AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 23, 2004
REGISTRATION NO. 333- ______
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 6712 85-0453611
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
300 NORTH PENNSYLVANIA AVENUE
ROSWELL, NEW MEXICO 88201
(505) 622-6201
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
AUBREY L. DUNN, JR.
300 NORTH PENNSYLVANIA AVENUE
ROSWELL, NEW MEXICO 88201
(505) 622-6201
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Agent for Service)
Copies to:
GARY A. LAX, ESQ. RICHARD FISCH, ESQ.
KIP A. WEISMANN, ESQ. MALIZIA SPIDI & FISCH, PC
LUSE GORMAN POMERENK & SCHICK, P.C. 1100 NEW YORK AVENUE, NW,
5335 WISCONSIN AVENUE, N.W., SUITE 400 SUITE 340 WEST
WASHINGTON, D.C. 20015 WASHINGTON, D.C. 20005
PHONE: (202) 274-2000 PHONE: (202) 434-4660
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [X]
If the securities being registered on this Form are to be offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box: [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
========================================= ====================== ================ ==================== =====================
PROPOSED PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM AGGREGATE REGISTRATION FEE
SECURITIES TO BE REGISTERED REGISTERED OFFERING PRICE OFFERING PRICE
PER SHARE
- ----------------------------------------- ---------------------- ---------------- -------------------- ---------------------
Common Stock, $0.01 par value per share 685,464 shares (1) (2) $ 25,250,515 (2) $3,200
========================================= ====================== ================ ==================== =====================
(1) Represents the maximum number of shares of First Federal Banc of the
Southwest, Inc. common stock that may be issued in connection with the
proposed merger to which this Registration Statement relates.
(2) Pursuant to Rule 457(f), the registration fee was computed on the basis
of $20.25, the market value of the common stock of GFSB Bancorp, Inc. to
be exchanged or cancelled in the merger, computed in accordance with
Rule 457(c) on the basis of the average of the high and low price per
share of such common stock quoted on the Nasdaq SmallCap Market on
November 19, 2004, and 1,246,939 shares of common stock of GFSB Bancorp,
Inc. that may be received by the Registrant and/or cancelled upon
consummation of the merger.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION SHALL
THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES
ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH
DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
- ------------------- -------------------
First Federal Logo GFSB Logo
- ------------------- -------------------
JOINT PROXY STATEMENT/PROSPECTUS
MERGER PROPOSED - YOUR VOTE IS VERY IMPORTANT
The boards of directors of First Federal Banc of the Southwest, Inc. and
GFSB Bancorp, Inc. have approved an agreement to merge GFSB Bancorp, Inc., with
and into First Federal Banc of the Southwest, Inc. First Federal Banc of the
Southwest, Inc. is referred to herein as First Federal and GFSB Bancorp, Inc. is
referred to herein as GFSB. Following this proposed merger Gallup Federal
Savings Bank, a wholly owned subsidiary of GFSB, will merge with and into First
Federal Bank, a wholly owned subsidiary of First Federal.
GFSB stockholders will have the right to elect to receive in exchange
for each share of GFSB common stock they own, subject to adjustment or proration
under certain circumstances:
o $20.00 in cash; or
o 1.136 shares of First Federal common stock and cash in lieu of
fractional shares.
In addition, stockholders must also select to receive cash for some of
their shares and shares of First Federal common stock for others. However,
because First Federal and GFSB have agreed that 51% of the total number of
shares of GFSB common stock outstanding will be exchanged for First Federal
common stock, regardless of your election, you may receive a combination of cash
and shares of First Federal common stock for your GFSB shares different than you
elected depending upon the election made by other GFSB stockholders. The federal
income tax consequences of the merger to you will depend on whether you receive
cash, shares of First Federal common stock or a combination of cash and First
Federal common stock in exchange for your shares of GFSB common stock. First
Federal has applied to have its common stock listed on the Nasdaq SmallCap
Market under the trading symbol "__________."
We cannot complete the merger unless we obtain the necessary regulatory
approvals and unless the stockholders of both First Federal and GFSB approve the
merger agreement. First Federal will hold a special meeting of its stockholders
on _______, 2005 at _____ a.m., local time, at its main office located at 300
North Pennsylvania Avenue, Roswell, New Mexico and GFSB will hold a special
meeting of its stockholders on _______, 2005 at _____ __.m., local time, at its
loan center located at 214 West Aztec Avenue, Gallup, New Mexico to consider and
vote on this merger proposal.
Whether or not you plan to attend your company's special meeting, please
take the time to vote by completing and mailing the enclosed proxy card to us.
If you sign, date and mail your proxy card without indicating how you want to
vote, your proxy will be counted as a vote "FOR" the merger agreement and the
transactions contemplated by the merger agreement. If you do not return your
proxy card, abstain, or fail to instruct your broker how to vote any shares held
for you in "street name," it will have the same effect as a vote against the
merger.
This document serves two purposes. It is the proxy statement being used
by both the GFSB and First Federal board of directors to solicit proxies for use
at their special meetings. It is also the prospectus of First Federal regarding
the First Federal common stock to be issued to GFSB stockholders if the merger
is completed. This document also gives you detailed information about the
merger, the merger agreement, the procedures for electing to receive shares of
First Federal common stock or cash in the merger and the parties to the merger
and includes a copy of the merger agreement as Annex A. YOU SHOULD READ THIS
DOCUMENT AND ALL ATTACHMENTS CAREFULLY. BEFORE YOU MAKE A DECISION ON HOW TO
VOTE, YOU SHOULD CONSIDER THE "RISKS RELATED TO THE MERGER" BEGINNING ON PAGE
____ OF THIS DOCUMENT.
We are enthusiastic about the merger and the strength and capabilities
we expect from the combined company. We join each other's board of directors in
recommending that you vote in favor of the merger agreement and the related
transactions.
Aubrey L. Dunn, Jr. Richard C. Kauzlaric
- --------------------------------------- -------------------------------------
President and Chief Executive Officer President and Chief Executive Officer
First Federal Banc of the Southwest, Inc. GFSB Bancorp, Inc.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION, NOR ANY BANK REGULATORY
AGENCY, NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE
SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS DOCUMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE SECURITIES OFFERED
THROUGH THIS DOCUMENT ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF
A BANK OR SAVINGS ASSOCIATION AND ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS IS _______, 2005, AND
IT IS FIRST BEING MAILED TO FIRST FEDERAL AND GFSB STOCKHOLDERS ON OR ABOUT
_____, 2005.
REFERENCES TO ADDITIONAL INFORMATION
This document incorporates important business and financial information
about GFSB from documents filed with the Securities and Exchange Commission
("SEC") that have not been included in or delivered with this document. You may
read and copy these documents at the SEC's public reference facilities. Please
call the SEC at 1-800-SEC-0330 for information about these facilities. This
information is also available at the Internet site the SEC maintains at
HTTP://WWW.SEC.GOV. See "Where You Can Find More Information" on page ____.
GFSB will provide you with copies of these documents, without charge,
upon written or oral request to:
GFSB Bancorp, Inc.
221 West Aztec Avenue
Gallup, New Mexico 87301
Attention: Jerry R. Spurlin
Telephone: (505) 726-6500
In order to receive timely delivery of the documents in advance of the
special meeting of stockholders, you should make your request no later than
_____________, 2005.
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON ___________, 2005 AT ___ A.M.
AT FIRST FEDERAL BANK
300 NORTH PENNSYLVANIA AVENUE
ROSWELL, NEW MEXICO 88201
To the Stockholders of First Federal Banc of the Southwest, Inc.:
NOTICE IS HEREBY GIVEN that a special meeting of stockholders of First
Federal Banc of the Southwest, Inc. ("First Federal"), will be held at _______
a.m., local time, on _________, 2005 at First Federal Bank's main office located
at 300 North Pennsylvania Avenue, Roswell, New Mexico 88201 for the following
purposes:
o to consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Merger, dated as of August 25, 2004, by
and between First Federal and GFSB Bancorp, Inc., pursuant to
which GFSB Bancorp, Inc., will merge with and into First Federal
Banc of the Southwest, Inc., as more fully described in the
attached joint proxy statement/prospectus; and
o to transact such other business as may properly come before the
special meeting or any postponement or adjournment of the
special meeting. Management of First Federal is not aware of any
such other business.
As more fully explained in the joint proxy statement/prospectus that
accompanies this notice, only First Federal stockholders of record as of the
close of business on ____________, 2005, are entitled to notice of and to vote
at the First Federal special meeting or any adjournment or postponement of the
special meeting.
YOU ARE CORDIALLY INVITED TO ATTEND THIS SPECIAL MEETING OF
STOCKHOLDERS. WHETHER OR NOT YOU PLAN TO ATTEND THIS SPECIAL MEETING IN PERSON,
WE URGE YOU TO DATE, SIGN AND RETURN PROMPTLY THE ENCLOSED PROXY IN THE
ACCOMPANYING ENVELOPE. YOU MAY REVOKE YOUR PROXY PRIOR TO ITS EXERCISE IN THE
MANNER PROVIDED IN THE ACCOMPANYING JOINT PROXY STATEMENT/PROSPECTUS. IF YOUR
SHARES OF FIRST FEDERAL COMMON STOCK ARE HELD IN "STREET NAME" BY YOUR BROKER OR
OTHER NOMINEE, ONLY THAT HOLDER CAN VOTE YOUR SHARES. YOU SHOULD FOLLOW THE
DIRECTIONS PROVIDED BY YOUR BROKER OR NOMINEE REGARDING HOW TO INSTRUCT THEM TO
VOTE YOUR SHARES.
By Order of the Board of Directors
George A. Rosenbaum, Jr.
Secretary
Roswell, New Mexico
________________, 2005
GFSB BANCORP, INC.
NOTICE OF SPECIAL MEETING OF THE STOCKHOLDERS
TO BE HELD ON _______________, 2005
AT THE GALLUP FEDERAL SAVINGS BANK LOAN CENTER
214 WEST AZTEC AVENUE
GALLUP, NEW MEXICO 87301
To the Stockholders of GFSB Bancorp, Inc.:
NOTICE IS HEREBY GIVEN that a special meeting of the stockholders of
GFSB Bancorp, Inc. ("GFSB") will be held at ____ p.m., local time, on
___________ at its loan center located at 214 West Aztec Avenue, Gallup, New
Mexico 87301 for the following purposes:
o to consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Merger, dated as of August 25, 2004, by
and between First Federal Banc of the Southwest, Inc. ("First
Federal") and GFSB pursuant to which GFSB will merge with and
into First Federal and each shares of GFSB common stock (other
than shares the holders of which have perfected dissenters'
rights of appraisal) will be converted into the right to receive
either $20.00 in cash or shares of First Federal with an
approximate value of $20.00 or combination thereof as more fully
described in the attached joint proxy statement/prospectus; and
o to transact such other business as may properly come before the
special meeting or any postponement or adjournment of the annual
meeting. Management of GFSB, is not aware of any such other
business.
As more fully explained in the joint proxy statement/prospectus that
accompanies this notice, only holders of record of GFSB common stock as of the
close of business on ____________, 2005 are entitled to notice of and to vote at
the GFSB special meeting or any adjournment or postponements thereof.
YOU ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING OF STOCKHOLDERS.
WHETHER OR NOT YOU PLAN TO ATTEND THE GFSB SPECIAL MEETING IN PERSON, WE URGE
YOU TO DATE, SIGN AND RETURN PROMPTLY THE ENCLOSED PROXY IN THE ACCOMPANYING
ENVELOPE. YOU MAY REVOKE YOUR PROXY PRIOR TO ITS EXERCISE IN THE MANNER PROVIDED
IN THE ACCOMPANYING JOINT PROXY STATEMENT/PROSPECTUS. IF YOUR SHARES OF GFSB
COMMON STOCK ARE HELD IN "STREET NAME" BY YOUR BROKER OR OTHER NOMINEE, ONLY
THAT HOLDER CAN VOTE YOUR SHARES. YOU SHOULD FOLLOW THE DIRECTIONS PROVIDED BY
YOUR BROKER OR NOMINEE REGARDING HOW TO INSTRUCT THEM TO VOTE YOUR SHARES.
By Order of the Board of Directors
George S. Perce
Secretary
Gallup, New Mexico
_________________, 2005
TABLE OF CONTENTS
PAGE
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS......................................4
QUESTIONS AND ANSWERS ABOUT THE MERGER.........................................1
SUMMARY........................................................................4
General.....................................................................4
The Merger..................................................................6
The Merger Agreement.......................................................10
RISKS RELATED TO THE MERGER...................................................14
A WARNING ABOUT FORWARD-LOOKING STATEMENTS....................................16
COMPARATIVE PER SHARE DATA....................................................18
SELECTED HISTORICAL FINANCIAL INFORMATION.....................................19
Selected Historical Financial Information For First Federal................19
Selected Historical Financial Information For GFSB.........................21
THE FIRST FEDERAL SPECIAL MEETING.............................................24
General....................................................................24
Date, Place and Time of the Special Meeting................................24
Purpose of the Special Meeting.............................................24
Who Can Vote at the Special Meeting; Record Date...........................24
Attending the Special Meeting..............................................25
Quorum and Vote Required...................................................25
Shares Held by First Federal Officers and Directors and by GFSB............25
Voting by Proxy............................................................25
Revocability of Proxies....................................................26
Solicitation of Proxies....................................................26
THE GFSB SPECIAL MEETING......................................................26
General....................................................................26
Date, Place and Time of the Special Meeting................................27
Purpose of the Special Meeting.............................................27
Who Can Vote at the Special Meeting; Record Date...........................27
Attending the Special Meeting..............................................27
Quorum and Vote Required...................................................27
Shares Held by GFSB Officers and Directors and by First Federal............28
Voting by Proxy............................................................28
Revocability of Proxies....................................................28
Solicitation of Proxies....................................................29
Participants in Gallup Federal Savings Bank's Employee Stock
Ownership Plan..........................................................29
OWNERSHIP OF FIRST FEDERAL COMMON STOCK.......................................30
OWNERSHIP OF GFSB COMMON STOCK................................................32
THE MERGER....................................................................34
Parties to the Merger......................................................34
Form of the Merger.........................................................35
Merger Consideration; Cash or Stock Election...............................35
Election Procedures; Surrender of Stock Certificates.......................36
Treatment of GFSB Stock Options............................................38
Treatment of GFSB Stock Awards.............................................38
Background of the Merger...................................................39
Reasons for the Merger.....................................................41
Effects of the Merger......................................................44
Opinion of First Federal's Independent Financial Advisor...................45
Opinion of GFSB's Independent Financial Advisor............................52
Dissenters' Rights of Appraisal............................................60
i
Interests of Certain GFSB Directors and Officers in the Merger.............64
Nasdaq SmallCap Market Listing.............................................67
Material Federal Income Tax Consequences of the Merger.....................67
Tax Consequences to First Federal and its Stockholders.....................70
Accounting Treatment of the Merger.........................................70
Resales of First Federal Common Stock......................................70
Regulatory Approvals and Notices Required for the Merger...................71
Requirement for Stockholder Approval.......................................71
THE MERGER AGREEMENT..........................................................71
Terms of the Merger........................................................71
When Will the Merger be Completed..........................................72
Conditions to Completing the Merger........................................72
Conduct of Business Before the Merger......................................73
Covenants of GFSB and First Federal in the Merger Agreement................77
Terminating the Merger Agreement...........................................79
Termination Fee............................................................80
Expenses...................................................................81
Changing the Terms of the Merger Agreement.................................81
Bank Merger................................................................81
New Members of the Board of Directors......................................81
FIRST FEDERAL'S MANAGEMENTS' DISCUSSION AND ANALYSIS..........................81
Result of Operations.......................................................84
Market Area................................................................93
Lending Activities.........................................................94
Delinquent Loans, Other Real Estate Owned and Classified Assets...........102
Securities Activities.....................................................108
Sources of Funds..........................................................112
Activities of Subsidiaries and Affiliated Entities........................113
Competition...............................................................114
Employees.................................................................114
Properties................................................................114
Legal Proceedings.........................................................115
MANAGEMENT OF FIRST FEDERAL..................................................115
Position(s) Held With First Federal Banc of the Southwest, Inc............115
Transactions With Certain Related Persons.................................120
DESCRIPTION OF FIRST FEDERAL COMMON STOCK....................................120
General...................................................................120
Common Stock..............................................................120
Preferred Stock...........................................................121
MANAGEMENT FOLLOWING THE MERGER..............................................121
First Federal.............................................................121
Directors' Compensation...................................................122
Executive Officers Who Are Not Directors..................................122
PRO FORMA FINANCIAL INFORMATION..............................................123
First Federal and GFSB....................................................124
Unaudited Pro Forma Condensed Combined Consolidated Balance Sheet.........124
as of September 30, 2004..................................................124
First Federal and GFSB....................................................126
Unaudited Pro Forma Condensed Combined Consolidated Statement of Income...126
For the Twelve Months Ended September 30, 2004............................126
Notes to the Unaudited Pro Forma Condensed Combined.......................128
Consolidated Financial Statements.........................................128
COMPARISON OF RIGHTS OF STOCKHOLDERS.........................................131
RESTRICTIONS ON ACQUISITION OF FIRST FEDERAL.................................136
Business Combinations with Interested Stockholders........................136
Board of Directors........................................................137
ii
Stockholder Action by Written Consent; Special Meetings of Stockholders...137
Advance Notice Provisions for Stockholder Nominations and Proposals.......137
Preferred Stock...........................................................138
Amendment of Certificate of Incorporation.................................138
Delaware Corporate Law....................................................138
LEGAL MATTERS................................................................139
EXPERTS......................................................................139
WHERE YOU CAN FIND MORE INFORMATION..........................................139
STOCKHOLDER PROPOSALS........................................................141
ANNEXES
ANNEX A Agreement and Plan of Merger by and between First Federal Banc of the
Southwest, Inc. and GFSB Bancorp, Inc., dated August 25, 2004
ANNEX B Fairness Opinion of Hovde Financial, Inc.
ANNEX C Fairness Opinion of McDonald Investments, Inc.
ANNEX D Section 262 of the Delaware General Corporation Law
ANNEX E Annual Report on Form 10-KSB for the year ended June 30, 2004
(including all amendments), and Quarterly Report on Form 10-QSB for
the three months ended September 30, 2004 of GFSB Bancorp, Inc.
iii
QUESTIONS AND ANSWERS ABOUT THE MERGER
WHY ARE GFSB AND FIRST FEDERAL MERGING?
Our companies are proposing to merge because we believe that the merger
will benefit our stockholders, customers and employees. We believe the merger
will create a stronger financial services company that will be better positioned
to compete in the financial services industry in New Mexico through expanded
operations and market coverage.
WHAT AM I BEING ASKED TO VOTE ON AND HOW DOES MY BOARD OF DIRECTORS RECOMMEND
THAT I VOTE?
You are being asked to vote "FOR" the adoption of the Agreement and Plan
of Merger dated as of August 25, 2004 providing for the merger of GFSB with and
into First Federal. The First Federal and GFSB boards of directors have
determined that the proposed merger is in the best interests of the stockholders
of their respective companies, have approved the merger agreement and recommend
that their stockholders vote "FOR" the adoption of the merger agreement and the
related transactions.
WHAT VOTE IS REQUIRED TO ADOPT THE MERGER AGREEMENT?
The adoption of the merger agreement requires the affirmative vote of at
least a majority of the outstanding shares of common stock of each of First
Federal and GFSB.
WHAT WILL STOCKHOLDERS RECEIVE IN THE MERGER?
Under the merger agreement, stockholders of GFSB will have the
opportunity to elect to receive the form of consideration they receive for their
shares of GFSB common stock. As a result, each share of GFSB common stock you
own will be exchanged, at your election for either shares of First Federal
common stock or $20.00 in cash. In addition, GFSB stockholders may elect to
receive cash for some of their shares and shares of First Federal common stock
for others. Under the terms of the merger agreement, 1.136 shares of First
Federal common stock will be exchanged for each share of GFSB common stock.
Pursuant to the terms and conditions of the merger agreement, elections
will be limited by, among other things, a requirement that 51% of the total
number of outstanding shares of GFSB common stock will be exchanged for shares
of First Federal common stock. Therefore, the form of consideration you receive
will depend in part on the elections of other GFSB stockholders.
First Federal will not issue fractional shares in the merger. Instead,
GFSB stockholders will receive a cash payment, without interest, for the value
of any fraction of a share of First Federal common stock that they would
otherwise be entitled to receive.
The shares of First Federal common stock held by existing First Federal
stockholders will not change as a result of the merger.
HOW DO I ELECT TO RECEIVE CASH, FIRST FEDERAL COMMON STOCK OR A COMBINATION OF
BOTH FOR MY GFSB COMMON STOCK?
An election form will be sent to all GFSB stockholders separately on or
about the date this joint proxy statement/prospectus is mailed. For an election
to be effective, a properly completed election form, along with your GFSB stock
certificates or an appropriate guarantee of delivery, must be sent to and
received by Registrar and Transfer Company, the exchange agent, on or before
______ p.m., _______
1
time, on ____________, 2005. DO NOT SEND YOUR ELECTION FORM TOGETHER WITH YOUR
GFSB PROXY CARD. Instead, use the separate envelope specifically provided for
the election form and your GFSB stock certificates. If you do not make a timely
election you will be allocated First Federal common stock and/or cash depending
on the elections made by other GFSB stockholders and as determined by First
Federal.
WHAT RISKS SHOULD I CONSIDER BEFORE I VOTE ON THE MERGER AGREEMENT?
You should review "Risks Related to the Merger" on pages ____ through
____ of this document.
WHEN IS THE MERGER EXPECTED TO BE COMPLETED?
We are working to complete the merger during the first or second
calendar quarter of 2005. We must first obtain the necessary regulatory
approvals and the approvals of our respective stockholders at our respective
special meetings. We cannot assure you when or if all the conditions to the
merger will be met, and it is possible that we may not complete the merger.
HOW DO THE BOARD OF DIRECTORS OF GFSB AND FIRST FEDERAL PLAN TO VOTE?
All of the GFSB directors have signed an agreement with First Federal
committing that they will vote all of the shares of GFSB common stock they are
entitled to vote in favor of the merger agreement. In addition, all of the First
Federal directors have signed an agreement with GFSB committing that they will
vote all of the shares of First Federal common stock they are entitled to vote
in favor of the merger agreement.
DO I HAVE APPRAISAL RIGHTS?
Under Section 262 of the Delaware General Corporation Law, both First
Federal's and GFSB's stockholders have the right to obtain an appraisal of the
value of their shares of common stock in connection with the merger. However, in
order to perfect these appraisal rights, there are certain specific procedures
you must follow. These procedures are described more fully beginning on page
___.
We have included a copy of Section 262 of the Delaware General
Corporation Law as Annex D to this document.
I AM A GFSB STOCKHOLDER. HOW DO I EXCHANGE MY GFSB STOCK CERTIFICATES?
If you make an election, you must return your GFSB stock certificates or
an appropriate guarantee of delivery with your election form. Shortly after the
merger, the exchange agent will allocate cash and First Federal common stock
among GFSB stockholders, in accordance with the election allocation, election
and proration procedures in the merger agreement. If you do not submit an
election, form, you will receive instructions on how to surrender your GFSB
stock certificates from the exchange agent after the merger is completed. IN ANY
EVENT, YOU SHOULD NOT FORWARD YOUR GFSB STOCK CERTIFICATES WITH YOUR PROXY CARD.
WHAT DO I NEED TO DO NOW?
After you have read this document, please indicate on your proxy card
how you want to vote your shares. Sign and mail the proxy card in the enclosed
postage prepaid envelope as soon as possible, so that your shares will be
represented at the First Federal special meeting or the GFSB special meeting.
2
IF MY FIRST FEDERAL OR GFSB SHARES ARE HELD IN "STREET NAME" BY MY BROKER, BANK
OR NOMINEE, WILL MY BROKER, BANK OR NOMINEE AUTOMATICALLY VOTE MY SHARES FOR ME?
No. Your broker, bank or nominee cannot vote your shares of First
Federal or GFSB common stock unless you provide instructions on how to vote. You
should instruct your broker, bank or nominee how to vote your shares by
following the procedures your broker provides. If you do not provide
instructions to your broker, bank or nominee, your shares will not be voted, and
this will have the effect of voting against adoption of the merger agreement.
Please check the voting form used by your broker, bank or nominee to see if it
offers telephone or internet voting.
MAY I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
Yes. You may change your vote at any time before your proxy is voted at
the special meeting. You can do this in one of three ways. First, you can send a
written notice to the person whom you submitted your proxy stating that you
would like to revoke your proxy. Second, you can complete and submit a new proxy
card. If you choose either of these two methods you must submit your notice of
revocation or your new proxy card to your company before the special meeting. If
you are a First Federal stockholder, submit your notice of revocation or new
proxy card to First Federal, 300 North Pennsylvania Avenue, Roswell, New Mexico
88201, attention George A. Rosenbaum, Jr., Secretary. If you are a GFSB
stockholder, submit your notice of revocation or new proxy card to GFSB, 221
West Aztec Avenue, Gallup, New Mexico 87301, attention George S. Perce,
Secretary. Third, you may attend the special meeting and vote in person. Simply
attending the special meeting, however, will not revoke your proxy. You must
request a ballot and vote the ballot at the special meeting. If you have
instructed a broker to vote your shares, you must follow directions received
from your broker to change or revoke your vote. Your last vote will be the vote
that is counted.
WHO CAN HELP ANSWER YOUR QUESTIONS?
If you want additional copies of this document, or if you want to ask
any questions about the merger, you should contact:
For First Federal stockholders: For GFSB stockholders:
George A. Rosenbaum, Jr. Jerry R. Spurlin
First Federal Banc of the Southwest, Inc. GFSB Bancorp, Inc.
300 North Pennsylvania 221 West Aztec Avenue
Roswell, New Mexico 88201 Gallup, New Mexico 87301
Telephone: 505-622-6201 Telephone: 505-726-6500
Please also see "Where Can I Find More Information" on page ____ to find
out where you can find additional important information about First Federal and
GFSB.
3
- --------------------------------------------------------------------------------
SUMMARY
THIS SUMMARY HIGHLIGHTS CERTAIN INFORMATION REGARDING THE PROPOSED
MERGER AND STOCKHOLDER MEETINGS. THIS SUMMARY MAY NOT CONTAIN ALL OF THE
INFORMATION THAT IS IMPORTANT TO YOU. FOR A MORE COMPLETE UNDERSTANDING OF THE
MERGER AND FOR A MORE COMPLETE DESCRIPTION OF THE LEGAL TERMS OF THE MERGER, YOU
SHOULD READ THIS ENTIRE JOINT PROXY STATEMENT/PROSPECTUS CAREFULLY, AS WELL AS
THE ADDITIONAL DOCUMENTS WE REFER YOU TO, INCLUDING THE MERGER AGREEMENT, WHICH
WE HAVE ATTACHED AS ANNEX A. SEE ALSO "WHERE CAN I FIND MORE INFORMATION?" ON
PAGE ____. EACH ITEM IN THIS SUMMARY REFERS TO THE PAGE OF THIS DOCUMENT ON
WHICH THAT SUBJECT IS DISCUSSED IN GREATER DETAIL.
GENERAL
This joint proxy statement/prospectus relates to the proposed
acquisition of GFSB by First Federal through the merger of GFSB with and into
First Federal. Following GFSB's merger with First Federal, Gallup Federal
Savings Bank, a wholly owned subsidiary of GFSB, will merge with and into First
Federal Bank, a wholly owned subsidiary of First Federal. We expect to complete
the merger during the second quarter of 2005.
THE PARTIES (PAGE ___)
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
300 North Pennsylvania Avenue
Roswell, New Mexico 88201
Telephone: (505) 622-6201
First Federal is a Delaware corporation and registered savings and loan
holding company. First Federal's principal operating subsidiary is First Federal
Bank, a federally chartered savings bank. At September 30, 2004, First Federal
had, on a consolidated basis, approximately $348.1 million in total assets,
$254.4 million in total deposits, $251.7 million in net loans receivable and
stockholders' equity of $34.0 million.
Through First Federal Bank, First Federal serves clients through its
nine full services branches located in Bernalillo, Chaves, Dona Anna, Lincoln,
and Otero Counties, New Mexico and El Paso, Texas.
GFSB BANCORP, INC.
221 West Aztec Avenue
Gallup, New Mexico 87031
Telephone: (505) 757-6500
GFSB is a Delaware corporation and registered savings and loan holding
company. GFSB's principal operating subsidiary is Gallup Federal Savings Bank, a
federally chartered savings bank. At September 30, 2004, GFSB had, on a
consolidated basis, approximately $227.9 million in total assets, $136.4 million
in total deposits, $152.4 million in net loans receivable and stockholders'
equity of $18.9 million.
Through Gallup Federal Savings Bank, GFSB serves clients through its two
full service offices located in Gallup and Farmington, New Mexico.
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The Special Meetings (PAGE ___)
FIRST FEDERAL
First Federal will hold its special meeting of stockholders at the main
office of First Federal Bank located at 300 North Pennsylvania Avenue, Roswell,
New Mexico 88201, at __________ a.m. on ____________, 2005. At the special
meeting, First Federal stockholders will vote upon the proposal to approve and
adopt the merger agreement and the merger and any other matters that properly
come before the special meeting.
GFSB
GFSB will hold its special meeting of stockholders at the loan center of
Gallup Federal Savings Bank located at 214 West Aztec Avenue, Gallup, New Mexico
87301, at _____ __.m. on _____________, 2005. At the special meeting, holders of
GFSB common stock will vote upon the proposal to approve and adopt the merger
agreement and the merger and any other matters that properly come before the
special meeting.
RECORD DATES (PAGE ____)
FIRST FEDERAL
You are entitled to notice of and to vote at the First Federal special
meeting if you were the record owner of shares of First Federal common stock on
____________, 2005, the First Federal record date. As of that First Federal
record date, there were _____________ shares of First Federal common stock
issued and outstanding held by approximately _____ holders of record. Each
holder of First Federal common stock is entitled to one vote per share on any
matter that may properly come before the special meeting.
GFSB
You are entitled to notice of and to vote at the GFSB special meeting if
you were the record owner of shares of GFSB common stock on ____________, 2005,
the GFSB record date. As of the GFSB record date, there were ______________
shares of GFSB common stock issued and outstanding held by approximately ____
holders of record. Each holder of GFSB common stock is entitled to one vote per
share on any matter that may properly come before the special meeting.
VOTES REQUIRED (PAGE ____)
FIRST FEDERAL
Approval by the First Federal stockholders of the proposal to approve
and adopt the merger agreement requires the affirmative vote of a majority of
the outstanding shares of First Federal's common stock. See "The Merger -
Requirement for Stockholder Approval" on page ____.
GFSB
Approval by the GFSB stockholders of the proposal to approve and adopt
the merger agreement requires the affirmative vote of a majority of the
outstanding shares of GFSB common stock. See "The Merger - Requirement for
Stockholder Approval" on page ____.
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SHARE OWNERSHIP BY DIRECTORS AND OFFICERS (PAGES ____ THROUGH ____)
As of the First Federal record date, the directors and officers of First
Federal and their affiliates beneficially owned (exclusive of options) an
aggregate of __________ shares of First Federal common stock, or approximately
________ % of the shares of the First Federal common stock then outstanding.
Each director of First Federal executed a voting agreement with GFSB that
commits such director to vote the shares of First Federal common stock he or she
owns in favor of the proposal to approve and adopt the merger agreement.
As of the GFSB record date, the directors and officers of GFSB and their
affiliates beneficially owned (exclusive of options) an aggregate of ___________
shares of GFSB common stock, or approximately _____% of the shares of the GFSB
common stock then outstanding. Each director of GFSB executed a voting agreement
with First Federal that commits such director to vote the shares of GFSB common
stock he or she owns in favor of the proposal to approve and adopt the merger
agreement.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS (PAGE ____)
TO FIRST FEDERAL STOCKHOLDERS:
The First Federal board of directors has approved and adopted the merger
agreement, and recommends a vote "FOR" approval of the merger agreement and the
related transactions. You should refer to the reasons that the First Federal
board of directors considered in determining whether to approve the merger
agreement and related transactions, which are discussed on pages ____ through
_____.
TO GFSB STOCKHOLDERS:
The GFSB board of directors has approved and adopted the merger
agreement, and recommends a vote "FOR" approval of the merger agreement and the
related transactions. You should refer to the reasons that the GFSB board of
directors considered in determining whether to approve and adopt the merger
agreement and the related transactions, which are discussed on pages____
through____.
THE MERGER
EACH SHARE OF GFSB COMMON STOCK WILL BE EXCHANGED FOR EITHER SHARES OF FIRST
FEDERAL COMMON STOCK OR $20.00 IN CASH (PAGE____)
Upon the closing of the merger, each share of GFSB common stock (other
than shares the holders of which have perfected dissenters' rights of appraisal)
will automatically be converted into the right to receive either shares of First
Federal common stock or $20.00 in cash. You may elect either of these options
and may elect to receive cash for some shares of First Federal common stock for
others. The number of shares of First Federal common stock to be exchanged for
each share of GFSB common stock will be1.136.
The amount of cash and/or First Federal common stock that you receive
may be different from the amounts that you elect due to the allocation and
proration procedures described in the merger agreement. The merger agreement
provides that 51% of the outstanding GFSB common stock will be converted into
First Federal common stock and 49% of the GFSB common stock will be converted
into cash. Because the tax consequences of receiving cash will differ from the
tax consequences of receiving First Federal common stock, you should carefully
read the section of this document entitled "Material Federal Income Tax
Consequences of the Merger" beginning on page____.
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EACH SHARE OF FIRST FEDERAL COMMON STOCK IS VALUED AT 165% OF THE BOOK VALUE AT
SEPTEMBER 30, 2004 (PAGE ____)
The merger agreement provides that the value assigned to each share of
First Federal common stock is $17.60 which represents 165% of its book value as
of September 30, 2004, as determined in accordance with generally accepted
accounting principles, subject to certain adjustments. If you elect to exchange
some or all of your GFSB common stock for First Federal common stock, you should
be aware that there are no guarantees that the common stock of First Federal
will trade on the Nasdaq SmallCap market at a price equal to or exceeding
$17.60.
HOW TO ELECT TO RECEIVE CASH OR FIRST FEDERAL STOCK AND EXCHANGE YOUR GFSB STOCK
CERTIFICATES (PAGES___-____)
The exchange agent or, if your GFSB common stock is held in "street
name," your broker, bank or nominee, will mail you an election form on or about
the date this joint proxy statement/prospectus. The election form allows you to
elect to receive cash, First Federal common stock, or a combination of cash and
First Federal common stock or to elect no preference as to the type of
consideration you receive for your shares of GFSB common stock.
In order for your election to be effective, you must return your
properly completed election form, along with your GFSB stock certificates or an
appropriate guarantee of delivery to:
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
on or before 5:00 p.m., ___________ time, on ____________, 2005. Registrar and
Transfer Company will act as First Federal's exchange agent in the merger and
will process the exchange of GFSB stock certificates for either cash, First
Federal common stock or combination of both cash and shares of First Federal
common stock. Shortly after the merger, the exchange agent will allocate cash
and First Federal common stock among GFSB stockholders, in accordance with the
allocation, election and proration procedures in the merger agreement. If you do
not make a proper election, you will receive instructions on how to surrender
your GFSB stock certificates from the exchange agent after the merger is
completed. In any event, you should NOT forward your GFSB stock certificates
with your proxy cards.
If you have a preference for receiving either cash, First Federal common
stock or combination of both the First Federal common stock and cash for your
GFSB common stock, you should complete and return the election form. If you
elect no preference or do not make an election, you will be allocated First
Federal common stock and/or cash depending on the elections made by other GFSB
stockholders. Please remember, however, that even if you do make an election,
you might not receive the amount of cash and/or First Federal common stock that
you elect due to the requirement that 51% of the outstanding shares of GFSB
common stock be exchanged for First Federal common stock and the remaining 49%
will be exchanged for cash.
OPINION OF HOVDE FINANCIAL, LLC., FINANCIAL ADVISOR TO FIRST FEDERAL (PAGE ____)
Hovde Financial, LLC ("Hovde"), the independent financial advisor to
First Federal, rendered a written fairness opinion to the First Federal board of
directors, dated as of August 25, 2004 and updated to ____________, 2005,
stating that as of such dates, the proposed merger consideration to be paid to
the stockholders of GFSB is fair, from a financial point of view, to the
stockholders of First Federal. A copy of the updated fairness opinion, setting
forth the information reviewed, assumptions made and matters
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considered by Hovde is attached to this document as Annex B. First Federal
stockholders are encouraged to read the fairness opinion in its entirety.
OPINION OF MCDONALD INVESTMENTS, INC., FINANCIAL ADVISOR TO GFSB (PAGES____
THROUGH____)
McDonald Investments, Inc. ("McDonald"), the independent financial
advisor to GFSB, rendered a written fairness opinion to the GFSB board of
directors, dated as of August 25, 2004 and updated to ____________, 2005,
stating that as of such dates the merger consideration to be paid was fair, from
a financial point of view, to the GFSB stockholders. A copy of the updated
fairness opinion, setting forth the information reviewed, assumptions made and
matters considered by McDonald is attached to this document as Annex C. GFSB
stockholders should read the fairness opinion in its entirety.
INTERESTS OF CERTAIN PERSONS IN THE MERGER (PAGES____ THROUGH____) [SECTION TO
BE UPDATED]
Some of GFSB's directors and officers have interests in the merger that
are different from, or are in addition to, their interests as stockholders in
GFSB. The members of GFSB's board of directors knew about these additional
interests, and considered them, when they approved the merger agreement. The
interests of GFSB's directors and officers include:
o a severance payment to Richard P. Gallegos, the President of
Gallup Federal Savings Bank, in consideration of the termination
of his existing change in control severance agreement of
approximately $254,840, and a $35,000 payment under a Release
and Non-Compete Agreement that he entered into with First
Federal, GFSB and Gallup Federal Savings Bank;
o the vesting of unvested GFSB restricted stock and stock options
awards as a result of completion of the merger;
o First Federal's offer of two year employment contracts to
Leonard C. Scalzi, William W. Head, Jr., and Jerry R. Spurlin
and two year change in control agreements to Ginger R. Palmer
and Debra S. Fischer, effective only upon closing of the merger;
o the provisions in the merger agreement relating to the
indemnification of directors and officers and insurance for
directors and officers of GFSB for events occurring before the
merger; and
o the appointment of two directors of GFSB to the board of
directors of First Federal and First Federal Bank.
DIRECTORS AND OFFICERS OF FIRST FEDERAL AND FIRST FEDERAL BANK FOLLOWING THE
MERGERS (PAGE____)
Upon completion of the merger, the current directors and officers of
First Federal will remain directors and officers of First Federal. Upon
completion of the subsequent bank merger, the current directors and officers of
First Federal Bank will remain directors and officers of First Federal Bank.
The officers of Gallup Federal Savings Bank, other than Richard P.
Gallegos, will serve as officers of First Federal or First Federal Bank after
completion of the merger. In addition, Richard C. Kauzlaric and Michael P.
Mataya, who are current members of the board of directors of GFSB, will be
appointed to the board of directors of First Federal and First Federal Bank.
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MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER (PAGES____ THROUGH____)
If you are a GFSB stockholder, the tax consequences of the merger to you
will depend upon the form of consideration you receive in the merger.
If you receive only shares of First Federal common stock and cash in
lieu of a fractional share in exchange for your GFSB common stock, then you
generally will not recognize any gain or loss, except with respect to the cash
received in lieu of a fractional share. If you receive only cash, then you
generally will recognize gain and likely will be permitted to recognize loss
equal to the difference between the amount of cash you receive and your basis in
your GFSB common stock. The tax treatment of any gain will depend upon your
individual circumstances.
If you receive a combination of First Federal common stock and cash
other than cash in lieu of a fractional share in exchange for your GFSB common
stock, then you will generally recognize gain in an amount equal to the lesser
of the total amount of cash received or the amount of gain realized on the
exchange, but you are not permitted to recognize a loss. Any gain recognized may
be treated as a dividend or capital gain, depending on your particular
circumstances.
The merger will not be taxable at the corporate level and there will be
no tax consequences to First Federal stockholders.
THIS TAX TREATMENT MAY NOT APPLY TO ALL GFSB STOCKHOLDERS. DETERMINING
THE ACTUAL TAX CONSEQUENCES OF THE MERGER TO YOU CAN BE COMPLICATED. YOU SHOULD
CONSULT YOUR OWN TAX ADVISOR FOR A FULL UNDERSTANDING OF THE MERGER'S TAX
CONSEQUENCES THAT ARE PARTICULAR TO YOU.
MARKET PRICE INFORMATION (PAGE____)
First Federal has never traded on an established exchange or automated
quotation system. First Federal's common stock has no market makers and trades
infrequently. First Federal has applied to have its common stock, as of the date
the merger is completed, listed on the Nasdaq SmallCap Market under the symbol
"__________". As a part of such effort, First Federal must obtain at least three
market makers for its shares of common stock. However, there can be no assurance
as to whether First Federal will obtain the required number of market makers for
its shares of common stock, whether the common stock will be quoted on the
Nasdaq SmallCap Market, or whether an active and liquid market for First
Federal's common stock will develop. The most recent First Federal common stock
trade we are aware of prior to the announcement of the merger on August 25,
2004, at a price of $79.00 per share (which translates to $9.875 after giving
effect to the First Federal eight for one stock split which occurred in January
2005). The most recent First Federal common stock trade we are aware of prior to
the date of this document took place on _________ at a price of $______ per
share (after giving effect to the stock split).
Shares of GFSB common stock trade on the Nasdaq SmallCap Market under
the symbol "GUPB." The closing price for GFSB's common stock on August 24, 2004,
the last day on which shares of its common stock were traded before the public
announcement of the merger, was $21.00 per share. The closing price for GFSB's
common stock on __________, 2005, the last practicable trading date before the
date of this document was $_____ per share.
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ACCOUNTING TREATMENT (PAGE____)
The merger will be accounted for under the purchase method of
accounting. Under this method of accounting, First Federal will record the fair
market value of GFSB's assets and liabilities on its financial statements. The
difference between the purchase price paid by First Federal and the fair market
value of GFSB's tangible and identifiable intangible assets net of its
liabilities will be recorded on First Federal's books as "goodwill."
REGULATORY APPROVALS (PAGE____)
First Federal and First Federal Bank must make certain filings with or
obtain approvals from the Office of Thrift Supervision, which we refer to as the
OTS, in connection with the transactions contemplated by the merger agreement.
We cannot predict whether or when we will obtain this required regulatory
clearance or whether any such clearance would have adverse conditions that would
permit First Federal to not consummate the merger.
APPRAISAL RIGHTS (PAGE____)
Both First Federal's and GFSB's stockholders have appraisal rights in
connection with the merger. Under Delaware law, GFSB stockholders who do not
wish to accept the merger consideration and First Federal stockholders who wish
to perfect such appraisal rights can dissent from the transaction and have the
fair value of their shares judicially determined and paid in cash. However, in
order to perfect such rights, you must not vote for the adoption of the merger
agreement and must follow specific procedures. You should carefully read "The
Merger-Appraisal Rights" and Section 262 of the Delaware Law which is attached
as Annex D to this proxy statement.
DIFFERENCES IN THE RIGHTS OF STOCKHOLDERS (PAGE____)
Both First Federal and GFSB are Delaware corporations. GFSB stockholders
who receive First Federal common stock in the merger will become First Federal
stockholders, and their rights will continue to be governed by Delaware law as
well as by First Federal's certificate of incorporation and bylaws. However,
there are several differences between the rights of GFSB's stockholders and
those of First Federal stockholders.
THE MERGER AGREEMENT
THERE ARE CONDITIONS THAT MUST BE SATISFIED OR WAIVED FOR THE MERGER TO OCCUR
(PAGE____)
Before we can complete the merger, each of the following conditions,
among others, must either be met or, unless prohibited by law, waived by the
party who was not obligated to meet such condition:
o First Federal and GFSB stockholders each must approve the merger
agreement by the affirmative vote of a majority of the issued
and outstanding shares of First Federal and GFSB;
o there must not be any outstanding decrees, injunctions, orders
or pending proceedings by a governmental authority that would
enjoin or prohibit the merger;
o First Federal and GFSB and their respective subsidiaries must
have received all necessary authorizations, orders and consents
of governmental authorities for the merger, without the
imposition of any condition that is reasonably likely to have an
adverse effect, and any required waiting periods must have
expired;
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o the Securities and Exchange Commission must declare effective
the registration statement relating to the shares of First
Federal common stock to be issued to GFSB stockholders in the
merger, of which this joint proxy statement/prospectus is a part
and all required state "blue sky" approvals shall have been
obtained;
o First Federal must have used its best efforts to obtain approval
from the Nasdaq SmallCap Market to list the shares of First
Federal common stock that will be issued in the merger;
o all representations and warranties made by both First Federal
and GFSB in the merger agreement must remain true and correct,
except for certain inaccuracies that would not have, or would
not reasonably be expected to have, a material adverse effect;
o First Federal and GFSB must have performed their respective
obligations under the merger agreement in all material respects;
o the parties must have received all required consents;
o the parties must have received an opinion of counsel to the
effect that the merger qualifies as a tax-free reorganization
under United States federal income tax laws;
o First Federal Bank and Gallup Federal Savings Bank must have
capital levels, immediately prior to the effective time of the
merger, at least equal to their capital levels reported as of
December 31, 2003, less certain transaction-related expenses;
o There shall have been no violation of certain employment and
other agreements entered into between certain officers of GFSB
and Gallup Federal Savings Bank and First Federal; and
o First Federal shall have deposited with the exchange agent
sufficient cash to pay the aggregate cash consideration to be
paid and irrevocably instructed its transfer agent to issue a
sufficient number of its shares.
We cannot be certain when or if the conditions to the merger will be
satisfied or waived, or that the merger will be completed.
TERMINATION OF THE MERGER AGREEMENT (PAGE____)
Either GFSB or First Federal may terminate the merger under certain
circumstances prior to closing or before or after the requisite stockholder
approvals, including the following:
o by mutual written consent by First Federal and GFSB;
o by either party if GFSB cannot obtain the requisite stockholder
approval, subject to certain limitations;
o by either party if a required regulatory approval is denied or a
governmental authority prohibiting the merger;
o by either party if the merger is not completed by June 30, 2005;
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o by the non-breaching party if the other party makes a
misrepresentation, breaches a warranty or fails to satisfy or
fulfill a covenant that would have a material adverse effect on
the party seeking to terminate the merger agreement;
o First Federal may also terminate the merger agreement if (i) the
GFSB stockholders fail to approve the merger agreement or the
stockholders' meeting is not held and (ii) GFSB's board of
directors withdraws or revises its recommendation to its
stockholders to approve the merger agreement in an adverse way
to First Federal; First Federal may also terminate the merger
agreement if any person or group acquires 25% or more of the
voting power of GFSB;
o GFSB may terminate the merger agreement prior to its stockholder
meeting under certain circumstances in order to accept a
superior proposal if, following notice to First Federal, First
Federal does not make an offer that is as favorable as the
superior proposal; or
o First Federal may terminate the merger agreement if GFSB becomes
entitled to terminate the merger agreement in order to accept a
superior proposal under certain circumstances.
TERMINATION FEES (PAGE____)
GFSB must pay First Federal a termination fee of $800,000 if the First
Federal terminates the merger agreement due to: (i) the GFSB stockholders
failing to approve the merger agreement after the GFSB board failed to recommend
approval of the merger agreement, or withdrew, modified or qualified its
recommendation in an adverse way, or (ii) GFSB having entered into an agreement
with a third party.
GFSB also must pay First Federal a termination fee of $800,000 if within
12 months after the merger agreement is terminated, GFSB consummates or enters
into any agreement with respect to an acquisition proposal where the merger
agreement was terminated under either of the following circumstances:
o First Federal terminates the merger agreement as a result of a
breach of the merger agreement by GFSB, and an acquisition
proposal from a third party had been publicly announced,
disclosed or communicated or made known to GFSB prior to the
date of termination; or
o the merger agreement is terminated due to the failure of GFSB's
stockholders to approve the merger, and an acquisition proposal
from a third party had been publicly announced, disclosed or
communicated or made known to GFSB prior to the date of the GFSB
stockholders' meeting.
Under no circumstances will GFSB be required to pay more than $800,000
in the aggregate under the termination fee provisions.
PAYMENT OF EXPENSES (PAGE____)
First Federal and GFSB will pay their own fees, costs and expenses
incurred in connection with the merger, except that expenses incurred in the
printing and mailing of this joint proxy statement/prospectus will be shared
equally by both parties.
COMPLETION OF THE MERGER (PAGE____)
The merger will become effective when we file a certificate of merger
with the Delaware Secretary of State. The bank merger will become effective at
the time and date specified in the Articles of Combination endorsed by the OTS.
It is anticipated that the merger will be completed in the second quarter of
2005.
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AGREEMENT NOT TO SOLICIT OTHER PROPOSALS (PAGE____)
GFSB has agreed not to initiate, solicit, encourage, facilitate, or
discuss any acquisition proposal with a third party. Despite the agreement of
GFSB not to solicit other acquisition proposals, the board of directors of GFSB
may generally negotiate, have discussions with, or provide certain information
to a third party who makes an unsolicited, written, bona fide acquisition
proposal, provided that the GFSB board of directors, in good faith deems such
action to be necessary for the proper discharge of its duties to GFSB
stockholders.
AMENDMENT; WAIVER (PAGE____)
The merger agreement may be amended by the parties at any time before
the closing of the merger. However, once GFSB stockholders approve the merger
agreement, First Federal and GFSB may not reduce or change the consideration to
be received by GFSB stockholders in the merger. In addition, each party can
waive in writing their rights to require the other party to adhere to the terms
and conditions of the merger agreement, where applicable law allows.
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RISKS RELATED TO THE MERGER
IN ADDITION TO THE OTHER INFORMATION INCLUDED IN OR INCORPORATED BY
REFERENCE INTO THIS JOINT PROXY STATEMENT/PROSPECTUS, INCLUDING THE MATTERS
ADDRESSED UNDER THE CAPTION "A WARNING ABOUT FORWARD-LOOKING INFORMATION"
BEGINNING ON PAGE____, YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS
IN DETERMINING WHETHER TO VOTE FOR THE MERGER AGREEMENT.
IF YOU ARE A GFSB STOCKHOLDER, YOU MAY NOT RECEIVE THE FORM OF MERGER
CONSIDERATION THAT YOU ELECT.
The merger agreement contains allocation and proration provisions that
are designed to ensure that 51% of the outstanding shares of common stock of
GFSB will be exchanged for shares of First Federal common stock and the
remaining 49% of the outstanding shares of common stock of GFSB will be
exchanged for cash. If you elect to receive all cash and the available cash is
oversubscribed, then you will receive a portion of the merger consideration in
shares of First Federal common stock. If you elect to receive all First Federal
common stock and the available First Federal common stock is oversubscribed,
then you will receive a portion of the merger consideration in cash. The type of
consideration you receive may also be affected by the requirement that the value
of the stock portion of the merger consideration must be equal to at least 45%
of the aggregate merger consideration.
If you receive a different form of consideration than you elected, the
tax consequences to you may be different than they would have been had you
received the form of consideration you elected (including the possible
recognition of taxable gain to the extent cash is received.) See "The
Merger--Material Federal Income Tax Consequences of the Merger" on page ___.
BECAUSE THE VALUE OF FIRST FEDERAL COMMON STOCK HAS BEEN NEGOTIATED IN THE
MERGER AGREEMENT, YOU CANNOT BE SURE OF THE MARKET VALUE OF THE FIRST FEDERAL
COMMON STOCK THAT YOU WILL RECEIVE IN THE MERGER.
Upon the closing of the merger, each share of GFSB common stock will
automatically be converted into the right to receive either shares of First
Federal common stock or $20.00 in cash based on your election preference. The
number of shares of First Federal common stock to be exchanged for each share of
GFSB common stock will be 1.136 (after giving effect to the stock split).
Pursuant to the terms of the merger agreement, First Federal's common stock is
valued at $17.60 which represents 165% of its book value, as determined in
accordance with generally accepted accounting principles, as of September 30,
2004. Changes in the value of First Federal common stock that you will receive
on the date of the merger may occur once the stock begins to trade on the Nasdaq
SmallCap market and may result from a variety of factors, including general
market and economic conditions, changes in First Federal's businesses,
operations and prospects, and regulatory considerations. Many of these factors
are beyond First Federal's control.
THE PRICE OF FIRST FEDERAL COMMON STOCK MIGHT DECREASE AFTER THE MERGER.
Following the merger, many holders of GFSB common stock will become
stockholders of First Federal. Such persons should be aware First Federal common
stock could decline in value after the merger or have a value of less than 165%
of First Federal's book value at September 30, 2004. In particular, because
First Federal's common stock has never been publicly traded, there can be no
assurance as to the range within which it will trade. The market value of First
Federal common stock is
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expected to fluctuate based upon general market economic conditions, First
Federal's business and prospects and other factors.
THE TAX CONSEQUENCES OF THE MERGER FOR GFSB STOCKHOLDERS WILL BE DEPENDENT ON
THE MERGER CONSIDERATION RECEIVED.
The tax consequences of the merger to GFSB stockholders will be
dependent on the merger consideration received by GFSB stockholders. GFSB
stockholders generally will not recognize any gain or loss on the exchange of
shares of GFSB common stock solely for shares of First Federal common stock;
however, GFSB stockholders generally will be taxed to the extent you receive
cash in exchange for your shares of GFSB common stock or instead of any
fractional share of First Federal common stock that such stockholders would
otherwise be entitled to receive. For detailed discussion of the tax
consequences of the merger, see "The Merger -- Material Federal Income Tax
Consequences of the Merger."
DIRECTORS AND OFFICERS OF GFSB HAVE POTENTIAL INTERESTS IN THE MERGER BESIDES
THOSE OF A GFSB STOCKHOLDER.
GFSB's executive officers negotiated the merger agreement with First
Federal, and the board of directors approved the merger agreement and is
recommending that GFSB stockholders vote for the merger agreement. In
considering these facts and the other information contained in this joint proxy
statement/prospectus, you should be aware that GFSB's executive officers and
directors have various interests in the merger besides being GFSB stockholders.
See "Interests of Certain GFSB Directors and Officers in the Merger."
THERE ARE UNCERTAINTIES IN INTEGRATING THE BUSINESS OPERATIONS OF GFSB WITH
FIRST FEDERAL AND IN REALIZING ENHANCED EARNINGS FOR THE COMBINED COMPANY.
The merger and the bank merger involve the integration of companies that
have previously operated independently. Successful integration of GFSB's
consolidated operations will depend primarily on First Federal's ability to
consolidate operations, systems and procedures and to eliminate redundancies and
costs. No assurance can be given that First Federal and GFSB will be able to
integrate their operations without encountering difficulties, including, without
limitation, the loss of key employees and customers, the disruption of their
respective ongoing businesses or possible inconsistencies in standards,
controls, procedures and policies.
The combined company's results may be affected if:
o the combination of the businesses of First Federal and GFSB
takes longer, or is more difficult, time-consuming or costly to
accomplish than expected;
o the expected growth opportunities and cost savings from the
merger are not fully realized or take longer to realize than
expected;
o economic conditions deteriorate in the Roswell or Gallup, New
Mexico, the primary market areas of First Federal and GFSB,
respectively; or
o operating costs, customer losses and business disruption
following the merger, including adverse effects on relationships
with employees, are greater than expected.
15
If any of these risks were to occur, the business, operations and/or
earnings of the combined company could be negatively affected.
UPON COMPLETION OF THE MERGER, THE CURRENT STOCKHOLDERS OF FIRST FEDERAL WILL
HAVE THEIR OWNERSHIP INTERESTS DILUTED.
The issuance of the shares of First Federal common stock in the merger
will dilute the ownership of the current First Federal stockholders. In the
merger, First Federal proposes to issue up to 685,464 shares of First Federal
common stock, which after issuance will represent approximately 17.8% of the
issued and outstanding shares of First Federal common stock (excluding any stock
options).
A WARNING ABOUT FORWARD-LOOKING STATEMENTS
First Federal and GFSB each have made forward-looking statements in this
document, and in certain documents that we refer to in this document, that are
subject to risks and uncertainties. These statements are based on the beliefs
and assumptions of each respective company's management, and on information
currently available to them. Forward-looking statements include the information
concerning possible or assumed future results of operations of First Federal
and/or GFSB are often preceded by, followed by, or include the words "will,"
"believes," "expects," "anticipates," "intends," "plans," "estimates" or similar
expressions.
Among other things, First Federal and GFSB each have made statements in
this document regarding statements of the benefit of the merger, including
future financial and operating results, cost savings, enhancements, revenues,
accretions and reported earnings that may be realized from the merger,
statements about First Federal's and GFSB's plans, objections, expectations, and
intentions and other statements that are not historical facts. With respect to
estimated cost savings, First Federal has made certain assumptions regarding,
among other things, the extent of operational overlap between First Federal and
GFSB, the amount of general and administrative expense consolidation, costs
relating to converting GFSB's bank operations and data processing to First
Federal's systems and the costs related to the merger. The realization of cost
savings is subject to the risk that the foregoing assumptions are not accurate.
Moreover, any statements in this document regarding the anticipated
effect of the merger and our anticipated performance in future periods are
subject to risks relating to, among other things, the following:
o the businesses of First Federal and GFSB may not be combined
successfully, or the combination may take longer or be more
difficult, time consuming or costly to accomplish than expected;
o the expected growth opportunities and cost savings from the
merger may not be fully realized or may take longer to realize
than expected;
o operating costs, customer losses and business disruption
following the merger, including adverse effects on relationships
with employees, may be greater than expected;
o the merger may not be consummated because of, among other
things, a failure to obtain required stockholder or governmental
approvals, or adverse regulatory conditions imposed in
connection with governmental approvals of the merger;
16
o adverse governmental or regulatory policies may be enacted;
o the interest rate environment may change, so as to compress
margins and adversely affect net interest income;
o First Federal or GFSB may experience adverse changes to credit
quality; and
o First Federal or GFSB may experience increased competition from
other financial services companies in their market areas.
Management of First Federal and GFSB believe these forward-looking
statements are reasonable; however, you should not place undue reliance on such
forward-looking statements, which are based on current expectations.
Forward-looking statements are not guarantees of future performance.
They involve risks, uncertainties and assumptions. The future results and
stockholder values of First Federal following completion of the merger may
differ materially from those expressed in these forward-looking statements. Many
of the factors that will determine these results and values are beyond First
Federal's and GFSB's ability to control or predict. For those statements, First
Federal and GFSB claim the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995.
17
COMPARATIVE PER SHARE DATA
The following table sets forth information about certain historical, pro
forma and pro forma equivalent per share financial information. In presenting
the comparative pro forma information for certain time periods, we assumed that
the merger had been effective throughout those periods and made certain other
assumptions. See "Pro Forma Financial Information" on page ___.
We present this information to reflect the fact that some GFSB
stockholders will receive shares of First Federal common stock for each share of
GFSB common stock exchanged in the merger. We also anticipate that the combined
company will derive financial benefits from the merger that include reduced
operating expenses and the opportunity to earn more revenue. The pro forma
information, while helpful in illustrating the financial characteristics of the
new company under one set of assumptions, does not reflect these benefits and,
accordingly, does not attempt to predict or suggest future results. The pro
forma information also does not necessarily reflect what the historical results
of the combined company would have been had our companies been combined during
these periods.
The information in the following table is based on, and should be read
together with, the historical financial information that we have presented in
this document. See "Pro Forma Financial Information."
FIRST FEDERAL GFSB PRO FORMA PER EQUIVALENT
HISTORICAL(1) HISTORICAL COMBINED GFSB SHARE(4)
------------- ---------- -------- -------------
(unaudited)
BOOK VALUE PER COMMON SHARE:
As of September 30, 2004 $ 10.67 $ 16.48 $_____(2) $_____
CASH DIVIDENDS DECLARED PER COMMON
SHARE:
For the Year ended September 30, 2004 $ 0.1874 $ 0.485 $_____(3) $_____
DILUTED NET INCOME PER COMMON SHARE:
Year ended September 30, 2004 $ 0.96 $ 1.26 $_____ $_____
- ------------------------------
(1) First Federal per share data has been adjusted to reflect an eight for
one stock split.
(2) The pro forma combined book value per share of First Federal common
stock is based upon the pro forma combined common stockholders' equity
for First Federal and GFSB divided by total pro forma common shares of
the combined entity.
(3) Pro forma dividends per share represent First Federal's historical
dividends per share.
(4) The per equivalent GFSB share amounts are computed by multiplying the
pro forma combined amounts by a factor of 1.136 to reflect the exchange
ratio in the merger.
18
SELECTED HISTORICAL FINANCIAL INFORMATION
The following tables show summarized historical financial data for First
Federal and GFSB. You should read this summary financial information in
connection with First Federal's and GFSB's historical financial information.
The audited financial statements of First Federal are included herein.
The audited financial statements of GFSB are included in GFSB's Annual Report on
Form 10-KSB (and any amendments) and the unaudited financial statements of GFSB
for the three months ended September 30, 2004 and 2003 are included in GFSB's
Quarterly Report on Form 10-QSB, both of which are included in Annex E.
Unaudited financial statements for First Federal and GFSB include
normal, recurring adjustments necessary to fairly present the data for those
periods. The unaudited data for periods of less than one year are not
necessarily indicative of expected results for a full year's operation.
SELECTED HISTORICAL FINANCIAL INFORMATION FOR FIRST FEDERAL
AT SEPTEMBER 30,
-------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
SELECTED FINANCIAL CONDITION DATA:
Total assets....................... $348,055,325 $359,184,512 $325,361,381 $289,218,873 $257,454,750
Loans receivable, net.............. 251,662,258 250,893,814 251,387,806 227,574,766 211,994,209
Loans held-for-sale................ 1,776,667 4,043,369 3,466,259 1,032,292 846,751
Investment securities.............. 41,167,030 49,726,259 24,050,086 22,135,154 28,428,828
Interest-earning deposits.......... 27,944,363 33,397,851 26,722,112 20,441,362 599,425
Deposits........................... 254,393,577 263,440,711 255,762,658 238,566,675 212,093,127
Borrowings......................... 57,329,399 61,508,851 37,655,292 20,760,239 18,805,833
Stockholders' equity............... 33,992,385 31,953,375 30,007,872 27,601,264 24,353,386
YEARS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
SELECTED OPERATING DATA:
Interest income.................... $18,771,567 $20,829,432 $21,016,426 $22,543,552 $21,202,083
Interest expense................... 5,680,538 6,504,500 7,225,473 10,869,364 10,426,447
----------- ----------- ----------- ----------- -----------
Net interest income............. 13,091,029 14,324,932 13,790,953 11,674,188 10,775,636
Provision for loan losses.......... (198,130) 90,980 357,574 213,386 509,797
----------- ----------- ----------- ----------- -----------
Net interest income after
provision for loan losses..... 13,289,159 14,233,952 13,433,379 11,460,802 10,265,839
Other income....................... 1,937,683 2,431,892 1,488,927 1,113,822 857,039
Other expense ..................... 10,258,644 10,873,477 9,776,474 8,394,581 7,923,892
----------- ----------- ----------- ----------- -----------
Income before income tax expense... 4,968,198 5,792,367 5,145,833 4,180,043 3,198,986
Income tax expense................. 1,911,147 2,221,869 2,004,323 1,669,168 1,225,848
----------- ----------- ----------- ----------- -----------
Net income...................... $ 3,057,051 $ 3,570,498 $ 3,141,510 $ 2,510,875 $ 1,973,138
=========== =========== =========== =========== ===========
19
AT OR FOR THE YEARS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------- ------------- ------------- ------------- -------------
SELECTED FINANCIAL RATIOS AND
OTHER DATA:
PERFORMANCE RATIOS:
Return on assets (ratio of net
income to average total assets).... 0.9% 1.0% 1.0% 0.9% 0.6%
Return on equity (ratio of net
income to average equity).......... 9.4% 11.5% 10.3% 8.5% 6.4%
Average interest rate spread (1) ..... 3.6% 3.4% 4.0% 4.1% 3.9%
Net interest margin (2)............... 4.0% 4.3% 4.7% 4.4% 3.1%
Efficiency ratio (3).................. 67.4% 65.2% 65.5% 66.8% 71.2%
Non-interest expense to average
total assets ...................... 2.9% 3.1% 3.2% 3.0% 2.3%
Average interest-earning assets to
average interest-bearing
liabilities........................ 115.0% 114.0% 113.0% 112.0% 114.0%
ASSET QUALITY RATIOS:
Non-performing assets to total
assets............................. 0.1% 0.3% 0.4% 0.4% 0.5%
Non-performing loans to total loans... 0.2% 0.4% 0.3% 0.3% 0.4%
Allowance for loan losses to
non-performing loans............... 455.1% 269.4% 279.5% 291.2% 216.5%
Allowance for loan losses to total
loans.............................. 0.9% 1.0% 1.0% 1.0% 0.9%
Allowance for loan losses to gross
loans.............................. 0.9% 1.0% 1.0% 1.0% 0.8%
CAPITAL RATIOS:
Equity to total assets at end of
period............................. 9.8% 8.9% 9.2% 9.5% 9.5%
Average equity to average assets...... 9.1% 9.0% 10.0% 10.6% 9.0%
Risk-based capital ratio (bank
only).............................. 14.8% 13.4% 14.2% 14.8% 14.9%
OTHER DATA:
Number of full service offices........ 10 10 10 9 7
- -------------------------------
(1) The average interest rate spread represents the difference between the
weighted-average yield on interest-earning assets and the
weighted-average cost of interest-bearing liabilities for the period.
(2) The net interest margin represents net interest income as a percent of
average interest-earning assets for the period.
(3) The efficiency ratio represents non-interest expense divided by the sum
of net interest income and non-interest income.
20
SELECTED HISTORICAL FINANCIAL INFORMATION FOR GFSB
AT OR FOR THE THREE
MONTHS ENDED
SEPTEMBER 30, AT OR FOR THE YEARS ENDED JUNE 30,
------------------- ----------------------------------------------------
2004 2003 2004 2003 2002 2001 2000
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
FINANCIAL CONDITION DATA:
Total Assets $227,928 $241,742 $232,087 $229,955 $206,145 $197,053 $176,786
Investment securities available-for-sale 29,780 33,396 30,519 29,279 23,973 21,804 25,439
Investment securities held-to-maturity 399 676 399 676 1,405 1,946 1,681
Mortgage-backed securities available for
sale 28,707 33,823 30,680 89,517 27,290 32,377 28,931
Mortgage-backed securities held-to-maturity -- -- -- -- -- -- --
Loans receivable, net, substantially pledged 152,388 157,456 152,842 146,396 139,748 130,431 109,777
Deposits 136,401 137,116 133,860 129,759 110,349 106,660 79,948
FHLB advances 65,897 77,973 73,652 76,642 76,386 72,106 82,935
Total equity, substantially restricted 18,901 17,817 16,132 17,744 16,383 14,979 12,686
OPERATING DATA:
Interest income $ 2,976 $ 3,007 $ 12,115 $ 12,743 $ 13,504 $ 14,437 $ 11,989
Interest expense 1,226 1,459 5,469 6,162 7,475 9,033 7,116
Net Interest income 1,750 1,548 6,646 5,581 6,029 5,404 4,871
Provision for loan losses -- 60 969 452 220 345 205
Net interest income after provision for
loan losses 1,750 1,488 5,677 6,129 5,809 5,059 4,886
Noninterest income 255 197 867 523 390 418 250
Noninterest expense 1,294 1,117 4,630 4,371 3,740 3,060 2,699
Income before income taxes 711 588 1,913 2,382 2,459 2,417 2,217
Income taxes 237 241 563 692 848 757 657
Net income 474 327 1,350 1,690 1,611 1,860 1,560
PER SHARE DATA:
Basic income per share $ 0.42 $ 0.29 $ 1.20 $ 1.52 $ 1.46 $ 1.50 $ 1.36
Diluted income per share 0.40 0.28 1.14 1.46 1.41 1.48 1.34
Dividends per share 0.13 0.11 0.49 0.43 0.39 0.34 0.30
PERFORMANCE RATIOS:
Return on average assets(1) 0.83% 0.55% 0.57% 0.76% 0.80% 0.88% 0.96%
Return on average equity(2) 10.19% 7.43% 7.48% 9.83% 10.19% 11.90% 12.58%
Net interest margin(3) 3.66% 2.75% 2.93% 3.19% 3.11% 2.98% 3.10%
Operating (noninterest) expense to average
total assets 2.26% 1.89% 1.95% 2.03% 1.86% 1.63% 1.66%
Efficiency ratio(4) 64.54% 64.01% 61.63% 60.67% 58.25% 52.56% 52.70%
Dividend payout ratio(5) 29.75% 37.93% 40.42% 28.29% 26.71% 22.67% 22.35%
ASSET QUALITY RATIOS:
Nonperforming loans to net loans(6) 0.61% 2.81% 0.88% 1.59% 0.74% 0.47% 0.86%
Allowance for loan losses to non-performing
loans 173.81% 33.92% 126.87% 60.25% 92.66% 135.47% 71.21%
Allowance for loan losses to gross loans 1.06% 0.94% 1.11% 0.94% 0.70% 0.53% 0.46%
- -------------------------------
(1) Net income divided by average total assets.
(2) Net income divided by average total equity.
(3) Net Interest income as a percentage of average interest-saving assets.
(4) Non Interest expense divided by the sum of net interest income and
noninterest income.
(5) Dividends paid divided by net income per basic share.
(6) Nonperforming loans consist of loan accounted for on a nonaccrual basis
and loans greater than 90 days delinquent.
21
SUMMARY SELECTED PRO FORMA COMBINED DATA
The following table shows information regarding First Federal financial
condition and operations, including per share data, after giving effect to the
merger. This information is called pro forma information in this joint proxy
statement/prospectus. The table sets forth selected financial information on a
pro forma combined basis as if the merger had become effective on September 30
2004, with respect to balance sheet information, and at the beginning of each
period presented, with respect to income statement information. The pro forma
information reflects the purchase method of accounting.
We anticipate that the merger will provide the combined company with
financial benefits that include reduced operating expenses and opportunity to
earn more revenue. The pro forma information, while helpful in illustrating the
financial characteristics of the combined company under one set of assumptions,
does not reflect these benefits and, accordingly, does not attempt to predict or
suggest future results. It also does not necessarily reflect what the historical
results of the combined company would have been had our companies been combined
during these periods.
You should read this summary pro forma information in conjunction with
the information under " " and with the historical information included in or
incorporated by reference in this document on which it is based.
TWELVE MONTHS
ENDED
SEPTEMBER 30,
2004
----------------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
PRO FORMA COMBINED INCOME STATEMENT DATA:
Interest income $30,510
Interest expense 9,216
Net interest income 21,294
Provision for loan losses (711)
Net interest income after provision for loan losses 20,583
Non-interest income 2,863
Non-interest expense 15,354
Net income 5,259
PRO FORMA PER SHARE DATA:
Basic net income $1.36
Diluted net income $1.35
PRO FORMA COMBINED BALANCE SHEET DATA(1):
Total assets $584,740
Loans receivable, net 408,741
Deposits 391,199
Total stockholders' equity 46,055
- -------------------------------
(1) Per share data has been adjusted to reflect an eight for one stock
split.
22
MARKET PRICE AND DIVIDEND INFORMATION
First Federal common stock is not listed or quoted on any exchange or
automated quotation system. First Federal has applied to be listed and traded on
the Nasdaq SmallCap Market under the symbol "__________." GFSB common stock is
listed on the Nasdaq SmallCap Market under the symbol "GUPB."
The following table lists the high and low closing prices per share for
First Federal common stock to the knowledge of First Federal based on actual
trades of stock. First Federal wishes to advise investors that it does not have
pricing information on all trades in its stock and there can be no assurances
that there were not other trades above or below the prices indicated. The table
also lists high and low bid prices for GFSB common stock as reported on the
Nasdaq SmallCap Market, as well as the cash dividends paid by First Federal and
GFSB for the periods indicated.
FIRST FEDERAL
COMMON STOCK(1) GFSB COMMON STOCK
----------------------------------------------------------------------------
HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS
----------------------------------------------------------------------------
2004
Quarter ended September 30, 2004 $12.06 $10.50 $0.125 $25.25 $19.65 $0.125
Quarter ended June 30, 2004 (2) (2) -- 23.18 21.00 0.125
Quarter ended March 31, 2004 (2) (2) 0.063 23.75 21.06 0.125
2003
Quarter ended December 31, 2003 9.87 9.87 -- 21.34 16.75 0.125
Quarter ended September 30, 2003 9.81 9.81 0.175 17.00 16.03 0.11
Quarter ended June 30, 2003 (2) (2) -- 17.63 15.94 0.11
Quarter ended March 31, 2003 (2) (2) 0.113 17.55 14.32 0.11
2002
Quarter ended December 31, 2002 (2) (2) -- 15.00 12.65 0.11
Quarter ended September 30, 2002 9.37 9.37 0.125 15.00 14.00 0.10
Quarter ended June 30, 2002 9.44 9.44 -- 15.00 13.90 0.10
Quarter ended March 31, 2002 (2) (2) 0.094 14.99 13.70 0.10
- ----------------
(1) The per share and dividend data of First Federal have been adjusted to
reflect an eight for one stock split.
(2) No stock trade data was available for the period indicated.
You should obtain current market quotations for GFSB common stock as the
market price of these securities will fluctuate between the date of this
document and the date on which the merger is completed, and thereafter. You can
get these quotations from a newspaper, on the Internet or by calling your
broker.
As of __________, 2005, there were approximately ___ holders of record
of First Federal common stock. As of ____________, 2005, there were
approximately ___ holders of record of GFSB
23
common stock. These numbers do not reflect the number of persons or entities who
may hold their stock in nominee or "street" name through brokerage firms.
Applicable law limits the ability of Gallup Federal Savings Bank and
First Federal Bank to pay dividends to their holding companies. The merger
agreement restricts cash dividends payable on GFSB common stock pending
consummation of the merger. Also, the boards of directors anticipate
coordinating the dividend record and payment dates for the common stock of the
two companies with the intention that GFSB's stockholders do not receive two
dividends, or fail to receive one dividend, for any single quarter with respect
to their shares of GFSB stock or shares of First Federal received in exchange
for GFSB Stock. See "The Merger Agreement--Conduct of Business Before the
Merger."
Following the merger, the declaration of dividends will be at the
discretion of First Federal's board of directors and will be determined after
consideration of various factors, including earnings, cash requirements, the
financial condition of First Federal, applicable state law and government
regulations and other factors deemed relevant by First Federal's board of
directors.
THE FIRST FEDERAL SPECIAL MEETING
GENERAL
This joint proxy statement/prospectus is being furnished to First
Federal stockholders in connection with the solicitation of proxies by the First
Federal board of directors to approve and adopt the merger agreement and the
related transactions.
DATE, PLACE AND TIME OF THE SPECIAL MEETING
The special meeting of stockholders of First Federal will be held at the
main office of First Federal Bank located at 300 North Pennsylvania Avenue,
Roswell, New Mexico 88201 on ______________, 2005 at ______ a.m., local time.
PURPOSE OF THE SPECIAL MEETING
The purpose of the special meeting is to consider and vote on a proposal
to approve and adopt the merger agreement and to act on any other matters
brought before the special meeting.
WHO CAN VOTE AT THE SPECIAL MEETING; RECORD DATE
You are entitled to vote your First Federal common stock at the special
meeting if the records of First Federal showed that you held your shares of
First Federal common stock as of the close of business on ___________, 2005. As
of the close of business on that date, a total of_________ shares of First
Federal common stock were outstanding. Each share of First Federal common stock
has one vote.
24
ATTENDING THE SPECIAL MEETING
If you are a beneficial owner of First Federal common stock held by a
broker, bank or other nominee (i.e., in "street name"), you will need proof of
ownership to be admitted to the special meeting. A recent brokerage statement or
letter from a bank or broker are examples of proof of ownership. If you want to
vote your shares of First Federal common stock held in street name in person at
the special meeting, you will have to obtain a written proxy in your name from
the broker, bank or other nominee who holds your shares of First Federal common
stock.
QUORUM AND VOTE REQUIRED
QUORUM. The special meeting will be held if one-third of the outstanding
shares of common stock of First Federal entitled to vote is represented in
person or by proxy at the special meeting. If you return valid proxy
instructions or attend the special meeting in person, your shares will be
counted for purposes of determining whether there is a quorum, even if you
abstain from voting. Broker non-votes also will be counted for purposes for
determining the existence of a quorum. A broker non-vote occurs when a broker,
bank or other nominee holding shares for a beneficial owner does not vote on a
particular proposal because the nominee does not have discretionary voting power
with respect to that item and has not received voting instructions from the
beneficial owner. Under applicable rules, brokers, banks and other nominees may
not exercise their voting discretion on the proposal to approve and adopt the
merger agreement and, for this reason, may not vote shares held for beneficial
owners without specific instructions from the beneficial owners.
VOTE REQUIRED. Approval and adoption of the merger agreement requires
the affirmative vote of the holders of at least a majority of the outstanding
shares of First Federal common stock entitled to vote at the special meeting.
FAILURE TO RETURN A PROPERLY EXECUTED PROXY CARD OR TO VOTE IN PERSON AT THE
SPECIAL MEETING WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE MERGER
AGREEMENT. Abstentions and broker non-votes will have the same effect as a vote
against the merger agreement.
SHARES HELD BY FIRST FEDERAL OFFICERS AND DIRECTORS AND BY GFSB
As of ____________, 2005, directors and executive officers of First
Federal beneficially owned ____________ shares of First Federal common stock,
not including shares that may be acquired upon the exercise of stock options.
This equals _____% of the outstanding shares of the First Federal common stock
outstanding as of such date. As of the same date, neither GFSB nor, any of its
directors and executive officers beneficially owned any shares of First Federal
common stock. All of First Federal directors entered into voting agreements with
GFSB to vote all shares of First Federal common stock owned by them in favor of
the proposal to approve the merger agreement.
VOTING BY PROXY
The board of directors of First Federal is sending you this document for
the purpose of requesting that you allow your shares of First Federal common
stock to be represented at the special meeting by the persons named in the
enclosed proxy card. You should complete and return the proxy card accompanying
this document in order to ensure that your vote is counted at the special
meeting, or any adjournment or postponement of the special meeting, regardless
of whether you attend the special meeting. If you sign and return a proxy card
without giving voting instructions, your shares will be voted "FOR" approval of
the merger agreement.
25
If any matters not described in this document are properly presented at
the special meeting, the persons named in the proxy card will use their own
judgment to determine how to vote your shares of First Federal common stock.
This includes a motion to adjourn or postpone the special meeting in order to
solicit additional proxies. However, no proxy voted against the proposal to
approve the merger agreement will be voted in favor of an adjournment or
postponement to solicit additional votes in favor of the merger agreement. First
Federal does not know of any other matters to be presented at the special
meeting.
First Federal stockholders should NOT send their stock certificates with
their proxy cards. If the merger is completed, First Federal stockholders will
not need to exchange their current stock certificates.
If your First Federal common stock is held in street name, you will
receive instructions from your broker, bank or other nominee that you must
follow in order to have your shares voted. Your broker or bank may allow you to
deliver your voting instructions via the telephone or the Internet. Please see
the instruction form that accompanies this document.
REVOCABILITY OF PROXIES
You may revoke your proxy at any time before the vote is taken at the
special meeting. To revoke your proxy you must either advise the Corporate
Secretary of First Federal in writing before your common stock has been voted at
the special meeting, deliver a properly executed proxy bearing a later date, or
attend the meeting and vote your shares of First Federal common stock in person.
Attendance at the special meeting without voting will not in itself constitute
revocation of your proxy.
Written notices of revocation and other communications regarding the
revocation of your proxy should be addressed to:
First Federal Banc of the Southwest, Inc.
300 North Pennsylvania Avenue
Roswell, New Mexico 88201
Attention: George A. Rosenbaum, Jr., Secretary
SOLICITATION OF PROXIES
First Federal will pay the cost of this proxy solicitation. In addition
to soliciting proxies by mail, directors, officers and employees of First
Federal may solicit proxies personally and by telephone. None of these persons
will receive additional or special compensation for soliciting proxies. First
Federal will, upon request, reimburse brokers, banks and other nominees for
their expenses in sending proxy materials to their customers who are beneficial
owners and obtaining their voting instructions.
THE GFSB SPECIAL MEETING
GENERAL
This joint proxy statement/prospectus is being furnished to GFSB
stockholders in connection with the solicitation of proxies by the GFSB board of
directors to approve and adopt the merger agreement and the merger.
26
DATE, PLACE AND TIME OF THE SPECIAL MEETING
The special meeting of stockholders of GFSB will be held at the loan
center of Gallup Federal Savings Bank located at 214 West Aztec Avenue, Gallup,
New Mexico 87301 on ______, 2005, at ____, local time.
PURPOSE OF THE SPECIAL MEETING
The purpose of the special meeting is to consider and vote on a proposal
to approve and adopt the merger agreement and to act on any other matters
brought before the special meeting.
WHO CAN VOTE AT THE SPECIAL MEETING; RECORD DATE
You are entitled to vote your GFSB common stock if you were a
stockholder of record as of the close of business on _________, 2005. As of the
close of business on that date, a total of ________ shares of GFSB common stock
were outstanding. Each share of GFSB common stock has one vote.
ATTENDING THE SPECIAL MEETING
If you are a beneficial owner of GFSB common stock held by a broker,
bank or other nominee (i.e., in "street name"), you will need proof of ownership
to be admitted to the special meeting. A recent brokerage statement or letter
from a bank or broker are examples of proof of ownership. If you want to vote
your shares of GFSB common stock held in street name in person at the special
meeting, you will have to obtain a written proxy in your name from the broker,
bank or other nominee who holds your shares of GFSB common stock.
QUORUM AND VOTE REQUIRED
QUORUM. The special meeting will be held if a majority of the
outstanding shares of common stock of GFSB entitled to vote is represented in
person or by proxy at the special meeting. If you return valid proxy
instructions or attend the special meeting in person, your shares will be
counted for purposes of determining whether there is a quorum, even if you
abstain from voting. Broker non-votes also will be counted for purposes for
determining the existence of a quorum. A broker non-vote occurs when a broker,
bank or other nominee holding shares for a beneficial owner does not vote on a
particular proposal because the nominee does not have discretionary voting power
with respect to that item and has not received voting instructions from the
beneficial owner. Under applicable rules, brokers, banks and other nominees may
not exercise their voting discretion on the proposal to approve and adopt the
merger agreement and, for this reason, may not vote shares held for beneficial
owners without specific instructions from the beneficial owners.
VOTE REQUIRED. Approval and adoption of the merger agreement requires
the affirmative vote of the holders of at least a majority of the outstanding
shares of GFSB common stock entitled to vote at the special meeting. FAILURE TO
RETURN A PROPERLY EXECUTED PROXY CARD OR TO VOTE IN PERSON AT THE SPECIAL
MEETING WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE MERGER AGREEMENT.
Abstentions and broker non-votes will have the same effect as a vote against the
merger agreement.
27
SHARES HELD BY GFSB OFFICERS AND DIRECTORS AND BY FIRST FEDERAL
As of ___________, 2005, directors and executive officers of GFSB
beneficially owned 464,839 shares of GFSB common stock, not including shares
that may be acquired upon the exercise of stock options. This equals 40.5% of
the outstanding shares of GFSB common stock as of such date. As of the same
date, neither First Federal nor any of its directors and executive officers
beneficially owned any shares of GFSB common stock. All the GFSB directors
entered into voting agreements with First Federal to vote all shares of GFSB
common stock owned by them in favor of the proposal to approve the merger
agreement.
VOTING BY PROXY
The board of directors of GFSB is sending this document to its
stockholders for the purpose of requesting that you allow your shares of GFSB
common stock to be represented at the special meeting by the persons named in
the enclosed proxy card. You should complete and return the proxy card
accompanying this document in order to ensure that your vote is counted at the
special meeting, or any adjournment or postponement of the special meeting,
regardless of whether you attend the special meeting. If you sign and return a
proxy card without giving voting instructions, your shares will be voted "FOR"
approval of the merger agreement.
If any matters not described in this document are properly presented at
the special meeting, the persons named in the proxy card will use their own
judgment to determine how to vote your shares of GFSB common stock. This
includes a motion to adjourn or postpone the special meeting in order to solicit
additional proxies. However, no proxy voted against the proposal to approve the
merger agreement will be voted in favor of an adjournment or postponement to
solicit additional votes in favor of the merger agreement. GFSB does not know of
any other matters to be presented at the special meeting.
If your GFSB common stock is held in street name, you will receive
instructions from your broker, bank or other nominee that you must follow in
order to have your shares of GFSB common stock voted. Your broker or bank may
allow you to deliver your voting instructions via the telephone or the Internet.
Please see the instruction form that accompanies this document.
GFSB STOCKHOLDERS SHOULD NOT SEND STOCK CERTIFICATES WITH THEIR PROXY
CARDS. GFSB STOCKHOLDERS WILL BE SENT ELECTION FORMS AND INSTRUCTIONS, AT WHICH
TIME THEY WILL BE REQUESTED TO SUBMIT THEIR STOCK CERTIFICATES. IF THE MERGER IS
COMPLETED, GFSB STOCKHOLDERS WHO DID NOT MAKE A TIMELY OR PROPER ELECTION WILL
BE MAILED A LETTER OF TRANSMITTAL PROMPTLY FOLLOWING THE COMPLETION OF THE
MERGER WITH INSTRUCTIONS ON HOW TO EXCHANGE THEIR GFSB STOCK CERTIFICATES FOR
THE MERGER CONSIDERATION.
REVOCABILITY OF PROXIES
You may revoke your proxy at any time before the vote is taken at the
special meeting. To revoke your proxy you must either advise the Secretary of
GFSB in writing before your common stock has been voted at the special meeting,
deliver a properly executed proxy bearing a later date, or attend the special
meeting and vote your shares of GFSB common stock in person. Attendance at the
special meeting will not in itself constitute revocation of your proxy.
28
Written notices of revocation and other communications regarding the
revocation of your proxy should be addressed to:
GFSB Bancorp, Inc.
221 West Aztec Avenue
Gallup, New Mexico 87301
Attention: George S. Perce, Secretary
SOLICITATION OF PROXIES
GFSB will pay the cost of this proxy solicitation. In addition to
soliciting proxies by mail, directors, officers and employees of GFSB may
solicit proxies personally and by telephone. None of these persons will receive
additional or special compensation for soliciting proxies. GFSB will, upon
request, reimburse brokers, banks and other nominees for their expenses in
sending proxy materials to their customers who are beneficial owners and
obtaining their voting instructions.
PARTICIPANTS IN GALLUP FEDERAL SAVINGS BANK'S EMPLOYEE STOCK OWNERSHIP PLAN
If you participate in the Gallup Federal Savings Bank Employee Stock
Ownership Plan, you will receive a voting instruction form that reflects all
shares of GFSB common stock you may vote under the plan. Under the terms of the
employee stock ownership plan, all shares of GFSB common stock held in the
employee stock ownership plan are voted by the employee stock ownership plan
trustees, but each participant in the employee stock ownership plan may direct
the trustees how to vote the shares of GFSB common stock allocated to his or her
employee stock ownership plan account. Unallocated shares of GFSB common stock
held by the employee stock ownership plan trust and allocated shares for which
no timely voting instructions are received will be voted by the trustees as
directed by the ESOP Plan Committee, subject to the exercise of their fiduciary
duties. The deadline for returning your voting instructions to the trustees is
_____________, 2005.
29
OWNERSHIP OF FIRST FEDERAL COMMON STOCK
The following table provides certain information as of _____________,
2005 with respect to persons known to First Federal to be the beneficial owners
of more than 5% of First Federal's outstanding common stock. For purposes of the
table below, a person is deemed to be the beneficial owner of any shares of
common stock over which the person has or shares, directly or indirectly, voting
or investment power or of which person has the right to acquire beneficial
ownership at any time within 60 days after _______, 2005.
NUMBER OF PERCENT OF
NAME SHARES COMMON STOCK
AND ADDRESS OWNED(1) OUTSTANDING
---------------------- -------------- --------------
Kay McMillan 893,224 27.91%
300 North Pennsylvania
Roswell, New Mexico 88201
Edward K. David
300 North Pennsylvania
Roswell, New Mexico 88201 307,752 9.63%
Marc Reischman
300 North Pennsylvania
Roswell, New Mexico 88201 216,984 6.78%
-------------------------------
(1) Share data has been adjusted to reflect an eight for one stock
split.
30
The following table provides information about the shares of First
Federal common stock beneficially owned by each director and executive officer,
and by all directors and executive officers of First Federal as a group as of
_____________, 2005.
NUMBER OF SHARES THAT MAY
NUMBER OF BE ACQUIRED WITHIN 60 PERCENT OF COMMON
NAME SHARES OWNED(1) DAYS BY EXERCISING OPTIONS STOCK OUTSTANDING
- ------------------------------------------ ------------------- --------------------------- ---------------------
Edward K. David 299,352 8,400 9.63%
Kay McMillan 880,824 12,400 27.91
Marc Reischman 203,384 13,600 6.78
Aubrey L. Dunn, Jr. 90,960 22,000 3.52
Arturo Jurado 73,560 3,200 2.41
Russell Weems 11,360 13,600 0.78
James E. Paul, Jr. 1,200 12,400 0.42
Michael A. McMillan 33,968 6,000 1.25
Larry Sheffield 56,336 10,800 2.10
George A. Rosenbaum, Jr. -- 8,800 0.28
All directors and executive officers as
a group (10 persons) 1,580,944 111,200 55.08%
(1) Amount includes shares held directly as well as shares held jointly with
family members, shares held in retirement accounts, shares held in a
fiduciary capacity and shares held by certain family members with
respect to which shares the persons listed above may be deemed to have
sole or shared voting and/or dispositive power. The amount reported
above does not include shares awarded as stock options that do not vest
within 60 days of ____________, 2005. The amount reported also has been
adjusted to reflect an eight for one stock split.
31
OWNERSHIP OF GFSB COMMON STOCK
The following table provides certain information as of _____________,
2005 with respect to persons known to GFSB to be the beneficial owner of more
than 5% of GFSB's outstanding common stock. For purposes of the table below, a
person is deemed to be the beneficial owner of any shares of GFSB common stock
over which the person has, or shares, directly or indirectly, voting or
investment power or of which person has the right to acquire beneficial
ownership at any time within 60 days after _______, 2005.
PERCENT OF
NAME NUMBER OF COMMON STOCK
AND ADDRESS SHARES OWNED OUTSTANDING
--------------------- -------------- -------------
Gallup Federal Savings Bank Employee Stock 96,043 8.5%
Ownership Plan
221 West Aztec Avenue
Gallup, New Mexico 87301
Lance S. Gad
1250 Fence Raw Drive 82,126 7.2%
Fairfield, Connecticut 06430
Charles L. Parker, Jr.
221 West Aztec Avenue 87,313 7.6%
Gallup, New Mexico 87301
Richard C. Kauzlaric
221 West Aztec Avenue 129,476 11.3%
Gallup, New Mexico 87301
George S. Perce
221 West Aztec Avenue 87,333 7.6%
Gallup, New Mexico 87301
32
The following table provides information about the shares of GFSB common
stock beneficially owned by each director and executive officer, and by all
directors and executive officers of GFSB as a group as of _________, 2005.
NUMBER OF SHARES THAT
MAY BE ACQUIRED WITHIN PERCENT
NUMBER OF 60 DAYS BY EXERCISING OF GFSB COMMON
NAME SHARES OWNED(1) OPTIONS STOCK OUTSTANDING
- ------------------------------------------ ------------------- ------------------------- --------------------
Michael P. Mataya 29,789 8,926 2.6%
Charles L. Parker, Jr. 87,312 9,264 7.6
George S. Perce 87,332 9,288 7.6
Richard C. Kauzlaric 129,475 10,180 11.2
Vernon I. Hamilton 55,906 9,095 4.8
James Nechero, Jr. 56,819 9,456 4.9
Richard P. Gallegos 26,497 12,500 2.3
Jerry R. Spurlin 38,669 -- 3.4
Leonard C. Scalzi 14,278 8,750 1.2
All directors and executive officers as 551,204 86,365 44.7%
a group (9 persons)
- -------------------------------
(1) Amount includes shares held directly as well as shares held jointly with
family members, shares held in retirement accounts, shares allocated to
the names individuals' ESOP accounts, shares held in a fiduciary
capacity and shares held by certain family members with respect to which
shares the persons listed above may be deemed to have sole or shared
voting and/or dispositive power.
33
THE MERGER
THE DETAILED TERMS OF THE MERGER ARE CONTAINED IN THE MERGER AGREEMENT
ATTACHED AS ANNEX A TO THIS JOINT PROXY STATEMENT/PROSPECTUS. THE FOLLOWING
DISCUSSION AND THE DISCUSSION UNDER "THE MERGER AGREEMENT" DESCRIBE CERTAIN
ASPECTS OF THE MERGER AND TERMS OF THE MERGER AGREEMENT. THESE DESCRIPTIONS ARE
QUALIFIED BY REFERENCE TO SUCH MERGER AGREEMENT WHICH IS INCORPORATED BY
REFERENCE HEREIN. WE ENCOURAGE YOU TO READ THE MERGER AGREEMENT CAREFULLY.
PARTIES TO THE MERGER
GFSB. GFSB was organized as a Delaware business corporation in 1995 to
be the savings and loan holding company for Gallup Federal Savings Bank in
connection with the conversion of Gallup Federal Savings Bank from mutual to
stock form of organization. The conversion was completed on June 29, 1995. As a
savings and loan holding company, GFSB is subject to regulation by the Office of
Thrift Supervision. Since its formation, GFSB's primary activity has been to
direct and coordinate the business of Gallup Federal Savings Bank.
Gallup Federal Savings Bank is a federally chartered savings bank
located in Gallup, New Mexico. Gallup Federal Savings Bank is regulated by the
Office of Thrift Supervision and its deposits are insured by the Federal Deposit
Insurance Corporation. Gallup Federal Savings Bank conducts business in Gallup
and Farmington, New Mexico. Gallup Federal Savings Bank is primarily engaged in
attracting deposits from the general public and using these funds to originate
loans secured by one- to four-family residential loans and commercial real
estate loans. To a lesser extent, Gallup Federal Savings Bank also originates
construction loans, commercial business loans, consumer, and multi-family loans.
For information on GFSB's business and financial statements and a
discussion of GFSB's recent results of operations, see its Quarterly Report on
Form 10-QSB for the quarter ended September 30, 2004 and its Annual Report on
Form 10-KSB for the year ended June 30, 2004, all of which are attached as Annex
E.
FIRST FEDERAL. First Federal was organized as a Delaware business
corporation in 1998 to be the holding company for First Federal Bank. As a
savings and loan holding company, First Federal is subject to regulation by the
Office of Thrift Supervision. Since its formation, First Federal's principal
activity has been to direct and coordinate the business of First Federal Bank.
First Federal Bank is a federally chartered savings bank headquartered
in Roswell, New Mexico. First Federal is regulated by the Office of Thrift
Supervision and its deposits are insured by the Federal Deposit Insurance
Corporation. First Federal Bank conducts business from its main office in
Roswell, New Mexico and 10 branch offices located in Bernalillo, Chaves, Dona
Anna, Lincoln and Otero Counties, New Mexico and El Paso, Texas. First Federal
Bank's business involves attracting deposits from the general public and using
such deposits, together with other funds, to originate primarily commercial real
estate, one- to four-family residential mortgages, and to a lesser extent
multi-family and construction loans primarily in its market area. First Federal
Bank also invests in mortgage-backed and related securities, taxable and
tax-exempt investment securities and other permissible investments.
The financial statements of First Federal and a discussion of First
Federal's recent results of operations are included elsewhere in the document .
34
FORM OF THE MERGER
The GFSB and the First Federal boards of directors each have unanimously
approved a merger agreement that provides for the merger of GFSB with and into
First Federal as the surviving corporation. First Federal has applied to have
its common stock listed on the Nasdaq SmallCap Market under the symbol
"__________" after completion of the merger.
MERGER CONSIDERATION; CASH OR STOCK ELECTION
If the merger becomes effective, each share of GFSB common stock issued
and outstanding immediately prior to the completion of the merger (other than
shares the holders of which have perfected dissenters' rights of appraisal) will
automatically be converted into the right to receive, at the holder's election
and subject to certain restrictions:
o $20.00 in cash (without interest); or
o shares of First Federal common stock and cash in lieu of
fractional shares.
No fractional shares of First Federal common stock will be issued in
connection with the merger. Instead GFSB stockholders will receive, without
interest, a cash payment from First Federal equal to the fractional share
interest they otherwise would have received, multiplied by the value of First
Federal common stock. For this purpose, First Federal common stock will be
valued at $17.60, which represents 165% of its book value calculated in
accordance with generally accepted accounting principles as of September 30,
2004, subject to certain adjustments.
Under the terms of the merger agreement, GFSB stockholders may elect to
exchange their shares for cash, shares of First Federal common stock or may
elect to receive cash for some shares and shares of First Federal common stock
for others. All elections of GFSB stockholders are further subject to the
allocation and proration provisions described in the merger agreement. These
provisions are designed to ensure that 51% of the total number of shares of GFSB
common stock issued and outstanding on the date of the merger will be converted
into the right to receive shares of First Federal common stock and the remaining
outstanding shares of GFSB common stock will be converted to cash. In addition,
the merger agreement provides that total value of the stock portion of the
merger consideration must be equal to at least 45% of the merger consideration.
We are not making any recommendation as to whether GFSB stockholders should
elect to receive cash or First Federal common stock in the merger. Each holder
of GFSB common stock must make his or her own decision with respect to such
election.
It is unlikely that elections will be made in the exact proportions
provided for in the merger agreement. As a result, the merger agreement
describes procedures to be followed if GFSB stockholders in the aggregate elect
to receive more or less of the First Federal common stock than First Federal has
agreed to issue. These procedures are summarized below.
o IF FIRST FEDERAL COMMON STOCK IS OVERSUBSCRIBED: If GFSB
stockholders elect to receive more First Federal common stock
than First Federal has agreed to issue in the merger, then all
GFSB stockholders who have elected to receive cash, or who have
made no election, will receive cash for their GFSB shares and
all stockholders who elected to receive First Federal common
stock will receive a pro rata portion of the available First
35
Federal common stock plus cash for those shares not converted
into First Federal common stock.
o IF FIRST FEDERAL COMMON STOCK IS UNDERSUBSCRIBED: If GFSB
stockholders elect to receive fewer shares of First Federal
common stock than First Federal has agreed to issue in the
merger, then all GFSB stockholders who have elected to receive
First Federal common stock will receive First Federal common
stock and those stockholders who elected to receive cash, or who
have made no election, will be treated in the following manner:
o If the number of shares held by GFSB stockholders who
have made no election is sufficient to make up the
shortfall in the number of First Federal shares that
First Federal is required to issue, then all GFSB
stockholders who elected cash will receive cash, and
those stockholders who made no election, will receive
both cash and shares of First Federal common stock in
whatever proportion is necessary to make up the
shortfall; or
o If the number of shares held by GFSB stockholders who
have made no election is insufficient to make up the
shortfall, then all GFSB stockholders who made no
election will receive shares of First Federal common
stock and those GFSB stockholders who elected to receive
cash will receive cash and shares of First Federal
common stock in whatever proportion is necessary to make
up the shortfall.
Notwithstanding these allocation procedures, as described under "--Tax
Consequences for GFSB Stockholders," it may be necessary for First Federal to
reduce the number of shares of GFSB common stock that will be converted into the
right to receive cash and correspondingly increase the number of shares of GFSB
common stock that will be converted into First Federal common stock. If this
adjustment is necessary, stockholders who elect to receive cash or a mixture of
cash and stock may be required on a pro rata basis to receive a greater amount
of First Federal common stock than they otherwise would have received.
NO GUARANTEE CAN BE MADE THAT YOU WILL RECEIVE THE AMOUNTS OF CASH
AND/OR STOCK YOU ELECT. AS A RESULT OF THE ALLOCATION PROCEDURES AND OTHER
LIMITATIONS OUTLINED IN THIS DOCUMENT AND IN THE MERGER AGREEMENT, YOU MAY
RECEIVE FIRST FEDERAL COMMON STOCK OR CASH IN AMOUNTS THAT VARY FROM THE AMOUNTS
YOU ELECT TO RECEIVE.
ELECTION PROCEDURES; SURRENDER OF STOCK CERTIFICATES
An election form is being mailed under separate cover from this joint
proxy statement/prospectus on or about the date this joint proxy
statement/prospectus is being mailed to holders of shares of GFSB common stock.
Each election form entitles the holder of the GFSB common stock to elect to
receive cash, First Federal common stock, or a combination of cash and First
Federal common stock, or elect no preference with respect to the merger
consideration you wish to receive.
Registrar and Transfer Company will act as exchange agent in the merger
and will process the exchange of GFSB stock certificates for cash and/or First
Federal common stock. TO MAKE A VALID ELECTION, YOU MUST SUBMIT A PROPERLY
COMPLETED ELECTION FORM, ALONG WITH YOUR GFSB STOCK CERTIFICATES REPRESENTING
ALL SHARES OF GFSB COMMON STOCK COVERED BY THE ELECTION FORM (OR AN
36
APPROPRIATE GUARANTEE OF DELIVERY) TO REGISTRAR AND TRANSFER COMPANY ON OR
BEFORE 5:00 P.M., ______________ TIME, ON ____________, 2005. Shortly after the
merger, the exchange agent will allocate cash and First Federal common stock
among GFSB stockholders, consistent with their elections and the allocation and
proration procedures set forth in the merger agreement. If you do not submit an
election form, you will receive instructions from the exchange agent on how to
surrender your GFSB stock certificates after the merger is completed. IN ANY
EVENT, DO NOT FORWARD YOUR GFSB STOCK CERTIFICATES WITH YOUR PROXY CARDS.
You may change your election at any time prior to the election deadline
by written notice accompanied by a properly completed and signed revised
election form received by the exchange agent prior to the election deadline. In
addition, you may revoke your election by written notice received by the
exchange agent prior to the election deadline or by withdrawal of your stock
certificates by written notice prior to the election deadline. All elections
will be revoked automatically if the merger agreement is terminated. If you have
a preference for receiving either First Federal stock and/or cash for your GFSB
stock, you should complete and return the election form. If you do not make an
election, you will be allocated First Federal common stock and/or cash depending
on the elections made by other stockholders.
If stock certificates for GFSB common stock are not immediately
available or you are unable to send the election form and other required
documents to the exchange agent prior to the election deadline a valid election
may be made, if:
o elections are made by or through a member firm of a registered
national securities exchange or of the National Association of
Securities Dealers, Inc., or by a commercial bank or trust
company having an office, branch or agency in the United States;
o the exchange agent receives, prior to the election deadline, a
properly completed and duly executed notice of guaranteed
delivery substantially in the form provided with the election
form (delivered by hand, mail, overnight courier, telex or
facsimile transmission); and
o the exchange agent receives, prior to the third business day
after the election deadline, the certificates for all exchanged
GFSB shares, or confirmation of the delivery of all such
certificates into the exchange agent's account with the
Depository Trust Company in accordance with the proper
procedures for such transfer, together with a properly completed
and duly executed election form and any other documents required
by the election form.
GFSB stockholders who do not submit a properly completed election form
or revoke their election form prior to the election deadline will have their
shares of GFSB common stock designated as non-election shares. GFSB stock
certificates represented by elections that have been revoked by written request
will be promptly returned without charge to such GFSB stockholder.
GFSB stockholders who hold their shares of common stock in "street name"
through a bank, broker or other financial institution, and who wish to make an
election, should seek instruction from the institution holding their shares of
how to make on election.
First Federal will deposit with the exchange agent the shares of First
Federal common stock and cash to be issued to GFSB stockholders in exchange for
the shares of GFSB common stock. Within five business days after completion of
the merger, the exchange agent will mail to GFSB stockholders who did not submit
election forms or revoked such forms, a letter of transmittal, together with
instructions for the exchange of their GFSB stock certificates for the merger
consideration. Until you surrender your GFSB
37
stock certificates for exchange after completion of the merger, you will not be
paid dividends or other distributions declared after the merger with respect to
any First Federal common stock into which your GFSB shares have been converted.
No interest will be paid or accrued to GFSB stockholders on the cash
consideration, cash in lieu of fractional shares or unpaid dividends, if any,
when you surrender your GFSB stock certificates, First Federal will pay any
unpaid dividends or other distributions, without interest. After the completion
of the merger, there will be no further transfers of GFSB common stock. GFSB
stock certificates presented for transfer after the completion of the merger
will be canceled and exchanged for the merger consideration.
If your GFSB stock certificates have been either lost, stolen or
destroyed, you will have to prove your ownership of these certificates and that
they were lost, stolen or destroyed before you receive any consideration for
your shares. Upon request, GFSB's transfer agent, Registrar and Transfer
Company, will send you instructions on how to provide evidence of ownership.
Any portion of the cash and shares of First Federal common stock made
available to the exchange agent that remains unclaimed by GFSB stockholders for
one year after the completion of the merger will be returned to First Federal
upon written request. Any GFSB stockholders who have not exchanged shares of
GFSB common stock in accordance with the merger agreement before that time may
look to First Federal for the merger consideration for their shares and any
unpaid dividends or other distributions after that time. None of First Federal,
GFSB, the exchange agent or any other person will be liable to any GFSB
stockholder for any amount delivered to a public official pursuant to applicable
abandoned property, escheat or similar laws.
TREATMENT OF GFSB STOCK OPTIONS
At the effective time of the merger, each outstanding option to purchase
shares of GFSB common stock, whether or not vested, shall be cancelled and
holders shall be entitled to receive in exchange therfor a combination of First
Federal common stock and cash equal to the number of shares of GFSB common stock
subject to such option multiplied by an amount equal to the excess of $20.00
over the applicable exercise price per share ("option value"). First Federal
shall pay the option holder in a number of whole shares of First Federal common
stock equal to a fraction, the numerator of which is the option value multiplied
by 0.51 and the denominator of which is $17.60. In addition, First Federal will
pay the option holder cash equal to the option value multiplied by 0.49. Any
fractional shares held by the option holder will be paid by First Federal in
cash.
TREATMENT OF GFSB STOCK AWARDS
At the effective time of the merger, each share of restricted stock
outstanding at the effective time and issued pursuant to the GFSB's Management
Stock Bonus Plan, to the extent not already vested, will vest and will represent
a right to receive the merger consideration.
38
BACKGROUND OF THE MERGER
FIRST FEDERAL
First Federal's board of directors meets regularly to review various
strategic options available to enhance the value of its franchise. Among the
items considered is the possible acquisition of other financial institutions. In
connection therewith, First Federal from time to time calls on other potential
financial institutions for possible mergers or acquisitions as part of its
business plan to effectively deploy its capital. First Federal then uses a
financial model to assess the impact on First Federal and its stockholders of
acquisitions of other institutions at various prices.
First Federal was contacted by GFSB's financial advisor, McDonald, in
December of 2003 regarding First Federal's possible interest in pursuing a
transaction with GFSB. First Federal executed a confidentiality agreement and
was sent information regarding GFSB.
Starting in January of 2004, as a part of First Federal's continued
expansion strategy, the board of directors and management undertook a detailed
analysis of the impact of a merger with GFSB. In connection therewith, First
Federal's President, Aubrey L. Dunn, Jr., had several informal discussions with
Richard C. Kauzlaric, the President of GFSB, during this period. Additionally,
First Federal contacted Hovde Financial LLC ("Hovde") to assist in the review of
a transaction with GFSB as well as other strategic initiatives that First
Federal was contemplating. Hovde has assisted First Federal on such issues from
time to time and is familiar with the operating history of First Federal. Hovde
attended a meeting of the board of directors of First Federal in February 2004
during which an analysis on a transaction with GFSB was presented. Shortly
thereafter, on March 10, 2004 First Federal entered into an agreement with Hovde
to act as its financial advisor regarding a proposed transaction with GFSB. On
the same day, First Federal and GFSB entered into a reciprocal confidentiality
agreement to facilitate the exchange of confidential information regarding each
institution. Shortly thereafter, Hovde drafted an indication of interest which
was approved by First Federal and sent to GFSB's financial advisor on March 22,
2004.
Several phone conversations and internal discussions ensued and on April
6, 2004, First Federal sent a revised indication of interest to GFSB proposing a
merger between the two institutions. Upon its acceptance, a due diligence team
comprised of representatives from First Federal, Hovde and First Federal's legal
counsel reviewed GFSB assets and liabilities during April and May 2004.
Following this due diligence process, representatives from both institutions
along with their respective financial advisors discussed the results of the due
diligence review. Based on the review and subsequent discussions a final revised
proposal was submitted to GFSB on June 8, 2004, which became the basis for the
merger agreement.
An initial draft of the merger agreement was submitted to GFSB on July
7, 2004 and following numerous conversations, meeting and revisions was
finalized on August 25, 2004. First Federal's board of directors, along with
legal counsel and Hovde, met several times either in person or via telephone
during the week of August 16th, 2004, with a final meeting occurring on August
24, 2004. At this meeting the final version of the merger agreement was approved
and Hovde provided First Federal with its Fairness Opinion regarding the merger
consideration to be paid in the transaction with GFSB. On the following day,
August 25, 2004, First Federal received word of GFSB's acceptance of the final
merger agreement and both parties executed the merger agreement and issued a
joint press release announcing the transaction.
39
GFSB
GFSB's management and board of directors have considered various
strategic alternatives as part of their continuing efforts to enhance GFSB's
community banking franchise and to maximize stockholder value. On May 7, 2003,
the board held a special meeting to discuss the current status of GFSB and
competitive and other challenges to its future success. The GFSB board decided
to conduct a detailed strategic review of various alternatives available to
GFSB, including possible expansions of the markets in which it operates or
entrance into new markets as well as the possibility of a strategic alliance of
GFSB with another financial institution. In order to facilitate the strategic
planning process, the board formed a strategic planning committee consisting of
Directors Kauzlaric, Parker and Mataya. The board and the strategic planning
committee continued to discuss these issues at its meetings during the summer of
2003.
On August 4, 2003, the board, upon recommendation of the strategic
planning committee, approved the engagement of McDonald to perform a
profitability analysis of GFSB. Representatives of McDonald presented this
analysis at a special meeting of the board held on August 19, 2003. After
considering this presentation and the various alternatives available to it, the
board decided to engage McDonald for additional strategic planning services
including the exploration of a possible affiliation of GFSB with another
company.
On September 15, 2003, the strategic planning committee met with
representatives of McDonald to discuss possible entities with whom GFSB could
explore a possible affiliation. McDonald prepared a draft confidential
memorandum with respect to GFSB which would be sent out to these entities (after
execution of a confidentiality agreement) to explore their interest in an
affiliation with GFSB. Representatives of McDonald contacted 19 institutions of
which 12 executed a confidentiality agreement and received the confidential
memorandum in December 2003. None of these entities submitted a proposal at a
price level the board deemed sufficient and as a result, at a special meeting of
the board held on January 21, 2004, the board discussed the results of the
process to date and determined to terminate its engagement of McDonald, although
McDonald was authorized to continue discussions with two prospective acquirers
that continued to express interest, First Federal and another financial
institution. The other financial institution held discussions with GFSB in
February 2004 and ultimately submitted a revised proposal in early March 2004
which was at a price level below its original proposal.
First Federal was one of the initial 12 parties executing a
confidentiality agreement in 2003. First Federal held discussion with GFSB in
February 2004, and in March 2004, First Federal, through its investment banker,
indicated that it was interested in continuing discussions regarding a possible
affiliation. On March 10, 2004, the GFSB board approved entering into a
reciprocal confidentiality agreement with First Federal. First Federal submitted
a preliminary indication of interest by letter dated March 22, 2004 that was
considered by the board, together with the proposal from the other financial
institution, on March 30, 2004. The proposal from First Federal offered a higher
value than that of the other financial institution. The First Federal proposal
called for a mixture of cash and stock to be given in exchange for the GFSB
common stock. The board had previously approved reinstating the engagement of
McDonald to assist it in evaluating these proposals. McDonald made a
presentation at the March 30, 2004 meeting comparing the terms of the two
proposals, including the value offered, and compared that to the value of GFSB
as a stand-alone institution. Following a lengthy discussion, the board approved
authorizing McDonald, together with legal counsel, to continue negotiations with
First Federal. On April 6, 2004, First Federal submitted a revised letter of
interest. On April 7, 2004, following a review of such revised letter, the board
authorized GFSB and First Federal to conduct due diligence related to the
proposed transaction.
40
First Federal conducted due diligence during April and early May 2004.
GFSB and representatives from McDonald conducted due diligence related to First
Federal during April 2004. During that time, the strategic planning committee
met with representatives of First Federal to discuss certain of the provisions
in the initial indication of interest and to discuss the due diligence performed
by First Federal. First Federal and GFSB representatives negotiated revised
terms of a proposed transaction between May 26, 2004 and June 8, 2004. On June
8, 2004, GFSB received a final proposal from First Federal. On June 10, 2004,
the GFSB board met to discuss the status of the negotiations with First Federal
and the final letter of interest. Representatives of McDonald participated in
such board discussions by telephone. McDonald reviewed with the board the terms
of the revised proposal. The board discussed in detail the proposal and
McDonald's presentation and authorized McDonald to convey GFSB's willingness to
proceed towards negotiating a definitive agreement with First Federal.
First Federal presented the initial draft of the definitive merger
agreement to GFSB on July 7, 2004. Such documents were distributed to each
director of GFSB on ___________, 2004, and were reviewed by GFSB's management
and directors, its special counsel and it financial advisor, McDonald. Such
documents were revised and negotiated until August 25, 2004.
The board met on August 17, 2004 to discuss with its legal counsel and
McDonald the status of negotiations and the current draft of the agreement.
Following conclusion of negotiations, the board met on August 25, 2004, to
discuss the outcome of final negotiations with First Federal and to review in
detail the Agreement and Plan of Merger and related documents, and discuss the
revisions and clarifications that had been negotiated since the August 17, 2004
board meeting. Special counsel and McDonald participated by telephone. McDonald
presented the board of GFSB with its opinion that the merger consideration being
offered to the stockholders of GFSB by First Federal was fair to the
stockholders of GFSB from a financial point of view. At this meeting, the GFSB
Board approved the merger agreement by a unanimous vote of all members of the
board, and subject to the exercise of its fiduciary duty, approved to recommend
that GFSB stockholders vote their shares in favor of approving the merger
agreement. GFSB and First Federal executed the definitive merger agreement and
issued a joint press release publicly announcing the transaction on August 25,
2004.
REASONS FOR THE MERGER
FIRST FEDERAL
The First Federal board of directors believes that the merger agreement
and the merger are in the best interests of First Federal and its stockholders.
Accordingly, the members of the First Federal board of directors unanimously
approved and adopted the merger agreement and recommends that First Federal
stockholders vote "FOR" the approval of the merger agreement. In reaching its
decision, the board of directors consulted with First Federal's management,
legal counsel and Hovde, First Federal's financial advisor. The First Federal
board of directors considered a number of factors, including the following:
o the business, operations, financial condition and earnings of
First Federal on a historical and a prospective basis and of the
combined company on a pro forma basis;
o an extensive analysis of the effect of the merger on the value
of First Federal's common stock;
o the complementary nature of the businesses of First Federal and
GFSB;
41
o the ability of the combined company to leverage expenses and to
achieve cost savings, operating efficiencies and opportunities
for revenue enhancement;
o the terms of the merger agreement including the provisions
protecting First Federal against a termination of the agreement;
o the opinion of Hovde Financial, LLC that the merger
consideration to be paid to the GFSB stockholders is fair, from
a financial point of view, to the holders of First Federal
common stock;
o the value of GFSB based on various pricing ratios and other data
in comparison with the value of other thrift institutions in
recent merger deals;
o the results of the due diligence investigations of GFSB
conducted by management and First Federal's financial and legal
advisors;
o the familiarity of the First Federal board with and review of
GFSB's business, operations, financial condition and earnings on
an historical and a prospective basis;
o the current and prospective economic and regulatory environment,
burdens and constraints affecting banking organizations such as
First Federal and GFSB and the changing competitive environment
for banking services; and
o the probable impact of the merger on customers and employees and
the communities and business served by First Federal and GFSB.
There are numerous factors other than the merger that could cause First
Federal's results of operations, including, among other things, earnings per
share, to increase or decrease after the merger. Therefore, we cannot assure you
that the anticipated benefits of the merger discussed in the previous paragraphs
will happen. You should read "Risks Related to the Merger" on pages____
through____ and "A Warning About Forward-Looking Statements" on pages____
through____ for a discussion of the factors that could affect First Federal's
future operations and financial condition.
First Federal's board of directors has unanimously approved the merger
agreement and recommends that First Federal stockholders vote "FOR" the approval
of the merger agreement.
GFSB
The GFSB board has unanimously determined that the merger is fair to,
and in the best interests of, GFSB and its stockholders. In arriving at this
determination and approving and recommending the merger agreement, the GFSB
board, among other things, consulted with McDonald with respect to the financial
aspects and fairness of the merger consideration to the GFSB stockholders from a
financial point of view and with its legal counsel as to its legal duties and
the other terms of the merger agreement. In arriving at its determination and
recommendation, the GFSB board considered a number of factors, including the
following:
o The financial presentation of McDonald and the opinion of
McDonald that, as of the date of and based upon the
considerations in rendering such opinion, the merger
consideration of $20.00 in cash per share or approximately
$20.00 in First Federal common stock per share was fair, from a
financial point of view, to the holders of GFSB common stock.
Such opinion has been updated as
42
of the date of the mailing of these materials (see "Opinion of
GFSB's Independent Financial Advisor," on page ____);
o The fact that the cash component of the merger consideration is
fixed at $20.00, and that the stock component of the merger
consideration is fixed at a price of approximately $20.00 per
share based on an exchange ratio calculated by dividing $20.00
by a number equal to 165% of the book value of First Federal
common stock at September 30, 2004 and will not fluctuate after
September 30, 2004 based on increases or decreases in the market
price of First Federal common stock;
o First Federal's agreement that it will register its common stock
under the Securities Exchange Act of 1934, as amended and use
its best efforts to have it listed on the Nasdaq SmallCap
Market;
o GFSB board's belief that the terms of the merger agreement are
attractive in that the merger agreement allows GFSB stockholders
to become stockholders of a larger combined institution;
o The GFSB board's understanding of and review of information
concerning the business, results of operations, financial
condition, competitive position and future prospects of GFSB and
its review of information concerning the business, results of
operations, financial condition, competitive position and future
prospects of First Federal (including the results of GFSB's due
diligence review of First Federal);
o The current and prospective environment in which GFSB operates,
including national, regional and local economic conditions, the
competitive environment for banks and other financial
institutions generally and the increased regulatory burdens on
financial institutions generally and the trend toward
consolidation in the banking industry and in the financial
services industry and the likely effect of these factors on GFSB
in light of, and in the absence of, the proposed merger with
First Federal;
o The GFSB board's understanding of the results that could be
expected to be obtained by GFSB if it continued to operate
independently, and the likely benefits and risks to stockholders
of such course, as compared with the value of the merger
consideration being offered by First Federal;
o The ability of First Federal to receive the requisite regulatory
approvals in a timely manner;
o The terms and conditions of the merger agreement, including the
parties' respective representations, warranties, covenants and
other agreements, the conditions to closing and the termination
provisions;
o The fact that, although the merger agreement limits GFSB's
ability to solicit or discuss alternative transactions with
third parties during the pendency of the merger, the merger
agreement permits GFSB's board of directors, in the exercise of
its fiduciary duties, under certain conditions, to furnish
information to, or engage in negotiations with, a third party
which has submitted an unsolicited proposal to acquire GFSB;
o The fact that the merger agreement provides for GFSB's payment
of a termination fee of $800,000 to First Federal if the merger
agreement is terminated under certain limited circumstances and
GFSB enters into or consummates an alternative transaction with
a third party within 12 months of such termination, and the
effect such termination fee could have on a third
43
party's decision to propose a merger or similar transaction to
GFSB at a higher price than that contemplated by the merger with
First Federal;
o The effects of the merger on GFSB's depositors and customers and
the communities served by GFSB which were deemed to be favorable
given that they would be served by a geographically diversified
organization which had greater resources than GFSB;
o The expectation that the merger will generally be a tax-free
transaction to GFSB and its stockholders, to the extent the GFSB
stockholders elect to receive shares of First Federal common
stock in exchange for their shares of GFSB common stock;
o The fact that GFSB stockholders who desired to receive cash in
lieu of First Federal common stock as the merger consideration
could elect to do so under the First Federal proposal, subject
to the requirement that 51% of the total number of outstanding
shares of GFSB be exchanged for First Federal common stock;
o The effects of the merger on GFSB's employees, including the
prospects for employment with a large, growing organization such
as First Federal with an expanding business presence in the
market areas served by GFSB;
o The interests of GFSB executive officers and directors with
respect to the merger apart from their interests as holders of
GFSB common stock, and the risk that these interests might
influence their decision with respect to the merger; and
o That the transaction would be subject to a vote of the
stockholders of both GFSB and First Federal.
The GFSB board has unanimously approved the merger agreement and
unanimously recommends that GFSB shareholders vote "FOR" approval and adoption
of the merger agreement.
The discussion of the factors considered by the GFSB board is not
intended to be exhaustive, but includes all material factors considered. In view
of the wide variety of factors considered in connection with its evaluation of
the merger and the complexity of these matters, the GFSB board did not assign
any specific or relative weights to any of the foregoing factors, and individual
directors may have weighted factors differently. The GFSB board conducted an
overall analysis of the factors described above, including thorough discussions
with, and questioning of, GFSB management and GFSB's legal and financial
advisors, and considered the factors overall to be favorable to, and to support,
its determination.
EFFECTS OF THE MERGER
Among the reasons for the recommendation of the First Federal and GFSB
boards that their respective stockholders approve the merger agreement and the
merger is their belief that, over the long-term, the merger will be beneficial
to First Federal stockholders, including GFSB stockholders who may become First
Federal stockholders following completion of the merger. First Federal believes
that one of the potential benefits of the merger is that the cost savings that
may be realized by combining the two companies will enhance First Federal's
earnings.
44
First Federal currently expects to reduce expenses by eliminating areas
where there are redundancies and by combining certain support and other
functions after the merger. First Federal believes that it will achieve cost
savings by:
o eliminating external data processing costs;
o reducing the ratio of professional fees to revenues;
o achieving economies of scale in advertising and marketing
budgets; and
o eliminating certain duplicative "back office" functions.
The amount of any cost savings First Federal may realize in 2005 will
depend upon how quickly and efficiently First Federal is able to implement the
processes outlined above. However, there can be no assurance as to whether First
Federal will be able to achieve any of the above.
First Federal also anticipates that the merger will present significant
revenue enhancement opportunities for the combined entity. These opportunities
may result from, among other factors:
o an ability to offer a wider variety of banking products and
services to GFSB's customers; and
o the potential to increase overall market share in the
communities presently served by First Federal and GFSB.
There can be no assurance that First Federal will be able to achieve any
of the above revenue enhancements.
The companies have prepared financial statements that show, under one
set of assumptions, the combined operations and financial condition of the two
companies as if the merger had occurred on the date and at the beginning of the
periods indicated. These are known as "pro forma" financial statements. The full
pro forma financial statements are set forth beginning on page____. However, the
pro forma financial statements do not reflect any anticipated costs savings or
revenue enhancements as we cannot assure you that we will achieve them.
OPINION OF FIRST FEDERAL'S INDEPENDENT FINANCIAL ADVISOR
Hovde has delivered to the First Federal board its opinion that, based
upon and subject to the various considerations set forth in its written opinion
dated August 25, 2004, as updated to _______, 2005, the aggregate merger
consideration as described in the Agreement is fair, from a financial point of
view, to the holders of First Federal common stock as of such date. In
requesting Hovde's advice and opinion, no limitations were imposed by First
Federal upon Hovde with respect to the investigations made or procedures
followed by it in rendering its opinion. THE FULL TEXT OF THE OPINION OF HOVDE,
DATED ________, 2005, WHICH DESCRIBES THE PROCEDURES FOLLOWED, ASSUMPTIONS MADE,
MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED HERETO
AS ANNEX B. FIRST FEDERAL STOCKHOLDERS SHOULD READ THIS OPINION IN ITS ENTIRETY.
Hovde is a nationally recognized investment banking firm and, as part of
its investment banking business, is continually engaged in the valuation of
financial institutions in connection with mergers and acquisitions, private
placements and valuations for other purposes. As a specialist in securities of
45
financial institutions, Hovde has experience in, and knowledge of, banks,
thrifts and bank and thrift holding companies. First Federal's board selected
Hovde to act as its financial advisor in connection with the merger on the basis
of the firm's reputation and expertise in transactions such as the merger.
Hovde will receive a fee contingent upon the completion of the merger
for services rendered in connection with advising First Federal regarding the
merger, including the fairness opinion and financial advisory services provided
to First Federal. First Federal has also agreed to indemnify Hovde against any
claims, losses and expenses arising out of the merger or Hovde's engagement that
did not arise from Hovde's gross negligence or willful misconduct.
HOVDE'S OPINION IS DIRECTED ONLY TO THE FAIRNESS, FROM A FINANCIAL POINT
OF VIEW, OF THE AGGREGATE MERGER CONSIDERATION, AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY FIRST FEDERAL STOCKHOLDER AS TO HOW THE STOCKHOLDER SHOULD
VOTE AT THE FIRST FEDERAL MEETING. THE SUMMARY OF THE OPINION OF HOVDE SET FORTH
IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF THE OPINION.
The following is a summary of the analyses performed by Hovde in
connection with its fairness opinion. Certain of these analyses were presented
to the First Federal board by Hovde on August 24, 2004 and were confirmed in
writing on August 25, 2004. The summary set forth below does not purport to be a
complete description of either the analyses performed by Hovde in rendering its
opinion or the presentation made by Hovde to the First Federal board, but it
does summarize all of the material analyses performed and presented by Hovde.
The preparation of a fairness opinion involves various determinations as
to the most appropriate and relevant methods of financial analyses and the
application of those methods to the particular circumstances. In arriving at its
opinion, Hovde did not attribute any particular weight to any analysis and
factor considered by it, but rather made qualitative judgments as to the
significance and relevance of each analysis and factor. Hovde may have given
various analyses more or less weight than other analyses. Accordingly, Hovde
believes that its analyses and the following summary must be considered as a
whole and that selecting portions of its analyses, without considering all
factors and analyses, could create an incomplete view of the process underlying
the analyses set forth in its report to the First Federal board and its fairness
opinion.
In performing its analyses, Hovde made numerous assumptions with respect
to industry performance, general business and economic conditions and other
matters, many of which are beyond the control of First Federal and GFSB. The
analyses performed by Hovde are not necessarily indicative of actual value or
actual future results, which may be significantly more or less favorable than
suggested by such analyses. Such analyses were prepared solely as part of
Hovde's analysis of the fairness of the aggregate merger consideration, from a
financial point of view, to the stockholders of First Federal. The analyses do
not purport to be an appraisal or to reflect the prices at which a company might
actually be bought or sold or the prices at which any securities may trade at
the present time or at any time in the future. Hovde's opinion does not address
the relative merits of the merger as compared to any other business combination
in which First Federal might engage. In addition, as described above, Hovde's
opinion to the First Federal board was one of many factors taken into
consideration by the First Federal board in making its determination to approve
the merger agreement.
During the course of its engagement, and as a basis for arriving at its
opinion, Hovde reviewed and analyzed material bearing upon the financial and
operating condition of First Federal and GFSB and material prepared in
connection with the merger, including, among other things, the following:
46
o the merger agreement;
o certain historical publicly available information concerning
First Federal and GFSB;
o the nature and terms of recent merger transactions; and
o financial and other information provided to Hovde by the
managements of First Federal and GFSB. Hovde also took into
account its experience in other transactions as well as its
knowledge of the commercial banking industry and its general
experience in securities valuations.
In rendering its opinion, Hovde assumed and relied upon the accuracy and
completeness of the publicly available and other financial and other information
provided to it, relied upon the representations and warranties of First Federal
and GFSB made pursuant to the merger agreement, and did not independently
attempt to verify any of such information. Hovde also assumed that the financial
forecasts furnished to or discussed with Hovde by First Federal or GFSB were
reasonably prepared and reflected the best currently available estimates and
judgments of the senior managements of First Federal and GFSB as to the future
financial performance of First Federal, GFSB or the combined entity, as the case
may be. Hovde has not made any independent evaluation or appraisal of any
properties, assets or liabilities of First Federal or GFSB. In addition, Hovde
noted that it is not an expert in the evaluation of loan portfolios or
allowances for loan, lease or real estate owned losses and, upon the advice of
First Federal and GFSB, it assumed that the allowances for loan, lease and real
estate owned losses (as currently stated or as adjusted for in connection with
the merger or otherwise) provided to it by First Federal or GFSB and used by it
in its analysis and in rendering its fairness opinion were in the aggregate
adequate to cover all such losses. The fairness opinion was based upon market,
economic and other conditions as they existed on, and could be evaluated as of,
the date of the fairness opinion.
PREMIUM ANALYSIS. Based upon a price of $20.00 per share of GFSB common
stock, the discount to GFSB's closing price on August 24, 2004, of $21.00 was
(4.8)%. Due to the limited trading volume of GFSB Common Stock, this was also
the discount to its trading value two weeks and four weeks prior to August 24,
2004.
ANALYSIS OF SELECTED MERGERS. As part of its analysis, Hovde reviewed
comparable mergers involving thrifts in the Southwestern United States (Arizona,
Colorado, Louisiana, Nevada, New Mexico, Texas and Utah) announced since July 1,
2001, in which the selling institution had assets between $50 million and $500
million (the "Southwest Merger Group"). This Southwest Merger Group consisted of
the following ten transactions:
- ------------------------------------------------------- -----------------------------------------------------
BUYER SELLER
- ------------------------------------------------------- -----------------------------------------------------
First Federal Bank of LA (LA) First Allen Parish Bancorp (LA)
- ------------------------------------------------------- -----------------------------------------------------
Prosperity Bancshares, Inc. (TX) Village Bank & Trust S.S.B. (TX)
- ------------------------------------------------------- -----------------------------------------------------
Teche Holding Co. (LA) St. Landry Financial Corp. (LA)
- ------------------------------------------------------- -----------------------------------------------------
Hgroup Acquisitions Co. (TX) Heritage Bancshares (TX)
- ------------------------------------------------------- -----------------------------------------------------
Franklin Bank Corp. (TX) Jacksonville Bancorp Inc. (TX)
- ------------------------------------------------------- -----------------------------------------------------
Premier Bcshs Inc. (TX) Synergy Bank, SSB (TX)
- ------------------------------------------------------- -----------------------------------------------------
SNB Inc. (LA) Algiers Bancorp, Inc. (LA)
- ------------------------------------------------------- -----------------------------------------------------
IBERIABNAK Corp. (LA) Acadiana Bancshares, Inc. (LA)
- ------------------------------------------------------- -----------------------------------------------------
FBOP Corp. (IL) American Home Loan Corp. (AZ)
- ------------------------------------------------------- -----------------------------------------------------
Texas United Bancshares, Inc. (TX) Bryan-College Station Financial HC (TX)
- ------------------------------------------------------- -----------------------------------------------------
47
Hovde also reviewed comparable mergers involving thrifts nationwide
announced since January 1, 2002, in which the total assets of the seller were
between $250 million and $350 million (the "Nationwide Merger Group"). This
Nationwide Merger Group consisted of the following 16 transactions:
- ------------------------------------------------------- -----------------------------------------------------
BUYER SELLER
- ------------------------------------------------------- -----------------------------------------------------
Park National Corp. (OH) First Federal Bancorp Inc. (OH)
- ------------------------------------------------------- -----------------------------------------------------
East West Bancorp Inc. (CA) Trust Bancorp Inc. (CA)
- ------------------------------------------------------- -----------------------------------------------------
First Community Corp. (SC) DutchFork Bancshares Inc. (SC)
- ------------------------------------------------------- -----------------------------------------------------
Carver Bancorp Inc. (NY) Independence Federal Savings Bank (DC)
- ------------------------------------------------------- -----------------------------------------------------
Rock Bancshares Inc. (AR) HCB Bancshares Inc. (AR)
- ------------------------------------------------------- -----------------------------------------------------
Banknorth Group Inc. (ME) Foxborough Savings Bank (MA)
- ------------------------------------------------------- -----------------------------------------------------
Washington Federal Inc. (WA) United S&L Bank (WA)
- ------------------------------------------------------- -----------------------------------------------------
FNB Corp. (VA) Bedford Bancshares Inc. (VA)
- ------------------------------------------------------- -----------------------------------------------------
IBERIABANK Corp. (LA) Acadiana Bancshares Inc. (LA)
- ------------------------------------------------------- -----------------------------------------------------
Sterling Financial Corp. (WA) Empire Federal Bancorp Inc. (MT)
- ------------------------------------------------------- -----------------------------------------------------
Boston Bank of Commerce (MA) Family Savings Bank, FSB (CA)
- ------------------------------------------------------- -----------------------------------------------------
Midwest Banc Holdings Inc. (IL) Big Foot Financial Corp. (IL)
- ------------------------------------------------------- -----------------------------------------------------
NSB Holding Corp. (NY) Liberty Bancorp Inc. (NY)
- ------------------------------------------------------- -----------------------------------------------------
Berkshire Financial Holdings (PA) USABancshares.com Inc. (PA)
- ------------------------------------------------------- -----------------------------------------------------
Banknorth Group Inc. (ME) Ipswich Bancshares Inc. (MA)
- ------------------------------------------------------- -----------------------------------------------------
Kearny, MHC (NJ) Pulaski Bancorp Inc. (NJ)
- ------------------------------------------------------- -----------------------------------------------------
Hovde calculated the medians and averages (each as of the announcement
date of the transaction) for the following relevant transaction ratios in the
Nationwide Merger Group and the Southwest Merger Group: the percentage of the
offer value to the acquired company's total assets, the multiple of the offer
value to the acquired company's earnings per share for the twelve months
preceding the announcement date of the transaction; the multiple of the offer
value to the acquired company's tangible book value per share; and the tangible
book value premium to core deposits. Hovde compared these multiples with the
corresponding multiples for the merger, valuing the shares of First Federal
common stock and cash that would be received pursuant to the merger agreement at
$20.00 per share of GFSB common stock. In calculating the multiples for the
merger, Hovde used GFSB's earnings per share for the 12 months ended June 30,
2004, and GFSB's tangible book value per share, total assets, and total deposits
as of June 30, 2004. The results of this analysis are as follows:
48
Offer Value to
-----------------------------------------------
12 months Ratio of Tangible
Tangible Preceding Book Value
Total Book Value Earnings Premium to Core
Assets Per Share Per Share Deposits
(%) (x) (x) (%)
--------------- -------------- -------------- -------------------
First Federal / GFSB Transaction 10.4 1.26 17.8 6.5
Nationwide Merger Group median 16.0 1.61 19.2 12.9
Nationwide Merger Group average 17.8 1.78 22.6 13.2
Nationwide Merger Group high 39.2 3.01 62.1 35.1
Nationwide Merger Group low 1.2 1.00 10.9 0.3
Southwest Merger Group median 14.5 1.55 18.2 7.5
Southwest Merger Group average 13.8 1.85 19.7 8.0
Southwest Merger Group high 23.5 4.96 40.9 14.4
Southwest Merger Group low 3.2 1.13 10.5 2.5
49
COMPARABLE COMPANY ANALYSIS. Using publicly available information, Hovde
compared the financial performance and stock market valuation of GFSB with the
following nationwide publicly traded banking institutions with assets between
$250 million and $350 million (the "Nationwide Comparables"):
- ---------------------------------------------------- -------------------------- ----------------------
COMPANY NAME HEADQUARTERS TOTAL ASSETS ($000)
- ---------------------------------------------------- -------------------------- ----------------------
Access Anytime Bancorp, Inc. Albuquerque, NM 284,582
- ---------------------------------------------------- -------------------------- ----------------------
AJS Bancorp, Inc. (MHC) Midlothian, IL 272,789
- ---------------------------------------------------- -------------------------- ----------------------
Alpena Bancshares, Inc. (MHC) Alpena, MI 256,177
- ---------------------------------------------------- -------------------------- ----------------------
American Bank Holdings, Inc. Silver Spring, MD 253,459
- ---------------------------------------------------- -------------------------- ----------------------
BankPlus, FSB Morton, IL 319,982
- ---------------------------------------------------- -------------------------- ----------------------
Broadway Financial Corporation Los Angeles, CA 267,250
- ---------------------------------------------------- -------------------------- ----------------------
Citizens First Financial Corp. Bloomington, IL 327,103
- ---------------------------------------------------- -------------------------- ----------------------
Elmira Savings Bank, FSB Elmira, NY 317,540
- ---------------------------------------------------- -------------------------- ----------------------
First Bancorp of Indiana, Inc. Evansville, ID 270,892
- ---------------------------------------------------- -------------------------- ----------------------
First Bancshares, Inc. Mountain Grove, MO 264,978
- ---------------------------------------------------- -------------------------- ----------------------
First Federal Bancshares, Inc. Colchester, IL 307,723
- ---------------------------------------------------- -------------------------- ----------------------
First Franklin Corporation Cincinnati, OH 272,770
- ---------------------------------------------------- -------------------------- ----------------------
Greene County Bancorp Inc. (MHC) Catskill, NY 284,675
- ---------------------------------------------------- -------------------------- ----------------------
Hemlock Federal Financial Corp. Oak Forest, IL 318,365
- ---------------------------------------------------- -------------------------- ----------------------
Jacksonville Bancorp, Inc. (MHC) Jacksonville, IL 265,795
- ---------------------------------------------------- -------------------------- ----------------------
Jefferson Bancshares, Inc. Morristown, TN 305,474
- ---------------------------------------------------- -------------------------- ----------------------
Laurel Capital Group, Inc. Allison Park, CA 306,633
- ---------------------------------------------------- -------------------------- ----------------------
Monarch Community Bancorp, Inc. Coldwater, MI 291,925
- ---------------------------------------------------- -------------------------- ----------------------
Nittany Financial Corp. State College, PA 295,155
- ---------------------------------------------------- -------------------------- ----------------------
Park Bancorp, Inc. Chicago, IL 270,174
- ---------------------------------------------------- -------------------------- ----------------------
Pathfinder Bancorp, Inc. (MHC) Oswego, NY 299,932
- ---------------------------------------------------- -------------------------- ----------------------
Perpetual Federal Savings Bank Urbana, OH 323,725
- ---------------------------------------------------- -------------------------- ----------------------
River Valley Bancorp Madison, IL 274,228
- ---------------------------------------------------- -------------------------- ----------------------
Rome Bancorp, Inc. (MHC) Rome, NY 262,211
- ---------------------------------------------------- -------------------------- ----------------------
Service Bancorp Inc. (MHC) Medway, MA 319,990
- ---------------------------------------------------- -------------------------- ----------------------
Sturgis Bancorp, Inc. Sturgis, MI 314,126
- ---------------------------------------------------- -------------------------- ----------------------
The Northern Savings & Loan Company Elyria, OH 313,944
- ---------------------------------------------------- -------------------------- ----------------------
Union Community Bancorp Crawfordsville, IN 257,753
- ---------------------------------------------------- -------------------------- ----------------------
Westborough Financial Services, Inc. (MHC) Westborough, MA 263,230
- ---------------------------------------------------- -------------------------- ----------------------
50
Hovde also compared the financial performance and stock market valuation of GFSB
with the following Western United States publicly traded thrift institutions
with assets between $100 million and $750 million (the "Western Comparables"):
------------------------------------------ -------------------------- ----------------------
COMPANY NAME HEADQUARTERS TOTAL ASSETS ($000)
------------------------------------------ -------------------------- ----------------------
Access Anytime Bancorp, Inc. Albuquerque, NM 284,582
------------------------------------------ -------------------------- ----------------------
Alamogordo Financial Corp. (MHC) Alamogordo, NM 157,747
------------------------------------------ -------------------------- ----------------------
Alaska Pacific Bancshares Inc. Juneau, AK 166,985
------------------------------------------ -------------------------- ----------------------
Eagle Bancorp (MHC) Helena, MT 205,298
------------------------------------------ -------------------------- ----------------------
FirstBank NW Corp. Clarkston, WA 735,277
------------------------------------------ -------------------------- ----------------------
GS Financial Corp. Metairie, LA 207,191
------------------------------------------ -------------------------- ----------------------
Minden Bancorp, Inc. (MHC) Minden, LA 109,759
------------------------------------------ -------------------------- ----------------------
Riverview Bancorp, Inc. Vancouver, WA 525,457
------------------------------------------ -------------------------- ----------------------
Teche Holding Co. Franklin, LA 653,034
------------------------------------------ -------------------------- ----------------------
Timberland Bancorp, Inc. Hoquiam, WA 437,688
------------------------------------------ -------------------------- ----------------------
Indications of such financial performance and stock market valuation
included profitability (return on average assets and return on average equity)
for the twelve months ended June 30, 2004, the ratio of tangible equity to
tangible assets (TER) non-performing assets (NPAs) to total assets, and
efficiency ratios (ER) at June 30, 2004. The calculation of price-to-last twelve
months estimated earnings, price-to-tangible book value are as of August 24,
2004 (One day prior to Hovde's presentation to First Federal's Board).
- ------------------------------------- -------- --------- ---------- --------- --------- ------------ ---------- -----------
PRICE TO PRICE TO PRICE TO
NPAS/ TANG. BOOK MRQ EPS LTM EPS
ROA (%) ROE (%) TER (%) ASSETS(%) ER VALUE (X) (X) (X)
- ------------------------------------- -------- --------- ---------- --------- --------- ------------ ---------- -----------
GFSB 0.34% 7.48% 7.81% 0.90% 61.6% 1.32 30.9 18.4
- ------------------------------------- -------- --------- ---------- --------- --------- ------------ ---------- -----------
Nationwide Comparables Median 0.69% 6.80% 9.66% 0.65% 70.4% 1.62 24.3 27.8
- ------------------------------------- -------- --------- ---------- --------- --------- ------------ ---------- -----------
Western Comparables Median 0.82% 6.70% 12.38% 0.42% 71.2% 1.31 18.0 20.0
- ------------------------------------- -------- --------- ---------- --------- --------- ------------ ---------- -----------
DISCOUNTED TERMINAL VALUE ANALYSIS. Hovde estimated the present value of
the GFSB common stock by starting with earnings of $1.35 million in 2004, $1.70
million in 2005 and assuming a 7.5% annual growth rate in earnings through 2008
(resulting in net income of $1.82 million, $1.97 million, and $2.11 million in
2006, 2007, and 2008, respectively). In arriving at the terminal value of GFSB's
earnings stream at the end of 2008, Hovde then assumed an average earnings
growth rate of 3% from 2008 into perpetuity. This terminal value was then
discounted, along with yearly cash flows for 2004 through 2008, at a range of
discount rates of 12.0%, 13.0%, 14.0%, 15.0% and 16% to arrive at the present
value for GFSB's common stock. These rates and values were chosen to reflect
different assumptions regarding the required rates of return of holders or
prospective buyers of GFSB's common stock. This analysis and its underlying
assumptions yielded a range of value for GFSB of approximately $23.64 per share
(at a 12% discount rate) to $20.08 per share (at a 15% discount rate), compared
to the merger consideration of $20.00 per share.
CONTRIBUTION ANALYSIS. Hovde prepared a contribution analysis showing
percentages of assets, loans, deposits and common equity at June 30, 2004, for
First Federal and for GFSB and estimated fiscal
51
year 2005 net income that would be contributed to the combined company on a pro
forma basis by First Federal and GFSB, respectively. In addition, this analysis
showed that holders of GFSB common stock would own approximately 17.8% of the
pro forma common shares outstanding of First Federal, assuming an exchange ratio
of 1.136 and that 51% of the consideration is paid in First Federal common
stock.
First Federal GFSB
Contribution Contribution
to Pro Forma to Pro Forma
----------------- -----------------
Total assets 61.0% 39.0%
Total net loans 63.3% 36.7%
Total deposits 66.2% 33.8%
Total equity 63.4% 36.9%
Net income - estimated fiscal year 2005 63.8% 36.2%
FINANCIAL IMPLICATIONS TO FIRST FEDERAL STOCKHOLDERS. Hovde prepared an
analysis of the financial implications of the merger consideration to a holder
of First Federal common stock. This analysis indicated that on a pro forma
equivalent basis, assuming that 51% of the merger consideration is paid in First
Federal common stock with a value of $140.79 per share, including potential cost
savings but excluding revenue enhancements, a stockholder of First Federal would
achieve approximately 17.0% accretion in GAAP earnings per share, 27.3%
accretion in cash earnings per share, an increase in book value per share of
approximately 8.5%, and a decrease in tangible book value per share of 11.2% in
2005 as a result of the consummation of the merger.
- ---------------------------------- -- ------------------------------------------------------------------
Per Share
- ---------------------------------- -- ------------------------------------------------------------------
GAAP Cash Book Tangible Book
- ---------------------------------- -- ----------- -- ----------- -- -------------- -- ------------------
Earnings Earnings Value Value
- ---------------------------------- -- ----------- -- ----------- -- -------------- -- ------------------
First Federal Standalone $7.31 $7.31 $83.94 $82.91
- ---------------------------------- -- ----------- -- ----------- -- -------------- -- ------------------
Pro Forma $8.55 $9.30 $91.05 $73.59
- ---------------------------------- -- ----------- -- ----------- -- -------------- -- ------------------
Accretion (Dilution) 17.0% 27.3% 8.5% (11.2)%
- ---------------------------------- -- ----------- -- ----------- -- -------------- -- ------------------
- ---------------------------------- -- ----------- -- ----------- -- -------------- -- ------------------
Based upon the foregoing analyses and other investigations and
assumptions set forth in its opinion, without giving specific weightings to any
one factor or comparison, Hovde determined that the aggregate merger
consideration was fair, from a financial point of view, to the stockholders of
First Federal.
A copy of Hovde's fairness opinion is attached to this joint proxy
statement/prospectus to stockholders as Annex B.
OPINION OF GFSB'S INDEPENDENT FINANCIAL ADVISOR
GENERAL. Pursuant to an engagement letter dated September 3, 2003
between GFSB and McDonald, GFSB retained McDonald to act as its sole financial
advisor in connection with a possible merger and related matters. As part of its
engagement, McDonald agreed, if requested by GFSB, to render an opinion with
respect to the fairness, from a financial point of view, to the holders of GFSB
common stock, of the merger consideration as set forth in the merger agreement.
McDonald is regularly engaged in evaluations of similar businesses and in
advising institutions with regard to mergers and acquisitions, as well as
raising debt and equity capital for such institutions. GFSB selected McDonald as
its financial advisor based upon McDonald's qualifications, expertise, and
reputation in such capacity.
52
On August 25, 2004, McDonald delivered its written opinion that the
merger consideration of approximately $20.00 in stock and cash per share of GFSB
common stock was fair to GFSB's stockholders, from a financial point of view, as
of the date of such opinion. No limitations were imposed by GFSB on McDonald
with respect to the investigations made or the procedures followed in rendering
its opinion.
From August 25, 2004 to __________, 2005, McDonald analyzed the
financial market conditions, comparable companies and comparable transactions,
and observed no material change from the analysis presented on August 25, 2004.
McDonald has issued an updated option as of ________ 2005, which is attached as
ANNEX C.
THE FULL TEXT OF MCDONALD'S WRITTEN OPINION TO GFSB'S BOARD OF
DIRECTORS, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED, AND EXTENT
OF REVIEW BY MCDONALD, IS ATTACHED AS ANNEX C, AND IS INCORPORATED HEREIN BY
REFERENCE. IT SHOULD BE READ CAREFULLY AND IN ITS ENTIRETY IN CONJUNCTION WITH
THIS JOINT PROXY STATEMENT/PROSPECTUS. THE FOLLOWING SUMMARY OF MCDONALD'S
OPINION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE
OPINION. MCDONALD'S OPINION IS ADDRESSED TO GFSB'S BOARD OF DIRECTORS AND DOES
NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER OF GFSB AS TO HOW SUCH
STOCKHOLDER SHOULD VOTE AT THE SPECIAL MEETING DESCRIBED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS.
In connection with rendering its opinion dated August 25, 2004, McDonald
has reviewed and analyzed, among other things, the following:
(i) the merger agreement;
(ii) certain financial statements and other financial information of
GFSB and its subsidiary Gallup Federal Savings Bank, including
the Annual Reports on Form 10-KSB for each of the years in the
three year period ended June 30, 2003; internal and the
Regulatory Financial Statements for Gallup Federal Savings Bank
and GFSB for the quarters ended December 31, 2003 and March 31,
2004; the Quarterly Reports on Form 10-QSB for the quarters
ended December 31, 2003 and March 31, 2004; and the internal
financial statements for the year ended June 30, 2004;
(iii) certain other internal information, primarily financial in
nature, including projections, concerning the business and
operations of GFSB and Gallup Federal Savings Bank furnished to
us by GFSB and Gallup Federal Savings Bank for purposes of our
analysis;
(iv) the historical trading price and volume of GFSB's common stock;
(v) the process leading to the receipt of offers and the responses
of certain potential acquirers concerning the potential
acquisition of GFSB;
(vi) certain publicly available information with respect to certain
other companies that we believe to be comparable to GFSB and the
trading markets for such other companies' securities;
(vii) certain publicly available information concerning the nature and
terms of certain other transactions that we considered relevant
to our inquiry;
(viii) certain publicly available, internal, and audited financial
information for First Federal;
(ix) certain other information concerning First Federal;
(x) discussions with First Federal personnel regarding the proposed
financing of the transaction;
53
(xi) the economic, banking and competitive climate for banking
institutions in New Mexico;
(xii) the business and prospects of GFSB through meetings and
discussions with certain officers and employees of GFSB; and
(xiii) other matters we believe relevant to our inquiry.
The written opinion provided by McDonald to GFSB was necessarily based
upon economic, monetary, financial market and other relevant conditions as of
the dates thereof. In connection with its review and arriving at its opinion,
McDonald relied upon the accuracy and completeness of the financial information
and other pertinent information provided by GFSB and First Federal to McDonald
for purposes of rendering its opinion. McDonald did not assume any obligation to
verify independently any of the provided information as being complete and
accurate in all material respects. With regard to the financial forecasts
established and developed for GFSB with the input of management, McDonald
assumed that these materials had been reasonably prepared on bases reflecting
the best available estimates and judgments of GFSB as to the future performance
of GFSB and that the projections provided a reasonable basis upon which McDonald
could formulate its opinion. GFSB does not publicly disclose such internal
management projections of the type utilized by McDonald in connection with
McDonald's role as financial advisor to GFSB with respect to the review of the
merger. Therefore, such projections cannot be assumed to have been prepared with
a view towards public disclosure. The projections were based upon numerous
variables and assumptions that are inherently uncertain, including, among
others, factors relative to the general economic and competitive conditions
facing GFSB Accordingly, actual results could vary significantly from those set
forth in the respective projections.
McDonald does not claim to be an expert in the evaluation of loan
portfolios or the allowance for loan losses with respect thereto and therefore
assumes that such allowances for GFSB are adequate to cover such losses. In
addition, McDonald does not assume responsibility for the review of individual
credit files and did not make an independent evaluation, appraisal or physical
inspection of the assets or individual properties of GFSB, nor was McDonald
provided with such appraisals. Furthermore, McDonald assumes that the merger
will be consummated in accordance with the terms set forth in the merger
agreement, without any waiver of any material terms or conditions by GFSB, and
that obtaining the necessary regulatory approvals for the merger will not have
an adverse effect on either separate institution or the combined entity.
McDonald assumes that the merger will be recorded as a "purchase" in accordance
with generally accepted accounting principles.
In connection with rendering its August 25, 2004 opinion to GFSB's board
of directors, McDonald performed a variety of financial and comparative
analyses, which are briefly summarized below. Such summary of analyses does not
purport to be a complete description of the analyses performed by McDonald.
Moreover, McDonald believes that these analyses must be considered as a whole
and that selecting portions of such analyses and the factors considered by it,
without considering all such analyses and factors, could create an incomplete
understanding of the scope of the process underlying the analyses and, more
important, the opinion derived from them. The preparation of a financial
advisor's opinion is a complex process involving subjective judgments and is not
necessarily susceptible to partial analyses or a summary description of such
analyses. In its full analysis, McDonald also included assumptions with respect
to general economic, financial market and other financial conditions.
Furthermore, McDonald drew from its past experience in similar transactions, as
well as its experience in the valuation of securities and its general knowledge
of the banking industry as a whole. Any estimates in McDonald's analyses were
not necessarily indicative of actual future results or values, which may diverge
significantly more or less favorably from such estimates. Estimates of company
54
valuations do not purport to be appraisals or to reflect necessarily the prices
at which companies or their respective securities actually may be sold. None of
the analyses performed by McDonald were assigned a greater significance by
McDonald than any other in deriving its opinion.
IMPLIED OFFER PRICE. As of _______, 2005, the GFSB record date, a
stockholder would have received $20.00 in stock and cash as outlined in the
merger agreement in exchange for each share of GFSB common stock that a
stockholder owned at that time. GFSB option holders would have received, in
stock and cash, the difference between $20.00 and the exercise price of the
option times the number of shares subject to the option. The estimated mix will
be 51% in stock of First Federal and 49% cash. The resulting total merger
consideration is approximately $24.1 million. The implied total merger
consideration results in a multiple of 17.8 times trailing earnings of GFSB for
the twelve months ended June 30, 2004 and an implied multiple of 1.33 times
tangible book value and 1.33 times book value at June 30, 2004.
COMPARISON WITH THE OTHER OFFERS. McDonald compared the First Federal
offer to the other offers received. The monetary value of the offer to GFSB
stockholders by First Federal was higher than the other offer and verbal
indication of interest received.
COMPARISON WITH PUBLICLY TRADED STOCK PRICE. GFSB is a publicly traded
company whose stock trades very infrequently. McDonald's opinion was delivered
on August 25, 2004. The last public trade of GFSB common stock was 250 shares at
$21.00 on August 19, 2004. The offer price of $20.00 represents a discount of
4.8% to this value. During the 52 weeks ended August 23, 2004, GFSB Bancorp's
common stock traded on 37 days, representing average daily volume of 84 shares
over this period. In an analysis of offer prices for publicly traded thrifts
with assets from $150 to $500 million, between January 1, 2003 and August 23,
2004, the average offer price represented 14.7% premium over the closing trading
price five days before the announcement, and ranged from a high of a premium of
31.5% to a low of a discount of 6.9%.
COMPARABLE COMPANY ANALYSIS. McDonald reviewed and compared the
valuation implied by the financial consideration and actual selected financial
information for GFSB with corresponding information for a peer group of publicly
traded thrifts. The trading multiples referenced in this section represent
minority valuations or the value at which one-share trades in the open market.
The companies in the guideline comparable group were chosen based on the
following parameters:
o thrifts with assets size between $100 million and $300 million;
o thrifts with a return on assets between 0.5% and 1.0%; and
o thrifts located in rural areas.
The search resulted in a guideline comparable company group consisting
of nine companies. The pricing multiples in the following table, except for
those related to GFSB, represent the public trading values.
The following table represents a summary analysis of the guideline
comparable company group and GFSB based on market prices as of August 23, 2004
and the latest publicly available financial data as of or for the last twelve
months ended March 31, 2004 or June 30, 2004:
55
MEAN MEDIAN GFSB(1)
-------------- -------------- --------------
Total Assets ($000) $228,011 $228,884 $584,740
Equity /Assets 9.51% 9.97% 7.9%
ROA 0.78% 0.77% 0.9%
Price/LTM Earnings 15.4x 15.0x 17.9x
Premium/Assets 1.63% 1.57% 2.57%
Price/ Book 120.1% 116.8% 132.9%
Price/Tangible Book 136.1% 119.0% 132.9%
-------------------------------
(1) GFSB's return on average assets and return on average equity are
for the twelve months ended September 30, 2004. GFSB's multiples
represent the merger pricing multiples.
McDonald's analysis of the guideline comparable company group, implied a
reference valuation range for GFSB of between $13.13 and $23.28 per share.
COMPARABLE TRANSACTION ANALYSIS. McDonald reviewed and compared actual
information for a group of four guideline comparable merger transactions,
announced since January 1, 2000, deemed pertinent to an analysis of the merger.
Transactions in the guideline comparable group were chosen based on the
following parameters:
o thrift acquisitions with assets size between $100 million and
$325 million;
o thrift acquisition with a return on assets between 0.5% and
1.0%; and
o thrifts located in rural areas.
The following table represents a summary analysis for the comparable
merger transaction group and GFSB based on publicly announced transaction data:
MEAN MEDIAN GFSB(1)
-------------- -------------- --------------
Total Assets ($000) $208,521 $200,001 $584,740
Equity /Assets 9.7% 9.3% 7.9%
ROA 0.78% 0.79% 0.9%
Price/Earnings 16.9x 17.9x 17.9x
Price/Book 141.3% 137.4% 132.9%
Price/Tangible Book 141.3% 137.4% 132.9%
Premium/Assets 4.85% 4.36% 2.57%
-------------------------------
(1) GFSB's return on average assets and return on average equity are
for the twelve months ended September 30, 2004. GFSB's multiples
represent the merger pricing multiples.
McDonald's analysis of comparable merger transactions implied a
reference valuation range for GFSB of between $13.76 and $29.70 per share.
It is important to note that McDonald found it difficult to find
comparable companies for both the public trading and precedent sale analyses
that were in markets generally perceived to be similar to Gallup, New Mexico
from the standpoint of geographic proximity to larger markets, per capita income
levels and growth characteristics.
56
DISCOUNTED EARNINGS ANALYSIS. McDonald performed a discounted earnings
analysis with regard to GFSB under various scenarios. McDonald's base discounted
earnings valuation analyzed GFSB on a stand-alone basis. McDonald also assumed
that GFSB performed in accordance with the financial statement forecasts from
2004 through 2008, developed by McDonald using assumptions and guidance from
GFSB's senior management. This analysis utilized a discount rate range of
approximately 13.5% to 17.5%. McDonald estimated the terminal values by using
multiples of earnings, book value, and premium to assets. The terminal multiples
ranged from 15.9 to 19.9 times earnings, 1.17 to 1.57 times book value, and
premium to assets ratios from 2.4% to 6.4%, based upon the data from the
precedent merger transaction analysis. In addition, McDonald performed the
discounted earnings analysis using a terminal multiple range from 14.0 to 18.0
times earnings, 1.00 to 1.39 times book value, and premium to assets ratios from
0.0% to 3.9%, based upon guideline public comparable companies. This analysis
was based on estimates considering market and company specific events and is not
necessarily indicative of actual values or actual future results and does not
purport to reflect the prices at which any securities may trade at the present
or at any time in the future. McDonald noted that the discounted earnings
analysis was included because it is a widely used valuation methodology, but
noted that the results of such methodology are highly dependent upon the
numerous assumptions that must be made, including earnings growth rates,
discount rates, and terminal values.
McDonald's discounted earnings analysis implied a reference valuation
range for GFSB of between $13.76 and $19.20 per share based on control terminal
multiples and a reference valuation range for GFSB of between $12.09 and $16.48
per share based on guideline public comparable trading terminal multiples.
First Federal is a privately held company and therefore does not have a
daily market price for its common stock. Given that a portion of the merger
consideration will be in the form of common stock of First Federal, McDonald
conducted a valuation of First Federal's common stock on a pro forma basis
("First Federal - Pro Forma") after the combination with GFSB The following
analysis assumes that 51% of the merger consideration will be stock and 49% will
be cash. The analysis assumes that approximately $11.8 million of trust
preferred securities and excess cash at the holding company are used to finance
the cash portion of the transaction. This analysis values the stock portion of
the merger consideration and then adds it to the cash portion to develop an
estimated range of total value per share.
COMPARABLE COMPANY ANALYSIS. McDonald developed a valuation range for
First Fed - Pro Forma using the valuation and financial data for a peer group of
publicly traded thrifts. The trading-multiples referenced in this section
represent minority valuations or the value at which one-share trades in the open
market.
The companies in the guideline comparable group were chosen based on the
following parameters:
o thrifts with assets size between $500 million and $900 million;
and
o thrifts with a return on assets between 0.6% and 1.3%.
The search resulted in a guideline comparable company group consisting
of 13 companies. The pricing multiples in the following table, except for those
related to First Federal - Pro Forma represent the public trading values.
The following table represents a summary analysis of the guideline
comparable company group and First Federal Pro Forma based on market prices as
of August 23, 2004 and the latest publicly available financial data as of or for
the last twelve months ended March 31, 2004 or June 30, 2004:
57
FIRST FEDERAL - PRO
MEAN MEDIAN FORMA(1)
-------------- --------------- ---------------------
Total Assets ($000) $674,115 $693,888 $[593,838]
Equity /Assets 9.3% 9.0% [ ]%
ROA 0.9% 0.8% [ ]%
Price/LTM Earnings 16.3x 15.4x NM
Price/ Book 145.8% 146.1% NM
Price/Tangible Book 158.6% 152.0% NM
Premium/Assets 4.1% 4.0% NM
--------------------------------
1) First Federal Pro Forma's return on average assets and return on
average equity are for the twelve months ended September 30,
2004. First-Fed Pro Forma's multiples represent the merger
pricing multiples.
McDonald's analysis of the guideline comparable company group implied a
reference valuation range between $19.26 and $20.87 per share using the First
Federal - Pro Forma valuation for the stock portion of the merger consideration.
COMPARABLE TRANSACTION ANALYSIS. McDonald reviewed and compared actual
information for a group of seven guideline comparable merger transactions
announced since January 1, 2000, deemed pertinent to an analysis of the merger.
The multiples referenced in this section represent control valuations or the
value at which ownership control is exchanged. In order to use these multiples
to estimate the value of one share of stock, which represents the value of a
minority ownership position, it is necessary to adjust the multiples for a
minority position. The discount for a minority position was calculated by taking
the median of the premium of a merger price at announcement over the trading
price five days prior to the announcement of all thrift merger transactions for
the twelve months ended August 23, 2004. The resulting control premium of 20.4%
is converted to a discount of 16.7%. In calculating the imputed reference
valuation range, a minority discount of 16.7% was applied to the appropriate
valuation multiples. Transactions in the guideline comparable group were chosen
based on the following parameters:
o thrift acquisitions with assets size between $500 million and
$900 million; and
o thrift acquisition with ROA between 0.6% and 1.3%.
The following table represents a summary analysis for the comparable
merger transaction group and First Federal - Pro Forma based on publicly
announced transaction data:
FIRST FEDERAL - PRO
MEAN MEDIAN FORMA(1)
-------------- --------------- ---------------------
Total Assets ($000) $661,524 $664,815 $[593,838]
Equity /Assets 10.9% 10.2% [ ]%
ROA 0.91% 0.99% [ ]%
Price/Earnings 19.7x 18.5x NM
Price/Book 158.8% 155.3% NM
Price/Tangible Book 165.1% 164.5% NM
Premium/Assets 6.3% 6.6% NM
-----------------------
(1) First Federal - Pro Forma's return on average assets and return
on average equity are for the twelve months ended September 30,
2004. First Federal - Pro Forma's multiples represent the merger
pricing multiples.
58
McDonald's analysis of comparable merger transactions, discounted for a
minority position, implied a reference valuation range of between $19.25 and
$20.68 per share using the First Fed-Pro Forma valuation for the stock portion
of the merger consideration.
DISCOUNTED EARNINGS ANALYSIS. McDonald performed a discounted earnings
analysis with regard to First Fed-Pro Forma under various scenarios. McDonald's
base discounted earnings valuation analyzed First Fed-Pro Forma on a combined
basis as if the transaction were closed. McDonald also assumed that First
Fed-Pro Forma performed in accordance with the financial statement forecasts
from 2004 through 2008, developed by McDonald using assumptions and guidance
from First Federal and GFSB Bancorp's senior management. This analysis utilized
a discount rate of approximately 15.6%. McDonald estimated the terminal values
by using multiples of earnings, book value, and premium to assets. The terminal
multiples of 15.4 times earnings, 1.54 times adjusted book value, and premium to
assets ratio of 4.0% are based upon guideline public comparable companies. This
analysis was based on estimates considering market and company specific events
and is not necessarily indicative of actual values or actual future results and
does not purport to reflect the prices at which any securities may trade at the
present or at any time in the future. McDonald noted that the discounted
earnings analysis was included because it is a widely used valuation
methodology, but noted that the results of such methodology are highly dependent
upon the numerous assumptions that must be made, including earnings growth
rates, discount rates, and terminal values.
McDonald's discounted earnings analysis implied a reference valuation
range of between $17.18 and $18.34 per share based on guideline public
comparable trading terminal multiples and using the First Fed-Pro Forma
valuation for the stock portion of the merger consideration.
OTHER ANALYSES. McDonald also reviewed certain other information and
performed other analyses including reviewing GFSB's past discussions with
potential interested parties and the process leading up to the merger agreement.
NO COMPANY USED AS A COMPARISON IN THE ABOVE ANALYSIS IS IDENTICAL TO
GFSB AND NO OTHER TRANSACTION IS IDENTICAL TO THE MERGER. ACCORDINGLY, AN
ANALYSIS OF THE RESULTS OF THE FOREGOING IS NOT PURELY MATHEMATICAL; RATHER,
SUCH ANALYSES INVOLVE COMPLEX CONSIDERATIONS AND JUDGMENTS CONCERNING
DIFFERENCES IN FINANCIAL MARKET AND OPERATING CHARACTERISTICS OF THE COMPANIES
AND OTHER FACTORS THAT COULD AFFECT THE PUBLIC TRADING VOLUME OF THE COMPANIES
TO WHICH GFSB IS BEING COMPARED.
For its financial advisory services provided to GFSB, McDonald has been
paid fees of $110,000 as of October 2004 and will be paid a fee of approximately
$370,000 contingent upon closing of the merger. In addition, GFSB has agreed to
reimburse McDonald for all reasonable out-of-pocket expenses incurred by it on
GFSB's behalf, as well as to indemnify McDonald against certain liabilities,
including any which may arise under the federal securities laws.
McDonald is a member of all principal securities exchanges in the United
States and in the conduct of its broker-dealer activities may have from time to
time purchased securities from, and sold securities to, GFSB.
59
DISSENTERS' RIGHTS OF APPRAISAL
Under Delaware law, stockholders of First Federal and GFSB, including
employee stock ownership plan participants with respect to the shares allocated
to their accounts, have the right to dissent from the merger and to receive
payment in cash for the fair value of their shares of common stock instead of
the merger consideration. First Federal and GFSB stockholders electing to do so
must comply with the provisions of Section 262 of the Delaware General
Corporation Law in order to perfect their rights of appraisal. A copy of the
applicable Delaware statute is attached as ANNEX D of this document.
ENSURING PERFECTION OF APPRAISAL RIGHTS CAN BE COMPLICATED. THE
PROCEDURAL RULES ARE SPECIFIC AND MUST BE FOLLOWED PRECISELY. A FAILURE TO
COMPLY WITH THESE PROCEDURAL RULES MAY RESULT IN BECOMING INELIGIBLE TO PURSUE
APPRAISAL RIGHTS.
The following is intended as a brief summary of the material provisions
of the Delaware statutory procedures that a First Federal or GFSB stockholder
must follow in order to dissent from the merger and obtain payment of the fair
value of his or her shares of common stock instead of the merger consideration.
This summary, however, is not a complete statement of all applicable
requirements and is qualified in its entirety by reference to Section 262 of the
Delaware General Corporation Law, the full text of which appears in Annex D of
this joint proxy statement/prospectus. Under Section 262 of the Delaware General
Corporation Law, not less than 20 days before First Federal's or GFSB's special
meeting of stockholders, First Federal and GFSB must notify each of the holders
of record of its capital stock as of _______________, 2005, that appraisal
rights are available and include in the notice a copy of Section 262 of the
Delaware General Corporation Law. First Federal and GFSB intend that this joint
proxy statement/prospectus constitutes this notice.
If you are a First Federal or GFSB stockholder who wishes to exercise
your appraisal rights, you must satisfy the provisions of Section 262 of the
Delaware General Corporation Law. Section 262 requires the following:
YOU MUST MAKE A WRITTEN DEMAND FOR APPRAISAL: You must deliver a written
demand for appraisal to First Federal or GFSB, as __________, 2005before the
vote on the merger agreement is taken at the each company's respective special
meeting. This written demand for appraisal must be separate from your proxy
card. A vote against the merger agreement alone will not constitute a demand for
appraisal.
YOU MUST REFRAIN FROM VOTING FOR ADOPTION OF THE MERGER AGREEMENT: You
must not vote for adoption of the merger agreement. If you vote, by proxy or in
person, in favor of the merger agreement, this will terminate your right to
appraisal. You can also terminate your right to appraisal if you return a signed
proxy card and:
o fail to vote against adoption of the merger agreement; or
o fail to note that you are abstaining from voting.
If you do either of these two things, your appraisal rights will terminate even
if you previously filed a written demand for appraisal.
YOU MUST CONTINUOUSLY HOLD YOUR SHARES OF FIRST FEDERAL OR GFSB COMMON
STOCK: You must continuously hold your shares of First Federal common stock or
GFSB common stock from the date
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you make the demand for appraisal through the effective date of the merger. If
you are the record holder of First Federal common stock or GFSB common stock on
the date the written demand for appraisal is made but thereafter transfer the
shares prior to the effective date of the merger, you will lose any right to
appraisal for those shares.
A written demand for appraisal of First Federal common stock or GFSB
common stock is only effective if it is signed by, or for, the stockholder of
record who owns such shares at the time the demand is made. The demand must also
be signed precisely as the stockholder's name appears on his or her stock
certificate. If you are the beneficial owner of First Federal common stock or
GFSB common stock, but not the stockholder of record, you must have the
stockholder of record sign any demand for appraisal.
If you own First Federal common stock or GFSB common stock in a
fiduciary capacity, such as a trustee, guardian or custodian, you must disclose
the fact that you are signing the demand for appraisal in that capacity.
If you own First Federal common stock or GFSB common stock with more
than one person, such as in a joint tenancy or tenancy in common, all the owners
must sign, or have signed for them, the demand for appraisal. An authorized
agent, including an agent for one or more of the joint owners, may sign the
demand for appraisal for a stockholder of record; however, the agent must
expressly disclose who the stockholder of record is and that the agent is
signing the demand as that stockholder's agent.
If you are a record owner, such as a broker, who holds First Federal or
GFSB common stock as a nominee for others, you may exercise a right of appraisal
with respect to the shares of First Federal or GFSB common stock held for one or
more beneficial owners, while not exercising such right for other beneficial
owners. In such a case, you should specify in the written demand the number of
shares of First Federal or GFSB common stock as to which you wish to demand
appraisal. If you do not expressly specify the number of shares, the demand will
be presumed to cover all the shares of First Federal or GFSB common stock that
are in your name.
If you are a First Federal stockholder who elects to exercise appraisal
rights, you should mail or deliver a written demand to: First Federal Banc of
the Southwest, Inc., 300 North Pennsylvania, Roswell, New Mexico 88201,
Attention: George A. Rosenbaum, Jr., Secretary.
If you are a GFSB stockholder who elects to exercise appraisal rights,
you should mail or deliver a written demand to: GFSB Bancorp, Inc., 221 West
Aztec Avenue, Gallup, New Mexico 87301, Attention: George S. Perce, Secretary.
It is important that First Federal and GFSB receive all written demands
before the vote concerning the merger agreement is taken at the each company's
respective special meeting of stockholders. As explained above, this written
demand would be signed by, or on behalf of, the stockholder of record. The
written demand for appraisal should specify the stockholder's name and mailing
address, the number of shares of common stock owned, and that the stockholder is
demanding appraisal of such stockholder's shares.
If the merger is completed, each holder of First Federal common stock or
GFSB common stock who has perfected appraisal rights in accordance with Section
262 of the Delaware General Corporation Law will be entitled to be paid by First
Federal for such stockholder's shares of common stock the fair value in cash of
those shares. The Delaware Court of Chancery will determine the fair value of
the shares, exclusive of any element of value arising from the completion or
expectation of the merger,
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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 may
take into account all relevant factors and upon such determination will then
direct the payment of the fair value of the shares, together with any interest,
to the holders of First Federal common stock or GFSB common stock who have
perfected their appraisal rights. The shares of First Federal common stock and
GFSB common stock with respect to which holders have perfected their appraisal
rights in accordance with Section 262 and have not effectively withdrawn or lost
their appraisal rights are referred to in this document as the dissenting
shares.
STOCKHOLDERS CONSIDERING SEEKING APPRAISAL FOR THEIR SHARES SHOULD NOTE
THAT THE FAIR VALUE OF THEIR SHARES DETERMINED UNDER SECTION 262 OF DELAWARE LAW
COULD BE MORE, THE SAME, OR LESS THAN THE CONSIDERATION THEY WOULD RECEIVE
PURSUANT TO THE MERGER AGREEMENT IF THEY DID NOT SEEK APPRAISAL OF THEIR SHARES.
The Delaware Court of Chancery may determine the costs of the appraisal
proceeding and allocate them among the parties as the court deems equitable
under 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 reasonable attorneys' fees and the fees and
expenses of experts, to be charged pro rata against the value of all shares
entitled to appraisal. In the absence of such determination or assessment, each
stockholder bears its own expenses.
If you are a GFSB stockholder and fail to comply with any of these
conditions and the merger becomes effective, you will only be entitled to
receive the consideration provided in the merger agreement for your shares.
Within ten days after the effective date of the merger, First Federal
must give written notice that the merger has become effective to each
stockholder who has fully complied with the conditions of Section 262 of the
Delaware General Corporation Law.
Within 120 days after the effective date of the merger, either the
surviving corporation of the merger or any stockholder who has complied with the
conditions of Section 262 may file a petition in the Delaware Court of Chancery.
This petition should request that the Delaware Court of Chancery determine the
value of the shares of First Federal common stock or GFSB common stock held by
all the stockholders who are entitled to appraisal rights. If you intend to
exercise your appraisal rights, you should file this petition in the Delaware
Court of Chancery. First Federal has no obligation to file this petition, and if
you do not file this petition within 120 days after the effective date of the
merger, you will lose your rights of appraisal. A dissenting stockholder must
also serve a copy of the petition on First Federal.
If you change your mind and decide you no longer wish to exercise your
appraisal rights, you may withdraw your demand for appraisal rights at any time
within 60 days after the effective date of the merger. A withdrawal request
received more than 60 days after the effective date of the merger is effective
only with the written consent of First Federal. If you effectively withdraw your
demand for appraisal rights and you are a GFSB stockholder, you will receive the
merger consideration provided in the merger agreement.
If you have complied with the conditions of Section 262, you are
entitled to receive a statement from First Federal. This statement will set
forth the number of shares not voted in favor of the merger agreement and that
have demanded appraisal rights and the number of stockholders who own those
shares. In order to receive this statement you must send a written request to
First Federal within 120 days after the effective date of the merger. First
Federal must mail this statement within ten days after it
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receives the written request or within ten days after the expiration of the
period for the delivery of demands, whichever is later.
If you properly file a petition for appraisal in the Chancery Court and
deliver a copy to First Federal, First Federal will then have 20 days to provide
the Chancery Court with a list of the names and addresses of all stockholders
who have demanded appraisal rights and have not reached an agreement with First
Federal as to the value of their shares. The Registry in the Court of Chancery,
if so ordered by the Court of Chancery, will give notice of the time and place
fixed for the hearing of such petition to the stockholders on the list. At the
hearing, the Chancery Court will determine the stockholders who have complied
with Section 262 and are entitled to appraisal rights. The Chancery Court may
also require you to submit your stock certificates to the Registry in the Court
of Chancery so that it can note on the certificates that an appraisal proceeding
is pending. If you do not follow the Chancery Court's directions, you may be
dismissed from the proceeding.
After the Chancery Court determines which stockholders are entitled to
appraisal rights, the Chancery Court will appraise the shares of stock that are
the subject of the demand for appraisal. To determine the fair value of the
shares, the Chancery Court will consider all relevant factors except for any
appreciation or depreciation due to the anticipation or accomplishment of the
merger. After the Chancery Court determines the fair value of the shares, it
will direct the First Federal to pay that value to the stockholders who have
successfully sought appraisal rights. The Chancery Court can also direct First
Federal to pay interest, simple or compound, on that value if the Chancery Court
determines that interest is appropriate. In order to receive payment for your
shares under an appraisal procedure, you must surrender your stock certificates
to First Federal.
If you demand appraisal rights, after the effective date of the merger
you will not be entitled:
o to vote the shares of common stock for which you have demanded
appraisal rights for any purpose;
o to receive payment of dividends or any other distribution with
respect to the shares of common stock for which you have
demanded appraisal, except for dividends or distributions, if
any, that are payable to holders of record as of a record date
prior to the effective date of the merger; or
o to receive the payment of the consideration provided for in the
merger agreement (unless you properly withdraw your demand for
appraisal).
If you do not file a petition for an appraisal within 120 days after the
effective date of the merger, your right to an appraisal will terminate. If you
are a GFSB stockholder, you may withdraw your demand for appraisal and accept
the merger consideration by delivering to First Federal a written withdrawal of
your demand, except that:
o any attempt to withdraw made more than 60 days after the
effective date of the merger will require the written approval
of First Federal; and
o an appraisal proceeding in the Chancery Court cannot be
dismissed unless the Chancery Court approves.
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IF YOU FAIL TO COMPLY STRICTLY WITH THE PROCEDURES DESCRIBED ABOVE YOU
WILL LOSE YOUR APPRAISAL RIGHTS. CONSEQUENTLY, IF YOU WISH TO EXERCISE YOUR
APPRAISAL RIGHTS, WE STRONGLY URGE YOU TO CONSULT A LEGAL ADVISOR BEFORE
ATTEMPTING TO DO SO.
INTERESTS OF CERTAIN GFSB DIRECTORS AND OFFICERS IN THE MERGER
When considering the recommendations of the GFSB board of directors
regarding the merger, you should be aware that some of the employees of GFSB and
Gallup Federal Savings Bank and members of the GFSB board of directors and
management have interests that differ from, and may conflict with, your
interests as a stockholder of GFSB. The GFSB board of directors was aware of
these interests when it approved the merger and the merger agreement.
EMPLOYMENT AGREEMENT WITH JERRY R. SPURLIN. Mr. Spurlin, Chief Financial
Officer of GFSB and Gallup Federal Savings Bank, currently has a change in
control severance agreement with Gallup Federal Savings Bank that provides Mr.
Spurlin with a severance payment and continuation of certain employee benefits
if he is terminated following a change in control of GFSB or Gallup Federal
Savings Bank. The merger with First Federal will constitute a change in control
of GFSB and Gallup Federal Savings Bank for purposes of the change in control
agreement and, as a result Mr. Spurlin would be entitled to receive a cash
severance payment in the amount of approximately $200,000 and the continuation
of certain benefits. Rather than take the severance payment, Mr. Spurlin has
agreed to terminate his agreement with GFSB effective as of the closing date of
the merger and enter into 24 month employment agreement with First Federal Bank.
This agreement provides for a base salary of $100,000 per year and a one-time
payment of $50,000 to Mr. Spurlin. In the event Mr. Spurlin completes his
agreement with First Federal Bank, he will be entitled to a lump-sum payment of
$150,000 (or prorated if the agreement is terminated early for reasons other
than cause). Mr. Spurlin's contract provides that he may be terminated for
cause.
EMPLOYMENT AGREEMENT WITH WILLIAM W. HEAD, JR. Mr. Head is a Vice
President of Gallup Federal Savings Bank. Mr. Head currently has a change in
control severance agreement with Gallup Federal Savings Bank that provides him
with a severance payment and continuation of certain employee benefits if he is
terminated following a change in control of GFSB or Gallup Federal Savings Bank.
The merger with First Federal will constitute a change in control of GFSB and
Gallup Federal Savings Bank for purposes of the change in control agreement and,
as a result, Mr. Head would be entitled to receive a cash severance payment in
the amount of approximately $152,506 and the continuation of certain benefits.
Rather than take the severance payment, Mr. Head has agreed to terminate his
change in control agreement with Gallup Federal Savings Bank effective as of the
closing date of the merger and has entered into a 24 month change in severance
agreement with First Federal Bank. This agreement provides for a base salary of
$76,253 per year. The $152,506 payment due Mr. Head under his employment
agreement with Gallup Federal Savings Bank will be reduced by 1/24th for each
full or partial month Mr. Head works for First Federal Bank. Mr. Head may be
terminated for cause under this agreement.
EMPLOYMENT AGREEMENT WITH LEONARD C. SCALZI.. Mr. Scalzi is a Senior
Vice President of Gallup Federal Savings Bank. Mr. Scalzi currently has a change
in control severance agreement with Gallup Federal Savings Bank that provides
him with a severance payment and continuation of certain employee benefits if he
is terminated following a change in control of GFSB or Gallup Federal Savings
Bank. The merger with First Federal will constitute a change in control of GFSB
and Gallup Federal Savings Bank for purposes of the change in control severance
agreement and, as a result, Mr. Scalzi
64
would be entitled to receive a cash severance payment in the amount of
approximately $169,600 and the continuation of certain benefits. Rather than
take the severance payment, Mr. Scalzi has agreed to terminate his change in
control severance agreement with Gallup Federal Savings Bank effective as of the
closing date of the merger and has entered into a 24 month employment agreement
with First Federal Bank. This agreement provides for a base salary of $120,000
per year. If Mr. Scalzi's employment is terminated for other than cause,
disability or retirement, he shall receive a lump sum equal to the greater of
the payments due for the remaining term of the agreement, or two (2) times the
highest annual rate of base salary. Mr. Scalzi may be terminated for cause under
this agreement.
AGREEMENTS WITH OTHER OFFICERS. In connection with the merger, First
Federal entered into change in severance agreements with Debra S. Fischer and
Ginger R. Palmer, officers of Gallup Federal Savings Bank. These officers
currently have change in control severance agreements with Gallup Federal
Savings Bank. These individuals have agreed to terminate their respective
agreements with Gallup Federal Savings Bank effective as of the closing date of
the merger and have entered into 24 month change in severance agreements with
First Federal Bank. The change in severance agreements entered into between
these individuals and First Federal Bank contain a payment provision in the
event of a change in control of First Federal Bank equal to twice their
individual salaries. The agreements also provide that the employees may by
terminated for cause without any payment by First Federal Bank.
RELEASE AND NON-COMPETE AGREEMENT WITH RICHARD P. GALLEGOS. Mr. Gallegos
is the President of Gallup Federal Savings Bank. Mr. Gallegos currently has a
change in control severance agreement with Gallup Federal Savings Bank that
provides him with a severance payment if he is terminated following a change in
control of GFSB or Gallup Federal Savings Bank. The merger with First Federal
will constitute a change in control of GFSB and Gallup Federal Savings Bank for
purposes of the employment agreement and, as a result, Mr. Gallegos is entitled
to receive a cash severance payment in the amount of approximately $254,840. Mr.
Gallegos will be paid his severance payment. Additionally, Mr. Gallegos has
entered into a Release and Non-Compete Agreement with First Federal. Gallup
Federal Savings Bank will make a one-time payment to Mr. Gallegos under this
agreement of $35,000. This agreement prohibits Mr. Gallegos from competing with
First Federal, GFSB and Gallup Federal Savings Bank for a two-year period in
certain areas of New Mexico and from soliciting First Federal's employees and
customers. Additionally, the agreement releases First Federal from all liability
to Mr. Gallegos.
VESTING OF GFSB RESTRICTED STOCK. Under GFSB's Management Stock Bonus
Plan, restricted stock awards vest over a period of five years. Under the terms
of the plan, all issued but unvested restricted shares will become vested upon a
change in control of GFSB. The signing of the merger agreement will constitute a
change in control of GFSB and all shares of unvested restricted stock became
vested. The following table reflects, as of ________, 2005, the number of shares
of unvested restricted stock held by each executive officer which became vested
upon the signing of the merger agreement and the value of the merger
consideration that each will receive in exchange for their shares, assuming a
merger consideration value of $20.00.
65
Total Merger
Number of Consideration Value
Name Unvested Shares of for Unvested Shares
and Title Restricted Stock of Restricted Stock
--------- ---------------- -------------------
Leonard C. Scalzi 750 $15,000
Senior Vice President
Jerry R. Spurlin 1,700 $34,000
Chief Financial Officer
William W. Head, Jr. 960 $19,200
Chief Lending Officer
GFSB STOCK OPTIONS. At the effective time of the merger, each
outstanding option to purchase shares of GFSB common stock, whether or not
vested, shall be cancelled and holders shall be entitled to receive a
combination of First Federal common stock and cash equal to the number of shares
of GFSB common stock subject to such option multiplied by an amount equal to the
excess of $20.00 over the applicable exercise price per share ("option value").
First Federal shall pay the option holder in a number of whole shares of First
Federal common stock equal to a fraction, the numerator of which is the option
value multiplied by 0.51 and the denominator of which is $17.60. First Federal
will pay the option holder cash equal to the option value multiplied by 0.49.
Any fractional shares held by the option holder will be paid by First Federal in
cash.
The following table reflects the number of options held by each director
and executive officer and the payment that each will receive in exchange for
their total outstanding options, whether currently vested or not, before
deductions of any applicable withholding taxes, assuming the individuals do not
exercise any options prior to the merger closing:
Name and Title Number of Options Total Payment of Options(1)
-------------- ----------------- ---------------------------
Michael P. Mataya 8,926 $107,777
Charles L. Parker, Jr. 9,264 $110,819
George S. Perce 9,288 $111,035
Richard C. Kauzlaric 10,180 $119,063
Vernon I. Hamilton 9,095 $109,298
James Nechero, Jr. 9,456 $112,547
Richard P. Gallegos 12,500 $113,750
Jerry R. Spurlin -- $ --
Leonard C. Scalzi 8,750 $ 78,750
William W. Head, Jr. 8,906 $112,216
- ----------------
(1) Assumes $20 equivalent payment for options. Any unexercised options as
of the effective time of the merger, whether or not vested, shall be
canceled in exchange for a combination of shares of First Federal common
stock (51%) and cash (49%) equal to the value of such option which will
be calculated as the excess, if any, of $20 over the per share exercise
price multiplied by the number of shares subject to the option.
APPOINTMENTS TO THE FIRST FEDERAL AND GFSB BOARD OF DIRECTORS. Upon
completion of the merger, First Federal will appoint Richard C. Kauzlaric and
Michael P. Mataya to the boards of directors of First Federal and First Federal
Bank. These directors will be paid the same fees as are paid to First Federal's
and First Federal Bank's directors.
TERMINATION OF THE GALLUP FEDERAL SAVINGS BANK ESOP. GFSB will terminate
its employee stock ownership plan upon completion of the merger. All plan
participant's accounts shall become fully vested at such time. The plan will
repay its existing loan from GFSB and will allocate the plan assets and
66
First Federal common stock to the accounts of the plan participants, in
proportion to their account balances, to the extent allowed under applicable law
and the governing documents of the plan.
PROTECTION OF GFSB DIRECTORS AND OFFICERS AGAINST CLAIMS. For a period
of six years after the closing of the merger, First Federal has agreed to
indemnify and hold harmless each present and former director and officer of GFSB
and its subsidiaries from liability and expenses arising out of matters existing
or occurring at or before the consummation of the merger to the fullest extent
allowed under Delaware law as in effect at the time of the closing of the
merger. This indemnification extends to liability arising out of the
transactions contemplated by the merger agreement. First Federal has also agreed
to advance any related costs to each of these persons as they are incurred.
First Federal has also agreed that it will maintain a policy of directors' and
officers' liability insurance coverage for the benefit of GFSB's directors and
officers for three years following consummation of the merger, subject to
certain limitations on the amount of premiums to be paid.
NASDAQ SMALLCAP MARKET LISTING
First Federal has applied to list the shares of First Federal common
stock to be issued in the merger on the Nasdaq SmallCap Market. First Federal
must use its best efforts to obtain approval from the Nasdaq SmallCap Market to
list the shares of First Federal common stock that will be issued in the merger.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following discussion addresses the material United States federal
income tax consequences of the merger to holders of GFSB common stock. This
discussion applies only to GFSB stockholders that hold their GFSB common stock
as a capital asset within the meaning of Section 1221 of the Internal Revenue
Code. Further, this discussion does not address all aspects of United States
federal taxation that may be relevant to a particular stockholder in light of
its personal circumstances or to stockholders subject to special treatment under
the United States federal income tax laws including: banks or trusts; tax-exempt
organizations; insurance companies; dealers in securities or foreign currency;
traders in securities who elect to apply a mark-to-market method of accounting;
pass-through entities and investors in such entities; foreign persons;
stockholders who received their GFSB common stock through the exercise of
employee stock options, through a tax-qualified retirement plan or otherwise as
compensation; and stockholders who hold GFSB common stock as part of a hedge,
straddle, constructive sale, conversion transaction or other integrated
instrument.
This discussion is based on the Internal Revenue Code, Treasury
regulations, administrative rulings and judicial decisions, all as in effect as
of the date of this joint proxy statement/prospectus and all of which are
subject to change (possibly with retroactive effect) and to differing
interpretations. Tax considerations under state, local and foreign laws are not
addressed in this document. THE TAX CONSEQUENCES OF THE MERGER TO YOU MAY VARY
DEPENDING UPON YOUR PARTICULAR CIRCUMSTANCES. THEREFORE, YOU SHOULD CONSULT YOUR
TAX ADVISOR TO DETERMINE THE PARTICULAR TAX CONSEQUENCES OF THE MERGER TO YOU,
INCLUDING THOSE RELATING TO STATE AND/OR LOCAL TAXES.
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It is a condition to the obligations of GFSB and First Federal to
complete the merger that First Federal and GFSB receive an opinion of Luse
Gorman Pomerenk & Schick, P.C. to the effect that (1) the merger will be treated
for federal income tax purposes as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code, (2) First Federal and GFSB will
each be a party to that reorganization within the meaning of Section 368(b) of
the Internal Revenue Code, and (3) except to the extent of any cash received in
lieu of a fractional share interest in First Federal common stock and cash
consideration received, no gain or loss will be recognized by stockholders of
GFSB who exchange their GFSB common stock for First Federal common stock in the
merger.
In rendering its opinion, counsel may require and rely upon
representations contained in letters and certificates to be received from
officers of First Federal, GFSB and others. Neither of these tax opinions will
be binding on the Internal Revenue Service or the courts, and we do not intend
to request any ruling from the Internal Revenue Service with respect to the
federal income tax consequences of the merger.
Although the merger agreement allows us to waive the condition that we
receive a tax opinion from counsel, we currently do not anticipate doing so.
The federal income tax consequences of the merger to you will depend
primarily on whether you exchange your GFSB common stock for solely First
Federal common stock (except for cash received instead of a fractional share of
First Federal common stock), solely cash or a combination of stock and cash.
Regardless of whether you elect to receive First Federal common stock, cash or a
combination of stock and cash, the federal income tax consequences will depend
on the actual merger consideration that you receive.
EXCHANGE SOLELY FOR FIRST FEDERAL COMMON STOCK. No gain or loss will be
recognized by a GFSB stockholder who receives solely shares of First Federal
common stock (except for cash received in lieu of fractional shares, as
discussed below) in exchange for all of his or her shares of GFSB common stock.
The tax basis of the shares of First Federal common stock received by a GFSB
stockholder in such exchange will be equal to the basis of the GFSB common stock
surrendered in exchange for the First Federal common stock (except for the basis
attributable to any fractional shares of First Federal common stock, as
discussed below). The holding period of the First Federal common stock received
will include the holding period of shares of GFSB common stock surrendered in
exchange for the First Federal common stock, provided that such shares were held
as capital assets of the GFSB stockholder at the effective time of the merger.
EXCHANGE SOLELY FOR CASH. A GFSB stockholder who receives solely cash in
exchange for all of his or her shares of GFSB common stock (and is not treated
as constructively owning First Federal common stock after the merger under the
circumstances referred to below under "--Possible Dividend Treatment") will
recognize gain or loss for federal income tax purposes equal to the difference
between the cash received and such stockholder's tax basis in the GFSB common
stock surrendered in exchange for the cash. Such gain or loss will be a capital
gain or loss, provided that such shares were held as capital assets of the GFSB
stockholder at the effective time of the merger. Such gain or loss will be
long-term capital gain or loss if the GFSB stockholder's holding period is more
than one year. The Internal Revenue Code contains limitations on the extent to
which a taxpayer may deduct capital losses from ordinary income.
EXCHANGE FOR FIRST FEDERAL COMMON STOCK AND CASH. A GFSB stockholder who
receives a combination of First Federal common stock and cash in exchange for
his or her GFSB common stock will
68
not be permitted to recognize any loss for federal income tax purposes. Such a
stockholder will recognize gain, if any, equal to the lesser of (1) the amount
of cash received or (2) the amount of gain "realized" in the transaction. The
amount of gain a GFSB stockholder "realizes" will equal the amount by which (a)
the cash plus the fair market value at the effective time of the merger of the
First Federal common stock received exceeds (b) the stockholder's basis in the
GFSB common stock to be surrendered in the exchange for the cash and First
Federal common stock. Any recognized gain could be taxed as a capital gain or a
dividend, as described below. The tax basis of the shares of First Federal
common stock received by such GFSB stockholder will be the same as the basis of
the shares of GFSB common stock surrendered in exchange for the shares of First
Federal common stock, adjusted as provided in Section 358(a) of the Internal
Revenue Code for the cash received in exchange for such shares of GFSB common
stock. The holding period for shares of First Federal common stock received by
such GFSB stockholder will include such stockholder's holding period for the
GFSB common stock surrendered in exchange for the First Federal common stock,
provided that such shares were held as capital assets of the stockholder at the
effective time of the merger.
A GFSB stockholder's federal income tax consequences will also depend on
whether his or her shares of GFSB common stock were purchased at different times
or at different prices. If they were, the GFSB stockholder could realize gain
with respect to some of the shares of GFSB common stock and loss with respect to
other shares. Such GFSB stockholder would have to recognize such gain to the
extent such stockholder receives cash with respect to those shares in which the
stockholder's adjusted tax basis is less than the amount of cash plus the fair
market value at the effective time of the merger of the First Federal common
stock received, but could not recognize loss with respect to those shares in
which the GFSB stockholder's adjusted tax basis is greater than the amount of
cash plus the fair market value at the effective time of the merger of the First
Federal common stock received. Any disallowed loss would be included in the
adjusted basis of the First Federal common stock. Such a GFSB stockholder is
urged to consult his or her own tax advisor respecting the tax consequences of
the merger to that stockholder.
POSSIBLE DIVIDEND TREATMENT. In certain circumstances, a GFSB
stockholder who receives solely cash, or a combination of cash and First Federal
common stock, in the merger may receive ordinary income, rather than capital
gain, treatment on all or a portion of the gain recognized by that stockholder
if the receipt of cash "has the effect of the distribution of a dividend." The
determination of whether a cash payment has such effect is based on a comparison
of the GFSB stockholder's proportionate interest in First Federal after the
merger with the proportionate interest the stockholder would have had if the
stockholder had received solely First Federal common stock in the merger. This
could happen because of your purchase (or the purchase by a family member) of
additional First Federal stock or a repurchase of shares by First Federal. For
purposes of this comparison, the GFSB stockholder may be deemed to
constructively own shares of First Federal common stock held by certain members
of the stockholder's family or certain entities in which the stockholder has an
ownership or beneficial interest and certain stock options may be aggregated
with the stockholder's shares of First Federal common stock. The amount of the
cash payment that may be treated as a dividend is limited to the stockholder's
ratable share of the accumulated earnings and profits of GFSB at the effective
time of the merger. Any gain that is not treated as a dividend will be taxed as
a capital gain, provided that the stockholder's shares were held as capital
assets at the effective time of the merger. Because the determination of whether
a cash payment will be treated as having the effect of a dividend depends
primarily upon the facts and circumstances of each GFSB stockholder,
stockholders are urged to consult their own tax advisors regarding the tax
treatment of any cash received in the merger.
CASH IN LIEU OF FRACTIONAL SHARES. A GFSB stockholder who holds GFSB
common stock as a capital asset and who receives in the merger, in exchange for
such stock, solely First Federal common
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stock and cash in lieu of a fractional share interest in First Federal common
stock will be treated as having received such cash in full payment for such
fractional share of stock and as capital gain or loss, notwithstanding the
dividend rules discussed above.
BACKUP WITHHOLDING. Payments of cash to a holder surrendering shares of
GFSB common stock will be subject to information reporting and backup
withholding (whether or not the holder also receives First Federal common stock)
at a rate of 28% of the cash payable to the holder, unless the holder furnishes
its taxpayer identification number in the manner prescribed in applicable
Treasury Regulations, certifies that such number is correct, certifies as to no
loss of exemption from backup withholding and meets certain other conditions.
Penalties apply for failure to furnish correct information and for failure to
include reportable payments in income. Any amounts withheld from payments to a
holder under the backup withholding rules may be allowed as a refund or credit
against the holder's U.S. federal income tax liability, provided the required
information is furnished to the Internal Revenue Service. Each holder of GFSB
common stock should consult with his or her own tax advisor as to his or her
qualification for exemption from backup withholding and the procedures for
claiming such exemption.
TAX CONSEQUENCES TO FIRST FEDERAL AND ITS STOCKHOLDERS
Assuming, consistent with the above described tax opinion, the merger
qualifies as a reorganization within the meaning of section 368 of the Internal
Revenue Code, neither First Federal nor its stockholders will recognize gain or
loss in connection with the merger, although First Federal will succeed to any
tax liabilities of GFSB.
ACCOUNTING TREATMENT OF THE MERGER
First Federal will account for the merger as a purchase, as that term is
used under generally accepted accounting principles, for accounting and
financial reporting purposes. Under the purchase method of accounting, the
assets and liabilities of GFSB will be recorded on First Federal's consolidated
balance sheet at their estimated fair value at the effective date of the merger.
The amount by which the purchase price paid by First Federal exceeds the fair
value of the net tangible and identifiable intangible assets acquired by First
Federal through the merger will be recorded as goodwill. Financial statements of
First Federal issued after the effective date of the merger will reflect these
values and will not be restated retroactively to reflect the historical position
or results of operations of GFSB.
RESALES OF FIRST FEDERAL COMMON STOCK
The shares of First Federal common stock to be issued to stockholders of
GFSB common stock in the merger have been registered under the Securities Act of
1933, as amended. Shares of First Federal common stock issued in the merger may
be traded freely and without restriction by those stockholders not deemed to be
"affiliates" of GFSB, as that term is defined in the rules under the Securities
Act. First Federal common stock received by those stockholders of GFSB who are
deemed to be "affiliates" of GFSB at the time the merger is submitted for vote
of the stockholders of GFSB may be resold without registration under the
Securities Act only to the extent provided for by Rule 145 promulgated under the
Securities Act, which permits limited sales under certain circumstances, or
pursuant to another exemption from registration. An affiliate of GFSB is an
individual or entity that controls, is controlled by or is under common control
with, GFSB, and may include the executive officers and directors of GFSB, as
well as certain principal stockholders of GFSB. The same restrictions apply to
certain relatives or the spouse of those persons and any trusts, estates,
corporations or other entities in which those persons have a 10% or greater
beneficial interest.
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GFSB has agreed in the merger agreement to use its best efforts to cause
each person who is an affiliate of GFSB for purposes of Rule 145 under the
Securities Act to deliver to First Federal a written agreement intended to
ensure compliance with the Securities Act.
REGULATORY APPROVALS AND NOTICES REQUIRED FOR THE MERGER
Completion of the merger and the bank merger is subject to certain
regulatory approvals and consents. The merger and the bank merger are subject to
the prior approval of the Office of Thrift Supervision. In reviewing the
applications, the Office of Thrift Supervision must consider, among other
factors, the financial and managerial resources and future prospects of the
existing institutions, and the convenience and needs of the communities to be
served. The Office of Thrift Supervision will also consider the institutions'
compliance with applicable laws and regulations. Finally, the Office of Thrift
Supervision may not approve a transaction:
o that would tend to create or result in a monopoly or be in
furtherance of any combination, conspiracy or attempt to
monopolize the business of banking in any part of the United
States; or
o if its effect in any section of the country may be to lessen
competition substantially or which in any other manner would be
restraint on trade;
unless the Office of Thrift Supervision finds that the anti-competitive effects
of the transaction are clearly outweighed in the public interest by the probable
effect of the transaction on meeting the convenience and needs of the
communities to be served. Additionally, the Office of Thrift Supervision must
determine that First Federal Bank and Gallup Federal Savings Bank each maintain
effective anti-money laundering programs.
REQUIREMENT FOR STOCKHOLDER APPROVAL
The merger is subject to the approval of the holders of a majority of
the outstanding common stock of each of First Federal and GFSB. On __________,
2005, the directors and executive officers of First Federal beneficially owned
___________ shares or ____% of the outstanding common stock of First Federal,
while the directors and executive officers of GFSB beneficially owned
___________ shares or ____% of the outstanding stock of GFSB.
THE MERGER AGREEMENT
THE FOLLOWING DESCRIBES MATERIAL PROVISIONS OF THE MERGER AGREEMENT.
THIS DESCRIPTION DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED BY REFERENCE
TO THE MERGER AGREEMENT, WHICH IS ATTACHED AS ANNEX A AND IS INCORPORATED BY
REFERENCE INTO THIS JOINT PROXY STATEMENT/PROSPECTUS.
TERMS OF THE MERGER
The merger agreement provides for a business combination in which GFSB
will merge with and into First Federal. First Federal will be the surviving
corporation in the merger.
As a result of the merger, except as noted below, each outstanding share
of GFSB common stock will be converted into the right to receive, at the
election of the holder and subject to certain restrictions,
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shares of First Federal common stock or $20.00 in cash. GFSB stockholders will
be permitted to elect to exchange all of their GFSB shares for cash, all of
their GFSB shares for First Federal stock, or some of their shares for cash and
some of their shares for First Federal stock. See "The Merger-Conversion of GFSB
Common Stock." First Federal will not issue fractions of shares of First Federal
common stock, but instead will pay each holder of GFSB common stock who would
otherwise be entitled to a fraction of a share of First Federal common stock an
amount in cash determined by multiplying that fraction by $17.60. If there is a
change in the number or classification of shares of First Federal outstanding as
a result of a stock split, stock dividend, reclassification, recapitalization,
or other similar transaction, the exchange ratio will be equitably adjusted.
Shares of GFSB common stock held directly or indirectly by First Federal will be
canceled and retired upon completion of the merger, and no payment will be made
for them. Canceled shares will not include shares held by either GFSB or First
Federal in a fiduciary capacity or in satisfaction of a debt previously
contracted. Holders of shares for which appraisal rights have been validly
exercised will be entitled only to the rights granted by Delaware law.
WHEN WILL THE MERGER BE COMPLETED
The closing of the merger will take place on the fifth business day
following satisfaction or waiver of all of the conditions to the merger
contained in the merger agreement, unless we agree to a later date. See
"--Conditions to Completing the Merger." On the closing date, First Federal will
file a certificate of merger with the Delaware Secretary of State merging GFSB
into First Federal. The merger will become effective at the time stated in the
certificate of merger.
First Federal and GFSB expect to complete the merger in the first or
second calendar quarters of 2005. However, we cannot guarantee when or if the
required regulatory approvals will be obtained. See "The Merger--Regulatory
Approvals Needed to Complete the Merger." Furthermore, either company may
terminate the merger agreement if, among other reasons, the merger has not been
completed on or before June 30, 2005, unless failure to complete the merger by
that time is due to a misrepresentation, breach of warranty or failure to
fulfill a covenant by the party seeking to terminate the agreement. See
"--Terminating the Merger Agreement."
CONDITIONS TO COMPLETING THE MERGER
First Federal's and GFSB's obligations to consummate the merger are
conditioned on the following:
o approval of the merger agreement by the First Federal and GFSB
stockholders;
o receipt of all required regulatory approvals without any
materially adverse conditions and the expiration of all
statutory waiting periods;
o no party to the merger being subject to any legal order that
prohibits consummating any part of the transaction, no
governmental entity having instituted any proceeding for the
purpose of blocking the transaction, and the absence of any
statute, rule or regulation that prohibits completion of any
part of the transaction;
o the registration statement of which this joint proxy
statement/prospectus forms a part being declared effective by
the Securities and Exchange Commission, the absence of any
pending or threatened proceeding by the Securities and Exchange
Commission to suspend the
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effectiveness of the registration statement and the receipt of
all required state "blue sky" approvals;
o receipt by us of all consents and approvals from third parties
(other than those required from government agencies) required to
complete the merger, unless failure to obtain those consents or
approvals would not have a material adverse effect on First
Federal after completion of the merger;
o receipt by each of us of an opinion from Luse Gorman Pomerenk &
Schick, P.C. to the effect that the merger will be treated for
federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code; and
o the other party having performed in all material respects its
obligations under the merger agreement, the other party's
representations and warranties being true and correct as of the
date of the merger agreement and as of the closing date, and
receipt of a certificate signed by the other party's chief
executive officer and chief financial officer to that effect.
o First Federal Bank and Gallup Federal Savings Bank must have
capital levels, immediately prior to the effective time of the
merger, at least equal to their capital levels reported as of
December 31, 2003, less certain transaction-related expenses;
o There shall have been no violation of certain employment and
other agreements entered into between certain officers of GFSB
and Gallup Federal Savings Bank and First Federal; and
o First Federal shall have deposited with the exchange agent
sufficient cash to pay the aggregate cash consideration to be
paid and irrevocably instructed its transfer agent to issue a
sufficient number of its shares.
We cannot guarantee whether all of the conditions to the merger will be
satisfied or waived by the party permitted to do so.
CONDUCT OF BUSINESS BEFORE THE MERGER
GFSB has agreed that, until completion of the merger and unless
permitted by First Federal, neither it nor its subsidiaries will:
GENERAL BUSINESS
o conduct its business other than in the regular, ordinary and
usual course consistent with past practice;
o fail to use its best efforts to maintain and preserve intact its
business organization, properties, leases, employees and
advantageous business relationships and retain the services of
its officers and key employees;
o take any action that would adversely affect or delay its ability
to perform its obligations under the merger agreement or to
consummate the transactions contemplated by the merger
agreement;
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INDEBTEDNESS
o other than overnight deposits incur any indebtedness or become
responsible for the obligations of any person or entity, other
than the creation of demand deposits, NOW accounts, money market
and passbook accounts, borrowings from the Federal Home Loan
Bank and securities sold under an agreement to repurchase that
mature within one year and sales of certificates of deposit that
mature within 36 months; provided, however, that in no event
will such borrowings exceed an aggregate of $2,000,000;
o prepay any such indebtedness so as to cause itself to incur a
prepayment penalty thereunder;
CAPITAL STOCK
o adjust, split, combine or reclassify its capital stock;
o pay any cash or stock dividends or make any other distribution
on its capital stock, other than regular quarterly cash
dividends on GFSB common stock at a rate not in excess of the
lesser of $0.125 per share of GFSB common stock or 45% of GFSB's
net earnings for the prior quarter;
o grant any stock awards under any of its benefit plans (other
than its ESOP) or grant any individual corporation or other
entity any right to acquire any of its shares of capital stock;
o issue any securities convertible or exercisable for any shares
of its capital stock, except pursuant to the exercise of
outstanding stock options;
DISPOSITIONS
o dispose of any of its material properties or assets with a value
of $100,000 or more, or cancel or release any indebtedness,
other than in the ordinary course of business or pursuant to
commitments existing as of the date of the merger agreement;
INVESTMENTS
o make any equity investment other than pursuant to commitments
existing as of the date of the merger agreement;
CONTRACTS
o enter into, renew, amend or terminate any contract or agreement,
or make any change in any of its leases or contracts, other than
with respect to those involving the payment of less than, or the
provision of goods and services with a market value less than
$25,000 per year, and those specifically permitted by the merger
agreement;
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LOANS
o make, renegotiate, renew, increase, extend or purchase any
loans, advances, credit enhancements or extensions, except, (i)
in conformity with existing lending practices; (ii) in amounts
not to exceed an aggregate of $350,000 with respect to any one
borrower in the case of secured loans and $20,000 for unsecured
loans; or (iii) pursuant to binding obligations in effect as of
the date of the merger agreement.
o make or increase any loan or extension of credit or commit to
make or increase any such loan or extension of credit to any
director or executive officer of GFSB or Gallup Federal Savings
Bank, except for loans or extensions of credit on terms made
available to the general public and other than renewals of
existing loans or commitments to loan;
EMPLOYEES
o increase the compensation or fringe benefits of any of its
employees or directors, except for annual non-officer salary
increases of not more than 5% consistent with past practice;
o pay any pension, retirement allowance or contribution not
required by law or the terms of GFSB's 401(k) profit-sharing
plan to any employees or directors;
o voluntarily accelerate the vesting or the lapsing of any
restrictions with respect to any stock options or other
stock-based compensation;
o elect any new senior executive officer or director;
o submit any stock option or similar plan to GFSB's stockholders
for approval;
o hire any employee;
o make any monthly contribution to the Gallup Federal Savings Bank
ESOP in excess of the scheduled monthly contributions;
SETTLING CLAIMS
o settle any claim against it for more than $10,000 or impose or
agree to material restrictions on its operations;
GOVERNING DOCUMENTS
o amend its certificate of incorporation or bylaws;
INVESTMENT SECURITIES
o restructure or materially change its investment securities
portfolio through purchases, sales or otherwise, or the manner
in which the portfolio is classified or reported;
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o make any investment in any debt security, including
mortgage-backed and mortgage-related securities, other than U.S.
government and U.S. government agency securities with final
maturities not greater than one year;
CAPITAL EXPENDITURES
o make any capital expenditures in excess of $5,000 other than
pursuant to binding commitments existing on the date of the
merger agreement necessary to maintain existing assets in good
repair or to make payment of necessary taxes;
BRANCHES
o establish or commit to establish any new branch or other office
or file an application to relocate or terminate the operation of
an existing banking office;
ACCOUNTING
o change its method of accounting, except as required by changes
in generally accepted accounting principles or regulatory
guidelines;
MERGER AGREEMENT
o take any action that is intended or expected to result in any of
its representations and warranties under the merger agreement
being or becoming untrue in any material respect or in the
conditions to the merger not being satisfied or in a violation
of a provision of the merger agreement;
o knowingly take any action that would prevent or impede the
merger from qualifying as a reorganization under Section 368(a)
of the Internal Revenue Code; and
o agree or commit to take, or adopt any resolutions in support of,
any of the foregoing actions.
First Federal has agreed that, until the completion of the merger and
unless permitted to by GFSB, it will not:
o take any action that is intended or expected to result in any of
its representations and warranties under the merger agreement
being or becoming untrue in any material respect or in the
conditions to the merger not being satisfied or in a violation
of a provision of the merger agreement;
o knowingly take any action that would prevent or impede the
merger from qualifying as a reorganization under Section 368(a)
of the Internal Revenue Code;
o amend its certificate of incorporation or bylaws in a manner
that would materially and adversely effect the benefits of the
merger to GFSB stockholders;
o issue any shares of First Federal common stock for other than
cash or for a price less than $17.60;
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o issue any stock options for securities convertible into First
Federal common stock at a per share price of less than $17.60;
o repurchase shares of First Federal common stock for a per share
price greater than $17.60;
o issue any securities or options with greater voting rights than
First Federal's current stockholders or having a preference in
dividends or liquidation over current stockholders;
o make, declare or pay any dividend in excess of $0.50 per share
per quarter of First Federal common stock, except for an annual
dividend declared before September 30, 2004, of up to $2.50 per
share of First Federal stock (or $0.3125 per share of First
Federal stock as adjusted to reflect its eight for one stock
split); and
o agree or commit to take, or adopt any resolutions in support of,
any of the foregoing actions.
COVENANTS OF GFSB AND FIRST FEDERAL IN THE MERGER AGREEMENT
AGREEMENT NOT TO SOLICIT OTHER PROPOSALS. GFSB has agreed not to
initiate, solicit, knowingly encourage or facilitate any inquiries or
discussions that constitute or could reasonably lead to an acquisition proposal
or participate in any discussion or negotiations regarding an acquisition
proposal with a third party. An acquisition proposal includes any proposal or
offer with respect to the following:
o any merger, consolidation, share exchange, business combination,
or other similar transaction involving GFSB or its subsidiaries;
o any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of 25% or more of the consolidated assets of GFSB;
o any tender offer or exchange offer for 25% or more of the
outstanding shares of capital stock of GFSB or the filing of a
registration statement under the Securities Act of 1933 in
connection therewith; or
o any public announcement of a proposal, plan or intention to do
any of the foregoing or any agreement to engage in any of the
foregoing.
Despite the agreement of GFSB not to solicit other acquisition
proposals, the board of directors of GFSB may generally have discussions and
negotiations with, and provide information to, a third party who makes an
unsolicited, written, bona fide acquisition proposal and recommend such proposal
to its stockholders, provided that the GFSB board of directors determines in
good faith that such action is necessary for the proper discharge of its duties
to GFSB stockholders under applicable law.
If GFSB receives a proposal or information request from a third party or
enters into negotiations with a third party regarding a superior proposal, GFSB
must notify First Federal and provide First Federal with information about the
third party and its proposal.
EMPLOYEE MATTERS. Each person who is an employee of GFSB or Gallup
Federal Savings Bank as of the closing of the merger (whose employment is not
specifically terminated upon the closing) will become an employee of First
Federal Bank. First Federal will make available employer provided health
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and other employee welfare benefit plans to each continuing employee on the same
basis that it provides such coverage to First Federal employees.
CERTAIN OTHER COVENANTS. The merger agreement also contains other
agreements relating to our conduct before consummation of the merger, including
the following:
o After all requisite approvals necessary to consummate the merger
are obtained, Gallup Federal Savings Bank will, at the request
of First Federal, modify and change its loan, litigation, real
estate valuation and investment and asset/liability management
policies and practices so as to be more consistent with those of
First Federal Bank and GFSB will recognize for financial
reporting purposes all of its expenses related to the merger;
provided, however, GFSB is not obligated to do so until it
receives written confirmation from First Federal that all
conditions to its obligation to close have been satisfied or
waived and provided that any such changes are in accordance with
generally accepted accounting principles and applicable law.
o Upon reasonable notice, GFSB will give First Federal reasonable
access during normal business hours to GFSB's property, books,
records and personnel and furnish all information First Federal
may reasonably request.
o GFSB will promptly provide First Federal with a copy of all
documents filed with the Securities and Exchange Commission,
each report filed with its banking regulators, each management
report provided to its board of directors, each public press
release and all other information concerning its business,
properties and personnel as requested by First Federal.
o GFSB will meet with First Federal on a regular basis to
facilitate the integration of the two companies and to discuss
and plan for the conversion of GFSB's data processing and
related electronic information systems.
o First Federal and GFSB will use their reasonable best efforts to
submit all necessary applications, notices, and other filings
with any governmental entity, the approval of which is required
to complete the merger and related transactions.
o First Federal and GFSB will use their reasonable best efforts to
obtain all third party consents necessary to consummate the
merger.
o GFSB will take any necessary action to exempt First Federal and
this transaction from any anti-takeover provisions contained in
GFSB's certificate of incorporation or bylaws or federal or
state law.
o First Federal and GFSB will use all reasonable efforts to take
all actions necessary to consummate the merger and the
transactions contemplated by the merger agreement.
o GFSB and First Federal will consult with each other regarding
any public statements about the merger and any filings with any
governmental entity or with any national securities exchange or
market.
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o First Federal will file a registration statement, of which this
joint proxy statement/prospectus forms a part, with the
Securities and Exchange Commission registering the shares of
First Federal common stock to be issued in the merger to GFSB
stockholders, and will use its best efforts to have such
registration statement declared effective and First Federal will
list its stock for trading on the Nasdaq SmallCap Market.
o GFSB will take all actions necessary to convene a meeting of its
stockholders to vote on the merger agreement. The GFSB board of
directors will recommend at the stockholder meeting that the
stockholders vote to approve the merger and will use its
reasonable best efforts to solicit stockholder approval, unless
it determines that such actions would not comply with its
fiduciary obligations to GFSB stockholders.
o First Federal will take all actions necessary to convene a
meeting of its stockholders to vote on the merger agreement. The
First Federal board of directors will recommend at the
stockholder meeting that the stockholders vote to approve the
merger and will use its reasonable best efforts to solicit
stockholder approval.
o GFSB will use its reasonable best efforts to cause certain
persons who are affiliates of it under Rule 145 of the
Securities Act to deliver to First Federal a letter to the
effect that such person will comply with Rule 145.
o First Federal and GFSB will notify each other of any material
contract defaults and any events that would reasonably be likely
to result in a material adverse effect on the other. They also
will notify each other of any communication from a third party
regarding the need to obtain that party's consent in connection
with the merger.
o First Federal and GFSB will take appropriate board action to
exempt GFSB directors and officers from short-swing profit
liability that could arise under the federal securities laws in
connection with the transactions being completed by the merger
agreement.
o GFSB will pay dividends on its common stock on a quarterly basis
and each of First Federal and GFSB will coordinate with the
other the payment of dividends on First Federal common stock and
GFSB common stock.
REPRESENTATIONS AND WARRANTIES MADE BY FIRST FEDERAL AND GFSB IN THE MERGER
AGREEMENT
First Federal and GFSB have made certain customary representations and
warranties to each other in the merger agreement relating to our businesses. For
information on these representations and warranties, please refer to the merger
agreement attached as Annex A. The representations and warranties generally must
be true in all material respects through the completion of the merger unless the
change does not have a material negative impact on our business, financial
condition or results of operations. See "--Conditions to Completing the Merger."
TERMINATING THE MERGER AGREEMENT
The merger agreement may be terminated at any time prior to the
completion of the merger, either before or after approval of the merger
agreement by GFSB stockholders, as follows:
o with the mutual consent of First Federal and GFSB;
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o by either party, if the stockholders of GFSB fail to approve the
merger agreement (provided that GFSB will only be entitled to
terminate for this reason if it has complied with its
obligations under the merger agreement with respect to its
stockholder meeting);
o by either party, if a required regulatory approval, consent or
waiver is denied or any governmental entity prohibits the
consummation of the merger or the transactions contemplated by
the merger agreement;
o by either party, if the merger is not consummated by June 30,
2005, unless failure to complete the merger by that time is due
to a misrepresentation, breach of a warranty or failure to
fulfill a covenant by the party seeking to terminate the
agreement;
o by either party, if the other party makes a misrepresentation,
breaches a warranty or fails to fulfill a covenant that cannot
be cured within a specified time and that would have a material
adverse effect on the other party;
o by First Federal, if (i) the GFSB stockholders fail to approve
the merger agreement or the board fails to hold a meeting to
vote on the merger agreement; and (ii) the board of directors of
GFSB does not recommend approval of the merger in this joint
proxy statement/prospectus or withdraws or revises its
recommendation in a manner adverse to First Federal;
o prior to the GFSB stockholder meeting, by GFSB in order to enter
into an unsolicited acquisition proposal which GFSB's board of
directors believes, after consultation with its financial
advisors, is more favorable to GFSB than the merger provided
that such termination can occur only after GFSB notifies First
Federal of such offer and First Federal determines not to make a
revised proposal;
o by First Federal if any person shall have acquired 25% or more
of the voting power of GFSB; or
o by First Federal if GFSB becomes entitled to terminate the
merger agreement as a result of its entrance into an acquisition
agreement with a third party.
TERMINATION FEE
The merger agreement requires GFSB to pay First Federal a fee of
$800,000 if First Federal terminates the merger agreement as a result of (i) the
failure of the GFSB stockholders to approve the merger agreement after GFSB's
board of directors to recommend approval of the merger or withdrew, qualified or
modified recommendation to approve the merger, or (iii) GFSB's entrance into an
acquisition agreement or similar agreement with a third party.
The merger agreement also requires GFSB to pay First Federal a fee of
$800,000 if, within 12 months after the merger agreement is terminated, GFSB
consummates or enters into any agreement with respect to an acquisition proposal
and if the merger agreement is terminated under either of the following
circumstances:
o First Federal may also terminate the merger agreement if (i) the
GFSB stockholders fail to approve the merger agreement or the
stockholders' meeting is not held and (ii) GFSB's board of
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directors withdraws or revises its recommendation to its
stockholders to approve the merger agreement in an adverse way
to; First Federal may also terminate the merger agreement if any
person or group acquires 25% or more of the voting power of
GFSB;
o GFSB may terminate the merger agreement prior to its stockholder
meeting under certain circumstances in order to accept a
superior proposal if, following notice to First Federal, First
Federal does not make an offer that is as favorable as the
superior proposal; or
o First Federal may terminate the merger agreement if GFSB becomes
entitled to terminate the merger agreement in order to accept a
superior proposal under certain circumstances.
Under no circumstances will GFSB be required to pay more than $800,000
in the aggregate under the termination fee provisions.
EXPENSES
Each of First Federal and GFSB will pay its own costs and expenses
incurred in connection with the merger, except that First Federal and GFSB will
share equally the expense of filing, printing and mailing this joint proxy
statement/prospectus.
CHANGING THE TERMS OF THE MERGER AGREEMENT
Before the completion of the merger, First Federal and GFSB may agree to
waive, amend or modify any provision of the merger agreement. However, after the
vote by GFSB stockholders, First Federal and GFSB can make no amendment or
modification that would reduce the amount or alter the kind of consideration to
be received by GFSB's stockholders under the terms of the merger.
BANK MERGER
Pursuant to the merger agreement, Gallup Federal Savings Bank and First
Federal Bank entered into the bank merger agreement. The bank merger agreement
provides for the merger of Gallup Federal Savings Bank with and into First
Federal Bank.
NEW MEMBERS OF THE BOARD OF DIRECTORS
After completion of the merger, the board of directors of First Federal
and First Federal Bank will consist of all of the current directors of First
Federal and First Federal Bank and Richard C. Kauzlaric and Michael P. Mataya.
FIRST FEDERAL'S MANAGEMENTS' DISCUSSION AND ANALYSIS
GENERAL
First Federal, a Delaware corporation, was organized in 1998 for the
purpose of becoming the savings and loan holding company of First Federal Bank.
Originally chartered in 1920 as a mutual savings association, the First Federal
Bank converted to the stock form of ownership in 1979.
First Federal Bank is headquartered in Roswell, New Mexico, and
currently serves the financial needs of communities in its trade area through
its office located at 300 N. Pennsylvania Ave., Roswell,
81
New Mexico 88201, and eight branch offices located in Lincoln, Otero, Dona Ana
and Bernalillo Counties in New Mexico and El Paso County, Texas. First Federal;
business involves providing assistance in the management and coordination of the
financial resources of First Federal Bank and providing capital, business
development and long-range planning services to First Federal Bank. First
Federal Bank is ________________
First Federal's revenues are derived principally from interest earned on
loans and, to a lesser extent, from interest earned on investments,
mortgage-backed and related securities. The operations of First Federal are
influenced significantly by general economic conditions and by policies of
financial institution regulatory agencies, including the Office of Thrift
Supervision, the Board of Governors of the Federal Reserve and the FDIC. First
Federal's cost of funds is influenced by interest rates on competing investments
and general market interest rates. Lending activities are affected by the demand
for financing of real estate and other types of loans, which in turn is affected
by the interest rates at which such financings may be offered.
First Federal's net interest income is dependent primarily upon the
difference or spread between the average yield earned on loans receivable, net
and investments and the average rate paid on deposits and borrowings, as well as
the relative amounts of such assets and liabilities. First Federal 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.
Management's discussion and analysis of financial condition and results
of operations are intended to assist in understanding the financial condition
and results of operations of First Federal. The information contained in this
section should be read in conjunction with the financial statements and
accompanying notes contained elsewhere herein.
COMMITMENT FOR TRUST PREFERRED STOCK FINANCING
During November 2004, First Federal signed a commitment letter with
Cohen Brothers & Co. to issue $7 million of trust preferred securities. Under
the terms of the applicable commitment letter, the trust preferred securities
will carry a dividend rate which is fixed at 5.70% for five years and then
floats at 90-day Libor plus 185 basis points for the remaining period. The trust
preferred securities are expected to be structured so that all dividends therein
is tax deductible to First Federal. The trust preferred securities will have a
maturity of 30 years and are expected to be redeemable, without penalty
beginning 20%. It is anticipated that the trust preferred securities will be
issued in January 2005.
Additionally, prior to the commencement of the merger First Federal
anticipates the issuance of an additional $3 million in preferred trust
securities. While no commitment letter has been entered into at this time, First
Federal anticipates that the $3 million in trust preferred securities will be
variable rate and structured in a manner similar to the $7 million trust
preferred securities.
BUSINESS STRATEGY
The Board seeks to deliver a return to its stockholders through lending
in the retail, commercial and residential markets of the communities First
Federal serves.
82
First Federal's focus is to enhance net interest income while limiting
interest rate risk through a balance sheet structure utilizing variable rate
assets funded by the most cost effective funding sources available to First
Federal, whether in the form of deposits or borrowings. While market share
increases remain a strategic goal, management is steadfast in the belief that
asset quality and profitability are paramount to asset growth. As a result of
this philosophy, management remains focused on pricing assets to maximize net
interest income and limit interest rate risk rather than for market share
growth. Furthermore, management may continue to utilize borrowings to fund asset
growth, rather than deposits, when the cost of borrowings is more attractive
than the cost of deposits, or to match certain long-term assets with long-term
liabilities.
Management implements during 2004 incentive based compensation that
rewards employees for attaining production and customer service levels and
believes this strategy will assist in profitable growth while containing salary
expense levels commensurate with profitability increases. Under the program,
loan officers are rewarded based on loan volume above an established production
level, growth in overall outstanding loan balance and overall portfolio
management. Division presidents are rewarded based on location loan growth and
certain other criteria. All other employees receive bonuses based on net income
exceeding budget levels for the fiscal year. The implementation of the incentive
program should serve as a catalyst for creating profitable growth for First
Federal, improving operational efficiencies and delivering superior customer
service.
Information technology innovation that increases operating efficiencies
remains a major strategy for First Federal. A technology committee reviews all
related needs in the areas of information technology budgets, customer
information privacy, information technology security, information technology
policies, all information technology related upgrades and installations, and any
other technology concerns and issues that arise. First Federal fully intends to
utilize technology to improve efficiencies across its market area.
While acquisitions of other institutions or branch offices remain a
consideration and opportunity for growth, management continues to seek
opportunities for internal growth within its existing franchise area. In order
to facilitate internal growth, management has procured two sites to open
additional full-service branches in the Albuquerque, New Mexico area.
FINANCIAL CONDITION
SEPTEMBER 30, 2004 COMPARED TO SEPTEMBER 30, 2003.
Total assets decreased approximately $11.1 million, or 3.1% from $359.2
million as of September 30, 2003 to $348.1 million as of September 30, 2004. The
decline was primarily due to a net reduction in held-to-maturity investment
securities of $8.6 million, a decline in interest-earning deposits of $5.3
million, and a decrease in loans held for sale of $2.3 million. Offsetting the
decline were increases in cash due from banks of $2.7 million, and property and
equipment of $1.6 million.
Total loans increased $514,000, or 0.2% from $253.8 million as of
September 30, 2003 to $254.3 million as of September 30, 2004. The increase in
loans was primarily in conventional first mortgage loans and commercial real
estate loans. The net growth in loans reflect an increase of $8.5 million in
residential first mortgage loans and an increase of $1.7 million in commercial
real estate loans offset by a declines in consumer loans of $5.4 million,
commercial non-real estate of $3.0 million, and $1.3 million in construction
loans. The increase in residential loans and in commercial real estate loans
were due to increased originations. The consumer loan outstandings have been
adversely impacted by many of the
83
customers refinancing their primary residence and paying off other types of
debt. Additionally, the automobile industry has used "zero" rate financing as a
marketing tool to sell more cars. Consequently, many consumers purchasing
vehicles do not need traditional financing sources.
The rising interest rate environment has significantly slowed the
refinance boom of the last few years. Consequently, First Federal has sought to
establish relationships with various mortgage brokers as a source of additional
mortgage loans.
Investment securities declined $8.6 million, or 17%, from $49.7 million
as of September 30, 2003 to $41.1 million as of September 2004. The decrease was
due primarily to a $22.4 million decline in government and federal agency held
to maturity securities offset by a $16.0 million increase in government and
federal available for sale securities. First Federal opted to place new
purchases of investment securities into the available for sale designation. This
allows the institution to include those assets in the internal liquidity
analysis. The overall decline in the investment portfolio, in part, reflects the
funding source for the decline in deposits that is discussed in this section.
Mortgage-backed securities decreased approximately $2.0 million due to principal
repayments.
Deposits decreased $9.0 million, or 3.4% from $263.4 million as of
September 30, 2003 to $254.4 million as of September 30, 2004. The decline in
deposits reflected the decrease in savings and money market accounts of $14.0
million and certificate of deposits of $800,000 offset by increases in
non-interest-bearing demand deposits of $4.0 million and interest-bearing demand
deposit accounts of $2.2 million. As the Federal Reserve Board has raised short
term interest rates, depositors with funds in the savings accounts have begun to
seek alternate investments. As of September 30, 2004, First Federal has not
increased the rates on savings accounts. The institution monitors deposit rates
across its markets and will act accordingly to maintain deposits commensurate
with the need to fund assets that will produce a positive spread for the
institution. Federal Home Loan Bank ("FHLB") borrowings declined $4.2 million
from $61.5 million as of September 30, 2003 to $57.3 million as of September 30,
2004. First Federal generally borrows through the FHLB only to fund certain long
term loans or will use when they are lower cost then gathering deposits.
The allowance for loan losses declined approximately $242,000 from $2.5
million as of September 30, 2003 to $2.3 million as of September 30, 2004. The
decline is the result of a negative provision for fiscal year 2004 of $198,000
and net charge-offs of approximately $44,000. As of September 30, 2004,
management deemed the allowance adequate to cover probable losses in the
portfolio.
Stockholders' equity increased $2.0 million, or 6.25%, to approximately
$34.0 million as of September 30, 2004 compared to $32.0 million as of September
30, 2003. This net increase is attributable to net income for the period of
approximately $3.1 million, and $187,000 from the exercise of stock-options.
Those increases in equity were offset by a treasury stock repurchase (at cost)
of approximately $541,000 available for general purposes, and cash dividends
paid and declared of approximately $596,000.
RESULT OF OPERATIONS
First Federal's results of operations depend primarily upon the level of
net interest income, which is the difference between the interest income earned
on its interest-earning assets such as loans and investments, and the costs of
First Federal's interest-bearing liabilities, primarily deposits and borrowings.
Results of operations are also dependent upon the level of First Federal's
non-interest
84
income including fee income and service charges, and affected by the level of
its non-interest expense, including its general and administrative expenses. Net
interest income depends upon the volume of interest-earning assets and
interest-bearing liabilities and the interest rate earned or paid on them,
respectively.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 2004 AND
SEPTEMBER 30, 2003
NET INCOME. Net income decreased by approximately $513,000 from $3.6
million for the fiscal year ending September 30, 2003 to $3.1 million for the
fiscal year ending September 30, 2004. The decrease was primarily due to a
decline in net interest income of $945,000 and a decrease in non-interest income
of $494,000. The decrease in loan income was partially offset by a of the
provision for loan losses of $289,000, and a decrease in non-interest expenses
of $615,000. Income tax expense declined $311,000 as a result of the lower
income.
NET INTEREST INCOME. Net interest income declined $1.2 million from
$14.3 million for the fiscal year ending September 30, 2003 to $13.1 million for
the fiscal year ending September 30, 2004 due to a $2.1 million decrease in
interest income offset by a decline of $824,000 in interest expense. The
decrease in interest income was due to the decrease in the yield earned on
interest-earning assets, primarily loans, offset by an increase in the average
balance of interest-earning assets during the fiscal year ending September 30,
2004. The average balance of interest-earning assets increased $8.5 million from
$327.7 million for fiscal year ending September 30, 2003 to $336.3 million for
the fiscal year ending September 30, 2004. Interest-earning assets increased
primarily due to an increase in the average balance of investment securities of
$13.9 million offset by the decline in the average balance of loans of $5.8
million. The average tax equivalent yield on interest-earning assets was 5.2%
for the fiscal year ending September 30, 2004 as compared to 5.3% for the fiscal
year ending September 30, 2003. The decrease in yield was due primarily to
continued lower market interest rates during the fiscal year as compared to
prior years. A component of loan interest income is loan fees which are accreted
into interest income. Loan fees for the period ending September 30, 2004 were
down approximately $380,000, or approximately 27.8%, from the prior fiscal year.
This decline in loan fees is primarily related to fees on mortgage loan
activities which slowed significantly as the national rates for mortgages moved
upward during this fiscal year.
Interest expense declined approximately $824,000 from $6.5 million for
fiscal year 2003 to $5.7 million in fiscal year 2004. The decline is primarily a
result of continued lower average rates paid on interest-bearing liabilities.
The average rate paid on interest-bearing liabilities declined from 1.9% for the
fiscal year ending September 30, 2003 to 1.7% for the fiscal year ending
September 30, 2004. Deposits experienced both a declining interest rate and
balance during the current fiscal year. The average balance of borrowings
increased $6.5 million, or 12.0% in fiscal year 2004 due to the matching of the
origination of fixed rate commercial real estate loans. However, the decline in
interest rates were offset by the average increase in borrowings outstanding.
PROVISION FOR LOAN LOSSES. The provision for loan loss declined by
$289,000 from a $91,000 expense for fiscal 2003 to a negative provision of
($198,000) for fiscal 2004 based on management's overall assessment of the
adequacy of the allowance for loan losses. The negative provision in fiscal 2004
was due management's analysis of various factors, including the market value of
the underlying collateral, changes in the loan portfolio, the relationship of
the allowance for loan losses to outstanding loans, historical loss experience,
delinquency trends and prevailing and projected economic conditions. Although
the institution maintains its allowance for loan losses at a level it considers
adequate to provide for future losses, there can be no assurance that such
losses will not exceed the estimated amounts or that
85
additional substantial provisions for loan losses will not be require in future
periods. At September 30, 2004, the allowance for loan losses totaled $2.3
million, 0.9% of net loans and 455.1% of non-performing loans. Non-performing
loans decreased $431,000 from $926,000 as of September 30, 2003 to $495,000 as
of September 30, 2004.
OTHER INCOME. Other income declined approximately $494,000 from $2.4
million in fiscal year 2003 to $1.9 million in fiscal year 2004 primarily due to
a decrease in the gain on sale of residential mortgage loans of $622,000. This
decline is related to the slowdown of the refinance boom that was experienced in
prior periods. The decrease in revenue is partially offset by a $125,000
increase in service charges and other fees. The improvement in service charges
and other fees was a result of continual adherence to charging and collecting
fees in accordance with the established fee schedules. In addition, rental
income on leased property grow $44,000 over fiscal year 2003. This was related
to the rental of a portion of the new Albuquerque branch office.
NON-INTEREST EXPENSE. Non interest expense declined $615,000 from
approximately $10.9 million in fiscal year 2003 to approximately $10.3 million
in fiscal year 2004. The decrease in non-interest expense was due to reductions
in compensation and benefits of $262,000, occupancy expense of $73,000,
depreciation and amortization of $100,000, communication expense of $14,000,
employee business related expenses of $71,000, postage and printing supply
expense of $58,000 and other related expense declines of $55,000. All of these
favorable trends in declining expenses were offset by a $19,000 increase in
professional service fees.
Compensation and benefit expense declined $262,000 in fiscal year 2004
as compared to 2003.A portion of this savings was realized by a plan to
restructure the officer ranks through attrition and replacement during the last
quarter of fiscal year 2003 through fiscal year 2004. A significant portion of
the reduction related to the decrease in mortgage loan production for which the
mortgage loan officers are paid a portion of the fee income associated with
originating the mortgage. Since a mortgage productions levels and related income
were down from the prior year, the corresponding commission expense was also
lower.
Occupancy and equipment expense declined approximately $73,000 primarily
due to expense reductions in building and equipment repair and maintenance of
$146,000 offset by an increase in utilities of $10,000 and building tax and
insurance of $64,000. Building tax and insurance expense increased due to the
purchase of the Trawood office in El Paso and the completion of the new branch
location in Albuquerque during fiscal year 2004. The decrease in amortization
and depreciation primarily relates to the delayed adoption of certain accounting
standards in fiscal year 2004 which did not materially impact the financial
statements and expiration of amortization of certain other intangible accounts
at the end of 2003.
INCOME TAX EXPENSE. Income tax expense declined $311,000 as a result of
lower income results before income tax.
YIELD AND COST DATA. The following table presents for the periods
indicated the total dollar amount of interest income from average
interest-earning assets and the resultant yields, as well as the interest
expense on average interest bearing liabilities, expressed both in dollars and
rates. All average balances are monthly average balances. Yields are reported on
a tax equivalent basis. Non-accruing loans have been included in the table as
loans carrying a zero yield. Included in interest income on loans are loan fees
and other charges on loans totaling $1.9 million, $3.1 million and $1.7 million
for the years ended September 30, 2004, 2003 and 2002, respectively.
86
The following tables set forth average balance sheets, average yields
and costs, and certain other information for the periods indicated. No
tax-equivalent yield adjustments were made, as the effect thereof was not
material. All average balances are daily average balances. Non-accrual loans
were included in the computation of average balances, but have been reflected in
the table as loans carrying a zero yield. The yields set forth below include the
effect of deferred fees, discounts and premiums that are amortized or accreted
to interest income or expense.
YEAR ENDED SEPTEMBER 31,
------------------------------------------------------------------------------
2004 2003
-------------------------------------- --------------------------------------
AVERAGE AVERAGE
OUTSTANDING OUTSTANDING
BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE
----------- ---------- ------------ ----------- ---------- ------------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Loans......................... $ 254,508 $ 16,010 6.3% $ 260,343 $ 17,576 6.8%
Investment securities......... 54,619 1,187 2.2% 40,679 1,074 2.6%
Interest-earning deposits..... 27,151 302 1.1% 26,719 311 1.2%
--------- --------- --------- --------- --------- ---------
Total interest-earning
assets................... 336,278 17,499 5.2% 327,741 18,961 5.8%
Non-interest-earning assets... 19,502 19,107
--------- ---------
Total assets............... $ 355,780 $ 346,848
========= =========
INTEREST-BEARING LIABILITIES:
Passbook savings.............. $ 95,889 $ 715 0.7% $ 100,710 1,344 1.3%
Interest bearing checking..... 45,787 65 0.1% 41,418 83 0.2%
Money market/NOW accounts..... 8,166 28 0.3% 10,448 59 0.6%
Certificates of deposit....... 81,521 2,881 3.5% 80,400 2,511 3.1%
--------- --------- --------- --------- --------- ---------
Total deposits............. 231,364 3,689 1.6% 232,976 3,997 1.7%
FHLB advances................. 59,757 2,707 4.5% 53,268 2,508 4.7%
--------- --------- --------- --------- --------- ---------
Total interest-bearing
liabilities.............. 291,121 6,395 2.2% 286,244 6,505 2.3%
Non-interest-bearing
liabilities................. 36,101 33,325
--------- ---------
Total liabilities.......... 327,222 319,569
Stockholders' equity.......... $ 28,558 27,279
--------- ---------
Total liabilities and
stockholders' equity..... 355,780 $ 346,848
========= =========
Net interest income........... $ 11,103 $ 12,456
========= =========
Net interest rate spread (1).. 3.0% 8.5%
Net interest-earning assets (2) $ 45,157 $ 41,497
========= =========
Net interest margin (2)....... 3.3% 3.8%
Average interest-earning
assets to interest-bearing
liabilities................ 115.5% 114.5%
(CONT'D)
YEAR ENDED SEPTEMBER 31,
--------------------------------------
2002
--------------------------------------
AVERAGE
OUTSTANDING
BALANCE INTEREST YIELD/RATE
----------- ---------- ------------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Loans......................... $ 242,168 $ 18,262 7.5%
Investment securities......... 26,279 1,048 4.0%
Interest-earning deposits..... 18,848 326 1.7%
--------- --------- ---------
Total interest-earning
assets................... 287,295 19,636 6.8%
Non-interest-earning assets... 17,912
---------
Total assets............... $ 305,207
=========
INTEREST-BEARING LIABILITIES:
Passbook savings.............. $ 100,386 2,211 2.2%
Interest bearing checking..... 37,096 166 0.4%
Money market/NOW accounts..... 8,975 151 1.7%
Certificates of deposit....... 78,226 3,099 4.0%
--------- --------- ---------
Total deposits............. 224,683 5,628 2.5%
FHLB advances................. 29,265 1,598 2.5%
--------- --------- ---------
Total interest-bearing
liabilities.............. 253,948 7,226 2.8%
Non-interest-bearing
liabilities................. 24,615
---------
Total liabilities.......... 278,563
Stockholders' equity.......... 26,644
---------
Total liabilities and
stockholders' equity..... $ 305,207
=========
Net interest income........... $ 12,410
=========
Net interest rate spread (1).. 4.0%
Net interest-earning assets (2) $ 33,347
=========
Net interest margin (2)....... 4.3%
Average interest-earning
assets to interest-bearing
liabilities................ 113.1%
87
The following table 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 changes related to
outstanding balances and those due to the changes in 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.
YEARS ENDED SEPTEMBER 30, YEARS ENDED SEPTEMBER 30,
2004 VS. 2003 2003 VS. 2002
--------------------------------- ---------------------------------
INCREASE (DECREASE) TOTAL INCREASE (DECREASE) TOTAL
DUE TO INCREASE DUE TO INCREASE
--------------------- (DECREASE) --------------------- (DECREASE)
VOLUME RATE RATE VOLUME RATE RATE
---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
INTEREST-EARNING ASSETS:
Loans................ $(394) $(1,172) $(1,566) $1,370 $(2,056) $(686)
Investment securities 368 (255) 113 574 (549) 26
Interest-earning
deposits........... 5 (14) (9) 136 (151) (15)
Total
interest-earning
assets........... (21) (1,442) (1,462) 2,081 (2,756) (675)
INTEREST-BEARING
LIABILITIES:
Passbook savings..... 64 565 629 (7) 874 867
NOW/Interest bearing
accounts........... (9) 27 19 (19) 102 83
Money Market Accounts 13 18 31 (25) 118 93
Certificates of deposit (35) (335) (370) (86) 674 588
Total deposits..... 33 275 308 (137) 1,768 1,631
---------- ---------- ---------- ---------- ---------- ----------
FHLB Advances........ (305) 106 (199) (1,311) 401 (901)
Total
interest-bearing
liabilities...... (272) 381 109 (1,448) 2,169 721
---------- ---------- ---------- ---------- ---------- ----------
Change in net interest
income............... $(293) $(1,060) $(1,353) $633 $(587) $46
========== ========== ========== ========== ========== ==========
ASSET/LIABILITY MANAGEMENT AND MARKET RISK
First Federal's profitability, like that of many financial institutions,
is dependent to a large extent upon its net interest income. When
interest-bearing liabilities mature or reprice more quickly (liability
sensitive) than interest-earning assets in a given period, a significant
increase in market rates of interest could adversely affect net interest income.
Similarly, when interest-earning assets mature or reprice more quickly (asset
sensitive) than interest-bearing liabilities, falling interest rates could
result in a decrease in net interest income. Finally, a flattening of the "yield
curve" ( i.e. , a decline in the difference between long- and short-term
interest rates) could adversely impact net interest income to the extent that
First Federal's assets have a longer average term than its liabilities.
First Federal is also subject to interest rate risk to the extent that
the value of its net assets fluctuates with interest rates. In general, the
value of a portion of First Federal's assets will decline in the event of an
increase in interest rates. Historically, First Federal's lending activity
consisted primarily of one-to four-family mortgages with long terms and fixed
rates. These assets are interest rate sensitive and
88
therefore decline in value during a period of rising interest rates. Conversely,
these assets can increase in value during a period of decreasing interest rates
to the extent they do not prepay. As part of First Federal's business strategy
and asset/liability management policy, a primary focus of lending activity is
the acquisition of variable rate and/or shorter term loans thereby decreasing
interest rate risk and fluctuations in the value of First Federal's assets. At
September 30, 2004, First Federal had approximately $103.8 million in variable
rate loans.
First Federal has an asset/liability management policy. The principal
goals of this policy are to manage First Federal's net interest margin and
interest rate position. Nonetheless, First Federal's results of operations and
the economic value of its equity remain vulnerable to increases in interest
rates and declines in the difference between long- and short-term interest
rates.
Asset/Liability management is monitored at the bank level by a committee
that is comprised of First Federal's president & chief executive officer, chief
financial officer, chief credit officer, senior vice presidents and the
controller of the bank. The committee meets periodically to review First
Federal's interest rate risk position and product mix and to make
recommendations for adjustments to First Federal's Board of Directors.
Management also monitors First Federal's interest rate risk position on a
monthly basis, reviews First Federal's portfolio, earnings, liquidity, asset
quality, formulates investment strategies and oversees the timing and
implementation of transactions to assure attainment of the Board's objectives in
a most effective manner.
The principal elements of First Federal's asset/liability management
policy are as follows. First, First Federal requires that one-to-four family ARM
loans be indexed to changes in rates paid on U.S. Treasury securities or LIBOR
and all other adjustable rate loans be indexed to the Prime rate as published in
the Wall Street Journal. Management believes that U.S. Treasury securities,
LIBOR and the Prime rate are significantly more interest rate sensitive than
other indices and provides a better opportunity to manage interest rate risk in
a changing rate environment. Second, management intends to maintain significant
non-residential mortgage term portfolios such as First Federal's commercial
business, consumer and commercial real estate loans, subject to market
conditions. In general, such loans carry shorter terms to maturity and/or
repricing, and are more interest rate sensitive than most of First Federal's
other assets. Third, management has used marketing and other initiatives to
maintain First Federal's transaction and other deposit accounts and believes
that such accounts generally carry lower interest costs and are less sensitive
to interest rate shifts than the certificates of deposit. First Federal also
utilizes FHLB borrowings in funding assets when the cost of these borrowing is
more attractive than the cost of deposits. There can be no assurance as to
whether or when any or all of the elements of the asset/liability management
program will prove to be successful over future periods of time.
Economic Value of Equity ("EVE") analysis provides a quantitative
measure of interest rate risk. In essence, this approach calculates the
difference between the market value of assets and liabilities under different
interest rate environments. The degree of change between interest rate shock
levels is a measure of the volatility of value risk. The following table sets
forth, as of September 30, 2004, the estimated changes in First Federal's EVE in
the event of the specified instantaneous changes in interest rates.
89
ECONOMIC VALUE OF EQUITY
- -------------------------------------------------------------
Change in
- -------------------------------------------------------------
Interest Rates Estimated Amount of Percent
- -------------------------------------------------------------
(Basis Points) EVE Change Change
- -------------------------------------------------------------
(Dollars in Thousands)
- -------------------------------------------------------------
+300 $ 48,019 (861) (2)
- -------------------------------------------------------------
200 48,781 (99) 0
- -------------------------------------------------------------
100 49,218 339 1
- -------------------------------------------------------------
0 48,880 0 0
- -------------------------------------------------------------
-100 46,928 (1,951) (4)
- -------------------------------------------------------------
Certain assumptions were employed in preparing the previous table. These
assumptions relate to interest rates, loan prepayment rates varied by categories
and rate environment, deposit decay rates varied by categories and rate
environment and the market values of certain assets under the various interest
rate scenarios. It was also assumed that delinquency rates will not change as a
result of changes in interest rates although there can be no assurance that this
will be the case. In the event that interest rates do change in the designated
amounts, there can be no assurance that First Federal's assets and liabilities
would perform as set forth above. In addition, a change in Treasury rates in the
designated amounts accompanied by a change in the shape of the Treasury yield
curve would cause significantly different changes to the EVE than indicated
above.
LIQUIDITY AND CAPITAL RESOURCES
First Federal's principal sources of funds are deposits and borrowings,
scheduled payments and prepayment of loan principal and mortgage-backed
securities, scheduled payments and maturities of investment securities and
operations. While scheduled loan repayments and maturing investments are
relatively predictable, deposit flows and early loan repayments are more
influenced by general interest rates, floors and caps on loan rates, general
economic conditions and competition. First Federal generally manages the pricing
of its deposits to be competitive and to increase core deposit relationships,
but has from time to time decided not to pay deposit rates that are as high as
those of its competitors and, when necessary, to supplement deposits with less
expensive alternative sources of funds, such as FHLB borrowings.
The primary investing activities of First Federal are originating loans
and, to a much lesser extent, purchasing mortgage-backed and investment
securities. During fiscal years ended September 30, 2004, 2003, and 2002, First
Federal had loan originations net of principal repayments of $2.3 million, $1.2
million and ($26.2) million, respectively. A substantial portion of loan
originations were funded by proceeds of loan repayments, the maturity or sale of
securities, deposits and FHLB advances.
The primary financing activities of First Federal are deposits and
borrowings. During the fiscal years ended September 30, 2004, 2003, and 2002,
First Federal experienced a net change in deposits of ($9.0) million, $7.7
million, and $17.2 million. Certificates of deposits as of September 30, 2004
maturing within one year total $22.9 million. Management expects most of these
deposits to remain with the Bank. During the fiscal years ended September 30,
2004, 2003 and 2002, First Federal's net financing activity (proceeds less
repayments) with the FHLB totaled ($4.2) million, $23.9 million, and $16.9
million, respectively.
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First Federal's most liquid assets are cash and cash equivalents, which
consist of short-term highly liquid investments with original maturities of less
than three months that are readily convertible to known amounts of cash and
interest-bearing deposits. The level of these assets is dependent on First
Federal's operating, financing and investing activities during any given period.
At September 30, 2004, cash and cash equivalents totaled $9.5 million.
Liquidity management is both a daily and long-term responsibility of
management. First Federal adjusts its investments in liquid assets based upon
management's assessment of (i) expected loan demand, (ii) expected deposit
flows, (iii) yields available on interest-earning deposits and investment
securities, and (iv) the objectives of its asset/liability management program.
Excess liquidity is invested generally in interest-earning overnight deposits
and short- and intermediate-term U.S. Government and agency obligations and
mortgage-backed securities of short duration. If First Federal requires funds
beyond its ability to generate them internally, the Bank has additional
borrowing capacity with the FHLB of Dallas which is, in the opinion of
management, adequate to provide any funds needed.
First Federal anticipates that it will have sufficient funds available
to meet current loan commitments. At September 30, 2004, First Federal had
outstanding loan commitments totaling $21.5 million.
Both First Federal and First Federal Bank are required to maintain
minimum levels of regulatory capital. At September 30, 2004, both First Federal
and First Federal Bank exceeded all of their capital requirements.
IMPACT OF NEW ACCOUNTING STANDARDS
See Note 1 of the Notes to the Consolidated Financial Statements
included herein for information regarding the effect of implementing new
accounting standards.
IMPACT OF INFLATION AND CHANGING PRICES
First Federal's Consolidated Financial Statements and Notes have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without consideration for changes in the relative purchasing
power of money over time due to inflation. The impact of inflation can be found
in the increased cost of First Federal's operations. Nearly all the assets and
liabilities of First Federal are financial, unlike most industrial companies. As
a result, First Federal's performance is directly impacted by changes in
interest rates, which are indirectly influenced by inflationary expectations.
Changes in interest rates do not necessarily move to the same extent as changes
in the price of goods and services.
BUSINESS OF FIRST FEDERAL
FIRST FEDERAL
In August 1998, First Federal was formed to be the holding company for
First Federal Bank. First Federal is incorporated under the laws of the State of
Delaware and is a savings and loan holding company registered with the Office of
Thrift Supervision.
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At September 30, 2004, First Federal had $348.1 million of assets and
stockholders' equity of $34.0 million (or 9.77% of total assets). First Federal
derives its revenues primarily from the operations of First Federal Bank in the
form of distributions from First Federal Bank to First Federal.
The executive offices of First Federal are located at 300 North
Pennsylvania Avenue, Roswell, New Mexico 88201, and its telephone number at that
address is (505) 622-6201.
The principal activities of First Federal are providing assistance in
the management and coordination of the financial resources of First Federal Bank
and providing capital, business development and long-range planning services to
First Federal Bank.
As a savings and loan holding company, First Federal is subject to
regulation by the Office of Thrift Supervision. The Office of Thrift Supervision
regulates the types of banking and nonbanking activities in which First Federal
Bank may engage. Under applicable federal rules, there are generally no
limitations or restrictions on the non-bank activities of First Federal.
First Federal has no full-time employees. Certain of the executive
officers and directors of First Federal Bank also serve as executive officers
and directors of First Federal. The executive officers receive no direct
compensation for the duties performed by them for First Federal, although some
may receive compensation from First Federal Bank by virtue of their positions as
executive officers or directors of First Federal Bank. First Federal may
determine to compensate its executive officers in the future although First
Federal has no current plan to do so.
FIRST FEDERAL BANK
First Federal Bank is a full-service, community-oriented savings bank
that provides financial services to individuals, families and businesses through
9 branch offices and 11 ATMs throughout Bernalillo, Chaves, Dona Ana, Lincoln
and Otero Counties, New Mexico and El Paso, Texas.
Originally organized in 1920 as a mutual savings association, First
Federal Bank converted to the stock form of ownership in 1979. On August 18,
1998, First Federal Bank reorganized into a holding company structure with the
formation of First Federal.
First Federal Bank is a full-service financial institution and offers a
wide range of financial services, including the acceptance of checking, savings
and certificate deposits and the making of residential mortgage loans,
commercial real estate loans, consumer loans, commercial non-real estate loans,
construction loans, and other term loans. First Federal Bank does not offer
trust services. First Federal Bank also invests in mortgage-backed and other
securities and funds a portion of its activities through FHLB activities and
other third party borrowings.
For the convenience of its customers, First Federal Bank offers
drive-through banking facilities, night depository, personalized checks, charge
cards through a correspondent bank, ATM/Debit Cards and safe deposit boxes.
First Federal Bank's operation services include cashier's checks, travelers'
checks, domestic wire transfers, account research, stop payments and
photocopies.
MARKET AREA
First Federal Bank is an independent community bank offering a diverse
range of financial services to businesses and individuals as an alternative to
money center and super-regional banks in our market area. At September 30, 2004,
First Federal Bank provided these services through nine full-service
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branch offices and 11 ATMs located in Bernalillo, Chaves, Dona Ana, Lincoln and
Otero Counties, New Mexico and El Paso, Texas. Our primary market for deposits
is currently concentrated around Chaves, Dona Ana and Lincoln Counties, New
Mexico; although, in recent years, our commercial loan growth has greatly
increased through our entrance into the Albuquerque, New Mexico and El Paso,
Texas markets.
Chaves, Dona Ana and Lincoln counties are located in the southern part
of New Mexico. Chaves County, with Roswell being the county seat, boasts one of
the largest privately held airplane runways in the United States, is the seventh
largest producer of milk in the United States with 82,000 dairy cattle, and is
also the home to one of the largest mozzarella cheese plants worldwide. Dona Ana
County, with Las Cruces as its county seat, is the home to New Mexico State
University. Las Cruces was recently ranked the number one "Metro Area to Do
Business" by the Forbes/Milken Institute and a "Top Area in the U.S. to Retire"
by MONEY Magazine. Lincoln County, whose county seat is Carrizozo, boasts the
mountain community of Ruidoso with its skiing in the winter and horse racing in
the summer, and Capitan and Lincoln with the history of Billy the Kid. The
economic environment in Chaves, Dona Ana and Lincoln and contiguous counties
continues to be favorable and has supported increased commercial and residential
activity in recent years.
The population of Chaves, Dona Ana and Lincoln Counties increased by
approximately 5.8%, 22.4% and 37.1%, respectively, between 1990 and 2000, while
the population of the State of New Mexico as a whole increased by 16.8% during
the same period.
The economy of our primary market area is based on a mixture of service,
agriculture, manufacturing and wholesale/retail trade. Approximately 27.6%,
32.3% and 27.9% of the workforces of Chaves, Dona Ana and Lincoln Counties,
respectively, are employed in managerial, professional or administrative support
positions. Other employment is provided by a variety of industries and state and
local governments. Chaves, Dona Ana and Lincoln Counties provide numerous
opportunities for employment through their diverse large and small business
employers. As of September 2004, the unemployment rates in Chaves County was
6.9%, Dona Ana was 6.0%, and Lincoln County was 3.5%. The overall rates for the
State of New Mexico at 5.3% were slightly lower than the United States as a
whole at 5.4%.
LENDING ACTIVITIES
GENERAL. Although First Federal Bank originates first mortgage loans
secured by one- to four-family residences, our recent focus has been on our
commercial real estate and other loans. To a lesser extent, First Federal Bank
also makes loans secured by savings accounts. First Federal Bank retains most of
the loans it originates, although it may sell longer-term one- to four-family
residential loans and participations in some large commercial loans. The vast
majority of First Federal Bank's loan officers have come from commercial banking
backgrounds.
ONE- TO FOUR-FAMILY REAL ESTATE LENDING. First Federal Bank offers
conforming and non-conforming, fixed-rate and adjustable-rate residential
mortgage loans with maturities of up to 30 years and maximum loan amounts
generally of up to $600,000. This portfolio totaled $114.6 million, or 45.1% of
our total loan portfolio at September 30, 2004. First Federal Bank also offers
both FHA and VA government loans. All government guaranteed or insured loans are
sold into the secondary market.
First Federal Bank currently offers both fixed- and adjustable-rate
conventional mortgage loans with terms of 10 to 30 years that are fully
amortizing with monthly payments. One- to four-family residential mortgage loans
are generally underwritten according to Fannie Mae or Freddie Mac
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guidelines, and loans that conform to such guidelines are referred to as
"conforming loans." First Federal Bank generally originates both fixed-rate and
ARM loans in amounts up to the maximum conforming loan limits as established by
Fannie Mae and Freddie Mac, which is currently $333,700 for single-family homes.
Private mortgage insurance is generally required for loans with loan-to-value
ratios in excess of 80%. First Federal Bank also originates loans above
conforming limits, referred to as "jumbo loans," that have been underwritten to
the credit standards of Fannie Mae or Freddie Mac. These loans are generally
eligible for sale to various firms that specialize in the purchase of such
non-conforming loans, although First Federal Bank retained one of these loans in
our portfolio with an original principal balance of $450,000 originated in
fiscal 2004. First Federal Bank also originates loans that do not meet the
standards of Fannie Mae or Freddie Mac, but are deemed to be acceptable risks.
The balance of such loans as of September 30, 2004 was $38.9 million, all of
which are retained in our loan portfolio.
First Federal Bank actively monitors its interest rate risk position to
determine the desirable level of investment in fixed-rate mortgages. First
Federal Bank does not retain the servicing rights on the loans it sells.
Generally, First Federal Bank does not retain any fixed-rate loans with a
maturity over 15 years.
First Federal Bank currently offers several ARM loan products secured by
residential properties with rates that are fixed for a period ranging from 12
months to five years. After the initial term, the interest rate on these loans
is generally reset every year based upon a contractual spread or margin above
the average yield on either U.S. Treasury securities or the London InterBank
Offered Rate (LIBOR), adjusted to a constant maturity of one year, as published
weekly by the Federal Reserve Board or the Federal National Mortgage
Association, respectively, and subject to certain periodic and lifetime
limitations on interest rate changes. Many of the borrowers who select these
loans have shorter-term credit needs than those who select long-term, fixed-rate
loans. ARM loans generally pose different credit risks than fixed-rate loans
primarily because the underlying debt service payments of the borrowers rise as
interest rates rise, thereby increasing the potential for default. At September
30, 2004, our ARM portfolio included approximately $13.8 million in loans that
re-price annually after an initial fixed-rate period of one, three or five
years.
First Federal Bank requires that borrowers maintain fire and extended
coverage casualty insurance (and, if appropriate, flood insurance) in an amount
at least equal to the lesser of the loan balance or the replacement cost of the
improvements.
COMMERCIAL REAL ESTATE LENDING. First Federal Bank originates real
estate loans secured by first liens on commercial real estate. The commercial
real estate properties are predominantly non-residential properties such as
office buildings, shopping centers, retail strip centers, motels/hotels,
industrial and warehouse properties and, to a lesser extent, more specialized
properties such as mobile home parks and restaurants. First Federal Bank may,
from time to time, purchase commercial real estate loan participations. First
Federal Bank targets commercial real estate loans with initial principal
balances between $150,000 and $2.5 million. Loans secured by commercial real
estate totaled approximately $89.9 million, or 35.4% of our total loan portfolio
at September 30, 2004. Substantially all of our commercial real estate loans are
secured by properties located in our primary market area.
Most of our commercial real estate loans are written as adjustable-rate
or ten-year fixed-rate mortgages and have maturities of five to ten years.
Amortization on these loans is typically based on 15- to 20-year payout
schedules. First Federal Bank also originates some 15- to 20-year fixed-rate,
fully amortizing loans. These fixed rate loans are matched with FHLB advances.
Margins generally range from 250 basis points to 360 basis points above the
applicable Federal Home Loan Bank advance rate.
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In the underwriting of commercial real estate loans, First Federal Bank
generally lends up to 75% of the property's appraised value. Decisions to lend
are based on the economic viability of the property and the creditworthiness of
the borrower. In evaluating a proposed commercial real estate loan, First
Federal Bank emphasizes primarily the ratio of the property's projected net cash
flow to the loan's debt service requirement (generally requiring a ratio of 1.20
times), computed after deduction for a vacancy factor and property expenses it
deems appropriate. In addition, a personal guarantee of the loan is generally
required from the principal(s) of the borrower. First Federal Bank requires
title insurance insuring the priority of our lien, fire and extended coverage
casualty insurance, and flood insurance, if appropriate, in order to protect our
security interest in the underlying property.
Commercial real estate loans generally carry higher interest rates and
have shorter terms than those on one- to four-family residential mortgage loans.
Commercial real estate loans, however, entail significant additional credit
risks compared to one- to four-family residential mortgage loans, as they
typically involve large loan balances concentrated with a single borrower or
groups of related borrowers. In addition, the payment experience on loans
secured by income-producing properties typically depends on the successful
operation of the related real estate project and thus may be subject to a
greater extent to adverse conditions in the real estate market and in the
general economy.
CONSUMER LOANS. First Federal Bank originates a variety of consumer and
other loans, including real estate loans, home equity lines of credit,
automobiles, recreational vehicles and personal unsecured loans. The terms of
these are fixed-rate installment loans and variable rate lines of credit. As of
September 30, 2004, consumer loans totaled $21.0 million, or 8.3% of the total
loan portfolio.
At September 30, 2004, the largest group of consumer loans consisted of
$14.2 million or 6.7% of our total loan portfolio, which are loans secured by
first and second liens on residential properties. First Federal Bank offers
fixed-rate, fixed-term and second mortgage loans, referred to as homeowner
loans, and it also offers adjustable-rate home equity lines of credit.
Other consumer loans include automobile loans. As of September 30, 2004,
these loans totaled approximately $5.8 million, or 2.3% of our total loan
portfolio. Automobile loans are written with fixed rates and are fully
amortizing. The rate and term are primarily determined by the credit worthiness
of the borrower and the age of the automobile. The value of the automobile
financed will typically not exceed 120% of the vehicle's MSRP or NADA retail.
First Federal's ability to originate automobile loans is dependent in part on
the availability to consumers of low cost financing from automobile
manufacturers.
Other consumer loans also include secured and unsecured installment
loans for other purposes. Unsecured installment loans generally have shorter
terms than secured consumer loans, and generally have higher interest rates than
rates charged on secured installment loans with comparable terms.
Our procedures for underwriting consumer loans include an assessment of
an applicant's credit history and the ability to meet existing obligations and
payments on the proposed loan. Although an applicant's creditworthiness is a
primary consideration, the underwriting process also includes a comparison of
the value of the collateral security, if any, to the proposed loan amount.
Consumer loans generally entail greater risk than residential mortgage
loans, particularly in the case of consumer loans that are unsecured or secured
by assets that tend to depreciate rapidly. In addition, the repayment of
consumer loans depend on the borrower's continued financial stability, as their
repayment is more likely to be adversely affected by job loss, divorce, illness
or personal bankruptcy than a single family mortgage loan.
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COMMERCIAL BUSINESS LOANS. First Federal Bank makes various types of
secured and unsecured commercial loans to customers in our market area for the
purpose of financing equipment acquisition, expansion, working capital and other
general business purposes. The terms of these loans generally range from less
than one year to five years. The loans are either negotiated on a fixed-rate
basis or carry adjustable interest rates indexed to Wall Street Journal Prime.
At September 30, 2004, it had 218 commercial business loans outstanding with an
aggregate balance of approximately $14.3 million, or 5.6% of the total loan
portfolio.
Commercial credit decisions are based upon a credit assessment of the
loan applicant. A determination is made as to the applicant's ability to repay
in accordance with the proposed terms as well as an overall assessment of the
risks involved. An evaluation is made of the applicant to determine character
and capacity to manage. Personal guarantees of the principals are generally
required. In addition to an evaluation of the loan applicant's financial
statements, a determination is made of the probable adequacy of the primary and
secondary sources of repayment to be relied upon in the transaction. Credit
agency reports of the applicant's credit history supplement the analysis of the
applicant's creditworthiness. Checks with other banks and trade investigations
also may be conducted. Collateral supporting a secured transaction also is
analyzed to determine its marketability. Commercial business loans generally
bear higher interest rates than residential loans of like duration because they
involve a higher risk of default since their repayment is generally dependent on
the successful operation of the borrower's business and the sufficiency of
collateral, if any.
CONSTRUCTION LOANS. First Federal Bank originates land acquisition,
development and construction loans to builders and other borrowers in our market
area. These loans totaled approximately $14.5 million, or 5.7% of our total loan
portfolio at September 30, 2004.
Acquisition loans help finance the purchase of land intended for future
development, including single-family homes, multi-family housing, and commercial
income property. In some cases, First Federal Bank may make an acquisition loan
before the borrower has received approval to develop the land as planned. In
general, the maximum loan-to-value ratio for a raw land acquisition loan is 60%
of the appraised value of the property. It also makes development loans to
builders and developers in our market area to finance improvements to real
estate, consisting mostly of single-family subdivisions, typically to finance
the infrastructure-type cost of utilities, roads, sewers and other development
costs. Builders generally rely on the sale of single-family homes to repay
development loans, although in some cases the improved building lots may be sold
to another builder. The maximum amount loaned is generally limited to the lesser
of 85% of the cost of the improvements or 75% of the appraised value. Advances
are made in accordance with a schedule reflecting the cost of the improvements
incurred.
First Federal Bank also grants construction loans to area builders in
conjunction with development loans. In the case of residential subdivisions,
these loans finance the cost of completing homes (including unsold homes) on the
improved property. Advances on construction loans are made in accordance with a
schedule reflecting the cost of construction incurred. Repayment of construction
loans on residential properties is normally expected from the sale of units to
individual purchasers. In the case of income-producing property or
owner-occupied property, repayment is usually expected from permanent financing
upon completion of construction.
Land acquisition, development and construction lending exposes us to
greater credit risk than permanent mortgage financing. The repayment of land
acquisition, development and construction loans depends upon the sale of the
property to third parties or the availability of permanent financing upon
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completion of all improvements. In the event First Federal Bank makes an
acquisition loan on property that is not yet approved for the planned
development, there is the risk that approvals will not be granted or will be
delayed. These events may adversely affect the borrower and the collateral value
of the property. Development and construction loans also expose us to the risk
that improvements will not be completed on time in accordance with
specifications and projected costs. In addition, the ultimate sale or rental of
the property may not occur as anticipated.
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LOAN PORTFOLIO COMPOSITION. The following table sets forth the
composition of our loan portfolio, including loans held for sale, by type of
loan at the dates indicated.
AT SEPTEMBER 30,
---------------------------------------------------------------------
2004 2003 2002
--------------------- --------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- --------- ---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
First mortgage............. $ 114,616 45.00% $ 106,082 42.00% $ 106,418 42.00%
Commercial mortgage........ 89,874 35.00% 88,137 35.00% 70,659 28.00%
Construction............... 14,502 6.00% 15,812 6.00% 16,132 6.00%
Commercial................. 14,282 6.00% 17,307 7.00% 25,601 10.00%
Consumer and other loans... 21,019 8.00% 26,440 10.00% 35,448 14.00%
---------- ---------- ----------
Total loans................ $ 254,293 100.00% $ 253,778 100.00% $ 254,258 100.00%
========= ========= =========
Other items:
Unadvanced construction
loans................... 19,456 11,159 14,462
Deferred loan origination
costs................... -- -- --
Deferred loan origination
fees.................... 377 398 405
Allowance for loan losses.. 2,253 2,495 2,468
---------- ---------- ----------
Total loans, net........... $ 232,207 $ 239,726 $ 236,923
========== ========== ==========
(CONT'D)
AT SEPTEMBER 30,
----------------------------------------------
2001 2000
--------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT
---------- --------- ---------- ---------
First mortgage............. $ 85,102 37.00% $ 89,835 42.00%
Commercial mortgage........ 60,097 26.00% 52,716 25.00%
Construction............... 10,452 5.00% 10,992 5.00%
Commercial................. 28,039 12.00% 24,750 12.00%
Consumer and other loans... 46,693 20.00% 36,304 17.00%
--------- ----------
Total loans................ $ 230,383 100.00% $ 214,597 100.00%
========= =========
Other items:
Unadvanced construction
loans................... 9,622 4,977
Deferred loan origination
costs................... -- --
Deferred loan origination
fees.................... 525 398
Allowance for loan losses.. 2,263 2,018
--------- ----------
Total loans, net........... $ 217,974 $ 207,204
========= ==========
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LOAN PORTFOLIO MATURITIES AND YIELDS. The following table summarizes the
scheduled repayments of our loan portfolio at September 30, 2004. Demand loans,
loans having no stated repayment schedule or maturity, and overdraft loans are
reported as being due in one year or less.
RESIDENTIAL
MORTGAGE COMMERCIAL MORTGAGE CONSTRUCTION COMMERCIAL
-------------------- -------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE
---------- -------- ---------- -------- ---------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
1 year or less............... $ 1,071 8.06% $ 5,901 7.12% $ 14,161 5.83% $ 4,192 6.19%
Greater than 1 to 3 years.... 982 6.31% 6,488 6.57% 341 6.91% 3,194 6.60%
Greater than 3 to 5 years.... 27,743 4.45% 7,679 6.66% 0.00% 2,464 6.33%
Greater than 5 to 10 years... 23,740 6.49% 17,290 6.68% 0.00% 1,939 6.42%
Greater than 10 to 20 years.. 33,835 5.70% 51,247 6.42% 0.00% 2,493 6.17%
More than 20 years........... 27,245 5.82% 1,268 6.25% 0.00% -- 0.00%
---------- ---------- ---------- ----------
Total........................ $114,616 $ 89,873 $ 14,502 $ 14,282
========== ========== ========== ==========
TOTAL
--------------------
WEIGHTED
AVERAGE
AMOUNT RATE
---------- --------
(DOLLARS IN THOUSANDS)
1 year or less............... $ 26,735 6.40%
Greater than 1 to 3 years.... 17,028 6.85%
Greater than 3 to 5 years.... 43,192 5.21%
Greater than 5 to 10 years... 48,875 6.65%
Greater than 10 to 20 years.. 89,950 6.08%
More than 20 years........... 28,512 5.84%
-----------
Total........................ $ 254,292
===========
The total amount of loans due after September 30, 2005 which have
predetermined interest rates is $______________, while the total amount of loans
due after such date which have floating or adjustable interest rates is
$____________.
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LOAN ORIGINATIONS, PURCHASES, SALES AND SERVICING. While First Federal
Bank originates both fixed-rate and adjustable-rate loans, our ability to
generate each type of loan depends upon borrower demand, market interest rates,
borrower preference for fixed- versus adjustable-rate loans, and the interest
rates offered on each type of loan by other lenders in our market area. This
includes competing banks, savings banks, credit unions, mortgage banking
companies and life insurance companies that may also actively compete for local
loans. Loan originations are derived from a number of sources, including branch
office personnel, existing customers, builders, attorneys, real estate broker
referrals and walk-in customers.
Our loan origination and sales activity may be adversely affected by a
rising interest rate environment that typically results in decreased loan
demand, while declining interest rates may stimulate increased loan demand.
Accordingly, the volume of loan origination, the mix of fixed and
adjustable-rate loans, and the profitability of this activity can vary from
period to period. One- to four-family residential mortgage loans are generally
underwritten to current Fannie Mae and Freddie Mac seller/servicer guidelines,
and closed on standard Fannie Mae/Freddie Mac documents. If such loans are sold,
the sales are conducted using standard Fannie Mae/Freddie Mac purchase contracts
and master commitments as applicable. One- to four-family mortgage loans may be
sold both to Fannie Mae and Freddie Mac on a non-recourse basis whereby
foreclosure losses are generally the responsibility of the purchaser and not
First Federal Bank. Our policy has been to release the servicing rights for all
loans sold. However, First Federal Bank does service loans for others. As of
September 30, 2004, it serviced approximately $8.4 million of loans for others.
LOAN APPROVAL AUTHORITY AND UNDERWRITING. The board of directors
approves all loans where the total relationship exposure ("TRE") exceeds
$1,500,000. The board of directors has granted lending authority to the
Director's Loan Committee, the members of which are three Directors, one of
which must either be the Chairman, Vice Chairman, Chief Executive Officer or
Chief Credit Officer of First Federal Bank. The Director's Loan Committee
approves all loans where the TRE is in excess of $1 million but does not exceed
$1.5 million. The Board of Directors has also granted lending authority to the
Senior Loan Committee, whose members are the Chief Credit Officer and two Senior
Vice Presidents of First Federal Bank. The Senior Loan Committee approves all
loans where the TRE is in excess of $500,000 but does not exceed $1 million.
Finally, the Board of Directors has granted lending authority to designated
officers of First Federal Bank, based on their duties and their experience, to
approve loans within specified TRE levels. The maximum individual lending
authority granted by the Board of Directors is $500,000 secured and $100,000
unsecured.
First Federal Bank has established a risk rating system for our
commercial business loans, commercial and multi-family real estate loans,
agricultural loans, acquisition and development, and construction loans to
builders. The risk rating system assesses a variety of factors to rank the risk
of default and risk of loss associated with the loan. These ratings are
initially performed by the originating officer and are reviewed periodically
through First Federal's internal asset review procedures.
In connection with our residential and commercial real estate loans,
First Federal Bank generally requires property appraisals to be performed by
independent appraisers who are approved by the Board of Directors. Appraisals
are then reviewed by the appropriate loan underwriting areas. Under certain
conditions, appraisals may not be required for loans under $250,000 or in other
limited circumstances. It also requires hazard insurance and, if indicated,
flood insurance on property securing mortgage loans. Title insurance is required
with the exception of consumer loans under $50,000, such as home equity lines of
credit and homeowner loans and some promotional, refinance loans.
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LOAN ORIGINATION FEES AND COSTS. In addition to interest earned on
loans, First Federal Bank may also receive loan origination fees. Such fees vary
with the volume and type of loans and commitments made, and competitive
conditions in the mortgage markets. Pursuant to FAS 91, it defers loan
origination fees and costs, and amortize such amounts as an adjustment to yield
over the term of the loan by use of the level-yield method. Deferred loan
origination fees (net of deferred fees) were $376,970 at September 30, 2004.
LOANS TO ONE BORROWER. At September 30, 2004, our five largest aggregate
amounts loaned to any one borrower and certain related interests (including any
unused lines of credit) consisted of secured and unsecured financing of $3.2
million, $2.7 million, $2.6 million, $2.4 million and $1.7 million,
respectively.
DELINQUENT LOANS, OTHER REAL ESTATE OWNED AND CLASSIFIED ASSETS
COLLECTION PROCEDURES. A late notice is sent on the sixth, eleventh and
fifteenth day after the payment due date on a loan requesting the payment due
plus any late charge that was assessed. Accounts are distributed to a collector
or account officer to contact borrowers, determine the reason for delinquency
and arrange for payment, and accounts are monitored for receipt of payments. If
payments are not received within 30 days of the original due date, a letter
demanding payment of all arrearages is sent and contact efforts are continued.
If payment is not received within 60 days of the due date, loans are generally
accelerated and payment in full is demanded. Failure to pay within 90 days of
the original due date generally results in legal action, notwithstanding ongoing
collection efforts. Unsecured consumer loans are charged-off after 120 days. For
commercial loans, loans are charged off at the time a loss is recognized by
management, but generally not later than 120 days past due. Loans that are well
collateralized and in the process of collection may not be charged off in the
120 day time frame.
LOANS PAST DUE AND NON-PERFORMING ASSETS. Loans are reviewed on a
regular basis, and are placed on non-accrual status when either principal or
interest is 90 days or more past due. In addition, loans are placed on
non-accrual status when, in the opinion of management, there is sufficient
reason to question the borrower's ability to continue to meet contractual
principal or interest payment obligations. Interest accrued and unpaid at the
time a loan is placed on non-accrual status is reversed from interest income.
Interest payments received on non-accrual loans are not recognized as income
unless warranted based on the borrower's financial condition and payment record.
At September 30, 2004, First Federal Bank had non-accrual loans of $495,116.
Real estate acquired as a result of foreclosure or by deed in lieu of
foreclosure is classified as real estate owned ("REO") until such time as it is
sold. When real estate is acquired through foreclosure or by deed in lieu of
foreclosure, it is recorded at its fair value, less estimated costs of disposal.
If the fair value of the property is less than the loan balance, the difference
is charged against the allowance for loan losses.
101
NON-PERFORMING ASSETS. The table below sets forth the amounts and
categories of our non-performing assets at the dates indicated. At each date
presented, we had no troubled debt restructurings (loans for which a portion of
interest or principal has been forgiven and loans modified at interest rates
materially less than current market rates).
AT SEPTEMBER 30,
--------------------------------------------------------------
2004 2003 2002 2001 2000
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Non-accrual loans:
Fist mortgage.................. $ 78 $ 214 $ 239 $ 189 $ 108
Commercial mortgage............ -- 665 188 425 758
Construction................... 417 47 399 50 --
Commercial..................... -- -- 57 92 60
Consumer and other............. -- -- -- 21 7
--------- --------- --------- --------- ---------
Total non-performing loans... $ 495 $ 926 $ 883 $ 777 $ 932
--------- --------- --------- --------- ---------
Loans greater than 90 days
delinquent
and still accruing:
First mortgage................. $ -- $ -- $ 27 $ -- $ --
Commercial mortgage............ -- -- -- -- --
Construction................... -- -- -- -- --
Commercial..................... -- -- 150 -- --
Consumer and other............. -- -- -- -- --
--------- --------- --------- --------- ---------
Total loans 90 days and still
accruing................ $ -- $ -- $ 177 $ -- $ --
--------- --------- --------- --------- ---------
Real estate owned:
First mortgage................. $ -- $ -- $ 167 $ 223 $ 203
Commercial mortgage............ -- -- -- 201 --
Construction................... -- -- -- -- --
Commercial..................... -- -- -- -- --
Consumer and other............. -- -- 10 -- 33
--------- --------- --------- --------- ---------
Total real estate owned...... -- -- 177 424 236
--------- --------- --------- --------- ---------
Total non-performing assets....... $ 495 $ 926 $ 1,237 $ 1,201 $ 1,168
========= ========= ========= ========= =========
Troubled Debt Restructured........ $ 424 $ 503 $ 163 $ 269 $ 437
========= ========= ========= ========= =========
Ratios:
Non-performing loans to total
loans........................ 0.1% 0.4% 0.3% 0.3% 0.4%
Non-performing assets to total
assets....................... 0.1% 0.3% 0.4% 0.4% 0.5%
For the year ended September 30, 2004, gross interest income that would
have been recorded had the non-accrual loans at the end of the period remained
on accrual status throughout the period amounted to $41,385. Interest income
actually recognized on such loans totaled $37,446.
102
CLASSIFICATION OF ASSETS. Our policies, consistent with regulatory
guidelines, provide for the classification of loans and other assets that are
considered to be of lesser quality as "other assets especially mentioned"
("OAEM"), "substandard", "doubtful", or "loss" assets. A special mention credit
is considered to be currently protected from loss but is potentially weak. No
loss of principal or interest is foreseen; however, proper supervision and
management attention is required to deter further deterioration in the credit.
An asset is considered substandard if it is inadequately protected by the
current net worth and paying capacity of the obligor or of the collateral
pledged, if any. Substandard assets include those characterized by the distinct
possibility that the institution will sustain some loss if the deficiencies are
not corrected. Assets classified as doubtful have all of the weaknesses inherent
in those classified substandard with the added characteristic that the
weaknesses present make collection or liquidation in full, on the basis of
currently existing facts, conditions, and values, highly questionable and
improbable. Assets classified as loss are those considered uncollectible and of
such little value that their continuance as assets is not warranted. Assets that
do not expose us to risk sufficient to warrant classification in one of the
aforementioned categories, but which possess potential weaknesses that deserve
our close attention, are required to be designated as "watch". As of September
30, 2004, First Federal Bank had $3.1 million of assets designated as watch.
Assets are classified into the above mentioned categories and
allocations are made based on historical loss experience. The allowance for loan
losses represents amounts that have been established to recognize losses
inherent in the loan portfolio that are both probable and reasonably estimable
at the date of the financial statements. When it classifies problem assets as
"loss", First Federal Bank charges off such amount. Our determination as to the
classification of our assets and the amount of our loss allowances are subject
to review by our regulatory agencies, which can order the establishment of
additional loss allowances. Management regularly reviews our asset portfolio to
determine whether any assets require classification in accordance with
applicable regulations. On the basis of management's review of our assets at
September 30, 2004, classified assets consisted of OAEM assets of approximately
$2.1 million, substandard assets of approximately $3.4 million and no doubtful
assets.
ALLOWANCE FOR LOAN LOSSES. First Federal Bank provides for loan losses
based on the allowance method. Accordingly, all loan losses are charged to the
related allowance and all recoveries are credited to it. Additions to the
allowance for loan losses are provided by charges to income based on various
factors which, in management's judgment, deserve current recognition in
estimating probable losses. Management regularly reviews the loan portfolio and
makes provisions for loan losses in order to maintain the allowance for loan
losses in accordance with accounting principles generally accepted in the United
States of America. The allowance for loan losses consists of amounts
specifically allocated to non-performing loans and other criticized or
classified loans (if any) as well as allowances determined for each major loan
category. After it establishes a provision for loans that are known to be
non-performing, criticized or classified, it calculates a percentage to apply to
the remaining loan portfolio to estimate the probable losses inherent in that
portion of the portfolio. When the loan portfolio increases, therefore, the
percentage calculation results in a higher dollar amount of estimated probable
losses than would be the case without the increase, and when the loan portfolio
decreases, the percentage calculation results in a lower dollar amount of
estimated probable losses than would be the case without the decrease. These
percentages are determined by management based on historical loss experience for
the applicable loan category, which may be adjusted to reflect our evaluation
of:
1. Portfolio composition, size, and maturities of the various
segmented portions of the portfolio.
103
2. Concentrations of borrowers, industries, geographical sectors,
loan product, loan classes and collateral types, etc.
3. Off balance sheet risks, letters of credit (where there is no
back-up note), unfunded commitments, and lines of credit.
4. Volume and trend of loan delinquencies and those on non-accrual.
5. Criticized and classified assets. Trends in the aggregate and
developments in significant individual credits identified as
problems or Watch List items.
6. Non-Performing Loans and Non-Performing Assets. Trends in the
aggregate and developments on significant individual items.
7. Historical trends of actual loan losses or charge-offs (net
recoveries) based on volume and types of loans.
8. Specific issues brought to the attention of Senior Management
citing weakness or deficiencies in systems and procedures or any
violations of First Federal Bank policies which may lead to or
create any undue risk to First Federal Bank.
9. Significant recoveries or additions to the allowance for loan
losses.
10. Changes in national and local economic conditions, including
rapid changes in interest rates.
Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. The allowance for losses on loans is based on
management's estimates. In connection with the determination of the value of
foreclosed real estate, management obtains independent appraisals for
significant properties.
While management uses available information to recognize losses on loans
and foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory agencies,
as an integral part of their examination process, periodically review First
Federal's allowances for losses on loans and foreclosed real estate. Such
agencies may require First Federal to recognize additions to the allowances
based on their judgments about information available to them at the time of
their examination. Because of these factors, it is reasonably possible that the
allowances for losses on loans and the valuation of foreclosed real estate may
change materially in the near term.
104
The following table sets forth activity in our allowance for loan losses
for the periods indicated.
AT OR FOR THE YEARS ENDED SEPTEMBER 30,
-----------------------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Balance at beginning of period.. $ 2,495 $ 2,468 $ 2,263 $ 2,018 $ 1,720
-------- -------- -------- -------- --------
Charge-offs:
Residential mortgage......... 14 22 1 46 --
Commercial mortgage.......... -- 38 71 -- 5
Construction................. -- -- 7 257 16
Commercial................... 3 15 45 12 150
Consumer and other........... 45 25 42 80 91
-------- -------- -------- -------- --------
Total charge-offs.......... $ 62 $ 100 $ 166 $ 395 $ 262
Recoveries:
Residential mortgage......... -- 5 1 8 --
Commercial mortgage.......... 12 2 4 -- --
Construction................. -- -- -- 259 --
Commercial................... 4 17 -- 148 5
Consumer and other........... 2 12 8 11 46
-------- -------- -------- -------- --------
Total recoveries........... $ 18 $ 36 $ 13 $ 426 $ 51
Net (charge-offs) recoveries.... (44) (64) (153) 31 (211)
Provision for loan losses....... (198) 91 358 214 509
--------- -------- -------- -------- --------
Balance at end of year.......... $ 2,253 $ 2,495 $ 2,468 $ 2,263 $ 2,018
======== ======== ======== ======== ========
Ratios:
Net charge-offs to average
loans outstanding
(annualized).............. (0.0)% (0.0)% (0.0)% (0.0)% (0.0)%
Allowance for loan losses to
non-performing loans at
end of period............. 455.1% 269.4% 279.5% 291.2% 216.5%
Allowance for loan losses to
total loans at end of
period.................... 0.9% 1.0% 1% 1.0% 0.9%
105
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES. The following table sets forth
the allowance for loan losses allocated by loan category, the total loan
balances by category (including loans held for sale), and the percent of loans
in each category to total loans at the dates indicated. The allowance for loan
losses allocated to each category is not necessarily indicative of future losses
in any particular category and does not restrict the use of the allowance to
absorb losses in other categories.
AT SEPTEMBER 30,
-------------------------------------------------------------------------------------------
2004 2003
----------------------------------------- -----------------------------------------
PERCENT OF PERCENT OF
ALLOWANCE LOAN LOANS IN EACH ALLOWANCE LOAN LOANS IN EACH
FOR LOAN BALANCES BY CATEGORY TO FOR LOAN BALANCES BY CATEGORY TO
LOSSES CATEGORY TOTAL LOANS LOSSES CATEGORY TOTAL LOANS
----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Residential mortgage.. $ 297 $ 114,616 45.1% $ 304 $ 106,082 41.8%
Commercial mortgage... 1,401 89,874 35.3% 974 88,137 34.7%
Construction.......... 105 14,502 5.7% 70 15,812 6.2%
Commercial............ 104 14,282 5.6% 76 17,307 6.8%
Consumer and other.... 381 21,019 8.3% 447 26,440 10.4%
----------- ----------- ----------- ----------- ----------- -----------
Total................. $ 2,288 $ 254,293 100.00% $ 1,871 $ 253,778 100.00%
=========== =========== =========== =========== =========== ===========
(CONT'D)
AT SEPTEMBER 30,
------------------------------------------
2002
------------------------------------------
PERCENT OF
ALLOWANCE LOAN LOANS IN EACH
FOR LOAN BALANCES BY CATEGORY TO
LOSSES CATEGORY TOTAL LOANS
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Residential mortgage.. $ 327 $ 106,418 41.9%
Commercial mortgage... 1,171 70,659 27.8%
Construction.......... 68 16,132 6.3%
Commercial............ 107 25,601 10.1%
Consumer and other.... 714 35,448 13.9%
----------- ----------- -----------
Total................. $ 2,387 $ 254,258 100.00%
=========== =========== ===========
AT SEPTEMBER 30,
----------------------------------------------------------------------------------------
2001 2000
------------------------------------------ ------------------------------------------
PERCENT OF PERCENT OF
ALLOWANCE LOAN LOANS IN EACH ALLOWANCE LOAN LOANS IN EACH
FOR LOAN BALANCES BY CATEGORY TO FOR LOAN BALANCES BY CATEGORY TO
LOSSES CATEGORY TOTAL LOANS LOSSES CATEGORY TOTAL LOANS
----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Residential mortgage.. $ 252 $ 85,102 36.9% $ 253 $ 89,835 41.9%
Commercial mortgage... 992 60,097 26.1% 799 52,716 24.6%
Construction.......... 40 10,452 4.5% 37 10,992 5.1%
Commercial............ 108 28,039 12.2% 83 24,750 11.5%
Consumer and other.... 838 46,693 20.3% 552 36,304 16.9%
----------- ----------- ----------- ----------- ----------- -----------
Total................. $ 2,230 $ 230,383 100.00% $ 1,723 $ 214,597 100.00%
=========== =========== =========== =========== =========== ===========
106
SECURITIES ACTIVITIES
Our securities investment policy is established by our board of
directors. This policy dictates that investment decisions be made based on the
safety of the investment, liquidity requirements, potential returns, cash flow
targets, and consistency with our interest rate risk management strategy. The
board oversees our investment program and evaluates on an ongoing basis our
investment policy and objectives. Our chief financial officer, or our chief
financial officer acting with our chief executive officer, is responsible for
making securities portfolio decisions in accordance with established policies.
Our chief financial officer and chief executive officer have the authority to
purchase and sell securities within specific guidelines established by the
investment policy. In addition, all transactions are reviewed by the Board at
least monthly.
Our current investment policy generally permits securities investments
in debt securities issued by the U.S. Government and U.S. Agencies, and
municipal bonds, as well as investments in preferred and common stock of
government agencies and government sponsored enterprises such as Fannie Mae,
Freddie Mac and the Federal Home Loan Bank of Dallas (federal agency
securities). Securities in these categories are classified as "investment
securities" for financial reporting purposes. The policy also permits
investments in mortgage-backed securities, including pass-through securities
issued and guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. Our current
investment strategy uses a risk management approach of diversified investing in
fixed-rate securities with short- to intermediate-term maturities, as well as
adjustable-rate securities, which may have a longer term to maturity. The
emphasis of this approach is to increase overall investment securities yields
while managing interest rate risk. Maturities on fixed rate instruments are
limited to five years or less. Any exceptions must be approved by the board of
directors.
SFAS No. 115 requires that, at the time of purchase, First Federal Bank
designates a security as held to maturity, available for sale, or trading,
depending on our ability and intent. Securities available for sale are reported
at fair value, while securities held to maturity are reported at amortized cost.
It does not have a trading portfolio.
GOVERNMENT SECURITIES. At September 30, 2004, First Federal Bank held
government securities available for sale with a fair value of $16.0 million,
consisting primarily of agency obligations with short- to medium-term maturities
(one to five years). While these securities generally provide lower yields than
other investments such as mortgage-backed securities, our current investment
strategy is to maintain investments in such instruments to the extent
appropriate for liquidity purposes, and as collateral for borrowings.
MUNICIPAL BONDS. At September 30, 2004, First Federal Bank held
approximately $1.5 million in municipal bonds. These bonds are classified as
held to maturity at amortized cost.
EQUITY SECURITIES. At September 30, 2004, our equity securities
available for sale had a fair value of approximately $600,000 and consisted of
stock issued by Freddie Mac and Fannie Mae, and certain other equity
investments. First Federal Bank also held approximately $3.3 million (at cost)
of Federal Home Loan Bank of Dallas common stock, a portion of which must be
held as a condition of membership in the Federal Home Loan Bank System, with the
remainder held as a condition to our borrowing under the Federal Home Loan Bank
advance program.
MORTGAGE-BACKED SECURITIES. First Federal Bank purchases mortgage-backed
securities in order to: (i) generate positive interest rate spreads with minimal
administrative expense; (ii) lower credit risk as
107
a result of the guarantees provided by Freddie Mac, Fannie Mae and Ginnie Mae;
and (iii) increase liquidity. It invests primarily in mortgage-backed securities
issued or sponsored by Fannie Mae, Freddie Mac, and Ginnie Mae. At September 30,
2004, our mortgage-backed securities portfolio totaled approximately $2.05
million, consisting of $2.0 million available for sale at fair value and $54,000
held to maturity at amortized cost.
Mortgage-backed securities are created by pooling mortgages and issuing
a security collateralized by the pool of mortgages with an interest rate that is
less than the interest rate on the underlying mortgages. Mortgage-backed
securities typically represent a participation interest in a pool of
single-family or multi-family mortgages, although most of our mortgage-backed
securities are collateralized by single-family mortgages. The issuers of such
securities (generally U.S. Government agencies and government sponsored
enterprises, including Fannie Mae, Freddie Mac and Ginnie Mae) pool and resell
the participation interests in the form of securities to investors, such as us,
and guarantee the payment of principal and interest to these investors.
Investments in mortgage-backed securities involve a risk that actual prepayments
will be greater or less than the prepayment rate estimated at the time of
purchase, which may require adjustments to the amortization of any premium or
accretion of any discount relating to such instruments, thereby affecting the
net yield on such securities. First Federal Bank reviews prepayment estimates
for our mortgage-backed securities at purchase to ensure that prepayment
assumptions are reasonable considering the underlying collateral for the
securities at issue and current interest rates, and to determine the yield and
estimated maturity of the mortgage-backed securities portfolio. Periodic reviews
of current prepayment speeds are performed in order to ascertain whether
prepayment estimates require modification, that would cause amortization or
accretion adjustments.
108
INVESTMENT SECURITIES PORTFOLIO. The following table sets forth the
composition of our investment securities portfolio at the dates indicated.
AT SEPTEMBER 30,
-----------------------------------------------------------------
2004 2003 2002
------------------- ------------------- -------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
--------- -------- --------- -------- --------- --------
(IN THOUSANDS)
DEBT SECURITIES:
U.S. Government and
agency obligations...... $ 37,684 $ 37,586 $ 43,269 $ 43,373 $ 10,320 $ 10,431
State agency and
municipal obligations... 1,468 1,476 2,335 2,369 1,119 1,153
--------- -------- --------- -------- --------- --------
Corporate bonds and
other obligations...... -- -- 203 203 600 600
--------- -------- --------- -------- --------- --------
Mortgage-backed securities:
Pass-through
securities:
Fannie Mae............ 988 1,030 2,344 2,432 6,023 6,241
Freddie Mac........... 981 1,023 1,627 1,694 5,666 5,813
CMOs:
Fannie Mae............ -- -- -- -- -- --
Freddie Mac........... -- -- -- -- -- --
--------- -------- --------- -------- --------- --------
Total debt securities..... 41,121 41,115 49,778 50,071 23,728 24,238
--------- -------- --------- -------- --------- --------
MARKETABLE EQUITY SECURITIES:
Common stock.............. 10 10 10 10 10 10
Preferred stock........... -- -- -- -- -- --
Mutual funds.............. 600 600 600 600 600 600
--------- -------- --------- -------- --------- --------
Total equity securities... 610 610 610 610 610 610
--------- -------- --------- -------- --------- --------
Total investment
securities.............. $ 41,731 $ 41,725 $ 50,388 $ 50,681 $ 24,338 $ 24,848
========= ======== ========= ======== ========= ========
At September 30, 2004, the available for sale federal agency securities,
at fair value, totaled $16.0 million, or 4.6% of total assets. Of the portfolio,
based on amortized cost, approximately $11.5 million had maturities of one year
or less and a weighted average yield of 3.0%, and approximately $4.5 million had
maturities of between one and five years and a weighted average yield of 2.5%.
The agency securities portfolio includes both non-callable and callable
debentures. The agency callable debentures contain various call terms from
continuously callable after 30 days, to quarterly callable with no call for the
first six months.
At September 30, 2004, our available for sale mortgage-backed
securities, approximately $1.9 million, at fair value, consisted of pass-through
securities, which totaled 1.3% of total assets.
At September 30, 2004, our held to maturity mortgage-backed securities
portfolio totaled approximately $53,000 at amortized cost, with a weighted
average yield of 6.94% and contractual maturities within five years. First
Federal Bank had no mortgage-backed securities with contractual maturities over
five years.
109
PORTFOLIO MATURITIES AND YIELDS. The composition and maturities of the
investment securities portfolio and the mortgage- at September 30, 2004 are
summarized in the following table. Maturities are based on the final contractual
payment dates, and do not reflect the impact of prepayments or early redemptions
that may occur. State and municipal securities yields have not been adjusted to
a tax-equivalent basis.
MORE THAN ONE YEAR MORE THAN FIVE YEARS
ONE YEAR OR LESS THROUGH FIVE YEARS THROUGH TEN YEARS
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE
COST YIELD COST YIELD COST YIELD
----------- --------- ----------- --------- ----------- ---------
DEBT SECURITIES:
U.S. Government and agency
securities.................... $31,458,561 2.1% $6,225,507 2.2% $ -- 0.0%
State agency and municipal
obligations................... 1,088,096 2.2% 379,822 3.3% -- 0.0%
----------- --------- ----------- --------- ----------- ---------
Mortgage-backed securities:
Pass-through securities:
Fannie Mae.................. -- 0.0% 988,110 5.4% -- 0.0%
Freddie Mac................. -- 0.0% 980,937 5.7% -- 0.0%
--------- --------- ---------
Total debt securities........... 32,546,657 2.1% 8,574,376 3.0% -- 0.0%
----------- --------- ----------- --------- ----------- ---------
MARKETABLE EQUITY SECURITIES:
Common stock.................... -- 10,000 --
Mutual funds.................... -- 600,000 --
----------- ----------- -----------
Total equity securities......... -- 610,000 --
----------- ----------- -----------
Total interest securities....... $32,546,657 $ 9,184,376 $ --
=========== =========== ===========
(CONT'D)
MORE THAN TEN YEARS TOTAL SECURITIES
---------------------- -------------------------------------
WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE
COST YIELD COST FAIR VALUE YIELD
----------- --------- ----------- ---------- ---------
(DOLLARS IN THOUSANDS)
DEBT SECURITIES:
U.S. Government and agency
securities.................... $ -- 0.0% $37,684,068 $37,581,151 2.1%
State agency and municipal
obligations................... -- 0.0% 1,467,918 1,477,660 2.5%
----------- --------- ----------- ----------- ---------
Mortgage-backed securities:
Pass-through securities:
Fannie Mae.................. -- 0.0% 998,110 1,029,599 5.4%
Freddie Mac................. -- 0.0% 980,937 1,023,397 5.7%
--------- ---------
Total debt securities........... -- 0.0% 41,121,033 41,114,8075 2.3%
----------- --------- ----------- ----------- ---------
0.0%
MARKETABLE EQUITY SECURITIES:
Common stock.................... -- 10,000 10,000
-----------
Mutual funds.................... -- 600,000 600,000
----------- ----------- -----------
Total equity securities......... -- 600,000 610,000
----------- ----------- -----------
Total interest securities....... $ -- $41,731,033 $41,724,807
=========== =========== ===========
110
SOURCES OF FUNDS
GENERAL. Deposits, borrowings, repayments and prepayments of loans and
securities, proceeds from sales of loans and securities, proceeds from maturing
securities and cash flows from operations are the primary sources of our funds
for use in lending, investing and for other general purposes.
DEPOSITS. First Federal Bank offers a variety of deposit accounts with a
range of interest rates and terms. Our deposit accounts consist of savings
accounts, NOW accounts, checking accounts, money market accounts, club accounts,
certificates of deposit, IRAs and other qualified plan accounts. It provides
various commercial checking accounts for businesses. In addition, it provides
low-cost checking account services for low-income customers.
At September 30, 2004, our deposits totaled $254.4 million. NOW and
interest-bearing deposits totaled $44.1 million, and non-interest-bearing demand
deposits and cashiers checks outstanding totaled $33.5 million. Savings and
money market deposits totaled $97.3 million at September 30, 2004. Also at that
date, First Federal Bank had a total of $79.4 million in certificates of
deposit, of which $22.9 million had maturities of one year or less. Although it
has a significant portion of our deposits in shorter-term certificates of
deposit, management monitors activity on these accounts and, based on historical
experience and our current pricing strategy it believes it will retain a large
portion of such accounts upon maturity.
Our deposits are obtained predominantly from the areas in which our
branch offices are located. First Federal Bank relies on our favorable
locations, customer service and competitive pricing to attract and retain these
deposits. While it accepts certificates of deposit in excess of $100,000 for
which it may provide preferential rates, it does not actively solicit such
deposits, as they are more difficult to retain than core deposits.
The following tables set forth the distribution of total deposit
accounts, by account type, at the dates indicated.
AT SEPTEMBER 30,
------------------------------------------------------------------------------------------------
2004 2002 2001
------------------------------ ------------------------------ ------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE PERCENT RATE BALANCE PERCENT RATE BALANCE PERCENT RATE
--------- --------- -------- --------- --------- -------- --------- --------- --------
(DOLLARS IN THOUSANDS)
DEPOSIT TYPE:
Demand deposits........ $ 34,188 12.9% 0.0% $ 30,576 11.6% 0.0% $ 21,673 8.8% 0.0%
NOW deposits........... 45,787 17.2% 0.1% 41,418 15.7% 0.2% 37,096 15.1% 0.4%
Money market deposits.. 8,166 3.1% 0.3% 10,448 4.0% 0.6% 8,975 3.6% 1.7%
Regular savings........ 95,889 36.1% 0.7% 100,710 38.2% 1.3% 100,386 40.7% 2.2%
Club accounts.......... -- 0.0% 0.0% -- 0.0% 0.0% -- 0.0% 0.0%
--------- --------- -------- --------- --------- -------- --------- --------- --------
Total transaction
accounts.......... $ 184,031 69.3% 0.4% $ 183,152 69.5% 0.8% $ 168,130 68.2% 1.5%
Certificates of
deposit........... 81,521 30.7% 3.5% 80,400 30.5% 3.1% 78,226 31.8% 4.0%
--------- --------- -------- --------- --------- -------- --------- --------- --------
Total deposits...... $ 265,552 100.00% 1.4% $ 263,552 100.00% 1.5% $ 246,356 100.00% 2.3%
========= ======== ======== ========= ======== ======== ========= ========= ========
111
The following table sets forth the time deposits in First Federal
classified by interest rate as of the dates indicated.
AT SEPTEMBER 30,
-------------------------------------
2004 2003 2002
----------- ----------- -----------
(IN THOUSANDS)
Interest Rate
Less than 2%... $ 40,288 $ 32,217 $ 5,678
2.00% -2.99%... 11,380 9,798 33,803
3.00% -3.99%... 13,417 14,042 9,031
4.00% -4.99%... 11,011 18,354 19,237
5.00% -5.99%... 1,156 1,828 7,982
6.00% -6.99% 2,154 3,918 6,786
7.00% -7.99%... -- -- --
----------- ----------- -----------
Total.......... $ 79,406 $ 80,157 $ 82,517
=========== =========== ===========
As of September 30, 2004, the aggregate amount of outstanding
certificates of deposit in amounts greater than or equal to $100,000 was
approximately $22.7 million. The following table sets forth the maturity of
those certificates as of September 30, 2004. The following table sets forth, by
interest rate ranges, information concerning certificates of deposit at the
dates indicated.
AT
SEPTEMBER 30, 2004
------------------
(IN THOUSANDS)
Three months or less................... $ 10,571
Over three months through six months... 4,392
Over six months through one year....... 2,433
Over one year to three years........... 3,219
Over three years....................... 2,122
----------
Total.................................. $ 22,737
==========
BORROWINGS. Our borrowings consist of advances. At September 30, 2004,
First Federal Bank had access to additional Federal Home Loan Bank advances of
up to $116.9 million. The following table sets forth information concerning
balances and interest rates on our Federal Home Loan Bank advances and
repurchase agreements at the dates and for the periods indicated.
AT OR FOR THE YEARS ENDED SEPTEMBER 30,
------------------------------------------
2003 2002 2001
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Balance at end of period................... $ 61,509 $ 37,655 $ 20,760
Average balance during period.............. $ 53,268 $ 29,265 $ 19,937
Maximum outstanding at any month end....... $ 61,509 $ 37,655 $ 20,997
Weighted average interest rate at end of
period.................................. 4.6% 5.1% 6.2%
Average interest rate during period........ 4.7% 5.2% 6.2%
ACTIVITIES OF SUBSIDIARIES AND AFFILIATED ENTITIES
First New Mexico Service Corp. is a wholly owned subsidiary of First
Federal Bank. It was established in 1993 for the purpose of holding an
investment in real estate. It no longer holds that real estate and currently has
no activity. At September 30, 2004, the Company's investment in this subsidiary
was $0.
112
COMPETITION
First Federal Bank faces significant competition in both originating
loans and attracting deposits. Most of the communities it operates in have a
high concentration of financial institutions, many of which are significantly
larger institutions with greater financial resources than us, and many of which
are our competitors to varying degrees. Our competition for loans comes
principally from commercial banks, savings banks, mortgage banking companies,
credit unions, insurance companies and other financial service companies. Our
most direct competition for deposits has historically come from commercial
banks, savings banks and credit unions. First Federal Bank faces additional
competition for deposits from non-depository competitors such as the mutual fund
industry, securities and brokerage firms and insurance companies. It has
emphasized personalized banking and the advantage of local decision making in
our banking business, and this strategy appears to have been well received in
our market areas. It does not rely on any individual, group, or entity for a
material portion of our deposits.
EMPLOYEES
As of September 30, 2004, First Federal had 118 full-time employees and
nine part-time employees. The employees are not represented by a collective
bargaining unit and it considers our relationship with our employees to be good.
PROPERTIES
As of September 30, 2004, First Federal Bank owned 13 operating
properties, including its headquarters, and two additional sites for future
expansion in the Albuquerque market. First Federal Bank leases one property from
an unrelated third party. At September 30, 2004, the net book value of our
property was approximately $9.2 million. The following is a list of our
operating locations:
CORPORATE OFFICE:
300 N. Pennsylvania Ave.
(Includes a separate drive-up)
Roswell, NM 88201
(505) 622-6201
BRANCH OFFICES:
1810 S. Main St. 1800 S. Telshor (Includes a separate drive-up)
Roswell, NM 88203 Las Cruces, NM 88011
(505) 622-6201 (505) 522-2664
3201 N. Main St. 301 W. Amador
Roswell, NM 88201 Las Cruces, NM 88005
(505) 622-6201 (505) 522-2664
398 Sudderth 7015 N. Mesa
Ruidoso, NM 88345 El Paso, TX 79912
(505) 257-4006 (915) 587-6599
100 Smokey Bear 2290 Trawood Dr.
Capitan, NM 88316 El Paso, TX 79935
(505) 354-5030 (915) 594-0681
113
411 Central 4301 The 25 Way, NE
Carrizozo, NM 88301 Albuquerque, NM 87109
(505) 348-2277 (505) 341-3240
300 E. 1st St.
Alamogordo, NM 88310
(505) 439-0011
LEGAL PROCEEDINGS
First Federal is not involved in any pending legal proceedings other
than routine legal proceedings occurring in the ordinary course of business
which, in the aggregate, involve amounts which are believed by management to be
immaterial to our financial condition and results of operations.
MANAGEMENT OF FIRST FEDERAL
First Federal's Board is comprised of nine members. Our bylaws provide
that approximately one-third of the directors are to be elected annually.
Directors of First Federal are generally elected to serve for a three-year
period and until their respective successors shall have been elected and shall
qualify.
The table below sets for the certain information, as of September 30,
2004, regarding current members of the board of directors and executive officers
who are not directors, including their terms of office of board members.
Position(s) Held With First Director Current Term
Name Age Federal Banc of the Southwest, Inc. Since(1) Expires
- -----------------------------------------------------------------------------------------------------------------
DIRECTORS
Edward K. David 70 Chairman of the Board 1981 2006
Marc Reischman 53 Vice Chairman of the Board. 1998 2008
Aubrey L. Dunn, Jr. 48 President, Chief Executive Officer 1996 2006
and Director
Kay R. McMillan (2)(3) 68 Director 2003 2006
Michael A. McMillan(2) 38 Director 2003 2008
Arturo Jurado 62 Director 1994 2008
Russell P. Weems 56 Director 1991 2007
Larry L. Sheffield(4) 56 Director 1995 2007
James E. Paul, Jr. 60 Director 2000 2007
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
George A. Rosenbaum, Jr. 48 Executive Vice President and Chief N/A N/A
Financial Officer
- -----------------------
(1) Includes service with First Federal Bank.
(2) Kay R. McMillan and Michael A. McMillan are related to one another as
mother and son, respectively.
(3) Includes Ms. McMillan's service as an Advisory Director of First
Federal.
(4) Includes Mr. Sheffield's service as a Director and Advisory Director of
First Federal and First Federal Bank.
114
The merger agreement between First Federal and GFSB provides that upon
completion of the merger, Richard C. Kauzlaric and Michael P. Mataya, who are
two current directors of GFSB will be appointed to the Board of Directors of
First Federal and First Federal Bank.
The business experience for the past five years for each of our
directors and executive officers is as follows:
EDWARD K. DAVID has served as a Director of First Federal Bank since
1981 and as a Director of First Federal since its formation in 1998. He became
Chairman of the Board of Directors in 2003. Mr. David is the President of David
Petroleum Corporation, an oil and gas exploration company.
MARC REISCHMAN has served as a Director of First Federal Bank since 1998
and as a Director of First Federal since its formation in 1998. He became Vice
Chairman of the Board of Directors in 2004. Mr. Reischman is Chief Executive
Officer of Holsum Inc., a New Mexico company.
AUBREY L. DUNN, JR. has served as President, Chief Executive Officer and
a Director of First Federal Bank since 1996 and as the President, Chief
Executive Officer and a Director of First Federal since its formation in 1998.
KAY R. MCMILLAN first served as an Advisory Director of First Federal
and First Federal Bank in 2003. In 2004, she became a full Director of First
Federal and First Federal Bank. Ms. McMillan is the largest stockholder in First
Federal and is the Chairman of the Board of Permian Exploration Corporation, an
oil and gas company. For over 30 years, Ms. McMillan has been a private investor
in numerous businesses. Ms. McMillan is the mother of Michael A. McMillan.
MICHAEL A. MCMILLAN first served as an Advisory Director of First
Federal and First Federal Bank in 2002. In 2003, he became a full Director of
First Federal and First Federal Bank. Since 1992, Mr. McMillan has been employed
by Permian Exploration Corporation, an oil and gas company. Since 2003, he has
served as the President of Permian Exploration Corporation. Mr. McMillan is the
son of Kay R. McMillan.
ARTURO JURADO has served as a Director of First Federal Bank since 1994
and as a Director of First Federal since its formation in 1998. Mr. Jurado is
the President of Jurado Farms.
RUSSELL P. WEEMS has served as a Director of First Federal Bank since
1991 and as a Director of First Federal since its formation in 1998. He is an
architect.
LARRY L. SHEFFIELD served as a Director of First Federal Bank from 1995
to 2002, and as a Director of First Federal since its formation in 1998 to 2002.
From 2002 to 2004, he served as an Advisory Director of First Federal and First
Federal Bank. In 2004, he became a full Director of First Federal and First
Federal Bank. Mr. Sheffield is the President of LLS Development Corp, a real
estate investment company.
JAMES E. PAUL, JR. has served as a Director of First Federal and First
Federal Bank since 2000. Since 1991, he has been the President of the Jim Paul
Company and JP&A Concerts.
GEORGE A. ROSENBAUM, JR. has been employed by First Federal and First
Federal Bank since 2003. From 2002 to 2003, he served as the Chief Financial
Officer of Illini Bancorp, Inc., a publicly traded bank holding company. From
2000 to 2002, Mr. Rosenbaum was a Senior Manager with McGladrey & Pullen LLP.
Mr. Rosenbaum is a certified public accountant with over 25 years of experiences
in the financial services industry.
115
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The business of First Federal is conducted at regular and special
meetings of the Board of Directors and its standing committees. The standing
committees consist of the Executive, Nominating and Stock Option Committees.
During the fiscal year ended September 30, 2004, the Board of Directors met at
12 regular meetings and three special meetings. No member of the Board of
Directors or any committee thereof attended less than 75% of said meetings.
The Executive Committee consists of Chairman David, President and Chief
Executive Officer Dunn, Vice Chairman Reischman, and Director Michael A.
McMillan. The Executive Committee meets as necessary when the Board of Directors
is not in session to exercise general control and supervision in all matters
pertaining to the interest of First Federal, subject at all times to the
direction of the Board of Directors. The Executive Committee met one time during
the fiscal year ended September 30, 2004.
The Nominating Committee consists of Chairman Michael A. McMillan,
Director Edward David, and Director Jurado. The Nominating Committee meets to
nominate persons for election to the Board of Directors of First Federal, unless
the entire Board of Directors decides to act as the Nominating Committee. The
Nominating Committee did not meet during the fiscal year ended September 30,
2004.
The Stock Option Committee consists of Chairman David, Vice Chairman
Reischman, Director Jurado, and Director Michael A. McMillan. The Stock Option
Committee meets as necessary to determine grants of stock options under First
Federal's 2002 Stock Option and Incentive Plan. The Stock Option Committee met
two times during the fiscal year ended September 30, 2004.
COMPENSATION OF DIRECTORS
FEES. Directors of First Federal do not receive a fee for serving on the
Board of Directors. Fees are paid for serving on the Board of Directors of First
Federal Bank. Directors of First Federal Bank receive a fee of $1,200 per Board
meeting attended and $250 per committee meeting attended.
STOCK OPTION PLAN. During the fiscal year ended September 30, 2004,
First Federal adopted, and its stockholders approved, the First Federal Banc of
the Southwest, Inc. 2002 Stock Option and Incentive Plan. Pursuant to this stock
option plan, options to purchase 6,350 shares were granted to non-employee
directors Edward David, Russell Weems, Marc Reischman, Arturo Jurado, Jim Paul,
Michael McMillan, Larry Sheffield, Kay McMillan and then-director Judy Collins
during the fiscal year ended September 30, 2004.
116
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth for the three
years ended September 30, 2004, certain information as to the total remuneration
paid by First Federal to its Chief Executive Officer and First Federal's other
executive officers who received total annual compensation in excess of $100,000
(together, "Named Executive Officers").
LONG-TERM COMPENSATION
----------------------------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------- --------------------------- ----------------------------------
YEAR RESTRICTED OPTIONS/
NAME AND PRINCIPAL ENDED OTHER ANNUAL STOCK SARS LTIP ALL OTHER
POSITION 9/30 SALARY BONUS COMPENSATION(1) AWARDS (#)(3) PAYOUTS COMPENSATION(2)
- ------------------------ -------- ---------- --------- --------------- ---------- -------- ------- ---------------
Aubrey L. Dunn, Jr., 2004 $ 217,308 $ -- $ -- $ -- -- $ -- $ --
President, Chief 2003 207,308 5,813 -- -- -- -- 9,000
Executive Officer and 2002 196,665 82,341 -- -- 80,000 -- 9,000
Director
George A. Rosenbaum, 2004 $ 116,711 $ -- $ -- $ -- 8,800 $ -- $ --
Jr., Executive Vice 2003 9,731 -- -- -- -- -- 846
President and Chief --(4) -- -- -- -- -- -- --
Financial Officer
- -------------------
(1) First Federal Bank provides certain members of senior management with
certain other personal benefits, the aggregate value of which did not
exceed the lesser of $50,000 or 10% of the total annual salary and bonus
reported for each officer. The value of such personal benefits is not
included in this table.
(2) Includes employer contributions to a 401(k) plan.
(3) Options shown have been adjusted to reflect an eight for one stock
split.
(4) Mr. Rosenbaum was not employed by First Federal during fiscal year 2002.
117
STOCK OPTION PLAN. During the fiscal year ended September 30, 2004,
First Federal adopted, and its stockholders approved, the First Federal Banc of
the Southwest, Inc. 2002 Stock Option and Incentive Plan. Set forth in the table
that follows is information relating to options granted under the stock option
plan to the Named Executive Officers during the fiscal year ended September 30,
2004.
OPTION GRANTS IN FISCAL YEAR 2004
- -------------------------------------------------------------------------------------------------------------
INDIVIDUAL GRANTS
- -------------------------------------------------------------------------------------------------------------
PERCENT OF TOTAL EXERCISE
OPTIONS GRANTED OR BASE
OPTIONS TO EMPLOYEES IN PRICE EXPIRATION GRANT DATE PRESENT VALUE
NAME GRANTED FISCAL 2004 ($)(1) DATE ($)(2)
- ------------------------- ------- ------------------ ---------- ------------ ------------------------
Aubrey L. Dunn, Jr. -- --% -- -- --
George A. Rosenbaum, Jr. 4,000 20.62% 18.00 11/5/08
4,800 22.22% 10.625 7/21/09
- ---------------
(1) The exercise price of the options is equal to the fair market value of
the underlying shares on the date of the award. The number of options
shown have been adjusted to reflect an eight for one stock split.
(2) Based on a grant date present value of $17.60 per share derived using
the negotiated value of First Federal's common stock for purposes of its
merger with GFSB of 165% of First Federal's book value as of September
30, 2004 as determined in accordance with generally accepted accounting
principles.
Set forth below is certain information concerning options outstanding to
the Named Executive Officers at September 30, 2004, and the options exercised by
the Named Executive Officers during 2004.
AGGREGATE OPTION EXERCISES IN 2004 FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
YEAR-END YEAR-END (1)
VALUE ------------------------- -------------------------
SHARES ACQUIRED REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
NAME UPON EXERCISE ($) (#) ($)
- ------------------------- ----------------- ------------- ------------------------- -------------------------
Aubrey L. Dunn, Jr. 17,920 225,792 22,000/80,000 277,200/628,000
George A. Rosenbaum, Jr. -- -- 8,800/0 63,880/--
- ------------------
(1) Equals the difference between the aggregate exercise price of such
options and the aggregate fair market value of the shares of common
stock that would be received upon exercise, assuming such exercise
occurred as of the effective time of the merger of First Federal with
GFSB using the negotiated value of First Federal's common stock for
purposes of its merger with GFSB of 165% of First Federal's book value
as of September 30, 2004 as determined in accordance with generally
accepted accounting principles. The number of options shown have been
adjusted to reflect an eight for one stock split.
401(K) PLAN. First Federal Bank provides its employees a qualified,
tax-exempt pension plan with a "cash-or-deferred arrangement " qualifying under
Section 401(k) of the Internal Revenue Code. Generally, employees who have
attained age 21 and who have completed one year of employment, during which they
worked at least 1,000 hours, are eligible to participate in the 401(k) plan as
of the first day of the month following their eligibility. Eligible employees
are permitted to contribute up to 15% of their compensation to the 401(k) plan
on a pre-tax basis, up to a maximum of $13,000. First Federal Bank matches 4% of
the participant's salary reduction contribution to the 401(k) plan.
118
Participation contributions to the 401(k) plan are vested at a rate of
20% per year beginning with the participant's second year of employment with
First Federal Bank. Withdrawals are not permitted before age 59 1/2. Except in
the event of death, disability, termination of employment or reasons of proven
financial hardship. With certain limitations, participants may make withdrawals
from their accounts while actively employed. Upon termination of employment, the
participant's account will be distributed, unless he or she elects to defer the
payment.
The 401(k) plan may be amended by the Board of Directors, except that no
amendment may be made which would reduce the interest of any participant in the
401(k) plan trust fund or divert any of the assets of the 401(k) plan trust fund
to purposes other than the benefit of participants or their beneficiaries.
For the fiscal year ended September 30, 2004, First Federal Bank made
approximately $166,154 in contributions to the 401(k) plan.
TRANSACTIONS WITH CERTAIN RELATED PERSONS
No directors, executive officers or immediate family members of such
individuals were engaged in transactions with First Federal or any subsidiary
involving more than $60,000 (other than through a loan) during the fiscal year
ended September 30, 2004. In addition, during the fiscal year ended September
30, 2004, no directors, executive officers or immediate family members of such
individuals were involved in loans from First Federal or First Federal Bank
involving more than $60,000 which had not been made in the ordinary course of
business and on substantially the same terms and conditions, including interest
rate and collateral, as those of comparable transactions prevailing at the time
with other persons, and do not include more than the normal risk of
collectibility or present other unfavorable features.
DESCRIPTION OF FIRST FEDERAL COMMON STOCK
Set forth below is a summary of the certain features of the First
Federal common stock. This summary is not a complete discussion of the charter
documents and other instruments of First Federal that create the rights of the
security holders.
GENERAL
In January 2005, First Federal's stockholders approved an amendment to
its certificate of incorporation to increase the number of authorized shares of
common stock. First Federal is authorized to issue 6,000,000 shares of common
stock having a par value of $.01 per share and 500,000 shares of preferred stock
having a par value of $.01 per share. Each share of First Federal's common stock
has the same relative rights as, and is identical in all respects with, each
other share of common stock.
COMMON STOCK
DIVIDENDS. First Federal can pay dividends out of statutory surplus or
from certain net profits if, as and when declared by its board of directors. The
payment of dividends by First Federal is subject to limitations that are imposed
by law and applicable regulation. The holders of common stock of First Federal
are entitled to receive and share equally in any dividends as may be declared by
the board of directors of First Federal out of funds legally available for the
payment of dividends. If First Federal issues preferred stock, the holders of
the preferred stock may have a priority over the holders of the common stock
with respect to dividends.
119
VOTING RIGHTS. The holders of common stock of First Federal currently
possess exclusive voting rights in First Federal. They elect First Federal's
board of directors and act on any other matters as are required to be presented
to them under applicable law or as are otherwise presented to them by the board
of directors. Each holder of common stock is entitled to one vote per share and
does not have any right to cumulate votes in the election of directors. If First
Federal issues preferred stock, holders of preferred stock may also possess
voting rights.
LIQUIDATION. In the event of liquidation, dissolution or winding up of
First Federal, the holders of its common stock would be entitled to receive,
after payment or provision for payment of all its debts and liabilities, all of
the assets of First Federal available for distribution. If First Federal issues
preferred stock, the holders of the preferred stock may have a priority over the
holders of the common stock in the event of liquidation or dissolution.
PREEMPTIVE RIGHTS. Holders of the common stock of First Federal are not
entitled to preemptive rights with respect to any shares that may be issued. The
common stock is not subject to redemption.
PREFERRED STOCK
First Federal may issue preferred stock with such designations, powers,
preferences and rights as First Federal's board of directors may from time to
time determine. The board of directors can, without stockholder approval, issue
preferred stock with voting, dividend, liquidation and conversion rights that
could dilute the voting strength of the holders of the common stock and may
assist management in impeding an unfriendly takeover or attempted change in
control. None of the shares of the authorized preferred stock will be issued in
connection with the merger and there are no plans to issue preferred stock.
MANAGEMENT FOLLOWING THE MERGER
Information regarding the expected composition of the board of directors
of First Federal after the completion of the merger is provided below. Unless
otherwise stated, each individual has held his or her current occupation for the
last five years. The age indicated for each individual is as of ___________,
2005. The indicated period of service as a director includes the period of
service as a director of First Federal, First Federal Bank, GFSB or Gallup
Federal Savings Bank.
FIRST FEDERAL
TERMS ENDING IN 2006:
EDWARD K. DAVID, age 70, has served as a Director of First Federal Bank
since 1981 and as a Director of First Federal since its formation in 1998. He
became Chairman of the Board of Directors in 2003. Mr. David is the President of
David Petroleum Corporation, an oil and gas exploration company.
AUBREY L. DUNN, JR., age 48, has served as President, Chief Executive
Officer and a Director of First Federal Bank since 1996 and as the President,
Chief Executive Officer and a Director of First Federal since its formation in
1998.
KAY R. MCMILLAN, age 68, first served as an Advisory Director of First
Federal and First Federal Bank in 2003. In 2004, she became a full Director of
First Federal and First Federal Bank. Ms. McMillan is the largest stockholder in
First Federal and is the Chairman of the Board of Permian Exploration
Corporation, an oil and gas company. For over 30 years, Ms. McMillan has been a
private investor in numerous businesses. Ms. McMillan is the mother of Michael
A. McMillan.
120
RICHARD C. KAUZLARIC, age 67, is the President of GFSB. Mr. Kauzlaric is
also President of Bubany Insurance Agency, Inc., President of Western New Mexico
Gallup Foundation, past Regent of Western New Mexico University, past President
of New Mexico Amigos, and a sustaining member of the Amigos. Mr. Kauzlaric has
been instrumental in the redevelopment of downtown Gallup.
MICHAEL P. MATAYA, age 54, is a director of GFSB. He is also the
President and Chief Executive Officer of Indian Capital Distributing Co., a
wholesale gasoline marketer. Mr. Mataya is Director of the New Mexico Petroleum
Marketers Association, Director of the New Mexico Baptist Children's Home and is
a former member of the Board of Directors for Los Angeles Crippled Children's
Hospital.
TERMS ENDING IN 2007:
RUSSELL P. WEEMS, age 56, has served as a Director of First Federal Bank
since 1991 and as a Director of First Federal since its formation in 1998. He is
an architect.
LARRY L. SHEFFIELD, age 46, served as a Director of First Federal Bank
from 1995 to 2002, and as a Director of First Federal since its formation in
1998 to 2002. From 2002 to 2004, he served as an Advisory Director of First
Federal and First Federal Bank. In 2004, he became a full Director of First
Federal and First Federal Bank. Mr. Sheffield is the President of LLS
Development Corp, a real estate investment company.
JAMES E. PAUL, JR., age 60, has served as a Director of First Federal
and First Federal Bank since 2000. Since 1991, he has been the President of the
Jim Paul Company and JP&A Concerts.
TERMS ENDING IN 2008:
MARC REISCHMAN, age 53, has served as a Director of First Federal Bank
since 1998 and as a Director of First Federal since its formation in 1998. He
became Vice Chairman of the Board of Directors in 2004. Mr. Reischman is Chief
Executive Officer of Holsum Inc., a New Mexico company.
MICHAEL A. MCMILLAN, age 38, first served as an Advisory Director of
First Federal and First Federal Bank in 2002. In 2003, he became a full Director
of First Federal and First Federal Bank. Since 1992, Mr. McMillan has been
employed by Permian Exploration Corporation, an oil and gas company. Since 2003,
he has served as the President of Permian Exploration Corporation. Mr. McMillan
is the son of Kay R. McMillan.
ARTURO JURADO, age 62, has served as a Director of First Federal Bank
since 1994 and as a Director of First Federal since its formation in 1998. Mr.
Jurado is the President of Jurado Farms.
DIRECTORS' COMPENSATION
Directors of First Federal do not receive a fee for serving on the Board
of Directors. Fees are paid for serving on the Board of Directors of First
Federal Bank. Directors of First Federal Bank receive a fee of $1,200 per Board
meeting attended and $250 per committee meeting attended.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
After completion of the merger, the executive officers and key employees
of First Federal and First Federal Bank will consist of the current executive
officers and key employees of First Federal.
121
The following sets forth certain information regarding the executive
officers and key employees of First Federal and GFSB who are not anticipated to
be directors of First Federal after completion of the merger. The following
individuals are elected annually and hold office until their successors have
been elected and qualified or until they are removed or replaced. Ages are as of
_____________, 2005.
GEORGE A. ROSENBAUM, JR., age 48, has been employed by First Federal and
First Federal Bank since 2003. From 2002 to 2003, he served as the Chief
Financial Officer of Illini Bancorp, Inc., a publicly traded bank holding
company. From 2000 to 2002, Mr. Rosenbaum was a Senior Manager with McGladrey &
Pullen LLP. Mr. Rosenbaum is a certified public accountant with over 25 years of
experiences in the financial services industry.
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed combined consolidated
balance sheet as of September 30, 2004 and the unaudited pro forma condensed
combined consolidated statements of income for the year ended September 30,
2004, give effect to the pending merger, accounted for as a purchase. First
Federal's fiscal year ends September 30 and GFSB's fiscal year ends June 30. The
historical consolidated statements of income of GFSB as presented in the
unaudited pro forma condensed combined statement of income include information
from more than one of its fiscal years. To allow comparability of the periods,
GFSB's statements were adjusted to reflect an unaudited twelve month period
ending September 30, 2004.
The unaudited pro forma condensed combined consolidated financial
information is based on the historical consolidated financial statements of
First Federal and GFSB under the assumptions and adjustments set forth in the
accompanying notes. The unaudited pro forma condensed combined consolidated
balance sheet gives effect to the merger as if the merger had been consummated
at the end of the period presented. The unaudited pro forma condensed combined
consolidated statements of income give effect to the merger as if the merger had
been consummated on September 30 of the period presented. The unaudited pro
forma condensed combined consolidated financial statements do not give effect to
any anticipated cost savings or revenue enhancements in connection with the
merger.
You should read the unaudited pro forma condensed combined consolidated
financial statements in conjunction with the consolidated historical financial
statements of First Federal and GFSB, including the respective notes to those
statements. The pro forma information is not necessarily indicative of the
combined financial position or the results of operations in the future or of the
combined financial position or the results of operations which would have been
realized had the merger been consummated during the periods or as of the dates
for which the pro forma information is presented. First Federal anticipates that
the merger will provide the combined company with financial benefits that
include reduced operating expenses and opportunity to earn more revenue. In
addition, First Federal will incur costs in acquiring GFSB. The pro forma
information, while helpful in illustrating the financial characteristics of the
new company under one set of assumptions, does not reflect these benefits and
costs and, accordingly, does not attempt to predict or suggest future results.
Pro forma per share amounts for the combined company are based on a
1.136 exchange ratio.
122
FIRST FEDERAL AND GFSB UNAUDITED PRO FORMA CONDENSED COMBINED
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 2004
(IN THOUSANDS)
ACTUAL (UNAUDITED) PRO FORMA PRO FORMA
FIRST GFSB ADJUSTMENTS COMBINED
FEDERAL
---------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 9,528 $ 8,477 (991) (b)
(1,150) (c)
10,000 (f)
(11,594) (g) 14,270
Int Bearing deposits with banks 27,944 257 28,201
Securities available-for-sale 17,953 58,486 76,439
Securities held-to-maturity 23,214 399 9 (d) 23,622
Loans, net 253,439 152,388 2,914 (d) 408,741
Real estate owned -- 280 280
Premises and equipment 10,090 2,456 12,546
Accrued interest receivable 1,289 923 2,212
Other assets 4,189 4,159 8,348
Core deposit intangible 1,580 (e) 1,580
Goodwill 409 8,092 (j) 8,501
------------- ------------ ------------- ---------------
Total assets $ 348,055 $ 227,925 $584,740
LIABILITIES
Deposits $ 254,393 $ 136,401 405 (d) $ 391,199
Federal Home Loan Bank advances 57,330 65,897 6,499 (d) 129,726
Other borrowings 5,172 10,000 (f) 15,172
Accrued interest payable and other liabilities 2,340 1,455 (816) (d)
(391) (i) 2,588
------------ ------------ -------------- ---------------
Total liabilities 314,063 208,925 538,685
STOCKHOLDERS' EQUITY
Common stock 4 115 (115) (a)
1 (h) 5
Additional paid-in capital 5,255 3,172 (3,172) (a)
12,062 (h) 17,317
Unearned ESOP (44) 44 (a) --
Unearned stock awards
Treasury stock (2,721) --- (2,721)
Retained earnings 31,445 14,773 (14,773) (a) 31,445
Other comprehensive income 9 884 (884) (a) 9
------------ ------------ -------------- ---------------
Total stockholders' equity 33,992 18,900 46,055
------------ ------------ -------------- ---------------
Total liabilities and equity $ 348,055 $ 227,825 $ 584,740
Book value per share(k) $ 10.67 $ 16.48 $ 11.93
See Notes to the Unaudited Pro Forma Condensed Combined Consolidated Financial Statements.
123
(a) To record the elimination of GFSB equity.
(b) To record the capitalization of First Federal's unpaid costs related to
the merger.
(c) To record the payment of GFSB's unpaid costs related to the merger.
(d) To record the adjustment of loans, deposits and securities at fair
value, including the related deferred taxes.
(e) To record estimated identifiable intangible assets acquired in the
merger.
(f) To record issuance of $10 million in Trust Preferred Securities.
(g) To record the cash payment in connection with the purchase of 49% of
GFSB outstanding stock at $20 per share and the cash payment of GFSB
stock options pursuant to the merger agreement.
(h) To record the exchange of 51% of GFSB outstanding common stock and
applicable stock options for 685,464 shares of First Federal common
stock.
(i) To record the related tax effect of other merger charges.
(j) To record goodwill resulting from the merger.
(k) Per share data has been adjusted to reflect an eight for one stock
split.
124
FIRST FEDERAL AND GFSB
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED STATEMENT OF INCOME
FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 2004
(IN THOUSANDS, EXCEPT SHARE DATA)
ACTUAL (UNAUDITED) PRO FORMA PRO FORMA
FIRST GFSB ADJUSTMENTS COMBINED
FEDERAL
---------------------------------------------------------------------
INTEREST INCOME:
Loans $ 17,282 $ 9,974 $ (291) (a) $ 26,965
Securities 1,132 2,032 (54) (d)
(1) (f) 3,109
Other 358 78 436
------------- ------------- ------------- ------------------
Total interest income 18,772 12,084 30,510
INTEREST EXPENSE:
Deposits 2,974 2,645 (135) (b) 5,484
Federal Home Loan Bank advances 2,707 2,591 (2,166) (g) 3,132
Other borrowings -- -- 600 (h) 600
------------- ------------- ------------- ------------------
Total interest expense 5,681 5,236 9,216
Net interest income 13,091 6,848 21,294
Provision for loan losses 198 (909) (711)
------------- -------------- ------------- -------------------
Net interest income after provision for 13,289 5,939 20,583
loan losses
NON-INTEREST INCOME:
Service charges 881 744 1,625
Gain on sale of loans 586 72 658
Gain on sale of securities -- (1) (1)
Other 471 110 581
------------- ------------- ------------- ------------------
Total other income 1,938 925 2,863
NON-INTEREST EXPENSE:
Compensation and benefits 6,142 2,403 8,545
Occupancy and equipment 1,473 538 2,011
Data processing 500 387 887
Advertising 214 200 414
Professional fees 270 381 651
Other 1,660 899 287 (c) 2,846
------------- ------------- ------------- ------------------
Total other expense 10,259 4,808 15,354
Income before income taxes 4,968 2,056 8,092
Income taxes 1,911 559 363 (e) 2,833
------------- ------------- ------------- ------------------
Net income $ 3,057 $ 1,497 $ $ 5,259
Basic earnings per share(i) $ 0.96 $ 1.33 $ 1.36
Diluted earnings per share(i) $ 0.96 $ 1.26 $ 1.35
See Notes to the Unaudited Pro Forma Condensed Combined Consolidated Financial Statements.
125
(a) To record the amortization of fair value adjustments to loans acquired.
(b) To record the amortization of fair value adjustments to deposits
acquired.
(c) To record the amortization of core deposit intangible recorded at
acquisition.
(d) To record the lost interest on cash paid.
(e) To record the tax effect of all other adjustments at 34%.
(f) To record the amortization of premium recorded on securities.
(g) To record the amortization of fair value adjustments to FHLB advances
acquired.
(h) To record the interest expense related to the Trust Preferred
Securities.
(i) Per share data has been adjusted to reflect an eight for one stock split
for First Federal common stock.
126
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The unaudited Pro Forma Condensed Combined Consolidated Financial Data
has been prepared assuming the merger will be accounted for under the purchase
method and is based on the historical consolidated financial statements of First
Federal and the historical consolidated financial statements of GFSB, which have
been adjusted to reflect the historical cost of GFSB's assets at their fair
value. In addition, pro forma adjustments have been included to give effect to
events that are directly attributable to the merger and expected to have a
continuing impact on the combined company. Pro forma adjustments for the Pro
Forma Condensed Combined Consolidated Statements of Income include amortization
of core deposit intangible and other adjustments based on the allocated purchase
price of net assets acquired.
NOTE 2. CALCULATION OF THE PURCHASE PRICE AND GOODWILL
Pursuant to the merger agreement, the outstanding shares of GFSB (and
the vested stock options) will be exchanged for the "merger consideration". The
subsidiary of GFSB (Gallup Federal) owns 20,077 unallocated shares of GFSB that
were acquired for the Management Stock Bonus Plan. For practical purposes those
shares will be cancelled in conjunction with the transaction and not be
converted. In this pro forma the 20,077 shares were deducted from GFSB's total
outstanding shares of 1,146,645. Total shares subject to merger consideration
were computed as follows:
GFSB shares outstanding at 9/30/04 1,146,645
Unallocated Management Stock Bonus Plan shares (20,077)
------------
GFSB shares subject to merger consideration 1,126,568
============
The preliminary calculation of the cost to acquire GFSB is described in
the table below (in thousands):
September 30,
2004
-----------------
Cash payment to GFSB stockholders at $20 per
share for 49% of the 1,126,568 shares of GFSB
common stock outstanding, plus the cash portion
of the merger consideration for the vested
stock options $11,594
Market value of First Federal common stock to be
issued assuming that 51% of GFSB's common stock
outstanding, and the vested stock options will
be exchanged for 685,464 shares of First Federal
common stock assumed to be $17.60 per share 12,063
Cost of acquisition incurred by First Federal 991
-----------------
24,648
=================
Historical net assets of GFSB 18,900
Accrual of GFSB after-tax merger related charges,
data processing termination fees, and other
adjustments (759)
127
Fair market value adjustments (data as of 6/30/04):
Loans 2,914
Securities 9
Deposits (405)
FHLB Advances (6,499)
Core deposit intangible, estimated 1,580
Goodwill 8,092
Deferred taxes on purchase accounting adjustments 816
-----------------
$24,648
=================
NOTE 3. GFSB MERGER RELATED CHARGES
In connection with the merger, GFSB expects to incur pre-tax merger
related charges of approximately $1,202,000. These charges are expected to
include $457,000 in change-of-control, severance and other employee related
payments, and $745,000 in investment banking, legal and accounting fees. An
accrual for the merger related charges and the related tax effect has been
reflected in the unaudited Pro Forma Condensed Combined Consolidated Balance
Sheet as of September 30, 2004. As of September 30, 2004, GFSB had unpaid
pre-tax merger related charges of approximately $1,150,000.
NOTE 4. FIRST FEDERAL MERGER RELATED CHARGES
In connection with the merger, First Federal expects to incur pre-tax
merger related charges of approximately $991,000, consisting of investment
banking, legal and accounting fees. These fees have been reflected as a
component of the purchase price of GFSB. As of September 30, 2004, First Federal
had unpaid pre-tax merger related charges of approximately $991,000.
Note 5. Stockholders' Equity
Pursuant to the merger agreement, stockholders of GFSB will be entitled
to elect to receive, in exchange for each share of common stock held, either
$20.00 in cash or shares of First Federal common stock. The election process,
however, is subject to limitations that will cause the aggregate purchase price
to be comprised of 51% First Federal common stock and 49% cash. As discussed in
Note 2 above the GFSB stockholders will receive approximately$11.6 million in
cash and 485,464 shares of First Federal common stock . The 685,464 shares will
be issued out of authorized and unissued shares. Approximately 3,859,088 shares
of First Federal common stock will be outstanding for the combined company after
the merger.
NOTE 6. AVERAGE SHARES OUTSTANDING
The pro forma weighted average shares outstanding is based on the
historical First Federal weighted average shares outstanding plus 685,464 shares
of First Federal common stock to be issued to GFSB stockholders.
NOTE 7. TRUST PREFERRED SECURITIES
First Federal will issue approximately $10 million in trust preferred
securities ("TPS") to fund the cash portion of the acquisition. The TPS have
certain characteristics that allow the securities to be treated
128
as capital at First Federal level (within certain regulatory levels) and allows
the payment of interest to be treated as interest expense. The TPS provide for a
30 year term with a five year call by First Federal to redeem the securities.
First Federal plans on issuing the TPS with approximately $7 million with a five
year fixed rate and the balance issued with a floating rate. The pro forma
assumes the blended rate will be 6%.
NOTE 8. PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS
For purposes of determining the pro forma effect of the GFSB acquisition
on the statement of income, the following pro forma adjustments have been made
as if the acquisition had occurred as of September 30with respect to each of the
periods:
Year Ended
September 30, 2004
----------------------
(In thousands)
Yield adjustment for interest income on securities $ 1
Yield adjustment for interest income on loans 291
Amortization of core deposit intangible 287
Yield adjustment for lost interest on cash paid 54
Yield adjustment for interest expense on deposits (135)
----------------------
Yield adjustment for interest expense on FHLB advances (2,166)
Yield adjustment for interest expense on TPS 600
Tax benefits of pro forma adjustments 363
----------------------
$ (705)
The following assumptions were utilized for purposes of determining the
pro forma effect of the GFSB acquisition on the statement of income:
Weighted average Method of
Remaining Term Amortization/Accretion or
Useful Life Depreciation
----------- ------------
Securities 9 years Straight line
Loans 10 years Straight line
Core deposit intangible 10 years Accelerated method
Deposits 3 years Straight line
FHLB Advances 5 years Accelerated method
In addition to the above assumptions, reductions in interest income on
cash balances as a result of the cash payment to the GFSB stockholders are
calculated based on a 3.00% interest rate. Income tax expense is adjusted based
on a combined federal and state tax rate of 34%.
In accordance with Financial Accounting Standards No. 142, GOODWILL AND
OTHER INTANGIBLE ASSETS goodwill will not be amortized, but will be reviewed for
impairment at least annually.
129
COMPARISON OF RIGHTS OF STOCKHOLDERS
The rights of stockholders of First Federal and GFSB are currently
governed by their certificate of incorporation, bylaws and applicable provisions
of the Delaware General Corporation Law and the rules and regulations of the SEC
and the Nasdaq. If we complete the merger, GFSB stockholders who receive First
Federal common stock will become First Federal stockholders and their rights
will be governed by First Federal's certificate of incorporation and bylaws and
the Delaware General Corporation Law.
The following is a summary of the material differences between the
rights of a GFSB stockholder and the rights of a First Federal stockholder. This
summary is not a complete statement of the differences between the rights of
GFSB stockholders and the rights of First Federal stockholders and is qualified
in its entirety by reference to and to the certificate incorporation and bylaws
of each corporation. Copies of First Federal's and GFSB's certificate of
incorporation and bylaws are on file with the Securities and Exchange
Commission.
AUTHORIZED STOCK
- ----------------------------------------------------------------------------------------------------------------------
FIRST FEDERAL GFSB
- ------------------------------------------------------- -----------------------------------------------------
o The First Federal certificate of o The GFSB certificate of incorporation
incorporation authorizes 6,500,000 shares of authorizes 2,000,000 shares of capital stock,
capital stock, consisting of 6,000,000 shares of consisting of 1,500,000 shares of common
common stock, $.01 par value, and 500,000 shares stock, $.10 par value, and 500,000 shares of
of serial preferred stock, $.01 par value. serial preferred stock, $.10 par value.
o As of ________ , 2005, there were 3,173,624 o As of _____________, 2005, there were
shares of First Federal common stock issued and 1,146,645 shares of GFSB common stock issued
outstanding. and outstanding.
o As of September 30, 2004, there were no o Same.
shares of preferred stock issued or outstanding.
VOTING RIGHTS
- ----------------------------------------------------------------------------------------------------------------------
FIRST FEDERAL GFSB
- ------------------------------------------------------- -----------------------------------------------------
o The holders of the common stock exclusively o Same.
possess all voting power, subject to the
authority of the board of directors to offer
voting rights to the holders of preferred stock.
o Holders of common stock may not cumulate o Same.
their votes for the elections of directors.
o Each share of common stock is entitled to
one vote. Beneficial owners of 10% or more of
the outstanding stock are subject to voting
limitations.
130
REQUIRED VOTE FOR AUTHORIZATION OF CERTAIN ACTIONS
- ----------------------------------------------------------------------------------------------------------------------
FIRST FEDERAL GFSB
- ------------------------------------------------------- -----------------------------------------------------
o At least 75% of the outstanding shares of o At least 80% of the outstanding shares of
voting stock must approve certain "business voting stock generally must approve any
combinations" involving an "interested business combination.
stockholder" or any "affiliate of an "interested
stockholder." However, if a majority of
directors not affiliated with the interested
stockholder approves the business combination
and certain pricing criteria are satisfied, a
majority vote of the outstanding shares is
sufficient to approve a business combination.
o The approval of the holders of at least 80% o No similar provision.
of voting shares is required subject to certain
exceptions for any direct or indirect purchase
or other acquisition of equity securities from
any interested person other than certain
acquisitions made on the same terms to all
holders of such securities.
DIVIDENDS
- ----------------------------------------------------------------------------------------------------------------------
FIRST FEDERAL GFSB
- ------------------------------------------------------- -----------------------------------------------------
o Holders of common stock are entitled, when o
declared by the Board, to receive dividends,
subject to the rights of holders of preferred
stock.
STOCKHOLDERS' MEETINGS
- ----------------------------------------------------------------------------------------------------------------------
FIRST FEDERAL GFSB
- ------------------------------------------------------- -----------------------------------------------------
o First Federal must deliver notice of the o Same.
meeting and, in the case of a special meeting, a
description of its purpose no fewer than ten
days and no more than 60 days before the meeting
to each stockholder entitled to vote.
o Only the board of directors may call a o Only by the majority of the board of
special meeting. directors or the Chairman of the Board.
o The holders of at least one third of the o The holders of at least a majority of the
voting stock constitutes a quorum for voting stock constitute a quorum for
stockholder meetings. stockholders meetings.
131
o The board of directors or any stockholder o Same.
entitled to vote may nominate directors for
election or propose new business.
o To nominate a director, stockholders must o To nominate a director or propose new
give written notice to the Secretary of First business, stockholders must give written
Federal not less than 60 days prior to the notice to the Secretary of GFSB not less than
meeting. However, if First Federal gives less 60 days prior to the anniversary date of the
than 40 days' notice or prior public disclosure immediately proceeding annual meeting. Each
of the meeting, written notice of the nomination notice given by a stockholder with respect to
must be delivered to the Secretary not later a nomination to the board of directors or
than ten days following the date notice of the proposal for new business must include certain
meeting was mailed to stockholders or public information regarding the nominee or proposal
disclosure of the meeting was made. Each and the stockholder making the nomination or
notice given by a stockholder with respect to a proposal.
nomination to the board of directors must
include certain information regarding the
nominee and the stockholder making the
nomination.
o To propose new business, stockholders must
give written notice to the Secretary of First
Federal not less than 60 days prior to the
anniversary date of the preceding year's annual
meeting. However, if the date of the meeting is
advanced by more than 20 days or delayed more
than 60 days from the anniversary date of the
prior year's annual meeting, written notice of
the nomination must be delivered to the
Secretary on the later of (i) the 60th day prior
to the annual meeting or (ii) the 10th day
following the date notice of the meeting was
mailed to stockholders or public disclosure of
the date of the meeting was made. Each notice
given by a stockholder with respect to a
proposal for new business must include certain
information regarding the proposal and the
stockholders making the proposal.
ACTION BY STOCKHOLDERS WITHOUT A MEETING
- ----------------------------------------------------------------------------------------------------------------------
FIRST FEDERAL GFSB
- ------------------------------------------------------- ------------------------------------------------------
o No action that requires the approval of the o Same.
stockholders may be taken without a meeting by
the written consent of stockholders.
132
BOARD OF DIRECTORS
- ----------------------------------------------------------------------------------------------------------------------
FIRST FEDERAL GFSB
- ------------------------------------------------------- ------------------------------------------------------
o The certificate of incorporation provides o The bylaws provides that the number of
that the number of directors shall be fixed by directors shall be seven but the certificate of
resolution of the board of directors. incorporation provides the number may be
increased or decreased by the Board provided
that there be no fewer than three nor more than
15.
o The board of directors is divided into three o Same.
classes as equal in number as possible and
approximately one-third of the directors are
elected at each annual meeting.
o Vacancies on the board of directors will be o Vacancies on the board of directors will be
filled a majority vote of the directors then in filled by a vote of two-thirds of the directors
office. then in office.
o Directors may be removed only for cause by o Directors may be removed only for cause by
the vote of at least 75% of the outstanding the vote of at least 80% of the outstanding
shares entitled to vote for directors. shares entitled to vote for directors.
o Directors are not personally liable to First o Same.
Federal or its stockholders for monetary damages
for a breaches of their fiduciary duties except
for (i) breaches of the duty of loyalty, (ii)
acts or omissions not in good faith which
involve intentional misconduct, and (iii) any
transactions from which a director derives
improper personal benefits. In addition, if
applicable law is amended to further eliminate
or limit personal liability of directors, then
the liability of directors shall be limited to
the fullest extent permitted by law. No similar
restrictions.
o None. o Each director must be a resident of New
Mexico and the owner of not less than 100
shares of GFSB stock.
133
AMENDMENT OF THE BYLAWS
- ----------------------------------------------------------------------------------------------------------------------
FIRST FEDERAL GFSB
- ------------------------------------------------------- ------------------------------------------------------
o The bylaws may be amended or repealed only o The bylaws may be amended or repealed with
with the approval of at least a majority of the the approval of the board of directors or by
board of directors or by the vote of at least the vote of at least 80% of the outstanding
75% of the outstanding shares. shares.
AMENDMENT OF THE CERTIFICATE OF INCORPORATION
- ----------------------------------------------------------------------------------------------------------------------
FIRST FEDERAL GFSB
- ------------------------------------------------------- ------------------------------------------------------
o The certificate of incorporation may be o The certificate of incorporation may be
amended or repealed upon approval of at least a amended or repealed upon approval of at least a
majority of the board of directors and by a majority of the board of directors and by a
majority of shares entitled to vote on the majority of shares entitled to vote on the
matter unless otherwise provided in the matter unless otherwise provided in the
certificate of incorporation or Delaware law. certificate of incorporation or Delaware law.
However, amendments to the certificate of However, amendments to the certificate of
incorporation that would revise the provisions incorporation that would revise the provisions
relating to the number, term and classification, relating to the number, term and
election and removal procedures for directors, classification, election and removal procedures
meetings of stockholders, and director for directors, meetings of stockholders, and
liability, require approval by at least 75% of director liability, require approval by at
the outstanding shares, entitled to vote in the least 80% of the outstanding shares, entitled
election of directors. to vote in the election of directors.
134
RESTRICTIONS ON ACQUISITION OF FIRST FEDERAL
First Federal's certificate of incorporation and bylaws contain certain
provisions that could make more difficult an acquisition of First Federal by
means of a tender offer, proxy contest or otherwise. Certain provisions will
also render the removal of the incumbent board of directors or management of
First Federal more difficult. These provisions may have the effect of deterring
or defeating a future takeover attempt that is not approved by First Federal's
board of directors, but which First Federal stockholders may deem to be in their
best interests or in which stockholders may receive a substantial premium for
their shares over then current market prices. As a result, stockholders who
might desire to participate in such a transaction may not have the opportunity
to do so. The following description of these provisions is only a summary and
does not provide all of the information contained in First Federal's certificate
of incorporation and bylaws. See "Where You Can Find More Information" as to
where to obtain a copy of these documents.
BUSINESS COMBINATIONS WITH INTERESTED STOCKHOLDERS
The certificate of incorporation requires the approval of the holders of
at least 75% of First Federal's outstanding shares of voting stock entitled to
vote to approve certain "business combinations" with an "interested
stockholder." This supermajority voting requirement will not apply in cases
where the proposed transaction has been approved by a majority of those members
of First Federal's board of directors who are unaffiliated with the interested
stockholder and who were directors before the time when the interested
stockholder became an interested stockholder or if the proposed transaction
meets certain conditions that are designed to afford the stockholders a fair
price in consideration for their shares. In each such case, where stockholder
approval is required, the approval of only a majority of the outstanding shares
of voting stock is sufficient. Under Delaware law, absent this provision,
business combinations must be approved by the vote of the holders of only a
majority of the outstanding shares of common stock of First Federal and any
other affected class of stock unless the transaction is with a person who owns
15% or more of the corporation's voting stock.
The term "interested stockholder" includes any individual, group acting
in concert, corporation, partnership, association or other entity (other than
First Federal or its subsidiary) who or which is the beneficial owner, directly
or indirectly, of more than 10% of the outstanding shares of voting stock of
First Federal.
A "business combination" includes:
o any merger or consolidation of First Federal or any of its
subsidiaries with any interested stockholder, affiliate of an
interested stockholder or any corporation which is, or after
such merger or consolidation would be, an affiliate of an
interested stockholder;
o any sale or other disposition to or with any interested
stockholder or its affiliate of 25% or more of the assets of
First Federal or combined assets of First Federal and its
subsidiaries;
o the issuance or transfer to any interested stockholder or its
affiliate by First Federal (or any subsidiary) of any securities
of First Federal (or any subsidiary) in exchange for any cash,
securities or other property the value of which equals or
exceeds 25% of the fair market value of the common stock of
First Federal;
o the adoption of any plan for the liquidation or dissolution of
First Federal proposed by or on behalf of any interested
stockholder or its affiliate; and
135
o any reclassification of securities, recapitalization, merger or
consolidation of First Federal with any of its subsidiaries or
any other transaction which has the effect of increasing the
proportionate share of common stock or any class of equity or
convertible securities of First Federal or subsidiary owned
directly or indirectly, by an interested stockholder or its
affiliate.
BOARD OF DIRECTORS
CLASSIFIED BOARD. The board of directors of First Federal is divided
into three classes, each of which contains approximately one-third of the number
of directors. The stockholders elect one class of directors each year for a term
of three years. The classified board makes it more difficult and time consuming
for a stockholder group to fully use its voting power to gain control of the
board of directors without the consent of the incumbent board of directors of
First Federal.
FILLING OF VACANCIES; REMOVAL. First Federal's certificate of
incorporation provides that any vacancy occurring in its board, including a
vacancy created by an increase in the number of directors, may be filled by a
vote of a majority of the directors then in office. A person appointed to fill a
vacancy on the board of directors will serve until the expiration of his or her
term. The certificate of incorporation of First Federal provides that a director
may be removed from the board of directors prior to the expiration of his or her
term only for cause and only upon the vote of 75% of the outstanding shares of
voting stock. These provisions make it more difficult for stockholders to remove
directors and replace them with their own nominees.
STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS OF STOCKHOLDERS
Stockholders of First Federal must act only through an annual or special
meeting. Stockholders cannot act by written consent in lieu of a meeting. The
certificate of incorporation provides that only a majority of the board of
directors of First Federal may call special meetings of the stockholders of
First Federal. Stockholders are not able to call a special meeting or require
that the board do so. At a special meeting, stockholders may consider only the
business specified in the notice of meeting given by First Federal. The
provisions of First Federal's certificate of incorporation prohibiting
stockholder action by written consent may have the effect of delaying
consideration of a stockholder proposal until the next annual meeting, unless a
special meeting is called at the request of a majority of the board of
directors. These provisions also would prevent the holders of a majority of
common stock from unilaterally using the written consent procedure to take
stockholder action. Moreover, a stockholder could not force stockholder
consideration of a proposal between annual meetings over the opposition of the
board of directors by calling a special meeting of stockholders.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER NOMINATIONS AND PROPOSALS
First Federal's bylaws establish advance notice procedures for
stockholders to nominate directors or bring other business before an annual
meeting of stockholders of First Federal. A person may not be nominated for
election as a director unless that person is nominated by or at the direction of
First Federal's board of directors or by a stockholder who has given appropriate
notice to First Federal before the meeting. Similarly, a stockholder may not
bring business before an annual meeting unless the stockholder has given First
Federal appropriate notice of its intention to bring that business before the
meeting. For more information, see "- Comparison of Rights of Stockholders -
Stockholder's Meeting."
A stockholder who desires to raise new business must provide certain
information to First Federal concerning the nature of the new business, the
stockholder and the stockholder's interest in the business
136
matter. Similarly, a stockholder wishing to nominate any person for election as
a director must provide First Federal with certain information concerning the
nominee and the proposing stockholder.
Advance notice of nominations or proposed business by stockholders gives
First Federal's board of directors time to consider the qualifications of the
proposed nominees, the merits of the proposals and, to the extent deemed
necessary or desirable by the board of directors, to inform stockholders and
make recommendations about those matters.
PREFERRED STOCK
The certificate of incorporation authorizes First Federal's board of
directors to establish one or more series of preferred stock and, for any series
of preferred stock, to determine the terms and rights of the series, including
voting rights, conversion rates, and liquidation preferences. Although First
Federal's board of directors has no intention at the present time of doing so,
it could issue a series of preferred stock that could, depending on its terms,
impede a merger, tender offer or other takeover attempt. First Federal's board
of directors will make any determination to issue shares with those terms based
on its judgment as to the best interests of First Federal and its stockholders.
AMENDMENT OF CERTIFICATE OF INCORPORATION
First Federal's certificate of incorporation requires the affirmative
vote of 75% of the outstanding voting stock entitled to vote to amend or repeal
certain provisions of the certificate of incorporation, including the provision
limiting voting rights, the provisions relating to approval of business
combinations with related persons, acting by written consent, calling special
meetings, the number and classification of directors, director and officer
indemnification by First Federal and amendment of First Federal's bylaws and
certificate of incorporation. These supermajority voting requirements make it
more difficult for the stockholders to amend these provisions of the First
Federal certificate of incorporation.
DELAWARE CORPORATE LAW
The State of Delaware has a statute designed to provide Delaware
corporations with additional protection against hostile takeovers. The Delaware
takeover statute is intended to discourage certain takeover practices by
impeding the ability of a hostile acquirer to engage in certain transactions
with the target company.
In general, the statute provides that a "person" who owns 15% or more of
the outstanding voting stock of a Delaware corporation (an "interested
stockholder") may not consummate a merger or other business combination
transaction with such corporation at any time during the three-year period
following the date such person became an interested stockholder. The term
"business combination" is defined broadly to cover a wide range of corporate
transactions including mergers, sales of assets, issuances of stock,
transactions with subsidiaries and the receipt of disproportionate financial
benefits.
The statute exempts the following transactions from the requirements of
the statute:
o any business combination if, before the date a person became an
interested stockholder, the board of directors approved either
the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder;
o any business combination involving a person who acquired at
least 85% of the outstanding voting stock in the transaction in
which he became an interested stockholder, excluding, for
137
purposes of determining the number of shares outstanding, shares
owned by the corporation's directors who are also officers and
specific employee stock plans;
o any business combination with an interested stockholder that is
approved by the board of directors and by a two-thirds vote of
the outstanding voting stock not owned by the interested
stockholder; and
o certain business combinations that are proposed after the
corporation had received other acquisition proposals and which
are approved or not opposed by a majority of certain continuing
members of the board of directors.
A corporation may exempt itself from the requirements of the statute by
adopting an amendment to its certificate of incorporation or bylaws electing not
to be governed by this statute. At the present time, First Federal's board of
directors does not intend to propose any such amendment.
LEGAL MATTERS
The validity of the shares of First Federal common stock to be issued in
connection with the merger will be passed upon for First Federal by Luse Gorman
Pomerenk & Schick, P.C., Washington, D.C.
EXPERTS
The financial statements of First Federal as of September 30, 2004 and
2003 and for the three fiscal years ended September 30, 2004 have been included
herein in reliance upon the report of Neff & Ricci LLP, independent certified
public accountants, with respect to those financial statements, and upon the
authority of that firm as experts in accounting and auditing.
The financial statements of GFSB as of Neff & Ricci LLP and for the two
fiscal years ended June 30, 2004 and 2003 have been included in the Annual
Report on Form 10-KSB delivered together with this joint proxy
statement/prospectus in reliance upon the report of Neff & Ricci LLP,
independent certified public accountants, with respect to these financial
statements, and upon the authority of that firm as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION
First Federal has filed with the Securities and Exchange Commission a
registration statement under the Securities Act that registers the shares of
First Federal common stock to be issued in connection with the merger. The
registration statement, including the exhibits, contains additional relevant
information about First Federal and First Federal common stock. The rules and
regulations of the SEC allow First Federal to omit certain information included
in the registration statement from this joint proxy statement/prospectus.
GFSB files and First Federal will file in the future annual, quarterly
and current reports, proxy statements and other information with the SEC. You
may read and copy any reports, statements or other information that First
Federal and GFSB file at the SEC's public reference room at 450 Fifth Street,
N.W., Washington, D.C. Please call the SEC at 1-800-SEC-0330 for further
information on the SEC's public reference rooms. GFSB's public filings are also
available to the public from commercial document retrieval services and at the
Internet World Wide Website maintained by the SEC at http://www.sec.gov.
138
The SEC allows GFSB to "incorporate by reference" information into this
joint proxy statement/prospectus. This means that GFSB can disclose important
information to you by referring you to another document filed separately with
the SEC. The information incorporated by reference is deemed to be part of this
document, except for any information superseded by information contained
directly in this document. This document incorporates by reference the documents
that are listed below that GFSB has previously filed with the SEC.
GFSB SEC FILINGS (FILE NO. 0-25854)
o Annual Report on Form 10-KSB for the year ended June 30, 2004,
and any amendments;
o Quarterly Report on Form 10-QSB for the quarter ended September
30, 2004; and
o Current Report on Form 8-K filed on August 26, 2004 and
September 21, 2004.
Documents incorporated by reference are available from First Federal
without charge (except for exhibits to the documents unless the exhibits are
specifically incorporated in this document by reference). You may obtain First
Federal documents incorporated by reference in this document by requesting them
in writing or by telephone at the following address:
First Federal Banc of the Southwest, Inc.
300 North Pennsylvania Avenue
Roswell, New Mexico 88201
Attention: George A. Rosenbaum, Jr., Secretary
Telephone No. (505) 622-6201
Documents incorporated by reference are available from GFSB without
charge (except for exhibits to the documents unless the exhibits are
specifically incorporated in this document by reference). You may obtain GFSB
documents incorporated by reference in this document by requesting them in
writing or by telephone at the following address:
GFSB Bancorp, Inc.
221 West Aztec Avenue
Gallup, New Mexico 87301
Attention: George S. Perce, Secretary
Telephone: (505) 726-6500
If you would like to request documents from First Federal or GFSB,
please do so by __________, 2005 in order to receive them before the special
meetings of stockholders. If you request any incorporated documents, we will
mail them to you by first-class mail, or other equally prompt means, within one
business day of our receipt of your request.
First Federal has supplied all information contained in this joint proxy
statement/prospectus relating to First Federal, and GFSB has supplied all
information relating to GFSB.
You should rely only on the information contained or incorporated by
reference in this document to vote your shares at the meeting. We have not
authorized anyone to provide you with information that is different from what is
contained or incorporated by reference in this document. This document is dated
____________. You should not assume that the information contained in this
document is accurate as of
139
any date other than that date, and neither the mailing of this document to
stockholders nor the issuance of First Federal's securities in the merger shall
create any implication to the contrary.
STOCKHOLDER PROPOSALS
FOR GFSB:
GFSB will hold an annual meeting for the year ending June 30, 2004 only
if the merger is not completed. Any proposal which a stockholder wishes to have
included in the proxy materials of GFSB relating to such annual meeting of
stockholders of GFSB, if it is held, must be received at the principal executive
offices of GFSB, a reasonable time before such meeting. In the event an annual
meeting is to be held, GFSB will disclose the precise deadline in a Form 10-QSB
or Form 8-K.
FOR FIRST FEDERAL:
Stockholder proposals intended to be presented at First Federal's next
annual meeting must have been received by its Secretary at the executive office
of First Federal located at 300 North Pennsylvania, Roswell, New Mexico 88201,
no later than _____________ to be eligible for inclusion in First Federal's
proxy statement and form of proxy relating to the next annual meeting. Any such
proposal would be subject to the requirements of the proxy rules adopted under
the Securities Exchange Act of 1934, as amended, and as with any stockholder
proposal (regardless of whether included in First Federal's proxy materials),
First Federal's certificate of incorporation and bylaws and Delaware law.
To be considered for presentation at the next annual meeting, but not
for inclusion in First Federal's proxy statement and form of proxy for that
meeting, proposals must be received by First Federal no later than ____________.
If however, the date of the next annual meeting is before ____________ or after
____________, proposals must instead be received by First Federal by the later
of the 70th day before the date of the next annual meeting or the tenth day
following the day on which public disclosure (by press release, in a publicly
available filing with the SEC, through a notice mailed to stockholders, or
otherwise) of the date of the next annual meeting is first made.
140
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
INDEPENDENT AUDITORS' REPORT..................................................1
CONSOLIDATED FINANCIAL STATEMENTS
Statements of Financial Condition.....................................2
Statements of Income..................................................4
Statements of Stockholders' Equity....................................5
Statements of Cash Flows..............................................6
Notes to Financial Statements.........................................8
INDEPENDENT AUDITORS' REPORT
Board of Directors
First Federal Banc of the Southwest, Inc.
Roswell, New Mexico
We have audited the accompanying consolidated statements of financial condition
of First Federal Banc of the Southwest, Inc. and subsidiary (Company) as of
September 30, 2004 and 2003, 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.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 financial statements referred to above present fairly, in
all material respects, the financial position of First Federal Banc of the
Southwest, Inc. and subsidiary as of September 30, 2004 and 2003, and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States of America.
Albuquerque, New Mexico
October 21, 2004
1
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 2004 AND 2003
2004 2003
------------- -------------
ASSETS
Cash and due from banks $ 9,528,244 6,821,377
Interest-bearing deposits with banks 27,944,363 33,397,851
Held-to-maturity investment securities 23,214,196 45,701,118
Available-for-sale investment securities 17,952,834 4,025,141
Loans held for sale 1,776,667 4,043,369
Loans receivable, net 251,662,258 250,893,814
Accrued interest receivable 1,289,134 1,428,670
Federal Home Loan Bank stock, at cost, restricted 3,269,500 3,080,800
Property, equipment, and construction in progress, net 10,089,950 8,520,444
Other assets 1,328,179 1,271,928
------------- -------------
Total assets $ 348,055,325 359,184,512
============= =============
See Notes to Consolidated Financial Statements.
2
2004 2003
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Savings, certificates of deposit
and demand accounts $ 254,393,377 263,440,711
Advances from the Federal Home Loan Bank 57,329,399 61,508,851
Escrows from borrowers for
taxes and insurance 713,262 659,802
Accrued and other liabilities 1,626,902 1,621,773
------------- -------------
Total liabilities 314,062,940 327,231,137
------------- -------------
Stockholders' Equity
Preferred stock, $0.01 par value; 500,000 shares
authorized; no shares issued and outstanding - -
Common stock, $0.01 par value; 1,000,000
shares authorized; 438,460 shares issued
and outstanding in 2004, and 434,775
shares issued and outstanding in 2003 4,384 4,347
Additional paid-in capital 5,254,770 5,067,332
Retained earnings 31,444,950 28,983,883
Accumulated other comprehensive income 9,773 78,234
------------- -------------
36,713,877 34,133,796
Treasury stock, at cost, 40,074 and 33,225 shares
at 2004 and 2003, respectively (2,721,492) (2,180,421)
------------- -------------
Total stockholders' equity 33,992,385 31,953,375
------------- -------------
Total liabilities and stockholders'
equity $ 348,055,325 359,184,512
============= =============
3
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 2004 AND 2003
2004 2003
------------- -------------
Interest Income
Interest and fees on loans $ 17,282,122 19,443,852
Interest on investment securities 1,131,335 1,008,677
Interest and dividends on other investments 358,110 376,903
------------- -------------
Total interest income 18,771,567 20,829,432
------------- -------------
Interest Expense
Deposits 2,973,762 3,996,809
Borrowed funds 2,706,776 2,507,691
------------- -------------
Total interest expense 5,680,538 6,504,500
------------- -------------
Net interest income before provision
for loan losses 13,091,029 14,324,932
Benefit (provision) for loan losses 198,130 (90,980)
------------- -------------
Net interest income after provision
for loan losses 13,289,159 14,233,952
------------- -------------
Other Income
Fees for other services to customers 881,029 830,067
Gain on sale of loans 585,472 1,207,083
Other 471,182 394,487
------------- -------------
Total other income 1,937,683 2,431,637
------------- -------------
Other Expenses
Compensation and related benefits 6,142,161 6,403,935
Occupancy 868,888 941,839
Data processing 498,707 498,455
Advertising 214,011 211,183
Telephone 195,321 209,115
Postage 154,327 190,737
Printing and supplies 183,253 204,628
Employee expenses 202,791 273,486
Depreciation and amortization 604,898 764,133
Loss on sale of available-for-sale investment securities - 827
Professional fees 270,115 250,863
Other 924,172 924,021
------------- -------------
Total other expenses 10,258,644 10,873,222
------------- -------------
Income before income taxes 4,968,198 5,792,367
Income tax expense 1,911,147 2,221,869
------------- -------------
Net income 3,057,051 3,570,498
============= =============
Net income per share $ 7.71 8.78
============= =============
See Notes to Consolidated Financial Statements.
4
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2004 AND 2003
Common Treasury
Stock Additional Stock
----------------------------- Paid-in ------------------------------
Shares Value Capital Shares Cost
------------- ------------- ------------- ------------- -------------
Balance at September 30, 2002 426,575 $ 4,265 $ 4,634,429 20,333 $ (1,167,976)
Sale of treasury stock - - - (150) 11,352
Purchase of treasury stock - - - 13,042 (1,023,797)
Issuance of common stock 8,200 82 432,903 - -
Dividends - $2.30 per share - - - - -
Comprehensive income:
Unrealized loss on
investment securities, net
of taxes - - - - -
Net income - - - - -
Total
------------- ------------- ------------- ------------- -------------
Balance at September 30, 2003 434,775 4,347 5,067,332 33,225 (2,180,421)
Purchase of treasury stock - - - 6,849 (541,071)
Issuance of common stock 3,685 37 187,438 - -
Dividends - $2.30 per share - - - - -
Comprehensive income:
Unrealized loss on
investment securities, net
of taxes - - - - -
Net income - - - - -
Total
------------- ------------- ------------- ------------- -------------
Balance at September 30, 2004 438,460 $ 4,384 $ 5,254,770 40,074 $ (2,721,492)
============= ============= ============= ============= =============
Accumulated
Other
Comprehensive
Retained Income
Earnings (Loss) TOTAL
------------- ------------- -------------
Balance at September 30, 2002 $ 26,344,273 $ 192,881 $ 30,007,872
Sale of treasury stock - - 11,352
Purchase of treasury stock - - (1,023,797)
Issuance of common stock - - 432,985
Dividends - $2.30 per share (930,888) - (930,888)
Comprehensive income:
Unrealized loss on
investment securities, net
of taxes - (114,647) -
Net income 3,570,498 - -
Total 3,455,851
------------- ------------- -------------
Balance at September 30, 2003 28,983,883 78,234 31,953,375
Purchase of treasury stock - - (541,071)
Issuance of common stock - - 187,475
Dividends - $2.30 per share (595,984) - (595,984)
Comprehensive income:
Unrealized loss on
investment securities, net
of taxes - (68,461) -
Net income 3,057,051 - -
Total 2,988,590
------------- ------------- -------------
Balance at September 30, 2004 $ 31,444,950 $ 9,773 $ 33,992,385
============= ============= =============
See Notes to Consolidated Financial Statements.
5
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2004 AND 2003
2004 2003
------------ ------------
Cash Flows From Operating Activities
Net income $ 3,057,051 3,570,498
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 604,898 764,133
Net gain on sale of real estate owned - (33,493)
Gain on sale of loans (585,472) (1,207,083)
(Benefit) provision for loan losses (198,130) 90,980
Net amortization of investment premiums 518,886 480,540
Changes in assets and liabilities
Accrued interest receivable 139,536 (619)
Prepaid expenses and other assets (66,659) (560,253)
Accounts payable
and accrued liabilities 5,129 292,455
Other, net (67,885) (187,109)
------------ ------------
Net cash provided by operating activities 3,407,354 3,210,049
------------ ------------
Cash Flows From Investing Activities
Decrease (increase) in interest-bearing deposits in banks 5,453,488 (6,675,739)
Proceeds from maturities and principal paydowns of
investment securities held-to-maturity 21,928,407 11,226,009
Principal payments on mortgage backed investment
securities held-to-maturity 44,994 55,984
Purchases of investment securities held-to-maturity - (41,844,465)
Proceeds from sales, maturities and principal paydowns of
investment securities available-for-sale 6,375,000 452,406
Purchases of investment securities available-for-sale (22,435,483) -
Principal payments on mortgage backed investment
securities available-for-sale 2,058,964 3,837,879
Net decrease in loans 2,281,860 1,156,427
Decrease in real estate owned, net - 200,312
Purchase of Federal Home Loan Bank stock (134,300) (1,119,724)
Net increase in premises and equipment (2,150,511) (2,183,533)
Proceeds from sale of land -- 307,501
------------ ------------
Net cash provided (used) by investing activities 13,422,419 (34,586,943)
------------ ------------
Cash Flows From Financing Activities
Net (decrease) increase in savings, certificates of deposit and
demand accounts (9,047,334) 7,678,053
Increase in advance payments by borrowers 53,460 53,479
Proceeds from issuance of common stock 187,475 432,985
Net change in FHLB advances (4,179,452) 23,853,559
Purchase of treasury stock, net (541,071) (1,012,445)
Cash dividends paid or declared (595,984) (930,888)
------------ ------------
Net cash (used) provided by financing activities (14,122,906) 30,074,743
------------ ------------
See Notes to Consolidated Financial Statements.
6
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 2004 AND 2003
2004 2003
------------ ------------
Increase (decrease) in cash on hand and in banks $ 2,706,867 (1,302,151)
Cash on hand and in banks at beginning of year 6,821,377 8,123,528
------------ ------------
Cash on hand and in banks at end of year $ 9,528,244 6,821,377
============ ============
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for
Interest on deposits and advances $ 5,753,348 6,465,928
Income taxes 1,787,344 2,103,400
Decrease in unrealized loss, net of deferred taxes, on
available-for-sale securities (other comprehensive income) (68,461) (114,647)
See Notes to Consolidated Financial Statements.
7
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activity and History. First Federal Banc of the Southwest, Inc.
(Company) was formed in April 1998 by First Federal Bank (Bank or Subsidiary),
to become the Bank's holding company. The acquisition of the Bank was effective
August 18, 1998, in connection with the Bank's reorganization into a holding
company structure.
The Bank's primary business is the origination of consumer, commercial and
mortgage loans and the solicitation of deposit accounts from the general public.
Since its original charter was granted in 1920, the Bank has promoted home
ownership through the granting of mortgage loans, primarily for the purchase,
construction or improvement of residential and non-residential real estate. This
has been, and continues to be, an important thrust of the Bank and is the focal
point of operations. The primary market area of the Bank includes Chaves,
Lincoln, Dona Ana, Otero, and Bernalillo Counties in New Mexico, and El Paso
County in Texas.
The Bank was chartered in 1920 as a mutual savings and loan association. In July
1979, the Bank converted to a common stock association until February 1983, when
it became a federally chartered Bank and changed its name to First Federal
Savings Bank of New Mexico, later First Federal Bank.
Principles of Consolidation. The 2004 and 2003 consolidated financial statements
include the accounts of the Company and the Bank. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Interest-Bearing Deposits. Interest-bearing deposits with banks consists of a
Federal Home Loan Bank (FHLB) account, accounts with other financial
institutions and certificates of deposit. The Bank's policy is to maintain
account balances, excluding balances with the FHLB, with institutions which are
federally insured by the U.S. Government.
The Bank is required by regulatory authorities to maintain certain cash balances
based on levels of customer deposits. The Bank was in compliance with the
required reserves at September 30, 2004 and 2003.
Investment Securities. Investment securities are comprised of U.S. Government
and Federal agency obligations, mortgage-backed securities, municipal and other
bonds.
Premiums and discounts associated with investment securities are amortized using
the interest method over the remaining period to contractual maturity or call
date. Premiums and discounts associated with mortgage-backed securities are
amortized and recognized in interest income using a method that approximates a
level yield. Gains and losses on the sale of investment securities and
mortgage-backed securities are determined using the specific identification
method.
8
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investments in equity securities that have readily determinable fair values and
all investments in debt securities are to be classified in three categories and
accounted for as follows:
. Debt securities that the Bank has the positive intent and ability to
hold to maturity are classified as held-to-maturity securities and
reported at amortized cost.
. Debt and equity securities that are bought and held principally for
the purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized holding gains
and losses included in earnings. The Bank does not have any securities
identified as trading securities.
. Debt and equity securities not classified as either held-to-maturity
securities or trading securities are classified as available-for-sale
securities and reported at fair value, with unrealized holding gains
and losses excluded from earnings and reported as a separate component
of stockholder's equity, net of applicable deferred income taxes.
Use of Estimates. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. The allowance for losses on loans is based on
management's estimates. In connection with the determination of the value of
foreclosed real estate, management obtains independent appraisals for
significant properties.
While management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory agencies,
as an integral part of their examination process, periodically review the Bank's
allowances for losses on loans and foreclosed real estate. Such agencies may
require the Bank to recognize additions to the allowances based on their
judgments about information available to them at the time of their examination.
Because of these factors, it is reasonably possible that the allowances for
losses on loans and the valuation of foreclosed real estate may change
materially in the near term.
Loans Held for Sale. Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of cost or estimated market value in
the aggregate. Net unrealized losses are recognized in the valuation allowance
by a charge to income.
Loans Receivable. Loans receivable are stated at unpaid principal balances, less
the allowance for loan losses, net deferred loan origination fees and unearned
discounts and interest.
9
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Unearned interest on discounted first mortgage loans are accrued to income using
the interest method over the remaining period to contractual maturity, adjusted
for anticipated prepayments. Discounts on consumer loans are recognized over the
lives of the loans using methods that approximate the interest method.
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 is back to normal, in
which case the loan is returned to accrual status.
Allowance for Loan Losses. The allowance is maintained at a level determined
adequate by management to absorb future potential losses in the loan portfolio.
The amount of the allowance is based on management's evaluation of the
collectibility of the loan portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, specific impaired
loans, economic conditions and other risks inherent in the portfolio. Allowances
for impaired loans are generally determined based on collateral values or the
present value of estimated cash flows. The allowance is increased by a provision
for loan losses, which is charged to expense, and reduced by charge-offs, net of
recoveries.
Impairment of Loans. The Bank recognizes bad debt expense for the difference
between the carrying value of the loan and the fair value of the collateral
underlying the loan. The entire change in the fair value of the collateral
between reporting periods is reported as bad debt expense in the same manner in
which impairment initially was recognized (for an increase in impairment), or as
a deduction in the amount of bad debt expense that otherwise would be reported
(for a decrease in impairment). A loan which foreclosure is probable is
accounted for as a loan until the Bank receives physical possession of the
debtor's assets, regardless of whether formal foreclosure proceedings take
place.
Mortgage Servicing Rights. The cost of mortgage servicing rights is amortized in
proportion to, and over the period of, estimated net servicing revenues.
Impairment of mortgage servicing rights is assessed based on the fair value of
those rights. The amount of impairment recognized is the amount by which the
capitalized mortgage servicing rights exceed their fair value.
Quoted market prices are not available for the excess servicing receivables.
Thus, the excess servicing receivables and the amortization thereon are
periodically evaluated in relation to estimated future servicing revenues,
taking into consideration changes in interest rates, current prepayment rates,
and expected future cash flows.
Advertising. The Bank's policy is to expense the cost of advertising in the
period the expenses are incurred.
10
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Loan Origination Fees. Loan origination fees and direct origination costs in
excess of the Bank's cost to originate are deferred and amortized over the
contractual life of the loan using the interest method. Amortization of deferred
loan fees is discounted when a loan is placed on non-accrual status. If the loan
is held for sale, the fees are deferred until the loan is sold.
Real Estate Owned and Real Estate Held for Investment. Foreclosed real estate
owned is recorded at the lower of cost (principal balance of former loan plus
costs of obtaining title and major repairs, if any) or fair value (based on the
property's appraised value), less estimated cost of disposition at the date of
foreclosure. Any write-downs based on the asset's fair value at the date of
acquisition are charged to the allowance for loan losses. These assets are
subsequently carried at the lower of this new basis or estimated fair value less
disposition costs. Costs relating to development and improvement of properties
are capitalized, whereas costs incurred in maintaining foreclosed real estate
and subsequent write-downs to reflect declines in the fair value of the property
are expensed.
Federal Home Loan Bank Stock (FHLB). FHLB stock is stated at cost, based on the
ultimate recoverability of its par value. The FHLB stock represents a form of
equity interest in the FHLB and can be sold back only at par and only to the
FHLB or to another institution. The FHLB stock lacks a market and, accordingly,
is a restricted investment security. Membership in FHLB requires purchase of
stock. Stock ownership is adjusted for levels of activity with the FHLB.
Property and Equipment. Property and equipment is stated on the cost basis.
Depreciation is generally computed using the straight-line method over the
following estimated useful lives for buildings of 15 to 40 years and furniture,
fixtures, and equipment of 3 to 20 years. The assets' actual useful lives could
differ from the estimated useful lives used for calculating depreciation. It is
the Bank's policy to capitalize project and interest costs associated with the
construction or remodeling of facilities.
Net Income Per Share. Net income per share has been computed on the basis of
weighted-average number of shares of stock outstanding.
Reclassifications. Certain reclassifications have been made to 2003 information
to conform to 2004 presentation.
Income Taxes. Deferred taxes represent the future tax return consequences of
differences between the basis of assets and liabilities for financial and income
tax reporting, which will be either taxable or deductible when those assets and
liabilities are recovered or settled.
Cash and Cash Equivalents. Cash and cash equivalents include currency on hand
and due from banks.
11
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock Options. The Company applies APB Opinion 25 and related Interpretations in
accounting for its plan. Accordingly, no compensation cost has been recognized
for its stock option plan. Had compensation cost for the Company's stock option
plan been determined based on the fair value at the grant dates for awards under
the plan consistent with the method of FASB Statement 123, the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below:
2004 2003
-------------- --------------
Net income (as reported) $ 3,057,051 3,570,498
Pro forma 3,055,492 3,570,156
Earnings per share (as reported) 7.71 8.78
Pro forma 7.70 8.78
The fair value of each option granted is estimated on the grant date using the
Black-Scholes option-pricing model with the following assumptions:
2004 2003
-------------- --------------
Expected dividend yield 1.81% 3.20%
Expected price volatility .58% .58%
Risk free interest rate 2.20% 1.24%
Expected life of options 4-5 years 4-5 years
Fair Values of Financial Instruments. The following methods and assumptions were
used by the Company in estimating the fair values of its financial instruments:
Cash and Cash Equivalents. The carrying amounts reported in the
Consolidated Statements of Financial Position for cash and short-term
instruments approximate the fair values of those assets.
Investment Securities, including mortgage-backed securities. Fair values
for investment securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based
on quoted market prices of comparable instruments.
Loans Held for Sale. The fair values of the Bank's loans held for sale are
based on quoted market prices of similar loans being sold in the secondary
market.
12
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Loans Receivable. For variable-rate loans that reprice frequently and with
no significant change in credit risk, fair values are based on carrying
values. The fair values for certain mortgage loans (e.g., one-to-four
family residential) and other consumer loans are based on quoted market
prices of similar loans sold in conjunction with securitization
transactions, adjusted for differences in loan characteristics. The fair
values for other loans (e.g., commercial real estate and rental property
mortgage loans and commercial loans) are estimated using discounted cash
flow analyses, using interest rates currently being offered for loans with
similar term to borrowers of similar credit quality. The carrying amount of
accrued interest approximates its fair value.
Deposit Liabilities. The fair values disclosed for demand deposits (e.g.,
interest-bearing and non interest-bearing checking, passbook savings, and
certain types of money market accounts) are equal to the amount payable on
demand at the reporting date (i.e., their carrying amounts). Fair values
for fixed-rate certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates currently being offered
on certificates to a schedule of aggregated expected monthly maturities on
time deposits.
Federal Home Loan Bank Advances. The fair value of Federal Home Loan Bank
advances is estimated based on interest rates for the same or similar debt
offered to the Bank having the same or similar remaining maturities and
collateral requirements.
Recent Accounting Developments. In December 2003, the Accounting Standards
Executive Committee of the American Institute of Certified Public Accountants
(the "AcSEC") issued Statement of Position ("SOP") 03-3, Accounting for Certain
Loans or Debt Securities Acquired in a Transfer. The SOP is effective for loans
acquired in fiscal years beginning after December 15, 2004, with early adoption
encouraged. A certain transition provision applies for certain aspects of loans
currently within the scope of Practice Bulletin 6, Amortization of Discounts on
Certain Acquired Loans. The SOP addresses accounting for differences between
contractual cash flows and cash flows expected to be collected from an
investor's initial investment in loans or debt securities (loans) acquired in a
transfer if those differences are attributable, at least in part, to credit
quality. It includes loans acquired in business combinations. The SOP does not
apply to loans originated by the entity. Adoption of this SOP is not expected to
have a material impact on the Company's financial statements.
On March 31, 2004, the Financial Accounting Standards Board ratified the
consensus of its Emerging Issues Task Force (EITF) Issue 03-01 regarding the
recognition and measurement of other-than-temporary impairments of unrealized
losses on available for sale debt and equity securities. On September 30, 2004,
the FASB staff issued a Staff Position that delayed the effective date for the
measurement and recognition guidance in EITF Issue 03-01. The delay did not
suspend the requirement to recognize other-than-temporary impairments as
required by existing authoritative literature. Adoption of further provisions
when they are effective is not expected to have a material impact on the
Company's financial statements.
13
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
NOTE 2. INVESTMENT SECURITIES
The amortized costs and aggregate fair values of investment securities
classified as held-to-maturity were as follows at September 30:
2004
---------------------------------------------------------
GROSS GROSS AGGREGATE
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------- ----------- ----------- -----------
U.S. Government and Federal
agency obligations $ 21,693,500 1,127 (62,346) 21,632,281
Mortgage-backed securities
FHLMC 52,778 1,140 - 53,918
Municipal and other bonds 1,467,918 10,924 (3,068) 1,475,774
-------------- ----------- ----------- -----------
Total investment securities $ 23,214,196 13,191 (65,414) 23,161,973
============== =========== =========== ===========
2003
---------------------------------------------------------
GROSS GROSS AGGREGATE
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------- ----------- ----------- -----------
U.S. Government and Federal
agency obligations $ 43,268,715 104,707 - 43,373,422
Mortgage-backed securities
FHLMC 97,773 3,152 - 100,925
Municipal and other bonds 2,334,630 33,970 - 2,368,600
-------------- ----------- ----------- -----------
Total investment securities $ 45,701,118 141,829 - 45,842,947
============== =========== =========== ===========
The amortized costs and aggregate fair values of investment securities
classified as available-for-sale were as follows at September 30:
2004
---------------------------------------------------------
GROSS GROSS AGGREGATE
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------- ----------- ----------- -----------
Federal agency obligations $ 15,990,568 7,025 (43,898) 15,953,695
Mortgage-backed securities
FHLMC 928,159 41,320 - 969,479
FNMA 988,110 41,551 - 1,029,660
-------------- ----------- ----------- -----------
Total investment securities $ 17,906,837 89,896 (43,898) 17,952,834
============== =========== =========== ===========
14
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE 2. INVESTMENT SECURITIES (CONTINUED)
2003
------------------------------------------------------
Gross Gross Aggregate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- ----------- ----------- -----------
Mortgage-backed securities
FHLMC $ 1,529,771 63,329 - 1,593,100
FNMA 2,344,034 88,007 - 2,432,041
-------------- ----------- ----------- -----------
Total investment securities $ 3,873,805 151,336 - 4,025,141
============== =========== =========== ===========
The amortized costs and fair value of all debt securities by contractual
maturity as of September 30, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Available-for-Sale Held-to-Maturity
---------------------------- --------------------------
Amortized Aggregate Amortized Aggregate
Cost Fair Value Cost Fair Value
-------------- ----------- ----------- -----------
Due in one year or less $ 11,502,006 11,487,091 21,044,651 20,998,850
Due after one through five years 4,488,562 4,466,665 2,116,767 2,109,205
Mortgage-backed securities 1,916,269 1,999,078 52,778 53,918
-------------- ----------- ----------- -----------
$ 17,906,837 17,952,834 23,214,196 23,161,973
============== =========== =========== ===========
The U.S. Government and Federal agency obligations are comprised of FHLB
debentures and U.S. Treasury Note. Mortgage-backed securities held by the Bank
represent participation certificates guaranteed by the Federal National Mortgage
Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC), which are
issued by qualified mortgage lenders that pool qualifying loans.
During fiscal year 2003, the Bank sold investment securities classified as
available-for-sale for total proceeds $452,406, resulting in a gross realized
loss of $827.
The fair value of mortgage-backed securities and investments in U.S. Government
and Federal agency obligations pledged to state, city and county deposits was
$8,931,000 and $10,857,000 at September 30, 2004 and 2003, respectively.
15
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE 3. LOANS RECEIVABLE
Loans receivable consisted of the following at September 30:
2004 2003
--------------- ---------------
First mortgage loans:
Conventional $ 110,584,974 100,132,064
Guaranteed - FHA and VA 4,030,545 5,950,106
Construction loans 14,501,993 15,812,057
Commercial real estate loans 89,872,992 88,137,062
Commercial non-real estate loans 14,282,456 17,307,402
Loans collateralized by savings accounts 473,674 642,957
Consumer loans 20,545,689 25,796,673
--------------- ---------------
254,292,323 253,778,321
--------------- ---------------
Less:
Net deferred loan origination fees (376,970) (389,372)
Allowance for loan losses (2,253,095) (2,495,135)
--------------- ---------------
(2,630,065) (2,884,505)
--------------- ---------------
$ 251,662,258 250,893,814
=============== ===============
All first mortgage loans and construction loans are secured by a primary lien on
the mortgaged property.
Changes in allowance for loan losses were as follows for the years ended
September 30:
2004 2003
--------------- ---------------
Balance at beginning of year $ 2,495,135 2,468,311
(Benefit) provision (198,130) 90,980
--------------- ---------------
2,297,005 2,559,291
Charge-offs, net (43,910) (64,156)
--------------- ---------------
Balance at end of year $ 2,253,095 2,495,135
=============== ===============
During the years ended September 30, 2004 and 2003, the Bank had recoveries
totaling $18,627 and $37,078, respectively.
The weighted average yield on all loans was 6.11% and 6.46% at September 30,
2004 and 2003, respectively.
The Bank's loan servicing portfolio is:
2004 2003
--------------- ---------------
Loans $ 15,745,513 20,373,878
Service Fees 33,728 55,760
Custodial Escrow 68,870 94,059
16
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE 3. LOANS RECEIVABLE (CONTINUED)
Nonaccrual and renegotiated loans for which interest has been reduced totaled
$918,920 and $450,916 at September 30, 2004 and 2003, respectively. The Bank is
not committed to lend additional funds to debtors whose loans have been
modified.
There was no material difference between interest income that would have been
recorded under the original terms of such loans and the interest income actually
recognized for the years ended September 30, 2004 and 2003.
An impaired loan can be valued based upon its fair value or the market value of
the underlying collateral if the loan is primarily collateral dependent. The
Bank assesses for impairment all loans delinquent more than 90 days.
Uncollectible interest on loans that are contractually past due is charged off,
or an allowance account 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 cash payments are received, until, in management's judgment, the
borrower's ability to make periodic principal and interest payments is back to
normal, in which case the loan is returned to accrual status. The average
impaired loan balance for the years ended September 30, 2004 and 2003 were
$1,144,701 and $1,998,193, respectively.
2004 2003
--------------- ---------------
Loans receivable that were evaluated
for credit losses in accordance with
FASB Statement No. 114, as amended $ 1,262,446 1,613,993
Specific allowances for credit losses 407,541 135,828
Interest collected on impaired loans 127,091 158,360
Of the Bank's total loans at September 30, 2004, approximately $103,791,000 and
$150,501,000 represent variable and fixed rate instruments, respectively. Of the
Bank's total loans at September 30, 2003, approximately $102,230,000 and
$152,707,000 represent variable and fixed rate instruments, respectively.
An analysis of loans to directors, executive officers and employees is as
follows at September 30:
2004 2003
--------------- ---------------
Balance at beginning of year $ 697,187 857,000
New loans made 229,019 497,461
Loan principal repayments (512,191) (657,274)
--------------- ---------------
Balance at end of year $ 414,015 697,187
=============== ===============
17
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE 3. LOANS RECEIVABLE (CONTINUED)
None of the loans to directors, executive officers and employees were on
nonaccrual, were past due or were restructured during the years ended September
30, 2004 and 2003.
All loans to directors, executive officers and employees were made in the
ordinary course of business and were made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable third-party transactions.
NOTE 4. PROPERTY, EQUIPMENT AND CONSTRUCTION IN PROGRESS
Property and equipment, summarized by major classifications, was as follows at
September 30:
2004 2003
--------------- ---------------
Land $ 2,823,645 2,107,627
Buildings and improvements 9,325,511 7,520,990
Furniture, fixtures and equipment 3,708,128 3,473,089
Construction in progress 24,449 620,296
--------------- ---------------
15,881,733 13,722,002
Accumulated depreciation (5,791,783) (5,201,558)
--------------- ---------------
$ 10,089,950 8,520,444
=============== ===============
The Bank leases equipment and buildings under agreements, which are classified
as operating leases. The building lease is a ten-year lease which expires in
2012, with options to renew for additional five-year periods. Rent expense under
these operating lease agreements was $136,569 and $183,698 for the years ended
September 30, 2004 and 2003, respectively.
As of September 30, 2004, future minimum lease payments under noncancelable
operating leases are as follows:
Years Ending Lease
September 30, Commitments
- ------------- ---------------
2005 $ 84,019
2006 82,718
2007 77,506
2008 67,821
2009 67,202
Thereafter 168,006
---------------
$ 547,272
===============
18
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE 5. SAVINGS, CERTIFICATES OF DEPOSIT AND DEMAND ACCOUNTS
Deposits consisted of the following at September 30:
2004 2003
--------------- ---------------
Non interest-bearing checking accounts $ 30,085,015 26,070,616
Interest-bearing checking accounts 44,097,550 41,861,262
Passbook savings 89,494,173 103,142,240
Money market deposits 7,854,175 8,229,316
Cashier checks 3,456,576 3,980,616
Certificates of deposit 79,405,888 80,156,661
--------------- ---------------
$ 254,393,377 263,440,711
=============== ===============
Interest expense incurred on the above deposits was as follows for the years
ended September 30:
2004 2003
--------------- ---------------
Interest-bearing checking accounts $ 64,660 83,248
Passbook savings 714,923 1,344,216
Money market deposits 28,174 58,823
Certificates of deposit 2,166,005 2,510,522
--------------- ---------------
$ 2,973,762 3,996,809
=============== ===============
Certificates of deposit by remaining maturity are as follows:
Year Ending
September 30, Amount
- ------------------- ---------------
Less than one year $ 22,948,531
One to two years 17,460,013
Two to three years 9,425,157
Three to four years 3,518,897
Four to five years 26,053,290
---------------
$ 79,405,888
===============
The weighted average interest rate on deposits was 1.06% and 1.23% at September
30, 2004 and 2003, respectively.
The aggregate amount of time deposits with a minimum denomination of $100,000
was approximately $22,736,000 and $24,110,000 at September 30, 2004 and 2003,
respectively.
Deposit account balances of related parties at September 30, 2004 and 2003 were
approximately $5,119,000 and $5,634,000, respectively.
19
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE 6. INCOME TAXES
The Company and the Bank have elected to file a consolidated tax return.
Consolidated tax expense is allocated among the entities based on the proportion
of their taxable income to consolidated taxable income.
Consolidated income tax expense consists of the following at September 30:
2004 2003
--------------- ---------------
Current
Federal $ 1,491,668 1,857,614
State 270,313 375,502
--------------- ---------------
1,761,981 2,233,116
--------------- ---------------
Deferred (benefit)
Federal 106,828 3,775
State 42,338 (15,022)
--------------- ---------------
149,166 (11,247)
--------------- ---------------
$ 1,911,147 2,221,869
=============== ===============
The differences between total tax expense and the amount computed by applying
the applicable statutory federal income tax rate of 34% to income before income
taxes at September 30 were:
2004 2003
--------------- ---------------
Computed "expected" tax expense $ 1,689,186 1,969,405
State income taxes, net 206,350 237,917
Other 15,611 14,547
--------------- ---------------
$ 1,911,147 2,221,869
=============== ===============
Deferred taxes are attributable to temporary differences, such as the use of
accelerated depreciation methods for tax purposes, the excess of the allowance
for loan losses for financial reporting purposes over the amount for tax
purposes which arose after 1987, differences in FHLB stock basis, the
recognition of unrealized gains and losses on securities for tax purposes, and
the deduction of loan origination costs for tax purposes. Certain unrealized
gains and losses on available-for-sale securities, which are deferred for
financial statement reporting purposes, are recognized currently for income tax
purposes.
20
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE 6. INCOME TAXES (CONTINUED)
The Company's deferred tax liabilities and assets are as follows at
September 30:
2004 2003
--------------- ---------------
Deferred tax assets $ 939,675 1,034,237
Deferred tax liabilities (1,055,866) (1,001,262)
--------------- ---------------
Net deferred tax (liability) asset $ (116,191) 32,975
=============== ===============
During the year ended September 30, 1997, the Bank changed its method of
computing its bad debt deduction for income tax purposes from the reserve method
to the specific charge-off method. The Bank was required for income tax purposes
to recapture the accumulated income tax bad debt reserve that arose in tax years
after December 31, 1987 in the amount of $742,368 over a six-year period on a
straight-line basis. For the year ending September 30, 2004, there were no
amounts remaining to be recaptured. For the year ending September 30, 2003, the
Bank had approximately $123,000 remaining to be recaptured. At September 30,
2004, the Bank had an accumulated bad debt reserve of approximately $5,158,000
for federal income tax purposes that arose in tax years beginning before
December 31, 1987, as a result of deductions taken for tax purposes only. No
deferred tax liability has been recognized on this reserve. The reserve can only
be used to absorb actual loan losses and any use for other purposes may result
in taxable income at current rates to the Bank.
NOTE 7. REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital requirements
administered by its primary federal regulator, the Office of Thrift Supervision
(OTS). The Bank's failure to meet the minimum regulatory 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
and the consolidated financial statements. Under the regulatory capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines involving 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 under the prompt corrective action guidelines are also subject to
qualitative judgments by the regulators about components, risk weighting, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of: total risk-based
capital and Tier I capital to risk-weighted assets (as defined in the
regulations), Tier I capital to adjusted total assets (as defined), and tangible
capital to adjusted total assets (as defined). As discussed in greater detail
below, as of September 30, 2004 and 2003, the Bank met all of the capital
adequacy requirements to which it is subject.
21
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE 7. REGULATORY MATTERS (CONTINUED)
As of September 30, 2004 and 2003, the Bank was categorized as "well
capitalized" under the regulatory framework for prompt corrective action. To
remain categorized as well capitalized, the Bank would have to maintain minimum
total risk-based, Tier I risk-based, and Tier I leverage ratios as disclosed in
the table below. There are no conditions or events since the most recent
notification that management believes have changed the Bank's prompt corrective
action category.
To be Well Capitalized for
Minimum for Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
------------------------ ----------------------- --------------------------
Ratio Amount Ratio Amount Ratio Amount
---------- ---------- ---------- ---------- ---------- -------------
(Dollars in Thousands) (Dollars in Thousands) (Dollars in Thousands)
As of September 30, 2004:
Total Capital (to risk-weighted
assets) 14.81% $ 31,801 >=8.00% >=$ 17,175 >=10.00% >=$ 21,469
Tier I (core) Capital
(to risk-weighted assets) 13.76 29,548 4.00 8,588 6.00 12,881
Tier I (core) Capital
(to adjusted total assets) 8.50 29,548 3.00 10,427 5.00 17,378
Tangible Capital
(to adjusted total assets) 8.50 29,548 1.50 5,213 - -
As of September 30, 2003:
Total Capital (to risk-weighted
assets) 13.39% $ 29,094 >=8.00% >=$ 17,385 >=10.00% >=$ 21,732
Tier I (core) Capital
(to risk-weighted assets) 12.24 26,599 4.00 8,693 6.00 13,039
Tier I (core) Capital
(to adjusted total assets) 7.37 26,599 3.00 10,827 5.00 18,044
Tangible Capital
(to adjusted total assets) 7.37 26,599 1.50 5,413 - -
As an entity regulated by the OTS, the Bank has restrictions on capital
distributions. The Board may approve dividends up to the current year's net
income plus retained earnings from the prior two years. For a distribution
within these limits, the Bank must notify the OTS 30 days before any such
distribution.
There are other restrictions that would apply to the Bank for distributions
above the amount outlined above. At present, management is not contemplating
distributions above this level. The restrictions that would apply are set forth
in 12 CFR section 563.143 of the Code of Federal Regulations.
22
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE 8. EMPLOYEE RETIREMENT PLAN
The 401(k) Plan is available to all employees who have completed three months of
service and have attained the age of 21. The rate of annual vesting is based on
employees' credited years of service with the Bank. Employees are fully vested
when they have attained six years or more of credited service. Qualifying
employees may contribute up to 15% of their annual earnings, but not in excess
of the maximum amount allowed by the Internal Revenue Service. The Plan has a
mandatory match of 4% and also allows the Employer to make a discretionary match
above the mandatory levels. The Bank expects to contribute approximately
$166,000 to the 401(k) Plan during the fiscal year 2005 for the 2004 plan year.
During the fiscal year ended September 30, 2004, the Bank contributed $143,187
to the 401(k) Plan for the 2003 plan year.
NOTE 9. ADVANCES FROM THE FEDERAL HOME LOAN BANK
At September 30, 2004 and 2003, the Bank had $57,329,399 and $61,508,851,
respectively, of borrowed funds comprised of advances payable to the Federal
Home Loan Bank. The advances payable, bear interest at fixed interest rates
ranging from 2.89% to 6.58%. Interest is due monthly.
Principal payments and maturities for the advances are as follows:
Years Ending
September 30: Amount
- ------------- ---------------
2005 $ 8,900,888
2006 6,355,919
2007 11,568,074
2008 4,784,823
2009 12,130,548
Thereafter 13,589,147
---------------
$ 57,329,399
===============
The purpose of these advances is to finance mortgage and commercial real estate
loans with fixed interest rates maturing approximately at the same time as the
related loans. This provides the Bank with a constant interest rate spread. The
advances are scheduled to mature from January 2005 to March 2020. The blanket
lien status allows the Bank to borrow up to specific loan percentages of the
eligible collateral as determined by the Federal Home Loan Bank of Dallas
(FHLB), not to exceed 35% of the Bank's total assets without specifically
listing, segregating, or delivering collateral to the FHLB. Eligible collateral
under the blanket lien for Community Financial Institutions is as follows:
first-lien mortgages on one-to-four family and multifamily (up to 75%), small
farm/agriculture loans (up to 40%) and small business loans (up to 60%). The
collateral value is adjusted for credit deficiencies, delinquencies greater than
90 days, and other types of exceptions. The blanket lien status pledge also
requires the Bank to pledge its demand deposit account, the capital stock of the
FHLB, and other assets pursuant to the FHLB's Advances, Collateral Pledge and
Security Agreement.
23
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE 10. SIGNIFICANT GROUP CONCENTRATION OF CREDIT RISK
The Bank's loan business activity is with customers located within the state of
New Mexico and the El Paso, Texas area. Generally, the loans are secured by real
estate, however, the Bank also makes consumer loans and commercial loans. All
loans are expected to be repaid from cash flows of the borrowers. Credit losses
arising from lending transactions are affected by the economic conditions
surrounding the agribusiness, oil and gas, military, government and
manufacturing industries within the state of New Mexico and the El Paso area.
The Bank's collateral policy is to secure all real estate loans by mortgages,
place first liens on collateral to commercial loans and perfect liens on
consumer loan products. The Bank infrequently grants unsecured loans to its
customers.
At September 30, 2004 and 2003, the Bank had credit commitments of $48,243,000
and $33,939,000, respectively. At September 30, 2004 and 2003, the Bank had
$21,495,000 and $9,266,000 outstanding against those lines, respectively.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank uses the same credit policies in
making commitments and conditional obligations as it does for on-balance sheet
instruments.
At September 30, 2004 and 2003, the Bank had $728,385 and $900,251 outstanding
under standby letters of credit, respectively. Standby letters of credit are
conditional commitments issued by the Bank to guarantee the performance of a
customer to a third party. Standby letters of credit generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
The credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held varies
and is required in instances where the Bank deems necessary.
24
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE 11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Bank has estimated the fair values of its financial instruments as follows
as of September 30:
2004 2003
-------------------------- --------------------------
CARRYING FAIR Carrying Fair
VALUE VALUE Value Value
------------ ----------- ------------ -----------
Financial assets:
Cash and due from banks $ 9,528,000 9,528,000 6,821,000 6,821,000
Interest bearing deposits
with banks 27,944,000 27,944,000 33,398,000 33,398,000
Held-to-maturity
investment securities 23,214,000 23,162,000 45,701,000 45,843,000
Available-for-sale
investment securities 17,953,000 17,953,000 4,025,000 4,025,000
Loans held for sale 1,777,000 1,777,000 4,043,000 4,043,000
Loans receivable, net 251,662,000 258,381,000 250,894,000 257,747,000
Financial liabilities:
Savings, certificates and
demand accounts 254,393,000 254,771,000 263,441,000 265,219,000
Advances from the Federal
Home Loan Bank and other borrowings 57,533,000 58,637,000 61,509,000 64,578,000
Off-balance sheet items:
Credit commitments 26,748,000 26,748,000 24,673,000 24,673,000
Letters of credit 728,000 728,000 900,000 900,000
The carrying values in the preceding tables are included in the Consolidated
Statements of Financial Condition under the applicable captions.
25
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE 12. STOCK OPTION PLANS
1995 Stock Option Plan. The Bank has a nonqualified stock option plan, which
provides for the granting of stock options to directors, officers and key
employees. During fiscal 1998, upon formation of the Company, the nonqualified
stock option plan was transferred to the Holding Company. A maximum of 40,885
shares of stock may be issued under the plan. The option price, number of shares
and grant date are determined at the discretion of the Company's Board of
Directors. Grantees vest in the options at a rate determined by the Board of
Directors on the date of grant. The exercise price of each option approximates
the market price of the Company's stock on the date of grant. Options granted
under the plan are exercisable for a period not to exceed five years from the
options grant date.
2002 Stock Option and Incentive Plan. The shareholders of the Company approved
the "2002 Stock Option and Incentive Plan", ("the Plan") in January 2003. The
Plan designates that options granted to employees of the Company or its
affiliates will qualify as Incentive Stock Options. Options granted to person
who are not employees will be Non-Qualified Stock Options. Under the Plan,
awards may be made up to a maximum of 30,000 shares, subject to adjustment as
defined in Section 9 of the Plan. A Committee of the Board of Directors will
insure that the exercise price of any option shall not be less than the Market
Value per Share at the date of grant of the option, the expiration date shall
not exceed ten years from the date of grant. Other terms and conditions,
including vesting schedules may be imposed upon each grant. The terms and
conditions need not be identical among Participants. The Plan shall continue in
effect for a term of ten years unless sooner terminated under Section 16.
The weighted average remaining life of common stock options at September 30,
2004 and 2003 is 2.94 and 3.46 years, respectively.
The weighted average fair value of options granted during 2004 and 2003 were
$0.20 and $0.17 per share, respectively.
A summary of common stock option transactions during the years ended September
30, 2004 and 2003 follows:
Weighted Average
Options Exercise Price
--------- ------------------
Outstanding at September 30, 2002 19,560 $ 53.05
Granted 13,550 77.38
Exercised (8,200) 74.83
Forfeited (1,350) 50.99
---------
Outstanding at September 30, 2003 23,560 66.51
Granted 12,625 83.37
Exercised (3,685) 50.88
Forfeited (300) 80.00
---------
Outstanding at September 30, 2004 32,200 74.32
=========
Exercisable at September 30, 2004 22,200 $ 72.66
=========
26
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE 12. STOCK OPTION PLAN (CONTINUED)
Stock options available for issuance at September 30, 2004
Under the 1995 Stock Option Plan $ -
Under the 2002 Stock Option and Incentive Plan 9,050
----------
$ 9,050
==========
NOTE 13. PROPOSED ACQUISITION
On August 25, 2004, the Company announced that it had signed a definitive
agreement to acquire GFSB, Bancorp, Inc. (GFSB), parent holding company of
Gallup Federal Savings and Loan Association, Gallup, New Mexico. As of June 30,
2004, GFSB reported total assets of $232 million.
Under the terms of the agreement, each share of GFSB will be valued at $20 per
share. The GFSB shareholders can select either cash or stock in the Company
subject to an overall requirement that 51% of the shares must be converted to
Company stock. The transaction is subject to various terms and conditions,
including approval by the majority of shareholders of both companies and
approval by the appropriate regulatory agencies. In conjunction with the
transaction, the Company has agreed to register its common stock with the
Securities and Exchange Commission pursuant to the Securities Exchange Act of
1934. In addition, the Company will use its best efforts in attempting to be
listed on the NASDAQ stock exchange.
Subject to the various terms and conditions of the definitive agreement, the
Company anticipates consummation of the transaction in the second quarter of
2005.
27
ANNEX A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
DATED AS OF AUGUST 25, 2004
BY AND BETWEEN
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
AND
GFSB BANCORP, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Page No.
INTRODUCTORY STATEMENT
4
ARTICLE I DEFINITIONS
5
ARTICLE II THE MERGER
11
2.1 THE MERGER 11
2.2 CLOSING 11
2.3 EFFECTIVE TIME 11
2.4 EFFECTS OF THE MERGER 11
2.5 EFFECT ON OUTSTANDING SHARES OF GFSB COMMON STOCK 12
2.6 ELECTION AND PRORATION PROCEDURES. 12
2.7 EXCHANGE PROCEDURES 15
2.8 EFFECT ON OUTSTANDING SHARES OF FFBSW COMMON STOCK 18
2.9 DIRECTORS AFTER EFFECTIVE TIME 18
2.10 CERTIFICATE OF INCORPORATION AND BYLAWS 18
2.11 TREATMENT OF STOCK OPTIONS AND RESTRICTED STOCK 18
2.12 DISSENTERS' RIGHTS 19
2.13 BANK MERGER. 19
2.14 ALTERNATIVE STRUCTURE 19
ARTICLE III
3.1 DISCLOSURE LETTERS 20
3.2 REPRESENTATIONS AND WARRANTIES OF GFSB 20
3.3 REPRESENTATIONS AND WARRANTIES OF 36
ARTICLE IV CONDUCT PENDING THE MERGER
4.1 FORBEARANCES BY GFSB 44
4.2 FORBEARANCES BY FFBSW 47
ARTICLE V COVENANTS
5.1 ACQUISITION PROPOSALS 48
5.2 CERTAIN POLICIES AND ACTIONS OF GFSB 49
5.3 ACCESS AND INFORMATION 49
5.4 APPLICATIONS; CONSENTS; TRANSITION 50
5.5 ANTITAKEOVER PROVISIONS 51
5.6 ADDITIONAL AGREEMENTS 51
5.7 PUBLICITY 52
5.8 STOCKHOLDER MEETINGS 52
5.9 REGISTRATION OF FFBSW COMMON STOCK 53
5.10 AFFILIATE LETTERS 54
5.11 NOTIFICATION OF CERTAIN MATTERS 54
5.12 EMPLOYEE BENEFITS MATTERS 54
5.13 INDEMNIFICATION 57
5.14 SECTION 16 MATTERS 58
5.15 DIVIDENDS 58
ARTICLE VI CONDITIONS TO CONSUMMATION
6.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS 58
6.2 CONDITIONS TO THE OBLIGATIONS OF FFBSW 60
6.3 CONDITIONS TO THE OBLIGATIONS OF GFSB 61
2
ARTICLE VII TERMINATION
7.1 TERMINATION 61
7.2 TERMINATION FEE 63
7.3 EFFECT OF TERMINATION 63
ARTICLE VIII CERTAIN OTHER MATTERS
8.1 INTERPRETATION 64
8.2 SURVIVAL 64
8.3 WAIVER; AMENDMENT 64
8.4 COUNTERPARTS 64
8.5 GOVERNING LAW 64
8.6 EXPENSES 64
8.7 NOTICES 65
8.8 ENTIRE AGREEMENT; ETC. 65
8.9 SUCCESSORS AND ASSIGNS; ASSIGNMENT 66
EXHIBITS
Exhibit A Form of GFSB Director Voting Agreement
Exhibit B Form of FFBSW Director Voting Agreement
Exhibit C Form of Plan of Bank Merger
Exhibit D Form of Affiliate Letter
3
AGREEMENT AND PLAN OF MERGER
This is an AGREEMENT AND PLAN OF MERGER, dated as of the 25th day of
August, 2004 ("AGREEMENT"), by and between FIRST FEDERAL BANC OF THE SOUTHWEST,
INC., a Delaware corporation ("FFBSW"), and GFSB BANCORP, INC., a Delaware
corporation ("GFSB").
INTRODUCTORY STATEMENT
The Board of Directors of each of FFBSW and GFSB (i) has determined that
this Agreement and the business combination and related transactions
contemplated hereby are advisable and in the best interests of FFBSW or GFSB, as
the case may be, and in the best long-term interests of the stockholders of
FFBSW or GFSB, as the case may be, and (ii) has determined that this Agreement
and the transactions contemplated hereby are consistent with, and in furtherance
of, its respective business strategies.
The parties hereto intend that the Merger (as defined herein) shall
qualify as a reorganization under the provisions of Section 368(a) of the IRC
for federal income tax purposes.
FFBSW and GFSB each desire to make certain representations, warranties
and agreements in connection with the business combination and related
transactions provided for herein and to prescribe various conditions to such
transactions.
As a condition and inducement to FFBSW's willingness to enter into this
Agreement, at or prior to the date of this Agreement, each of the members of the
Board of Directors of GFSB has entered into an agreement dated as of the date
hereof in the form of EXHIBIT A pursuant to which he will vote his shares of
GFSB Common Stock in favor of this Agreement and the transactions contemplated
hereby .
As a condition and inducement to GFSB's willingness to enter into this
Agreement, each director and advisory director of FFBSW has entered into an
agreement dated as of the date hereof in the form of EXHIBIT B pursuant to which
he or she will vote his or her shares of FFBSW Common Stock in favor of this
Agreement and the transactions contemplated hereby.
In consideration of their mutual promises and obligations hereunder, the
parties hereto adopt and make this Agreement and prescribe the terms and
conditions hereof and the manner and basis of carrying it into effect, which
shall be as follows:
4
ARTICLE I DEFINITIONS
For purposes of this Agreement:
"ACQUISITION PROPOSAL" means any proposal or offer with respect to any
of the following (other than the transactions contemplated hereunder): (i) any
merger, consolidation, share exchange, business combination, or other similar
transaction involving GFSB or any of its Subsidiaries; (ii) any sale, lease,
exchange, mortgage, pledge, transfer or other disposition of 25% or more of
GFSB's consolidated assets in a single transaction or series of transactions;
(iii) any tender offer or exchange offer for 25% or more of the outstanding
shares of GFSB's capital stock or the filing of a registration statement under
the Securities Act in connection therewith; or (iv) any public announcement of a
proposal, plan or intention to do any of the foregoing or any agreement to
engage in an any of the foregoing.
"AGREEMENT" means this Agreement, as amended, modified, or amended and
restated from time to time in accordance with its terms.
"BANK MERGER" shall have the meaning given to that term in SECTION 2.13.
"BANK MERGER ACT" means the Bank Merger Act, as amended.
"CASH CONSIDERATION" shall have the meaning given to that term in
SECTION 2.5(A).
"CASH ELECTION" shall have the meaning given to that term in SECTION
2.6(B).
"CASH ELECTION SHARES" shall have the meaning given to that term in
SECTION 2.6(B).
"CERTIFICATE" shall have the meaning given to that term in SECTION
2.6(C).
"CERTIFICATE OF MERGER" shall have the meaning given to that term in
SECTION 2.3.
"CLOSING" shall have the meaning given to that term in SECTION 2.2.
"CLOSING DATE" shall have the meaning given to that term in SECTION 2.2.
"CONTINUING EMPLOYEE" shall have the meaning given to that term in
SECTION 5.12(A).
"CRA" means the Community Reinvestment Act.
"DGCL" means the Delaware General Corporation Law.
5
"DISCLOSURE LETTER" shall have the meaning given to that term in SECTION
3.1.
"DISSENTERS' SHARES" shall have the meaning given to that term in
SECTION 2.12.
"EFFECTIVE TIME" shall have the meaning given to that term in SECTION
2.3.
"ELECTION DEADLINE" shall have the meaning given to that term in SECTION
2.6(C).
"ELECTION FORM" shall have the meaning given to that term in SECTION
2.6(A).
"ENVIRONMENTAL LAW" means any federal, state or local law, statute,
ordinance, rule, regulation, code, license, permit, authorization, approval,
consent, order, directive, executive or administrative order, judgment, decree,
injunction, or agreement with any Governmental Entity relating to (i) the
protection, preservation or restoration of the environment (which includes,
without limitation, air, water vapor, surface water, groundwater, drinking water
supply, soil, surface land, subsurface land, plant and animal life or any other
natural resource), or to human health or safety as it relates to Hazardous
Materials, or (ii) the exposure to, or the use, storage, recycling, treatment,
generation, transportation, processing, handling, labeling, production, release
or disposal of, Hazardous Materials, in each case as amended and as now in
effect. The term Environmental Law includes, without limitation, the Federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
the Superfund Amendments and Reauthorization Act of 1986, the Federal Water
Pollution Control Act of 1972, the Federal Clean Air Act, the Federal Clean
Water Act, the Federal Resource Conservation and Recovery Act of 1976, the
Federal Solid Waste Disposal and the Federal Toxic Substances Control Act, the
Federal Insecticide, Fungicide and Rodenticide Act, the Federal Occupational
Safety and Health Act of 1970 as it relates to Hazardous Materials, the Federal
Hazardous Substances Transportation Act, the Emergency Planning and Community
Right-To-Know Act, the Safe Drinking Water Act, the Endangered Species Act, the
National Environmental Policy Act, the Rivers and Harbors Appropriation Act or
any so-called "Superfund" or "Superlien" law, each as amended and as now in
effect.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA AFFILIATE" means any entity that is considered one employer with
GFSB under Section 4001(b)(1) of ERISA or Section 414(b), (c), (m) or (o) of the
IRC.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXCHANGE AGENT" shall have the meaning given to that term in SECTION
2.6(C).
"EXCHANGE RATIO" shall have the meaning given to that term in SECTION
2.5(A).
6
"EXCLUDED SHARES" shall consist of (i) Dissenters' Shares and (ii)
shares held directly or indirectly by FFBSW (other than shares held in a
fiduciary capacity or in satisfaction of a debt previously contracted).
"FDIA" means the Federal Deposit Insurance Act, as amended.
"FDIC" means the Federal Deposit Insurance Corporation.
"FFBSW" shall have the meaning given to that term in the preamble.
"FFBSW COMMON STOCK" means the common stock, par value $.01 per share,
of FFBSW.
"FFBSW PRICE" means one hundred sixty-five percent (165%) of the fully
diluted book value per share of FFBSW Common Stock as determined in accordance
with generally accepted accounting principles as of September 30, 2004 ;
PROVIDED, HOWEVER, that the FFBSW Price shall be appropriately adjusted to take
into account any FFBSW stock split, stock dividend, reclassification, special
distribution or similar transaction which shall occur or be declared prior to
the Effective Time.
"FFBSW STOCKHOLDER MEETING" shall have the meaning given to that term on
SECTION 5.8.
"GFSB" shall have the meaning given to that term in the preamble and
shall include all predecessor entities of GFSB.
"GFSB COMMON STOCK" means the common stock, par value $.10 per share, of
GFSB.
"GFSB EMPLOYEE PLANS" shall have the meaning given to that term in
SECTION 3.2(R)(I).
"GFSB OPTION" shall have the meaning given to that term in SECTION
2.11(A).
"GFSB PENSION PLAN" shall have the meaning given to that term in SECTION
3.2(R)(III).
"GFSB QUALIFIED PLAN" shall have the meaning given to that term in
SECTION 3.2(R)(IV).
"GFSB'S REPORTS" shall have the meaning given to that term in SECTION
3.2(G).
"FRB" mean the Board of Governors of the Federal Reserve System.
7
"GFSB STOCKHOLDER MEETING" shall have the meaning given to that term in
SECTION 5.8.
"GALLUP FEDERAL" shall have the meaning given to that term in SECTION
2.13.
"GALLUP FEDERAL ESOP" shall have the meaning given to that term in
SECTION 5.12(D).
"GAAP" means generally accepted accounting principles.
"GOVERNMENT REGULATOR" means any federal or state governmental authority
charged with the supervision or regulation of depository institutions or
depository institution holding companies or engaged in the insurance of bank or
savings association deposits.
"GOVERNMENTAL ENTITY" means any court, administrative agency or
commission or other governmental authority or instrumentality.
"HAZARDOUS MATERIAL" means any substance (whether solid, liquid or gas)
which is or could be detrimental to human health or safety or to the
environment, currently listed, defined, designated or classified as hazardous,
toxic, radioactive or dangerous, or otherwise regulated, under any Environmental
Law, whether by type or by quantity, including any substance containing any such
substance as a component. Hazardous Material includes, without limitation, any
toxic waste, pollutant, contaminant, hazardous substance, toxic substance,
hazardous waste, special waste, industrial substance, oil or petroleum, or any
derivative or by-product thereof, radon, radioactive material, asbestos,
asbestos-containing material, urea formaldehyde foam insulation, lead and
polychlorinated biphenyl.
"HOLA" means the Home Owners' Loan Act, as amended.
"INDEMNIFIED PARTY" shall have the meaning given to that term in SECTION
5.13(A).
"IRC" means the Internal Revenue Code of 1986, as amended.
"IRS" means the Internal Revenue Service.
"KNOWLEDGE" means, with respect to a party hereto, actual knowledge of
the members of the Board of Directors of that party or any officer of that party
with the title ranking not less than senior vice president.
"LETTER OF TRANSMITTAL" shall have the meaning given to that term in
SECTION 2.7(A).
8
"LIEN" means any charge, mortgage, pledge, security interest, claim,
lien or encumbrance.
"LOAN" means a loan, lease, advance, credit enhancement, guarantee or
other extension of credit.
"LOAN PROPERTY" means any property in which the applicable party (or a
subsidiary of it) holds a security interest and, where required by the context,
includes the owner or operator of such property, but only with respect to such
property.
"MAILING DATE" shall have the meaning given to that term in SECTION
2.6(A).
"MATERIAL ADVERSE EFFECT" means an effect which is material and adverse
to the business, financial condition or results of operations of GFSB or FFBSW,
as the context may dictate, and its Subsidiaries taken as a whole; PROVIDED,
HOWEVER, that any such effect resulting from any (i) changes in laws, rules or
regulations or generally accepted accounting principles or regulatory accounting
requirements or interpretations thereof that apply to both FFBSW and GFSB, or to
financial and/or depository institutions generally, (ii) changes in economic
conditions affecting financial institutions generally within the region in which
FFBSW and GFSB operate, including but not limited to, changes in the general
level of market interest rates, (iii) actions and omissions of FFBSW or GFSB
taken consistent with the terms of the Agreement in contemplation of the
transactions contemplated hereby and (iv) direct effects of compliance with this
Agreement on the operating performance of the parties, including expenses
incurred by the parties in consummating the transactions contemplated by this
Agreement, including but not limited to reasonable compensation expenses
incurred or to be incurred as a result of the transactions contemplated
(provided that it is consistent with the terms of the Agreement ), and
compliance by FFBSW with the Securities Act, shall not be considered in
determining if a Material Adverse Effect has occurred.
"MAXIMUM INSURANCE AMOUNT" shall have the meaning given to that term in
SECTION 5.13(C).
"MERGER" shall have the meaning given to that term in SECTION 2.1.
"MERGER CONSIDERATION" shall have the meaning given to that term in
SECTION 2.5(A).
"MIXED ELECTION" shall have the meaning given to that term in SECTION
2.6(B).
"NASD" means the National Association of Securities Dealers, Inc.
"NON-ELECTION" shall have the meaning given to that term in SECTION
2.6(B).
"NON-ELECTION SHARES" shall have the meaning given to that term in
SECTION 2.6(B).
9
"OTS" means the Office of Thrift Supervision.
"PARTICIPATION FACILITY" means any facility in which the applicable
party (or a Subsidiary of it) participates in the management (including all
property held as trustee or in any other fiduciary capacity) and, where required
by the context, includes the owner or operator of such property, but only with
respect to such property.
"PERSON" means an individual, corporation, limited liability company,
partnership, association, trust, unincorporated organization or other entity.
"PROXY STATEMENT-PROSPECTUS" shall have the meaning given to that term
in SECTION 5.9(A).
"REGISTRATION STATEMENT" shall have the meaning given to that term in
SECTION 5.9(A).
"REPRESENTATIVE" shall have the meaning given to that term in SECTION
2.6(B).
"SEC" means the United States Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"SHORTFALL NUMBER" shall have the meaning given to that term in SECTION
2.6(E)(II).
"STOCK CONSIDERATION" shall have the meaning given to that term in
SECTION 2.5(A).
"STOCK CONVERSION NUMBER" shall have the meaning given to that term in
SECTION 2.6(D).
"STOCK ELECTION" shall have the meaning given to that term in SECTION
2.6(B).
"STOCK ELECTION SHARES" shall have the meaning given to that term in
SECTION 2.6(B).
"STOCK ELECTION NUMBER" shall have the meaning given to that term in
SECTION 2.6(B).
"SUBSIDIARY" means a corporation, financial institution, partnership,
joint venture or other entity in which GFSB or FFBSW, as the case may be, has,
directly or indirectly, an equity interest representing 50% or more of any class
of the capital stock thereof or other equity interests therein and includes all
predecessor entities thereof.
10
"SUPERIOR PROPOSAL" means an unsolicited, bona fide written offer made
by a third party to consummate an Acquisition Proposal that (i) GFSB's Board of
Directors determines in good faith, after consulting with its outside legal
counsel and its financial advisor, would, if accepted, be reasonably likely to
be consummated, (ii) is for 100% of the outstanding shares of GFSB Common Stock
and (iii) is, in the opinion of GFSB's Board of Directors after consultation
with its financial advisor, more favorable to the stockholders of GFSB from a
financial point of view than the transactions contemplated hereby.
"SURVIVING CORPORATION" shall have the meaning given to that term in
SECTION 2.1.
"TAXES" means all income, franchise, gross receipts, real and personal
property, real property transfer and gains, wage and employment taxes and any
applicable interest and penalties related thereto.
ARTICLE II
THE MERGER
2.1 THE MERGER. Upon the terms and subject to the conditions set
forth in this Agreement, GFSB will merge with and into FFBSW ("MERGER") at the
Effective Time. At the Effective Time, the separate corporate existence of GFSB
shall cease. FFBSW shall be the surviving corporation (hereinafter sometimes
referred to in such capacity as the "SURVIVING CORPORATION") in the Merger and
shall continue to be governed by the DGCL and its name and separate corporate
existence, with all of its rights, privileges, immunities, powers and
franchises, shall continue unaffected by the Merger.
2.2 CLOSING. The closing of the Merger (the "CLOSING") will take
place in the offices of Luse Gorman Pomerenk & Schick, P.C., 5335 Wisconsin
Avenue, N.W., Suite 400, Washington, DC 20015 at 2:00 p.m., Washington, DC time,
on the fifth business day following satisfaction or waiver of the conditions to
Closing set forth in Article VI (other than those conditions that by their
nature are to be satisfied at the Closing), or such later date as the parties
may otherwise agree (the "CLOSING DATE").
2.3 EFFECTIVE TIME. In connection with the Closing, FFBSW shall duly
execute, deliver and file a certificate of merger (the "CERTIFICATE OF MERGER")
with the Delaware Secretary of State. The parties will make all other filings or
recordings required under the DGCL. The Merger shall become effective at such
time as the Certificate of Merger is duly filed with the Delaware Secretary of
State or at such later date or time as FFBSW and GFSB agree and specify in the
Certificate of Merger (the date and time the Merger becomes effective being the
"EFFECTIVE TIME").
2.4 EFFECTS OF THE MERGER. The Merger will have the effects set
forth in the DGCL. Without limiting the generality of the foregoing, and subject
thereto, from and after the Effective Time, FFBSW shall possess all of the
properties, rights, privileges,
11
powers and franchises of GFSB and be subject to all of the debts, liabilities
and obligations of GFSB.
2.5 EFFECT ON OUTSTANDING SHARES OF GFSB COMMON STOCK.
(a) Subject to the provisions of SECTION 2.6 hereof, by
virtue of the Merger, automatically and without any action on the part of the
holder thereof, each share of GFSB Common Stock issued and outstanding at the
Effective Time, other than Excluded Shares, shall become and be converted into,
at the election of the holder as provided in and subject to the limitations set
forth in this Agreement, either (i) the right to receive $20.00 in cash without
interest (the "CASH CONSIDERATION") or (ii) the number of shares of FFBSW Common
Stock equal to the Exchange Ratio (as defined below) (the "STOCK
CONSIDERATION"). The Cash Consideration and the Stock Consideration are
sometimes referred to herein collectively as the "MERGER CONSIDERATION." The
"EXCHANGE RATIO" shall be equal to the quotient of $20.00 divided by the FFBSW
Price.
(b) Notwithstanding any other provision of this Agreement,
no fraction of a share of FFBSW Common Stock and no certificates or scrip
therefor will be issued in the Merger; instead, FFBSW shall pay to each holder
of GFSB Common Stock who would otherwise be entitled to a fraction of a share of
FFBSW Common Stock an amount in cash, rounded to the nearest cent, determined by
multiplying such fraction by the FFBSW Price.
(c) If, between the date of this Agreement and the Effective
Time, the outstanding shares of FFBSW Common Stock shall have been changed into
a different number of shares or into a different class by reason of any stock
dividend, subdivision, reclassification, recapitalization, split, combination or
exchange of shares, the Exchange Ratio shall be adjusted appropriately to
provide the holders of GFSB Common Stock the same economic effect as
contemplated by this Agreement prior to such event.
(d) As of the Effective Time, each Excluded Share, other
than Dissenters' Shares, shall be canceled and retired and shall cease to exist,
and no exchange or payment shall be made with respect thereto. All shares of
GFSB Common Stock that are held by FFBSW, if any, other than shares held in a
fiduciary capacity or in satisfaction of a debt previously contracted, shall be
canceled and shall constitute authorized but unissued shares. In addition, no
Dissenters' Shares shall be converted into the Cash Consideration or the Stock
Consideration pursuant to this SECTION 2.5 but instead shall be treated in
accordance with the provisions set forth in SECTION 2.12 of this Agreement.
2.6 ELECTION AND PRORATION PROCEDURES.
(a) An election form in such form as GFSB and FFBSW shall
mutually agree (an "ELECTION Form") shall be mailed on the Mailing Date (as
defined below) to each holder of record of shares of GFSB Common Stock as of a
record date which shall be the same date as the record date for eligibility to
vote on the Merger. The
12
"MAILING DATE" shall be the date on which proxy materials relating to the Merger
are mailed to holders of shares of GFSB Common Stock. FFBSW shall make available
AS MANY Election Forms as may be reasonably requested by all persons who become
holders of GFSB Common Stock after the record date for eligibility to vote on
the Merger and prior to the Election Deadline (as defined herein), and GFSB
shall provide to the Exchange Agent (as defined herein) all information
reasonably necessary for it to perform its obligations as specified herein.
(b) Each Election Form shall entitle the holder of shares of
GFSB Common Stock (or the beneficial owner through appropriate and customary
documentation and instructions) to (i) elect to receive the Cash Consideration
for all of such holder's shares (a "CASH ELECTION"), (ii) elect to receive the
Stock Consideration for all of such holder's shares (a "STOCK ELECTION"), (iii)
elect to receive the Cash Consideration with respect to some of such holder's
shares and the Stock Consideration with respect to such holder's remaining
shares (a "MIXED ELECTION") or (iv) make no election or to indicate that such
holder has no preference as to the receipt of the Cash Consideration or the
Stock Consideration (a "NON-ELECTION"). Holders of record of shares of GFSB
Common Stock who hold such shares as nominees, trustees or in other
representative capacities (a "REPRESENTATIVE") may submit multiple Election
Forms, provided that such Representative certifies that each such Election Form
covers all the shares of GFSB Common Stock held by that Representative for a
particular beneficial owner. Shares of GFSB Common Stock as to which a Cash
Election has been made (including pursuant to a Mixed Election) are referred to
herein as "CASH ELECTION SHARES." Shares of GFSB Common Stock as to which a
Stock Election has been made (including pursuant to a Mixed Election) are
referred to herein as "STOCK ELECTION Shares." Shares of GFSB Common Stock as to
which no election has been made are referred to as "NON-ELECTION Shares." The
aggregate number of shares of GFSB Common Stock with respect to which a Stock
Election has been made is referred to herein as the "STOCK ELECTION NUMBER."
(c) To be effective, a properly completed Election Form must
be received by an independent party appointed by FFBSW and consented to by GFSB,
which consent shall not be unreasonably withheld, to act as an exchange agent
(the "EXCHANGE AGENT") on or before 5:00 p.m. local time on the third business
day immediately preceding GFSB's Stockholder Meeting or on such other time and
date as GFSB and FFBSW may mutually agree) (the "ELECTION DEADLINE"). An
election shall have been properly made only if the Exchange Agent shall have
actually received a properly completed Election Form by the Election Deadline.
An Election Form shall be deemed properly completed only if accompanied by one
or more certificates representing GFSB Common Stock ("CERTIFICATES") (or
customary affidavits and, if required by FFBSW pursuant to SECTION 2.7(I),
indemnification regarding the loss or destruction of such Certificates or the
guaranteed delivery of such Certificates) representing all shares of GFSB Common
Stock covered by such Election Form, together with duly executed transmittal
materials included with the Election Form. Any GFSB stockholder may at any time
prior to the Election Deadline change his or her election by written notice
received by the Exchange Agent prior to the Election Deadline accompanied by a
13
properly completed and signed revised Election Form. Any GFSB stockholder may,
at any time prior to the Election Deadline, revoke his or her election by
written notice received by the Exchange Agent prior to the Election Deadline or
by withdrawal prior to the Election Deadline of his or her Certificates, or of
the guarantee of delivery of such Certificates, previously deposited with the
Exchange Agent. All elections shall be revoked automatically if the Exchange
Agent is notified in writing by FFBSW and GFSB that this Agreement has been
terminated. If a stockholder either (i) does not submit a properly completed
Election Form by the Election Deadline or (ii) revokes its Election Form prior
to the Election Deadline and does not submit a new properly executed Election
Form prior to the Election Deadline, the shares of GFSB Common Stock held by
such stockholder shall be designated Non-Election Shares. FFBSW shall cause the
Certificates representing GFSB Common Stock described in (ii) to be promptly
returned without charge to the person submitting the Election Form upon written
request to that effect from the person who submitted the Election Form. Subject
to the terms of this Agreement and of the Election Form, the Exchange Agent
shall have reasonable discretion to determine whether any election, revocation
or change has been properly or timely made and to disregard immaterial defects
in any Election Form, and any good faith decisions of the Exchange Agent
regarding such matters shall be binding and conclusive.
(d) Notwithstanding any other provision contained in this
Agreement, 51% of the total number of shares of GFSB Common Stock outstanding at
the Effective Time (the "STOCK CONVERSION NUMBER") shall be converted into the
Stock Consideration and the remaining outstanding shares of GFSB Common Stock
(excluding Excluded Shares) shall be converted into the Cash Consideration;
PROVIDED, HOWEVER, that for federal income tax purposes, it is intended that the
Merger will qualify as a reorganization under the provisions of Section 368(a)
of the IRC and, notwithstanding anything to the contrary contained herein, in
order that the Merger will not fail to satisfy continuity of interest
requirements under applicable federal income tax principles relating to
reorganizations under Section 368(a) of the IRC, FFBSW may increase the number
of shares of GFSB Common Stock that will be converted into the Stock
Consideration and reduce the number of shares of GFSB Common Stock that will be
converted into the right to receive the Cash Consideration to ensure that the
Stock Consideration will represent not less than 45% of the value of the
aggregate Merger Consideration, increased by the value of any Excluded Shares,
each as measured as of the Effective Time.
(e) Within three business days after the later to occur of
the Election Deadline or the Effective Time, FFBSW shall cause the Exchange
Agent to effect the allocation among holders of GFSB Common Stock of rights to
receive the Cash Consideration and the Stock Consideration and to distribute
such consideration as follows:
(i) If the Stock Election Number exceeds the Stock
Conversion Number, then all Cash Election Shares and all Non-Election Shares
shall be converted into the right to receive the Cash Consideration, and each
holder of Stock Election Shares will be entitled to receive (A) the Stock
Consideration in respect of that
14
number of Stock Election Shares equal to the product obtained by multiplying (1)
the number of Stock Election Shares held by such holder by (2) a fraction, the
numerator of which is the Stock Conversion Number and the denominator of which
is the Stock Election Number and (B) the Cash Consideration in respect of the
remaining number of such holder's Stock Election Shares;
(ii) If the Stock Election Number is less than the
Stock Conversion Number (the amount by which the Stock Conversion Number exceeds
the Stock Election Number being referred to herein as the "SHORTFALL NUMBER"),
then all Stock Election Shares shall be converted into the right to receive the
Stock Consideration and the Non-Election Shares and Cash Election Shares shall
be treated in the following manner:
(A) if the Shortfall Number is less than or
equal to the number of Non-Election Shares, then all Cash Election Shares shall
be converted into the right to receive the Cash Consideration and each holder of
Non-Election Shares shall receive (1) the Stock Consideration in respect of that
number of Non-Election Shares equal to the product obtained by multiplying (x)
the number of Non-Election Shares held by such holder by (y) a fraction, the
numerator of which is the Shortfall Number and the denominator of which is the
total number of Non-Election Shares and (2) the Cash Consideration in respect of
the remaining number of such holder's Non-Election Shares; or
(B) if the Shortfall Number exceeds the
number of Non-Election Shares, then all Non-Election Shares shall be converted
into the right to receive the Stock Consideration, and each holder of Cash
Election Shares shall receive (1) the Stock Consideration in respect of that
number of Cash Election Shares equal to the product obtained by multiplying (x)
the number of Cash Election Shares held by such holder by (y) a fraction, the
numerator of which is the amount by which the Shortfall Number exceeds the total
number of Non-Election Shares and the denominator of which is the total number
of Cash Election Shares and (2) the Cash Consideration in respect of the
remaining number of such holder's Cash Election Shares.
For purposes of the foregoing calculations, Excluded Shares
shall be deemed to be Cash Election Shares. For purposes of this SECTION 2.6(E),
if FFBSW is obligated to increase the number of shares of GFSB Common Stock to
be converted into shares of FFBSW Common Stock as a result of the application of
the last clause of SECTION 2.6(D) above, then the higher number shall be
substituted for the Stock Conversion Number in the calculations set forth in
this SECTION 2.6(E).
2.7 EXCHANGE PROCEDURES.
(a) Appropriate transmittal materials ("LETTER OF
TRANSMITTAL") in a form satisfactory to FFBSW and GFSB shall be mailed within
five (5) business days after the Effective Time to each holder of record of GFSB
Common Stock as of the Effective Time who did not previously submit a completed
Election Form. A Letter of Transmittal
15
will be deemed properly completed only if accompanied by certificates
representing all shares of GFSB Common Stock to be converted thereby.
(b) At and after the Effective Time, each Certificate
(except as specifically set forth in SECTION 2.5(D)) shall represent only the
right to receive the Merger Consideration.
(c) Prior to the Effective Time, FFBSW shall (i) reserve for
issuance with its transfer agent and registrar a sufficient number of shares of
FFBSW Common Stock to provide for payment of the aggregate Stock Consideration
and (ii) deposit, or cause to be deposited, with the Exchange Agent, for the
benefit of the holders of shares of GFSB Common Stock, an amount of cash
sufficient to pay the aggregate Cash Consideration.
(d) The Letter of Transmittal shall (i) specify that
delivery shall be effected, and risk of loss and title to the Certificates shall
pass, only upon delivery of the Certificates to the Exchange Agent, (ii) be in a
form and contain any other provisions as FFBSW may reasonably determine and
(iii) include instructions for use in effecting the surrender of the
Certificates in exchange for the Merger Consideration. Upon the proper surrender
of the Certificates to the Exchange Agent, together with a properly completed
and duly executed Letter of Transmittal, the holder of such Certificates shall
be entitled to receive in exchange therefor a certificate representing that
number of whole shares of FFBSW Common Stock that such holder has the right to
receive pursuant to SECTION 2.5, if any, and a check in the amount equal to the
cash that such holder has the right to receive pursuant to SECTION 2.5, if any,
(including any cash in lieu of fractional shares, if any, that such holder has
the right to receive pursuant to SECTION 2.5, and any dividends or other
distributions to which such holder is entitled pursuant to SECTION 2.5).
Certificates so surrendered shall forthwith be canceled. As soon as practicable
following receipt of the properly completed Letter of Transmittal and any
necessary accompanying documentation, the Exchange Agent shall distribute FFBSW
Common Stock and cash as provided herein. The Exchange Agent shall not be
entitled to vote or exercise any rights of ownership with respect to the shares
of FFBSW Common Stock held by it from time to time hereunder, except that it
shall receive and hold all dividends or other distributions paid or distributed
with respect to such shares for the account of the persons entitled thereto. If
there is a transfer of ownership of any shares of GFSB Common Stock not
registered in the transfer records of GFSB, the Merger Consideration shall be
issued to the transferee thereof if the Certificates representing such GFSB
Common Stock are presented to the Exchange Agent, accompanied by all documents
required, in the reasonable judgment of FFBSW and the Exchange Agent, to
evidence and effect such transfer and to evidence that any applicable stock
transfer taxes have been paid.
(e) No dividends or other distributions declared or made
after the Effective Time with respect to FFBSW Common Stock issued pursuant to
this Agreement shall be remitted to any person entitled to receive shares of
FFBSW Common Stock hereunder until such person surrenders his or her
Certificates in accordance with this SECTION 2.7. Upon the surrender of such
person's Certificates, such person shall be
16
entitled to receive any dividends or other distributions, without interest
thereon, which subsequent to the Effective Time had become payable but not paid
with respect to shares of FFBSW Common Stock represented by such person's
Certificates.
(f) The stock transfer books of GFSB shall be closed
immediately upon the Effective Time and from and after the Effective Time there
shall be no transfers on the stock transfer records of GFSB of any shares of
GFSB Common Stock. If, after the Effective Time, Certificates are presented to
FFBSW, they shall be canceled and exchanged for the Merger Consideration
deliverable in respect thereof pursuant to this Agreement in accordance with the
procedures set forth in this SECTION 2.7.
(g) Any portion of the aggregate amount of cash to be paid
pursuant to SECTION 2.5, any dividends or other distributions to be paid
pursuant to this SECTION 2.7 or any proceeds from any investments thereof that
remains unclaimed by the stockholders of GFSB for one year after the Effective
Time shall be repaid by the Exchange Agent to FFBSW upon the written request of
FFBSW. After such request is made, any stockholders of GFSB who have not
theretofore complied with this SECTION 2.7 shall look only to FFBSW for the
Merger Consideration deliverable in respect of each share of GFSB Common Stock
such stockholder holds, as determined pursuant to SECTION 2.5 of this Agreement,
without any interest thereon. If outstanding Certificates are not surrendered
prior to the date on which such payments would otherwise escheat to or become
the property of any governmental unit or agency, the unclaimed items shall, to
the extent permitted by any abandoned property, escheat or other applicable
laws, become the property of FFBSW (and, to the extent not in its possession,
shall be paid over to it), free and clear of all claims or interest of any
person previously entitled to such claims. Notwithstanding the foregoing,
neither the Exchange Agent nor any party to this Agreement (or any affiliate
thereof) shall be liable to any former holder of GFSB Common Stock for any
amount delivered to a public official pursuant to applicable abandoned property,
escheat or similar laws.
(h) FFBSW and the Exchange Agent shall be entitled to rely
upon GFSB's stock transfer books to establish the identity of those persons
entitled to receive the Merger Consideration, which books shall be conclusive
with respect thereto. In the event of a dispute with respect to ownership of
stock represented by any Certificate, FFBSW and the Exchange Agent shall be
entitled to deposit any Merger Consideration deliverable in respect thereof in
escrow with an independent third party and thereafter be relieved with respect
to any claims thereto.
(i) If any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed and, if required by the
Exchange Agent or FFBSW, the posting by such person of a bond in such amount as
the Exchange Agent may direct as indemnity against any claim that may be made
against it with respect to such Certificate, the Exchange Agent will issue in
exchange for such lost, stolen or destroyed Certificate the Merger Consideration
deliverable in respect thereof pursuant to SECTION 2.5.
17
2.8 EFFECT ON OUTSTANDING SHARES OF FFBSW COMMON STOCK. At and after
the Effective Time, each share of FFBSW Common Stock issued and outstanding
immediately prior to the Effective Time shall remain an issued and outstanding
share of common stock of the Surviving Corporation and shall not be affected by
the Merger.
2.9 DIRECTORS AFTER EFFECTIVE TIME. Immediately after the Effective
Time, until their respective successors are duly elected or appointed and
qualified, the directors of the Surviving Corporation shall consist of the
directors of FFBSW serving immediately prior to the Effective Time and the
directors of First Federal Bank shall consist of the current directors of First
Federal Bank serving at the Effective Time; PROVIDED, HOWEVER, that FFBSW shall
offer to Richard C. Kauzlaric and Michael P. Mataya the opportunity to serve on
its Board of Directors and the Board of Directors of First Federal Bank.
2.10 CERTIFICATE OF INCORPORATION AND BYLAWS. The certificate of
incorporation of FFBSW, as in effect immediately prior to the Effective Time,
shall be the certificate of incorporation of the Surviving Corporation until
thereafter amended in accordance with applicable law. The bylaws of FFBSW, as in
effect immediately prior to the Effective Time, shall be the bylaws of the
Surviving Corporation until thereafter amended in accordance with applicable
law.
2.11 TREATMENT OF STOCK OPTIONS AND RESTRICTED STOCK.
(a) Each option to purchase shares of GFSB Common Stock issued by
GFSB and outstanding at the Effective Time (a "GFSB OPTION") pursuant to any
GFSB stock option whether or not then vested or exercisable, shall be cancelled
and all rights thereunder shall be extinguished. As consideration for such
cancellation, FFSBW shall make payment immediately at the Effective Time to each
holder of a GFSB Option of an amount of Merger Consideration determined by
multiplying (x) the number of shares of GFSB Common Stock subject to such
holder's GFSB Option by (y) an amount equal to the excess (if any) of $20 over
the exercise price per share of such GFSB Option (the "Option Value"), PROVIDED,
HOWEVER, that such Option Value shall be paid as follows:
(i) a number of whole shares of FFBSW Common Stock equal to
a fraction, the numerator of which is the Option Value
multiplied by 0.51 and the denominator of which is the FFBSW
Price, with cash paid in lieu of fractional shares; and
(ii) an amount of cash equal to the Option Value multiplied
by 0.49;
PROVIDED FURTHER, no such payment shall be made to such holder unless and until
such holder has executed and delivered to GFSB an instrument in such form
prescribed by FFBSW and reasonably satisfactory to GFSB accepting such payment
in full settlement of his or her rights relative to GFSB Option. GFSB shall take
all actions which are necessary or appropriate to carry out the intention of the
above.
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(b) Awards outstanding as of the date hereof under GFSB's Management
Stock Bonus Plan, to the extent not already vested, shall vest and shall
represent the right to receive the same rights provided to other holders of GFSB
Common Stock pursuant to Section 2.5(a) above. GFSB agrees to take or to cause
to be taken all actions necessary to provide for such conversion at or prior to
the Effective Time, and shall use its reasonable best efforts to obtain the
written acknowledgement of each holder of a share of restricted GFSB Common
Stock with regard to the conversion of such shares in accordance with the terms
of this Agreement.
2.12 DISSENTERS' RIGHTS. Notwithstanding any other provision of this
Agreement to the contrary, shares of GFSB Common Stock that are outstanding
immediately prior to the Effective Time and which are held by stockholders who
shall have not voted in favor of the Merger and who have filed with GFSB a
written objection to the Merger in accordance with the DGCL (collectively, the
"DISSENTERS' SHARES") shall not be converted into or represent the right to
receive the Merger Consideration. Such stockholders instead shall be entitled
only to such rights as are granted by applicable law, except that all
Dissenters' Shares held by stockholders who shall have failed to perfect or who
effectively shall have withdrawn or otherwise lost their rights to payment of
the fair value of their shares under the DGCL shall thereupon be deemed to have
been converted into and to have become exchangeable for, as of the Effective
Time, the right to receive, without any interest thereon, the Merger
Consideration upon surrender in the manner provided in SECTION 2.7 of the GFSB
Certificate or GFSB Certificates that, immediately prior to the Effective Time,
evidenced such shares. GFSB shall give FFBSW (i) prompt notice of any written
objections to the Merger and (ii) the opportunity to participate in all
negotiations and proceedings with respect to demands under the DGCL consistent
with the obligations of GFSB thereunder. GFSB shall not, except with the prior
written consent of FFBSW, (x) make any payment with respect to such demand, (y)
offer to settle or settle any demand for payment or (z) waive any failure to
timely deliver a written demand for payment or timely take any other action in
accordance with the DGCL.
2.13 BANK MERGER. Concurrently with or as soon as practicable after
the execution and delivery of this Agreement, First Federal Bank, a wholly owned
subsidiary of FFBSW, and Gallup Federal Savings Bank ("GALLUP FEDERAL"), a
wholly owned subsidiary of GFSB, shall enter into the Plan of Bank Merger, in
the form attached hereto as EXHIBIT C, pursuant to which Gallup Federal will
merge with and into First Federal Bank (the "BANK MERGER"). The parties intend
that the Bank Merger will become effective simultaneously with or immediately
following the Effective Time.
2.14 ALTERNATIVE STRUCTURE. Notwithstanding anything to the contrary
contained in this Agreement, prior to the Effective Time, FFBSW may specify that
the structure of the transactions contemplated by this Agreement be revised and
the parties shall enter into such alternative transactions as FFBSW may
reasonably determine to effect the purposes of this Agreement; PROVIDED,
HOWEVER, that such revised structure shall not (i) alter or change the amount or
kind of the Merger Consideration, (ii) change the intended federal income tax
consequences of the transactions contemplated by this
19
Agreement or (iii) materially impede or delay the receipt of any regulatory
approval referred to in, or the consummation of the transactions contemplated
by, this Agreement. In the event that FFBSW elects to make such a revision, the
parties agree to execute appropriate documents to reflect the revised structure.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 DISCLOSURE LETTERS. Prior to the execution and delivery of this
Agreement, FFBSW and GFSB have each delivered to the other a letter (each, its
"DISCLOSURE LETTER") setting forth, among other things, facts, circumstances and
events the disclosure of which is required or appropriate in relation to any or
all of their respective representations and warranties (and making specific
reference to the Section of this Agreement to which they relate); provided, that
no such fact, circumstance or event is required to be set forth in the
Disclosure Letter as an exception to a representation or warranty if its absence
is not reasonably likely to result in the related representation or warranty
being deemed untrue or incorrect under the standards of SECTION 6.2(A) or
SECTION 6.3(A) as applicable. The mere inclusion of a fact, circumstance or
event in a Disclosure Letter shall not be deemed an admission by a party that
such item represents a material exception or that such item is reasonably likely
to result in a Material Adverse Effect. Any matter disclosed pursuant to one
section of a party's Disclosure Letter shall be deemed disclosed for all
purposes of such party's Disclosure Letter.
3.2 REPRESENTATIONS AND WARRANTIES OF GFSB. GFSB represents and
warrants to FFBSW that, except as disclosed in GFSB's Disclosure Letter:
(a) ORGANIZATION AND QUALIFICATION. GFSB is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and is registered with the OTS as a savings and loan holding
company. GFSB has all requisite corporate power and authority to own, lease and
operate its properties and to conduct the business currently being conducted by
it. GFSB is duly qualified or licensed as a foreign corporation to transact
business and is in good standing in each jurisdiction in which the character of
the properties owned or leased by it or the nature of the business conducted by
it makes such qualification or licensing necessary, except where the failure to
be so qualified or licensed and in good standing would not have a Material
Adverse Affect on GFSB.
20
(b) SUBSIDIARIES.
(i) GFSB's Disclosure Letter sets forth with respect
to each of GFSB's Subsidiaries its name, its jurisdiction of incorporation,
GFSB's percentage ownership, the number of shares of stock owned or controlled
by GFSB and the name and number of shares held by any other person who owns any
stock of the Subsidiary. GFSB owns of record and beneficially, directly or
indirectly, all the capital stock of each of its Subsidiaries free and clear of
any Liens. There are no contracts, commitments, agreements or understandings
relating to GFSB's right to vote or dispose of any equity securities of its
Subsidiaries. GFSB's ownership interest in each of its Subsidiaries is in
compliance with all applicable laws, rules and regulations relating to equity
investments by savings and loan holding companies or federally chartered savings
associations.
(ii) Each of GFSB's Subsidiaries is a corporation or
insured depository institution duly organized and validly existing under the
laws of its jurisdiction of incorporation or organization, has all requisite
corporate power and authority to own, lease and operate its properties and to
conduct the business currently being conducted by it and is duly qualified or
licensed as a foreign corporation to transact business and is in good standing
in each jurisdiction in which the character of the properties owned or leased by
it or the nature of the business conducted by it makes such qualification or
licensing necessary, except where the failure to be so qualified or licensed and
in good standing would not have a Material Adverse Affect on such Subsidiary.
(iii) The outstanding shares of capital stock of each
Subsidiary have been validly authorized and are validly issued, fully paid and
nonassessable. No shares of capital stock of any Subsidiary of GFSB are or may
be required to be issued by virtue of any options, warrants or other rights, no
securities exist that are convertible into or exchangeable for shares of such
capital stock or any other debt or equity security of any Subsidiary, and there
are no contracts, commitments, agreements or understandings of any kind for the
issuance of additional shares of capital stock or other debt or equity security
of any Subsidiary or options, warrants or other rights with respect to such
securities.
(iv) No Subsidiary of GFSB other than Gallup Federal
is an "insured depository institution" as defined in the FDIA and the applicable
regulations thereunder. Gallup Federal is a qualified thrift lender pursuant to
Section 10(m) of the HOLA and its deposits are insured by the FDIC through the
Savings Association Insurance Fund to the fullest extent permitted by law.
Gallup Federal is a member in good standing of the Federal Home Loan Bank of
Dallas.
(c) CAPITAL STRUCTURE.
(i) The authorized capital stock of GFSB consists
of:
21
(A) 1,500,000 shares of GFSB Common Stock;
and
(B) 500,000 shares of preferred stock, par
value $.10 per share.
(ii) As of the date of this Agreement:
(A) 1,146,645 shares of GFSB Common Stock
are issued and outstanding, all of which are validly issued, fully paid and
nonassessable and were issued in full compliance with all applicable laws .
(B) no shares of GFSB preferred stock are
issued and outstanding; and
(C) no shares of GFSB Common Stock are
reserved for issuance under any director or employee benefit plan except that:
(1) 96,896shares are issued and
outstanding and held by the ESOP Trust for the GFSB Employee Stock Ownership
Plan; and
(2) 217,474 shares reserved for
issuance under the GFSB Stock Option Plan of which 100,294 shares are subject to
outstanding awards.
(iii) Set forth in GFSB's Disclosure Letter is a
complete and accurate list of all outstanding GFSB Options, including the names
of the optionees, dates of grant, exercise prices, dates of vesting, dates of
termination, shares subject to each grant and whether stock appreciation,
limited or other similar rights were granted in connection with such options.
(iv) No bonds, debentures, notes or other
indebtedness having the right to vote on any matters on which stockholders of
GFSB may vote are issued or outstanding.
(v) Except as set forth in this Section 3.2(c) and
the GFSB Disclosure Letter as of the date of this Agreement, (A) no shares of
capital stock or other voting securities of GFSB or any of its Subsidiaries are
issued, reserved for issuance or outstanding and (B) neither GFSB nor any of its
Subsidiaries has or is bound by any outstanding subscriptions, options,
warrants, calls, rights, convertible securities, commitments or agreements of
any character obligating GFSB or any of its Subsidiaries to issue, deliver or
sell, or cause to be issued, delivered or sold, any additional shares of capital
stock of GFSB or obligating GFSB or any of its Subsidiaries to grant, extend or
enter into any such option, warrant, call, right, convertible security,
commitment or agreement. Except as set forth in the GFSB Disclosure Letter, as
of the date hereof, there are no outstanding contractual obligations of GFSB or
any of its Subsidiaries to repurchase, redeem or otherwise acquire any shares of
capital stock of GFSB or any of its Subsidiaries.
22
(d) AUTHORITY. GFSB has all requisite corporate power and
authority to enter into this Agreement, to perform its obligations hereunder and
to consummate the transactions contemplated by this Agreement. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
by this Agreement have been duly authorized by all necessary corporate actions
on the part of GFSB's Board of Directors, and no other corporate proceedings on
the part of GFSB are necessary to authorize this Agreement or to consummate the
transactions contemplated by this Agreement other than the approval and adoption
of this Agreement by the REQUISITE vote of the holders of GFSB Common Stock.
This Agreement has been duly and validly executed and delivered by GFSB and
constitutes a valid and binding obligation of GFSB, enforceable against GFSB in
accordance with its terms, subject to applicable bankruptcy, insolvency and
similar laws affecting creditors' rights and remedies generally and to general
principles of equity, whether applied in a court of law or a court of equity.
(e) NO VIOLATIONS. The execution, delivery and performance
of this Agreement by GFSB do not, and the consummation of the transactions
contemplated by this Agreement will not, (i) assuming all required governmental
approvals have been obtained and the applicable waiting periods have expired,
violate any law, rule or regulation or any judgment, decree, order, governmental
permit or license to which GFSB or any of its Subsidiaries (or any of their
respective properties) is subject, (ii) violate the certificate of incorporation
or bylaws of GFSB or the similar organizational documents of any of its
Subsidiaries or (iii) constitute a breach or violation of, or a default under
(or an event which, with due notice or lapse of time or both, would constitute a
default under), or result in the termination of, accelerate the performance
required by, or result in the creation of any Lien upon any of the properties or
assets of GFSB or any of its Subsidiaries under, any of the terms, conditions or
provisions of any note, bond, indenture, deed of trust, loan agreement or other
agreement, instrument or obligation to which GFSB or any of its Subsidiaries is
a party, or to which any of their respective properties or assets may be subject
except, in the case of (iii), for any such breaches, violations or defaults that
would not, individually or in the aggregate, have a Material Adverse Effect on
GFSB.
(f) CONSENTS AND APPROVALS. No consents or approvals of, or
filings or registrations with, any Governmental Entity or any third party are
required to be made or obtained in connection with the execution and delivery by
GFSB of this Agreement or the consummation by GFSB of the Merger and the other
transactions contemplated by this Agreement, including the Bank Merger, except
for (i) filings of applications and notices with, receipt of approvals or
nonobjections from, and expiration of the related waiting period required by,
federal and state banking authorities, (ii) filing of the Registration Statement
with the SEC and declaration by the SEC of the Registration Statement's
effectiveness under the Securities Act, and (iii) the registration or
qualification of the shares of FFBSW Common Stock to be issued in exchange for
shares of GFSB Common Stock under state securities or "blue sky" laws and
Exchange Act registration and Nasdaq listing. As of the date hereof, GFSB knows
of no reason pertaining to GFSB why any of the approvals referred to in this
SECTION 3.2(F) should not
23
be obtained without the imposition of any material condition or restriction
described in SECTION 6.1(B).
(g) SECURITIES FILINGS. Since June 30, 2001, GFSB has filed
with the SEC all reports, schedules, registration statements, definitive proxy
statements and other documents that it has been required to file under the
Securities Act or the Exchange Act (collectively, "GFSB'S REPORTS"). GFSB has
made available to FFBSW an accurate and complete copy of (i) each of GFSB's
Reports and (ii) each communication mailed by GFSB to its stockholders prior to
the date hereof. None of GFSB's Reports or such communications contained any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements made therein, in light
of the circumstances under which they were made, not misleading. As of their
respective dates, all of GFSB's Reports complied in all material respects with
the applicable requirements of the Securities Act or the Exchange Act, as the
case may be, and the rules and regulations of the SEC promulgated thereunder.
Each of the financial statements (including, in each case, any notes thereto) of
GFSB included in GFSB's Reports complied as to form, as of their respective
dates of filing with the SEC, in all material respects with applicable
accounting requirements and with the published rules and regulations of the SEC
with respect thereto.
(h) FINANCIAL STATEMENTS. GFSB has previously made available
to FFBSW copies of (i) the consolidated balance sheets of GFSB and its
Subsidiaries as of June 30, 2003 and 2002 and related consolidated statements of
income, cash flows and changes in stockholders' equity for each of the years in
the two-year period ended June 30, 2003, together with the notes thereto,
accompanied by the audit report of GFSB's independent public auditors, as
reported in GFSB's Annual Report on Form 10-KSB for the year ended June 30, 2003
filed with the SEC, (ii) the unaudited consolidated balance sheet of GFSB and
its Subsidiaries as of March 31, 2004 and the related consolidated statements of
income and cash flows for the nine months ended March 31, 2004 and 2003, as
reported in GFSB's Quarterly Report on Form 10-QSB for the period ended March
31, 2004 filed with the SEC and (iii) the unaudited condensed consolidated
balance sheet of GFSB and its Subsidiaries as of June 30, 2004 and the related
unaudited consolidated statements of income and cash flows for the three and
twelve month periods ended June 30, 2004 as reported in GFSB's Reports. Such
financial statements were prepared from the books and records of GFSB and its
Subsidiaries, fairly present the consolidated financial position of GFSB and its
Subsidiaries in each case at and as of the dates indicated and the consolidated
results of operations, retained earnings and cash flows of GFSB and its
Subsidiaries for the periods indicated, and, except as otherwise set forth in
the notes thereto, were prepared in accordance with GAAP consistently applied
throughout the periods covered thereby; PROVIDED, HOWEVER, that the unaudited
financial statements for interim periods are subject to normal year-end
adjustments (which will not be material individually or in the aggregate) and
lack footnotes to the extent permitted under applicable regulations. The books
and records of GFSB and its Subsidiaries have been, and are being, maintained in
all respects in accordance with GAAP and any other legal and accounting
requirements and reflect only actual transactions.
24
(i) UNDISCLOSED LIABILITIES. Except as set forth on the GFSB
Disclosure Letter, neither GFSB nor any of its Subsidiaries has incurred any
debt, liability or obligation of any nature whatsoever (whether accrued,
contingent, absolute or otherwise and whether due or to become due) other than
liabilities reflected on or reserved against in the consolidated balance sheet
of GFSB as of March 31, 2004 as included in GFSB's Quarterly Report on Form
10-QSB for the period ended March 31, 2004, except for (i) liabilities incurred
since March 31, 2004 in the ordinary course of business consistent with past
practice that, either alone or when combined with all similar liabilities, have
not had, and would not reasonably be expected to have, a Material Adverse Effect
on GFSB and (ii) liabilities incurred for legal, accounting, financial advising
fees and out-of-pocket expenses in connection with the transactions contemplated
by this Agreement.
(j) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as
disclosed in GFSB's Reports filed with the SEC prior to the date of this
Agreement or as set forth in the GFSB Disclosure Letter, and except for actions
and omissions of GFSB taken with the prior written consent of FFBSW, which
consent shall not be unreasonably withheld, in contemplation of the transactions
contemplated hereby and for direct effects of compliance with this Agreement on
the operating performance of GFSB, including expenses incurred by GFSB in
consummating the transactions contemplated by this Agreement, since June 30,
2003: (i) GFSB and its Subsidiaries have conducted their respective businesses
only in the ordinary and usual course of such businesses consistent with their
past practices, (ii) there has not been any event or occurrence that has had, or
is reasonably expected to have, a Material Adverse Effect on GFSB or on the
ability of GFSB to complete the transactions contemplated by this Agreement,
(iii) there has been no increase in the salary, compensation, pension or other
benefits payable or to become payable by GFSB or any of its Subsidiaries to any
of their respective directors, officers or employees, other than in conformity
with the policies and practices of such entity in the usual and ordinary course
of its business, (iv) neither GFSB nor any of its Subsidiaries has paid or made
any accrual or arrangement for payment of bonuses or special compensation of any
kind or any severance or termination pay to any of their directors, officers or
employees and (v) there has been no change in any accounting principles,
practices or methods of GFSB or any of its Subsidiaries other than as required
by GAAP.
(k) LITIGATION. There are no suits, actions or legal,
administrative or arbitration proceedings pending or, to the knowledge of GFSB,
threatened against or affecting GFSB or any of its Subsidiaries or any property
or asset of GFSB or any of its Subsidiaries that (i) individually or in the
aggregate, would reasonably be expected to have a Material Adverse Effect on
GFSB or (ii) challenge the validity or propriety of the transactions
contemplated by this Agreement. To the knowledge of GFSB, there are no
investigations, reviews or inquiries by any court or Governmental Entity pending
or threatened against GFSB or any of its Subsidiaries. Except as set forth in
the GFSB Disclosure Letter, there are no judgments, decrees, injunctions, orders
or rulings of any Governmental Entity or arbitrator outstanding against GFSB or
any of its Subsidiaries .
25
(l) ABSENCE OF REGULATORY ACTIONS. Since January 1, 2000,
neither GFSB nor any of its Subsidiaries has been a party to any cease and
desist order, written agreement or memorandum of understanding with, or any
commitment letter or similar undertaking to, or has been subject to any action,
proceeding, order or directive by any Government Regulator, or has adopted any
board resolutions at the request of any Government Regulator, or has been
advised by any Government Regulator that it is contemplating issuing or
requesting (or is considering the appropriateness of issuing or requesting) any
such action, proceeding, order, directive, written agreement, memorandum of
understanding, commitment letter, board resolutions or similar undertaking.
There are no unresolved violations, criticisms or exceptions by any Government
Regulator with respect to any report or statement relating to any examinations
of GFSB or its Subsidiaries.
(m) COMPLIANCE WITH LAWS. GFSB and each of its Subsidiaries
conducts its business in compliance in all material respects with all statutes,
laws, regulations, ordinances, rules, judgements, orders or decrees applicable
to it or the employees conducting such business. GFSB and each of its
Subsidiaries has all material permits, licenses, certificates of authority,
orders and approvals of, and has made all filings, applications and
registrations with, all Governmental Entities that are required in order to
permit it to carry on its business as it is presently conducted; all such
permits, licenses, certificates of authority, orders and approvals are in full
force and effect, and to the knowledge of GFSB, no suspension or cancellation of
any of them is threatened. Except as set forth in the GFSB Disclosure Letter,
neither GFSB nor any of its Subsidiaries has been given notice or been charged
with any violation of, any law, ordinance, regulation, order, writ, rule, decree
or condition to approval of any Governmental Entity.
(n) TAXES. All federal, state, local and foreign tax returns
required to be filed by or on behalf of GFSB or any of its Subsidiaries have
been timely filed or requests for extensions have been timely filed and any such
extension shall have been granted and not have expired, and all such filed
returns are complete and accurate in all material respects. All taxes shown on
such returns, all taxes required to be shown on returns for which extensions
have been granted and all other taxes required to be paid by GFSB or any of its
Subsidiaries have been paid in full or adequate provision has been made for any
such taxes on GFSB's balance sheet (in accordance with GAAP). There is no audit
examination, deficiency assessment, tax investigation or refund litigation with
respect to any taxes of GFSB or any of its Subsidiaries, and no claim has been
made in writing by any authority in a jurisdiction where GFSB or any of its
Subsidiaries do not file tax returns that GFSB or any such Subsidiary is subject
to taxation in that jurisdiction. All taxes, interest, additions and penalties
due with respect to completed and settled examinations or concluded litigation
relating to GFSB or any of its Subsidiaries have been paid in full or adequate
provision has been made for any such taxes on GFSB's balance sheet (in
accordance with GAAP). GFSB and its Subsidiaries have not executed an extension
or waiver of any statute of limitations on the assessment or collection of any
tax due that is currently in effect. GFSB and each of its Subsidiaries has
withheld and paid all taxes required to have been withheld and paid in
connection with amounts paid or
26
owing to any employee, independent contractor, creditor, stockholder or other
third party, and GFSB and each of its Subsidiaries has timely complied with all
applicable information reporting requirements under Part III, Subchapter A of
Chapter 61 of the IRC and similar applicable state and local information
reporting requirements. Except as set forth in the GFSB Disclosure Letter,
neither GFSB nor any of its Subsidiaries is a party to any agreement, contract,
arrangement or plan that has resulted or would result, individually or in the
aggregate, in connection with this Agreement, in the payment of any "excess
parachute payments" within the meaning of Section 280G of the IRC and neither
GFSB nor any of its Subsidiaries has made any payments and is not a party to any
agreement, and does not maintain any plan, program or arrangement, that could
require it to make any payments (including any deemed payment of compensation
upon the exercise of a GFSB Option or upon the issuance of any GFSB Common
Stock), that would not be fully deductible by reason of Section 162(m) of the
IRC.
(o) AGREEMENTS.
(i) Except as set forth on the GFSB Disclosure
Letter, GFSB and its Subsidiaries are not bound by any material contract (as
defined in Item 601(b)(10) of Regulation S-K promulgated by the SEC) to be
performed after the date hereof that has not been filed with GFSB's Reports.
(ii) GFSB's Disclosure Letter lists any contract,
arrangement, commitment or understanding (whether written or oral) not filed
with GFSB's Reports to which GFSB or any of its Subsidiaries is a party or is
bound:
(A) with any executive officer or other key
employee of GFSB or any of its Subsidiaries the benefits of which are
contingent, or the terms of which are materially altered, upon the occurrence of
a transaction involving GFSB or any of its Subsidiaries of the nature
contemplated by this Agreement;
(B) with respect to the employment of any
directors, officers, employees or consultants;
(C) any of the benefits of which will be
increased, or the vesting or payment of the benefits of which will be
accelerated, by the occurrence of any of the transactions contemplated by this
Agreement, or the value of any of the benefits of which will be calculated on
the basis of any of the transactions contemplated by this Agreement (including
any stock option plan, phantom stock or stock appreciation rights plan,
restricted stock plan or stock purchase plan);
(D) containing covenants that limit the
ability of GFSB or any of its Subsidiaries to compete in any line of business or
with any person, or that involve any restriction on the geographic area in
which, or method by which, GFSB (including any successor thereof) or any of its
Subsidiaries may carry on its business (other than as may be required by law or
any regulatory agency);
27
(E) pursuant to which GFSB or any of its
Subsidiaries may become obligated to invest in or contribute capital to any
entity;
(F) not fully disclosed in GFSB's Reports
that relates to borrowings of money (or guarantees thereof) by GFSB or any of
its Subsidiaries in excess of $25,000; or
(G) which is a lease or license with respect
to any property, real or personal, whether as landlord, tenant, licensor or
licensee, involving a liability or obligation as obligor in excess of $10,000 on
an annual basis.
(iii) Except as set forth on the GFSB Disclosure
Letter, neither GFSB nor any of its Subsidiaries is in default under (and no
event has occurred which, with due notice or lapse of time or both, would
constitute a default under) or is in violation of any provision of any note,
bond, indenture, mortgage, deed of trust, loan agreement, lease or other
agreement to which it is a party or by which it is bound or to which any of its
respective properties or assets is subject and, to the knowledge of GFSB, no
other party to any such agreement (excluding any loan or extension of credit
made by GFSB or any of its Subsidiaries) is in default in any respect
thereunder.
(p) INTELLECTUAL PROPERTY. Except as set forth on the GFSB
Disclosure Letter, GFSB and each of its Subsidiaries owns or possesses valid and
binding licenses and other rights to use without payment all patents,
copyrights, trade secrets, trade names, service marks, trademarks and other
proprietary intellectual property material to its businesses, and neither GFSB
nor any of its Subsidiaries has received any notice of conflict with respect
thereto that asserts the right of others. Each of GFSB and its Subsidiaries has
performed all the obligations required to be performed by it and are not in
default under any contract, agreement, arrangement or commitment relating to any
of the foregoing.
(q) LABOR MATTERS. GFSB and its Subsidiaries are in material
compliance with all applicable laws respecting employment, retention of
independent contractors, employment practices, terms and conditions of
employment, and wages and hours. Neither GFSB nor any of its Subsidiaries is or
has ever been a party to, or is or has ever been bound by, any collective
bargaining agreement, contract or other agreement or understanding with a labor
union or labor organization with respect to its employees, nor is GFSB or any of
its Subsidiaries the subject of any proceeding asserting that it has committed
an unfair labor practice or seeking to compel it or any such Subsidiary to
bargain with any labor organization as to wages and conditions of employment
nor, to the knowledge of GFSB, has any such proceeding been threatened, nor is
there any strike, other labor dispute or organizational effort involving GFSB or
any of its Subsidiaries pending or, to the knowledge of GFSB, threatened.
(r) EMPLOYEE BENEFIT PLANS.
28
(i) GFSB's Disclosure Letter contains a complete and
accurate list of all pension, retirement, stock option, stock purchase, stock
ownership, recognition and retention, savings, stock appreciation right, profit
sharing, deferred compensation, consulting, bonus, group insurance, severance
and other benefit plans, contracts, agreements and arrangements, including, but
not limited to, "employee benefit plans," as defined in Section 3(3) of ERISA,
incentive and welfare policies, contracts, plans and arrangements and all trust
agreements related thereto with respect to any present or former directors,
officers or other employees of GFSB or any of its Subsidiaries (hereinafter
referred to collectively as the "GFSB EMPLOYEE PLANS"). True and complete copies
of each agreement, plan, trust agreement, Form 5500 filed with the IRS for the
three most recently completed plan years, the most recent actuarial report and
financial statement, the most recent summary plan description, the most recent
determination letter issued by the IRS, any Form 5310 or Form 5330 filed with
the IRS, any loan agreements and related documents evidencing any outstanding
loan to an employee stock ownership plan maintained by GFSB or any Subsidiary,
and other documents referenced in GFSB's Disclosure Letter have been made
available to FFBSW. There has been no announcement or commitment by GFSB or any
of its Subsidiaries to create an additional GFSB Employee Plan, or to amend any
GFSB Employee Plan, except for amendments required by applicable law which do
not materially increase the cost of such GFSB Employee Plan.
(ii) To the knowledge of GFSB, there is no pending or
threatened litigation, administrative action or proceeding relating to any GFSB
Employee Plan. All of the GFSB Employee Plans comply in all material respects
with all applicable requirements of ERISA, the IRC and other applicable laws,
including but not limited to the Securities Act, the Exchange Act, the Age
Discrimination in Employment Act, and any regulations and rules promulgated
thereunder, and all filings, disclosures, notices required by ERISA, the IRC,
the Securities Act, the Exchange Act, the Age Discrimination in Employment Act
and any other applicable law have been timely made. There has occurred no
"prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of
the IRC) with respect to the GFSB Employee Plans which is likely to result in
the imposition of any penalties or taxes upon GFSB or any of its Subsidiaries
under Section 502(i) of ERISA or Section 4975 of the IRC, and neither GFSB nor
any of its Subsidiaries, nor any GFSB Employee Plan, nor any trust created
thereunder, nor any trustee or administrator thereof has engaged in a
transaction in connection with which any of the aforesaid persons or entities
would reasonably be expected to be subject to either a civil liability or
penalty pursuant to Section 409 of ERISA.
(iii) No liability to the Pension Benefit Guarantee
Corporation has been or is expected by GFSB or any of its Subsidiaries to be
incurred with respect to any GFSB Employee Plan which is subject to Title IV of
ERISA ("GFSB PENSION PLAN"), or with respect to any "single-employer plan" (as
defined in Section 4001(a) of ERISA) currently or formerly maintained by GFSB or
any ERISA Affiliate. No GFSB Pension Plan had an "accumulated funding
deficiency" (as defined in Section 302 of ERISA), whether or not waived, as of
the last day of the end of the most recent plan year ending prior to the date
hereof; the fair market value of the assets of each GFSB Pension
29
Plan exceeds the present value of the "benefit liabilities" (as defined in
Section 4001(a)(16) of ERISA) under such GFSB Pension Plan as of the end of the
most recent plan year with respect to the respective GFSB Pension Plan ending
prior to the date hereof, calculated on the basis of the actuarial assumptions
used in the most recent actuarial valuation for such GFSB Pension Plan as of the
date hereof; and no notice of a "reportable event" (as defined in Section 4043
of ERISA) for which the 30-day reporting requirement has not been waived has
been required to be filed for any GFSB Pension Plan within the 12-month period
ending on the date hereof. Neither GFSB nor any of its Subsidiaries has
provided, or is required to provide, security to any GFSB Pension Plan or to any
single-employer plan of an ERISA Affiliate pursuant to Section 401(a)(29) of the
IRC. Neither GFSB, its Subsidiaries, nor any ERISA Affiliate has contributed to
any "multiemployer plan," as defined in Section 3(37) of ERISA, on or after
September 26, 1980.
(iv) Each GFSB Employee Plan that is an "employee
pension benefit plan" (as defined in Section 3(2) of ERISA) and which is
intended to be qualified under Section 401(a) of the IRC (a "GFSB QUALIFIED
PLAN") has received a favorable determination letter from the IRS, and GFSB and
its Subsidiaries are not aware of any circumstances likely to result in
revocation of any such favorable determination letter. Each GFSB Qualified Plan
that is an "employee stock ownership plan" (as defined in Section 4975(e)(7) of
the IRC) has satisfied all of the applicable requirements of Sections 409 and
4975(e)(7) of the IRC and the regulations thereunder in all material respects
and any assets of any such GFSB Qualified Plan that, as of the end of the plan
year, are not allocated to participants' individual accounts are pledged as
security for, and may be applied to satisfy, any securities acquisition
indebtedness.
(v) Neither GFSB nor any of its Subsidiaries has any
obligations for post-retirement or post-employment benefits under any GFSB
Employee Plan that cannot be amended or terminated upon 60 days' notice or less
without incurring any liability thereunder, except for coverage required by Part
6 of Title I of ERISA or Section 4980B of the IRC, or similar state laws, the
cost of which is borne by the insured individuals.
(vi) All contributions required to be made under the
terms of any GFSB Employee Plan or ERISA Affiliate plan or any employee benefit
arrangement to which GFSB or Gallup Federal is a party or sponsor have been
timely made, and all anticipated contributions and funding obligations are
accrued monthly on GFSB consolidated financial statements to the extent required
and in accordance with GAAP. GFSB and its Subsidiaries have expensed and accrued
as a liability the present value of future benefits under each applicable GFSB
Employee Plan in accordance with applicable laws and GAAP consistently applied.
None of GFSB, Gallup Federal or any ERISA Affiliate (i) has provided, or would
reasonably be expected to be required to provide, security to any GFSB Pension
Plan or to any ERISA Affiliate plan pursuant to Section 401(a)(29) of the IRC,
or (ii) has taken any action, or omitted to take any action, that has resulted,
or would reasonably be expected to result, in the imposition of a lien under
Section 412(n) of the IRC or pursuant to ERISA.
30
(vii) Except as set forth on the GFSB Disclosure
Letter, The consummation of the Merger will not, directly or indirectly
(including, without limitation, as a result of any termination of employment or
service at any time prior to or following the Effective Time) (A) entitle any
employee, consultant or director to any payment or benefit (including severance
pay, change in control benefit, or similar compensation) or any increase in
compensation, (B) result in the vesting or acceleration of any benefits under
any GFSB Employee Plan or (C) result in any increase in benefits payable under
any GFSB Employee Plan.
(viii) Neither GFSB nor Gallup Federal maintains any
compensation plans, programs or arrangements under which any payment is
reasonably likely to become non-deductible, in whole or in part, for tax
reporting purposes as a result of the limitations under Section 162(m) of the
IRC and the regulations issued thereunder.
(ix) Except as set forth on the GFSB Disclosure
Letter, the consummation of the Merger will not, directly or indirectly
(including without limitation, as a result of any termination of employment or
service at any time prior to or following the Effective Time), entitle any
current or former employee, director or independent contractor of GFSB or Gallup
Federal to any actual or deemed payment (or benefit) which would constitute a
"parachute payment" (as such term is defined in Section 280G of the IRC).
(s) PROPERTIES.
(i) A description of each parcel of real property
owned by GFSB or a Subsidiary of GFSB is set forth in GFSB's Disclosure Letter.
GFSB and each of its Subsidiaries has good and marketable title to all real
property owned by it (including any property acquired in a judicial foreclosure
proceeding or by way of a deed in lieu of foreclosure or similar transfer), in
each case free and clear of any Liens except (A) liens for taxes not yet due and
payable, (B) such easements, restrictions and encumbrances, if any, as are not
material in character, amount or extent, and do not materially detract from the
value, or materially interfere with the present use of the properties subject
thereto or affected thereby and (C) as reflected on the consolidated balance
sheet of GFSB as of March 31, 2004 included in GFSB's Reports. All real property
and fixtures of GFSB and each of its Subsidiaries are in a good state of
maintenance and repair (normal wear and tear excepted), conform in all material
respects with all applicable ordinances, regulations and zoning laws and are
considered by GFSB to be adequate for the current business of GFSB and its
Subsidiaries. To the knowledge of GFSB, none of the buildings, structures or
other improvements located on its real property encroaches upon or over any
adjoining parcel or real estate or any easement or right-of-way.
(ii) Except as set forth in the GFSB Disclosure
Letter, GFSB and each of its Subsidiaries has good and marketable title to all
tangible material personal property owned by it, free and clear of all Liens
except such encumbrances, if any, as are
31
not material in character, amount or extent, and do not materially detract from
the value, or materially interfere with the present use of the properties
subject thereto or affected thereby. With respect to personal property used in
the business of GFSB and its Subsidiaries that is leased rather than owned,
neither GFSB nor any of its Subsidiaries is in default under the terms of any
such lease.
(iii) A description of all real property leased by
GFSB or a Subsidiary of GFSB is set forth in GFSB's Disclosure Letter. Each
lease pursuant to which GFSB or any of its Subsidiaries as lessee, leases real
or personal property, is valid and in full force and effect and neither GFSB nor
any of its Subsidiaries, nor, to GFSB's knowledge, any other party to any such
lease, is in default or in violation of any material provisions of any such
lease.
(t) FAIRNESS OPINION. GFSB has received the opinion of The
Wallach Company, a division of McDonald Investments Inc. to the effect that, as
of the date hereof, the Merger Consideration is fair, from a financial point of
view, to GFSB's stockholders.
(u) FEES. Other than financial advisory services performed
for GFSB by The Wallach Company, a division of McDonald Investments pursuant to
an agreement dated September 4, 2003, a true and complete copy of which is set
forth in GFSB's Disclosure Letter, neither GFSB nor any of its Subsidiaries, nor
any of their respective officers, directors, employees or agents, has employed
any broker or finder or incurred any liability for any financial advisory fees,
brokerage fees, commissions or finder's fees, and no broker or finder has acted
directly or indirectly for GFSB or any of its Subsidiaries in connection with
this Agreement or the transactions contemplated hereby.
(v) ENVIRONMENTAL MATTERS.
(i) Except as set forth in the GFSB Disclosure
Letter, each of GFSB and its Subsidiaries, the Participation Facilities, and, to
the knowledge of GFSB, the Loan Properties are, and have been, in substantial
compliance with all Environmental Laws.
(ii) There is no suit, claim, action, demand,
executive or administrative order, directive, investigation or proceeding
pending or, to the knowledge of GFSB, threatened, before any court, governmental
agency or board or other forum against GFSB or any of its Subsidiaries or any
Participation Facility (A) for alleged noncompliance (including by any
predecessor) with, or liability under, any Environmental Law or (B) relating to
the presence of or release into the environment of any Hazardous Material,
whether or not occurring at or on a site owned, leased or operated by GFSB or
any of its Subsidiaries or any Participation Facility.
(iii) To the knowledge of GFSB, there is no suit,
claim, action, demand, executive or administrative order, directive,
investigation or proceeding pending
32
or threatened before any court, governmental agency or board or other forum
relating to or against any Loan Property (or GFSB or any of its Subsidiaries in
respect of such Loan Property) (A) relating to alleged noncompliance (including
by any predecessor) with, or liability under, any Environmental Law or (B)
relating to the presence of or release into the environment of any Hazardous
Material, whether or not occurring at a Loan Property.
(iv) Neither GFSB nor any of its Subsidiaries, has
received any notice, demand letter, executive or administrative order, directive
or request for information from any Governmental Entity or any third party
indicating that it may be in violation of, or liable under, any Environmental
Law.
(v) Except as set forth on the GFSB Disclosure
Letter, to the knowledge of GFSB and its Subsidiaries, there are no underground
storage tanks at any properties owned or operated by GFSB or any of its
Subsidiaries or any Participation Facility and no underground storage tanks have
been closed or removed from any properties owned or operated by GFSB or any of
its Subsidiaries or any Participation Facility.
(vi) Except as set forth on the GFSB Disclosure
Letter, to the knowledge of GFSB and its Subsidiaries during the period of (A)
GFSB's or its Subsidiary's ownership or operation of any of their respective
current properties or (B) GFSB's or its Subsidiary's participation in the
management of any Participation Facility, there has been no release of Hazardous
Materials in, on, under or affecting such properties. To the knowledge of GFSB,
prior to the period of (A) GFSB's or its Subsidiary's ownership or operation of
any of their respective current properties or (B) GFSB's or its Subsidiary's
participation in the management of any Participation Facility, there was no
contamination by or release of Hazardous Material in, on, under or affecting
such properties.
(w) LOAN PORTFOLIO; ALLOWANCE FOR LOAN LOSSES.
(i) With respect to each Loan owned by GFSB or its
Subsidiaries in whole or in part:
(A) The note and the related security
documents are each legal, valid and binding obligations of the maker or obligor
thereof, enforceable against such maker or obligor in accordance with their
terms subject to bankruptcy, insolvency, and other laws of general applicability
relating to or affecting creditor's rights and general equity principles;
(B) neither GFSB nor any of its
Subsidiaries, nor to the knowledge of GFSB and its Subsidiaries, any prior
holder of a Loan, has modified the note or any of the related security documents
in any material respect or satisfied, canceled or subordinated the note or any
of the related security documents except as otherwise disclosed by documents in
the applicable Loan file;
33
(C) GFSB or a Subsidiary of GFSB is the sole
holder of legal and beneficial title to each Loan (or GFSB's or its Subsidiary's
applicable participation interest, as applicable), except as otherwise
referenced on the books and records of GFSB or a Subsidiary of GFSB;
(D) the original note and the related
security documents are maintained separately by GFSB from the Loan files, and
copies of any documents in the Loan files are true and correct copies of the
documents they purport to be and have not been suspended, amended, modified,
canceled or otherwise changed except as otherwise disclosed by documents in the
applicable Loan file; and
(E) with respect to a Loan held in the form
of a participation, the participation documentation is legal, valid, binding and
enforceable in accordance with its terms, subject to bankruptcy, insolvency,
fraudulent conveyance and other laws of general applicability relating to or
affecting creditors' rights and to general equity principles.
(ii) The allowance for loan losses amounts reflected
in GFSB's balance sheet at June 30, 2004 was, and the allowance for loan losses
shown on the balance sheets in GFSB's Reports for periods ending after June 30,
2004, in the opinion of management, were or will be adequate, as of the dates
thereof, under GAAP.
(iii) The GFSB Disclosure Letter sets forth every GFSB
loan, lease or other extension of credit as of July 31, 2004 (A) which is 90
days or more delinquent, (B) has been classified as "special mention",
"substandard", "doubtful", "loss", "non-performing", or "of concern", or (C)
involves a borrower or collateral in bankruptcy, reorganization or similar
proceeding. Since March 31, 2004, there has been no material adverse change in
the items listed in parts (A), (B) and (C) of this paragraph.
(x) DEPOSITS. Except as set forth in the GFSB Disclosure
Letter, none of the deposits of Gallup Federal is a "brokered" deposit, as such
terms is defined at 12 C.F.R. Section 337.6(a)(2).
(y) ANTI-TAKEOVER PROVISIONS INAPPLICABLE. Assuming the
accuracy of the representations contained in Section 3.3(f) hereof, the
Agreement, the Plan of Bank Merger, the Merger and the Bank Merger are not
subject to any provisions of an antitakeover nature contained in GFSB's or its
Subsidiaries' organizational documents, and the provisions of any federal or
state "anti-takeover," "fair price," "moratorium," "control share acquisition"
or similar laws or regulations.
(z) MATERIAL INTERESTS OF CERTAIN PERSONS. No officer or
director of GFSB, or any "associate" (as such term is defined in Rule 12b-2
under the Exchange Act) of any such officer or director, has any material
interest in any material contract or property (real or personal), tangible or
intangible, used in or pertaining to the business of GFSB or any of its
subsidiaries, except as set forth on the GFSB Disclosure Letter.
34
(aa) INSURANCE. GFSB and its Subsidiaries are presently
insured for amounts and against such risks as is required by law or contract.
Such insurance is similar in coverage and amount as the insurance maintained by
similar financial institutions. All of the insurance policies and bonds
maintained by GFSB and its Subsidiaries are in full force and effect, GFSB and
its Subsidiaries are not in default thereunder and all material claims
thereunder have been filed in due and timely fashion.
(bb) INVESTMENT SECURITIES; DERIVATIVES.
(i) Except as indicated in the GFSB Disclosure
Letter and except for (A) restrictions that exist for securities that are
classified as "held to maturity" and (B) securities which are pledged with
respect to certain borrowings of GFSB, none of the investment securities held by
GFSB or any of its Subsidiaries is subject to any restriction (contractual or
statutory) that would materially impair the ability of the entity holding such
investment freely to dispose of such investment at any time.
(ii) Except as set forth in the GFSB Disclosure
Letter neither GFSB nor any of its Subsidiaries is a party to or has agreed to
enter into an exchange-traded or over-the-counter equity, interest rate, foreign
exchange or other swap, forward, future, option, cap, floor or collar or any
other contract that is a derivative contract (including various combinations
thereof) or owns securities that are referred to generically as "structured
notes," "high risk mortgage derivatives," "capped floating rate notes" or
"capped floating rate mortgage derivatives."
(cc) INDEMNIFICATION. Except as provided in the certificate
of incorporation or bylaws of GFSB and the similar organizational documents of
its Subsidiaries and except as set forth in GFSB's Disclosure Letter, neither
GFSB nor any of its Subsidiaries is a party to any agreement that provides for
the indemnification of any of its present or former directors, officers or
employees, or other persons who serve or served as a director, officer or
employee of another corporation, partnership or other enterprise at the request
of GFSB and, to the knowledge of GFSB, there are no claims for which any such
person would be entitled to indemnification under the certificate of
incorporation or bylaws of GFSB or the similar organizational documents of any
of its Subsidiaries, under any applicable law or regulation or under any
indemnification agreement.
(dd) CORPORATE DOCUMENTS. GFSB has previously furnished or
made available to FFBSW a complete and correct copy of the certificate of
incorporation and bylaws of GFSB and similar organizational documents of each of
GFSB's Subsidiaries, as in effect as of the date of this Agreement. Neither GFSB
nor any of GFSB's Subsidiaries is in violation of its certificate of
incorporation, bylaws or similar organizational documents. The minute books of
GFSB and each of GFSB's Subsidiaries constitute a complete and correct record of
all material actions taken by their respective boards of directors (and each
committee thereof) and their stockholders.
35
(ee) GFSB INFORMATION. The information regarding GFSB and its
Subsidiaries to be supplied by GFSB for inclusion in the Registration Statement,
any filings or approvals under applicable state securities laws, or any filing
pursuant to Rule 165 or Rule 425 under the Securities Act or Rule 14a-12 under
the Exchange Act will not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading. The Proxy Statement Prospectus (except for such
portions thereof as relate only to FFBSW or any of its Subsidiaries) will comply
as to form in all material respects with the provisions of the Exchange Act and
the rules and regulations thereunder.
(ff) COMMUNITY REINVESTMENT ACT COMPLIANCE. Gallup Federal is
in material compliance with the applicable provisions of the CRA and the
regulations promulgated thereunder except where the failure to be in compliance
would not have a Material Adverse Effect of GFSB, and Gallup Federal currently
has a CRA rating of satisfactory or better. To the knowledge of GFSB, there is
no fact or circumstance or set of facts or circumstances that would cause Gallup
Federal to fail to comply with such provisions or cause the CRA rating of Gallup
Federal to fall below satisfactory.
(gg) TAX TREATMENT OF THE MERGER. GFSB has no knowledge of
any fact or circumstance relating to it that would prevent the transactions
contemplated by this Agreement from qualifying as a reorganization under Section
368 of the IRC.
(hh) ANTI-MONEY LAUNDERING COMPLIANCE. Gallup Federal
maintains an effective anti-money laundering program and is in compliance with
federal laws and regulations relating to such anti-money laundering program.
(ii) VOTING REQUIREMENTS.
The affirmative vote at the GFSB Stockholders Meeting of
the holders of a majority of the outstanding shares of GFSB Common Stock to
approve and adopt this Agreement is the only vote of the holders of any class or
series of the GFSB's capital stock necessary to approve and adopt this Agreement
and the transactions contemplated hereby, including the Merger.
3.3 REPRESENTATIONS AND WARRANTIES OF FFBSW. FFBSW represents and
warrants to GFSB that, except as set forth in FFBSW's Disclosure Letter:
(a) ORGANIZATION AND QUALIFICATION. FFBSW is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and is a registered savings and loan holding company with the
OTS. FFBSW has all requisite corporate power and authority to own, lease and
operate its properties and to conduct the business currently being conducted by
it. FFBSW is duly qualified or licensed as a foreign corporation to transact
business and is in good standing in each jurisdiction in which the character of
the properties owned or leased by it or the nature of the business conducted by
it makes such qualification or licensing necessary, except
36
where the failure to be so qualified or licensed and in good standing would not
have a Material Adverse Effect on FFBSW.
(b) SUBSIDIARIES.
(i) FFBSW owns of record and beneficially all the
capital stock of each of its Subsidiaries free and clear of any Liens. There are
no contracts, commitments, agreements or understandings relating to FFBSW's
right to vote or dispose of any equity securities of its Subsidiaries. FFBSW's
ownership interest in each of its Subsidiaries is in compliance with all
applicable laws, rules and regulations.
(ii) Each of FFBSW's Subsidiaries is a corporation or
insured depository institution duly organized and validly existing under the
laws of its jurisdiction of incorporation or organization, has all requisite
corporate power and authority to own, lease and operate its properties and to
conduct the business currently being conducted by it and is duly qualified or
licensed as a foreign corporation to transact business and is in good standing
in each jurisdiction in which the character of the properties owned or leased by
it or the nature of the business conducted by it makes such qualification or
licensing necessary, except where the failure to be so qualified or licensed and
in good standing would not have a Material Adverse Affect on FFBSW.
(iii) The outstanding shares of capital stock of each
Subsidiary have been validly authorized and are validly issued, fully paid and
nonassessable. Except as set forth in the Disclosure Letter, no shares of
capital stock of any Subsidiary are or may be required to be issued by virtue of
any options, warrants or other rights, no securities exist that are convertible
into or exchangeable for shares of such capital stock or any other debt or
equity security of any Subsidiary, and there are no contracts, commitments,
agreements or understandings of any kind for the issuance of additional shares
of capital stock or other debt or equity security of any Subsidiary or options,
warrants or other rights with respect to such securities.
(iv) No Subsidiary of FFBSW other than First Federal
Bank is an "insured depository institution" as defined in the FDIA and the
applicable regulations thereunder. First Federal Bank's deposits are insured by
the FDIC to the fullest extent permitted by law. First Federal Bank is a member
in good standing of the Federal Home Loan Bank of Dallas.
(c) CAPITAL STRUCTURE.
(i) The authorized capital stock of FFBSW consists
of:
(A) 1,000,000 shares of FFBSW Common Stock;
and
(B) 500,000 shares of preferred stock, par
value $.01 per share.
37
(ii) As of the date of this Agreement:
(A) 395,196 shares of FFBSW Common Stock are
issued and outstanding, all of which are validly issued, fully paid and
nonassessable and were issued in full compliance with all applicable laws;
(B) no shares of FFBSW preferred stock are
issued and outstanding; and
(C) 70,885 shares of FFBSW Common Stock are
reserved for issuance under FFBSW's stock-based benefit plans and awards
covering 20,950 shares are currently outstanding thereunder.
(iii) No bonds, debentures, notes or other
indebtedness having the right to vote on any matters on which stockholders of
FFBSW may vote are issued or outstanding.
(iv) As of the date of this Agreement, (A) no shares
of capital stock or other voting securities of FFBSW are issued, reserved for
issuance or outstanding and (B) neither FFBSW nor any of its Subsidiaries has or
is bound by any outstanding subscriptions, options, warrants, calls, rights,
convertible securities, commitments or agreements of any character obligating
FFBSW or any of its Subsidiaries to issue, deliver or sell, or cause to be
issued, delivered or sold, any additional shares of capital stock of FFBSW or
obligating FFBSW or any of its Subsidiaries to grant, extend or enter into any
such option, warrant, call, right, convertible security, commitment or
agreement. Except as set forth in the FFBSW Disclosure Letter, there are no
outstanding contractual obligations of FFBSW or any of its Subsidiaries to
repurchase, redeem or otherwise acquire any shares of capital stock of FFBSW or
any of its Subsidiaries.
(v) The shares of FFBSW Common Stock to be issued in
exchange for shares of GFSB Common Stock upon consummation of the Merger in
accordance with this Agreement have been duly authorized and when issued in
accordance with the terms of this Agreement, will be validly issued, fully paid
and nonassessable, free of any liens or encumbrances and subject to no
preemptive rights or rights of first refusal created by statute, the Certificate
of Incorporation or Bylaws of FFBSW or to any agreement to which FFBSW is a
party or by which it is bound.
(vi) It is understood that FFBSW may implement a 8:1
or other stock split between the date hereof and the Effective Time, although it
is under no obligation to do so. The information contained in this part (c)
regarding FFBSW's outstanding shares and stock options shall not be deemed
incorrect to the extent it changes as a result of a stock split.
(d) AUTHORITY. Subject to the requisite approval of the
shareholders of FFBSW, FFBSW has all requisite corporate power and authority to
enter into this
38
Agreement, to perform its obligations hereunder and to consummate the
transactions contemplated by this Agreement. The execution and delivery of this
Agreement and the consummation of the transactions contemplated by this
Agreement have been duly authorized by all necessary corporate actions on the
part of FFBSW's Board of Directors, and no other corporate proceedings (other
than the approval and adoption of this Agreement by FFBSW's stockholders) on the
part of FFBSW are necessary to authorize this Agreement or to consummate the
transactions contemplated by this Agreement. This Agreement has been duly and
validly executed and delivered by FFBSW and constitutes a valid and binding
obligation of FFBSW, enforceable against FFBSW in accordance with its terms,
subject to applicable bankruptcy, insolvency and similar laws affecting
creditors' rights and remedies generally and to general principles of equity,
whether applied in a court of law or a court of equity.
(e) NO VIOLATIONS. The execution, delivery and performance
of this Agreement by FFBSW do not, and the consummation of the transactions
contemplated by this Agreement will not, (i) assuming all required governmental
approvals have been obtained and the applicable waiting periods have expired,
violate any law, rule or regulation or any judgment, decree, order, governmental
permit or license to which FFBSW or any of its Subsidiaries (or any of their
respective properties) is subject, (ii) violate the certificate of incorporation
or bylaws of FFBSW or the similar organizational documents of any of its
Subsidiaries or (iii) constitute a breach or violation of, or a default under
(or an event which, with due notice or lapse of time or both, would constitute a
default under), or result in the termination of, accelerate the performance
required by, or result in the creation of any Lien upon any of the properties or
assets of FFBSW or any of its Subsidiaries under, any of the terms, conditions
or provisions of any note, bond, indenture, deed of trust, loan agreement or
other agreement, instrument or obligation to which FFBSW or any of its
Subsidiaries is a party, or to which any of their respective properties or
assets may be subject except, in the case of (iii), for any such breaches,
violations or defaults that would not, individually or in the aggregate, have a
Material Adverse Effect on FFBSW.
(f) CONSENTS AND APPROVALS. No consents or approvals of, or
filings or registrations with, any Governmental Entity or any third party are
required to be made or obtained in connection with the execution and delivery by
FFBSW of this Agreement or the consummation by FFBSW of the Merger and the other
transactions contemplated by this Agreement, including the Bank Merger, except
for (i) filings of applications and notices with, receipt of approvals or
nonobjections from, and expiration of the related waiting period required by,
federal and state banking authorities, (ii) filing of the Registration Statement
with the SEC and declaration by the SEC of the Registration Statement's
effectiveness under the Securities Act, and (iii) the registration or
qualification of the shares of FFBSW Common Stock to be issued in exchange for
shares of FFBSW Common Stock under the Securities Exchange Act of 1934 and the
state securities or "blue sky" laws and (iv) the listing of the FFBSW Common
Stock on the National Association of Securities Dealers Automated Quotation
system ("NASDAQ") . As of the date hereof, FFBSW knows of no reason pertaining
to FFBSW why any of the
39
approvals referred to in this SECTION 3.3(F) should not be obtained without the
imposition of any material condition or restriction described in SECTION 6.1(B).
(g) FINANCIAL STATEMENTS. FFBSW has previously made
available to GFSB copies of (i) the consolidated balance sheets of FFBSW and its
Subsidiaries as of September 30, 2003 and 2002 and related consolidated
statements of income, cash flows and changes in stockholders' equity for the two
years ended September 30, 2003, together with the notes thereto, accompanied by
the audit report of FFBSW's independent public auditors, as reported in FFBSW's
Annual Report and (ii) the unaudited consolidated balance sheet of FFBSW and its
Subsidiaries as of June 30, 2004 and the related consolidated statements of
income, cash flows and changes in stockholders' equity for the nine (9) months
ended June 30, 2004. Such financial statements were prepared from the books and
records of FFBSW and its Subsidiaries, fairly present the consolidated financial
position of FFBSW and its Subsidiaries in each case at and as of the dates
indicated and the consolidated results of operations, retained earnings and cash
flows of FFBSW and its Subsidiaries for the periods indicated, and, except as
otherwise set forth in the notes thereto, were prepared in accordance with GAAP
consistently applied throughout the periods covered thereby; PROVIDED, HOWEVER,
that the unaudited financial statements for interim periods are subject to
normal year-end adjustments (which will not be material individually or in the
aggregate) and lack footnotes to the extent permitted under applicable
regulations. The books and records of FFBSW and its Subsidiaries have been, and
are being, maintained in all respects in accordance with GAAP and any other
legal and accounting requirements and reflect only actual transactions.
(h) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as
disclosed in FFBSW's Disclosure Letter, since September 30, 2003 (i) FFBSW and
its Subsidiaries have conducted their respective businesses only in the ordinary
and usual course of such business consistent with their past practice, (ii)
there has not been any event or occurrence that has had, or is reasonably
expected to have, a Material Adverse Effect on FFBSW or on the ability of FFBSW
to complete the transactions contemplated by this Agreement and (iii) there has
been no change in any accounting principles, practices or methods of FFBSW or
any of its Subsidiaries other than as required by GAAP.
(i) LITIGATION. There are no suits, actions or legal,
administrative or arbitration proceedings pending or, to the knowledge of FFBSW,
threatened against or affecting FFBSW or any of its Subsidiaries or any property
or asset of FFBSW or any of its Subsidiaries that (i) individually or in the
aggregate, would reasonably be expected to have a Material Adverse Effect on
FFBSW or (ii) challenge the validity or propriety of the transactions
contemplated by this Agreement. To the knowledge of FFBSW, there are no
investigations, reviews or inquires by any court or Governmental Entity pending
or threatened against FFBSW or any of its Subsidiaries. There are no judgments,
decrees, injunctions, orders or rulings of any Governmental Entity or arbitrator
outstanding against FFBSW or any of its Subsidiaries that, individually or in
the aggregate, would reasonably be expected to have a Material Adverse Effect on
FFBSW.
40
(j) ABSENCE OF REGULATORY ACTIONS. Since January 1, 1999,
neither FFBSW nor any of its Subsidiaries has been a party to any cease and
desist order, written agreement or memorandum of understanding with, or any
commitment letter or similar undertaking to, or has been subject to any action,
proceeding, order or directive by any Government Regulator, or has adopted any
board resolutions at the request of any Government Regulator, or has been
advised by any Government Regulator that it is contemplating issuing or
requesting any such action, proceeding, order, directive, written agreement,
memorandum of understanding, commitment letter, board resolutions or similar
undertaking. There are no unresolved violations, criticisms or exceptions by any
Government Regulator with respect to any report or statement relating to any
examinations of FFBSW or its Subsidiaries.
(k) COMPLIANCE WITH LAWS. FFBSW and each of its Subsidiaries
conducts its business in compliance with all statutes, laws, regulations,
ordinances, rules, judgements, orders or decrees applicable to it or the
employees conducting such business. FFBSW and each of its Subsidiaries has all
permits, licenses, certificates of authority, orders and approvals of, and has
made all filings, applications and registrations with, all Governmental Entities
that are required in order to permit it to carry on its business as it is
presently conducted; all such permits, licenses, certificates of authority,
orders and approvals are in full force and effect, and, to the knowledge of
FFBSW, no suspension or cancellation of any of them is threatened. Neither FFBSW
nor any of its Subsidiaries has been given notice or been charged with any
violation of, any law, ordinance, regulation, order, writ, rule, decree or
condition to approval of any Governmental Entity which, individually or in the
aggregate, would reasonably be expected to have a Material Adverse Effect on
FFBSW.
(l) TAXES. All federal, state, local and foreign tax returns
required to be filed by or on behalf of FFBSW or any of its Subsidiaries have
been timely filed or requests for extensions have been timely filed and any such
extension shall have been granted and not have expired, and all such filed
returns are complete and accurate in all material respects. All taxes shown on
such returns, all taxes required to be shown on returns for which extensions
have been granted and all other taxes required to be paid by FFBSW or any of its
Subsidiaries have been paid in full or adequate provision has been made for any
such taxes on FFBSW's balance sheet (in accordance with GAAP). There is no audit
examination, deficiency assessment, tax investigation or refund litigation with
respect to any taxes of FFBSW or any of its Subsidiaries, and no claim has been
made in writing by any authority in a jurisdiction where FFBSW or any of its
Subsidiaries do not file tax returns that FFBSW or any such Subsidiary is
subject to taxation in that jurisdiction. All taxes, interest, additions and
penalties due with respect to completed and settled examinations or concluded
litigation relating to FFBSW or any of its Subsidiaries have been paid in full
or adequate provision has been made for any such taxes on FFBSW's balance sheet
(in accordance with GAAP). FFBSW and its Subsidiaries have not executed an
extension or waiver of any statute of limitations on the assessment or
collection of any tax due that is currently in effect. FFBSW and each of its
Subsidiaries has withheld and paid all taxes required to have been withheld and
paid in connection with amounts paid or owing to any employee, independent
contractor, creditor,
41
stockholder or other third party, and FFBSW and each of its Subsidiaries has
timely complied with all applicable information reporting requirements under
Part III, Subchapter A of Chapter 61 of the IRC and similar applicable state and
local information reporting requirements.
(m) AGREEMENTS. Neither FFBSW nor any of its Subsidiaries is
in default under (and no event has occurred which, with due notice or lapse of
time or both, would constitute a default under) or is in violation of any
provision of any note, bond, indenture, mortgage, deed of trust, loan agreement,
lease or other agreement to which it is a party or by which it is bound or to
which any of its respective properties or assets is subject and, to the
knowledge of FFBSW, no other party to any such agreement (excluding any loan or
extension of credit made by FFBSW or any of its Subsidiaries) is in default in
any respect thereunder, except for such defaults or violations that would not,
individually or in the aggregate, have a Material Adverse Effect on FFBSW.
(n) FFBSW INFORMATION. The information regarding FFBSW and
its Subsidiaries to be supplied by FFBSW for inclusion in the Registration
Statement, any filings or approvals under applicable state securities laws, or
any filing pursuant to Rule 165 or Rule 425 under the Securities Act or Rule
14a-12 under the Exchange Act will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. The Proxy
Statement-Prospectus (except for such portions thereof that relate only to GFSB
or any of its Subsidiaries) will comply as to form in all material respects with
the provisions of the Exchange Act and the rules and regulations thereunder. The
Registration Statement will comply as to form in all material respects with the
provisions of the Securities Act and the rules and regulations thereunder.
(o) COMMUNITY REINVESTMENT ACT COMPLIANCE. First Federal
Bank is in material compliance with the applicable provisions of the CRA and the
regulations promulgated thereunder, except where such failure to be in
compliance would not reasonably be expected to have a Material Adverse Effect on
FFBSW. First Federal Bank currently has a CRA rating of satisfactory or better.
To the knowledge of FFBSW, there is no fact or circumstance or set of facts or
circumstances that would cause First Federal Bank to fail to comply with such
provisions or cause the CRA rating of First Federal Bank to fall below
satisfactory.
(p) TAX TREATMENT OF THE MERGER. FFBSW has no knowledge of
any fact or circumstance relating to it that would prevent the transactions
contemplated by this Agreement from qualifying as a reorganization under Section
368 of the IRC.
(q) AVAILABILITY OF FUNDS. FFBSW has and will have available
to it at the Effective Time, sources of capital sufficient to pay the aggregate
Cash Consideration and to pay any other amounts payable pursuant to this
Agreement and to effect the transactions contemplated hereby. First Federal Bank
is, and immediately following the
42
Merger and the Bank Merger will be, in compliance with all applicable capital
requirements.
(r) ANTI-MONEY LAUNDERING. First Federal Bank maintains an
effective anti-money laundering program and is in compliance with federal law
and regulations relating to such anti-money laundering program.
(s) UNDISCLOSED LIABILITIES. Except as set forth on the
FFBSW Disclosure Letter, neither FFBSW nor any of its Subsidiaries has incurred
any debt, liability or obligation of any nature whatsoever (whether accrued,
contingent, absolute or otherwise and whether due or to become due) other than
liabilities reflected on or reserved against in the consolidated balance sheet
of FFBSW as of March 31, 2004, except for (i) liabilities incurred since March
31, 2004 in the ordinary course of business consistent with past practice that,
either alone or when combined with all similar liabilities, have not had, and
would not reasonably be expected to have, a Material Adverse Effect on FFBSW and
(ii) liabilities incurred for legal, accounting, financial advising fees and
out-of-pocket expenses in connection with the transactions contemplated by this
Agreement.
(t) VOTING REQUIREMENTS. The affirmative vote at the FFBSW
Stockholders Meeting of the holders of a majority of the outstanding shares of
FFBSW Common Stock to approve and adopt this Agreement is the only vote of the
holders of any class or series of the FFBSW's capital stock necessary to approve
and adopt this Agreement and the transactions contemplated hereby, including the
Merger.
(u) TITLE TO PROPERTIES. FFBSW has good and marketable title
to all of its respective properties, interests in properties and assets, real
and personal, reflected on its balance sheets as of June 30, 2004 (the "Balance
Sheet Date") as provided to GFSB pursuant to Section 3.3(g) hereof, or acquired
after the Balance Sheet Date (except properties, interests in properties and
assets sold or otherwise disposed of since the Balance Sheet Date in the
ordinary course of business. All properties used in the operations of FFBSW are
reflected in the FFBSW's balance sheets to the extent GAAP require the same to
be reflected. All leases are in good standing, are valid and effective in
accordance with their respective terms, and there is not under any such leases
any existing default or event of default (or event which with notice or lapse of
timing, or both, would constitute a default).
(v) ENVIRONMENTAL. To the knowledge of FFBSW, FFBSW is in
compliance with all applicable Environmental Laws and FFBSW has all permits,
authorizations and approvals required under applicable Environmental Laws and is
in compliance with the requirements of such permits, authorizations and
approvals. To the knowledge of FFBSW, there are no pending or threatened
Environmental Claims (as defined below) against FFBSW. "Environmental Claims"
means any and all administrative, regulatory or judicial actions, suits,
demands, demand letters, claims, liens, notices of noncompliance or violation,
investigations or proceedings relating in any way to any Environmental Law.
43
(w) LOANS; ALLOWANCE FOR LOAN LOSSES. All of the loans on
the books of FFBSW are valid and properly documented and were made in the
ordinary course of business, and the security therefore, if any, is valid and
properly perfected. Neither the terms of such loans, nor any of the loan
documentation, nor the manner in which such loans have been administered and
services, nor FFBSW's procedures and practices of approving or rejecting loan
applications, violates any applicable law, rule or regulation thereto. The
allowance for loan losses reflected on FFBSW's consolidated balance sheet as of
June 30, 2004, is and in the case of subsequently delivered financial statements
by FFBSW to GFSB, if any, in the opinion of management, adequate under GAAP as
of such date.
ARTICLE IV
CONDUCT PENDING THE MERGER
4.1 FORBEARANCES BY GFSB. Except as expressly contemplated or
permitted by this Agreement and to the extent required by law or regulation,
during the period from the date of this Agreement to the Effective Time, GFSB
shall not, nor shall GFSB permit any of its Subsidiaries to, without the prior
written consent of FFBSW, which consent shall not be unreasonably withheld:
(a) conduct its business other than in the regular, ordinary
and usual course consistent with past practice; use commercially reasonable
efforts to maintain and preserve intact its business organization, properties,
leases, employees and advantageous business relationships and retain the
services of its officers and key employees; or take any action that would
adversely affect or delay its ability to perform its obligations under this
Agreement or to consummate the transactions contemplated hereby;
(b) (i) incur, modify, extend or renegotiate any
indebtedness for borrowed money, or assume, guarantee, endorse or otherwise as
an accommodation become responsible for the obligations of any other individual,
corporation or other entity, other than (x) demand deposits, NOW, money market
and passbook deposit accounts, (y) securities sold with an agreement to
repurchase within one year, federal funds purchases with terms of one year or
less, and borrowings from a Federal Home Loan Bank that mature within one year
and (z) certificates of deposit that mature within 36 months; PROVIDED, HOWEVER,
that in no event shall any new borrowings under this Section exceed an aggregate
of $2.0 million; PROVIDED FURTHER, that this Section shall not apply to
overnight borrowings by Gallup Federal;
(ii) prepay any indebtedness or other similar
arrangements so as to cause GFSB to incur any prepayment penalty thereunder;
(c) (i) adjust, split, combine or reclassify any capital
stock;
(ii) make, declare or pay any dividend, or make any
other distribution on its capital stock, except for regular quarterly cash
dividends at a rate not in
44
excess of the lesser of $0.125 per share of GFSB Common Stock or 45% of GFSB's
net earnings for the prior quarter;
(iii) grant any stock awards under the GFSB Employee
Plans (other than the ESOP) or grant any individual, corporation or other entity
any right to acquire any shares of its capital stock; or
(iv) issue any additional shares of capital stock or
any securities or obligations convertible or exercisable for any shares of its
capital stock except pursuant to the exercise of stock options as of the date
hereof;
(d) sell, transfer, mortgage, encumber or otherwise dispose
of any of its material properties or assets with a value of $100,000 or more to
any individual, corporation or other entity other than a Subsidiary, or cancel,
release or assign any indebtedness to any such person or any claims held by any
such person, except in the ordinary course of business consistent with past
practice or pursuant to contracts or agreements in force at the date of this
Agreement;
(e) except pursuant to contracts or agreements in force at
the date of or permitted by this Agreement, make any equity investment, either
by purchase of stock or securities, contributions to capital, property
transfers, or purchase of any property or assets of any other individual,
corporation or other entity;
(f) enter into, renew, amend or terminate any contract or
agreement, or make any change in any of its leases or contracts, other than with
respect to those contracts or agreements individually involving aggregate
payments of less than, or the provision of goods or services with a market value
of less than, $25,000 per annum and other than contracts or agreements covered
by SECTION 4.1(G);
(g) make, renegotiate, renew, increase, extend, modify or
purchase any loan, lease (credit equivalent), advance, credit enhancement or
other extension of credit, or make any commitment in respect of any of the
foregoing, except (i) in conformity with existing lending practices in amounts
not to exceed an aggregate of $350,000 per borrower with respect to any
individual borrower in the case of secured loans and $20,000 in the case of
unsecured loans or (ii) loans or advances as to which GFSB has a binding
obligation to make such loans or advances as of the date hereof;
(h) except for loans or extensions of credit made on terms
generally available to the public, make or increase any loan or other extension
of credit, or commit to make or increase any such loan or extension of credit,
to any director or executive officer of GFSB or Gallup Federal, or any entity
controlled, directly or indirectly, by any of the foregoing, other than renewals
of existing loans or commitments to loan;
(i) increase in any manner the compensation or fringe
benefits of any of its employees or directors, or pay or make any stock award,
cash or stock bonus, pension, retirement allowance or contribution to any such
employees or directors not
45
required by any binding agreement in effect as of the date hereof, except for
annual non-officer employee salary increases of not more than 5% consistent with
past practice;
(i) except as may be required by law or by the terms
of GFSB's 401(k) profit sharing plan, make contributions to become a party to,
amend, make contributions to, or commit itself to any pension, retirement,
profit-sharing or welfare benefit plan or agreement or employment agreement with
or for the benefit of any employee or director;
(ii) voluntarily accelerate the vesting of, or the
lapsing of restrictions with respect to, any stock options or other stock-based
compensation;
(iii) elect to any senior executive office any person
who is not a member of its senior executive officer team as of the date of this
Agreement or elect to its Board of Directors any person who is not a member of
its Board of Directors as of the date of this Agreement, or hire any additional
employee;
(iv) submit for approval or ratification any stock
option or similar plan to its stockholders; or
(v) make any monthly contribution to the Gallup
Federal ESOP in excess of the scheduled monthly contributions; or
(j) settle any claim, action or proceeding involving payment
by it of money damages in excess of $10,000 or impose any material restriction
on its operations or the operations of any of its Subsidiaries;
(k) amend its certificate of incorporation or bylaws, or
similar governing documents;
(l) restructure or materially change its investment
securities portfolio through purchases, sales or otherwise, or the manner in
which the portfolio is classified or reported;
(m) make any investment in any debt security, including
mortgage-backed and mortgage-related securities, other than U.S. government and
U.S. government agency securities with final maturities not greater than one
year;
(n) make any capital expenditures in excess of $5,000 other
than pursuant to binding commitments existing on the date hereof, expenditures
necessary to maintain existing assets in good repair, to make payment of
necessary taxes;
(o) establish or commit to the establishment of any new
branch or other office facilities or file any application to relocate or
terminate the operation of any banking office;
46
(p) take any action that is intended or expected to result
in any of its representations and warranties set forth in this Agreement being
or becoming untrue in any material respect at any time prior to the Effective
Time, or in any of the conditions to the Merger set forth in Article VI not
being satisfied or in a violation of any provision of this Agreement;
(q) other than pursuant to this Agreement, implement or
adopt any change in its accounting principles, practices or methods, other than
as may be required by GAAP or regulatory guidelines;
(r) knowingly take any action that would prevent or impede
the Merger from qualifying as a reorganization within the meaning of Section 368
of the IRC; or
(s) agree to take, make any commitment to take, or adopt any
resolutions of its board of directors in support of, any of the actions
prohibited by this SECTION 4.1.
Any request by GFSB or response thereto by FFBSW shall be made
in accordance with the notice provisions of SECTION 8.7 and shall note that it
is a request pursuant to this SECTION 4.1.
4.2 FORBEARANCES BY FFBSW. Except as expressly contemplated or
permitted by this Agreement, and except to the extent required by law or
regulation or any Governmental Entity, during the period from the date of this
Agreement to the Effective Time, FFBSW shall not, nor shall FFBSW permit any of
its Subsidiaries to, without the prior written consent of GFSB, which shall not
unreasonably be withheld:
(a) take any action that is intended to or expected to
result in any of its representations and warranties set forth in this Agreement
being or becoming untrue in any material respect at any time prior to the
Effective Time, or in any of the conditions to the Merger set forth in Article
VI not being satisfied or in a violation of any provision of this Agreement;
(b) knowingly take any action that would prevent or impede
the Merger from qualifying as a reorganization within the meaning of Section 368
of the IRC;
(c) amend its Certificate of Incorporation or Bylaws in a
manner that would adversely affect the benefits of the Merger to the
stockholders of GFSB;
(d) issue any shares of FFBSW Common Stock for consideration
other than cash or for a price less than the FFBSW Price, or issue any options
for securities convertible into FFBSW Common Stock at a per share price less
than the FFBSW Price, or repurchase any shares of FFBSW Common Stock or
securities convertible into FFBSW Common Stock for a per share price greater
than the FFBSW Price;
47
(e) issue any securities with greater voting rights than
FFBSW Common Stock or convertible into securities with greater voting rights
than FFBSW Common Stock, or having a preference in dividends or liquidation over
the FFBSW Common Stock;
(f) agree to take, make any commitment to take, or adopt any
resolutions of its Board of Directors in support of, any of the actions
prohibited by this SECTION 4.2; or
(g) make, declare or pay any dividend, or make any other
distribution on its capital stock, except for an annual dividend declared before
September 30, 2004 of up to $2.50 per share of FFBSW Common Stock and quarterly
dividends thereafter not to exceed $0.50 per share per quarter of FFBSW Common
Stock.
ARTICLE V
COVENANTS
5.1 ACQUISITION PROPOSALS.
(a) Except as permitted by this Agreement, GFSB shall not,
and shall not authorize or permit any of its Subsidiaries or any of its
Subsidiaries' officers, directors or employees or any investment banker,
financial advisor, attorney, accountant or other representative retained by GFSB
or any of its Subsidiaries to, directly or indirectly, (i) solicit, initiate or
knowingly encourage, or take any other action to facilitate, any inquiries,
discussions or the making of any proposal that constitutes or could reasonably
be expected to lead to an Acquisition Proposal or (ii) participate in any
discussions or negotiations, or otherwise communicate in any way with any person
(other than FFBSW), regarding an Acquisition Proposal. Notwithstanding the
foregoing, GFSB may, in response to an unsolicited Proposal that did not
otherwise result from a breach of this SECTION 5.1, (x) furnish non-public
information with respect to GFSB to the person who made such Acquisition
Proposal (y) participate in discussions or negotiations with such person
regarding such Acquisition Proposal and (z) recommend such Acquisition Proposal
to the stockholders of GFSB, if and so long as GFSB's Board of Directors
determines in good faith, , that such action is legally necessary for the proper
discharge of its fiduciary duties under applicable law.
(b) Nothing contained in this Section 5.1 shall prohibit
GFSB from at any time taking and disclosing to its stockholders a position
contemplated by Rule 14d-9 or Rule 14e-2 promulgated under the Exchange Act or
making any disclosure required by Rule 14a-9 promulgated under the Exchange Act.
(c) GFSB will notify FFBSW orally (within two calendar days)
and in writing (within three business days) of any Acquisition Proposal, any
request for non-public information that could reasonably be expected to lead to
an Acquisition Proposal, or any inquiry with respect to an Acquisition Proposal,
including, in each case, the
48
identity of the person making such Acquisition Proposal, request or inquiry and
the terms and conditions thereof, and shall provide to FFBSW any written
materials received by GFSB or any of its Subsidiaries in connection therewith..
GFSB will keep FFBSW informed of any developments with respect to any such
Acquisition Proposal, request or inquiry immediately upon the occurrence
thereof. GFSB will immediately cease and cause to be terminated any existing
activities, discussions or negotiations with any parties conducted heretofore
with respect to any of the foregoing. GFSB will take the necessary steps to
inform the appropriate individuals or entities referred to in the first sentence
of SECTION 5.1(A) of the obligations undertaken in this SECTION 5.1. GFSB will
promptly request each person (other than FFBSW) that has executed a
confidentiality agreement prior to the date hereof in connection with its
consideration of a business combination with GFSB or any of its Subsidiaries to
return or destroy all confidential information previously furnished to such
person by or on behalf of GFSB or any of its Subsidiaries. GFSB shall not
release any third party from, or waive any provisions of, any confidentiality
agreements or standstill agreement to which it or any of its Subsidiaries is a
party.
5.2 CERTAIN POLICIES AND ACTIONS OF GFSB. At the request of FFBSW,
GFSB shall (i) cause Gallup Federal to modify and change its loan, litigation
and real estate valuation policies and practices (including loan classifications
and levels of reserves) and investment and asset/liability management policies
and practices so as to be consistent with those of First Federal Bank and (ii)
recognize for financial reporting purposes of all its expenses related to the
Merger; PROVIDED, HOWEVER, that GFSB shall not be required to take such actions
prior to the date on which all regulatory and stockholder approvals required to
consummate the transactions contemplated hereby are received, and until after
receipt of written confirmation from FFBSW that the conditions to FFBSW's
obligations to close the Merger have been satisfied or waived , and PROVIDED
FURTHER, that such policies and procedures are not prohibited by GAAP or any
applicable laws and regulations. GFSB's representations, warranties and
covenants contained in this Agreement shall not be deemed to be untrue or
breached in any respect for any purpose as a consequence of any modifications or
changes undertaken solely on account of this SECTION 5.2.
5.3 ACCESS AND INFORMATION.
(a) Upon reasonable notice, GFSB shall (and shall cause
GFSB's Subsidiaries to) afford FFBSW and its representatives (including, without
limitation, directors, officers and employees of FFBSW and its affiliates and
counsel, accountants and other professionals retained by FFBSW) such reasonable
access during normal business hours throughout the period prior to the Effective
Time to the books, records (including, without limitation, tax returns and work
papers of independent auditors), contracts, properties, personnel and to such
other information relating to GFSB and GFSB's Subsidiaries as FFBSW may
reasonably request. Upon reasonable notice, FFBSW shall (and shall cause First
Federal Bank to) afford GFSB and its representatives (including, without
limitation, directors, officers and employees of GFSB and its affiliates and
counsel, accountants and other professionals retained by GFSB) such
49
reasonable access during normal business hours throughout the period prior to
the Effective Time to the executive officers of FFBSW and First Federal Bank and
to such information regarding FFBSW and its Subsidiaries as GFSB may reasonably
request. No investigation by any party pursuant to this SECTION 5.3 shall affect
or be deemed to modify any representation or warranty made by the other party in
this Agreement.
(b) From the date hereof until the Effective Time, GFSB
shall, and shall cause GFSB's Subsidiaries to, promptly provide FFBSW with (i)
a copy of each report, schedule, registration statement and other document filed
or received by it pursuant to the requirements of the Securities Act or the
Exchange Act, (ii) a copy of each report filed with federal banking regulators,
(iii) a copy of each periodic report to its senior management and all materials
relating to its business or operations furnished to its Board of Directors, (iv)
a copy of each press release made available to the public and (iv) all other
information concerning its business, properties and personnel as FFBSW may
reasonably request. Notwithstanding the foregoing, neither GFSB nor its
Subsidiaries shall be required to provide access to or to disclose information
where such access or disclosure relates to any party's compliance with this
Agreement or would violate the rights of such entity's customers, jeopardize the
attorney-client privilege of the entity in possession or control of such
information, or contravene any law, rule, regulation, order, judgment, decree or
binding agreement entered into prior to the date of this Agreement. The parties
hereto will make appropriate substitute disclosure arrangements under
circumstances in which the restrictions of the previous sentence apply.
(c) GFSB and FFBSW will not, and will cause its
representatives not to, use any information obtained pursuant to this SECTION
5.3 for any purpose unrelated to the consummation of the transactions
contemplated by this Agreement. Subject to the requirements of applicable law,
GFSB and FFBSW will keep confidential, and will cause its representatives to
keep confidential, all information and documents obtained pursuant to this
SECTION 5.3 unless such information (i) was already known to such party or an
affiliate, other than pursuant to a confidentiality agreement or other
confidential relationship, (ii) becomes available to such party or an affiliate
from other sources not known by such party to be bound by a confidentiality
agreement or other obligation of secrecy, (iii) is disclosed with the prior
written approval of the other party or (iv) is or becomes readily ascertainable
from published information or trade sources.
(d) From and after the date hereof, representatives of FFBSW
and GFSB shall meet on a regular basis to discuss and plan for the conversion of
GFSB's and its Subsidiaries' data processing and related electronic
informational systems to those used by FFBSW and its Subsidiaries with the goal
of conducting such conversion simultaneously with the consummation of the Bank
Merger.
5.4 APPLICATIONS; CONSENTS; TRANSITION.
(a) The parties hereto shall cooperate with each other and
shall use their reasonable best efforts to prepare and file as soon as
practicable after the date hereof, but in no event later than ninety (90)
calendar days, all necessary applications,
50
notices and filings to obtain all permits, consents, approvals and
authorizations of all Governmental Entities that are necessary or advisable to
consummate the transactions contemplated by this Agreement. GFSB and FFBSW shall
furnish each other with all information concerning themselves, their respective
Subsidiaries, and their respective Subsidiaries' directors, officers and
stockholders and such other matters as may be reasonably necessary or advisable
in connection with any application, notice or filing made by or on behalf of
FFBSW, GFSB or any of their respective Subsidiaries to any Governmental Entity
in connection with the transactions contemplated by this Agreement and the Plan
of Bank Merger. FFBSW and GFSB shall have the right to review in advance, and to
the extent practicable each will consult with the other on, all the information
relating to FFBSW and GFSB, as the case may be, and any of their respective
Subsidiaries, that appears in any filing made with, or written materials
submitted to, any Governmental Entity pursuant to this SECTION 5.4(A).
(b) As soon as practicable after the date hereof, each of
the parties hereto shall, and they shall cause their respective Subsidiaries to,
use its best efforts to obtain any consent, authorization or approval of any
third party that is required to be obtained in connection with the transactions
contemplated by this Agreement and the Plan of Bank Merger.
(c) FFBSW and GFSB shall, and shall cause their respective
Subsidiaries to, use their reasonable best efforts to facilitate the integration
of the GFSB and its Subsidiaries, with the businesses of FFBSW and its
Subsidiaries to be effective as of the Effective Time. Without limiting the
generality of the foregoing, from the date hereof through the Effective Time and
consistent with the performance of their day-to-day operations and the
continuous operation of the GFSB and its Subsidiaries in the ordinary course of
business, GFSB and its Subsidiaries shall cause their employees to use their
reasonable best efforts to provide support and assistance to FFBSW on such tasks
as may be reasonably required to result in a successful integration at the
Effective Time.
5.5 ANTITAKEOVER PROVISIONS. GFSB and its Subsidiaries shall take
all steps required by any relevant federal or state law or regulation or under
any relevant agreement or other document to exempt or continue to exempt FFBSW,
First Federal Bank, the Agreement, the Plan of Bank Merger and the Merger from
any provisions of an antitakeover nature in GFSB's or its Subsidiaries'
certificate of incorporation and bylaws, or similar organizational documents,
and the provisions of any federal or state antitakeover laws.
5.6 ADDITIONAL AGREEMENTS. Subject to the terms and conditions
herein provided, each of the parties hereto agrees to use all reasonable efforts
to take promptly, or cause to be taken promptly, all actions and to do promptly,
or cause to be done promptly, all things necessary, proper or advisable under
applicable laws and regulations to consummate and make effective the
transactions contemplated by this Agreement as expeditiously as possible,
including using efforts to obtain all necessary actions or non-actions,
extensions, waivers, consents and approvals from all applicable Governmental
Entities, effecting all necessary registrations, applications and filings
(including, without
51
limitation, filings under any applicable state securities laws) and obtaining
any required contractual consents and regulatory approvals.
5.7 PUBLICITY. The initial press release announcing this Agreement
shall be a joint press release and thereafter GFSB and FFBSW shall consult with
each other prior to issuing any press releases or otherwise making public
statements with respect to the Merger and any other transaction contemplated
hereby and in making any filings with any Governmental Entity or with any
national securities exchange or market with respect thereto; PROVIDED, HOWEVER,
that nothing in this SECTION 5.7 shall be deemed to prohibit any party from
making any disclosure which its counsel deems necessary in order to satisfy such
party's disclosure obligations imposed by law.
5.8 STOCKHOLDER MEETINGS.
(a) GFSB will submit to its stockholders this Agreement and
any other matters required to be approved or adopted by stockholders in order to
carry out the intentions of this Agreement. In furtherance of that obligation,
and subject to receipt by GFSB from FFBSW of a written confirmation of a
financial plan for the funding of the Merger Consideration by FFBSW, GFSB will
take, in accordance with applicable law and its certificate of incorporation and
bylaws, all action necessary to call, give notice of, convene and hold a meeting
of its stockholders (the "GFSB STOCKHOLDER MEETING") as promptly as practicable
within 60 days of the effectiveness of the Registration Statement for the
purpose of considering and voting on approval and adoption of this Agreement and
the transactions provided for in this Agreement. GFSB's Board of Directors will
use all reasonable best efforts to obtain from GFSB's stockholders a vote
approving this Agreement. Except as otherwise provided in Section 5.1(a) of this
Agreement and subject to receipt by GFSB of an updated fairness opinion dated no
earlier than three (3) calendar days prior to the mailing, (i) GFSB's Board of
Directors shall recommend to GFSB's stockholders approval of this Agreement,
(ii) the Proxy Statement-Prospectus shall include a statement to the effect that
GFSB's Board of Directors has recommended that GFSB's stockholders vote in favor
of the approval of this Agreement and (iii) neither GFSB's Board of Directors
nor any committee thereof shall withdraw, amend or modify, or propose or resolve
to withdraw, amend or modify in a manner adverse to FFBSW, the recommendation of
GFSB's Board of Directors that GFSB's stockholders vote in favor of approval of
this Agreement or make any statement in connection with the GFSB Stockholder
Meeting inconsistent with such recommendation provided that nothing in this
Agreement shall prevent GFSB's Board of Directors from withholding, withdrawing,
amending or modifying its recommendation if GFSB's Board of Directors
determines, after consultation with its outside counsel, that such action is
legally required in order for the directors to comply with their fiduciary
duties to GFSB's shareholders under applicable law; PROVIDED FURTHER, that
Section 5.1 shall govern withholding, withdrawing, amending or modifying of such
recommendation in the circumstances described therein.
(b) FFBSW will submit to its stockholders this Agreement and
any other matters required to be approved or adopted by stockholders in
connection with this Agreement. In furtherance of that obligation, FFBSW will
take, in accordance with
52
applicable law and its certificate of incorporation and bylaws, all action
necessary to call, give notice of, convene and hold a meeting of its
stockholders (the "FFBSW STOCKHOLDER Meeting") as promptly as practicable (and
in any event within sixty (60) days of the effectiveness of the Registration
Statement, as such term is defined in Section 5.9 hereof) for the purpose of
considering and voting on approval and adoption of this Agreement and the
transactions provided for in this Agreement. FFBSW's Board of Directors will use
all reasonable best efforts to obtain from FFBSW's stockholders a vote approving
this Agreement. In connection therewith, (i) FFBSW's Board of Directors shall
recommend to FFBSW's stockholders approval of this Agreement, (ii) the Proxy
Statement-Prospectus shall include a statement to the effect that FFBSW's Board
of Directors has recommended that FFBSW's stockholders vote in favor of the
approval of this Agreement and (iii) neither FFBSW's Board of Directors nor any
committee thereof shall withdraw, amend or modify, or propose or resolve to
withdraw, amend or modify in a manner adverse to FFBSW, the recommendation of
FFBSW's Board of Directors that FFBSW's stockholders vote in favor of approval
of this Agreement or make any statement in connection with the FFBSW Stockholder
Meeting inconsistent with such recommendation.
5.9 REGISTRATION OF FFBSW COMMON STOCK.
(a) As promptly as reasonably practicable following the date
hereof, (and in any event no later than ninety (90) days of the date hereof),
FFBSW shall prepare and file with the SEC a registration statement on Form S-4
with respect to the issuance of FFBSW Common Stock in the Merger (such Form S-4,
and any amendments or supplements thereto, the "REGISTRATION STATEMENT"). The
Registration Statement shall contain proxy materials relating to the matters to
be submitted to the GFSB stockholders at the GFSB Stockholders Meeting and the
FFBSW stockholders at the FFBSW Stockholders Meeting which shall also constitute
the prospectus relating to the shares of FFBSW Common Stock to be issued in the
Merger (such proxy statement/prospectus, and any amendments or supplements
thereto, the "PROXY STATEMENT-PROSPECTUS"). GFSB will furnish to FFBSW the
information required to be included in the Registration Statement with respect
to its business and affairs and shall have the right to review and consult with
FFBSW and approve the form of, and any characterizations of such information
included in, the Registration Statement prior to its being filed with the SEC.
FFBSW shall use reasonable best efforts to have the Registration Statement
declared effective by the SEC and to keep the Registration Statement effective
as long as is necessary to consummate the Merger and the transactions
contemplated hereby. GFSB will use its best efforts to cause the Proxy Statement
Prospectus to be mailed to GFSB's stockholders promptly as practicable after the
Registration Statement is declared effective under the Securities Act. FFBSW
will advise GFSB, promptly after it receives notice thereof, of the time when
the Registration Statement has become effective, the issuance of any stop order,
the suspension of the qualification of the FFBSW Common Stock issuable in
connection with the Merger for offering or sale in any jurisdiction, or any
request by the SEC for amendment of the Proxy Statement-Prospectus or the
Registration Statement. If at any time prior to the Effective Time, any
information relating to FFBSW or GFSB, or any of their respective affiliates,
officers or directors, is discovered by
53
FFBSW or GFSB which should be set forth in an amendment or supplement to any of
the Registration Statement or the Proxy Statement-Prospectus so that any of such
documents would not include any misstatement of a material fact or omit to state
any material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, the party which
discovers such information shall promptly notify the other party hereto and, to
the extent required by law, rules or regulations, an appropriate amendment or
supplement describing such information shall be promptly filed by FFBSW with the
SEC and disseminated by GFSB to the stockholders of GFSB;
(b) FFBSW shall also take any action required to be taken
under any applicable state securities laws in connection with the Merger and
each of GFSB and FFBSW shall furnish all information concerning it and the
holders of GFSB Common Stock as may be reasonably requested in connection with
any such action;
(c) FFBSW shall at all times reserve and have available a
sufficient number of shares of FFBSW Common Stock to pay the Stock
Consideration;
(d) FFBSW shall also take any and all action required for
the FFBSW Common Stock to become registered under the Exchange Act; and
(e) Nasdaq listing. FFBSW will use its best efforts to
obtain approval for listing on the NASDAQ, as of the Effective Time.
5.10 AFFILIATE LETTERS. GFSB shall use its best efforts to cause each
director, executive officer and other person who is an "affiliate" of GFSB under
Rule 145 of the Securities Act to deliver to FFBSW as soon as practicable and
prior to the mailing of the Proxy Statement-Prospectus executed letter
agreements, each substantially in the form attached hereto as EXHIBIT D,
providing that such person will comply with Rule 145.
5.11 NOTIFICATION OF CERTAIN MATTERS. Each party shall give prompt
notice to the other of: (i) any event or notice of, or other communication
relating to, a default or event that, with notice or lapse of time or both,
would become a default, received by it or any of its Subsidiaries subsequent to
the date of this Agreement and prior to the Effective Time, under any contract
material to the financial condition, properties, businesses or results of
operations of each party and its Subsidiaries taken as a whole to which each
party or any Subsidiary is a party or is subject; and (ii) any event, condition,
change or occurrence which individually or in the aggregate has, or which is
reasonably likely to result in a Material Adverse Effect. Each of GFSB and FFBSW
shall give prompt notice to the other party of any notice or other communication
from any third party alleging that the consent of such third party is or may be
required in connection with any of the transactions contemplated by this
Agreement.
5.12 EMPLOYEE BENEFITS MATTERS.
(a) FFBSW will review all GFSB Employee Plans to determine
whether to maintain, terminate or continue such plans. All GFSB and Gallup
54
Federal employees who become participants in an FFBSW compensation and benefit
plan shall, for purposes of determining eligibility for and for any applicable
vesting periods of such employee benefits only (and not for pension benefit
accrual purposes) be given credit for meeting eligibility and vesting
requirements in such plans for service as an employee of GFSB or Gallup Federal
prior to the Effective Time. This Agreement shall not be construed to limit the
ability of FFBSW or First Federal Bank to terminate the employment of any
employee or to review employee benefits programs from time to time and to make
such changes as they deem appropriate.
(b) The GFSB Bancorp, Inc. Directors Deferred Compensation
Agreement and the Gallup Federal Savings Bank Directors Deferred Compensation
Agreement (the "Deferred Compensation Agreements") shall be terminated prior to
the Effective Time, and benefits thereunder paid out to participants in a lump
sum immediately prior to the Effective Time, provided, however, that each such
person entitled to a payment under a Deferred Compensation Agreement shall be
required to enter into an acknowledgement and release that the amounts paid
thereunder are in complete satisfaction of all amounts due under such Deferred
Compensation Agreement.
(c) All persons who are employees of Gallup Federal
immediately prior to the Effective Time and whose employment is not specifically
terminated at or prior to the Effective Time (a "CONTINUING Employee") shall, at
the Effective Time, become employees of First Federal Bank; PROVIDED, HOWEVER,
that in no event shall any of Gallup Federal's employees be officers of First
Federal Bank, or have or exercise any power or duty conferred upon such an
officer, unless and until duly elected or appointed to such position in
accordance with the bylaws of First Federal Bank and that FFBSW shall use
reasonable efforts to offer a position to all employees of Gallup Federal.
Except for Continuing Employees who have employment contracts with GFSB or
Gallup Federal as of the date hereof or enter into employment contracts with
FFBSW or First Federal Bank, all of the Continuing Employees shall be employed
at the will of First Federal Bank and no contractual right to employment shall
inure to such employees because of this Agreement. In the event any Continuing
Employee without an employment contact or change-in-control agreement is
terminated without cause within one year following the Effective Time, he or she
shall be entitled to receive, within ten (10) days of such termination, a cash
severance payment equal to one (1) week salary for each full year of continuous
service he or she has with GFSB, or Gallup Federal, First Federal Bank or FFBSW,
up to a maximum of eight (8) weeks salary.
(d) As of the Effective Time, FFBSW shall provide
employer-provided health and other employee welfare benefit plans to each
Continuing Employee on the same basis as it provides such coverage to FFBSW
employees, except that any eligibility waiting period otherwise applicable under
such plans to new employees shall not apply to a Continuing Employee or their
covered dependents who were covered under a similar GFSB Employee Plan at the
Effective Time.
(e) With respect to accrued but unused vacation time to
which any Continuing Employee is entitled pursuant to the vacation policy
55
applicable to such Continuing Employee immediately prior to the Effective Time,
FFBSW and its Subsidiaries shall assume the liability only for any vacation time
accrued in 2004 and will allow such Continuing Employee to use such accrued 2004
vacation time in accordance with the provisions of FFBSW's vacation policy as in
effect at the Effective Time as if such vacation time accrued in 2004 were
accrued while in the employ of FFBSW or one of its Subsidiaries.
(f) (i) Each participant in the GFSB Employee Stock
Ownership Plan ("GFSB ESOP") not fully vested will become fully vested in his or
her GFSB ESOP account as of the Effective Time. The GFSB ESOP will terminate
upon the Effective Time in accordance with its terms in effect as of the date of
this Agreement. Upon the repayment of the GFSB ESOP loan, the remaining shares
in the loan suspense account will be allocated (to the extent permitted by
Sections 401(a), 415 or 4975 of the IRC and the applicable laws and regulations
including, without limitation, the applicable provisions of ERISA) to GFSB ESOP
participants (as determined under the terms of the GFSB ESOP). Between the date
hereof and the Effective Time, the existing GFSB ESOP indebtedness shall
continue to be repaid in monthly installments pursuant to the terms of the ESOP
Loan Agreement dated as of June 29, 1995 by and between the GFSB Employee Stock
Ownership Plan Trust and GFSB, and GFSB or Gallup Federal shall make only such
contributions to the GFSB ESOP as necessary to fund such payments. Any
indebtedness of the GFSB ESOP remaining as of the Effective Time shall be repaid
from the trust associated with the GFSB ESOP through application of the Merger
Consideration received by the GFSB ESOP. GFSB and FFBSW agree that, subject to
the conditions described herein, as soon as possible after the Effective Time
and repayment of the GFSB ESOP loan and subject to applicable law, participants
in the GFSB ESOP will receive lump sum distributions of their GFSB ESOP
accounts.
(ii) The actions relating to the termination of the
GFSB ESOP will be adopted conditioned upon the consummation of the Merger and
upon receiving a favorable determination letter from the IRS with regard to the
continued qualification of the GFSB ESOP after any required amendments. GFSB
shall submit appropriate requests for any such determination letter to the IRS
and will use its best efforts to seek the issuance of such letter as soon as
possible following the date hereof. GFSB will adopt such additional amendments
to the GFSB ESOP as may be reasonably required by the IRS as a condition to
granting such determination letter, provided that such amendments do not
substantially change the terms outlined herein or would result in a Material
Adverse Effect on GFSB or result in an additional material liability to FFBSW.
(iii) As of and following the Effective Time, FFBSW
shall cause the GFSB ESOP to be maintained for the exclusive benefit of
employees and other persons who were participants or beneficiaries therein prior
to the Effective Time and proceed with termination of the GFSB ESOP through
distribution of its assets in accordance with its terms, subject to the
amendments described herein and as otherwise may be required to comply with
applicable law or to obtain a favorable determination letter from the IRS as to
the continuing qualified status of the GFSB ESOP, provided,
56
however, that no such distributions of the GFSB ESOP shall occur until a
favorable termination ruling has been received from the IRS.
(g) Subject to the foregoing paragraphs, FFBSW agrees to
honor in accordance with their terms all benefits vested as of the Effective
Time under the GFSB Employee Plans and all vested benefits or other vested
amounts earned or accrued through such time under contracts, arrangement
commitments or understandings described in GFSB's Disclosure Letter, including
benefits which vest or are otherwise accrued as a result of the consummation of
the transactions contemplated by this Agreement.
5.13 INDEMNIFICATION.
(a) From and after the Effective Time through the sixth
anniversary of the Effective Time, FFBSW agrees to indemnify and hold harmless
each present and former director, officer and employee of GFSB and its
Subsidiaries and each director, officer or employee of GFSB and its Subsidiaries
that is serving or has served as a director, officer, employee, representative
or agent of another entity expressly at GFSB's request or direction (each, an
"INDEMNIFIED PARTY"), against any costs or expenses (including reasonable
attorneys' fees), judgments, fines, amounts paid in settlement, losses, claims,
damages or liabilities incurred in connection with any claim, action, suit,
proceeding or investigation, whether civil, criminal, administrative or
investigative, arising out of matters existing or occurring at or prior to the
Effective Time (including the transactions contemplated by this Agreement),
whether asserted or claimed prior to, at or after the Effective Time, as they
are from time to time incurred, in each case to the fullest extent such person
would have been indemnified or have the right to advancement of expenses
pursuant to GFSB's certificate of incorporation and bylaws and, to the extent
applicable, any agreement between GFSB and Gallup Federal and such Indemnified
Party which are included in the GFSB Disclosure Letter, as in effect on the date
of this Agreement, and to the fullest extent permitted by law.
(b) Any Indemnified Party wishing to claim indemnification
under SECTION 5.13(A), upon learning of any such claim, action, suit, proceeding
or investigation, shall promptly notify FFBSW thereof, but the failure to so
notify shall not relieve FFBSW of any liability it may have hereunder to such
Indemnified Party if such failure does not materially and substantially
prejudice FFBSW.
(c) FFBSW shall maintain GFSB's existing directors' and
officers' liability insurance policy (or provide a policy providing comparable
coverage and amounts on terms no less favorable to the persons currently covered
by GFSB's existing policy, including FFBSW's existing policy if it meets the
foregoing standard) covering persons who are currently covered by such insurance
for a period of three (3) years after the Effective Time; PROVIDED, HOWEVER,
that in no event shall FFBSW be obligated to expend, in order to maintain or
provide insurance coverage pursuant to this SECTION 5.13(C), an amount in excess
of 150% of the annual premiums paid by GFSB as of the date hereof for such
insurance ("MAXIMUM INSURANCE AMOUNT"); PROVIDED FURTHER, that
57
if the amount of the annual premiums necessary to maintain or procure such
insurance coverage exceeds the Maximum Insurance Amount, FFBSW shall obtain the
most advantageous coverage obtainable for an annual premium equal to the Maximum
Insurance Amount.
(d) In the event FFBSW or any of its successors or assigns
(i) consolidates with or merges into any other person or entity and shall not be
the continuing or surviving corporation or entity of such consolidation or
merger or (ii) transfers or conveys all or substantially all of its properties
and assets to any person or entity, then, and in each such case, to the extent
necessary, proper provision shall be made so that the successors and assigns of
FFBSW assume the obligations set forth in this SECTION 5.13.
(e) The provisions of this SECTION 5.13 are intended to be
for the benefit of, and shall be enforceable by, each Indemnified Party and his
or her representatives.
5.14 SECTION 16 MATTERS. Prior to the Effective Time, GFSB and FFBSW
shall take all such steps as may be required to cause any dispositions of GFSB
Common Stock (including derivative securities with respect to GFSB Common Stock)
or acquisitions of FFBSW Common Stock resulting from the transactions
contemplated by this Agreement by each individual who is subject to the
reporting requirements of Section 16(a) of the Exchange Act with respect to GFSB
to be exempt under Rule 16b-3 promulgated under the Exchange Act. GFSB agrees to
promptly furnish FFBSW with all requisite information necessary for FFBSW to
take the actions contemplated by this SECTION 5.14.
5.15 DIVIDENDS. After the date of this Agreement, GFSB shall declare
and pay dividends on the GFSB Common Stock on a quarterly basis and each of
FFBSW and GFSB shall coordinate with the other regarding the payment of
dividends with respect to the FFBSW Common Stock and the GFSB Common Stock and
the record dates and payment dates relating thereto, it being the intention of
the parties hereto that holders of FFBSW Common Stock and GFSB Common Stock
shall not receive two dividends, or fail to receive one dividend, for any single
calendar quarter with respect to their shares of FFBSW Common Stock and/or GFSB
Common Stock or any shares of FFBSW Common Stock that any such holder receives
in exchange for such shares of GFSB Common Stock in the Merger.
ARTICLE VI
CONDITIONS TO CONSUMMATION
6.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS. The respective
obligations of each party to effect the Merger shall be subject to the
satisfaction of the following conditions:
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(a) STOCKHOLDER APPROVAL. This Agreement shall have been
approved by the requisite vote of GFSB's and FFBSW's stockholders in accordance
with applicable laws and regulations.
(b) REGULATORY APPROVALS. All approvals, consents or waivers
of any Governmental Entity required to permit consummation of the transactions
contemplated by this Agreement shall have been obtained and shall remain in full
force and effect, and all statutory waiting periods shall have expired;
PROVIDED, HOWEVER, that none of such approvals, consents or waivers shall
contain any condition or requirement that would reasonably be likely to have or
result in a Material Adverse Effect on FFBSW and its Subsidiaries after the
Effective Time.
(c) NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No party
hereto shall be subject to any order, decree or injunction of a court or agency
of competent jurisdiction that enjoins or prohibits the consummation of the
Merger or the Bank Merger and no Governmental Entity shall have instituted any
proceeding for the purpose of enjoining or prohibiting the consummation of the
Merger or the Bank Merger or any transactions contemplated by this Agreement. No
statute, rule or regulation shall have been enacted, entered, promulgated or
enforced by any Governmental Entity which prohibits or makes illegal
consummation of the Merger.
(d) REGISTRATION STATEMENT; BLUE SKY LAWS. The Registration
Statement shall have been declared effective by the SEC and no proceedings shall
be pending or threatened by the SEC to suspend the effectiveness of the
Registration Statement, and FFBSW shall have received all required approvals by
state securities or "blue sky" authorities with respect to the transactions
contemplated by this Agreement.
(e) THIRD PARTY CONSENTS. FFBSW and GFSB shall have obtained
the consent or approval of each person (other than the governmental approvals or
consents referred to in SECTION 6.1(B)) whose consent or approval shall be
required to consummate the transactions contemplated by this Agreement, except
those for which failure to obtain such consents and approvals would not,
individually or in the aggregate, have a Material Adverse Effect on FFBSW (after
giving effect to the consummation of the transactions contemplated hereby).
(f) TAX OPINION. FFBSW and GFSB shall have received an
opinion from Luse Gorman Pomerenk & Schick, P.C., dated as of the Closing Date,
in form and substance customary in transactions of the type contemplated hereby,
and reasonably satisfactory to GFSB and FFBSW, as the case may be, substantially
to the effect that on the basis of the facts, representations and assumptions
set forth in such opinions which are consistent with the state of facts existing
at the Effective Time, (i) the Merger will be treated for federal income tax
purposes as a reorganization within the meaning of Section 368(a) of the IRC,
(ii) FFBSW and GFSB will each be a party to that reorganization within the
meaning of Section 368(b) of the IRC and (iii) except to the extent of any cash
received in lieu of a fractional share interest in FFBSW Common Stock and cash
consideration received in the Merger, no gain or loss will be recognized by the
59
stockholders of GFSB who exchange their GFSB Common Stock for FFBSW Common Stock
pursuant to the Merger. Such opinion may be based on, in addition to the review
of such matters of fact and law as counsel considers appropriate,
representations contained in certificates of officers of FFBSW, GFSB and others.
6.2 CONDITIONS TO THE OBLIGATIONS OF FFBSW. The obligations of FFBSW
to effect the Merger shall be further subject to the satisfaction of the
following additional conditions, any one or more of which may be waived by FFBSW
in accordance with SECTION 8.3 hereof:
(a) GFSB'S REPRESENTATIONS AND WARRANTIES. Each of the
representations and warranties of GFSB contained in SECTIONS 3.2(A) (i) shall be
true and correct in all material respects as of the date of this Agreement; and
(ii) shall be true and correct as of the Effective Date as though made anew as
of the Effective Date, unless the representation and warranty relates only to a
specified earlier date; PROVIDED HOWEVER, in the case of clause (ii),
inaccuracies in such representations and warranties arising from events
occurring after the date of this Agreement will be disregarded if the
circumstances giving rise to such inaccuracies (considered collectively) do not
have, and are not likely to result in, a Material Adverse Effect on GFSB;
PROVIDED, HOWEVER, that, for purposes of determining the accuracy of such
representations and warranties, all "Material Adverse Effect" qualifications and
other materiality qualifications contained in such representations and
warranties shall be disregarded.
(b) PERFORMANCE OF GFSB'S OBLIGATIONS. GFSB shall have
performed in all material respects all obligations required to be performed by
it under this Agreement at or prior to the Effective Time.
(c) OFFICERS' CERTIFICATE. FFBSW shall have received a
certificate signed by the chief executive officer and the chief financial or
principal accounting officer of GFSB to the effect that the conditions set forth
in SECTIONS 6.2(A) and (B) have been satisfied.
(d) NO VIOLATION OF AGREEMENTS WITH EMPLOYEES. Prior to the
Effective Time, there shall be no violation of (1) the employment agreement
entered into between First Federal Bank and Jerry R. Spurlin, (2) the employment
agreement entered into between First Federal Bank and Leonard C. Scalzi, and (3)
any of the mutual release and non-compete agreements entered into by other
employees of GFSB.
(e) MINIMUM CAPITAL. Immediately prior to the Effective
Time, Gallup Federal shall have capital levels at least equal to those capital
levels reported by it as of December 31, 2003 on Schedule CCR of the Thrift
Financial Report filed with the OTS, less merger related expenses up to
$1,073,840 and without giving effect to the impact of the exercise of any GFSB
Stock Options.
60
6.3 CONDITIONS TO THE OBLIGATIONS OF GFSB. The obligations of GFSB
to effect the Merger shall be further subject to the satisfaction of the
following additional conditions, any one or more of which may be waived by GFSB:
(a) FFBSW'S REPRESENTATIONS AND WARRANTIES. Each of the
representations and warranties of FFBSW contained in SECTIONS 3.3(A) (i) shall
be true and correct in all material respects as of the date of this Agreement;
and (ii) shall be true and correct as of the Effective Date as though made anew
as of the Effective Date, unless the representation and warranty relates only to
a specified earlier date; PROVIDED HOWEVER, in the case of clause (ii),
inaccuracies in such representations and warranties arising from events
occurring after the date of this Agreement will be disregarded if the
circumstances giving rise to such inaccuracies (considered collectively) do not
have, and are not likely to result in, a Material Adverse Effect on FFBSW;
PROVIDED, however, that, for purposes of determining the accuracy of such
representations and warranties, all "Material Adverse Effect" qualifications and
other materiality qualifications contained in such representations and
warranties shall be disregarded.
(b) PERFORMANCE OF FFBSW'S OBLIGATIONS. FFBSW shall have
performed in all material respects all obligations required to be performed by
it under this Agreement at or prior to the Effective Time.
(c) OFFICERS' CERTIFICATE. GFSB shall have received a
certificate signed by the chief executive officer and the chief financial or
principal accounting officer of FFBSW to the effect that the conditions set
forth in SECTIONS 6.3(A) and (B) have been satisfied.
(d) DEPOSIT OF MERGER CONSIDERATION. FFBSW shall have
deposited with the Exchange Agent sufficient cash to pay the aggregate Cash
Consideration and shall have irrevocably instructed its transfer agent to issue
shares for the aggregate Stock Consideration.
(e) MINIMUM CAPITAL. Immediately prior to the Effective
Time, First Federal Bank shall have capital levels at least equal to those
capital levels reported by the it as of December 31, 2003 on Schedule CCR of the
Thrift Financial Report filed with the OTS, less merger related expenses up to
$765,000 and without giving effect to the exercise of any FFBSW stock options.
ARTICLE VII
TERMINATION
7.1 TERMINATION. This Agreement may be terminated, and the Merger
abandoned, at any time prior to the Effective Time, by action taken or
authorized by the Board of Directors of the terminating party, either before or
after any requisite stockholder approval:
61
(a) by the mutual written consent of FFBSW and GFSB; or
(b) by either FFBSW or GFSB, in the event of the failure of
GFSB's stockholders to approve the Agreement at the GFSB Stockholder Meeting;
PROVIDED, HOWEVER, that GFSB shall only be entitled to terminate the Agreement
pursuant to this clause if it has complied in all material respects with its
obligations under SECTION 5.8; or
(c) by either FFBSW or GFSB, upon written notice to the
other, if either (i) any approval, consent or waiver of a Governmental Entity
required to permit consummation of the transactions contemplated by this
Agreement shall have been denied or (ii) any Governmental Entity of competent
jurisdiction shall have issued a final, unappealable order enjoining or
otherwise prohibiting consummation of the transactions contemplated by this
Agreement; or
(d) by either FFBSW or GFSB, in the event that the Merger is
not consummated by June 30, 2005, unless the failure to so consummate by such
time is due to the failure of the party seeking to terminate this Agreement to
perform or observe the covenants and agreements of such party set forth herein;
or
(e) by either FFBSW or GFSB, upon written notice to the
other, (provided that the party seeking termination is not then in material
breach of any representation, warranty, covenant or other agreement contained
herein), in the event of a breach of any covenant or agreement on the part of
the other party set forth in this Agreement, or if any representation or
warranty of the other party shall have become untrue, in either case such that
the conditions set forth in SECTIONS 6.2(A) and (B) or SECTIONS 6.3(A) and (B),
as the case may be, would not be satisfied and such breach or untrue
representation or warranty has not been or cannot be cured within thirty (30)
days following written notice to the party committing such breach or making such
untrue representation or warranty;
(f) by FFBSW, if (i) the GFSB shareholders fail to approve
the Agreement or GFSB does not comply with its obligations under Section 5.8
hereof and (ii) the Board of Directors of GFSB does not publicly recommend in
the Proxy Statement-Prospectus that stockholders approve and adopt this
Agreement or if, after recommending in the Proxy Statement-Prospectus that
stockholders approve and adopt this Agreement, the Board of Directors of GFSB
withdraws, qualifies or revises such recommendation in any respect materially
adverse to FFBSW; or
(g) at any time prior to the GFSB Stockholder Meeting, by
GFSB in order to concurrently enter into an acquisition agreement or similar
agreement (each an "Acquisition Agreement") with respect to a Superior Proposal
which has been received and considered by GFSB and GFSB's Board of Directors in
compliance with Section 5.1 hereof, PROVIDED, HOWEVER, that this Agreement may
be terminated by GFSB pursuant to this Section 7.1(g) only after the second
business day following the receipt by FFBSW of written notice from GFSB advising
FFBSW that GFSB is prepared to enter into an
62
Acquisition Agreement with respect to a Superior Proposal, and describing in
reasonable detail such proposal and only if, during such five business day
period, FFBSW does not, in its sole discretion, make an offer to GFSB that
GFSB's Board of Directors determines in good faith, after consultation with its
financial advisors, is at least as favorable as the Superior Proposal; or
(h) by FFBSW, if any person or group (as those terms are
defined in the Exchange Act), other than FFBSW or any Subsidiary or any group
already owning 25% of more of FFBSW, shall have acquired beneficial ownership of
25% or more of the voting power of GFSB or any of its significant Subsidiaries;
or
(i) by FFBSW at any time after GFSB becomes entitled to
terminate the Agreement under paragraph (g) above.
7.2 TERMINATION FEE.
(a) If FFBSW terminates this Agreement pursuant to SECTION
7.1((F) OR (I)),OR GFSB terminates this Agreement pursuant to Section 7.1(g),
then GFSB shall make payment to FFBSW of a termination fee in the amount of
$800,000. Such amount shall be paid by wire transfer of immediately available
funds within two business days following such termination.
(b) If this Agreement is terminated by (i) FFBSW pursuant to
SECTION 7.1(E) or (ii) either party pursuant to SECTION 7.1(B), and in any such
case an Acquisition Proposal has been publicly announced, disclosed or
communicated or made known to the senior management or the Board of Directors of
GFSB at any time after the date of this Agreement and prior to the date of the
Stockholders Meeting, in the case of clause (ii), or the date of termination, in
the case of clause (i), then GFSB shall make payment to FFBSW of a termination
fee in the amount of $800,000 if within 12 months after such termination, GFSB
shall consummate or enter into any agreement with respect to such Acquisition
Proposal. Such amount shall be paid by wire transfer of immediately available
funds on the date of such execution or consummation.
(c) Notwithstanding anything herein to the contrary, in no
event shall the aggregate amount that GFSB must pay to FFBSW pursuant to
SECTIONS 7.2(A) and (B) exceed $ 800,000.
7.3 EFFECT OF TERMINATION. In the event of termination of this
Agreement by either FFBSW or GFSB as provided in SECTION 7.1, this Agreement
shall forthwith become void and, subject to SECTION 7.2, have no effect, and
there shall be no liability on the part of any party hereto or their respective
officers and directors, except that (i) SECTIONS 5.3(C), 7.2, and 8.6, shall
survive any termination of this Agreement, and (ii) notwithstanding anything to
the contrary contained in this Agreement, no party shall be relieved or released
from any liabilities or damages arising out of its willful breach of any
provision of this Agreement.
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ARTICLE VIII
CERTAIN OTHER MATTERS
8.1 INTERPRETATION. When a reference is made in this Agreement to
Sections or Exhibits such reference shall be to a Section of, or Exhibit to,
this Agreement unless otherwise indicated. The table of contents and headings
contained in this Agreement are for ease of reference only and shall not affect
the meaning or interpretation of this Agreement. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be deemed
followed by the words "without limitation." Any singular term in this Agreement
shall be deemed to include the plural, and any plural term the singular. Any
reference to gender in this Agreement shall be deemed to include any other
gender.
8.2 SURVIVAL. Only those agreements and covenants of the parties
that are by their terms applicable in whole or in part after the Effective Time,
including SECTION 5.13 of this Agreement, shall survive the Effective Time. All
other representations, warranties, agreements and covenants shall be deemed to
be conditions of the Agreement and shall not survive the Effective Time.
8.3 WAIVER; AMENDMENT. Prior to the Effective Time, any provision of
this Agreement may be: (i) waived in writing by the party benefited by the
provision or (ii) amended or modified at any time (including the structure of
the transaction) by an agreement in writing between the parties hereto except
that, after the vote by the stockholders of GFSB, no amendment or modification
may be made that would reduce the amount or alter or change the kind of
consideration to be received by holders of GFSB Common Stock or contravene any
provision of the DGCL, the federal and state securities and banking laws, or any
of the rules and regulations thereunder.
8.4 COUNTERPARTS. This Agreement may be executed in counterparts
each of which shall be deemed to constitute an original, but all of which
together shall constitute one and the same instrument.
8.5 SPECIFIC PERFORMANCE. The parties hereto agree that irreparable
damage would occur in the event that the provisions contained in this Agreement
are not performed in accordance with its specific terms and conditions, or are
otherwise breached. Thus, parties hereto agree that each shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions hereof in any competent court of
jurisdiction in the United States, and that such remedy is in addition to any
other remedy to which such party is entitled at law or in equity.
8.6 GOVERNING LAW. This Agreement shall be governed by, and
interpreted in accordance with, the laws of the State of Delaware, without
regard to conflicts of laws principles.
8.7 EXPENSES. Each party hereto will bear all expenses incurred by
it in connection with this Agreement and the transactions contemplated hereby,
except that
64
expenses incurred in connection with the printing and mailing of the Proxy
Statement-Prospectus and Registration Statement shall be shared equally by FFBSW
and GFSB.
8.8 NOTICES. All notices, requests, acknowledgments and other
communications hereunder to a party shall be in writing and shall be deemed to
have been duly given when delivered by hand, overnight courier or facsimile
transmission to such party at its address or facsimile number set forth below or
such other address or facsimile transmission as such party may specify by notice
(in accordance with this provision) to the other party hereto.
If to FFBSW, to:
First Federal Banc of the Southwest, Inc.
300 North Pennsylvania
Roswell, New Mexico 88201
Facsimile: (505) 627-2411
Attention: Aubrey L. Dunn, Jr.
With a copy to:
Luse Gorman Pomerenk & Schick, PC
5335 Wisconsin Avenue, N.W.
Suite 400
Washington, D.C. 20015
Facsimile: (202) 362-2902
Attention: Gary A. Lax, Esq.
If to GFSB, to:
GFSB Bancorp, Inc.
221 West Aztec Avenue
Gallup, New Mexico 87301
Facsimile: (505)722-8876
Attention: Richard C. Kauzlaric
With a copy to:
Malizia Spidi & Fisch, P.C.
1100 New York Avenue, N.W.
Suite 340 West
Washington, D.C. 20005
Facsimile: (202) 434-4661
Attention: Richard Fisch, Esq.
8.9 ENTIRE AGREEMENT; ETC. This Agreement, together with the
Disclosure Letters, represents the entire understanding of the parties hereto
with reference to the transactions contemplated hereby and supersedes any and
all other oral or written agreements heretofore made. All terms and provisions
of this Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective
65
successors and assigns. Except for SECTION 5.13, which confers rights on the
parties described therein, nothing in this Agreement is intended to confer upon
any other person any rights or remedies of any nature whatsoever under or by
reason of this Agreement.
8.10 SUCCESSORS AND ASSIGNS; ASSIGNMENT. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns; provided, however, that this Agreement may not be
assigned by either party hereto without the written consent of the other party.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers as of the date first above written.
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
By:
-------------------------------------
Aubrey L. Dunn, Jr.
President and Chief Executive Officer
GFSB BANCORP, INC.
By:
-------------------------------------
Richard C. Kauzlaric
President and Chief Executive Officer
67
[LOGO] [H] Hovde
FINANCIAL LLC
ANNEX B
August 25, 2004
Board of Directors
First Federal Banc of the Southwest, Inc.
300 North Pennsylvania
Roswell, New Mexico 88201
Members of the Board:
Hovde Financial LLC ("Hovde" or "we") has reviewed the Agreement and
Plan of Merger, dated August 25, 2004 (the "Agreement"), by and between First
Federal Banc of the Southwest, Inc. ("FFBSW") and GFSB Bancorp, Inc. ("GFSB").
Pursuant to the Agreement, at the Effective Time, GFSB will merge with and into
FFBSW (the "Merger") and the separate corporate existence of GFSB shall cease.
FFBSW shall be the surviving corporation in the Merger and shall continue
unaffected by the Merger. By virtue of the Merger, automatically and without any
action on the part of the holder thereof, each share of GFSB Common Stock issued
and outstanding at the Effective Time, other than Excluded Shares, shall become
and be converted into, at the election of the holder as provided, and subject to
the limitations set forth, in the Agreement, either (i) the right to receive
$20.00 in cash without interest (the "Cash Consideration") or (ii) the number of
shares of FFBSW Common Stock equal to the Exchange Ratio (the "Stock
Consideration"). The Cash Consideration and the Stock Consideration are
sometimes referred to herein collectively as the "Merger Consideration." The
"Exchange Ratio" shall be equal to the quotient of $20.00 divided by the FFBSW
Price. "FFBSW Price" means one hundred sixty-five percent (165%) of the fully
diluted book value per share of FFBSW Common Stock as determined in accordance
with generally accepted accounting principles as of September 30, 2004;
PROVIDED, HOWEVER, that the FFBSW Price shall be appropriately adjusted to take
into account any FFBSW stock split, stock dividend, reclassification, special
distribution or similar transaction which shall occur or be declared prior to
the Effective Time. Capitalized terms not otherwise defined herein shall have
the meanings attributed to them in the Agreement.
Hovde specializes in providing investment banking and financial advisory
services to commercial banks, thrift institutions, and specialty finance
companies. Hovde's principals are experienced in the independent valuation of
securities in connection with negotiated underwritings,
www.hovde.com
1824 Jefferson Place, NW 1629 Colonial Parkway 9841 Airport Boulevard, 12th Floor 3908 S. Ocean Boulevard, Suite M122
Washington, DC 20036 Inverness, IL 60067 Los Angeles, CA 90045 Highland Beach, FL 33487
Telephone 202.775.8109 Telephone 847.991.6622 Telephone 310.258.8064 Telephone 561.279.7199
Facsimile 202.293.5287 Facsimile 847.991.5928 Facsimile 310.258.8063 Facsimile 561.278.5856
Board of Directors
First Federal Banc of the Southwest, Inc.
August 25, 2004
Page 2 of 3
subscription and community offerings, private placements, merger and acquisition
transactions and recapitalizations.
Hovde was retained by FFBSW to act as its financial advisor and to
assist FFBSW with its potential acquisition of GFSB and to render an opinion as
to the fairness of the Merger Consideration, from a financial point of view, to
the shareholders of FFBSW for delivery to FFBSW's Board of Directors. Hovde will
receive compensation from FFBSW in connection with its services, all or part of
which may be dependent on the consummation of the Merger. Further, in the
ordinary course of their businesses, affiliates of Hovde may actively trade the
equity securities of GFSB for their own accounts and, accordingly, they may at
any time hold long or short positions in such securities.
During the course of our engagement, we reviewed and analyzed material
bearing upon the financial and operating conditions of GFSB, and material
prepared in connection with the proposed Merger, including the following: the
Agreement; information concerning GFSB, including consolidated financial
statements for each of the three years ended December 31, 2003, 2002 and 2001,
respectively; the results of operations for GFSB for the first and second
quarter of the year 2004; operating statistics and financial projections for
GFSB, including portfolio yields and expense ratios; the nature and terms of
recent sale and merger transactions involving savings institutions that we
consider relevant; and financial and other information provided to us by the
managements of FFBSW and GFSB.
In addition, we have met and/or discussed with members of the senior
management of GFSB for the purpose of reviewing its future prospects and plans.
We have also evaluated the pro forma contribution of GFSB's assets, liabilities,
equity and earnings to the pro forma company and the effect thereof on FFBSW's
shareholders, and we have conducted such other studies, analyses and
examinations as we deemed appropriate. Further, we took into account our
assessment of general economic, market and financial conditions and our
experience in other similar transactions as well as our overall knowledge of the
banking industry and our general experience in securities valuations.
In rendering this opinion, we have assumed, without independent
verification, the accuracy and completeness of the financial and other
information and representations contained in the materials provided to us by
FFBSW and GFSB, and in the discussions with the management of GFSB. We were not
retained to and did not conduct a physical inspection of any of the properties
or facilities of FFBSW or GFSB, nor did we make any independent evaluation or
appraisal of the assets, liabilities or prospects of FFBSW or GFSB.
Board of Directors
First Federal Banc of the Southwest, Inc.
August 25, 2004
Page 3 of 3
We have assumed that the Merger is, and will be, in compliance with all
laws and regulations that are applicable to FFBSW and GFSB. In rendering this
opinion, we have assumed that there are no factors that would impede any
necessary regulatory or governmental approval for the Merger and have further
assumed that in the course of obtaining the necessary regulatory and
governmental approvals, no restriction will be imposed on FFBSW that would have
a material adverse effect on FFBSW or the contemplated benefits of the Merger.
Our opinion is based solely upon the information available to us and the
economic, market, and other conditions as they exist as of the date hereof.
Events occurring and information that becomes available after the date hereof
could materially affect the assumptions and analyses used in preparing this
opinion.
This letter is solely for the information of the Board of Directors of
FFBSW and is not to be used, circulated, quoted or otherwise referred to for any
other purpose, nor is it to be filed with, included in or referred to in whole
or in part in any registration statement, proxy statement or any other document,
except in each case in accordance with our prior written consent which shall not
be unreasonably withheld; provided, however, that we hereby consent to the
inclusion and reference to this letter in any registration statement, proxy
statement, information statement or tender offer document to be delivered to the
holders of FFBSW Common Stock in connection with the Merger if and only if this
letter is quoted in full or attached as an exhibit to such document and this
letter has not been withdrawn prior to the date of such document.
Subject to the foregoing and based on our experience as investment
bankers, our activities and assumptions as described above, and other factors we
have deemed relevant, we are of the opinion that, as of the date hereof, the
Merger Consideration to be provided by FFBSW in connection with the Merger, as
described in the Agreement, is fair to FFBSW's shareholders, from a financial
point of view.
Sincerely,
HOVDE FINANCIAL LLC
[LOGO] McDONALD INVESTMENTS
ANNEX C
August 25, 2004
PERSONAL AND CONFIDENTIAL
The Board of Directors
GFSB Bancorp, Inc.
221 West Aztec
Gallup, NM 87301
Members of the Board:
You have requested our opinion as to the fairness, from a financial
point of view, as of the date hereof, of the consideration to be received by the
holders of the issued and outstanding common shares of GFSB Bancorp, Inc. (the
"Company"), pursuant to the Agreement and Plan of Merger, dated as of August 25,
2004 (the "Agreement"), by and among the Company and First Federal Banc of the
Southwest, Inc. ("FFBSW").
As more specifically set forth in the Agreement, and subject to a number
of terms, conditions and procedures described in the Agreement, at the effective
time the Company will be merged with and into FFBSW (the "Merger"), the separate
corporate existence of the Company shall cease and FFBSW shall be the surviving
corporation. All of the Company's common shares issued and outstanding
immediately prior to the effective time of the Merger (other than shares held in
the Company's treasury and shares as to which dissenters' rights of appraisal
have been elected and not withdrawn) will be exchanged for $20.00 per share;
comprised of i) approximately 51% in common stock of FFBSW, and ii) 49% in cash
("Merger Consideration"). The Merger Consideration will be comprised of a
minimum of 45% stock and the remaining in cash based on the election of the
shareholders as outlined in the Agreement.
McDonald Investments Inc. ("McDonald"), as part of its investment
banking business, is customarily engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes.
1401 17TH STREET, SUITE 750 DENVER, CO 80202
PHONE 303-293-2800 FAX 303-293-3914
The Board of Directors
GFSB Bancorp, Inc.
August 25, 2004
Page 2
In connection with rendering this opinion, we have reviewed and
analyzed, among other things, the following:
(i) the Agreement;(i)
(ii) certain financial statements and other financial information of
the Company and its subsidiary Gallup Federal Savings Bank (the
"Bank"), including the Annual Reports on Form 10-KSB or 10-K, as
applicable for each of the years in the three year period ended
June 30, 2003; internal and the Regulatory Financial Statements
for the Bank and the Company for the quarters ended December 31,
2003 and March 31, 2004; the Quarterly Reports on Form 10-Q for
the quarters ended December 31, 2003 and March 31, 2004; and the
internal financial statements for the year ended June 30, 2004;
(iii) certain other internal information, primarily financial in
nature, including projections, concerning the business and
operations of the Company and the Bank furnished to us by the
Company and the Bank for purposes of our analysis;
(iv) the historical trading price and volume of the Company's common
stock;
(v) the process leading to the receipt of offers and the responses
of certain potential acquirers concerning the potential
acquisition of the Company;
(vi) certain publicly available information with respect to certain
other companies that we believe to be comparable to the Company
and the trading markets for such other companies' securities;
(vii) certain publicly available information concerning the nature and
terms of certain other transactions that we considered relevant
to our inquiry;
(viii) certain publicly available, internal, and audited financial
information for FFBSW;
(ix) certain other information concerning FFBSW;
(x) discussions with FFBSW personnel regarding the proposed
financing of the transaction;
(xi) the economic, banking and competitive climate for banking
institutions in New Mexico;
(xii) the business and prospects of the Company through meetings and
discussions with certain officers and employees of the Company;
and
(xiii) other matters we believe relevant to our inquiry.
In our review and analysis and in arriving at our opinion, we have
assumed and relied upon the accuracy and completeness of all of the financial
and other information provided to us or publicly available and have assumed and
relied upon the representations and warranties of the Company and FFBSW
contained in the Agreement. We have not been engaged to, and have not
independently attempted to, verify any of such information. We have also relied
upon the management of the Company as to the reasonableness and achievability of
the financial and operating projections (and the assumptions and bases therefor)
provided to us and, with your consent, we have assumed that such projections
reflect the best currently available estimates and
The Board of Directors
GFSB Bancorp, Inc.
August 25, 2004
Page 3
judgments of management of the Company. We have not been engaged to assess the
reasonableness or achievability of such projections or the assumptions on which
they were based and express no view as to such projections or assumptions. In
addition, we have not conducted a physical inspection or appraisal of any of the
Company's assets, properties or facilities, nor have we been furnished with any
such evaluation or appraisal. We have also assumed that the conditions of the
Merger as set forth in the Agreement would be satisfied and that the Merger
would be consummated on a timely basis in the manner contemplated by the
Agreement.
It should be noted that this opinion is based on economic and market
conditions and other circumstances existing on, and information made available
as of, the date hereof and does not address any matters subsequent to such date.
In addition, our opinion is, in any event, limited to the fairness, as of the
date hereof, from a financial point of view, of the Merger Consideration to be
received by the Company's stockholders pursuant to the Agreement and does not
address the Company's underlying business decision to effect the Merger or any
other terms of the Merger. It should be noted that although subsequent
developments may affect this opinion, we do not have any obligation to update,
revise or reaffirm our opinion.
In the ordinary course of our business, we may actively trade securities
of the Company for our own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
It is understood that this opinion was prepared solely for the
confidential use of the Board of Directors of the Company and may not be
disclosed, summarized, excerpted from or otherwise publicly referred to without
our prior written consent, which will not be unreasonably withheld.
Notwithstanding the foregoing, this opinion may be included in the proxy
statement to be mailed to the holders of the Company's Common Stock in
connection with the Merger, provided that this opinion will be reproduced in
such proxy statement in full, and any description of or reference to us or our
actions, or any summary of the opinion in such proxy statement, will be in a
form reasonably acceptable to us and our counsel. Our opinion does not
constitute a recommendation to any stockholder of the Company as to how such
stockholder should vote at the stockholders' meeting held in connection with the
Merger.
The Board of Directors
GFSB Bancorp, Inc.
August 25, 2004
Page 4
In addition, we have acted as a financial adviser to the Company in
connection with the Merger and will receive from the Company a fee for our
services, a significant portion of which is contingent upon the consummation of
the Merger, as well as the Company's agreement to indemnify us under certain
circumstances.
Based upon and subject to the foregoing and such other matters as we
consider relevant, it is our opinion that as of the date hereof, the Merger
Consideration is fair, from a financial point of view, to the Company's common
stockholders.
Very truly yours,
/s/ McDONALD INVESTMENTS INC.
McDONALD INVESTMENTS INC.
ANNEX D
DELAWARE GENERAL CORPORATION LAW
SECTION 262
Section. 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 ss. 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 ss. 251 (other than a merger effected pursuant to ss.
251(g) of this title), ss. 252, ss. 254, ss. 257, ss. 258, ss. 263 or ss. 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
subsection (f) of ss. 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 ss.ss. 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;
D-1
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.
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under ss. 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 subsection (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 such
stockholder's shares shall deliver to the corporation, before the taking
of the vote on the merger or consolidation, a written demand for
appraisal of such stockholder'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 stockholder's 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
D-2
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 ss.
228 or ss. 253 of this title, thEn, either a constituent corporation
before the effective date of the merger or consolidation, or the
surviving or resulting corporation within 10 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 consolidation 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. 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 stockholder 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 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
D-3
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 such stockholder's 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 such stockholder's 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 a 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
D-4
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
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(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 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 such stockholder's
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.
D-5
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Articles ELEVENTH and TWELFTH of the Certificate of Incorporation of
First Federal Banc of the Southwest, Inc. (the "Corporation") sets forth
circumstances under which directors, officers, employees and agents of the
Corporation may be insured or indemnified against liability which they incur in
their capacities as such:
ELEVENTH:
A. Each person who was or is made a party or is threatened to be
made a party to or is otherwise involved in any action, suit or proceeding,
whether civil, criminal, administrative or investigative (hereinafter a
"proceeding"), by reason of the fact that he or she is or was a director or an
officer of the Corporation or is or was serving at the request of the
Corporation as a director or officer of another corporation, including, without
limitation, any Subsidiary (as defined in Article EIGHTH herein), partnership,
joint venture, trust or other enterprise, including service with respect to an
employee benefit plan (hereinafter an "indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as a director or officer or
in any other capacity while serving as a director or officer, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader indemnification
rights than such law permitted the Corporation to provide prior to such
amendment), against all expense, liability and loss (including attorneys' fees,
judgments, fines, ERISA excise taxes or penalties and amounts paid in
settlement) reasonably incurred or suffered by such indemnitee in connection
therewith; provided, however, that, except as provided in Section C hereof with
respect to proceedings to enforce rights to indemnification, the Corporation
shall indemnify any such indemnitee in connection with a proceeding (or part
thereof) initiated by such indemnitee only if such proceeding (or part thereof)
was authorized by the Board of Directors of the Corporation.
B. The right to indemnification conferred in Section A of this
Article shall include the right to be paid by the Corporation the expenses
incurred in defending any such proceeding in advance of its final disposition
(hereinafter an "advancement of expenses"); provided, however, that, if the
Delaware General Corporation Law requires, an advancement of expenses incurred
by an indemnitee in his or her capacity as a director or officer (and not in any
other capacity in which service was or is rendered by such indemnitee,
including, without limitation, service to an employee benefit plan) shall be
made only upon delivery to the Corporation of an undertaking (hereinafter an
"undertaking"), by or on behalf of such indemnitee, to repay all amounts so
advanced if it shall ultimately be determined by final judicial decision from
which there is no further right to appeal (hereinafter a "final adjudication"),
that such indemnitee is not entitled to be indemnified for such expenses under
this Section or otherwise. The rights to indemnification and to the advancement
of expenses conferred in Sections A and B of this Article shall be contract
rights and such rights shall continue as to an indemnitee who has ceased to be a
director or officer and shall inure to the benefit of the indemnitee's heirs,
executors and administrators.
C. If a claim under Section A or B of this Article is not paid in
full by the Corporation within sixty days after a written claim has been
received by the Corporation, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be twenty days, the
indemnitee may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim. If successful in whole or in part in any
such suit, or in a suit brought by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, the indemnitee shall also be
entitled to be paid the expense of prosecuting or defending such suit. In (i)
any suit brought by the indemnitee to enforce a right to indemnification
hereunder (but not in a suit brought by the indemnitee to enforce a right to an
advancement of expenses) it shall be a defense that, and (ii) in any suit by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking the Corporation shall be entitled to recover such expenses upon a
final adjudication that, the indemnitee has not met any applicable standard for
indemnification set forth in the Delaware General Corporation Law. Neither the
failure of the Corporation (including its Board of Directors,
independent legal counsel, or its stockholders) to have made a determination
prior to the commencement of such suit that indemnification of the indemnitee is
proper in the circumstances because the indemnitee has met the applicable
standard of conduct set forth in the Delaware General Corporation Law, nor an
actual determination by the Corporation (including its Board of Directors,
independent legal counsel, or its stockholders) that the indemnitee has not met
such applicable standard of conduct, shall create a presumption that the
indemnitee has not met the applicable standard of conduct or, in the case of
such a suit brought by the indemnitee, be a defense to such suit. In any suit
brought by the indemnitee to enforce a right to indemnification or to an
advancement of expenses hereunder, or by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the burden of
proving that the indemnitee is not entitled to be indemnified, or to such
advancement of expenses, under this Article or otherwise shall be on the
Corporation.
D. The rights to indemnification and to the advancement of expenses
conferred in this Article shall not be exclusive of any other right which any
person may have or hereafter acquire under any statute, the Corporation's
Certificate of Incorporation, Bylaws, agreement, vote of stockholders or
Disinterested Directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the Corporation
or another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the Corporation would
have the power to indemnify such person against such expense, liability or loss
under the Delaware General Corporation Law.
F. The Corporation may, to the extent authorized from time to time
by a majority vote of the disinterested directors, grant rights to
indemnification and to the advancement of expenses to any employee or agent of
the Corporation to the fullest extent of the provisions of this Article with
respect to the indemnification and advancement of expenses of directors and
officers of the Corporation.
TWELFTH: A director of this Corporation shall not be personally liable
to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law, or (iv) for any transaction from which the director derived an
improper personal benefit. If the Delaware General Corporation Law is hereafter
amended to further eliminate or limit the personal liability of directors, then
the liability of a director of the Corporation shall be eliminated or limited to
the fullest extent permitted by the Delaware General Corporation Law, as so
amended.
Any repeal or modification of the foregoing paragraph by the
stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The exhibits and financial statements filed as part of this Registration
Statement are as follows:
(a) Exhibits
2.1 Agreement and Plan of Merger by and between First Federal Banc of the
Southwest, Inc. and GFSB Bancorp, Inc., dated as of August 25, 2004.
(Incorporated by reference to Annex A to the Joint Proxy
Statement/Prospectus)
3.1 Certificate of Incorporation of First Federal Banc of the Southwest,
Inc.
3.2 Bylaws of First Federal Banc of the Southwest, Inc.
3.3 Certificate of Incorporation of GFSB Bancorp, Inc. (Incorporated by
reference to Exhibit 3.1 to the Registration Statement on Form S-1 filed
with the Commission on March 17, 1995).
3.4 Bylaws of GFSB Bancorp, Inc. (Incorporated by reference to Exhibit 3.2
to the Registration Statement on Form S-1 filed with the Commission on
March 17, 1995).
4.1 Form of Common Stock Certificate of First Federal Banc of the Southwest,
Inc.
5.1 Opinion of Luse Gorman Pomerenk & Schick, a Professional Corporation as
to the legality of the securities being issued.
8.1 Federal Tax Opinion of Luse Gorman Pomerenk & Schick, a Professional
Corporation*
10.1 Form of Employment Agreement with Jerry R. Spurlin
10.2 Form of Employment Agreement with William W. Head, Jr.
10.3 Form of Employment Agreement with Leonard C. Scalzi
10.4 Release on Non-Compete Agreement with Richard P. Gallegos
10.5 Purchase Agreement, dated as of May 9, 2003, by and between First
Federal Bank and Aubrey L. Dunn, Jr.
10.6 Form of Change in Control Agreement with Debra S. Fischer
10.7 Form of Change in Control Agreement with Ginger R. Palmer
21 Subsidiaries of First Federal Banc of the Southwest, Inc.
23.1 Consent of Neff & Ricci.
23.2 Consent of Neff & Ricci.
23.3 Consent of Hovde Financial, LLC
23.4 Consent of McDonald Investments Inc.
23.5 Consent of Luse Gorman Pomerenk & Schick, a Professional Corporation
(set forth in Exhibit 5.1).
24 Power of attorney (set forth on the signature pages to this Registration
Statement).
- --------------------------
* To be filed supplementally or by amendment.
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement; (i) to include
any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii)
to reflect in the prospectus any facts or events arising after the effective
date of the registration statement (or most recent post-effective amendment
thereof) which individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement; (iii) to include any
material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be a bona fide
offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) (1) The undersigned registrant hereby undertakes as follows:
that prior to any public reoffering of the securities registered hereunder
through use of a prospectus which is a part of this registration statement, by
any person or party who is deemed to be an underwriter within the meaning of
Rule 145(c), the issuer undertakes that such
reoffering prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items of
the applicable form.
(2) The registrant undertakes that every prospectus (i) that
is filed pursuant to paragraph (1) immediately preceding, or (ii) that purports
to meet the requirements of section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415, will be filed as
a part of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for the purposes of determining any
liability under the Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(c) The undersigned registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the prospectus
pursuant to Items 4, 10(b), 11 or 13 of this Form, within one business day of
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the registration statement
through the date of responding to the request.
(d) The undersigned registrant hereby undertakes to supply by means
of a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of, and
included in the registration statement when it became effective.
(e) The undersigned registrant hereby undertakes to deliver or cause
to be delivered with the prospectus, to each person to whom the prospectus is
sent or given, the latest annual report to security holders that is incorporated
by reference in the prospectus and furnished pursuant to an meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X are not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Roswell,
State of New Mexico, on November 22, 2004.
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
By: /s/ Aubrey L. Dunn, Jr.
-------------------------------------------
Aubrey L. Dunn, Jr.
President and Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned directors and officers of First Federal Banc of the
Southwest, Inc. (the "Company") severally constitute and appoint Aubrey L. Dunn,
Jr. with full power of substitution, our true and lawful attorney and agent, to
do any and all things and acts in our names in the capacities indicated below
which said Aubrey L. Dunn, Jr. may deem necessary or advisable to enable the
Company to comply with the Securities Act of 1933, and any rules, regulations
and requirements of the Securities and Exchange Commission, in connection with
the registration statement on Form S-4 relating to the offering of the Company
common stock, including specifically, but not limited to, power and authority to
sign for us or any of us in our names in the capacities indicated below the
registration statement and any and all amendments (including post-effective
amendments) thereto; and we hereby ratify and confirm all that said Aubrey L.
Dunn, Jr. shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signatures Title Date
- ---------- ----- ----
/s/ Aubrey L. Dunn, Jr. President and Chief Executive November 22, 2004
- ------------------------------- Officer (Principal Executive
Aubrey L. Dunn, Jr. Officer)
/s/ George A. Rosenbaum, Jr. Executive Vice President and November 22, 2004
- ------------------------------- Chief Financial Officer
George A. Rosenbaum, Jr. (Principal Financial and
Accounting Officer)
/s/ Edward K. David Chairman of the Board of November 22, 2004
- ------------------------------- Directors
Edward K. David
/s/ Marc Reischman Vice Chairman of the Board of November 22, 2004
- ------------------------------- Directors
Marc Reischman
/s/ Kay R. McMillan Director November 22, 2004
- -------------------------------
Kay R. McMillan
/s/ Michael A. McMillan Director November 22, 2004
- -------------------------------
Michael A. McMillan
/s/ Arturo Jurado Director November 22, 2004
- -------------------------------
Arturo Jurado
/s/ Russell P. Weems Director November 22, 2004
- -------------------------------
Russell P. Weems
/s/ Larry L. Sheffield Director November 22, 2004
- -------------------------------
Larry L. Sheffield
/s/ James E. Paul, Jr. Director November 22, 2004
- -------------------------------
James E. Paul, Jr.
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 23, 2004
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
EXHIBITS
TO THE
REGISTRATION STATEMENT
ON
FORM S-4
---------------------------
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
ROSWELL, NEW MEXICO
EXHIBIT INDEX
2.1 Agreement and Plan of Merger by and between First Federal Banc of the
Southwest, Inc. and GFSB Bancorp, Inc., dated as of August 25, 2004.
(Incorporated by reference to Annex A to the Joint Proxy
Statement/Prospectus)
3.1 Certificate of Incorporation of First Federal Banc of the Southwest,
Inc.
3.2 Bylaws of First Federal Banc of the Southwest, Inc.
3.3 Certificate of Incorporation of GFSB Bancorp, Inc. (Incorporated by
reference to Exhibit 3.1 to the Registration Statement on Form S-1 filed
with the Commission on March 17, 1995).
3.4 Bylaws of GFSB Bancorp, Inc. (Incorporated by reference to Exhibit 3.2
to the Registration Statement on Form S-1 filed with the Commission on
March 17, 1995).
4.1 Form of Common Stock Certificate of First Federal Banc of the Southwest,
Inc.
5.1 Opinion of Luse Gorman Pomerenk & Schick, a Professional Corporation as
to the legality of the securities being issued.
8.1 Federal Tax Opinion of Luse Gorman Pomerenk & Schick, a Professional
Corporation*
10.1 Form of Employment Agreement with Jerry R. Spurlin
10.2 Form of Employment Agreement with William W. Head, Jr.
10.3 Form of Employment Agreement with Leonard C. Scalzi
10.4 Release on Non-Compete Agreement with Richard P. Gallegos
10.5 Purchase Agreement, dated as of May 9, 2003, by and between First
Federal Bank and Aubrey L. Dunn, Jr.
10.6 Form of Change in Control Agreement with Debra S. Fischer
10.7 Form of Change in Control Agreement with Ginger R. Palmer
21 Subsidiaries of First Federal Banc of the Southwest, Inc.
23.1 Consent of Neff & Ricci.
23.2 Consent of Neff & Ricci.
23.3 Consent of Hovde Financial, LLC
23.4 Consent of McDonald Investments Inc.
23.5 Consent of Luse Gorman Pomerenk & Schick, a Professional Corporation
(set forth in Exhibit 5.1).
24 Power of attorney (set forth on the signature pages to this Registration
Statement).
- --------------------------
* To be filed supplementally or by amendment.