split.
Stock option plan: In October 1995, the FASB issued SFAS No.
123, "Accounting for Stock-Based Compensation," which establishes
a fair value based method for financial accounting and reporting
for stock-based employee compensation plans and for transactions
in which an entity issues its equity instruments to acquire
goods and services from nonemployees. However, the new standard
allows compensation to continue to be measured by using the
intrinsic value based method of accounting prescribed by
Accounting Principle Board opinion (APB) No. 25, "Accounting for
Stock Issued to Employees," but requires expanded disclosures.
The Company has elected to apply the intrinsic value based
method of accounting for stock options issued to employees.
Accordingly, compensation cost for stock options is measured as
the excess, if any, of the quoted market price of the Company's
stock at the date of grant over the amount an employee must pay
to acquire the stock.
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.
26<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
The following methods and assumptions were used by the 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.
Stock in Federal Home Loan Bank: The fair value of Federal Home
Loan Bank stock approximates its carrying amount.
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 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.
Federal Home Loan Bank advances: The fair values of all Federal
Home Loan Bank advances approximate their carrying amounts.
27<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
NOTE 2. SECURITIES
Securities are summarized below:
<TABLE>
<CAPTION>
June 30, 1997
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
cost Gains (Losses) Market Value
----------------------------------------------------
<S> <C> <C> <C> <C>
Securities held to maturity:
U.S. agency securities $1,497,785 $ 3,950 $ (8,510) $1,493,225
====================================================
Mortgage-backed securities $3,145,696 $67,161 $(11,387) $3,201,470
====================================================
</TABLE>
<TABLE>
<CAPTION>
June 30, 1997
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
cost Gains (Losses) Market Value
----------------------------------------------------
<S> <C> <C> <C> <C>
Securities available for sale:
Mutual funds $ 832,245 $ -- $(60,045) $ 772,200
Corporate stocks 986,252 152,038 1,000 1,137,290
----------------------------------------------------
$1,818,497 $152,038 $(61,045) $1,909,490
====================================================
</TABLE>
<TABLE>
<CAPTION> June 30, 1996
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
cost Gains (Losses) Market Value
----------------------------------------------------
<S> <C> <C> <C> <C>
Securities held to maturity:
U.S. agency securities $1,497,188 $ -- $(25,313) $1,471,875
Certificate of deposit 85,000 -- -- 85,000
----------------------------------------------------
$1,582,188 $ -- $(25,313) $1,556,875
Mortgage-backed securities $3,435,254 $44,597 $(74,927) $3,404,924
====================================================
</TABLE>
<TABLE>
<CAPTION>
June 30, 1996
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
cost Gains (Losses) Market Value
----------------------------------------------------
<S> <C> <C> <C> <C>
Securities available for sale:
Mutual funds $ 832,245 $ -- $ (75,645) $ 756,600
Corporate stocks 895,500 49,500 (28,837) 916,163
----------------------------------------------------
$1,727,745 $ 49,500 $(104,482) $1,672,763
====================================================
</TABLE>
28<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
The contractual maturities as of June 30, 1997 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
prepaid 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
----------------------------------------
Weighted
Amortized Estimated Average
Cost Market Value Interest Rate
----------------------------------------
<S> <C> <C> <C>
Due in one year or less $ -- $ -- --
Due after one year through five years 1,497,785 1,493,225 6.326%
-----------------------
$1,497,785 $1,493,225
=======================
</TABLE>
Gross realized gains and gross realized losses on sales of
available for sale securities were none and $2,525,
respectively, in 1997; $43,999 and $91,749, respectively, in
1996 and $36,250 and none, respectively, in 1995.
Mortgage-backed securities with a market value of approximately
$2,874,000 and U.S. agency securities with a market value of
approximately $992,000 as of June 30, 1997 were pledged as
collateral to secure certain deposits.
29<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
NOTE 3. LOANS RECEIVABLE
Loans receivable consisted of the following:
<TABLE>
<CAPTION>
June 30,
-------------------------
1997 1996
-------------------------
<S> <C> <C>
Real estate mortgage loans:
Secured by one to four family residences $53,390,705 $49,015,217
Secured by multi-family real estate 11,345,547 11,589,593
Secured by commercial real estate 8,786,447 8,183,912
Construction loans and land loans 4,311,310 3,720,627
----------- -----------
TOTAL REAL ESTATE MORTGAGE LOANS 77,834,009 72,509,349
----------- -----------
Consumer and other loans:
Secured by deposit accounts 56,212 41,899
Automobile loans 751,828 669,000
Home improvement loans 12,411 7,337
Home equity line-of-credit loans 419,396 274,145
Commercial loans 1,169,353 1,297,422
Other loans 259,714 295,125
----------- -----------
TOTAL CONSUMER AND OTHER LOANS 2,668,914 2,584,928
----------- -----------
TOTAL LOANS 80,502,923 75,094,277
Less:
Allowance for loan losses (645,757) (641,205)
Undisbursed portion of mortgage loans (1,146,601) (2,473,287)
Deferred loan fees (235,651) (206,889)
----------- -----------
$78,474,914 $71,772,896
=========== ===========
</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 47% 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-four Multi- Construction
Family Family Commercial and Land Total
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Wisconsin $ 5,132,734 $6,977,162 $4,922,628 $2,672,053 $19,704,577
Texas 959,183 -- -- -- 959,183
Colorado 68,729 -- 372,283 -- 441,012
Central Iowa 10,073,846 2,510,012 1,160,962 46,250 13,791,070
Other areas 655,616 437,879 538,180 189,000 1,820,675
----------- ---------- ---------- ---------- -----------
$16,890,108 $9,925,053 $6,994,053 $2,907,303 $36,716,517
=========== ========== ========== ========== ===========
</TABLE>
30<PAGE>
<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. The Company has 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, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997
---------------------------------
UNDER THE
ABOVE
AGREEMENT OTHERS TOTAL
---------------------------------
<S> <C> <C> <C>
Outstanding principal balance of loans
purchased and serviced by the Company $46,407,544 $853,564 $47,261,108
Partial interest sold to other financial
institutions 33,222,126 443,032 33,665,158
-----------------------------------
NET INVESTMENT $13,185,418 $410,532 $13,595,950
===================================
<CAPTION>
1996
---------------------------------
UNDER THE
ABOVE
AGREEMENT OTHERS TOTAL
---------------------------------
<S> <C> <C> <C>
Outstanding principal balance of loans
purchased and serviced by the Company $17,528,669 $825,289 $18,353,958
Partial interest sold to other financial
institutions 7,779,891 412,644 8,192,535
-----------------------------------
NET INVESTMENT $ 9,748,778 $412,645 $10,161,423
===================================
</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, 1997 and
1996 totaled approximately $710,000 and $736,000, respectively.
During the years ended June 30, 1997 and 1996, new loans to this
group totaled approximately $74,000 while repayments totaled
approximately $100,000.
31<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
Activity in the allowance for loan losses is summarized as
follows:
<TABLE>
<CAPTION>
Years ended June 30,
------------------------------------
1997 1996 1995
------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 641,205 $399,705 $399,705
Provision charged to income 121,000 249,000 --
Charge-offs (116,448) (7,500) --
Recoveries -- -- --
--------- -------- --------
Balance, end of year $ 645,757 $641,205 $399,705
========= ======== ========
</TABLE>
Impaired loans as of June 30, 1997 and 1996 totaled
approximately $922,000 and $735,000, respectively. The total
allowance for loan losses specifically related to these loans
was none and $109,000 on June 30, 1997 and 1996, respectively.
Interest income on impaired loans of $33,567 and none was
recognized for cash payments received for the years ended June
30, 1997 and 1996, respectively.
NOTE 4. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
<TABLE>
<CAPTION>
June 30,
-------------------------
1997 1996
-------------------------
<S> <C> <C>
Land $ 17,483 $ 17,483
Bank building 240,256 240,256
Furniture, fixtures and equipment 193,106 167,050
------------------------
450,845 424,789
Less accumulated depreciation (227,609) (190,374)
------------------------
$ 223,236 $ 234,415
========================
</TABLE>
NOTE 5. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consisted of the following:
<TABLE>
<CAPTION>
June 30,
-----------------------
1997 1996
-----------------------
<S> <C> <C>
Securities $ 21,207 $ 25,526
Loans receivable 475,814 387,643
Mortgage-backed securities 23,640 26,223
----------------------
$520,661 $439,392
======================
</TABLE>
32<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
NOTE 6. DEPOSITS
The scheduled maturities of certificate accounts are as follows
as of June 30, 1997:
1998 $27,758,883
1999 10,808,313
2000 1,930,865
2001 292,592
2002 626,216
Thereafter 242,807
-----------
$41,659,676
===========
Certificate of deposit accounts with balances of $100,000 and
above totaled $6,501,687 and $3,812,515 at June 30, 1997 and
1996, respectively. These certificates, at June 30, 1997, have
scheduled maturities of $501,063 in 3 months or less, $2,728,373
from 3 to 6 months, $1,318,771 from 6 to 12 months and
$1,953,480 beyond 12 months.
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
Years ended June 30,
------------------------------------
1997 1996 1995
------------------------------------
<S> <C> <C> <C>
NOW accounts $ 183,150 $ 63,698 $ 34,290
Money market deposit accounts 327,749 213,988 67,300
Passbook savings accounts 97,510 87,891 95,112
Certificates of deposit 2,324,016 2,181,293 1,887,548
---------- ---------- ----------
2,932,425 2,546,870 2,084,250
Less penalties for early withdrawals (5,168) (1,754) (5,455)
---------- ---------- ----------
INTEREST ON DEPOSITS $2,927,257 $2,545,116 $2,078,795
========== ========== ==========
</TABLE>
Noninterest bearing deposit accounts were approximately
$1,349,000 and $1,026,000 as of June 30, 1997 and 1996,
respectively.
NOTE 7. ADVANCES FROM FEDERAL HOME LOAN BANK
At June 30, 1997, advances from the Federal Home Loan Bank of
Des Moines consisted of various fixed rate advances with
interest rates ranging from 5.33% to 6.74%. These advances are
due at various dates from August 1997 through November 2008. 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, 1997, the maximum advances outstanding at a month
end were $20,961,466.
33<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
Following is a summary of future maturities of advances from the
Federal Home Loan Bank of Des Moines:
<TABLE>
<CAPTION>
June 30, 1997
---------------------
Weighted
Amount Rate
---------------------
<S> <C> <C>
Year ending June 30:
1998 $ 6,060,588 6.04%
1999 1,064,943 5.98
2000 4,569,619 6.35
2001 8,524,639 6.12
2002 80,031 5.98
Thereafter 661,646 5.98
-----------
$20,961,466
===========
</TABLE>
NOTE 8. INCOME TAXES AND RETAINED EARNINGS
Under the Internal Revenue Code and similar sections of Iowa
law, the Bank was allowed a special bad debt deduction related
to additions to tax bad debt reserves established for the
purpose of absorbing losses. Through June 30, 1996, the
provisions of the Code permitted the Bank to deduct from taxable
income an allowance for bad debts based on 8% of taxable income
before such deduction or actual loss experience. The Bank used
the percentage of taxable income method to compute its
deductions for the years ended June 30, 1996 and 1995.
Legislation passed in 1996 eliminated the percentage of taxable
income method as an option for computing bad debt deductions for
the year ended June 30, 1997 and in all future years. The Bank
will still be permitted to take deductions for bad debts, but
will be required to compute such deductions using an experience
method.
The Bank will also have to recapture its tax bad debt reserves
which have accumulated since June 30, 1988 amounting to
approximately $89,000. The tax associated with the recaptured
reserves is approximately $33,000 and will be paid over a six
year period beginning June 30, 1997. Deferred income taxes have
been previously established for the taxes associated with the
recaptured reserves.
Retained earnings at June 30, 1997 and 1996 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, 1997 and 1996.
34<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
Taxes on income are comprised as follows:
<TABLE>
<CAPTION>
Years ended June 30,
--------------------------------
1997 1996 1995
--------------------------------
<S> <C> <C> <C>
Current $363,180 $244,517 $328,585
Deferred 14,000 (61,000) (12,935)
--------------------------------
$377,180 $183,517 $315,650
================================
</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:
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------------
1997 1996 1995
-----------------------------------------------------------
PERCENT PERCENT PERCENT
OF PRETAX OF PRETAX OF PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Computed "expected"
taxes on income $424,400 34.0% $366,600 34.0% $321,800 34.0%
State taxes, net of federal
benefit 32,500 2.6 31,700 2.9 28,600 3.0
Tax-exempt interest and
dividends (15,200) (1.2) (27,000) (2.5) (261,00) (2.8)
Resolution of tax
contingency -- -- (137,000) (12.7) -- --
ESOP 25,800 2.1 20,200 1.9 10,200 1.1
Low income housing credit (42,100) (3.4) (30,500) (2.8) -- --
Other (48,220) (3.9) (40,483) (3.8) (18,850) (2.0)
-----------------------------------------------------------
PROVISION FOR
INCOME TAXES $377,180 30.2 $183,517 17.0 $315,650 33.3
===========================================================
</TABLE>
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, 1997 and 1996 are
as follows:
<TABLE>
<CAPTION>
June 30,
-----------------------
1997 1996
-----------------------
<S> <C> <C>
Federal Home Loan Bank stock $ 181,700 $ 181,700
Premises and equipment 21,600 16,900
Deferred compensation agreements (45,700) (54,000)
Loan fees deferred for financial reporting
purposes (6,700) (9,000)
Allowance for loan losses (211,600) (204,400)
ESOP and RRP plan (15,000) (19,800)
Other 149,200 96,600
-----------------------
DEFERRED INCOME TAX LIABILITY $ 73,500 $ 8,000
=======================
</TABLE>
35<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
NOTE 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, 1997, 1996 and 1995.
Recognition and retention plan (RRP): 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, 42,320 shares had been awarded to
directors, officers and other key employees as of June 30, 1997.
Expense of approximately $25,000, $47,000 and $87,000 was
recorded for the RRP for the years ended June 30, 1997, 1996 and
1995, respectively.
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 84,640 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
$137,963, $124,672 and $98,025 was recorded relative to the ESOP
for the years ended June 30, 1997, 1996 and 1995, 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.
36<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
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>
1997 1996
-----------------------
<S> <C> <C>
Allocated shares 34,164 21,118
Shares released for allocation 12,430 13,046
Unreleased shares` 38,046 50,476
-----------------------
TOTAL ESOP SHARES 84,640 84,640
=======================
Fair value of unreleased shares at June 30 $516,000 $511,000
</TABLE>
1993 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 (105,800 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 105,800 shares to certain officers, directors and employees,
primarily at an exercise price of $5 per share. The stock
options are exercisable through January 5, 2004. Options for
2,304 and 1,904 shares were exercised during the years ended
June 30, 1997 and 1996 and no options were exercised during
1995, leaving 101,592 options outstanding.
1997 stock option plan: The Board of Directors of the Company
has adopted the GFS Bancorp, Inc. 1997 Stock Option and
Incentive Plan (the "Plan"). The number of options authorized
under the Plan is 10% of the common stock issued and outstanding
on the plan date (98,870 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 50% 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 61,920 shares to certain officers and
directors, at an exercise price of $10.4375 per share, the
market value at the date of the grant. The stock options are
exercisable through February 19, 2007.
37<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
The table below reflects option activity for the period
indicated:
Year Ended
June 30, 1997
-------------
Balance at beginning of period --
Granted 61,920
Exercised --
-------
Balance at end of period 62,920
=======
Weighted average fair value per option of
options granted during the year $ 3.60
=======
Options exercisable 61,920
=======
Remaining shares available for grant 36,950
=======
Had compensation cost for the Plan been determined based on the
grant date fair values of awards (the method described in FASB
Statement No. 123), the approximate June 30, 1997 reported net
income and earnings per common share would have been decreased
to the pro forma amounts shown below. The June 30, 1996 and June
30, 1995 amounts for net income and earnings per common share
would not have been affected since the Plan was adopted during
the year ending June 30, 1997.
June 30, 1997
-------------
Net income:
As reported $871,158
Pro forma 730,905
Earnings per common share:
As reported $ .85
Pro forma .71
The fair value of the options is estimated at the grant date
using the Black-Scholes option-pricing model with the following
weighted-average assumptions: dividend rate of 2.05%, price
volatility of 25%, risk-free interest rate of 6.36% and expected
lives of 8 years.
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 $33,945, $22,256 and $30,240 for the years ending
June 30, 1997, 1996 and 1995, respectively.
38<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
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.
NOTE 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, 1997, the Bank meets all capital
adequacy requirements to which it is subject.
The Bank's actual capital amounts and ratios are also presented
in the table.
<TABLE>
<CAPTION>
To Be Well Capitalized
Under Prompt
Minimum for Capital Corrective Action
Actual Adequacy Purposes Provisions
-------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-------------------------------------------------------------
(000's) (000's) (000's)
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1997:
Total capital (to risk
weighted assets) $9,526 18.3% $4,162 8.0% $5,203 10.0%
Tier 1 Capital (to risk
weighted assets) 8,880 17.1 2,081 4.0 3,122 6.0
Tier 1 (Core) Capital
(to average assets) 8,880 9.8 2,719 3.0 4,532 5.0
Tangible capital (to
adjusted assets) 8,880 9.8 1,360 1.5 -- --
As of June 30, 1996:
Total capital (to risk
weighted assets) $8,962 19.1 $3,744 8.0 $4,680 10.0
Tier 1 Capital (to risk
weighted assets) 8,376 17.9 1,872 4.0 2,808 6.0
Tier 1 (Core) Capital
(to average assets) 8,376 10.2 2,458 3.0 4,096 5.0
Tangible capital (to
adjusted assets) 8,376 10.2 1,229 1.5 -- --
</TABLE>
39<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
The Bank is subject to certain restrictions on the amount of
dividends that may be paid without prior regulatory approval.
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.
NOTE 11. PARENT COMPANY FINANCIAL STATEMENTS
Presented below are condensed financial statements for the
parent company, GFS, Bancorp, Inc.:
CONDENSED BALANCE SHEET
JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
-----------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 142,924 $ 277,808
Investment in subsidiary 8,842,775 8,328,948
Securities available for sale, net 1,137,290 916,163
ESOP note receivable 211,600 272,057
Other assets 255,969 280,050
--------------------------
TOTAL ASSETS $10,590,558 $10,075,026
==========================
LIABILITIES, accrued expenses $ 53,380 $ 130,135
--------------------------
STOCKHOLDERS' EQUITY
Common stock 11,007 5,501
Additional paid-in capital 5,202,310 5,138,066
Retained earnings 6,523,527 5,856,546
Less common stock acquired by:
Employee stock ownership plan (197,631) (259,781)
Recognition and retention plan (7,225) (32,659)
Treasury stock, at cost (1,055,302) (728,800)
Net unrealized losses on investments -
subsidiary (37,545) (47,645)
Net unrealized gains on investments -
parent company 98,037 13,663
--------------------------
TOTAL STOCKHOLDERS' EQUITY 10,537,178 9,944,891
--------------------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $10,590,558 $10,075,026
==========================
</TABLE>
40<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
Condensed Statements of Income
Years Ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------
<S> <C> <C> <C>
Interest and other income $ 80,059 $105,770 $187,345
Operating expenses 121,551 97,391 101,739
---------------------------------
INCOME (LOSS) BEFORE EQUITY IN
NET INCOME OF SUBSIDIARY (41,492) 8,379 85,606
Equity in net income of subsidiary 840,330 846,330 573,230
---------------------------------
INCOME BEFORE INCOME TAXES 798,838 854,709 658,836
Provision for income taxes (credits) (72,320) (40,131) 27,950
---------------------------------
NET INCOME $871,158 $894,840 $630,886
=================================
</TABLE>
41<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 871,158 $894,840 $630,886
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed net income of
subsidiary (340,330) (846,330) (573,230)
(Gain) loss on sale of securities
available for sale 2,525 11,956 (36,250)
Decrease in other assets 24,081 21,950 10,000
Increase (decrease) in other liabilities (135,530) 59,930 7,782
Other -- -- (5,897)
------------------------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 421,904 142,346 33,291
------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available for sale (240,703) (181,500) (541,299)
Proceeds from maturity and sales of
securities available for sale 147,425 652,684 1,103,750
Increase in other assets -- (50,000) (250,000)
Payments received on ESOP debt 60,457 60,457 60,457
------------------------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (32,821) 481,641 372,908
------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance on common stock for
stock options exercised 2,000 -- --
Net proceeds from reissuance of treasury
stock 9,520 9,520 --
Purchase of treasury stock (344,085) (612,453) (131,313)
Dividends paid (191,402) (144,493) --
------------------------------
NET CASH (USED IN) FINANCING
ACTIVITIES (523,967) (747,426) (131,313)
------------------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (134,884) (123,439) 274,886
CASH AND CASH EQUIVALENTS
Beginning 277,808 401,247 126,361
------------------------------
Ending $ 142,924 277,808 401,247
==============================
</TABLE>
42<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
NOTE 12. FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of the Company's financial
instruments as of June 30, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
JUNE 30, 1997 JUNE 30, 1996
--------------------------------------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
--------------------------------------------------------
(Nearest 000) (Nearest 000) (Nearest 000) (Nearest 000)
<S> <C> <C> <C> <C>
Financial assets:
Cash and amounts due from
depository institutions $ 4,643 $ 4,643 $ 2,271 $ 2,271
Securities 6,553 6,604 6,690 6,635
Stock in FHLB 1,159 1,159 1,159 1,159
Loans receivable, net 78,475 78,648 71,773 71,824
Accrued interest receivable 521 521 439 439
Financial liabilities:
Deposits 59,551 59,657 53,122 53,330
Advances from FHLB 20,961 20,961 19,318 19,318
Off balance sheet financial
instruments, commitments
to extend credit -- -- -- --
</TABLE>
NOTE 13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance
sheet 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 ornotional
amounts of those instruments reflect the extent of involvement
the Company has in particular classes of financial instruments.
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, 1997 the Company had outstanding loan commitments
totaling $893,000. The outstanding loan commitments consisted of
$206,000 of fixed rate loan commitments and $687,000 of
adjustable rate loan commitments. The Company had $529,000
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.
43<PAGE>
<PAGE>
GFS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
NOTE 14. PENDING ACCOUNTING PRONOUNCEMENTS AND REGULATIONS
In February 1997, the FASB issued Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS No.
128"). SFAS No. 128 applies to all entities that have issued
publicly-held common stock or potential common stock. SFAS No.
128 requires the entities to present basic earnings per share
and diluted earnings per share on the face of the statements of
income. Basic earnings per share replaces "primary" earnings per
share and diluted earnings per share replaces "fully diluted"
earnings per share. The Company does not expect SFAS No. 128 to
materially affect its computation of earnings per share and
since the requirements of SFAS No. 128 are disclosure related,
its implementation will have no impact on the Company's
financial condition or results of operations.
In February 1997, the FASB issued Statement of Financial
Accounting Standards No. 129, "Disclosure of Information About
Capital Structure" ("SFAS No. 129"). SFAS No. 129 requires
separate disclosure about the capital structure of the entity.
While this statement codifies and contains a few more specifics,
it does not expand, in any significant manner, previously
existing disclosure requirements. SFAS No. 129 is effective for
periods ending after December 15, 1997. As the requirements of
SFAS No. 129 are disclosure related, its implementation will
have no impact on the Company's financial condition or results
of operations.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No.
130"). SFAS No. 130 requires that all items that are components
of comprehensive income defined as "the change in equity [net
assets] of a business enterprise during a period from
transactions and other events and circumstances from nonowner
sources, including all changes in equity during a period except
those resulting from investments by owners and distributions to
owners," be reported in a financial statement that is displayed
with the same prominence as other financial statements.
Companies will be required to (a) classify items of other
comprehensive income by their nature in a financial statement
and (b) display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial
position. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997, and requires reclassification of prior
periods presented. As the requirements of SFAS No. 130 are
disclosure related, its implementation will have no impact on
the Company's financial condition or results of operations.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosure about Segments of an Enterprise
and Related Information ("SFAS No. 131"). SFAS No. 131 requires
that enterprises report certain financial and descriptive
information about operating segments in complete sets of
financial statements of the Company and in condensed financial
statements of interim periods issued to shareholders. It also
requires that a Company report certain information about their
products and services, geographic areas in which they operate
and their major customers. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997. As the requirements of
SFAS No. 131 are disclosure related, its implementation will
have no impact on the Company's financial condition or results
of operations.
44<PAGE>
<PAGE>
STOCKHOLDER INFORMATION
EXECUTIVE OFFICES
1025 Main Street
Grinnell, IA 50112
ANNUAL MEETING
The Annual Meeting of Stockholders will be held on
October 23, 1997 at 9:30 a.m., local time, at the office of
Grinnell Federal Savings Bank located at 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 Co., N.A. Everen Securities, Inc. Housley, Kantarian &
2321 Koch's Lane Robert W. Baird & Co. Bronstein,P.C.
Quincy, IL 62301 Herzog, Heine, Geduld, Inc. Suite 700
Howe, Barnes Investments 1220 19th Street, NW
Washington, DC 20036
</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, 1997 there were 988,242 shares of GFS
Bancorp, Inc. common stock issued and outstanding and there were
approximately 247 holders of record and approximately 505
beneficial holders. The price range of the common stock after
giving retroactive effect for the 2 for 1 stock split for each
quarter of fiscal 1996 and 1997 was as follows:
<TABLE>
<CAPTION>
DIVIDENDS
FISCAL 1996 HIGH LOW DECLARED
- ----------- ---- ----- ----------
<S> <C> <C> <C>
First Quarter $ 9.625 $ 7.625 $0.375
Second Quarter $10.00 $ 9.25 $0.375
Third Quarter $10.375 $ 9.625 $0.375
Fourth Quarter $10.375 $10.00 $0.05
<CAPTION>
DIVIDENDS
FISCAL 1997 HIGH LOW DECLARED
- ----------- ---- ----- ----------
<S> <C> <C> <C>
First Quarter $10.50 $10.125 $0.05
Second Quarter $10.625 $10.125 $0.05
Third Quarter $11.50 $10.125 $0.05
Fourth Quarter $14.25 $11.50 $0.065
</TABLE>
The stock price information set forth in the table above was
provided by the NARD, 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.
45<PAGE>
<PAGE>
GFS BANCORP, INC.
Directors
LeRoy E. Meredith
Chairman of the Board
GFS Bancorp, Inc. and Grinnell Federal Savings Bank
Theodore Mokricky
Vice Chairman of the Board
Executive Director of Continuing Care Facility
David S. Clay
Vice President and Treasurer of Grinnell College
Albert C. Eisenman
Retired Former President of Grinnell Federal Savings Bank
Donald H. Howig
Retired Businessman
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
Executive Officers
LeRoy E. Meredith
Chairman of the Board
Steven L. Opsal
President and Chief Executive Officer
Katherine A. Rose
Senior Vice President and Chief Financial Officer
William T. Nassif
Senior Vice President and Chief Operating Officer
GRINNELL FEDERAL SAVINGS BANK
Executive Officers
LeRoy E. Meredith
Chairman of the Board
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
46<PAGE>
<PAGE>
APPENDIX E
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------------
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _______
Commission File Number: No. 0-22742
GFS BANCORP, INC.
______________________________________________________
(Exact name of registrant as specified in its charter)
Delaware 42-1410536
-------- ----------
(State of other jurisdiction of (I.R.S. Employer
of incorporation or organization Identification No.)
1025 Main Street, Grinnell, Iowa 50112-0030
--------------------------------------------
(Address of principal executive offices)
(515) 236-3121
--------------
(Issuer's telephone number)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 of 15(d) of the
Securities Exchange Act of 1934 during the preceding 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 [ ]
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
State the number of Shares outstanding of each of the issuer's
classes of common equity, as of the latest date:
As of September 30, 1997, there were 988,242 shares of the
Registrant's common stock issued and outstanding, including 8,538
shares of restricted stock.<PAGE>
<PAGE>
GFS BANCORP, INC.
INDEX
PART I. FINANCIAL INFORMATION (unaudited) PAGE NO.
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets, September 30, 1997
and June 30, 1997 (Unaudited) . . . . . . . . . . . 1
Consolidated Statement of Income for the Three
Months Ended September 30, 1997 and 1996
(Unaudited) . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statement of Shareholders' Equity,
for the Three Months Ended September 30, 1997
(Unaudited) . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statement of Cash Flows, for the Three
Months Ended September 30, 1997 and 1996
(Unaudited) . . . . . . . . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements
(Unaudited) . . . . . . . . . . . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . 8
PART II. OTHER INFORMATION
Signature Page . . . . . . . . . . . . . . . . . . 17
<PAGE>
<PAGE>
GFS BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
Sept 30 June 30,
1997 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions:
Noninterest bearing $ 295,807 $ 334,287
Interest bearing 5,112,463 4,308,632
Securities available for sale 1,765,332 1,909,490
Securities held to maturity 1,497,927 1,497,785
Mortgage-backed securities held to maturity 3,108,816 3,145,696
Stock in Federal Home Loan Bank, at cost
(approximate fair value) 1,159,000 1,159,000
Loans receivable, net 80,054,011 78,474,914
Real estate acquired in settlement of loans, net 211,828 0
Premises and equipment, net 237,549 223,236
Accrued interest receivable 548,421 520,661
Other assets 504,540 489,552
----------- -----------
Total Assets $ 94,495,694 $ 92,063,253
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand $ 6,733,642 $ 6,273,344
Savings and money market 11,992,657 11,617,756
Certificates of deposit 43,019,245 41,659,676
----------- -----------
Total Deposits 61,745,544 59,550,776
Advances from Federal Home Loan Bank 20,446,711 20,961,466
Advances from borrowers for taxes and insurance 905,117 713,593
Accrued dividends payable 64,235 64,235
Other accrued expenses and liabilities 454,611 236,005
----------- -----------
Total Liabilities $ 83,616,218 $ 81,526,075
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS EQUITY
Preferred stock, $.01 par value,
authorized 500,000 shares, issued none $ -- $ --
Common stock, $.01 par value,
authorized 2,000,000 shares; issued
1,100,720 shares; 11,007 11,007
Additional paid-in capital 5,230,429 5,202,310
Retained earnings -substantially restricted 6,759,727 6,523,527
Less:
Unearned employee stock ownership plan (182,546) (197,631)
Unearned retention and recognition plan (4,150) (7,225)
Treasury stock at cost 112,478 shares (1,055,302) (1,055,302)
Unrealized gain on securities
available for sale, net 120,311 60,492
----------- -----------
Total Stockholders' Equity $ 10,879,476 $ 10,537,178
----------- -----------
Total Liabilities and Stockholders' Equity $ 94,495,694 $ 92,063,253
=========== ===========
</TABLE>
1 <PAGE>
<PAGE>
GFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
September 30,
------------------------
1997 1996
---------- ---------
<S> <C> <C>
Interest income:
Loans receivable $1,743,965 $1,606,836
Mortgage-backed securities 57,884 62,487
Other securities and interest-bearing
cash accounts 102,241 89,947
---------- ----------
1,904,090 1,759,270
Interest expense:
Deposits 765,192 709,690
Advances from Federal Home Loan Bank 325,260 295,251
---------- ----------
1,090,452 1,004,941
Net interest income 813,638 754,329
---------- ----------
Provision for loan losses 24,000 49,000
Net interest income after provision
for loan losses 789,638 705,329
Noninterest income:
Loss on sale of securities available for sale (3,003) (1,576)
Other 48,679 34,531
---------- ----------
45,676 32,955
---------- ----------
Noninterest expense:
Salaries and employee benefits 239,782 213,723
Occupancy expenses 21,450 19,491
Federal deposit insurance premiums 9,228 29,091
FDIC-SAIF Special Assessment 0 287,568
Data processing services 18,838 17,134
Other 100,048 79,489
---------- ----------
389,346 646,496
---------- ----------
Income before provision for income taxes 445,968 91,788
Provision for income taxes 148,000 56,082
---------- ----------
Net income $ 297,968 $ 35,706
========== ==========
Earnings per common share 0.29 0.04
========== ==========
</TABLE>
2<PAGE>
<PAGE>
GFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Additional ESOP
Common Paid-in Retained Stock
Stock Capital Earnings Awards
------ ---------- -------- ------
<S> <C> <C> <C> <C>
Balance, June 30, 1997 $11,007 $5,202,310 $6,523,527 $(197,631)
Net income 297,968
Dividends (61,768)
ESOP common stock released
for allocation 28,119 15,085
Amortization of RRP
contributions
Net change in unrealized
loss on securities
available for sale
------- ---------- ---------- ---------
Balance, September 30, 1997 $11,007 $5,230,429 $6,759,727 $(182,546)
======= ========== ========== =========
</TABLE>
<TABLE>
<CAPTION>
Net Unrealized
Loss on
RRP Available Total
Stock Treasury for Sale Stockholders'
Awards Stock Securities Equity
------ -------- ---------- ------------
<S> <C> <C> <C> <C>
Balance, June 30, 1997 $(7,225) $(1,055,302) $ 60,492 $10,537,178
Net income 297,968
Dividends (61,768)
ESOP common stock released
for allocation 43,204
Amortization of RRP
contributions 3,075 3,075
Net change in unrealized
loss on securities
available for sale 59,819 59,819
------- ----------- -------- -----------
Balance, September 30, 1997 $(4,150) $(1,055,302) $120,311 $10,879,476
======== =========== ======== ===========
</TABLE>
3
<PAGE>
<PAGE>
GFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
September 30,
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 297,968 $ 35,706
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation (263) 8,193
Loss on sale of available for sale investments 3,003 1,576
ESOP and RRP expense 46,279 41,686
Deferred loan fees, net (8,741) (16,513)
Provisions for loan losses 24,000 49,000
Change in:
Accrued interest receivable (27,760) (31,658)
Other assets (14,988) 8,797
Other liabilities 183,331 146,846
---------- ----------
Net cash provided by operating activities 502,829 243,633
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturity of securities held to maturity 0 85,000
Maturity of securities available for sale 0 0
Proceeds from sales of securities available for sale 236,107 99,925
Purchase of securities held to maturity 0 0
Purchase of securities available for sale 0 0
Principal payments received on mortgage-backed
securities 36,880 156,698
Purchase of loans to be held in portfolio (3,169,706) (3,638,297)
Net change in loans outstanding 1,363,522 781,244
Proceeds from sale of real estate 0 226,616
Purchase of premises and equipment (14,050) (6,682)
---------- ----------
Net cash (used) by investing activities (1,547,247) (2,295,496)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 2,194,768 1,767,402
Advances from Federal Home Loan Bank 1,000,000 0
Repayment of advances from the Federal Home Loan Bank (1,514,755) (13,768)
Net increase in advances from borrowers for taxes
and insurance 191,524 91,451
Purchase of treasury stock 0 (143,375)
Dividends paid (61,768) (48,917)
---------- ----------
Net cash provided by financing activities 1,809,769 1,652,793
---------- ----------
Net(increase) in cash and cash equivalents 765,351 (399,070)
Cash and cash equivalents, beginning of period 4,642,919 2,271,132
---------- ----------
Cash and cash equivalents, end of period $5,408,270 $1,872,062
========== ==========
</TABLE>
4<PAGE>
<PAGE>
GFS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
---------------------
The accompanying unaudited Consolidated Financial
Statements have been prepared in accordance with
generally accepted accounting principles for interim
financial information and with the instructions to Form
10-QSB and Regulation S-X. Accordingly, they do not
include all the information and footnotes required by
generally accepted accounting principles for complete
financial statements.
In the opinion of management, the Consolidated
Financial Statements contain all adjustments (consisting
only of normal recurring adjustments) necessary to
present fairly the financial condition of GFS Bancorp,
Inc. as of September 30, 1997 and June 30, 1997, the
results of its operations for the three months ended
September 30, 1997 and 1996, changes in stockholders'
equity for the three months ended September 30, 1997 and
for the statement of cash flows for the three months
ended September 30, 1997 and 1996.
Operating results for the three months ended
September 30, 1997 are not necessarily indicative of the
results that may be expected for the fiscal year ending
June 30, 1998.
(2) Earnings Per Share of Common Stock
-----------------------------------
Earnings per share 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 period ended
September 30, 1997 was 1,036,350 shares. The amount set
forth above includes 8,538 shares of restricted stock
issued in accordance with the recognition and retention
plan established by the Company. These restricted stock
awards are reflected in the income per share
computations in the accompanying financial statements.
In addition, 84,640 shares of common stock were issued
to the Employee Stock Ownership Plan (ESOP) trust for
the benefit of the employees of the Company and its
subsidiaries. In accordance with American Institute of
Certified Public Accountants Accounting Standards
Division statement of position on
5<PAGE>
<PAGE>
93-6 "Employers Accounting for Employee Stock Ownership Plans,"
ESOP shares that have been committed to be released are
considered outstanding and ESOP shares that have not
been committed to be released are not considered outstanding. At
September 30, 1997, 46,016 ESOP shares were committed to be
released and were considered in the earnings per share
computations.
(3) Regulatory Capital Requirements
-------------------------------
Pursuant to Office of Thrift Supervision Regulations, savings
institutions must meet three separate minimum capital-to-asset
requirements. The following table summarizes, as of September 30,
1997, the capital requirements for Grinnell Federal Savings Bank
(the "Bank") under applicable regulations and its actual capital
ratios. As of September 30, 1997, the
Bank substantially exceeded all current regulatory capital
standards.
<TABLE>
<CAPTION>
Regulatory Actual
Capital Capital
Requirement (Bank Only) Excess Capital
--------------- --------------- ---------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Risk-Based . . . . . . . . $4,260 8.00% $9,855 18.51% $5,595 10.51%
Core Capital . . . . . . . 2,791 3.00 9,225 9.92 6,434 6.92
Tangible Capital. . . . . 1,396 1.50 9,225 9.92 7,829 8.42
</TABLE>
(4) Pending Accounting Pronouncements
---------------------------------
The Financial Accounting Standards Board (FASB) has approved,
effective for years beginning after December 15, 1997, Statement
No. 128, "Earning Per Share", Statement No. 129, "Disclosure of
Information About Capital Structure", Statement No. 130, "Reporting
Comprehensive Income and Statement No. 131, "Disclosure About
Segments of an Enterprise and Related Information". FASB
Statements No. 128, 129, 130 and 131 are not expected to have a
material effect on the Company's financial statements when adopted.
(5) Pending Acquisition by First Federal Savings Bank of
Siouxland
----------------------------------------------------
On October 16, 1997, the Company entered into an Agreement and
Plan of Reorganization (the "Agreement"), providing for the
acquisition of the Company by First Federal Savings Bank of
Siouxland ("First Federal"), a mutual holding company headquartered
6
<PAGE>
<PAGE>
in Sioux City, Iowa. The Agreement provides for the conversion of
each issued and outstanding share of the Company's common stock
into the right to receive $17.65 per share in cash from First
Federal. The acquisition is subject to receipt of regulatory
approvals, approvals by the Company's shareholders and other
conditions.
7<PAGE>
<PAGE>
PART I - ITEM 2
MANAGEMENTS'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. 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.
8<PAGE>
<PAGE>
Recent Event -- Pending Acquisition by First Federal Savings Bank
of Siouxland
- ------------------------------------------------------------
On October 16, 1997, the Company entered into an Agreement and
Plan of Reorganization (the "Agreement"), providing for the
acquisition of the Company by First Federal Savings Bank of
Siouxland ("First Federal"), a mutual holding company headquartered
in Sioux City, Iowa. The Agreement provides for the conversion of
each issued and outstanding share of the Company's common stock
into the right to receive $17.65 per share in cash from First
Federal. The acquisition is subject to receipt of regulatory
approvals, approvals by the Company's shareholders and other
conditions.
Financial Condition
- -------------------
The Company's total assets increased $2.4 million, or 2.6%,
from $92.1 million at June 30, 1997 to $94.5 million at September
30, 1997. This increase was due primarily to an increase of $1.6
million in net loans receivable, $765,000 in cash and $212,000 in
real estate acquired in settlement of loans. The increases were
partially offset by a $144,000 decrease in investment securities
and a $37,000 decrease in mortgage-backed securities. The
increases in loans were funded primarily by a $2.2 million increase
in savings deposits.
Total investment securities decreased by $144,000, or 4.2%,
from $3.40 million at June 30, 1997 to $3.26 million at September
30, 1997 due to the sale of an investment in common stock. At
September 30, 1997 the investment portfolio consisted primarily of
$1.5 million in U.S. agency obligations, $780,000 in mutual funds,
and $980,000 in equity securities consisting of common stocks of
two bank holding companies and preferred stocks of one bank holding
company, two utility companies and an automobile manufacturer.
Total mortgage-backed securities decreased $37,000, or 1.2%,
from $3.15 million at June 30, 1997 to $3.11 million at September
30, 1997. The decrease in mortgage-backed securities was due to
amortization of principal and prepayments.
Net loans receivable increased $1.6 million, or 2.0%, from
$78.5 million at June 30, 1997 to $80.1 million at September 30,
1997. Mortgage loans originated during the three months ended
September 30, 1997, totaled $3.6 million secured primarily by
9<PAGE>
<PAGE>
single family dwellings in the Bank's market area. During this
period, the Bank also purchased $900,000 of loans secured by
one-to-four family dwellings, $9.7 million of multi-family and
$720,000 of commercial real estate loans primarily located in the
Madison, Wisconsin area. Of the $11.3 million in one-to-four
family, multi-family, and commercial real estate purchased during
the period, $8.1 million were sold to other financial institutions
with the Bank retaining the servicing.
Total deposits increased by $2.2 million, or 3.7%, from $59.5
million at June 30, 1997 to $61.7 million at September 30, 1997.
This increase was primarily due to an increase of $1.4 million in
certificate of deposit accounts and $835,000 in demand, savings and
money market accounts. Management believes that this increase was
primarily attributable to successful marketing initiatives and
competitive pricing.
Total borrowed funds consisted of advances from the Federal
Home Loan Bank ("FHLB") of Des Moines. FHLB advances decreased by
$515,000, or 2.5%, from $20.96 million at June 30, 1997 to $20.45
million at September 30,1997.
Total stockholders' equity increased $342,000 from $10.54
million at June 30, 1997 to $10.88 million at September 30, 1997.
This increase was primarily due to net income of $298,000,
amortization of Recognition and Retention Plan ("RRP"), 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 declaration of a $0.065 dividend per share during the
September 30, 1997 quarter. (See Consolidated Statement of
Shareholders' Equity.)
Results of Operations - Comparison of Quarters Ended September 30,
1997 and 1996
- --------------------------------------------------------------
General. The Company's net income increased $262,000, or
727.8%, from $36,000 for the quarter ended September 30, 1996 to
$298,000 for the quarter ended September 30, 1997. This increase
resulted primarily from a one time after-tax special assessment
in September 1996 of $181,000 ($287,568 before the effect of
federal and state income taxes) levied by the Federal Deposit
Insurance Corporation (the "FDIC") in order to capitalize the
Savings Association Insurance Fund. Results for September 1997
10<PAGE>
<PAGE>
were also favorably impacted by an $84,000 increase in net interest
income after provision for loan losses, which, excluding the
deposit insurance assessment, was partially offset by a $30,000
increase in non-interest expense.
Net Interest Income. Net interest income, before provision
for loan losses, increased $60,000, or 8.0%, from $754,000 at
September 30, 1996 to $814,000 at September 30, 1997 due to
increases in average balances of interest-earning assets. The
Company's average spread increased from 2.65% for the three months
ended September 30, 1996 to 2.77% for the three months ended
September 30, 1997 due to the fact that yields on interest-earning
assets increased more than rates paid on interest-bearing
liabilities.
Interest Income. Interest income increased by $145,000, or
8.2%, from $1,759,000 at September 30, 1996 to $1,904,000 at
September 30, 1997. This increase was primarily due to an increase
of 0.08% in the average rate earned on interest-earning assets and
an increase of $8.0 million in the average balance of such assets.
The average balance of such assets increased due to an increase in
the average balance of loans as a result of increased originations
and purchases.
Interest Expense. Interest expense increased by $85,000, or
8.46%, from $1,005,000 for the quarter ended September 30, 1996 to
$1,090,000 for the quarter ended September 30, 1997. This increase
was primarily due to an $6.9 million increase in the average
balance of total deposits and borrowed funds, which was partially
offset by a 0.04% decrease in the average rate paid on
interest-bearing liabilities.
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 general
accepted accounting principles. A $24,000 provision for loan
losses was established for the quarter ended September 30, 1997,
as compared to a $49,000 provision for the quarter ended September
30, 1996. The higher level of loan loss provision in the year
earlier period reflects management's assessment based on loan
portfolio increases and the level of non-performing assets at that
time. Future additions to the allowance for loan losses are
dependent
11<PAGE>
<PAGE>
upon the performance and composition of the loan portfolio, the
economy, changes in real estate values and interest rates, the view
the regulatory authorities toward adequate reserve levels and
inflation. There can be no assurance that future losses will not
exceed estimated amounts or that additional provisions for loan
losses will not be required for future periods.
Non-Interest Income. Non-interest income increased from
$33,000 at September 30, 1996 to $46,000 at September 30, 1997.
Non-Interest Expense. Non-interest expense decreased by
$257,000 from $646,000 in the quarter ended September 30, 1996 to
$389,000 in the quarter ended September 30, 1997. This decrease
was primarily due to a $287,568 special one time FDIC-SAIF
insurance assessment in September 1996 (See Results of Operations
- - General above) and a $20,000 decrease in the quarterly FDIC-SAIF
premiums. Partially offsetting the decrease was a $26,000 increase
in compensation and benefits due to fiscal year-end salary
increases and a $21,000 increase in other non-interest expenses.
Provision for Income Taxes. Income tax expense was $56,000
for the quarter ended September 30, 1996 compared to $148,000 for
the quarter ended September 30, 1997. The $92,000 increase was due
to a increase in income subject to taxes.
Allowance for Loan Losses. The allowance for loan losses is
calculated based upon an evaluation of pertinent factors underlying
the types and qualities of the Company's loans. Management
considers such factors as the repayment status of a loan, the
estimated fair value of the underlying collateral, the borrower's
ability to repay the loan, current and anticipated economic
conditions which might affect the borrower's ability to repay the
loan and the Company's past statistical history concerning
charge-offs. The Company's allowance for loan losses as of
September 30, 1997 was $630,000, or 0.8% of the total loans. The
June 30, 1997 allowance for loan losses was $646,000, or 0.8% of
total loans. This $16,000 decrease reflects a $40,000 charge off
on multi-family real estate located in Madison, Wisconsin (see
Non-Performing Assets below) and the addition of $24,000 to the
allowance for loan losses. The ratio of the allowance for loan
losses to non-performing assets decreased from 70% of
non-performing assets at June 30, 1997 to 68% of non-performing
assets at September 30, 1997, due to the combination of a $7,000
increase in non-
12<PAGE>
<PAGE>
performing assets with the $16,000 decline in allowance for loan
losses referenced above. Management believes that the current
allowance for loan losses is adequate to protect against the risk
inherent in Grinnell Federal's loan portfolio based on all current
available information.
Non-Performing Assets. 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 $7,000 from $922,000, or 1.00% of total assets
at June 30, 1997, to $929,000, or 0.98% of total assets at
September 30, 1997. This $929,000 consisted primarily of nine
loans totaling $188,000 secured by single-family homes, two loans
totaling $498,000 secured by multi-family real estate located in
Madison, Wisconsin, four consumer loan totaling $31,000 and
$212,000 in real estate acquired in settlement of loans located in
Madison, Wisconsin.
The Madison, Wisconsin real estate acquired in settlement of
loans consists of a 104 unit apartment property. The Bank owns a
9% interest in this property based on its participation interest
in the original underlying loan. As discussed above, this asset
was written down to its approximate fair value on September 30,
1997 through a $40,000 charge-off to its Allowance for Loan Losses.
In addition, at September 30, 1997, other assets of concern
totaled $1,028,000 and included seven loans totaling $165,000
secured by single-family residences and a $272,000 single-family
home in Houston, Texas, one $537,000 loan secured by commercial
real estate located in Grinnell, Iowa, one $54,000 commercial
business loan and one $3,000 consumer loan. 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
$1.7 million at September 30,1997 as compared to $2.0 million at
June 30, 1997. At September 30, 1997, all classified assets were
included in non-performing assets or other assets of concern.
For all periods presented the Company had no significant
troubled debt restructuring. The following table sets forth the
amount of non-performing assets at the periods indicated.
13
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
September 30, June 30,
1997 1997
------------ -------
(Dollars in Thousands)
<S> <C> <C>
Non-Accruing Loans ................... $ 717 $ 922
Foreclosed Assets .................... 212 ---
----- -----
Total Non-Performing Assets .......... $ 929 $ 922
Total Non-Performing Assets as a
Percentage of Total Assets........ 0.98% 1.00%
</TABLE>
Liquidity and Capital Resources. The Company's primary
sources of funds are deposits, principal and interest payments on
loans and mortgage-backed securities, FHLB-Des Moines advances and
funds provided by operations. While scheduled loan and
mortgage-backed security repayments and maturity of short-term
investments are a relatively predictable source of funds, deposit
flows are greatly influenced by general interest rates, economic
conditions and competition. Current Office of Thrift Supervision
regulations require the Bank to maintain cash and eligible
investments in an amount equal to at least 5% of customer accounts
and short-term borrowings to assure its ability to meet demands for
withdrawals and repayments of short-term borrowings. At September
30, 1997 the Bank's liquidity ratio was 8.0% which exceeded the
minimum regulatory requirements.
The Company uses its capital resources principally to meet its
ongoing commitments to fund maturing certificates of deposits and
loan commitments, maintain its liquidity and meet operating
expenses. At September 30, 1997, the Company has commitments to
purchase or originate loans totaling $309,000 and $536,000 in
commitments for unused lines of credit. The Company considers it
liquidity and capital resources to be adequate to meet its
foreseeable short- and long-term needs. The Company expects to be
able to fund or refinance, on a timely basis, its material
commitments and long-term liabilities.
Regulatory standards impose the following capital
requirements: a risk-based capital standard expressed as a percent
of risk-adjusted assets, a leverage ratio of core capital to total
adjusted assets, and a tangible capital ratio expressed as a
percent of total adjusted assets. As of September 30, 1997, the
Bank exceeded all fully phased-in regulatory capital standards.
14<PAGE>
<PAGE>
At September 30, 1997, the Bank's tangible capital was $9.2
million, or 9.9%, of adjusted total assets, which is in excess of
the 1.5% requirement by $7.8 million. In addition, at
September 30, 1997, the Bank had core capital of $9.2 million , or
9.9%, of adjusted total assets, which exceeds the 3% requirement
by $6.4 million. The Bank had risk-based capital of $9.9 million
at September 30, 1997 or 18.5% of risk-adjusted assets which
exceeds the 8.0% risk-based capital requirement by $5.6 million.
The OTS requires every savings association with more than
normal interest rate risk 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. 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.
Regulatory Developments
- -----------------------
Legislation currently under consideration by Congress would
repeal the federal thrift charter and require federal associations
like the Bank to convert to national banks two years after the
enactment of the bill. The bill, in its current form, would permit
federal thrifts that converted to national banks to exercise any
authority which they were legally entitled to exercise immediately
prior to such conversion and would not be required to divest any
branches. Further, these institutions could continue to branch in
any state in which they were located to the same extent as national
banks. Unitary savings and loan holding companies, like the
Company, could continue to exercise any powers they had prior to
their subsidiary becoming a bank by operation of law as long as
they did not acquire another bank. Powers of those unitary savings
and loan holding companies that were grandfathered, however, could
not be transferred to another company which acquires control of the
unitary holding company after the effective date of the law. There
can be no assurance that this legislation will be passed in its
current form. At this time, the Company is unable to predict
whether such legislation would significantly impact its operation.
15<PAGE>
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
None.
Item 2. Changes in Securities
---------------------
None.
Item 3. Defaults Upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
--------------------------------------------------
None.
Item 5. Other Information
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
No. 27 Financial Data Schedule.
(b) Reports on Form 8-K
None.
16<PAGE>
<PAGE>
Pursuant to the requirements 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.
Dated: November 12, 1997 /s/ Steven L. Opsal
-------------------------------------
Steven L. Opsal, President
and Chief Executive Officer
Dated: November 12, 1997 /s/ Katherine A. Rose
-------------------------------------
Katherine A. Rose, Vice President
and Chief Financial Officer
17
<PAGE>
[DESCRIPTION] - Article 9 Fin. Data Schedule for 1st Qtr 10-Q
[ARTICLE] 9
[MULTIPLIER] 1
<TABLE>
<S> <C>
[PERIOD-TYPE] 3-MOS
[FISCAL-YEAR-END] JUN-30-1998
[PERIOD-END] SEP-30-1997
[CASH] 295,807
[INT-BEARING-DEPOSITS] 5,112,463
[FED-FUNDS-SOLD] 0
[TRADING-ASSETS] 0
[INVESTMENTS-HELD-FOR-SALE] 1,765,332
[INVESTMENTS-CARRYING] 4,606,743
[INVESTMENTS-MARKET] 0
[LOANS] 80,054,011
[ALLOWANCE] 630,000
[TOTAL-ASSETS] 94,495,694
[DEPOSITS] 61,745,544
[SHORT-TERM] 4,561,648
[LIABILITIES-OTHER] 1,423,963
[LONG-TERM] 15,885,063
[COMMON] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 11,007
[OTHER-SE] 10,868,469
[TOTAL-LIABILITIES-AND-EQUITY] 94,495,694
[INTEREST-LOAN] 1,743,965
[INTEREST-INVEST] 160,125
[INTEREST-OTHER] 0
[INTEREST-TOTAL] 1,904,090
[INTEREST-DEPOSIT] 765,192
[INTEREST-EXPENSE] 1,090,452
[INTEREST-INCOME-NET] 813,638
[LOAN-LOSSES] 24,000
[SECURITIES-GAINS] (3,000)
[EXPENSE-OTHER] 389,346
[INCOME-PRETAX] 445,168
[INCOME-PRE-EXTRAORDINARY] 445,968
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 297,968
[EPS-PRIMARY] 0.29
[EPS-DILUTED] 0.29
[YIELD-ACTUAL] 0
[LOANS-NON] 717,000
[LOANS-PAST] 0
[LOANS-TROUBLED] 0
[LOANS-PROBLEM] 1,028,000
[ALLOWANCE-OPEN] 646,000
[CHARGE-OFFS] 40,000
[RECOVERIES] 0
[ALLOWANCE-CLOSE] 630,000
[ALLOWANCE-DOMESTIC] 0
[ALLOWANCE-FOREIGN] 0
[ALLOWANCE-UNALLOCATED] 0
</TABLE>
<PAGE>
<PAGE>
REVOCABLE PROXY
GFS BANCORP, INC.
________________________________________________________________
SPECIAL MEETING OF STOCKHOLDERS
March 12, 1998
________________________________________________________________
The undersigned hereby appoints LeRoy E. Meredith, Steven L.
Opsal and Davis S. Clay with full powers of substitution, to act
as attorneys and proxies for the undersigned to vote all shares of
the Common Stock of GFS Bancorp, Inc. (the "Company") which the
undersigned is entitled to vote at the Special Meeting of
Stockholders, to be held at the main office of the Company at 1025
Main Street, Grinnell, Iowa on Thursday, March 12, 1998 at 9:30
a.m., local time, and at any and all adjournments thereof, as
indicated below and as determined by the majority of the Board of
Directors with respect to such other matters as may come before the
Special Meeting.
<TABLE>
<CAPTION> FOR AGAINST ABSTAIN
<S> <C> <C> <C>
1. The approval of a Merger Agreement and Plan
of Reorganization, dated as of October 16,
1997, (the "Agreement") providing for the
acquisition of the Company by First Federal
Savings Bank of Siouxland for a per share
purchase price of $17.65 in cash. [ ] [ ] [ ]
2. Adjournment of the meeting if necessary to
permit further solicitation of proxies in
the event that there are not sufficient
votes at the time of the meeting to approve
the Agreement. [ ] [ ] [ ]
</TABLE>
The Board of Directors recommends a vote "FOR" the listed
proposition.
________________________________________________________________
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE
SPECIFIED, THIS PROXY WILL BE VOTED FOR THE PROPOSITIONS STATED.
IF ANY OTHER BUSINESS IS PRESENTED AT THE SPECIAL MEETING,
INCLUDING WITHOUT LIMITATION MATTERS RELATING TO THE CONDUCT OF THE
SPECIAL MEETING AND MATTERS WHICH THE BOARD DOES NOT KNOW A
REASONABLE TIME BEFORE COMMENCEMENT OF THIS SOLICITATION ARE
TO BE PRESENTED AT THE SPECIAL MEETING, THIS PROXY WILL BE VOTED
BY THOSE NAMED IN THIS PROXY AS DIRECTED BY THE BOARD OF DIRECTORS.
AT THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS OF NO OTHER
BUSINESS TO BE PRESENTED AT THE SPECIAL MEETING.
________________________________________________________________
<PAGE>
<PAGE>
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
Should the undersigned be present and elect to vote at the
Special Meeting or at any adjournment thereof and after
notification to the Secretary of the Company at the Special Meeting
of the undersigned's decision to terminate this proxy, then the
power of said attorneys and proxies shall be deemed terminated and
of no further force and effect. The undersigned hereby revokes any
and all proxies heretofore given.
The undersigned acknowledges receipt from the Company prior
to the execution of this proxy of Notice of the Special Meeting and
a Proxy Statement, and copies of the Company's 1997 Annual Report
to Stockholders and Form 10-QSB for the Quarter Ended September 30,
1997.
Date: _______________, 1998
_____________________________ _____________________________
PRINT NAME OF STOCKHOLDER PRINT NAME OF STOCKHOLDER
_____________________________ _____________________________
SIGNATURE OF STOCKHOLDER SIGNATURE OF STOCKHOLDER
Please sign exactly as your name appears on the enclosed card.
When signing as attorney, executor, administrator, trustee or
guardian, please give your full title. If shares are held jointly,
each holder should sign.
________________________________________________________________
PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY PROMPTLY IN THE
ENCLOSED POSTAGE-PREPAID ENVELOPE.
________________________________________________________________
