AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 24, 2005
REGISTRATION NO. 333-120729
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. THREE
TO THE
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
(State or other jurisdiction of (Primary Standard Industrial
incorporation or organization) Classification Code Number)
85-0453611
(I.R.S. Employer
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 750,000 shares (1) (2) $ 25,250,515 (2) (3)
========================================= ====================== ================ ==================== =====================
(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.
(3) Registration fee was previously paid.
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., and
First Federal Banc of the Southwest, Inc. In this joint proxy
statement/prospectus, First Federal Banc of the Southwest, Inc. is referred to
as First Federal and GFSB Bancorp, Inc. is referred to as GFSB. Following the
proposed merger Gallup Federal Savings Bank, a wholly owned subsidiary of GFSB,
will merge 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 1.17806 shares of First Federal common stock.
GFSB stockholders will receive cash for any fractional shares they may
be entitled to receive. 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 therefore 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. Assuming that 51% of GFSB's outstanding shares are converted into
First Federal common stock, immediately following the completion of the merger
GFSB shareholders will own 18.3% of the outstanding shares of the combined
company. 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 "__________." It is expected
that First Federal's common stock will be approved for listing on the Nasdaq
SmallCap market at or prior to the completion of the merger.
We cannot complete the merger unless we obtain the necessary regulatory
approvals and 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. The proposal must be approved by a majority of outstanding
shares of GFSB and First Federal. The directors of First Federal and GFSB agreed
to vote their shares in favor of the merger. As of the voting record date, the
total number of shares held by First Federal directors is ____ shares or ____%
of its issued and outstanding common stock. The total number of shares held by
GFSB directors is _____ shares or ____% of its issued and outstanding common
stock.
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.
Aubrey L. Dunn, Jr. Richard C. Kauzlaric
- --------------------------------------- --------------------
President and Chief Executive Officer President and Chief Executive
First Federal Banc of the Southwest, Inc. Officer
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.
Whether or not you plan to attend the 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.
The accompanying 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 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.
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 of the
special meeting.
Whether or not you plan to attend the 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.
The accompanying 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.
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
SUMMARY 4
General 4
The Merger 5
The Merger Agreement 11
RISKS RELATED TO THE MERGER 15
A WARNING ABOUT FORWARD-LOOKING STATEMENTS 19
SELECTED HISTORICAL FINANCIAL INFORMATION 22
Selected Historical Financial Information For First Federal 22
Selected Historical Financial Information For GFSB 24
THE FIRST FEDERAL SPECIAL MEETING 27
General 27
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 28
Quorum and Vote Required 28
Shares Held by First Federal Officers and Directors and by GFSB 28
Voting by Proxy 28
Revocability of Proxies 29
Solicitation of Proxies 29
THE GFSB SPECIAL MEETING 29
General 29
Date, Place and Time of the Special Meeting 30
Purpose of the Special Meeting 30
Who Can Vote at the Special Meeting; Record Date 30
Attending the Special Meeting 30
Quorum and Vote Required 30
Shares Held by GFSB Officers and Directors and by First Federal 31
Voting by Proxy 31
Revocability of Proxies 31
Solicitation of Proxies 32
Participants in Gallup Federal Savings Bank's Employee Stock
Ownership Plan 32
OWNERSHIP OF FIRST FEDERAL COMMON STOCK 33
OWNERSHIP OF GFSB COMMON STOCK 35
THE MERGER 37
Parties to the Merger 37
Form of the Merger 38
Merger Consideration; Cash or Stock Election 38
Election Procedures; Surrender of Stock Certificates 39
Treatment of GFSB Stock Options 41
Treatment of GFSB Stock Awards 41
Background of the Merger 42
Reasons for the Merger 45
Effects of the Merger 48
Opinion of First Federal's Independent Financial Advisor 49
Fees payable to Hovde 50
Headquarters 55
Opinion of GFSB's Independent Financial Advisor 56
Fees payable to McDonald 63
Dissenters' Rights of Appraisal 64
Interests of Certain GFSB Directors and Officers in the Merger 68
1
Nasdaq SmallCap Market Listing 71
Material Federal Income Tax Consequences of the Merger 71
Tax Consequences to First Federal and its Stockholders 74
Accounting Treatment of the Merger 74
Resales of First Federal Common Stock 74
Regulatory Approvals and Notices Required for the Merger 75
Requirement for Stockholder Approval 75
THE MERGER AGREEMENT 75
Terms of the Merger 76
When Will the Merger be Completed 76
Conditions to Completing the Merger 76
Conduct of Business Before the Merger 77
Covenants of GFSB and First Federal in the Merger Agreement 81
Terminating the Merger Agreement 91
Termination Fee 92
Expenses 92
Changing the Terms of the Merger Agreement 92
Bank Merger 93
New Members of the Board of Directors 93
FIRST FEDERAL MANAGEMENT'S DISCUSSION AND ANALYSIS 93
Result of Operations 97
Market Area 108
Lending Activities 109
Delinquent Loans, Other Real Estate Owned and Classified Assets 117
Securities Activities 123
Sources of Funds 129
Activities of Subsidiaries and Affiliated Entities 131
Competition 131
Employees 132
Properties 132
Legal Proceedings 133
MANAGEMENT OF FIRST FEDERAL 133
Position(s) Held With First Federal Banc of the Southwest, Inc. 133
Transactions With Certain Related Persons 138
DESCRIPTION OF FIRST FEDERAL COMMON STOCK 138
General 138
Common Stock 138
Preferred Stock 139
MANAGEMENT FOLLOWING THE MERGER 139
First Federal 139
Directors' Compensation 140
Executive Officers Who Are Not Directors 140
PRO FORMA FINANCIAL INFORMATION 141
First Federal and GFSB Unaudited Pro Forma Condensed Combined
Consolidated Balance Sheet 143
First Federal and GFSB Unaudited Pro Forma Condensed Combined
Consolidated Statement of Income 150
Notes to the Unaudited Pro Forma Condensed Combined Consolidated
Financial Statements 152
COMPARISON OF RIGHTS OF STOCKHOLDERS 153
RESTRICTIONS ON ACQUISITION OF FIRST FEDERAL 159
Business Combinations with Interested Stockholders 159
Board of Directors 160
Stockholder Action by Written Consent; Special Meetings of Stockholders 160
Advance Notice Provisions for Stockholder Nominations and Proposals 160
Preferred Stock 161
Amendment of Certificate of Incorporation 161
Delaware Corporate Law 161
LEGAL MATTERS 162
EXPERTS 162
2
WHERE YOU CAN FIND MORE INFORMATION 162
STOCKHOLDER PROPOSALS 163
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 six months ended December 31, 2004 of GFSB Bancorp, Inc.
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 TO THE MERGER (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 December 31, 2004, First Federal
had, on a consolidated basis, approximately $348.4 million in total assets,
$255.5 million in total deposits, $255.7 million in net loans receivable and
stockholders' equity of $34.8 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) 726-6500
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 December 31, 2004, GFSB had, on a
consolidated basis, approximately $217.3 million in total assets, $131.6 million
in total deposits, $148.4 million in net loans receivable and stockholders'
equity of $19.1 million.
Through Gallup Federal Savings Bank, GFSB serves clients through its two
full service offices located in Gallup and Farmington, New Mexico.
4
THE MERGER
EACH SHARE OF GFSB COMMON STOCK WILL BE EXCHANGED FOR EITHER SHARES OF FIRST
FEDERAL COMMON STOCK, $20.00 IN CASH OR A COMBINATION OF FIRST FEDERAL COMMON
STOCK AND 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 and 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 be 1.17806.
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. Following receipt of election forms by GFSB stockholders, every
effort will be made to accommodate a stockholder's election. However, in the
event First Federal stock is oversubscribed or undersubscribed, the merger
agreement provides a method to allocate First Federal stock. SEE "The Merger -
Merger Consideration; Cash or Stock Elections." 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____.
EACH SHARE OF FIRST FEDERAL COMMON STOCK IS VALUED AT $16.977 WHICH MAY NOT
REPRESENT ITS ACTUAL VALUE
The merger agreement provides that the value assigned to each share of
First Federal common stock is $16.977 which represents 165% of its diluted 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 $16.977.
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
5
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 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.
HOVDE FINANCIAL, LLC., FINANCIAL ADVISOR TO FIRST FEDERAL, HAS OPINED THAT THE
MERGER CONSIDERATION IS FAIR TO STOCKHOLDERS OF FIRST FEDERAL FROM A FINANCIAL
POINT OF VIEW (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 considered by Hovde
is attached to this document as Annex B. First Federal stockholders are
encouraged to read the fairness opinion in its entirety. Hovde will receive a
fee of approximately $250,000 for acting as First Federal's financial advisor
and providing its fairness opinion to First Federal.
MCDONALD INVESTMENTS, INC., FINANCIAL ADVISOR TO GFSB, HAS OPINED THAT THE
MERGER CONSIDERATION IS FAIR TO STOCKHOLDERS OF GFSB FROM A FINANCIAL POINT OF
VIEW (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. McDonald will
receive a fee of $502,000 for acting as GFSB's financial advisor and providing
its fairness opinion to GFSB.
STOCKHOLDERS OF FIRST FEDERAL AND GFSB MAY SEEK AN APPRAISAL OF THE VALUE OF
THEIR SHARES (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.
6
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.
CERTAIN GFSB DIRECTORS AND OFFICERS HAVE INTERESTS IN THE MERGER THAT ARE
DIFFERENT FROM GFSB STOCKHOLDERS AS A WHOLE (PAGES____ THROUGH____)
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 100,294 unvested GFSB restricted stock and stock
options awards as a result of execution 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 for a period of six
years following the merger and insurance for directors and
officers of GFSB for events occurring before the merger for a
period of three years following the merger; and
o the appointment of GFSB directors Kauzlaric and Mataya to the
board of directors of First Federal and First Federal Bank.
FEDERAL INCOME TAX CONSEQUENCES TO STOCKHOLDERS WILL DIFFER DEPENDING ON WHETHER
YOU RECEIVE FIRST FEDERAL COMMON STOCK OR CASH (PAGES____ THROUGH____)
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.
GFSB and First Federal received a tax opinion of Luse Gorman Pomerenk &
Schick, P.C. dated January 18, 2005, in satisfaction of the condition. In
rendering its opinion, counsel relied upon representations contained in
certificates received from officers of First Federal and GFSB. This tax
7
opinion is not 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.
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.
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, but generally any gain will result in an increased tax
liability while any loss will decrease a tax liability.
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.
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.
8
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 for each share on
any matter that properly comes 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 for
each share on any matter that properly comes 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 ____.
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.
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RECOMMENDATIONS OF THE BOARDS OF DIRECTORS AND THEIR REASONS FOR THE MERGER
(PAGE ____)
TO FIRST FEDERAL STOCKHOLDERS:
The First Federal board of directors has approved and adopted the merger
agreement and recommends that you vote "FOR" approval of the merger agreement
and the related transactions. The board believes that the merger is fair to, and
in the best interests of, stockholders. In making this determination, the board
considered all of the factors it deemed material in "The Merger - Reasons for
the Merger - First Federal" on page ___. The board's primary reasons for
determining that the merger was fair to, and in the best interest of,
stockholders was the value being provided to First Federal stockholder on a per
share basis as well as the opportunity to create a larger more geographically
diverse company and the ability to have First Federal's stock quoted on Nasdaq.
Further, the board considered the opinion of First Federal's financial advisor
that the merger was fair, from a financial standpoint, to First Federal's
stockholders.
TO GFSB STOCKHOLDERS:
The GFSB board of directors has approved and adopted the merger
agreement and recommends that you vote "FOR" approval of the merger agreement
and the related transactions. The board believes that the merger is fair to, and
in the best interests of stockholders. In making this determination, the board
considered all factors it deemed material as discussed in "The Merger--Reasons
for the Merger--GFSB" on page ___. The board's primary reasons for determining
that the merger was fair to, and in the best interest of, stockholders was the
value being offered as compared to what it estimated stockholders would receive
in the long term should GFSB remain an independent entity given the lack of
growth opportunities in the market in which it operated and the highly
competitive nature of the industry generally. The board also believed that
stockholders would benefit by having the opportunity to become part of a larger
and more geographically diverse entity. Lastly, the board considered the opinion
of GFSB's financial advisor that the merger consideration is fair, from a
financial point of view, to the holders of GFSB common stock.
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.
MARKET PRICE INFORMATION FOR FIRST FEDERAL AND GFSB (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, was at a price of $79.00 per share (which translates
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to $9.875 after giving effect to First Federal's anticipated eight-for-one stock
split. 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.
THE MERGER WILL BE ACCOUNTED FOR AS A PURCHASE (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."
WE MUST OBTAIN THE APPROVAL OF THE OFFICE OF THRIFT SUPERVISION TO COMPLETE THE
MERGER (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.
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;
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;
11
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;
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;
12
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 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.
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.
13
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.
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 Avenue 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.
14
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 OR TO ELECT FIRST
FEDERAL STOCK AS YOUR MERGER CONSIDERATION.
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. In addition, the value of the stock portion of the merger
consideration must be equal to at least 45% of the aggregate merger
consideration. As a result of these limitations, you may not receive the form of
merger consideration you elect. 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.
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. Generally, the receipt of cash
will result in a taxable event for a GFSB stockholder. See "The Merger--Material
Federal Income Tax Consequences of the Merger" on page ___.
THE VALUE OF FIRST FEDERAL COMMON STOCK IS SET IN THE MERGER AGREEMENT AT
$16.977 PER SHARE. THIS WILL NOT REPRESENT THE MARKET VALUE OF FIRST FEDERAL
COMMON STOCK ONCE IT BEGINS TO TRADE ON THE NASDAQ SMALLCAP MARKET.
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 1.17806 (after giving effect to the stock split).
Pursuant to the terms of the merger agreement, First Federal's common stock is
valued at $16.977 which represents 165% of its diluted book value, as determined
in accordance with generally accepted accounting principles, as of September 30,
2004, subject to certain adjustments. 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 PER SHARE 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 diluted 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
15
expected to fluctuate based upon general market economic conditions, First
Federal's business and prospects and other factors.
GFSB STOCKHOLDERS WILL HAVE TAX CONSEQUENCES FROM THE CASH 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 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,
including:
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 signing of the merger agreement;
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 GFSB directors Kauzlaric and Mataya to the
board of directors of First Federal and First Federal Bank.
These payments and interest may cause some of GFSB's directors and
executive officers to view the proposed transaction differently than you would
view it.
WE MAY BE UNABLE TO SUCCESSFULLY INTEGRATE THE BUSINESS OPERATIONS OF GFSB WITH
FIRST FEDERAL IN ORDER TO OBTAIN 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
16
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.
We may not achieve our expectations for the combined company 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.
If any of these risks were to occur, the business, operations and/or
earnings of the combined company could be negatively affected.
FOLLOWING 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 709,906 shares of First Federal common
stock, which after issuance will represent approximately 18.3% of the issued and
outstanding shares of First Federal common stock (excluding any stock options).
FIRST FEDERAL'S BOARD, MANAGEMENT AND EMPLOYEES WILL CONTINUE TO OWN OVER 42.7%
OF THE STOCK AFTER THE MERGER.
First Federal's directors, executive officers and their associates will
continue to own over 42.7% of the issued and outstanding common stock of First
Federal following the merger. This aggregate amount of ownership by the board,
management and the affiliates will give them significant influence on any vote
submitted to the stockholders of First Federal in the future.
HOLDERS OF FIRST FEDERAL COMMON STOCK MAY NOT BE ABLE TO SELL THEIR SHARES WHEN
DESIRED IF A LIQUID TRADING MARKET DOES NOT DEVELOP.
First Federal has never issued common stock to the public. Consequently,
there is no established market for the common stock. First Federal expects its
common stock to be listed for trading on the Nasdaq SmallCap market under the
symbol "____." First Federal cannot predict whether a liquid trading market in
shares of its common stock will develop or how liquid that market might become.
Persons owning shares may not be able to sell their shares when they desire if a
liquid trading market does not develop or sell them at a price equal to or above
the per share merger consideration paid even if a liquid trading market
develops.
17
RISKS RELATED TO OUR BUSINESS
FIRST FEDERAL'S LOAN PORTFOLIO POSSESSES INCREASED RISK DUE TO ITS SUBSTANTIAL
AMOUNT OF COMMERCIAL REAL ESTATE, CONSUMER, COMMERCIAL BUSINESS AND CONSTRUCTION
LOANS.
First Federal's outstanding commercial real estate, consumer, commercial
business and construction loans accounted for approximately 55.5% of its total
loan portfolio as of December 31, 2004. These types of loans may involve a
higher degree of risk compared to first mortgage loans on one- to four-family,
owner occupied residential properties. These loans may have higher risks than
loans secured by residential real estate for the following reasons:
o COMMERCIAL REAL ESTATE AND COMMERCIAL BUSINESS LOANS. Repayment
is dependent on income being generated by the rental property or
business in amounts sufficient to cover operating expenses and
debt service.
o COMMERCIAL AND CONSTRUCTION LOANS. Repayment is dependent upon
the business in amounts sufficient to cover operating expenses
and debt service or upon the successful completion of the
project and the ability of the contractor or builder to repay
the loan from the sale of the property or obtaining permanent
financing.
o CONSUMER LOANS. Consumer loans (such as automobile loans) are
collateralized, if at all, with assets that may not provide an
adequate source of repayment of the loan due to depreciation,
damage or loss.
CHANGES IN INTEREST RATES MAY HURT FIRST FEDERAL'S PROFITS.
To be profitable, First Federal has to earn more money in interest that
it receives on loans and investments than it pays in interest to its depositors
and lenders. Interest rates are at historically low levels. If interest rates
rise, First Federal's net interest income could be reduced because interest paid
on interest-bearing liabilities, including deposits and borrowings, increases
more quickly than interest received on interest-earning assets, including loans
and mortgage-backed and related securities. In addition, rising interest rates
may negatively affect income because it may reduce the demand for loans and the
value of our mortgage-related and investment securities. In the alternative, if
interest rates decrease, First Federal's net interest income could increase.
However, in a declining rate environment, First Federal may also be susceptible
to the payoff or refinance of high rate mortgage loans that could reduce First
Federal's net interest income. For a further discussion of how changes in
interest rates could impact First Federal, see "First Federal Management's
Discussion and Analysis - Asset/Liability Management and Market Risk."
STRONG COMPETITION IN FIRST FEDERAL'S PRIMARY MARKET AREA MAY REDUCE ITS ABILITY
TO ATTRACT AND RETAIN DEPOSITS AND OBTAIN LOANS.
First Federal operates in a competitive market for the attraction of
deposits, which is its primary source of funds, and the ability to obtain loans
through origination or purchase. Historically, First Federal's most direct
competition for savings deposits has come from credit unions, community banks,
large commercial banks and thrift institutions in its primary market areas.
Particularly in times of extremely low or extremely high interest rates, First
Federal has faced additional significant competition for investors' funds from
short-term money market securities and other corporate and government
securities. First Federal's competition for loans comes principally from
mortgage bankers, commercial
18
banks, other thrift institutions, insurance companies and credit unions. Such
competition for deposits and the origination and purchase of loans may limit
First Federal's future growth and earnings prospects.
IF ECONOMIC CONDITIONS DETERIORATE, FIRST FEDERAL'S RESULTS OF OPERATIONS AND
FINANCIAL CONDITION COULD BE ADVERSELY IMPACTED AS BORROWERS' ABILITY TO REPAY
LOANS DECLINES AND THE VALUE OF THE COLLATERAL SECURING OUR LOANS DECREASES.
First Federal's financial results may be adversely affected by changes
in prevailing economic conditions, including decreases in real estate values,
changes in interest rates which may cause a decrease in interest rate spreads,
adverse employment conditions, the monetary and fiscal policies of the federal
and New Mexico state governments and other significant external events. Because
we have a significant amount of real estate loans in New Mexico, decreases in
real estate values in New Mexico could adversely affect the value of property
used as collateral. Adverse changes in the economy may also have a negative
effect on the ability of borrowers to make timely repayments of their loans,
which would have an adverse impact on First Federal's earnings.
FIRST FEDERAL OPERATES IN A HIGHLY REGULATED ENVIRONMENT AND MAY BE ADVERSELY
AFFECTED BY CHANGES IN LAWS AND REGULATIONS.
First Federal is subject to extensive regulation, supervision and
examination by the Office of Thrift Supervision, its chartering authority, and
by the Federal Deposit Insurance Corporation, which insures First Federal Bank's
deposits. As a savings and loan holding company, First Federal is subject to
regulation and supervision by the Office of Thrift Supervision. Such regulation
and supervision govern the activities in which financial institutions and their
holding companies may engage and are intended primarily for the protection of
the federal deposit insurance fund and depositors. These regulatory authorities
have extensive discretion in connection with their supervisory and enforcement
activities, including the imposition of restrictions on the operations of
financial institutions, the classification of assets by financial institutions
and the adequacy of financial institutions' allowance for loan losses. Any
change in such regulation and oversight, whether in the form of regulatory
policy, regulations, or legislation, could have a material impact on First
Federal and First Federal Bank.
First Federal's operations are also subject to extensive regulation by
other federal, state and local governmental authorities, and are subject to
various laws and judicial and administrative decisions that impose requirements
and restrictions on its operations. These laws, rules and regulations are
frequently changed by legislative and regulatory authorities. There can be no
assurance that changes to existing laws, rules and regulations, or any other new
laws, rules or regulations, will not be adopted in the future, which could make
compliance more difficult or expensive or otherwise adversely affect First
Federal's business, financial condition or prospects.
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.
19
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;
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, GFSB
claims the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995.
20
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 December 31, 2004 $ 10.84 $ 16.67 $ 11.95 (2) $ 14.08
CASH DIVIDENDS DECLARED PER COMMON SHARE:
For the three months ended December 31, 2004 $ 0.0375 $ 0.125 $ 0.0375 (3) $ 0.044
DILUTED NET INCOME PER COMMON SHARE:
Three months ended December 31, 2004 $ 0.23 $ 0.27 $ 0.28 $ 0.33
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 $ 11.86 (2) $ 13.97
CASH DIVIDENDS DECLARED PER COMMON SHARE:
For the Year ended September 30, 2004 $ 0.1875 $ 0.485 $ 0.1875 (3) $ 0.213
DILUTED NET INCOME PER COMMON SHARE:
Year ended September 30, 2004 $ 0.96 $ 1.26 $ 1.17 $ 1.38
- ------------------------------
(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 1.17806 to reflect the
exchange ratio in the merger.
21
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
information regarding First Federal for the period ended December 31, 2004 is
derived from the interim unaudited financial statements, and for the years ended
September 30, 2004, 2003 and the two year period ended September 30, 2004 is
derived from its audited financial statements. The information regarding GFSB at
and for the years ended June 30, 2004 and 2003 and the two year period ended
June 30, 2004, is derived from their audited financial statements incorporated
by reference from the GFSB Annual Report on Form 10-KSB, a copy of which is
attached as Annex E herewith. Prior year-end information is not incorporated
herein by reference. The interim unaudited and audited financial statements of
First Federal are included as part of this joint proxy statement/prospectus. 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 six months ended December 31, 2004 and 2003 are included in GFSB's
Quarterly Report on Form 10-QSB, both of which are included in Annex E.
SELECTED HISTORICAL FINANCIAL INFORMATION FOR FIRST FEDERAL
AT DECEMBER 31, AT SEPTEMBER 30,
---------------- ---------------------------------------------------------------------------
2004 2004 2003 2002 2001 2000
---------------- ------------- ------------- ------------- ------------- -------------
SELECTED FINANCIAL CONDITION DATA:
Total assets....................... $ 348,369,901 $ 348,055,325 $ 359,184,512 $ 325,361,381 $ 289,218,873 $ 257,454,750
Loans receivable, net.............. 255,653,808 251,662,258 250,893,814 251,387,806 227,574,766 211,994,209
Loans held-for-sale................ 1,852,070 1,776,667 4,043,369 3,466,259 1,032,292 846,751
Investment securities.............. 36,755,831 41,167,030 49,726,259 24,050,086 22,135,154 28,428,828
Interest-earning deposits.......... 26,429,880 27,944,363 33,397,851 26,722,112 20,441,362 599,425
Deposits........................... 255,506,247 254,393,577 263,440,711 255,762,658 238,566,675 212,093,127
Borrowings......................... 55,953,516 57,329,399 61,508,851 37,655,292 20,760,239 18,805,833
Stockholders' equity............... 34,818,357 33,992,385 31,953,375 30,007,872 27,601,264 24,353,386
FOR THE THREE MONTHS
ENDED DECEMBER 31, YEARS ENDED SEPTEMBER 30,
------------------------- ------------------------------------------------------------------
2004 2003 2004 2003 2002 2001 2000
----------- ----------- ----------- ----------- ----------- ----------- -----------
SELECTED OPERATING DATA:
Interest income............. $ 4,678,839 $ 4,717,705 $18,771,567 $20,829,432 $21,016,426 $22,543,552 $21,202,083
Interest expense............ 1,305,092 1,470,717 5,680,538 6,504,500 7,225,473 10,869,364 10,426,447
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net interest income...... 3,373,747 3,246,988 13,091,029 14,324,932 13,790,953 11,674,188 10,775,636
Provision for loan losses... 143 (674) (198,130) 90,980 357,574 213,386 509,797
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net interest income
after
provision for loan
losses................. 3,373,604 3,247,662 13,289,159 14,233,952 13,433,379 11,460,802 10,265,839
Other income................ 460,592 521,099 1,937,683 2,431,892 1,488,927 1,113,822 857,039
Other expense .............. 2,555,736 2,556,160 10,258,644 10,873,477 9,776,474 8,394,581 7,923,892
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before income tax
expense..................... 1,278,460 1,212,601 4,968,198 5,792,367 5,145,833 4,180,043 3,198,986
Income tax expense.......... 512,114 485,016 1,911,147 2,221,869 2,004,323 1,669,168 1,225,848
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income............... $ 766,346 $ 727,585 $ 3,057,051 $ 3,570,498 $ 3,141,510 $ 2,510,875 $ 1,973,138
=========== =========== =========== =========== =========== =========== ===========
22
FOR THE THREE MONTHS
ENDED DECEMBER 31, (4) YEARS ENDED SEPTEMBER 30,
------------------------- ------------------------------------------------------------------
2004 2003 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% 0.8% 0.9% 1.0% 1.0% 0.9% 0.6%
Return on equity (ratio of
net income to average
equity).................. 8.9% 9.3% 9.4% 11.5% 10.3% 8.5% 6.4%
Average interest rate
spread (1) .............. 3.5% 3.2% 3.6% 3.4% 4.0% 4.1% 3.9%
Net interest margin (2)..... 4.2% 3.8% 4.0% 4.3% 4.7% 4.4% 3.1%
Efficiency ratio (3)........ 18.3% 18.9% 67.4% 65.2% 65.5% 66.8% 71.2%
Non-interest expense to
average total assets .... 3.0% 2.8% 2.9% 3.1% 3.2% 3.0% 2.3%
Dividend payout ratio....... 15.7% 0.0% 19.5% 26.1% 22.6% 17.7% 18.1%
Average interest-earning
assets to average
interest-bearing
liabilities.............. 116.7% 115.5% 115.5% 114.1% 113.5% 111.6% 114.5%
ASSET QUALITY RATIOS:
Non-performing assets to
total assets............. 0.2% 0.2% 0.1% 0.3% 0.4% 0.4% 0.5%
Non-performing loans to
total loans.............. 0.2% 0.3% 0.2% 0.4% 0.3% 0.3% 0.4%
Allowance for loan losses
to non-performing loans.. 396.1% 363.6% 455.1% 269.4% 279.5% 291.2% 216.5%
Allowance for loan losses
to total loans........... 0.9% 1.0% 0.9% 1.0% 1.0% 1.0% 0.9%
Allowance for loan losses
to gross loans........... 0.9% 1.0% 0.9% 1.0% 1.0% 1.0% 0.8%
CAPITAL RATIOS:
Equity to total assets at
end of period............ 10.0% 8.7% 9.8% 8.9% 9.2% 9.5% 9.5%
Average equity to average
assets................... 9.9% 8.7% 9.1% 9.0% 10.0% 10.6% 9.0%
Risk-based capital ratio
(bank only).............. 15.0% 14.0% 14.8% 13.4% 14.2% 14.8% 14.9%
OTHER DATA:
Number of full service
offices.................. 10 10 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.
(4) Applicable ratios have been annualized.
23
Information set forth below for GFSB for the six months ended December
31, 2004 and 2003 was derived from unaudited financial statements and includes
normal, recurring adjustments necessary to fairly present the data for those
periods. The data at and for these periods are not necessarily indicative of
expected results for a full year's operation.
SELECTED HISTORICAL FINANCIAL INFORMATION FOR GFSB
AT OR FOR THE SIX
MONTHS ENDED
DECEMBER 31,(7) AT OR FOR THE YEARS ENDED JUNE 30,
------------------- -----------------------------------------------------
2004 2003 2004 2003 2002 2001 2000
-------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
FINANCIAL CONDITION DATA:
Total Assets $217,257 $239,521 $232,087 $229,955 $206,145 $197,053 $176,786
Investment securities available-for-sale 27,910 32,733 30,519 29,279 23,973 21,804 25,439
Investment securities held-to-maturity 390 399 399 676 1,405 1,946 1,681
Mortgage-backed securities available for
sale 26,454 32,460 30,680 38,517 27,290 32,377 28,931
Loans receivable, net, substantially pledged 148,420 157,745 152,842 146,396 139,748 130,431 109,777
Deposits 131,589 139,702 133,860 129,759 110,349 106,660 79,948
FHLB advances 60,468 72,399 73,652 76,642 76,386 72,106 82,935
Total equity, substantially restricted 19,116 18,170 18,132 17,744 16,383 14,979 12,686
OPERATING DATA:
Interest income $ 5,945 $ 6,094 $ 12,115 $ 12,743 $ 13,504 $ 14,437 $ 11,989
Interest expense 2,417 2,877 5,469 6,162 7,475 9,033 7,118
Net interest income 3,529 3,216 6,646 6,581 6,029 5,404 4,871
Provision for loan losses 60 130 969 452 220 345 205
Net interest income after provision for
loan losses 6,469 3,086 5,677 6,129 5,809 5,059 4,666
Noninterest income 511 446 867 623 390 418 250
Noninterest expense 2,638 2,306 4,630 4,371 3,740 3,060 2,699
Income before income taxes 1,342 1,227 1,913 2,382 2,459 2,417 2,217
Income taxes 541 400 563 692 848 757 657
Net income 801 827 1,350 1,690 1,611 1,660 1,560
PER SHARE DATA:
Basic income per share $ 0.70 $ 0.74 $ 1.20 $ 1.52 $ 1.46 $ 1.50 $ 1.36
Diluted income per share 0.67 0.70 1.14 1.46 1.41 1.46 1.34
Dividends per share 0.25 0.235 0.49 0.43 0.394 0.34 0.30
PERFORMANCE RATIOS:
Return on average assets(1) 0.7% 0.7% 0.6% 0.8% 0.8% 0.9% 1.0%
Return on average equity(2) 8.5% 9.3% 7.5% 9.8% 10.2% 11.9% 12.6%
Net interest margin(3) 3.3% 2.8% 2.9% 3.2% 3.1% 3.0% 3.1%
Operating (noninterest) expense to average
total assets 2.3% 1.9% 2.0% 2.0% 1.9% 1.6% 1.7%
Efficiency ratio(4) 65.3% 63.0% 61.6% 60.7% 58.3% 52.6% 52.7%
Dividend payout ratio(5) 35.7% 31.8% 40.4% 28.3% 26.7% 22.7% 22.4%
ASSET QUALITY RATIOS:
Nonperforming loans to net loans(6) 0.6% 1.9% 0.9% 1.6% 0.7% 0.5% 0.7%
Allowance for loan losses to non-performing
loans 181.7% 51.5% 126.9% 60.3% 92.7% 135.5% 71.2%
Allowance for loan losses to gross loans 1.1% 1.0% 1.1% 0.9% 0.7% 0.6% 0.5%
- -------------------------------
(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.
(7) Applicable ratios have been annualized.
24
SUMMARY SELECTED PRO FORMA COMBINED DATA
The following table shows information regarding First Federal's
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, for the periods presented as if the
merger had become effective on the statement date with respect to balance sheet
information, and as of October 1, 2003 for 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 from 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
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.
This summary pro forma information should be read in conjunction with
the information under "PRO FORMA FINANCIAL INFORMATION" and with the historical
information included in or incorporated by reference in this document on which
it is based.
AT DECEMBER 31,
2004
(IN THOUSANDS)
PRO FORMA COMBINED BALANCE SHEET DATA
Total assets $567,602
Loans receivable, net 408,846
Deposits 387,562
Total stockholders' equity 46,750
THREE MONTHS TWELVE MONTHS
ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
2004 2004
-------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA COMBINED INCOME STATEMENT DATA:
Interest income $7,575 $30,462
Interest expense 2,502 10,696
Net interest income 5,073 19,766
Provision for loan losses (60) (711)
Net interest income after provision for loan losses 5,013 19,055
Non-interest income 716 2,863
Non-interest expense 3,961 15,354
Net income 1,001 4,250
PRO FORMA PER SHARE DATA: (1)
Basic net income $0.26 $1.09
Diluted net income $0.25 $1.06
- -------------------------------
(1) Per share data has been adjusted to reflect an eight-for-one
stock split.
25
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 closing 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 December 31, 2004 (2) (2) $0.0375 $23.60 $19.53 $0.125
Quarter ended September 30, 2004 $12.06 $9.875 $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.
26
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 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. You may also be asked to vote upon a
proposal to adjourn the special meeting. First Federal could use any such
adjournment of the special meeting for the purpose, among others, of allowing
more time to solicit votes to approve the merger agreement. First Federal may
adjourn the meeting for up to 30 days without any new notice being mailed to
stockholders.
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.
27
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.
28
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.
29
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. You may also be asked to vote upon a
proposal to adjourn the special meeting. GFSB could use any such adjournment of
the special meeting for the purpose, among others, of allowing more time to
solicit votes to approve the merger agreement. Any such adjournment could be a
period up to 29 days without any new notice being mailed to stockholders.
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.
30
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.
31
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.
32
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.
33
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 206,184 10,800 6.78
Aubrey L. Dunn, Jr. 90,960 22,000 3.52
Arturo Jurado 73,560 3,200 2.41
Russell Weems 14,160 10,800 0.78
James E. Paul, Jr. 2,800 10,800 0.42
Michael A. McMillan 33,968 6,000 1.25
Larry Sheffield 59,136 8,000 2.10
George A. Rosenbaum, Jr. -- 8,800 0.28
All directors and executive officers as
a group (10 persons) 1,660,944 101,200 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.
34
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.
ERCENT 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 87,312 7.6%
Gallup, New Mexico 87301
Richard C. Kauzlaric
221 West Aztec Avenue 129,475 11.2%
Gallup, New Mexico 87301
George S. Perce
221 West Aztec Avenue 87,332 7.6%
Gallup, New Mexico 87301
35
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 11.3
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.
36
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 ALL MATERIAL
ASPECTS OF THE MERGER AND TERMS OF THE MERGER AGREEMENT. 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 December 31, 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.
37
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 $16.977, which represents 165% of its diluted 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
Federal common stock plus cash for those shares not converted
into First Federal common stock.
38
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 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
39
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 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
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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 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 $16.977. 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.
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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, dated
January 2, 2004, and was sent information regarding GFSB on at that time.
Beginning 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, Mr. Aubrey L. Dunn, Jr., had several informal discussions
with Mr. Richard C. Kauzlaric, the President of GFSB, concerning the business
and operations of GFSB. 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 had
informally and without compensation previously assisted First Federal with
respect to strategic initiatives from time to time and is familiar with the
operating history of First Federal. Mr. Matthew F.X. Veneri, a Vice President of
Hovde attended a meeting of the board of directors of First Federal on February
26, 2004 during which an analysis of 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. After reviewing additional information regarding
GFSB during the period beginning March 10, 2004 and ending March 17, 2004, Hovde
participated by telephone in a Board meeting of First Federal during which an
initial offer for GFSB was discussed and agreed upon. Shortly thereafter, Hovde
drafted an indication of interest which was finalized and approved by First
Federal and sent to Mr. Parker Lofgren at McDonald, GFSB's financial advisor, on
March 22, 2004.
Mr. Veneri and Mr. Lofgren had numerous conversations during the
following days regarding the March 22, 2004 indication of interest, particularly
regarding the overall value for GFSB, the mix of cash and stock, board
representation and composition and the treatment of GFSB's existing stock
options. These conversations were finalized on April 1, 2004 and the results
were reported to Mr. Dunn at First Federal. On April 5, 2004, a revised
indication of interest was drafted by Mr. Veneri at Hovde and was sent to Mr.
Dunn and First Federal's counsel. After approval of this revised indication of
interest, on April 6, 2004, First Federal sent it to GFSB proposing a merger
between the two institutions.
During the last week of April and the first week of May 2004, a due
diligence team, comprised of representatives from First Federal, Hovde and First
Federal's legal counsel, reviewed GFSB's assets and liabilities. Those present
during this due diligence process were Messrs. Dunn, Veneri, George Rosenbaum,
First Federal's Chief Financial Officer, Jim Nelson, First Federal's Chief
Credit Officer, and four other members of First Federal's lending group. During
the week of May 10, 2004, the team of First Federal representatives reviewed and
formalized the results of the due diligence process. Of particular
42
importance was the credit file review conducted by Mr. Nelson and his staff. A
conversation was held between Messrs. Dunn, Rosenbaum, Nelson and Veneri on May
12, 2004 to detail the findings of the credit file review in order to address
any issues that had become apparent as a result of such review. A conference
call was then scheduled for May 20, 2004 between certain parties from First
Federal, including Messrs. Dunn, Rosenbaum, Nelson and Veneri and certain
parties from GFSB, including Messrs. Kauzlaric, Jerry Spurlin, Richard Gallegos
and Lofgren. During this telephone call, the findings from the due diligence
process were discussed and questions regarding the loan files identified by Mr.
Nelson were raised in order to get a clearer understanding of any credit issues.
Mr. Nelson incorporated the results of the conference call into his analysis
and, based on this, along with other items identified by First Federal's due
diligence team regarding the financial performance of GFSB, a revised indication
of interest was prepared and presented to First Federal's Board for approval on
May 27, 2004. This revised indication of interest was memorialized in writing
and sent to Mr. Lofgren on May 28, 2004 in the form of a memorandum amending the
April 6, 2004 indication of interest. At GFSB's request, the contents of the May
28, 2004 memorandum were put into a formal expression of interest dated June 8,
2004, which became the basis for the merger agreement, and was sent via email
and facsimile to McDonald.
This drafting process commenced on June 14, 2004 and over the ensuing
weeks a total of six drafting sessions occurred involving the full board of
directors and/or senior management of First Federal along with its legal counsel
and, on one occasion, the involvement of Mr. Veneri from Hovde.
The merger agreement that resulted from these drafting sessions was
submitted to GFSB on July 7, 2004. First Federal's legal counsel received
initial comments from GFSB's legal counsel and financial advisor on July 16,
2004. On July 28, 2004, Messrs. Veneri and Lofgren had a telephonic conversation
to address the remaining issues still unresolved in the merger agreement. Of
particular importance during this conversation were the severance payments,
dividend payments, employment agreements for key executives, the treatment of
options and the date to be used to determine the First Federal stock price.
Messrs. Veneri, Dunn and Rosenbaum had several discussions during the week of
August 2, 2004 specifically regarding these issues. These issues were finally
agreed upon during the week of August 9, 2004 during two telephone calls between
Messrs. Veneri, Dunn, Kauzlaric and Lofgren. These revisions were incorporated
in the merger agreement at that time.
First Federal's board of directors, along with its legal counsel and
Hovde, held several meetings, either in person or by telephone during the week
of August 16th, 2004, with a final meeting occurring on August 24, 2004. At this
last meeting, the final version of the merger agreement was approved and Hovde
provided First Federal with its opinion as to the fairness, from a financial
point of view, of the merger consideration to the stockholders of First Federal.
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.
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
43
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 which 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.
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
44
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 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. In
particular, the primary issue still being negotiated were the date to be used to
determine the value of the First Federal stock, the method, for converting
options, limitations on dividend payments during the pendancy of the agreement
and various social issues.
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.
The board also believed that stockholders would benefit by having an ownership
interest in a larger, more geographically diverse, and publicly traded company.
Accordingly, the members of the First Federal board of directors unanimously
approved and adopted the merger agreement and recommend 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 the following positive and negative factors in
reviewing and approving the merger agreement:
POSITIVE FACTORS
o the increased per share income to First Federal stockholders of
the combined company on a pro forma basis;
o a larger combined company of approximately $570 million in total
assets on a pro forma basis, and 14 branches located throughout
the state of New Mexico and in El Paso, Texas;
o the attractiveness of having a branch office in Farmington, New
Mexico;
o the cost saving and efficiencies that could be obtained by
combining the respective company's personnel and technologies;
45
o the benefits provided to its stockholders by being able to
freely purchase or sell shares on a listed market; and
o as a larger company that is publicly traded, its stock could
command a higher overall multiple of book value.
NEGATIVE FACTORS
o the fact that existing First Federal stockholders' ownership
interest will be diluted by the proposed transaction;
o the requirement that two GFSB directors be placed on First
Federal's board of directors and their interaction with existing
board members;
o the costs and compliance burden of being a publicly traded,
public reporting company;
o the integration and management of additional employees;
o the ability to properly supervise distant branch offices;
o the added strain of integrating Gallup Federal Savings Bank's
loan system into First Federal Bank's system;
o the net charge-offs in Gallup Federal Savings Bank's loan
portfolio as compared to First Federal Bank's loan portfolio;
and
o the longer term duration of investments in Gallup Federal
Savings Bank's investment portfolio as compared to the shorter
term duration of investments in First Federal Bank's investment
portfolio.
The discussion of the factors considered by the First Federal 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 First Federal board did
not assign any specific or relative weights to any of the foregoing factors, and
individual directors may have weighted factors differently. The First Federal
board conducted an overall analysis of the factors described above, including
thorough discussions with, and questioning of, First Federal management and
First Federal's legal and financial advisors, and considered the factors overall
to be favorable to, and to support, its determination.
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 the legal duties and
the other terms of the merger agreement. The primary reason for the board's
determination was its 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
46
First Federal. The board also believed that stockholders would benefit by having
the opportunity to become part of a larger and more geographically diverse
entity. Additionally, the board considered the opinion of GFSB's financial
advisor that the merger consideration is fair, from a financial point of view,
to the holders of GFSB common stock.
In connection with its review and approval of the merger agreement, the
board also considered numerous factors, including the following positive and
negative factors:
POSITIVE FACTORS
o The fact that GFSB stockholders who receive shares of First
Federal common stock will be entitled to receive the same level
of public disclosure regarding their investment as they
currently receive due to First Federal's agreement that it will
register its common stock under the Securities Exchange Act of
1934, as amended;
o First Federal's agreement that it will use its best efforts to
have its common stock listed on the Nasdaq SmallCap Market which
will assist in the development of a market for the stock;
o GFSB's positive perception about First Federal and its prospects
due to its understanding of and review of information concerning
the business, results of operations, financial condition,
competitive position and future prospects of First Federal
including the results of its due diligence review of First
Federal;
o The GFSB board's belief that pursuing the merger with First
Federal would be more beneficial to stockholders than remaining
independent due to 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 effects of these
factors of GFSB in light of, and in the absence of, the proposed
merger with First Federal;
o The perceived ability of First Federal to receive the requisite
regulatory approvals in a timely manner; and
o The terms and conditions of the merger agreement, including the
parties' respective representations and warranties, the
restrictive covenants and other agreements, the conditions to
closing and termination provisions which the Board believed
provided adequate assurances about the current operations of
First Federal and sufficiently limited the types of activities
First Federal could undertake during the pendancy of the merger
agreement.
NEGATIVE FACTORS
o The fact that the First Federal common stock was not currently
listed or traded on any established market and therefore there
was no assurance that an active and liquid market would develop
for the First Federal common stock after the merger or the price
at which the First Federal common stock would trade;
47
o The provisions in the merger agreement limiting the number of
shares that may be exchanged for cash and for stock which is
likely to result in some stockholders receiving a form of merger
consideration other than what they actually elected;
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
although this factor was mitigated somewhat by the fact that
such circumstances would generally involve the receipt and
consummation of an acquisition proposal with a third party; and
o The fact that the merger agreement limits GFSB's ability to
solicit or discuss alternative transactions during the pendancy
of the merger, although this was mitigated by the fact that
GFSB's board was permitted, in the exercise of its fiduciary
duties, to engage in discussions with parties who submit an
unsolicited proposal.
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
The boards of First Federal and GFSB believe that one of the potential
beneficial effects of the merger will be the realization of cost savings
resulting from the combination of the two companies, thereby enhancing the
earnings of First Federal.
First Federal expects to reduce expenses by eliminating areas where
there are redundancies and combining certain support and other functions after
the merger. First Federal believes that it will achieve these cost savings by:
reducing data processing costs; reducing the ratio of professional fees to
revenues; achieving economies of scale in advertising and marketing budgets; and
eliminating certain duplicative "back office" functions.
In identifying prospective cost savings, First Federal, with the
assistance of its financial advisor, Hovde, reviewed its general and
administrative expenses as well as other non-interest expenses budgeted for
2004. Categories for each of the general and administrative expenses and the
other non-interest expenses were evaluated and First Financial and Hovde
estimated the percent of low-, mid- and high-range cost savings that potentially
could be achieved for each category. These ranges of cost savings estimates were
then averaged across the categories for each of the general and administrative
expenses and the other non-interest expenses, such that an average estimated
percent of low-, mid-, and high-range cost savings could be established for the
general and administrative expenses and the other non-interest expenses.
48
In examining the general and administrative expenses the following
categories were considered: Directors compensation, MSBP salaries,
administrative, bookkeeping, operations, real estate, commercial, consumer,
overtime/other salaries, performance bonuses, and benefits. It was estimated
that, with respect to general and administrative expenses, the low-range cost
savings would be 13%, the mid-range cost savings would be 18%, and the
high-range cost savings would be 23%. First Federal and Hovde believe that the
mid-range cost savings estimate of 18% of the general and administrative
expenses that was budgeted $2,228,306 for 2004 can reasonably be anticipated.
In examining the other non-interest expenses the following categories
were considered: Data processing, armored transfer, legal & professional fees,
advertising, organizational dues and subscriptions, audit and accounting
services, charitable contributions, federal insurance premiums, insurance and
surety bond premiums, postage, ATM expenses, supervisory fees, travel, and
directors' travel, directors' meals. It was estimated that, with respect to
other non-interest expenses, the low-range cost savings would be 16%, the
mid-range cost savings would be 28%, and the high-range cost savings would be
39%. First Federal and Hovde believe that the mid-range cost savings estimate of
28% of the other non-interest expenses that was budgeted $1,490,359 for 2004 can
reasonably be anticipated.
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 assurances as to whether
First Federal will be able to achieve any of these cost savings.
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: An ability to offer a wider variety of
banking products and services to GFSB's customers; and 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 these revenue enhancements and any projections with respect to such revenue
enhancements are speculative and cannot be quantified.
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
period indicated. These are known as "pro forma" financial statements. No cost
savings or revenue enhancements were included in the pro forma financial
statements.
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 merger 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
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.
49
FEES PAYABLE TO HOVDE
Hovde will receive a fee equal to approximately $250,000 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. Except for the consideration paid or payable by First
Federal to Hovde in connection with the merger, Hovde has not received any
consideration from either First Federal or GFSB during the past two years. Hovde
did not determine the amount of merger consideration to be paid in respect of
the merger. The merger consideration was determined by negotiations between the
parties.
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. WE ENCOURAGE YOU TO READ THE FULL-TEXT
OF HOVDE'S OPINION, ATTACHED TO THIS DOCUMENT AS ANNEX B.
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:
50
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)
- ----------------------------------------- -------------------------------------------
51
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:
52
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
53
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
- -------------------------------------------- --------------------- ----------------------
54
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 calculations of price-to-last
twelve months estimated earnings and price-to-tangible book value are as of
August 24, 2004 (One day prior to Hovde's presentation to First Federal's
Board).
- ------------------------------------- -------- --------- ---------- --------- --------- ------------ ---------- -----------
NPAs/ Price to Price to Price to
Assets Tang. Book MRQ EPS LTM EPS
ROA (%) ROE (%) TER (%) (%) 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 16.0% 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.
55
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 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 1.17806 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 fully diluted value of $140.21 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
56
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.
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 opinion 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 TO THIS DOCUMENT AS ANNEX C. IT SHOULD BE
READ CAREFULLY AND IN ITS ENTIRETY IN CONJUNCTION WITH THIS JOINT PROXY
STATEMENT/PROSPECTUS. THE FOLLOWING IS A SUMMARY OF MCDONALD'S 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;
57
(ix) certain other information concerning First Federal;
(x) discussions with First Federal 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 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.
58
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 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 $24.6 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.
59
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:
MEAN MEDIAN GFSB(1)
---------------- --------------- ----------------------
Total Assets ($000) $228,011 $228,884 $232,087
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 $232,087
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
60
Gallup, New Mexico from the standpoint of geographic proximity to larger
markets, per capita income levels and growth characteristics.
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.
61
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:
FIRST FEDERAL - PRO
MEAN MEDIAN FORMA(1)
------------------ --------------- ----------------------
Total Assets ($000) $674,115 $693,888 $581,754
Equity /Assets 9.3% 9.0% 7.9%
ROA 0.9% 0.8% 0.9%
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:
62
FIRST FEDERAL - PRO
MEAN MEDIAN FORMA(1)
------------------ --------------- ----------------------
Total Assets ($000) $661,524 $664,815 $581,754
Equity /Assets 0.9% 10.2% 7.9%
ROA 0.91% 0.99% 0.9%
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.
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.
FEES PAYABLE TO MCDONALD
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. Except for
these fees, McDonald has not received any consideration from GFSB during the
past two years. McDonald did not determine the amount of
63
merger consideration to be received by GFSB stockholders in respect of the
merger. The merger consideration was determined by negotiations between the
parties.
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.
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 of Section 262 of the Delaware General Corporation Law, the full
text of which appears in Annex D of this joint proxy statement/prospectus.
Stockholders are encouraged to read the full-text of Section 262 of the Delaware
General Corporation Law. 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 __________, 2005 before 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
64
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 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
65
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, 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
66
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 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:
67
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.
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 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 a 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 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 an employment 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 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.
68
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 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. Scalzi might possibly be entitled to receive a cash severance
payment in the amount of approximately $169,600 and the continuation of certain
benefits. In lieu of any possible 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 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 control agreements with First Federal Bank.
The change in control 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 be 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, GFSB and
Gallup Federal Savings Bank. 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 Gallup Federal Savings Bank 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.
69
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 value of such
option which will be calculated as the excess, if any, of $20.00 over the per
share exercise price multiplied by the number of shares subject to the option.
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 $16.977. 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 $20.00 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 $20.00 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.
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TERMINATION OF THE GALLUP FEDERAL SAVINGS BANK ESOP. GFSB will terminate
its employee stock ownership plan upon completion of the merger. All plan
participants' accounts shall become fully vested at such time. The plan will
repay its existing loan from GFSB and will allocate the plan assets and 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.
Below is a summary of counsel's federal tax opinion, which has been
filed as an exhibit to First Federal's registration statement on Form S-4 with
the SEC.
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.
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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 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 368(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. For
example, if a GFSB stockholder owning 100 shares of GFSB common stock that he
purchased for $15.00 per share receives $20 per share in cash for 49 of his GFSB
shares, and 51 shares of First Federal common stock for his remaining 51 shares
of GFSB common stock, the GFSB stockholder should recognize a taxable gain of
$500, and should have a tax basis in his 51 shares of First Federal common stock
of $1,020 as a result 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
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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 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
The merger, when consummated in accordance with its terms, will qualify
or be treated as a reorganization within the meaning of section 368 of the
Internal Revenue Code. Therefore, 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 who were 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
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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.
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. THE FULL-TEXT OF THE MERGER
AGREEMENT IS ATTACHED AS ANNEX A TO THIS JOINT PROXY STATEMENT/PROSPECTUS.
STOCKHOLDERS ARE ENCOURAGED TO READ THE FULL-TEXT OF THE MERGER AGREEMENT.
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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, 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 $16.977. 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;
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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 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;
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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;
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;
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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;
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;
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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;
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;
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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 $16.977;
o issue any stock options for securities convertible into First
Federal common stock at a per share price of less than $16.977;
o repurchase shares of First Federal common stock for a per share
price greater than $16.977;
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
(or $0.0625 per share of First Federal stock as adjusted to
reflect its eight-for-one stock split) 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.
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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 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.
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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.
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
use its best efforts to 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. 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."
The representations and warranties of GFSB are as follows:
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o that GFSB and its subsidiaries are duly organized, validly
existing, in good standing, and properly licensed by applicable
state and federal authorities;
o that Gallup Federal Savings Bank is GFSB's only insured
depository institution subsidiary and is a member of the Federal
Home Loan Bank of Dallas;
o that GFSB has a certain number of shares of common stock issued
and outstanding, including shares reserved for issuance under
its benefit plans;
o that GFSB has the requisite corporate power and authority to
enter into the merger agreement and that the execution of the
merger agreement has been properly authorized by necessary
corporate actions;
o that the merger agreement will not violate any applicable laws
or result in a breach, default or violation of any other
agreement to which GFSB or any of it subsidiaries is a party;
o that there are no consents or approvals necessary for GFSB to
consummate the merger, except for filings with the federal
banking regulators, the SEC, any state securities
administrators, and the National Association of Securities
Dealers Automated Quotation system;
o that GFSB has made appropriate filings with the SEC since June
30, 2001;
o that GFSB has made its financial statements available to First
Federal for its review and the financial statements fairly
present the consolidated financial position of GFSB and its
subsidiaries;
o that, except as otherwise disclosed to First Federal, GFSB has
no undisclosed liabilities;
o that, except as otherwise disclosed to First Federal or in
GFSB's SEC filings, GFSB has conducted its operations in the
ordinary course of business and that there has been no event or
occurrence that has had, or is reasonably expected to have, a
material adverse effect on GFSB or its ability to complete the
merger;
o that, except as otherwise disclosed to First Federal or in
GFSB's SEC filings, GFSB has not increased 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;
o that, except as otherwise disclosed to First Federal or in
GFSB's SEC filings, 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;
o that, except as otherwise disclosed to First Federal or in
GFSB's SEC filings, there has been no change in any accounting
principles, practices or methods of GFSB or any of its
subsidiaries other than as required by generally accepted
accounting principles;
84
o that there are no lawsuits, 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, individually or in the aggregate, would reasonably be
expected to have a material adverse effect on GFSB or challenge
the validity or propriety of the merger;
o that, 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, and that,
except as otherwise disclosed to First Federal, there are no
judgments, decrees, injunctions, orders or rulings of any
governmental entity or arbitrator outstanding against GFSB or
any of its subsidiaries;
o that, since January 1, 2000, neither GFSB nor any of its
subsidiaries have been a party to a formal or informal action by
any governmental regulator and that 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;
o that GFSB and its subsidiaries conduct their business in
compliance in all material respects with all statutes, laws,
regulations, ordinances, rules, judgments, orders or decrees
applicable to it or the employees conducting such business and,
except as otherwise disclosed to First Federal, 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;
o that all of the federal, state and local tax returns required to
be filed by GFSB and its subsidiaries have been properly filed;
o that, except as otherwise disclosed to First Federal, 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 the merger,
in the payment of any "excess parachute payments" within the
meaning of Section 280G of the Internal Revenue Code 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 Internal Revenue Code;
o that all material contracts and agreements to which GFSB is a
party have been properly disclosed to First Federal or are
otherwise included in GFSB's reports filed with the SEC;
o that, except as otherwise disclosed to First Federal, GFSB is
not in material default or breach of any contract to which it is
a party;
o that, except as otherwise disclosed to First Federal, GFSB and
its subsidiaries possess valid and binding intellectual property
licenses;
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o that GFSB and its subsidiaries are in material compliance with
all applicable labor laws and neither GFSB nor any of its
subsidiaries is a party to or bound by any collective bargaining
agreement, contract or other agreement or understanding with a
labor union or labor organization;
o that all pension, retirement and benefit plans have been
properly disclosed to First Federal;
o that there are no pending or threatened action or liabilities
with respect to any of pension, retirement or benefits plans,
and that any contributions or payments required to be made by
GFSB have been accrued monthly on GFSB's consolidated financial
statements to the extent required and in accordance with
generally accepted accounting principles;
o that the description of all properties owned or leased by GFSB
and its subsidiaries have been properly disclosed to First
Federal and that GFSB has marketable title to such property;
o that GFSB has obtained an opinion from its financial advisor
that the merger is fair, from a financial point of view, to
GFSB's stockholders;
o that, except as otherwise disclosed to First Federal, 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 merger;
o that, except as otherwise disclosed to First Federal, GFSB and
its subsidiaries are in full compliance with applicable
environmental laws and that there are no lawsuits or claims
pending or threatened against GFSB or its subsidiaries for
violations or non-compliance of applicable environmental laws;
o that the notes and security documents of all loans owned by GFSB
or its subsidiaries are originals and are legal, valid and
binding obligations of the borrower, and that GFSB or its
subsidiaries hold legal or beneficial title to such loans;
o that 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 SEC filings for
periods ending after June 30, 2004, in the opinion of GFSB
management, were or will be adequate, as of the dates thereof,
under generally accepted accounting principles;
o that GFSB has properly disclosed to First Federal every loan,
lease or other extension of credit owned by GFSB or its
subsidiaries as of July 31, 2004 which is 90 days or more
delinquent, has been classified as "special mention",
"substandard", "doubtful", "loss", "non-performing", or "of
concern", or involves a borrower or collateral in bankruptcy,
reorganization or similar proceeding, and that since March 31,
2004, there has been no material adverse change in these
categories of loans;
o that except as otherwise disclosed to First Federal, none of the
deposits of Gallup Federal Savings Bank is a brokered deposit,
as that terms is defined by the Federal Deposit Insurance
Corporation;
86
o that the merger is not subject to any anti-takeover provisions
that may be contained in GFSB organizational documents or
provisions of federal law;
o that, except as otherwise disclosed to First Federal, no officer
or director of GFSB, or any "associate" (as such term is defined
in Rule 12b-2 under the Exchange Act of 1934, as amended) 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;
o that GFSB and its subsidiaries are presently insured for amounts
and against such risks as is required by law or contract, and
that the insurance policies and bonds are in full force and
effect;
o that, except as otherwise disclosed to First Federal and except
for restrictions that exist for securities that are classified
as "held to maturity" and 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 their ability to freely to dispose of such investment at
any time;
o that, except as otherwise disclosed to First Federal, 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";
o that, except as otherwise disclosed to First Federal or
contained in its organizational documents, 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 in such capacities 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 its organizational documents
or applicable law;
o that First Federal has been provided with a complete and correct
copy of the organizational documents of GFSB and its
subsidiaries and that neither GFSB nor any of its subsidiaries
is in violation of its organizational documents;
o that the minute books of GFSB and each of its 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;
o that the information regarding GFSB and its subsidiaries to be
supplied by GFSB for inclusion in any SEC filings 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;
87
o that the proxy statement prospectus (except for such portions
thereof as relate only to First Federal or any of its
subsidiaries) will comply as to form in all material respects
with the provisions of the Exchange Act of 1934, as amended, and
applicable SEC rules;
o that Gallup Federal Savings Bank is in material compliance with
the requirements of the Community Reinvestment Act and has a
satisfactory rating under that law, and, to the knowledge of
GFSB, there is no facts or circumstances that would cause Gallup
Federal Savings Bank to fail to comply with that law or cause
its rating to fall below satisfactory;
o that GFSB has no knowledge of any facts or circumstances
relating to it that would prevent the merger from qualifying as
a reorganization under Section 368 of the Internal Revenue Code;
o that Gallup Federal Savings Bank maintains an effective
anti-money laundering program and is in compliance with federal
laws and regulations relating to such anti-money laundering
program; and
o that 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 the merger agreement is the
only vote of the holders of any class or series of the GFSB's
capital stock necessary to approve and adopt the merger
agreement or merger.
The representations and warranties of First Federal are as follows:
o that First Federal and its subsidiaries are duly organized,
validly existing, in good standing, and properly licensed by
applicable state and federal authorities;
o that First Federal Bank is First Federal's only insured
depository institution subsidiary and is a member of the Federal
Home Loan Bank of Dallas;
o that First Federal has a certain number of shares of common
stock issued and outstanding, including shares reserved for
issuance under its benefit plans;
o that, subject to requisite stockholder approval, First Federal
has the requisite corporate power and authority to enter into
the merger agreement and that the execution of the merger
agreement has been properly authorized by necessary corporate
action of First Federal's board of directors;
o that, assuming appropriate approvals from governmental entities,
the merger agreement will not violate any applicable laws or
result in a breach, default or violation of its organizational
documents or any agreement to which First Federal or any of it
subsidiaries is a party;
o that there are no consents or approvals necessary for First
Federal to consummate the merger, except for filings with the
federal banking regulators, the SEC, any state securities
administrators, and the National Association of Securities
Dealers Automated Quotation system;
88
o that First Federal has made its financial statements available
to GFSB for its review and the financial statements fairly
present the consolidated financial position of First Federal and
its subsidiaries;
o that, except as otherwise disclosed to GFSB, since September 30,
2003, First Federal has conducted its operations in the ordinary
course of business and that there has been no event or
occurrence that has had, or is reasonably expected to have, a
material adverse effect on First Federal or its ability to
complete the merger;
o that, except as otherwise disclosed to GFSB, since September 30,
2003, neither First Federal nor any of its subsidiaries has made
any change in its accounting principles, practices or methods,
other than as required by generally accepted accounting
principles;
o that there are no lawsuits, actions or legal, administrative or
arbitration proceedings pending or, to the knowledge of First
Federal, threatened against or affecting First Federal or any of
its subsidiaries or any property or asset of First Federal or
any of its subsidiaries that, individually or in the aggregate,
would reasonably be expected to have a material adverse effect
on First Federal or challenge the validity or propriety of the
merger;
o that, since January 1, 1999, neither First Federal nor any of
its subsidiaries have been a party to a formal or informal
action by any governmental regulator and that there are no
unresolved violations, criticisms or exceptions by any
government regulator with respect to any report or statement
relating to any examinations of First Federal or its
subsidiaries;
o that First Federal and its subsidiaries conducts its business in
compliance with all statutes, laws, regulations, ordinances,
rules, judgments, orders or decrees applicable to it and that
neither First Federal 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 that would have a material
adverse effect on First Federal;
o that all of the federal, state and local tax returns required to
be filed by First Federal and its subsidiaries have been
properly filed;
o that neither First Federal nor any of its subsidiaries is in
default, violation or breach of any note, bond, indenture, or
agreement to which it is a party, except for defaults or
violations that would not, individually or in the aggregate,
have a material adverse effect on First Federal;
o that the information regarding First Federal and its
subsidiaries to be included in any SEC filings 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;
o that the proxy statement prospectus (except for such portions
thereof as 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 of 1934, as amended, and applicable SEC
rules;
89
o that First Federal Bank is in material compliance with the
requirements of the Community Reinvestment Act and has a
satisfactory rating under that law, and, to the knowledge of
First Federal, there is no facts or circumstances that would
cause First Federal Bank to fail to comply with that law or
cause its rating to fall below satisfactory;
o that First Federal has no knowledge of any facts or
circumstances relating to it that would prevent the merger from
qualifying as a reorganization under Section 368 of the Internal
Revenue Code;
o that, as of the effective time of the merger, First Federal will
have the funds available to pay the aggregate cash consideration
for the merger and any other amounts payable pursuant to this
merger agreement;
o that First Federal Bank is, and immediately following the merger
will be, in compliance with all applicable capital requirements;
o that First Federal Bank maintains an effective anti-money
laundering program and is in compliance with federal laws and
regulations relating to such anti-money laundering program;
o that, except as otherwise disclosed to GFSB and for liabilities
incurred since March 31, 2004 in the ordinary course of business
consistent with past practice that would not reasonably be
expected to have a material adverse effect on First Federal and
liabilities incurred for professional services and out-of-pocket
expenses in connection with the merger, neither First Federal
nor any of its subsidiaries has incurred any debt, liability or
obligation of any nature whatsoever other than liabilities
reflected on or reserved against in the consolidated balance
sheet of First Federal as of March 31, 2004;
o that the affirmative vote at the First Federal stockholders
meeting of the holders of a majority of the outstanding shares
of First Federal common stock to approve and adopt the merger
agreement is the only vote of the holders of any class or series
of the First Federal's capital stock necessary to approve and
adopt the merger agreement or merger;
o that First Federal 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 or acquired after that date (except properties, interests
in properties and assets sold or otherwise disposed of in the
ordinary course of business), and that all utilized by First
Federal are reflected in its balance sheets to the extent
required by generally accepted accounting principles, and that
all leases are in good standing, valid and effective in
accordance with their respective terms, and that there is no
existing default or event of default under those leases;
o that to the knowledge of First Federal, it is in compliance with
all applicable environmental laws, has all permits,
authorizations and approvals required under applicable
environmental laws (and is in compliance with the requirements
of such permits, authorizations and approvals), and there are no
pending or threatened 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;
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o that all of the loans on the books of First Federal are valid
and properly documented and were made in the ordinary course of
business, and the security for the loans, if any, is valid and
properly perfected;
o that neither the terms of loans on the books of First Federal
nor any of the loan documentation or the manner in which such
loans have been administered and serviced, or First Federal's
procedures and practices of approving or rejecting loan
applications, violates any applicable law, rule or regulation
thereto; and
o that the allowance for loan losses reflected on First Federal's
consolidated balance sheet as of June 30, 2004, and in the case
of subsequently delivered financial statements by First Federal
to GFSB, if any, is in the opinion of management, adequate under
generally accepted accounting principles.
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;
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;
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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 fails to recommend approval of the merger or withdrew,
qualified or modified recommendation to approve the merger, or (ii) 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
directors withdraws or revises its recommendation to its
stockholders to approve the merger agreement in an adverse way;
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.
92
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. Following the merger, Gallup Federal Savings Bank's offices will
retain their current names, but operate as branches of 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 MANAGEMENT'S 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, 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, New Mexico 88201, and
nine branch offices located in Lincoln, Otero, Dona Ana and Bernalillo Counties
in New Mexico and El Paso County, Texas. First Federal's 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'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 in this joint proxy statement/prospectus.
COMMITMENT FOR TRUST PREFERRED STOCK FINANCING
93
During January 2005, First Federal issued through Cohen Brothers & Co.
$7 million of trust preferred securities. The trust preferred securities 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 was structured so that all dividends paid are tax deductible to First
Federal. The trust preferred securities has a maturity of 30 years and is
redeemable, without penalty beginning March 15, 2010.
Additionally, prior to the commencement of the merger, First Federal
will issue through Cohen Brothers & Co. an additional $3 million in trust
preferred securities. These trust preferred securities carry a floating dividend
rate which is 90-day LIBOR plus 185 basis points. These trust preferred
securities will be structured so that all dividends paid are tax deductible to
First Federal. The trust preferred securities will have a maturity of 30 years
and will be redeemable, without penalty, beginning five years from the date of
their issuance.
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.
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.
94
FINANCIAL CONDITION
DECEMBER 31, 2004 COMPARED TO SEPTEMBER 30, 2004.
Total assets increased slightly by approximately $300,000, or 0.1% from
$348.1 million as of September 30, 2004 to $348.4 million as of December 31,
2004. The increase was primarily due to increases in net loans of approximately
$4.0 million, cash and due from banks of $2.2 million and available-for-sale
investment securities of $2.7 million. Offsetting these increases were declines
in interest bearing deposits with banks of $1.5 million and held-to-maturity
investment securities of $7.1 million.
Total gross loans, excluding loans held for sale, increased $3.6
million, or 1.4% from $254.3 million as of September 30, 2004, to $257.9 million
as of December 31, 2004. The increase in loans was primarily in commercial real
estate loans and consumer loans. The net growth in loans reflect an increase of
$2.7 million in commercial real estate loans, $1.4 million in consumer loans,
$200,000 in residential first mortgage loans, and $200,000 in other commercial
loans offset by a $900,000 decline in construction loans. The increase in
commercial real estate loans was due to increased originations. Consumer loan
growth was primarily driven by a $2.6 million increase in home equity loans
offset by a $1.0 million decline in consumer real estate loans and a $200,000
decrease in consumer auto loans. During this period, First Federal was offering
a new home equity loan product and was experiencing favorable participation in
most markets.
Investment securities declined $4.4 million, or 10.7%, from $41.2
million as of September 30, 2004 to $36.8 million as of December 31, 2004. The
decrease was due primarily to a $7.1 million decline in government and federal
agency held to maturity securities, a $255,000 decline in mortgaged-backed
available for sale securities, a $7,000 decrease in mortgaged-backed held to
maturity securities, offset by a $2.9 million increase in government and federal
agency available for sale securities. First Federal continues the practice of
placing most of our new purchases of investment securities in the available for
sale designation.
Deposits increased $1.1 million, or 0.4% from $254.4 million as of
September 30, 2004 to $255.5 million as of December 31, 2004. The net increase
in deposits is composed of a decline in savings and money market accounts of
$3.4 million and certificate of deposits of $200,000 offset by increases in
non-interest bearing accounts of $1.0 million and interest bearing demand
deposits of $3.7 million. As the Federal Reserve Board has raised short term
interest rates, depositors with funds in savings accounts have begun to seek
alternate investments. 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 $1.6 million from $57.3 million as of
September 30, 2004 to $55.8 million as of December 31, 2004. This decline was
related to maturities and scheduled principal payments of the borrowings.
Additional advances were not necessary due to increases in deposits and no
significant demand for loan funding.
As of December 31, 2004, the loss history had not changed from September
30, 2004 results; therefore, the allowance for loan loss remained flat to the
September 30, 2004 balance of $2.3 million. As of December 31, 2004, management
deemed the allowance adequate to cover probable losses in the portfolio.
95
Stockholders' equity increased $700,000, or 2.1%, to approximately $34.7
million as of December 31, 2004 compared to $34.0 million as of September 30,
2004. This net increase is attributable to an increase in net income for the
period of approximately $766,000 and an increase of $105,000 from the exercise
of stock options. Those increases in equity were offset by cash dividends
declared of approximately $120,000.
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 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 17.2%, 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 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
96
generally borrows through the FHLB only to fund certain long term loans or will
use the borrowings 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 6.3%, 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 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 THREE MONTHS ENDED DECEMBER 31, 2004 AND
DECEMBER 31, 2003
NET INCOME. Net income improved by approximately $39,000 from $727,600
for the three months ending December 31, 2003 to $766,000 for the three months
ending December 31, 2004. The increase was primarily due to an increase in net
interest income of $126,000 offset by a decline of $61,000 in non-interest
income. The decrease in loan income of $55,000 was offset by a reduction in
interest expense of $166,000 and non-interest expense remaining consistent with
the same period in the prior year.
NET INTEREST INCOME. Net interest income before loan loss provision
increased $127,000 from approximately $3.2 million for the three months ending
December 31, 2003 to $3.4 million for the three months ending December 31, 2004.
A decrease in interest income of $39,000 was offset by a decline of $166,000 in
interest expense. The decrease in interest income was due to the decrease in the
yield earned on interest-earning assets, both loans and investment securities,
partially offset by an increase in the average balance of loans during the
period. The average balance of interest-earning assets declined $17.3 million
from $341.9 million for the three months ending December 31, 2003 to $324.6
million for the three months ending December 31, 2004. Interest-earning assets
declined primarily due to a decrease in the average balance of investment
securities of $11.9 million offset by a $4.1 million increase in the average
balance of loans. The average tax equivalent yield on interest-earning assets
was 5.3% for the three months ending December 31, 2004 as compared to 5.2% for
the three months ending December 31, 2003.
97
As lower average rates paid on interest-bearing liabilities continued,
interest expense declined approximately $166,000 from $1.5 million for the three
months ending December 31, 2003 to $1.3 million for the three months ending
December 31, 2004. The average rate paid on interest-bearing liabilities
declined from 2.0% for the three months ending December 31, 2003 to 1.9% for the
same period ending December 31, 2004. The average balance of borrowings declined
$4.3 million, or 7.1% in the three months ending December 31, 2004, while the
average yield also declined from 4.6% to 4.4%.
PROVISION FOR LOAN LOSS. The provision for loan loss for the three
months ending December 31, 2004, remained flat to prior year results based on
management's overall assessment of the adequacy of the allowance for loan loss.
Although the institution maintains its allowance for loan losses at a level it
considers adequate to provide for future losses as discussed earlier, there can
be no assurance that such losses will not exceed the estimated amounts or that
additional substantial provisions for loan losses will not be required in future
periods. At December 31, 2004, the allowance for loan losses totaled $2.3
million, 0.9% of net loans and 396.1% of non-performing loans. Non-performing
loans decreased $114,000 from $683,000 as of December 31, 2003 to $569,000 as of
December 31, 2004.
OTHER INCOME. Other income declined approximately $60,000 from $521,000
during the three months ending December 31, 2003 to $461,000 during the three
months ending December 31, 2004. The decline is primarily attributed to a
$53,000 decrease in the gain on sale of residential mortgage loans of as a
result of lower originations in long-term residential mortgage loans. Fees and
other service charge income also declined $12,000 during the period, offset by a
$5,000 increase in other non-interest income primarily due to increased rental
income.
NON-INTEREST EXPENSE. Non-interest expense remained relatively flat to
prior year results. A $62,000 increase in compensation and benefits was offset
by a decline of $26,000 in occupancy expense, $14,000 in data processing,
$34,000 in advertising and $12,000 in employee expenses.
Compensation and benefit expense increased $62,000 in the three months
ending December 31, 2004 as compared to the same period in 2003 due to the
replacement and addition of officer positions primarily in the lending area
resulting in a total salary expense increase of $182,000 over the same period
prior year. As a result of the additional salary expense, payroll benefit and
tax expense increased $19,000. This increase in compensation and benefit expense
was offset by declining mortgage production, which lowered commission expense by
$138,000 as compared to the same period in the prior year.
Occupancy and equipment expense declined approximately $26,000 primarily
due to cost reductions in building and equipment repair and maintenance expense
of $45,000 offset by an increase in utilities of $3,000 and building tax and
insurance expense of $16,000. These changes are the result of purchasing the
Trawood branch in El Paso, TX in 2004 and completing the construction of the new
location in Albuquerque, New Mexico in January 2004. The new owned facility in
Albuquerque, replaced a leased location. As a result of these changes the lease
payments decreased while the expenses associated with ownership, such as,
utilities, taxes and insurance, increased.
INCOME TAX EXPENSE. Income tax expense increased $27,000 as a result of
higher pre-tax income.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 2004 AND
SEPTEMBER 30, 2003
98
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 reduction in
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 pre-tax income.
NET INTEREST INCOME. Net interest income before loan loss provision
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, partially 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 was 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 to 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 additional substantial
provisions for loan losses will not be required 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
99
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 grew $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 $160,000, 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 savings of $112,000 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. The balance, $150,000 was realized by
a reduction of mortgage loan incentives paid. Since mortgage production 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 assets at
the end of 2003.
INCOME TAX EXPENSE. Income tax expense declined $311,000 as a result of
lower pre-tax income.
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 daily 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.
100
THREE MONTHS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
2004 2003
--------------------------------------- ---------------------------------------
AVERAGE AVERAGE
OUTSTANDING OUTSTANDING
BALANCE INTEREST YIELD/RATE(3) BALANCE INTEREST YIELD/RATE(3)
----------- ---------- ------------- ----------- ---------- -------------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Loans............................ $ 254,664 $ 3,944 6.2% $ 250,532 $ 4,059 6.5%
Investment securities............ 45,197 275 2.4% 57,140 298 2.1%
Interest-earning deposits........ 24,754 116 1.9% 34,255 77 0.9%
--------- --------- --------- --------- --------- ---------
Total interest-earning
assets...................... 324,616 4,335 5.3% 341,927 4,433 5.2%
Non-interest-earning assets...... 21,748 17,092
--------- ---------
Total assets.................. $ 346,364 $ 359,019
========= =========
INTEREST-BEARING LIABILITIES:
Savings.......................... $ 88,485 $ 163 0.7% $ 101,669 195 0.8%
NOW/Interest bearing checking.... 46,265 13 0.1% 44,605 18 0.2%
Money market..................... 7,578 7 0.3% 8,416 7 0.3%
Certificates of deposit.......... 79,219 508 2.6% 80,666 559 2.8%
--------- --------- --------- --------- --------- ---------
Total deposits................ 221,547 690 1.2% 235,355 780 1.3%
FHLB advances.................... 56,297 615 4.4% 60,582 691 4.6%
--------- --------- --------- --------- --------- ---------
Total interest-bearing
liabilities................. 277,843 1,305 1.9% 295,937 1,471 2.0%
Non-interest-bearing
liabilities...................... 37,920 35,516
--------- ---------
Total liabilities............. 315,764 331,453
Stockholders' equity............. $ 30,600 27,566
--------- ---------
Total liabilities and
stockholders' equity........ 346,364 $ 359,019
========= =========
Net interest income.............. $ 3,030 $ 2,963
========= =========
Net interest rate spread(1)...... 3.5% 3.2%
Net interest-earning assets(2) $ 46,773 $ 45,989
========= =========
Net interest margin(2)........... 3.7% 3.5%
Average interest-earning
assets to interest-bearing
liabilities.................... 116.8% 115.5%
- -----------------------------------------
(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 yield has been annualized for comparable purposes.
101
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------------------------
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......... 81,522 2,166 3.5% 80,400 2,511 3.1%
--------- --------- --------- --------- --------- ---------
Total deposits............... 231,364 2,974 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 5,681 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............. $ 11,818 $ 12,456
========= =========
Net interest rate spread ....... 3.3% 3.5%
Net interest-earning assets..... $ 45,157 $ 41,497
========= =========
Net interest margin............. 3.5% 3.8%
Average interest-earning
assets to interest-bearing
liabilities................... 115.5% 114.5%
(CONTINUED)
YEAR ENDED SEPTEMBER 30,
--------------------------------------
2002
--------------------------------------
AVERAGE
OUTSTANDING
BALANCE INTEREST YIELD/RATE
----------- ---------- ----------
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....... 8,975 152 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 ....... 4.0%
Net interest-earning assets..... $ 33,347
=========
Net interest margin............. 4.3%
Average interest-earning
assets to interest-bearing
liabilities................... 113.1%
102
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.
THREE MONTHS ENDED DECEMBER 31, YEARS ENDED SEPTEMBER 30, YEARS ENDED SEPTEMBER 30,
2004 VS. 2003 2004 VS. 2003 2003 VS. 2002
-------------------------------- ------------------------------- --------------------------------
INCREASE (DECREASE) TOTAL INCREASE (DECREASE) TOTAL INCREASE (DECREASE) TOTAL
DUE TO INCREASE DUE TO INCREASE DUE TO INCREASE
--------------------- (DECREASE) --------------------- (DECREASE) --------------------- (DECREASE)
VOLUME RATE RATE VOLUME RATE RATE VOLUME RATE RATE
---------- --------- -------- ---------- --------- -------- ---------- --------- --------
(IN THOUSANDS)
INTEREST-EARNING ASSETS:
Loans.................... $67 $(181) $(114) $(394) $(1,172) $(1,566) $1,370 $(2,056) $(686)
Investment securities.... (62) 39 (23) 368 (255) 113 575 (549) 26
Interest-earning
deposits............... (21) 61 39 5 (14) (9) 136 (151) (15)
Total
interest-earning
assets............... (17) (81) (98) (20) (1,442) (1,462) 2,081 (2,756) (675)
INTEREST-BEARING
LIABILITIES:
Passbook savings......... 25 7 32 64 565 629 (7) 874 867
NOW/Interest bearing
accounts............... (1) 6 5 (9) 27 19 (19) 102 83
Money Market Accounts.... 1 0 1 13 18 31 (25) 118 93
Certificates of deposit.. 10 41 51 (35) 380 345 (86) 674 588
Total deposits......... 35 54 89 33 990 1,023 (137) 1,768 1,631
---------- --------- -------- ---------- --------- -------- ---------- --------- --------
FHLB Advances............ 49 27 76 (305) 106 (199) (1,311) 401 (910)
Total
interest-bearing
liabilities........ 84 81 166 (272) 1,096 824 (1,448) 2,169 721
---------- --------- -------- ---------- --------- -------- ---------- --------- --------
Change in net interest
income.................... $68 $(0) $68 $(293) $(345) $(638) $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
103
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
December 31, 2004, First Federal had approximately $103.6 million in variable
rate loans and $103.8 million at September 30, 2004.
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 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 borrowings 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 December 31, 2004, the estimated changes in First Federal Bank's
EVE in the event of the specified instantaneous changes in interest rates.
104
ECONOMIC VALUE OF EQUITY
- --------------------------------------------------------------------
Change in
Interest Rates Estimated Amount of Percent
(Basis Points) EVE Change Change
- --------------------------------------------------------------------
(Dollars in Thousands)
- --------------------------------------------------------------------
+300 $ 49,489 (1,155) (2)
+200 50,329 (316) (1)
+100 50,830 185 0
0 50,645 0 0
-100 48,859 (1,786) (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. In addition, an intangible asset is created that approximates
the value of the deposits at $16.0 million as of December 31, 2004. 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 the three months ending December 31, 2004, and the fiscal
years ended September 30, 2004, 2003, and 2002, First Federal had loan
originations net of principal repayments of ($4.0) million, $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. For the three months ending December 31, 2004 and during the fiscal
years ended September 30, 2004, 2003, and 2002, First Federal experienced a net
change in deposits of $1.1 million, ($9.0) million, $7.7 million, and $17.2
million. Certificates of deposits as of December 31, 2004 and September 30, 2004
maturing within one year total $41.7 million and $41.0 million, respectively.
Management expects most of these deposits to remain with the Bank. During the
three months ending December 31, 2004 and 2003, and fiscal years
105
ended September 30, 2004, 2003 and 2002, First Federal's net financing activity
(proceeds less repayments) with the FHLB totaled ($1.6) million, ($1.4) million,
($4.2) million, $23.9 million, and $16.9 million, respectively.
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 December 31, 2004, cash and cash equivalents totaled $11.7 million and $9.5
million at September 30, 2004.
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 December 31, 2004, First Federal had
unfunded outstanding loan commitments totaling $32.0 million and $26.7 million
at September 30, 2004.
Both First Federal and First Federal Bank are required to maintain
minimum levels of regulatory capital. At December 31, 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 in this joint proxy statement/prospectus for information regarding the
effect of implementing new accounting standards.
CRITICAL ACCOUNTING POLICIES
The Management's Discussion and Analysis of Financial Condition and
Results of Operations, and disclosures included within this joint proxy
statement/prospectus, are based on the First Federal's audited consolidated
financial statements. These statements have been prepared in accordance with the
standards of the Public Company Accounting Oversight Board (United States). The
financial information contained in these statements is, for the most part, based
on approximate measures of the financial effects of transactions and events that
have already occurred. However, the preparation of these statements requires
management to make certain estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses.
First Federal's significant accounting policies are described in the
Notes to Consolidated Financial Statements. Based on its consideration of
accounting policies that involve the most complex and subjective estimates and
judgments, management has identified its most critical accounting policy to be
that related to the allowance for loan losses.
The allowance for loan losses is established through a provision for
loan losses charged to expense. Loans are charged against the allowance for loan
losses when management believes that
106
collectibility of the principal is unlikely. First Federal has policies and
procedures for evaluating the overall credit quality of its loan portfolio
including timely identification of potential problem credits. On a quarterly
basis, management reviews the appropriate level for the allowance for loan
losses incorporating a variety of risk considerations, both quantitative and
qualitative. Quantitative factors include First Federal's historical loss
experience, delinquency and charge-off trends, collateral values, known
information about individual loans and other factors. Qualitative factors
include the general economic environment in First Federal's market areas and the
expected trend of those economic conditions. To the extent actual results differ
from forecasts and management's judgment, the allowance for loan losses may be
greater or less than future charge-offs.
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.
At December 31, 2004, First Federal had $348.4 million of assets and
stockholders' equity of $34.9 million (or 10.0% of total assets). At September
30, 2004, First Federal had $348.1 million of assets and stockholders' equity of
$34.0 million (or 9.8% 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
107
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 County, 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 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 branch
offices and 11 ATMs located in Bernalillo, Chaves, Dona Ana, Lincoln and Otero
Counties, New Mexico and El Paso County, 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
County, 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.
108
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 rate for the
State of New Mexico at 5.3% was 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 $114.8 million or 44.5% of
our total loan portfolio at December 31, 2004, and $114.6 million, or 45.1% at
September 30, 2004. These loans have an average original loan balance of
approximately $75,000. 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 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. During the year ended September 30,
2004, First Federal Bank only originated three of these jumbo loans. 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 December 31, 2004 was $46.3 million and $50.8
million as of September 30, 2004, all of which are retained in our loan
portfolio.
109
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 December
31, 2004 and September 30, 2004, our ARM portfolio included approximately $15.7
million and $13.8 million, respectively, 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 $92.6 million or 35.9% of our total loan portfolio
at December 31, 2004 and 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.
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.
110
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
December 31, 2004, consumer loans totaled $22.0 million, or 8.7% of the total
loan portfolio and $21.0 million or 8.3% at September 30, 2004.
At December 31, 2004, the largest group of consumer loans consisted of
$15.8 million or 6.1% of our total loan portfolio, which are loans secured by
first and second liens on residential properties. The balance of these loans at
September 30, 2004, was $14.2 million or 6.7% of our total loan portfolio. 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 December 31, 2004,
consumer automobile loans totaled $5.6 million or 2.2% of our total loan
portfolio. 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.
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,
agri-business 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 December 31, 2004,
111
commercial loans consisted of 208 commercial business loans with an aggregate
balance of $14.5 million or 5.6% of our total loan portfolio. At September 30,
2004, First Federal Bank 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. At December 31, 2004, construction loans totaled $13.6 million or 5.3% of
our total loan portfolio. 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
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.
112
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.
113
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 MONTH ENDED
DECEMBER 31, At September 30,
------------------- ----------------------------------------
2004 2004 2003
------------------- ------------------- -------------------
Amount Percent Amount Percent Amount Percent
---------- -------- ---------- -------- ---------- --------
(Dollars in thousands)
Residential mortgage....... $ 114,821 44.5% $ 114,616 45.1% $ 106,082 41.8%
Commercial mortgage........ 92,600 35.9% 89,874 35.3% 88,137 34.7%
Construction............... 13,628 5.3% 14,502 5.7% 15,812 6.2%
Commercial................. 14,464 5.6% 14,282 5.6% 17,307 6.8%
Consumer and other loans... 22,394 8.7% 21,019 8.3% 26,440 10.4%
---------- -------- ---------- ----------
Total loans................ $ 257,907 100.0% $ 254,293 100.0% $ 253,778 100.0%
======== ======== ========
Other items:
Unadvanced construction
loans................... 23,550 19,456 11,159
Deferred loan origination
costs................... -- -- --
Deferred loan origination
fees.................... 371 377 398
Allowance for loan losses.. 2,254 2,253 2,495
---------- ---------- ----------
Total loans, net........... $ 231,733 $ 232,207 $ 239,726
========== ========== ==========
(CONTINUED)
At September 30,
-------------------------------------------------------------
2002 2001 2000
-------------------- ------------------ -------------------
Amount Percent Amount Percent Amount Percent
---------- --------- --------- -------- ---------- --------
(Dollars in thousands)
Residential mortgage....... $ 106,418 41.9% $ 85,102 36.99% $ 89,835 41.9%
Commercial mortgage........ 70,659 27.8% 60,097 26.1% 52,716 24.6%
Construction............... 16,132 6.3% 10,452 4.5% 10,992 5.1%
Commercial................. 25,601 10.1% 28,039 12.2% 24,750 11.5%
Consumer and other loans... 35,448 13.9% 46,693 20.3% 36,304 16.9%
---------- --------- ----------
Total loans................ $ 254,258 100.00% $ 230,383 100.0% $ 214,597 100.0%
========= ======== ========
Other items:
Unadvanced construction
loans................... 14,462 9,622
Deferred loan origination 4,977
costs................... -- --
Deferred loan origination --
fees.................... 405 524
Allowance for loan losses.. 2,468 2,263 398
---------- --------- 2,018
Total loans, net........... $ 236,923 $ 217,974 ----------
========== =========
114
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 8.1% $ 5,901 7.1% $ 14,161 5.8% $ 4,192 6.2%
Greater than 1 to 3 years ... 982 6.3% 6,488 6.6% 341 6.9% 3,194 6.6%
Greater than 3 to 5 years ... 27,743 4.5% 7,679 6.7% -- 0.0% 2,464 6.3%
Greater than 5 to 10 years .. 23,740 6.5% 17,290 6.7% -- 0.0% 1,939 6.4%
Greater than 10 to 20 years . 33,835 5.7% 51,247 6.4% -- 0.0% 2,493 6.2%
More than 20 years .......... 27,245 5.8% 1,268 6.3% -- 0.0% -- 0.0%
--------- --------- --------- ---------
Total ..................... $ 114,616 $ 89,873 $ 14,502 $ 14,282
========= ========= ========= =========
Consumer Total
--------------------- ---------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
--------- --------- --------- ---------
(Dollars in Thousands)
1 year or less .............. $ 1,411 8.4% $ 26,735 6.4%
Greater than 1 to 3 years ... 6,022 7.4% 17,028 6.9%
Greater than 3 to 5 years ... 5,305 6.6% 43,192 5.2%
Greater than 5 to 10 years .. 5,906 7.3% 48,875 6.7%
Greater than 10 to 20 years . 2,375 4.2% 89,950 6.1%
More than 20 years .......... -- 0.0% 28,513 5.8%
--------- ---------
Total ..................... $ 21,019 $ 254,293
========= =========
The total amount of loans due after September 30, 2005 which have
predetermined interest rates is $153,529,157, while the total amount of loans
due after such date which have floating or adjustable interest rates is
$75,338,632.
115
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
December 31, 2004, it serviced approximately $7.6 million of loans for others,
and $8.4 million as of September 30, 2004.
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. For loans under
$250,000, an appraisal or an evaluation is required, unless the real estate is
taken as collateral out of an abundance of caution. 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.
116
Loans designated as "troubled debt restructurings" involves a situation
in which a portion of interest or principal has been forgiven and/or loans
modified at interest rates materially less than current market rates.
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 markets. Pursuant to SFAS 91, First Federal Bank defers loan
origination fees and costs, and amortizes such amounts as an adjustment to yield
and fee income over the term of the loan by use of the level-yield method. The
balance of the loan fees (net of costs) to defer for future years was $370,740
at December 31, 2004, and $376,970 at September 30, 2004.
LOANS TO ONE BORROWER. At December 31, 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, $2.6 million, $2.5 million, $2.2 million and $2.0 million. 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.
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 December 31, 2004 and September 30, 2004, First Federal Bank had non-accrual
loans of $568,710 and $495,116, respectively.
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.
117
NON-PERFORMING ASSETS. The table below sets forth the amounts and
categories of our non-performing assets at the dates indicated.
AT
DECEMBER 31, At September 30,
------------ --------------------------------------------------------------
2004 2004 2003 2002 2001 2000
------------ --------- --------- --------- --------- ---------
(Dollars in thousands)
Non-accrual loans:
Residential mortgage........... $ 94 $ 78 $ 214 $ 239 $ 189 $ 107
Commercial mortgage............ 349 -- 665 188 425 758
Construction................... -- 417 47 399 50 --
Commercial..................... 121 -- -- 57 92 60
Consumer and other............. 5 -- -- -- 21 7
------------ --------- --------- --------- --------- ---------
Total non-performing loans... $ 569 $ 495 $ 926 $ 883 $ 777 $ 932
------------ --------- --------- --------- --------- ---------
Loans greater than 90 days
delinquent and still accruing:
Residential mortgage........... $ -- $ -- $ -- $ 27 $ -- $ --
Commercial mortgage............ -- -- -- -- -- --
Construction................... -- -- -- -- -- --
Commercial..................... -- -- -- 150 -- --
Consumer and other............. -- -- -- -- -- --
------------ --------- --------- --------- --------- ---------
Total loans 90 days and still
accruing................ $ -- $ -- $ -- $ 177 $ -- $ --
------------ --------- --------- --------- --------- ---------
Real estate owned:
Residential mortgage........... $ -- $ -- $ -- $ 167 $ 223 $ 203
Commercial mortgage............ -- -- -- -- 201 --
Construction................... -- -- -- -- -- --
Commercial..................... -- -- -- -- -- --
Consumer and other............. 4 -- -- 10 -- 33
------------ --------- --------- --------- --------- ---------
Total real estate owned...... 4 -- -- 177 424 236
------------ --------- --------- --------- --------- ---------
Total non-performing assets....... $ 573 $ 495 $ 926 $ 1,237 $ 1,201 $ 1,168
============ ========= ========= ========= ========= =========
Troubled Debt Restructured........ $ 421 $ 424 $ 503 $ 163 $ 269 $ 437
============ ========= ========= ========= ========= =========
Ratios:
Non-performing loans to total
loans.......................... 0.2% 0.2% 0.4% 0.3% 0.3% 0.4%
Non-performing assets to total
assets......................... 0.2% 0.1% 0.3% 0.4% 0.4% 0.5%
For the three months ended December 31, 2004 and 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 $6,166 and $41,385, respectively. Interest income
actually recognized on such loans for those same periods totaled $7,723 and
$37,446, respectively.
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.
118
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 December 31, 2004,
First Federal Bank had $2.6 million of assets designated as watch and $3.1
million as of September 30, 2004.
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
December 31, 2004, classified assets consisted of OAEM assets of approximately
$1.9 million, substandard assets of approximately $3.4 million and no doubtful
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.
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.
119
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.
120
The following table sets forth activity in our allowance for loan losses
for the periods indicated.
AT OR FOR THE THREE
MONTHS ENDED
DECEMBER 31, AT OR FOR THE YEARS ENDED SEPTEMBER 30,
------------------ -----------------------------------------------------
2004 2003 2004 2003 2002 2001 2000
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Balance at beginning of period.. $ 2,253 $ 2,495 $ 2,495 $ 2,468 $ 2,263 $ 2,018 $ 1,720
-------- -------- -------- -------- -------- -------- --------
Charge-offs:
Residential mortgage......... -- 13 14 22 1 46 --
Commercial mortgage.......... -- -- -- 38 71 -- 5
Construction................. -- -- -- -- 7 257 16
Commercial................... -- -- 3 15 45 12 150
Consumer and other........... -- 14 45 25 42 80 91
-------- -------- -------- -------- -------- -------- --------
Total charge-offs.......... $ -- $ 27 $ 62 $ 100 $ 166 $ 395 $ 262
Recoveries:
Residential mortgage......... -- -- -- 5 1 8 --
Commercial mortgage.......... 1 12 12 2 4 -- --
Construction................. -- -- -- -- -- 259 --
Commercial................... -- 3 4 17 -- 148 5
Consumer and other........... -- -- 2 12 8 11 46
-------- -------- -------- -------- -------- -------- --------
Total recoveries........... $ 1 $ 15 $ 18 $ 36 $ 13 $ 426 $ 51
Net (charge-offs) recoveries.... 1 (12) (44) (64) (153) 31 (211)
Provision for loan losses....... -- -- (198) 91 358 214 509
-------- -------- --------- -------- -------- -------- --------
Balance at end of period........ $ 2,254 $ 2,483 $ 2,253 $ 2,495 $ 2,468 $ 2,263 $ 2,018
======== ======== ======== ======== ======== ======== ========
Ratios:
Net charge-offs to average
loans outstanding............. 0.0% (0.0%) (0.0)% (0.0)% (0.1)% (0.0)% (0.1)%
Allowance for loan losses to
non-performing loans at end
of period..................... 396.1% 363.5% 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% 0.9% 1.0% 1.0% 1.0% 0.9%
121
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 DECEMBER 31, AT SEPTEMBER 30,
----------------------------------------- -----------------------------------------
2004 2004
----------------------------------------- -----------------------------------------
Percent of Percent of
Loans in Loans in
Allowance Loan Each Allowance Loan 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........ $ 296 $ 114,821 44.5% $ 297 $ 114,616 45.1%
Commercial
mortgage........ 1,396 92,600 35.9% 1,401 89,874 35.3%
Construction...... 101 13,628 5.3% 105 14,502 5.7%
Commercial........ 107 14,464 5.6% 104 14,282 5.6%
Consumer and
other........... 423 22,394 8.7% 381 21,019 8.3%
----------- ----------- ----------- ----------- ----------- -----------
Total............. $ 2,322 $ 257,907 100.0% $ 2,288 $ 254,293 100.00%
=========== =========== =========== =========== =========== ===========
AT SEPTEMBER 30,
------------------------------------------------------------------------------------
2003 2002
----------------------------------------- -----------------------------------------
Percent of Percent of
Loans in Loans in
Allowance Loan Each Allowance Loan 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........ $ 304 $ 106,082 41.8% $ 327 $ 106,418 41.9%
Commercial
mortgage........ 974 88,137 34.7% 1,171 70,659 27.8%
Construction...... 70 15,812 6.2% 68 16,132 6.3%
Commercial........ 76 17,307 6.8% 107 25,601 10.1%
Consumer and
other........... 447 26,440 10.4% 714 35,448 13.9%
----------- ----------- ----------- ----------- ----------- -----------
Total............. $ 1,871 $ 253,778 100.00% $ 2,387 $ 254,258 100.00%
=========== =========== =========== =========== =========== ===========
AT SEPTEMBER 30,
------------------------------------------------------------------------------------
2001 2000
----------------------------------------- -----------------------------------------
Percent of Percent of
Loans in Loans in
Allowance Loan Each Allowance Loan Each
for Loan Balances by Category to for Loan Balances by Category to
Losses Category Total Loans Losses Category Total Loans
----------- ----------- ----------- ----------- ----------- -----------
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% 551 36,304 16.9%
----------- ----------- ----------- ----------- ----------- -----------
$ 2,230 $ 230,383 100.00% $ 1,723 $ 214,597 100.00%
Total............. =========== =========== =========== =========== =========== ===========
122
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
designate 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 December 31, 2004 and September 30, 2004,
First Federal Bank held government securities available for sale with a fair
value of $19.0 million and $16.0 million, respectively, 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 December 31, 2004 and 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. The market adjustment to the equity securities at December 31, 2004
and September 30, 2004, was a loss of $31,390 and $29,649, respectively. At
December 31, 2004 and September 30, 2004, 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.
123
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 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 December 31, 2004, our
mortgage-backed securities portfolio totaled approximately $1.8 million,
consisting of $1.7 million classified as available for sale at fair value and
$43,000 held to maturity at amortized cost. 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.
124
INVESTMENT SECURITIES PORTFOLIO. The following table sets forth the
composition of our investment securities portfolio at the dates indicated.
AT DECEMBER 31, AT SEPTEMBER 30,
-------------------------------- --------------------------------
2004 2004
-------------------------------- --------------------------------
AMORTIZED FAIR DIFFERENCE AMORTIZED FAIR DIFFERENCE
COST VALUE IN VALUE COST VALUE IN VALUE
----------- ------- ---------- ----------- ------- ----------
(IN THOUSANDS)
DEBT SECURITIES:
U.S. Government and
agency obligations.. $ 33,589 $33,440 $ (149) $ 37,684 $37,584 $ (100)
State agency and
municipal
obligations......... 1,467 1,469 2 1,468 1,478 10
----------- ------- ---------- ----------- ------- ----------
Corporate bonds and
other obligations... -- -- -- -- -- --
----------- ------- ---------- ----------- ------- ----------
Mortgage-backed
securities:
Pass-through
securities:
Fannie Mae........ 877 907 31 988 1,030 41
Freddie Mac....... 849 880 32 981 1,023 42
CMOs:
Fannie Mae........ -- -- -- -- -- --
Freddie Mac....... -- -- -- -- -- --
----------- ------- ---------- ----------- ------- ----------
Total debt
securities.......... 36,781 36,696 (85) 41,121 41,115 (6)
----------- ------- ---------- ----------- ------- ----------
MARKETABLE EQUITY
SECURITIES:
Common stock.......... 10 10 -- 10 10 --
Preferred stock....... -- -- -- -- -- --
Mutual funds.......... 600 569 (31) 600 570 (30)
----------- ------- ---------- ----------- ------- ----------
Total equity
securities.......... 610 579 (31) 610 580 (30)
----------- ------- ---------- ----------- ------- ----------
Total investment
securities.......... $ 37,391 $37,275 (116) $ 41,731 $41,695 $ (36)
=========== ======= ========== =========== ======= ==========
(CONTINUED)
AT SEPTEMBER 30,
-------------------------------------------------------------------
2003 2002
-------------------------------- --------------------------------
AMORTIZED FAIR DIFFERENCE AMORTIZED FAIR DIFFERENCE
COST VALUE IN VALUE COST VALUE IN VALUE
----------- ------- ---------- ----------- ------- ----------
(IN THOUSANDS)
DEBT SECURITIES:
U.S. Government and
agency obligations.. $ 43,269 $43,373 $ 105 $ 10,320 $10,431 $ 111
State agency and
municipal
obligations......... 2,335 2,369 34 1,119 1,153 33
----------- ------- ---------- ----------- ------- ----------
Corporate bonds and
other obligations... 203 203 -- -- -- --
----------- ------- ---------- ----------- ------- ----------
Mortgage-backed
securities:
Pass-through
securities:
Fannie Mae........ 2,344 2,432 88 6,023 6,241 218
Freddie Mac....... 1,627 1,694 66 5,666 5,813 148
CMOs:
Fannie Mae........ -- -- -- -- -- --
Freddie Mac....... -- -- -- -- -- --
----------- ------- ---------- ----------- ------- ----------
Total debt
securities.......... 49,778 50,071 293 23,728 24,238 511
----------- ------- ---------- ----------- ------- ----------
MARKETABLE EQUITY
SECURITIES:
Common stock.......... 10 10 -- 10 10 --
Preferred stock....... -- -- -- -- -- --
Mutual funds.......... 600 579 (21) 600 600 --
----------- ------- ---------- ----------- ------- ----------
Total equity
securities.......... 610 589 (21) 610 610 --
----------- ------- ---------- ----------- ------- ----------
Total investment
securities.......... $ 50,388 $50,660 $ 272 $ 23,738 $24,248 $ 511
=========== ======= ========== =========== ======= ==========
125
At December 31, 2004, the available for sale federal agency securities,
at fair value, totaled $19.0 million, or 5.5% of total assets. Of the portfolio,
based on amortized cost, approximately $3.0 million had maturities of one year
or less and a weighted average yield of 1.7%, and approximately $16.0 million
had maturities of between one and five years and a weighted average yield of
3.3%. 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 December 31, 2004, our available for sale mortgage-backed securities,
approximately $1.7 million, at fair value, consisted of pass-through securities,
which totaled 0.5% of total assets.
At December 31, 2004, our held to maturity mortgage-backed securities
portfolio totaled approximately $43,096 at amortized cost, with a weighted
average yield of 6.7% and contractual maturities within five years. First
Federal Bank had no mortgage-backed securities with contractual maturities over
five years.
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.
126
PORTFOLIO MATURITIES AND YIELDS. The composition and maturities of the
investment securities portfolio and the mortgage-backed securities at December
31, 2004 are summarized in the following table. Maturities are based on the
earliest callable date for debentures and final contractual payment dates for
mortgage-backed securities, 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................. $ 17,613,749 1.6% $ 15,975,179 3.3% $ -- 0.0%
State agency and municipal
obligations................ 1,086,927 2.2% 379,852 3.3% -- 0.0%
------------- -------- ------------- -------- ------------- --------
Corporate bonds and other
obligations................ -- 0.0% -- 0.0% -- 0.0%
Mortgage-backed
securities:
Pass-through securities:
Fannie Mae............... 159,418 5.0% 717,260 5.4% -- 0.0%
Freddie Mac.............. -- 0.0% 848,622 5.7% -- 0.0%
-------- -------- --------
CMOs:
Fannie Mae............... -- 0.0% -- 0.0% -- 0.0%
------------- -------- ------------- -------- ------------- --------
Freddie Mac.............. -- 0.0% -- 0.0% -- 0.0%
------------- -------- ------------- -------- ------------- --------
Total debt securities........ 18,860,094 1.7% 17,920,913 3.5% -- 0.0%
------------- -------- ------------- -------- ------------- --------
MARKETABLE EQUITY SECURITIES:
Common stock................. -- 10,000 --
Preferred stock..............
------------- ------------- -------------
Mutual funds................. -- 600,000 --
------------- ------------- -------------
Total equity securities...... -- 610,000 --
------------- ------------- -------------
Total investment securities.. $ 18,860,094 $ 18,530,913 $ --
============= ============= =============
(CONTINUED)
MORE THAN TEN YEARS TOTAL SECURITIES
----------------------- --------------------------------------
WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE
COST YIELD COST FAIR VALUE YIELD
------------- -------- ------------- ------------ ---------
DEBT SECURITIES:
U.S. Government and agency
securities................. $ -- 0.0% $ 33,588,928 $ 33,439,766 2.4%
State agency and municipal
obligations................ -- 0.0% 1,466,779 1,468,921 2.5%
------------- -------- ------------- ------------ ---------
Corporate bonds and other
obligations................ -- 0.0% -- -- 0.0%
Mortgage-backed
securities:
Pass-through securities:
Fannie Mae............... -- 0.0% 876,678 907,228 5.4%
Freddie Mac.............. -- 0.0% 848,622 880,280 5.7%
-------- ---------
CMOs:
Fannie Mae............... 0.0% -- -- 0.0%
------------- -------- ------------- ------------ ---------
Freddie Mac.............. 0.0% -- -- 0.0%
------------- -------- ------------- ------------ ---------
Total debt securities........ -- 0.0% 36,781,007 36,696,195 2.5%
------------- -------- ------------- ------------ ---------
0.0%
MARKETABLE EQUITY SECURITIES:
Common stock................. -- 10,000 10,000
Preferred stock..............
------------- ------------- ------------
Mutual funds................. -- 600,000 568,610
------------- ------------- ------------
Total equity securities...... -- 610,000 578,610
------------- ------------- ------------
Total investment securities.. $ -- $ 37,391,007 $ 37,274,805
============= ============= ============
127
PORTFOLIO MATURITIES AND YIELDS. The composition and maturities of the
investment securities portfolio and the mortgage-backed securities at September
30, 2004 are summarized in the following table. Maturities are based on the
earliest callable date for debentures and final contractual payment dates for
mortgage-backed securities, 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.................... $ 22,462,449 1.6% $ 15,221,617 2.9% $ -- 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........... 23,550,545 1.6% 17,570,486 3.2% -- 0.0%
------------- -------- ------------- -------- ------------- --------
MARKETABLE EQUITY SECURITIES:
Common stock.................... -- 10,000 --
Mutual funds.................... -- 600,000 --
------------- ------------- -------------
Total equity securities......... -- 610,000 --
------------- ------------- -------------
Total investment securities..... $ 23,550,545 $ 18,180,486 $ --
============= ============= =============
(CONTINUED)
MORE THAN TEN YEARS TOTAL SECURITIES
----------------------- --------------------------------------
WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE
COST YIELD COST FAIR VALUE YIELD
DEBT SECURITIES: ------------- -------- ------------- ------------ ---------
U.S. Government and agency
securities.................... $ -- 0.0% $ 37,684,066 $ 37,584,151 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% 988,110 1,029,599 5.4%
Freddie Mac................. -- 0.0% 980,937 1,023,397 5.7%
-------- ---------
Total debt securities........... -- 0.0% 41,121,031 41,114,807 2.3%
------------- -------- ------------- ------------ ---------
0.0%
MARKETABLE EQUITY SECURITIES:
Common stock.................... -- 10,000 10,000
Mutual funds.................... -- 600,000 570,351
------------- ------------- ------------
Total equity securities......... -- 610,000 580,351
------------- ------------- ------------
Total investment securities..... $ -- $ 41,731,033 $ 41,695,158
============= ============= ============
128
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 December 31, 2004, our deposits totaled $255.5 million. NOW and
interest-bearing deposits totaled $47.8 million, and non-interest-bearing demand
deposits and cashiers' checks outstanding totaled $34.6 million. Savings and
money market deposits totaled $93.9 million at December 31, 2004. Also at that
date, First Federal Bank had a total of $79.2 million in certificates of
deposit, of which $41.7 million had maturities of one year or less.
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.
129
The following tables set forth the distribution of total deposit
accounts, by account type, at the dates indicated.
AT DECEMBER 31, AT SEPTEMBER 30,
-------------------------------- --------------------------------
2004 2004
-------------------------------- --------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE PERCENT RATE BALANCE PERCENT RATE
----------- --------- ---------- ----------- --------- ----------
(DOLLARS IN THOUSANDS)
DEPOSIT TYPE:
Demand deposits........ $ 35,668 13.9% 0.0% $ 34,198 12.9% 0.0%
NOW deposits........... 46,265 18.0% 0.1% 45,787 17.2% 0.1%
Money market deposits 7,578 2.9% 0.3% 8,166 3.1% 0.3%
Regular savings........ 88,485 34.4% 0.7% 95,889 36.1% 0.7%
Total transaction
accounts........... $ 177,996 69.2% 0.4% $ 184,031 69.3% 0.4%
Certificates of
deposit............ 79,219 30.8% 2.6% 81,521 30.7% 3.5%
----------- --------- ---------- ----------- --------- ----------
Total deposits....... $ 257,215 100.0% 1.1% $ 265,552 100.00% 1.4%
=========== ========= ========== =========== ========= ==========
(CONTINUED)
AT SEPTEMBER 30,
-------------------------------------------------------------------
2003 2002
-------------------------------- --------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE PERCENT RATE BALANCE PERCENT RATE
----------- --------- ---------- ----------- --------- ----------
(DOLLARS IN THOUSANDS)
DEPOSIT TYPE:
Demand deposits........ $ 30,576 11.6% 0.0% $ 21,673 8.8% 0.0%
NOW deposits........... 41,418 15.7% 0.2% 37,096 15.1% 0.4%
Money market deposits 10,448 4.0% 0.6% 8,975 3.6% 1.7%
Regular savings........ 100,710 38.2% 1.3% 100,386 40.7% 2.2%
Total transaction
accounts........... $ 183,152 69.5% 0.8% $ 168,130 68.2% 1.5%
Certificates of
deposit............ 80,400 30.5% 3.1% 78,226 31.8% 4.0%
----------- --------- ---------- ----------- --------- ----------
Total deposits....... $ 263,552 100.00% 1.5% $ 246,356 100.00% 2.3%
=========== ========= ========== =========== ========= ==========
130
The following table sets forth the time deposits in First Federal Bank
classified by interest rate as of the dates indicated.
AT
DECEMBER 31, AT SEPTEMBER 30,
----------- ---------------------------------------
2004 2004 2003 2002
----------- ----------- ----------- -----------
(IN THOUSANDS)
Interest Rate
Less than 2%... $ 34,424 $ 40,288 $ 32,217 $ 5,678
2.00% -2.99%... 17,859 11,380 9,798 33,803
3.00% -3.99%... 13,362 13,417 14,042 9,031
4.00% -4.99%... 10,373 11,011 18,354 19,237
5.00% -5.99%... 1,150 1,156 1,828 7,982
6.00% -6.99% 2,004 2,154 3,918 6,786
7.00% -7.99%... -- -- -- --
----------- ----------- ----------- -----------
Total.......... $ 79,172 $ 79,406 $ 80,157 $ 82,517
=========== =========== =========== ===========
- - As of December 31, 2004, the aggregate amount of outstanding
certificates of deposit in amounts greater than or equal to $100,000 was
approximately $23.4 million. The following table sets forth the maturity of
those certificates as of December 31, 2004.
AT
DECEMBER 31, 2004
-----------------
(IN THOUSANDS)
Three months or less................ $ 8,425
Over three months through six months 6,498
Over six months through one year.... 3,207
Over one year to three years........ 3,029
Over three years.................... 2,235
----------
Total............................... $ 23,394
==========
BORROWINGS. Our borrowings consist primarily of advances from the
Federal Home Loan Bank of Dallas. At December 31, 2004, First Federal Bank had
access to additional Federal Home Loan Bank advances of up to $101.6 million.
The following table sets forth information concerning balances and interest
rates on our Federal Home Loan Bank advances at the dates and for the periods
indicated.
AT OR FOR
THE THREE
MONTHS ENDED AT OR FOR THE YEARS ENDED SEPTEMBER 30,
DECEMBER 31, ------------------------------------------
2004 2004 2003 2002
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Balance at end of period............... $ 55,753 $ 57,330 $ 61,509 $ 37,655
Average balance during period.......... $ 56,297 $ 59,757 $ 53,268 $ 29,265
Maximum outstanding at any month end... $ 56,806 $ 64,893 $ 61,509 $ 37,655
Weighted average interest rate at end
of period............................ 4.4% 4.3% 4.6% 5.1%
Average interest rate during period.... 4.6% 4.6% 4.7% 5.2%
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 December 31, 2004, First Federal's investment in this subsidiary
was $0.
COMPETITION
131
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
At December 31, 2004, First Federal had 114 full-time employees and
eight part-time 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 14 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 December 31, 2004 and September 30, 2004, the net
book value of our property was approximately $9.1 million and $9.2 million,
respectively. 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
132
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 Federal Director Current Term
Name Age 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)(5) 38 Director 2002 2008
Arturo Jurado 62 Director 1994 2008
Russell P. Weems 56 Director 1991 2007
Larry L. Sheffield(4) 46 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 N/A N/A
Chief 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.
(5) Includes Mr. McMillan's service as an Advisory Director of First Federal.
133
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 2003. 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 a
self-employed 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 experience
in the financial services industry.
134
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 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 and $250 per committee meeting attended.
STOCK OPTION PLAN. During the fiscal year ended September 30, 2002, the
board of directors of First Federal adopted subject to stockholder approval the
First Federal Banc of the Southwest, Inc. 2002 Stock Option and Incentive Plan.
This stock option plan was approved by First Federal's stockholders during
fiscal year ended September 30, 2003. Pursuant to this stock option plan,
options to purchase an aggregate of 50,800 shares (adjusted for the
eight-for-one stock split) were granted to non-employee directors Edward David,
Russell Weems, Marc Reischman, Arturo Jurado, Jim Paul, Michael McMillan, Larry
Sheffield and then-director Judy Collins during the fiscal year ended September
30, 2004 at an exercise price ranging from $10.00 to $11.00 per share and to
director Kay McMillian at an exercise price ranging from $10.63 to $11.69 per
share. In addition, during the same year director Kay McMillan was granted
options to purchase 9,200 shares (adjusted for the eight-for-one stock split)
under the First Federal's 1995 plan at an exercise price of $10.95 per share.
All such options are immediately exercisable.
135
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 Bank'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 OTHER ANNUAL RESTRICTED OPTIONS/
NAME AND PRINCIPAL ENDED COMPENSATION STOCK SARS LTIP ALL OTHER
POSITION 9/30 SALARY BONUS (1) AWARDS (#)(3) PAYOUTS COMPENSATION(2)
- ---------------------------- -------- ---------- ----------- ------------ ------------ ---------- --------- ----------------
Aubrey L. Dunn, Jr., 2004 $ 217,308 $ -- $ -- $ -- -- $ -- $ --
President, Chief Executive 2003 207,308 12,226 -- -- -- -- 9,000
Officer and Director 2002 196,665 22,341 -- -- 80,000 -- 9,000
George A. Rosenbaum, Jr., 2004 $ 116,711 $ -- $ -- $ -- 8,800 $ -- $ --
Executive Vice President 2003 9,731 -- -- -- -- -- 846
and Chief Financial Officer --(4) -- -- -- -- -- -- --
- ------------------------
(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 $50,000 or 10% of the total annual salary and bonus
reported for each officer. The value of such personal benefits is not
included in this table.
(2) Includes employer contributions to a 401(k) plan.
(3) Options shown have been adjusted to reflect an eight-for-one stock
split.
(4) Mr. Rosenbaum was not employed by First Federal during fiscal year 2002.
136
STOCK OPTION PLAN. During the fiscal year ended September 30, 2003,
First Federal stockholders approved, the First Federal Banc of the Southwest,
Inc. 2002 Stock Option and Incentive Plan. Set forth in the table that follows
is information relating to options granted under the stock option plan to the
Named Executive Officers during the fiscal year ended September 30, 2004.
OPTION GRANTS IN FISCAL YEAR 2004
- -----------------------------------------------------------------------------------
INDIVIDUAL GRANTS
- -----------------------------------------------------------------------------------
PERCENT OF TOTAL EXERCISE
OPTIONS GRANTED OR BASE
OPTIONS TO EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED FISCAL 2004 ($)(1) DATE
- ----------------------- ----------- ------------------ ----------- -------------
Aubrey L. Dunn, Jr. -- --% -- --
George A. Rosenbaum, Jr. 4,000 20.62% 10.00 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 has been adjusted to reflect an eight-for-one stock split.
(2) Based on a grant date present value of $16.977 per share derived using
the negotiated value of First Federal's common stock for purposes of its
merger with GFSB of 165% of First Federal's diluted book value as of
September 30, 2004 as determined in accordance with generally accepted
accounting principles.
Set forth below is certain information concerning options outstanding to
the Named Executive Officers at September 30, 2004, and the options exercised by
the Named Executive Officers during 2004.
AGGREGATE OPTION EXERCISES IN 2004 FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
YEAR-END YEAR-END (1)
VALUE --------------------------- ---------------------------
SHARES ACQUIRED REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
NAME UPON EXERCISE ($) (#) ($)
- --------------------------- ----------------- -------------- --------------------------- ---------------------------
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. Since First Federal's shares of common
stock have never been public traded, there can be no assurance that this
amount approximates market value. See "Risks Related to the Merger - The
Value of First Federal Common Stock is set in the Merger Agreement at
$16.977 Per Share. This Will Not Represent the Market Value of First
Federal Common Stock Once It Begins to Trade On the Nasdaq Small Cap
Market." The number of options shown has 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.
137
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 material 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.
138
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.
139
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.
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.
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 and $250 per committee meeting attended.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
140
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.
The following sets forth certain information regarding the executive
officer of First Federal who is not anticipated to be director of First Federal
after completion of the merger. The following individual is elected annually and
holds office until his successor has been elected and qualified or until he is
removed or replaced. Age is 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
experience in the financial services industry.
PRO FORMA FINANCIAL INFORMATION
The following 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 results for GFSB were derived from their 10-KSB report
dated June 30, 2004, less the quarterly results reported on their 10-QSB dated
September 30, 2003, and adding the quarterly results as of their 10-QSB dated
September 30, 2004.
Also included is an unaudited pro forma condensed combined consolidated
balance sheet as of December 31, 2004 and the unaudited pro forma condensed
combined consolidated statements of income for the three month period ended
December 31, 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 the date of the period presented.
The unaudited pro forma condensed combined consolidated statement of
income for the year ended September 30, 2004, gives effect to the merger as if
the merger had been consummated on October 1, 2003.
The unaudited pro forma condensed combined consolidated statement of
income for the three months ended December 31, 2004, gives effect to the merger
as if the merger had been consummated on October 1, 2003. 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.
The unaudited pro forma condensed combined consolidated financial
statements should be read 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
141
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
1.17806 exchange ratio. The pro forma shares were calculated based on the merger
agreement requirement of exchanging 51% of GFSB outstanding stock and options
into FFBSW stock and the remaining 49% into cash at the time of the merger.
142
FIRST FEDERAL AND GFSB
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2004
(IN THOUSANDS, EXCEPT PER SHARE)
FIRST PRO FORMA PRO FORMA
FEDERAL GFSB ADJUSTMENTS COMBINED
------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 11,711 $ 6,277 (861) (b)
(927) (c)
7,000 (f)
(11,580) (g) 11,620
Int Bearing deposits with banks 26,430 363 26,793
Securities available-for-sale 20,634 54,364 74,998
Securities held-to-maturity 16,122 390 11 (d) 16,523
Loans, net 257,506 148,420 2,920 (d) 408,846
Real estate owned -- 283 283
Premises and equipment 10,034 2,411 12,445
Accrued interest receivable 1,228 807 2,035
Other assets 4,296 3,942 8,238
Core deposit intangible 1,491 (e) 1,491
Goodwill 409 3,921 (j) 4,330
------------- ------------- ---------------
Total assets $ 348,370 $ 217,257 $567,602
LIABILITIES
Deposits $ 255,507 $ 131,590 465 (d) $ 387,562
FHLB advances and repurchase agreements 55,753 60,468 824 (d) 117,045
Other borrowings 4,809 7,000 (f) 11,809
Accrued interest payable and other liabilities 2,412 1,274 1,065 (d)
(315) (i) 4,436
-------------- ---------------
Total liabilities 313,672 198,141 520,852
STOCKHOLDERS' EQUITY
Common stock 4 115 (115) (a)
1 (h) 5
Additional paid-in capital 5,359 3,238 (3,238) (a)
12,051 (h) 17,410
Unearned ESOP (24) 24 (a) --
Unearned stock awards
Treasury stock (2,721) -- (2,721)
Retained earnings 32,091 14,959 (12,051) (a) 32,091
Other comprehensive income (35) 828 (828) (a) (35)
------------- ---------- -------------- ----------------
Total stockholders' equity 34,698 19,116 46,750
------------ ---------- ------------- ---------------
Total liabilities and equity $ 348,370 $ 217,257 $ 567,602
Book value per share(k) $ 10.84 $ 16.67 $ 11.95
See Notes to the Unaudited Pro Forma Condensed Combined Consolidated Financial Statements.
143
(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 $7 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 709,906 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
for First Federal common stock.
144
FIRST FEDERAL AND GFSB
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED DECEMBER 31, 2004
(IN THOUSANDS, EXCEPT SHARE DATA)
FIRST PRO FORMA PRO FORMA
FEDERAL GFSB ADJUSTMENTS COMBINED
---------------------------------------------------------------------
INTEREST INCOME:
Loans $ 4,288 $ 2,484 $ (73) (a) $ 6,699
Securities 254 462
-- (d) 716
Other 137 23 160
------------- ------------- ------------------
Total interest income 4,679 2,969 7,575
INTEREST EXPENSE:
Deposits 690 598 (39) (b) 1,249
FHLB advances and repurchase agreements 615 593 (55) (e) 1,153
Other borrowings -- -- 143 (f) 143
------------- ------------- ------------- ------------------
Total interest expense 1,305 1,191 2,502
Net interest income 3,374 1,778 5,073
Provision for loan losses -- (60) (60)
------------- -------------- -------------------
Net interest income after provision for 3,374 1,718 5,013
loan losses
NON-INTEREST INCOME:
Service charges 215 220 435
Gain on sale of loans 129 15 144
Gain on sale of securities -- -- --
Other 116 21 137
------------- ------------- ------------------
Total other income 460 256 716
NON-INTEREST EXPENSE:
Compensation and benefits 1,531 684 2,215
Occupancy and equipment 209 126 335
Data processing 128 91 219
Advertising 18 42 60
Professional fees 43 127 170
Other 627 274 61 (c) 962
------------- ------------- -------------- ------------------
Total other expense 2,556 1,344 3,961
Income before income taxes 1,278 630 1,768
Income taxes 512 303 (48) (g) 767
------------- ------------- -------------- ------------------
Net income $ 766 $ 327 $ 1,001
Basic earnings per share(i) $ 0.24 $ 0.29 $ 0.26
Diluted earnings per share(i) $ 0.23 $ 0.27 $ 0.25
See Notes to the Unaudited Pro Forma Condensed Combined Consolidated Financial Statements.
145
(a) To record the three month period of amortization of fair value
adjustments to loans acquired.
(b) To record the three month period of amortization of fair value
adjustments to deposits acquired.
(c) To record the three month period of amortization of core deposit
intangible recorded at acquisition.
(d) To record the three month period of amortization of premium recorded on
securities.
(e) To record the three month period of amortization of fair value
adjustments to FHLB advances and repurchase agreements acquired.
(f) To record the three month period of interest expense related to the
Trust Preferred Securities.
(g) To record the tax effect of all other adjustments at 34%.
(h) Per share data has been adjusted to reflect an eight-for-one stock split
for First Federal common stock.
146
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED
CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2004
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 21,323 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 information the 21,323 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 12/31/04 1,146,645
Unallocated Management Stock Bonus Plan shares (21,323)
----------
GFSB shares subject to merger consideration 1,125,322
==========
The preliminary calculation of the cost to acquire GFSB is described in
the table below (in thousands):
December 31,
2004
--------------------
Cash payment to GFSB directors and employees for options at the excess of $20
per option for 49% of the 100,294 options of GFSB common stock $ 552
Cash payment for GFSB stockholders at $20 per share for 49% of the 1,126,568
share of GFSB common stock outstanding 11,028
Market value of First Federal common stock to be issued assuming that 51% of
GFSB's common stock outstanding will be exchanged for 676,857 shares of First
Federal common stock assumed to be $16.977 per share 11,478
Market value of First Federal common stock to be issued assuming that 51% of
GFSB's vested stock options will be exchanged for 33,798 shares of First Federal
common stock assumed to be $16.977 per share 574
Estimated cost of acquisition incurred by First Federal 861
-------------
$ 24,493
=============
147
Historical net assets of GFSB $ 19,116
Accrual of unpaid GFSB after-tax merger related charges, data processing
termination fees, and other adjustments (612)
Fair market value adjustments (data as of 12/31/04):
Loans 2,920
Securities 11
Deposits (465)
FHLB Advances and repurchase agreements (824)
Core deposit intangible, estimated(1) 1,491
Goodwill 3,921
Deferred taxes on purchase accounting adjustments (1,065)
-------------
$ 24,493
=============
- --------------------------
(1) The core deposit intangible was estimated at 3% of the non-time
deposits. A detailed study will be performed using the deposit base as
of the closing date. The final core deposit intangible could vary
significantly from this estimate.
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 unpaid merger related charges and the related tax effect has
been reflected in the unaudited Pro Forma Condensed Combined Consolidated
Balance Sheet as of December 31, 2004. As of December 31, 2004, GFSB had unpaid
pre-tax merger related charges of approximately $927,000.
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 December 31, 2004, First Federal
had unpaid pre-tax merger related charges of approximately $861,000.
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 709,906 shares of First Federal common stock. The 709,906 shares will
be issued out of authorized and unissued shares. Approximately 3,883,530 shares
of First Federal common stock will be outstanding for the combined company after
the merger.
NOTE 6. AVERAGE SHARES OUTSTANDING
148
The pro forma weighted average shares outstanding is based on the split
adjusted First Federal weighted average shares outstanding plus 709,906 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 as capital at
First Federal level (within certain regulatory guidelines) 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. In
January 2005, First Federal issued $7 million of TPS with a five-year fixed rate
at 5.7%. The $7 million of TPS and related expense is included in this pro
forma. First Federal anticipates issuing an additional $3 million in TPS prior
to consummating the transaction. However, that amount and the related expense is
not included in this pro forma.
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 at October 1, 2003:
Three Months Ended
December 31, 2004
----------------------
(In thousands)
Yield adjustment for interest income on securities $ --
Yield adjustment for interest income on loans 73
Amortization of core deposit intangible 61
Yield adjustment for interest expense on deposits (39)
Yield adjustment for interest expense on FHLB (55)
advances and repurchase agreements
Adjustment for interest expense on TPS 100
------------
Tax benefits of pro forma adjustments (48)
-----------
$ 92
===========
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
Useful Life or 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 and
repurchase agreements 5 years Accelerated method
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.
149
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)
FIRST PRO FORMA PRO FORMA
FEDERAL GFSB ADJUSTMENTS COMBINED
---------------------------------------------------------------------
INTEREST INCOME:
Loans $ 17,282 $ 9,974 $ (393) (a) $ 26,863
Securities 1,132 2,032
(1) (d) 3,163
Other 358 78 436
------------- ------------- ------------- ------------------
Total interest income 18,772 12,084 30,462
INTEREST EXPENSE:
Deposits 2,974 2,645 (180) (b) 5,439
FHLB advances and repurchase agreements 2,707 2,591 (440) (e) 4,858
Other borrowings -- -- 399 (f) 399
------------- ------------- ------------- ------------------
Total interest expense 5,681 5,236 10,696
Net interest income 13,091 6,848 19,766
Provision for loan losses 198 (909) (711)
------------- -------------- ------------- -------------------
Net interest income after provision for 13,289 5,939 19,055
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 6,564
Income taxes 1,911 559 (156) (g) 2,314
------------- ------------- ------------- ------------------
Net income $ 3,057 $ 1,497 $ $ 4,250
Basic earnings per share(i) $ 0.96 $ 1.33 $ 1.09
Diluted earnings per share(i) $ 0.96 $ 1.26 $ 1.06
See Notes to the Unaudited Pro Forma Condensed Combined Consolidated Financial Statements.
150
(a) To record the annual amortization of fair value adjustments to loans
acquired.
(b) To record the annual amortization of fair value adjustments to deposits
acquired.
(c) To record the annual amortization of core deposit intangible recorded at
acquisition.
(d) To record the annual amortization of premium recorded on securities.
(e) To record the annual amortization of fair value adjustments to FHLB
advances and repurchase agreements acquired.
(f) To record the annual interest expense related to the Trust Preferred
Securities.
(g) To record the tax effect of all other adjustments at 34%.
(h) Per share data has been adjusted to reflect an eight-for-one stock split
for First Federal common stock.
151
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED
CONSOLIDATED FINANCIAL STATEMENTS AT SEPTEMBER 30, 2004
NOTE 1. 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 at October 1, 2003:
Year Ended
September 30, 2004
----------------------
(In thousands)
Yield adjustment for interest income on securities $ 1
Yield adjustment for interest income on loans 393
Amortization of core deposit intangible 287
Yield adjustment for interest expense on deposits (180)
Yield adjustment for interest expense on FHLB advances
and repurchase agreements (440)
Adjustment for interest expense on TPS 399
Tax benefits of pro forma adjustments (156)
-----------
$ 304
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
Useful Life or 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 and repurchase agreements 5 years Accelerated method
152
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.
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 incorporation o The GFSB certificate of incorporation authorizes
authorizes 6,500,000 shares of capital stock, 2,000,000 shares of capital stock, consisting of
consisting of 6,000,000 shares of common stock, 1,500,000 shares of common stock, $.10 par
$.01 par value, and 500,000 shares of serial value, and 500,000 shares of serial preferred
preferred stock, $.01 par value. stock, $.10 par value.
o As of ________ , 2005, there were 3,173,624 o As of _____________, 2005, there were 1,146,645
shares of First Federal common stock issued and shares of GFSB common stock issued and
outstanding. outstanding.
o As of September 30, 2004, there were no shares o Same.
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 their o Same
votes for the election of directors.
153
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.
154
REQUIRED VOTE FOR AUTHORIZATION OF CERTAIN ACTIONS
- ------------------------------------------------------------------------------------------------------------------
FIRST FEDERAL GFSB
- ------------------------------------------------------- ------------------------------------------------------
o At least 75% of the outstanding shares of voting o At least 80% of the outstanding shares of voting
stock must approve certain "business stock must approve certain business combinations
combinations" involving an "interested unless at least two-thirds of the members of the
stockholder" or any "affiliate of an "interested board not affiliated with the transaction have
stockholder." However, if a majority of voted to approve the transaction.
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% of o No similar provision.
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 Same
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 meeting o Same.
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 special o Only by the majority of the board of directors
meeting. or the Chairman of the Board.
o The holders of at least one third of the voting o The holders of at least a majority of the voting
stock constitute a quorum for stockholder stock constitute a quorum for stockholders
meetings. meetings.
155
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 give o To nominate a director or propose new business,
written notice to the Secretary of First Federal stockholders must give written notice to the
not less than 60 days prior to the meeting. Secretary of GFSB not less than 60 days prior to
However, if First Federal gives less than 40 the anniversary date of the immediately
days' notice or prior public disclosure of the proceeding annual meeting. Each notice given by
meeting, written notice of the nomination must a stockholder with respect to a nomination to
be delivered to the Secretary not later than ten the board of directors or proposal for new
days following the date notice of the meeting business must include certain information
was mailed to stockholders or public disclosure regarding the nominee or proposal and the
of the meeting was made. Each notice given by a stockholder making the nomination or proposal.
stockholder with respect to a 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.
156
BOARD OF DIRECTORS
- ------------------------------------------------------------------------------------------------------------------
FIRST FEDERAL GFSB
- ------------------------------------------------------- ------------------------------------------------------
o The certificate of incorporation provides that o The bylaws provides that the number of directors
the number of directors shall be fixed by 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 by a majority vote of the directors then filled by a vote of two-thirds of the directors
in office. then in office.
o Directors may be removed only for cause by the o Directors may be removed only for cause by the
vote of at least 75% of the outstanding shares vote of at least 80% of the outstanding shares
entitled to vote for directors. 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.
AMENDMENT OF THE BYLAWS
- ------------------------------------------------------------------------------------------------------------------
FIRST FEDERAL GFSB
- ------------------------------------------------------- ------------------------------------------------------
o The bylaws may be amended or repealed only with o The bylaws may be amended or repealed with the
the approval of at least a majority of the board approval of the board of directors or by the
of directors or by the vote of at least 75% of vote of at least 80% of the outstanding shares.
the outstanding shares.
157
AMENDMENT OF THE CERTIFICATE OF INCORPORATION
- ------------------------------------------------------------------------------------------------------------------
FIRST FEDERAL GFSB
- ------------------------------------------------------- ------------------------------------------------------
o The certificate of incorporation may be amended o The certificate of incorporation may be amended
or repealed upon approval of at least a majority or repealed upon approval of at least a majority
of the board of directors and by a majority of of the board of directors and by a majority of
shares entitled to vote on the matter unless shares entitled to vote on the matter unless
otherwise provided in the certificate of otherwise provided in the certificate of
incorporation or Delaware law. However, incorporation or Delaware law. However,
amendments to the certificate of incorporation amendments to the certificate of incorporation
that would revise the provisions relating to the that would revise the provisions relating to the
number, term and classification, election and number, term and classification, election and
removal procedures for directors, meetings of removal procedures for directors, meetings of
stockholders, and director liability, require stockholders, and director liability, require
approval by at least 75% of the outstanding approval by at least 80% of the outstanding
shares, entitled to vote in the election of shares, entitled to vote in the election of
directors. directors.
158
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
159
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
160
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
161
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 and the United States federal income tax consequences
of 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 two fiscal years ended September 30, 2004 have been included in
this joint proxy statement/prospectus 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 SEC 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.
162
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 Reports on Form 10-QSB for the quarters ended
September 30, 2004 and December 31, 2004; and
o Current Reports on Form 8-K filed on August 26, 2004, and
September 21, 2004 and February 14, 2005.
GFSB documents that have been 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 GFSB 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 GFSB 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
163
____________. You should not assume that the information contained in this
document is accurate as of 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.
FIRST FEDERAL SEC FILINGS (FILE NO. 333-120729)
On May 8, 1998, in connection with First Federal Bank's formation of a
holding company, First Federal filed a Registration Statement (the "1998
Registration Statement") on Form S-4EF with the SEC. The 1998 Registration
Statement was effective on filing with the SEC and the holding company formation
was completed on August 18, 1998.
The 1998 Registration Statement was filed for the sole purpose of
facilitating the stockholder vote on the holding company formation and the First
Federal Bank stockholders were advised in several places in the 1998
Registration Statement and the proxy statement contained in the 1998
Registration Statement that First Federal would not file any periodic reports
with the SEC subsequent to the completion of the holding company formation as
First Federal intended to, and was eligible to, deregister its shares
immediately upon the completion of the holding company formation. Although First
Federal inadvertently failed to file its deregistration notice, it has not filed
any required periodic reports with the SEC to date. However, upon the
effectiveness of First Federal's registration statement on Form S-4, First
Federal expects to commence filing periodic reports with the SEC.
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 Avenue, 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.
164
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
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards required 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.
As discussed in Note 15, the accompanying 2004 and 2003 consolidated statements
of cash flows have been restated.
/s/ Neff + Ricci LLP
Albuquerque, New Mexico
October 21, 2004, except for note 15 as to which the date is March 22, 2005
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 18,533,185 4,614,195
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 747,828 682,874
-----------------------------------
TOTAL ASSETS $ 348,055,325 359,184,512
===================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
2
2004 2003
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Interest bearing $ 220,851,786 233,389,479
Non-interest bearing 33,541,591 30,051,232
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 average common share
Basic 7.71 8.78
Diluted 7.65 8.71
Average common shares - basic 396,703 406,827
Average common shares - diluted 399,640 410,103
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
Accumulated
Common Treasury Other
Stock Additional Stock Comprehensive
------------------ Paid-in ---------------------- Retained Income
Shares Value Capital Shares Cost Earnings (Loss) TOTAL
Balance at September 30, 2002 426,575 $ 4,265 $4,634,429 20,333 $(1,167,976) $26,344,273 $192,881 $30,007,872
Sale of treasury stock - - - (150) 11,352 - - 11,352
Purchase of treasury stock - - - 13,042 (1,023,797) - - (1,023,797)
Issuance of common stock 8,200 82 432,903 - - - - 432,985
Dividends - $2.30 per share - - - - - (930,888) - (930,888)
Comprehensive income:
Other comprehensive
income (loss) - - - - - - (114,647) -
Net income - - - - - 3,570,498 - -
TOTAL 3,455,851
-----------------------------------------------------------------------------------------------
Balance at September 30, 2003 434,775 4,347 5,067,332 33,225 (2,180,421) 28,983,883 78,234 31,953,375
Purchase of treasury stock - - - 6,849 (541,071) - - (541,071)
Issuance of common stock 3,685 37 187,438 - - - - 187,475
Dividends - $1.50 per share - - - - - (595,984) - (595,984)
Comprehensive income:
Other comprehensive
income (loss) - - - - - - (68,461) -
Net income - - - - - 3,057,051 - -
TOTAL 2,988,590
-----------------------------------------------------------------------------------------------
Balance at September 30, 2004 438,460 $ 4,384 $5,254,770 40,074 $(2,721,492) $31,444,950 $ 9,773 $33,992,385
===============================================================================================
Reconciliation of Other Comprehensive Income (Loss)
2004 2003
Unrealized (losses) gains on securities:
Unrealized holding (losses)
gains arising during period $ (114,101) (191,906)
Related taxes 45,640 76,762
Plus: Reclassification adjustments for net
losses included in net income - 828
Related taxes - (331)
--------------------------
TOTAL OTHER COMPREHENSIVE (LOSS) INCOME $ (68,461) (114,647)
==========================
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
(AS RESTATED*) (as restated*)
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
FHLB stock dividend (54,400) (64,576)
Changes in assets and liabilities
Proceeds from sale of loans held for sale 40,714,819 78,507,746
Originations of loans held for sale (37,862,645) (77,877,773)
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 (13,485) (122,533)
----------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,259,528 3,840,022
----------------------------------------
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 (increase) in loans (570,314) 526,454
Decrease in real estate owned, net - 200,312
Purchase of Federal Home Loan Bank stock (134,300) (1,119,724)
Purchases of property and equipment (2,325,966) (2,187,033)
Proceeds from the sale of property and equipment 175,455 3,500
Proceeds from sale of land - 307,501
----------------------------------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 10,570,245 (35,216,916)
----------------------------------------
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
(AS RESTATED*) (as restated*)
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 note 15 to these consolidated financial statements.
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 the level-yield method. 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:
o 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.
o 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.
o 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.
In addition, if a loss is deemed to be other than temporary, it is recognized as
a realized loss in the income statement.
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. Currently, all loans held for sale are presold to an
investor. These amounts represent loan sales that are pending final settlement
with the investor.
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 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
and outstanding commitments to extend credit. 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. The provision for loan loss is determined
utilizing a reserve track model that bases the provision required on collateral
values or the present value of estimated cash flows to current loans including
commitments to originate loans. Unfunded commitments and letters of credit are
reserved at .25% of the unfunded amounts. The provision for loan loss is
recorded as a reduction to interest income from loans. The allowance is
increased by the provision of loan losses 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 COMMON SHARE. Basic income per common share is calculated by
dividing net income applicable to common equity by the weighted average number
of shares of common stock outstanding for the period. Diluted income per common
share is calculated by adjusting the weighted average number of shares of common
stock outstanding that would be issued assuming the exercise of stock options
during the period using the treasury stock method.
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 income per average common share would have been reduced to the pro
forma amounts indicated below:
Years ended September 30,
2004 2003
------------- -------------
Net income (as reported) $ 3,057,051 3,570,498
Deduct: Total stock-based employee
compensation determined under fair
value based method for all awards,
net of related tax effects (1,559) (342)
------------- -------------
Pro forma net income 3,055,492 3,570,156
============= =============
Income per share:
Basic - as reported $7.71 8.78
Basic - pro forma $7.70 8.78
Diluted - as reported $7.65 8.71
Diluted - pro-forma $7.65 8.71
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.
CREDIT COMMITMENTS AND LETTERS OF CREDIT. The value of credit commitments
and letters of credit are based on current credit terms and offerings as
they are less than twelve-month terms and determined to be at market value.
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
-----------------------------------------------------------
HELD-TO-MATURITY GROSS GROSS AGGREGATE
INVESTMENT SECURITIES 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
-----------------------------------------------------------
Held-to-Maturity Gross Gross Aggregate
Investment Securities 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
-----------------------------------------------------------
AVAILABLE-FOR-SALE GROSS GROSS AGGREGATE
INVESTMENT SECURITIES 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
Common Stock 10,000 - - 10,000
Mutual Funds 600,000 - (29,649) 570,351
-----------------------------------------------------------
TOTAL INVESTMENT SECURITIES $ 18,516,837 89,896 (73,547) 18,533,185
===========================================================
14
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE 2. INVESTMENT SECURITIES (CONTINUED)
2003
-----------------------------------------------------------
AVAILABLE-FOR-SALE GROSS GROSS AGGREGATE
INVESTMENT SECURITIES 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
Common Stock 10,000 - - 10,000
Mutual Funds 600,000 - (20,946) 579,054
-----------------------------------------------------------
TOTAL INVESTMENT SECURITIES $ 4,483,805 151,336 (20,946) 4,614,195
===========================================================
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
Common Stock 10,000 10,000 - -
Mutual Funds 600,000 570,351 - -
-----------------------------------------------------------
$ 18,516,837 18,533,185 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.
There were no securities with unrealized losses which management considers to be
permanent impairments at September 30, 2004. The reason for the temporary loss
on debt securities is that market credit spreads on these securities change as
market interest rates move in varying economic cycles.
15
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE 2. INVESTMENT SECURITIES (CONTINUED)
The only available-for-sale category with unrealized losses longer than 12
months is the Bank's investment in a non diversified close-end investment
management company electing status as a business development company under the
Investment Company Act of 1940. The fund invests primarily in private placement
debt securities specifically designed to support underlying community
development activities targeted to low-and-moderate income individuals such as
affordable housing, education, small business lending, and job creating
activities. Fund investments must carry a AAA credit rating or carry credit
enhancement from a AAA-rated credit enhancer or be issued by the U.S.
Government, government agencies or government-sponsored enterprises. This
investment will generally be considered eligible for regulatory credit under the
Community Reinvestment Act ("CRA"). There is no established trading market for
these shares. Unrealized losses incurred by the fund are due to changing market
interest rates in varying economic cycles. Management does not believe the
unrealized losses to be other than temporary because of the quality of the
underlying assets of this fund.
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
====================================
16
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE 3. LOANS RECEIVABLE (CONTINUED)
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
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.
17
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE 3. LOANS RECEIVABLE (CONTINUED)
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
==================================
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 18,533,000 18,533,000 4,614,000 4,614,000
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
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 income per average common 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
Income per average common 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
The weighted average fair value of options granted during 2004 and 2003 were
$0.20 and $0.17 per share, respectively.
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.
26
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE 12. STOCK OPTION PLANS (CONTINUED)
The weighted average remaining life of common stock options exercisable and
outstanding at September 30, 2004 and 2003 is 2.94 and 3.46 years, respectively.
A summary of common stock option transactions during the years ended September
30, 2004 and 2003 follows:
Weighted Average Price
Options Exercise Price Range
--------- ------------------------
Outstanding at September 30, 2002 19,560 $ 53.05 $ 40.00-74.80
Granted 13,550 77.38 75.00-82.50
Exercised (8,200) 74.83 40.00-75.00
Forfeited (1,350) 50.99 75.00-82.50
---------
Outstanding at September 30, 2003 23,560 66.51 40.00-82.50
Granted 12,625 83.37 80.00-93.50
Exercised (3,685) 50.88 40.00-80.00
Forfeited (300) 80.00 80.00
---------
Outstanding at September 30, 2004 32,200 74.32 40.00-93.50
=========
Exercisable at September 30, 2003 13,560 58.04 40.00-82.50
=========
Exercisable at September 30, 2004 22,200 $ 72.66 40.00-93.50
=========
The following table presents information by ranges of exercise price on options
outstanding at September 30, 2004:
Exercise Price Number of Wtd Avg Remaining
Range Options Exercise Price Life (Yrs)
$ 40-49 2,750 $ 40.00 1.00
$ 50-59 425 57.00 .10
$ 60-69 2,500 62.00 .42
$ 60-69 2,550 68.00 2.10
$ 70-79 12,000 77.50 8.43
$ 80-89 11,750 83.36 4.15
$ 90-99 225 93.50 4.80
--------------------------------------------
32,200 $ 74.32 4.98
============================================
27
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE 12. STOCK OPTION PLANS (CONTINUED)
The following table presents information by ranges of exercisable price on
options exercisable and outstanding at September 30, 2004:
Exercise Price Number of Wtd Avg Remaining
Range Options Exercise Price Life (Yrs)
$ 40-49 2,750 $ 40.00 1.00
$ 50-59 425 57.00 .10
$ 60-69 2,500 62.00 .42
$ 60-69 2,550 68.00 2.10
$ 70-79 2,000 75.00 3.10
$ 80-89 11,750 83.36 4.15
$ 90-99 225 93.50 4.80
--------------------------------------------
22,200 $ 72.66 2.94
============================================
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.
28
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE 14. INCOME PER COMMON SHARE
Basic income per common share is calculated by dividing net income applicable to
common equity by the weighted average number of shares of common stock
outstanding for the period. Diluted income per common share is calculated by
adjusting the weighted average number of shares of common stock outstanding that
would be issued assuming the exercise of stock options during the period using
the treasury stock method. The following reconciles amounts reported in the
financial statements:
For the Year Ended September 30, 2004
-------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
Income available to common stockholders -
basic income per share $ 3,057,051 396,703 $ 7.71
Effect of dilutive securities:
Options -- 2,937
-------------------------
Income available to common stockholders -
diluted income per common share $ 3,057,051 399,640 $ 7.65
=========================
For the Year Ended September 30, 2003
-------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
Income available to common stockholders -
basic income per share $ 3,570,498 406,827 $ 8.78
Effect of dilutive securities:
Options -- 3,276
-------------------------
Income available to common stockholders -
diluted income per common share $ 3,570,498 410,103 $ 8.71
=========================
29
FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE 15. RESTATEMENT OF CONSOLIDATED STATEMENT OF CASH FLOWS
Subsequent to the Company's issuance of its consolidated financial statements
for the year ended September 30, 2004, management determined that cash flows
from the origination and sale of loans held for sale should be reflected gross
in its consolidated statements of cash flows and be included within operating
activities rather than a net presentation within investing activities. Certain
other areas of the statement were expanded to include immaterial items that were
previously reported as "Other, net" or grouped with other line items. In
conjunction with the Company's merger with GFSB Bancorp, Inc. and the related
filing of the Company's registration statement on Form S-4 with the Securities
and Exchange Commission, the consolidated statements of cash flow for the years
ended September 30, 2004 and 2003 have been restated to present the gross cash
flow activities related to loans held for sale and certain other specific items
into the respective detail cash flow activity. A summary of the significant
effects of the restatement is as follows:
For the years ended September 30,
---------------------------------
2004 2003
---- ----
Cash Flows from Operating Activities
Net cash provided by operating activities,
as previously reported $ 3,407,354 3,210,049
Adjustment of cash flows related to loans
held for sale
Proceeds from sale of loans held for sale 40,714,819 78,507,746
Originations of loans held for sale (37,862,645) 77,877,773)
------------- -------------
Net cash provided by operating activities, as restated 6,259,528 3,840,022
============= =============
Cash Flows from Investing Activities
Net cash provided by (used in) investing activities,
as previously reported 13,422,419 (34,586,943)
Adjustment to cash flows related to loans held for sale (2,852,174) (629,973)
------------- -------------
Net cash provided by (used in) investing
activities, as restated $ 10,570,245 (35,216,916)
============== =============
30
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
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"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.
18
(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,
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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
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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
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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
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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.
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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.
63
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.
66
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
ANNEX E
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One):
[X] ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended June 30, 2004.
OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to .
-------------- --------------
Commission File Number: 0-25854
-------
GFSB BANCORP, INC.
----------------------------------------------
(Name of Small Business Issuer in its Charter)
Delaware 04-2095007
- -------------------------------------------- --------------------------------
(State or Other Jurisdiction of Incorporation (I.R.S. Employer
or Organization) Identification No.)
221 West Aztec Avenue, Gallup, New Mexico 87301
- ------------------------------------------ ------------
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number: (505) 722-4361
--------------
Securities Registered Under Section 12(b) of the Exchange Act: None
Securities Registered Under Section 12(g) of the Exchange Act:
Common Stock, par value $0.10 per share
---------------------------------------
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. YES X NO .
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $12,981,533
-----------
The aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant, based on the average of the bid and
asked price for the registrant's Common Stock on the Nasdaq SmallCap Market at
September 15, 2004, was $11,348,682. Solely for purposes of this calculation,
the term "affiliate" refers to directors and executive officers and the
beneficial owners of more than 10% of the issuer's Common Stock.
As of September 15, 2004, there were issued and outstanding 1,146,645
shares of the issuer's Common Stock.
Transitional Small Business Disclosure format (check one):
Yes No X
--- ---
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Proxy Statement for the 2004 Annual Meeting of Stockholders.
(Part III)
================================================================================
PART I
GFSB Bancorp, Inc. (the "Company" or "Registrant") may from time to
time make written or oral "forward-looking statements", including statements
contained in the Company's filings with the Securities and Exchange Commission
(including this annual report on Form 10-KSB and the exhibits thereto), in its
reports to stockholders and in other communications by the Company, which are
made in good faith by the Company pursuant to the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Board of Governors of the
Federal Reserve System, inflation, interest rate, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Company and the perceived overall value of these products and
services by users, including the features, pricing and quality compared to
competitors' products and services; the willingness of users to substitute
competitors' products and services for the Company's products and services; the
success of the Company in gaining regulatory approval of its products and
services, when required; the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking, securities and
insurance); technological changes; acquisitions; changes in consumer spending
and saving habits; and the success of the Company at managing these risks.
The Company cautions that this list of important factors is not
exclusive. The Company does not undertake to update forward-looking statements,
whether written or oral, that may be made from time to time by or on behalf of
the Company.
Item 1. Description of Business
- ------- -----------------------
General
The Company is a unitary savings and loan holding company which, under
existing laws, generally is not restricted in the types of business activities
in which it may engage provided that the Bank retains a specified amount of its
assets in housing-related investments. The Company conducts no significant
business or operations of its own other than holding all of the outstanding
stock of the Bank. References to the Company or Registrant generally refers to
the consolidated entity which includes the main operating company, the Bank,
unless the context indicates otherwise.
The Bank is a federally chartered stock savings bank headquartered in
Gallup, New Mexico. It is subject to examination and comprehensive regulation by
the Office of Thrift Supervision ("OTS") and its deposits are federally insured
by the Savings Association Insurance Fund ("SAIF"). The Bank is a member of and
owns capital stock in the Federal Home Loan Bank ("FHLB") of Dallas, which is
one of the 12 regional banks in the FHLB System.
The Company operates a traditional savings bank business, attracting
deposit accounts from the general public and using those deposits, together with
other funds, primarily to originate and invest in loans
1
secured by one- to four-family residential loans and commercial real estate
loans. To a lesser extent, the Company also originates construction loans,
commercial business loans, consumer loans, and multi-family loans.
Competition
The competition for deposit products comes from other insured financial
institutions such as commercial banks, thrift institutions, credit unions, and
multi-state regional banks in the Company's market area of Gallup and
Farmington, New Mexico and the surrounding communities of McKinley and San Juan
Counties, New Mexico. Based on data compiled by the FDIC as of June 30, 2003
(the latest date for which data is available), the Bank had the largest share of
FDIC-insured deposits in McKinley County with 33.25% and the sixth largest share
in San Juan County with 2.23%. This data does not take into account deposits
held by credit unions. Deposit competition also includes a number of insurance
products sold by local agents and investment products such as mutual funds and
other securities sold by local and regional brokers. Loan competition varies
depending upon market conditions and comes from other insured financial
institutions such as commercial banks, thrift institutions, credit unions,
multi-state regional banks, and mortgage bankers.
2
Lending Activities
Loan Portfolio Composition. The following table sets forth the dollar
amounts and percentage of the portfolio represented by the Company's various
types of loans at the dates indicated.
` At June 30,
---------------------------------------------------------------------------------------- ------------
2004 2003 2002 2001 2000
----------------- ------------------- ------------------ ----------------- -------------------
$ % $ % $ % $ % $ %
-------- ------ -------- ------ -------- ------ -------- ------ -------- -------
(Dollars in Thousands)
Type of Loans:
- -------------
Mortgage loans:
Residential $ 85,543(1) 55.00% $85,730(1) 57.51% $89,804(1) 61.42% $81,662(1) 60.44% $ 78,920(1) 69.08%
Commercial real estate 34,647 22.28 25,913 17.38 21,726 14.86 23,085 17.09 18,376 16.09
Construction:
Residential 1,388 0.89 2,735 1.84 2,623 1.79 830 0.62 581 0.51
Commercial 1,811 1.17 5,280 3.54 4,715 3.23 5,397 3.99 3,787 3.31
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
123,388 79.34 119,658 80.27 118,868 81.30 110,974 82.14 101,664 88.99
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Commercial business 26,573 17.09 23,655 15.87 21,824 14.93 18,042 13.35 6,853 6.00
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Consumer:
Savings account 1,637 1.05 1,212 0.81 1,452 0.99 1,228 0.91 1,083 0.95
Automobile and other 3,920 2.52 4,538 3.05 4,061 2.78 4,867 3.60 4,642 4.06
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
5,557 3.57 5,750 3.86 5,513 3.77 6,095 4.51 5.725 5.01
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans $155,518 100.00% $149,063 100.00% $146,205 100.00% $135,111 100.00% $114,242 100.00%
-------- ====== -------- ====== -------- ====== -------- ====== -------- ======
Less:
Loan participations sold (41) (475) (773) (3,156) (3,308)
Loans in process -- -- -- -- --
Deferred loan
origination fees
and costs (922) (796) (767) (699) (645)
Allowance for loan losses (1,714) (1,396) (984) (825) (512)
-------- -------- -------- -------- --------
Total loans, net $152,842 $146,396 $143,681 $130,431 $109,777
======== ======== ======== ======== ========
- -------------------
(1) Included in this category are loans classified as held for sale of
$411,400, $132,000, $297,000, $980,000 and $105,000, respectively. Such
loans constitute one-to-four family mortgage loans.
3
Loan Maturity Schedules. The following table sets forth the estimated
maturity of the Company's loan portfolio at June 30, 2004. The table does not
include prepayments or scheduled principal repayments. Prepayments or scheduled
principal repayments totaled $48.7 million for the year ended June 30, 2004. All
mortgage loans are shown as maturing based on contractual maturities.
Due after
Due within 1 through Due after
1 year 5 years 5 years Total
-------- -------- -------- --------
(In Thousands)
One-to-four-family ...................................... $ 1,018 $ 9,903 $ 69,585 $ 80,506
Multi-family and commercial real estate ................. 3,234 25,115 11,334 39,683
Construction ............................................ 2,664 418 117 3,199
Commercial business ..................................... 11,345 10,445 4,783 26,573
Consumer ................................................ 1,336 2,436 1,785 5,557
-------- -------- -------- --------
Total ................................................... $ 19,597 $ 48,317 $ 87,604 $155,518
======== ======== ======== ========
The following table sets forth as of June 30, 2004 the dollar amount of
all loans due more than one year after June 30, 2004, which have fixed rates of
interest and floating or adjustable interest rates.
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In Thousands)
One-to-four-family ............................ $ 79,313 $ 175 $ 79,488
Multi-family and commercial real estate ....... 14,574 21,875 36,449
Construction .................................. 335 200 535
Commercial business ........................... 3,172 12,056 15,228
Consumer ...................................... 2,618 1,603 4,221
-------- -------- --------
Total ......................................... $100,012 $ 35,909 $135,921
======== ======== ========
One-to-Four-Family Residential Loans. The Company's primary lending
activity consists of the origination of one-to-four-family residential mortgage
loans secured by property located in its primary market areas. The Company
generally originates owner-occupied one-to-four-family residential mortgage
loans in amounts up to 80% of the lesser of the appraised value or selling price
of the mortgaged property without requiring mortgage insurance. The Company will
originate a mortgage loan in an amount up to 95% of the lesser of the appraised
value or selling price of a mortgaged property, however, mortgage insurance is
generally required for the amount in excess of 80% of such value.
Non-owner-occupied residential mortgage loans are originated up to 80% of the
lesser of the appraised value or selling price of the property.
The Company primarily originates fixed-rate mortgage loans that have
maturities of up to 15 years. In addition, the Company originates loans with
terms over 15 years for sale in the secondary market. Generally, the Company's
underwriting guidelines conform to Federal Home Loan Mortgage Corporation
("FreddieMac") and Federal National Mortgage Association ("FannieMae")
guidelines. At June 30, 2004, fixed-rate loans held-for-sale totalled
approximately $411,400.
4
For all adjustable-rate mortgage loans, the Company requires the
borrower to qualify at the initial index interest rate. The adjustable-rate
mortgage loans provide for annual interest rate adjustments based upon the
one-year treasury rate with a maximum annual adjustment of not more than 2% over
the initial rate of interest. Adjustable-rate mortgage loans reprice every year
and provide for terms of up to 30 years with most loans having terms of 15 or 30
years.
It is the current policy of the Company to remain a portfolio lender
for its adjustable-rate loans. Adjustable rate loans do have higher credit risks
compared to fixed-rate mortgage loans due to the possibility of borrower default
when interest rates reset higher and monthly payment amounts increase.
The one-to-four-family residential loan portfolio also includes second
mortgage loans if the Company holds the first mortgage loan for such property
and the combined loan to value ratio is no greater than 80%.
Multi-family and Commercial Real Estate Loans. Multi-family and
commercial real estate secured loans are originated in amounts generally up to
80% of the appraised value of the property. Such appraised value is determined
by an independent appraiser previously approved by the Company. The Company's
commercial real estate loans are permanent loans secured by approved property
such as churches, motels, small office buildings, retail stores, small strip
plazas, and other non-residential buildings. The Company generally originates
fixed-rate commercial real estate loans with balloon maturities of five years
and with amortization periods of up to 25 years, and to a lesser extent,
adjustable-rate loans based on a margin over the Wall Street Journal prime rate.
Multi-family loans are primarily secured by apartment buildings,
located in the Company's primary market area. Loans secured by multi-family
property may be originated in amounts up to 80% of the appraised value with
either fixed or adjustable rates of interest. The Company generally originates
fixed-rate multi-family loans with balloon maturities of five years and with
amortization periods of up to 25 years, and to a lesser extent, adjustable-rate
loans based on a margin over the Wall Street Journal prime rate.
Multi-family and commercial real estate loans have significantly more
risk than one-to-four-family mortgage loans due to the usually higher loan
amounts and the credit risk, which arises from concentration of principal in a
smaller number of loans, the effects of general economic conditions on income
producing property and the difficulty of evaluating and monitoring the loans.
Construction Loans. The Company makes construction loans to individuals
to construct single-family owner-occupied homes and to builders who have a
proven track record on either a pre-sold or speculative basis. Loans made to
individual property owners are construction-to-permanent loans which generally
provide for the payment of interest during a construction period at fixed or
adjustable interest rates and then covert to permanent loans, having terms
similar to one-to-four-family residential mortgage loans. Loans made to builders
are generally loans which require the payment of interest at fixed rates during
the construction term and the payment of the principal in full at the end of the
construction period, which generally is for a term of 6 months.
Construction financing generally has a higher degree of credit risk
than one-to-four-family residential loans. The risk is dependent largely on the
value of the property when completed as compared to the estimated cost,
including interest, of building the property. If the estimated value is
inaccurate, the Company may have a completed project with a value too low to
assure full repayment of the loan.
5
Construction loans made to builders who are building to resell have a
maximum loan-to-value ratio of 80% of the appraised value of the property.
Construction loans to individuals who intend to occupy the finished premises
generally have a maximum loan-to-value ratio of 80%.
Commercial Business Loans. Commercial business loans, primarily
consisting of revolving lines of credit, short-term working capital loans, and
term loans up to seven years, are originated to meet the needs of local small
businesses. The majority of the loans are secured by inventory, equipment,
accounts receivable, marketable securities, savings deposits, real estate,
personal guaranties, or a combination of these types of collateral. Commercial
business loans generally involve a greater degree of risk than residential
mortgage loans and frequently carry larger loan balances. The Company offers
fixed-rate commercial business loans and adjustable-rate loans which adjust
daily based upon Wall Street Journal prime. This increased credit risk is a
result of several factors, including the concentration of principal in a limited
number of loans and borrowers, the effects of general economic conditions on
business cash flow, and the difficulty of evaluating and monitoring these types
of loans.
Consumer Loans. Consumer loans primarily consist of automobile loans,
home equity lines of credit, loans secured by savings accounts and unsecured
personal loans. Home equity lines of credit are originated on an adjustable rate
basis, with a loan to value ratio of 90%, if the Company holds the first
mortgage loan. Otherwise, the maximum loan to value ratio is 80%. Loans secured
by vehicles are financed for terms of up to 60 months, with fixed interest
rates. The underwriting standards employed by the Company for consumer loans
include a determination of the applicant's payment history on other debts and an
assessment of the borrower's ability to make payments on the proposed loan and
other indebtedness. In addition to the creditworthiness of the applicant, the
underwriting process also includes a comparison of the value of the security, if
any, in relation to the proposed loan amount. Consumer loans tend to have higher
interest rates and shorter maturities than one- to four-family first mortgage
loans, but are considered to entail a greater risk of default than one-to
four-family mortgage loans.
Loan Approval Authority and Underwriting. The loan approval process is
segmented by the type and size of loan. All loans secured by deposit accounts as
well as small real estate, commercial and consumer loans may be approved by
certain loan officers within designated limits. Members of senior management
have varying individual levels of authority to approve loans up to a maximum of
$100,000 for unsecured loans and $350,000 for secured loans. The Management Loan
Committee, consisting of three members of senior management and two non-employee
Directors, may approve loans in excess of individual officer limits up to a
maximum of $1,000,000 secured and $500,000 unsecured. The Board of Directors
approves loans over $1,000,000 secured and $500,000 unsecured and also reviews
all loans that have been approved by officers or committees.
The Company uses board approved independent fee appraisers on most real
estate loans. It is the Company's policy to obtain title insurance on all
properties securing real estate loans and to obtain insurance coverage
appropriate to the collateral on secured loans.
Loan Commitments. At June 30, 2004, the Company had $7 million of
outstanding commitments to originate new loans at market interest rates, $3
million in undisbursed funds related to construction loans and straight lines of
credit and $9 million in commitments to fund revolving lines and letters of
credit.
6
Non-Performing and Problem Assets
Loan Delinquencies. The Company's collection procedures provide that
when a mortgage loan is 15 days past due, a notice of nonpayment is sent. If
payment is still delinquent after 30 days past due, the customer will receive a
telephone call within ten days. If the delinquency continues, similar subsequent
efforts are made to eliminate the delinquency. If the loan continues in a
delinquent status for 120 days or more and no repayment plan is in effect, the
Bank typically initiates foreclosure proceedings. For consumer loans, a notice
is generated when the loan is ten days past due. Further collection efforts
generally commence for consumer loans by the time a payment is delinquent 20
days. Collection procedures for other non-mortgage loans generally begin after a
loan is one day delinquent. Loans are reviewed on a monthly basis and are
generally placed on a non-accrual status when the loan becomes more than 90 days
delinquent. Interest accrued and unpaid at the time a loan is placed on
non-accrual status is charged against interest income. Subsequent interest
payments, if any, are either applied to the outstanding principal balance or
recorded as interest income, depending on the assessment of the ultimate
collectibility of the loan.
The following table sets forth information regarding nonaccrual loans,
accruing loans more than 90 days past due and real estate owned, as of the dates
indicated. At each of the dates presented, the Company had no impaired loans
within the meaning of Statement of Financial Accounting Standards ("SFAS") No.
114, as amended by SFAS No. 118. Interest income that would have been recorded
on loans accounted for on a nonaccrual basis or as a troubled debt restructuring
under the original terms of such loans would have totaled $59,037 and $16,643,
respectively, for the year ended June 30, 2004. A total of $1,123 in interest
income was recognized on the troubled debt restructuring and no interest income
was recognized on the non-accrual loans during the year ended June 30, 2004.
7
At June 30,
----------------------------------------------
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
(Dollars in thousands)
Troubled debt restructurings ................................... $ 306 $ -- $ -- $ -- $ --
====== ====== ====== ====== ======
Loans accounted for on a non-accrual basis:
Mortgage loans:
Construction ................................................. $ -- $1,124 $ -- $ -- $ --
Permanent loans secured by 1-4 dwelling units ................ 471 771 70 398 542
All other mortgage loans ..................................... -- 317 6 48 83
Non-mortgage loans:
Commercial ................................................... 876 56 164 64 16
Consumer ..................................................... 4 49 6 99 78
------ ------ ------ ------ ------
Total .................................................... $1,351 $2,317 $ 246 $ 609 $ 719
------ ------ ------ ------ ------
Accruing loans which are contractually past due 90 days or more:
Mortgage loans:
Permanent loans secured by 1-4 dwelling units ................ $ -- $ -- $ 621 $ -- $ --
All other mortgage loans ..................................... -- -- 108 -- --
Non-mortgage loans:
Commercial ................................................... -- -- 20 -- --
Consumer ..................................................... -- -- 67 -- --
------ ------ ------ ------ ------
Total .................................................... $ -- $ -- $ 816 $ -- $ --
------ ------ ------ ------ ------
Total non-accrual and accrual loans ............................ $1,351 $2,317 $1,062 $ 609 $ 719
------ ------ ------ ------ ------
Real estate owned .............................................. 432 195 143 -- 38
Other repossessed assets ....................................... 5 19 7 -- --
------ ------ ------ ------ ------
Total non-performing assets .................................... $1,788 $2,531 $1,212 $ 609 $ 757
====== ====== ====== ====== ======
Total non-accrual and 90-day past due loans
to net loans ............................................... 0.88% 1.59% 0.74% 0.47% 0.66%
Total non-accrual and 90-day past due loans
to total assets ............................................ 0.58% 1.01% 0.51% 0.31% 0.41%
Total non-performing assets to total assets .................... 0.77% 1.10% 0.59% 0.31% 0.43%
At June 30, 2004, there were no loans not presented above with respect
to which known information about the possible credit problems of the borrowers
or the cash flows of the security properties have caused management to have
concerns as to the ability of the borrowers to comply with present loan
repayment terms.
Classified Assets. OTS regulations provide for a classification system
for problem assets of insured institutions which covers all problem assets.
Under this classification system, problem assets of insured institutions are
classified as "substandard," "doubtful," or "loss." An asset is considered
substandard if it is inadequately protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if any. Substandard assets
include those characterized by the "distinct possibility" that the insured
institution will sustain "some loss" if the deficiencies are not corrected.
Assets classified as doubtful have all of the weaknesses inherent in those
classified substandard, with the added characteristic that the weaknesses
present make "collection or liquidation in full," on the basis of currently
existing facts, conditions and values, "highly questionable and improbable."
Assets classified as loss are those considered "uncollectible" and of such
little value that their continuance as assets without the
8
establishment of a specific loss reserve is not warranted. Assets may be
designated "special mention" because of a potential weakness that does not
currently warrant classification in one of the aforementioned categories.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as loss, it is required either to establish a specific allowance
for losses equal to 100% of that portion of the asset so classified or to charge
off such amount. An institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS, which may order the establishment of additional general or specific loss
allowances. A portion of general loss allowances established to cover possible
losses related to assets classified as substandard or doubtful may be included
in determining an institution's regulatory capital, while specific valuation
allowances for loan losses generally do not qualify as regulatory capital.
The following table sets forth the Company's classified assets in
accordance with its classification system at June 30, 2004 (in thousands):
Special mention $ 3,118
Substandard 7,035
Doubtful --
Loss --
-------
Total $10,153
=======
Out of the $10,153,000 of the Company's loans classified special
mention or substandard at June 30, 2004, $9,518,000 were either not delinquent
or were delinquent less than ninety days, and were therefore not included as
non-accrual loans. These loans are classified due either to a history of
delinquency or to other credit quality concerns.
Allowances for Loan Losses. A provision for loan losses is charged to
operations based on management's evaluation of the losses that may be incurred
in the Company's loan portfolio. Such evaluation, which includes a review of all
loans of which full collectibility of interest and principal may not be
reasonably assured, considers the Company's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, estimated value of any underlying collateral, any
existing guarantees, past performance of the loan, available documentation for
the loan, legal impediments to collection, financial condition of the borrower,
and current economic conditions.
Management will continue to review the entire loan portfolio to
determine the extent, if any, to which further additional loss provisions may be
deemed necessary. There can be no assurance that the allowance for losses will
be adequate to cover losses which may in fact be realized in the future and that
additional provisions for losses will not be required.
9
The following table sets forth information with respect to the
Company's allowance for loan losses at the dates indicated.
At June 30,
-----------------------------------------------------------------
2004 2003 2002 2001 2000
--------- --------- --------- --------- ---------
(Dollars in thousands)
Total loans outstanding, net .............. $ 152,842 $ 146,396 $ 143,681 $ 130,431 $ 109,777
========= ========= ========= ========= =========
Average loans outstanding ................. $ 155,587 $ 144,841 $ 137,754 $ 121,237 $ 103,252
========= ========= ========= ========= =========
Allowance balances (at beginning of period) $ 1,396 $ 984 $ 825 $ 512 $ 443
Provision:
Residential ............................. -- 11 48 58 57
Consumer and commercial business ........ 969 441 177 287 148
--------- --------- --------- --------- ---------
969 452 225 345 205
--------- --------- --------- --------- ---------
Charge-offs:
Residential ............................. (24) (6) (11) -- (113)
Consumer and commercial business ........ (643) (37) (81) (32) (25)
--------- --------- --------- --------- ---------
(667) (43) (92) (32) (138)
Recoveries:
Residential ............................. -- 1 -- -- --
Consumer and commercial business ........ 16 2 26 -- 2
--------- --------- --------- --------- ---------
16 3 26 -- 2
--------- --------- --------- --------- ---------
Net charge-offs ........................... (651) (40) (66) (32) (136)
--------- --------- --------- --------- ---------
Allowance balance (at end of period) ...... $ 1,714 $ 1,396 $ 984 $ 825 $ 512
========= ========= ========= ========= =========
Allowance for loan losses as a percent
of total loans outstanding, net ......... 1.12% 0.95% 0.68% 0.63% 0.47%
========= ========= ========= ========= =========
Out of the $643,000 in charge-offs on consumer and commercial business
loans during the year ended June 30, 2004, $339,000 was a loss on a
participation loan purchased in a commercial real estate construction project
for a hotel, $198,000 was a loss on a commercial loan to a local start-up
manufacturing entity, and the remaining $106,000 consisted of losses on small
consumer and commercial loans.
10
Analysis of the Allowance for Loan Losses
The following table sets forth the allocation of the allowance by
category, which management believes can be allocated only on an approximate
basis. The allocation of the allowance to each category is not necessarily
indicative of future loss and does not restrict the use of the allowance to
absorb losses in any category.
At June 30,
--------------------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
-------------------- ------------------- ------------------- ------------------- -------------------
Percent of Percent of Percent of Percent of Percent of
Loans in Each Loans in Each Loans in Each Loans in Each Loans in Each
Category to Category to Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
Residential
real estate $ 300 55.00% $ 312 57.51% $ 307 61.42% $275 60.44% $217 69.08%
Commercial
real estate 281 22.28 221 17.38 163 14.86 156 17.09 131 16.09
Construction,
consumer and
commercial
business 1,133 22.72 863 25.11 514 23.72 394 22.47 164 14.83
------ ------ ------ ------ ----- ------ ---- ------ ---- ------
Total $1,714 100.00% $1,396 100.00% $ 984 100.00% $825 100.00% $512 100.00%
====== ====== ====== ====== ===== ====== ==== ====== ==== ======
11
Investment Activities
General. The Company is required under federal regulation to maintain a
sufficient level of liquid assets (including specified short-term securities and
certain other investments), as determined by management and defined and reviewed
for adequacy by the OTS during its regular examinations. The OTS, however, does
not prescribe by regulation a minimum amount or percentage of liquid assets. The
level of liquid assets varies depending upon several factors, including: (i) the
yields on investment alternatives, (ii) management's judgment as to the
attractiveness of the yields then available in relation to other opportunities,
(iii) expectation of future yield levels, and (iv) management's projections as
to the short-term demand for funds to be used in loan origination and other
activities. Investment securities, including mortgage-backed securities, are
classified at the time of purchase, based upon management's intentions and
abilities, as securities held to maturity or securities available-for-sale. Debt
securities acquired with the intent and ability to hold-to-maturity are
classified as held-to-maturity and are stated at cost and adjusted for
amortization of premium and accretion of discount, which are computed using the
level yield method and recognized as adjustments of interest income. All other
debt securities are classified as available-for-sale.
Current regulatory and accounting guidelines regarding investment
securities (including mortgage- backed securities) require the Company to
categorize securities as "held-to-maturity," "available-for-sale" or "trading."
As of June 30, 2004, Company had securities (including mortgage-backed
securities) classified as "held-to-maturity" and "available-for-sale" in the
amount of $398,999 and $61,199,023, respectively, and had no securities
classified as "trading." Securities classified as "available-for-sale" are
reported for financial reporting purposes at the fair market value with net
changes in the market value from period to period included as a separate
component of stockholders' equity, net of income taxes. Changes in the market
value of securities available-for-sale do not affect the Company's income. In
addition, changes in the market value of securities available-for-sale do not
affect the Bank's regulatory capital requirements or its loan-to-one borrower
limit.
At June 30, 2004, the Company's investment portfolio policy allowed
investments in instruments such as: (i) U.S. Treasury obligations, (ii) U.S.
federal agency or federally sponsored agency obligations, (iii) municipal
obligations, (iv) mortgage-backed securities, (v) banker's acceptances, (vi)
certificates of deposit, (vii) investment grade corporate bonds, (viii) mortgage
derivative securities, (ix) private-label mortgage pass-thru securities and
commercial paper. The board of directors may authorize additional investments.
As a source of liquidity and to supplement Company's lending
activities, the Company has invested in residential mortgage-backed securities.
Mortgage-backed securities can serve as collateral for borrowings and, through
repayments, as a source of liquidity. Mortgage-backed securities represent a
participation interest in a pool of single-family or other type of mortgages.
Principal and interest payments are passed from the mortgage originators,
through intermediaries (generally quasi-governmental agencies) that pool and
repackage the participation interests in the form of securities, to investors,
like us. The quasi-governmental agencies guarantee the payment of principal and
interest to investors and include the FreddieMac, Government National Mortgage
Association ("GinnieMae"), and FannieMae.
Mortgage-backed securities typically are issued with stated principal
amounts. The securities are backed by pools of mortgages that have loans with
interest rates that are within a set range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed rate or adjustable
rate mortgage loans. Mortgage-backed securities are generally referred to as
mortgage participation certificates or pass-through certificates. The interest
rate risk characteristics of the underlying pool of
12
mortgages (i.e., fixed rate or adjustable rate) and the prepayment risk, are
passed on to the certificate holder. The life of a mortgage-backed pass-through
security is equal to the life of the underlying mortgages. Expected maturities
will differ from contractual maturities due to scheduled repayments and because
borrowers may have the right to call or prepay obligations with or without
prepayment penalties. Mortgage-backed securities issued by FreddieMac,
GinnieMae, and FannieMae make up a majority of the pass-through certificates
market.
The Company also invests in mortgage-related securities, primarily
collateralized mortgage obligations, issued or sponsored by FreddieMac,
GinnieMae, and FannieMae, as well as private issuers. Collateralized mortgage
obligations are a type of debt security that aggregates pools of mortgages and
mortgage-backed securities and creates different classes of collateralized
mortgage obligations securities with varying maturities and amortization
schedules as well as a residual interest with each class having different risk
characteristics. The cash flows from the underlying collateral are usually
divided into "tranches" or classes whereby tranches have descending priorities
with respect to the distribution of principal and interest repayment of the
underlying mortgages and mortgage backed securities as opposed to pass through
mortgage backed securities where cash flows are distributed pro rata to all
security holders. Unlike mortgage backed-securities from which cash flow is
received and prepayment risk is shared pro rata by all securities holders, cash
flows from the mortgages and mortgage backed securities underlying
collateralized mortgage obligations are paid in accordance with a predetermined
priority to investors holding various tranches of such securities or
obligations. A particular tranche or class may carry prepayment risk which may
be different from that of the underlying collateral and other tranches.
Collateralized mortgage obligations attempt to moderate reinvestment risk
associated with conventional mortgage-backed securities resulting from
unexpected prepayment activity.
Investment Portfolio. The following table sets forth the carrying value
of the Company's securities at the dates indicated.
At June 30,
-----------------------------
2004 2003 2002
------- ------- -------
(In thousands)
Securities held-to-maturity:
Tax-exempt securities $ 399 $ 676 $ 410
Corporate debt securities -- -- 995
------- ------- -------
Total securities held-to-maturity 399 676 1,405
------- ------- -------
Securities available-for-sale:
Mutual funds 9,800 9,943 2,828
US agency securities 5,015 5,626 2,771
FreddieMac stock 1,392 1,116 1,346
FannieMae/SLMA preferred 1,200 1,425 1,500
SLMA asset-backed note 1,300 1,858 1,980
Tax-exempt securities 5,523 5,443 5,610
Taxable securities -- -- --
Collateralized mortgage obligations 6,289 3,869 7,939
Mortgage-backed securities 30,680 38,517 27,290
------- ------- -------
Total securities available-for-sale 61,199 67,797 51,264
------- ------- -------
Total investment and mortgage-backed securities $61,598 $68,473 $52,669
======= ======= =======
13
The following table sets forth information regarding the scheduled
maturities, carrying values, market value and weighted average yields for the
Bank's investment securities portfolio at June 30, 2004. The following table
does not take into consideration the effects of scheduled repayments or the
effects of possible prepayments.
At June 30, 2004
------------------------------------------------------------------------------------------------------
Less than 1 to Over 5 to Over 10 Total
1 year 5 years 10 years years Securities
------------------ ----------------- ----------------- ----------------- -------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
Securities
held-to-maturity:
Tax-exempt
securities (1).......... $ -- --% $ 145 4.25% $ -- --% $ 254 8.75% $ 399 7.11% $ 408
------- ------ ------ ------- ------- -------
Total
securities
held-to-maturity.... -- 145 4.25 -- 254 8.75 399 7.11 408
------- ------ ------ ------- ------- -------
Securities
available-for-sale:
Mutual funds.............. 9,949 2.21 -- -- -- -- -- -- 9,949 2.21 9,800
US Agency securities...... 4,013 2.59 1,004 1.73 -- -- -- -- 5,017 2.42 5,015
FreddieMac stock (2)...... -- -- -- -- -- -- 8 1.08 8 1.78 1,392
FannieMae/SLMA
preferred............... -- -- -- -- -- -- 1,500 1.47 1,500 1.47 1,200
SLMA asset-backed
securities.............. -- -- -- -- 1,296 1.97 -- -- 1,296 1.97 1,300
Tax-exempt
securities (1).......... 136 1.51 895 3.79 -- -- 4,166 6.17 5,197 5.64 5,523
Taxable securities........ -- -- -- -- -- -- -- -- -- -- --
Collateralized
mortgage
obligations
securities.............. -- -- 819 3.33 -- -- 5,508 2.68 6,327 2.76 6,289
Mortgage-backed
securities............. -- -- -- -- 1,932 5.80 29,133 4.28 31,065 4.37 30,680
------- ------ ------ ------- ------- -------
Total securities
available-for-sale.. 14,098 2.31 2,718 2.89 3,228 4.26 40,315 4.15 60,359 3.67 61,199
------- ------ ------ ------- ------- -------
Total investment and
mortgage-backed
securities ............... $14,098 2.31% $2,863 2.96% $3,228 4.26% $40,569 4.18% $60,758 3.69% $61,607
======= ==== ====== ==== ====== ==== ======= ==== ======= ==== =======
- ------------------
(1) Average yield is computed on a book value basis rather than a tax
equivalent basis.
(2) Average yield is computed on a redemption value basis.
14
Sources of Funds
General. Deposits are a major external source of the Company's funds
for lending and other investment purposes. The Company derives funds from
amortization and prepayment of loans and, to a lesser extent, maturities of
investment securities, borrowings, amortization and prepayments of
mortgage-backed securities, and operations. Scheduled loans and mortgage-backed
securities principal repayments are a relatively stable source of funds, while
deposit inflows and outflows, and loans and mortgage-backed securities
prepayments are significantly influenced by general interest rates and market
conditions.
Deposits. Consumer and commercial deposits are attracted principally
from within the Company's primary market area through the offering of a
selection of deposit instruments including regular savings accounts, money
market accounts, and term certificate accounts. Deposit account terms vary
according to the minimum balance required, the time period the funds must remain
on deposit, and the interest rate, among other factors.
Deposit Distribution. The following table sets forth the average
balance and the weighted average rates for each period on each category of
deposits presented.
Year Ended June 30,
-----------------------------------------------------------------------------
2004 2003 2002
-------------------- -------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
(Dollars in thousands)
Demand deposits $ 16,169 0.00% $ 13,122 0.00% $ 9,024 0.00%
Interest-bearing demand
and NOW deposits 10,877 0.28 8,830 0.75 8,081 0.94
Money market savings 12,723 0.83 11,421 1.93 10,465 1.57
Savings accounts 7,338 0.89 5,910 1.08 8,271 0.74
Time deposits 89,923 2.88 77,180 3.55 75,510 4.98
-------- -------- --------
Total deposits $137,030 2.04% $116,463 2.65% $111,351 3.65%
======== ======== ========
Time Deposits. The following table indicates the amount of the
Company's time deposits of $100,000 or more by time remaining until maturity as
of June 30, 2004.
Maturity Period Time Deposits
--------------- -------------
(In thousands)
Within three months $ 8,452
More than three through six months 7,703
More than six through nine months 3,629
Over nine months 25,319
-------
Total $45,103
=======
Borrowings. The Company may obtain advances from the FHLB of Dallas
(the "FHLB") to supplement its supply of lendable funds. Advances from the FHLB
are typically secured by a pledge of the Company's stock in the FHLB, a portion
of the Company's first mortgage loans and certain other assets. Each FHLB credit
program has its own interest rate, which may be fixed or variable, and range of
maturities. The Company, if the need arises, may also access the Federal Reserve
Bank discount
15
window to supplement its supply of lendable funds and to meet deposit withdrawal
requirements. At June 30, 2004, borrowings with the FHLB totaled $73,652,218 of
which $30,756,838 were short-term. The following table sets forth certain
information regarding the Company's FHLB advances (which were its only category
of short-term borrowing) for the periods indicated.
June 30,
--------------------------------
2004 2003 2002
---- ---- ----
(Dollars in thousands)
Amount outstanding at end of period...................... $73,652 $76,642 $ 76,387
Weighted average interest rate at end of period .......... 3.48% 4.01% 4.32%
Maximum amount of short-term borrowingsoutstanding
at any month end ....................................... $33,418 $39,954 $ 34,727
Approximate average short-term borrowings outstanding.... $30,757 $32,978 $ 30,072
Approximate weighted average rate paid during period...... 3.61% 4.23% 4.62%
Personnel
As of June 30, 2004, the Company employed 54 employees with 51 working
full-time. None of the Company's employees are represented by a collective
bargaining group. The Company believes that its relationship with its employees
is good.
REGULATION
Set forth below is a brief description of certain laws which relate to
the regulation of the Company and the Bank. The description does not purport to
be complete and is qualified in its entirety by reference to applicable laws and
regulations.
Regulation of the Company
General. The Company is a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Company is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over the
Company and its non-savings association subsidiaries, should such subsidiaries
be formed, which authority also permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
association. This regulation and oversight is intended primarily for the
protection of the depositors of the Bank and not for the benefit of stockholders
of the Company.
As a unitary savings and loan holding company, the Company generally is
not subject to any restrictions on its business activities. While the
Gramm-Leach-Bliley Act (the "GLB Act") terminated the "unitary thrift holding
company" exemption from activity restrictions on a prospective basis, the
Company enjoys grandfathered status under this provision of the GLB Act because
it acquired the Bank prior to May 4, 1999. As a result, the Company's freedom
from activity restrictions as a unitary savings and loan holding company was not
affected by the GLB Act. However, if the Company were to acquire control of an
additional savings association, its business activities would be subject to
restriction under the Home Owners' Loan Act. Furthermore, if the Company were in
the future to sell control of the Bank to any other company, such company would
not succeed to the Company's grandfathered status under the GLB Act and would be
subject to the same activity restrictions. The continuation of the Company's
exemption from restrictions on business activities as a unitary savings and loan
holding company is also subject to the Company's continued compliance with the
Qualified Thrift Lender ("QTL") test. See "- Regulation of the Bank - Qualified
Thrift Lender Test."
16
Regulation of the Bank
General. Set forth below is a brief description of certain laws that
relate to the regulation of the Bank. The description does not purport to be
complete and is qualified in its entirety by reference to applicable laws and
regulations. As a federally chartered, SAIF-insured savings association, the
Bank is subject to extensive regulation by the OTS and the Federal Deposit
Insurance Corporation ("FDIC") Lending activities and other investments must
comply with various federal statutory and regulatory requirements. The Bank is
also subject to certain reserve requirements promulgated by the Federal Reserve
Board.
The OTS regularly examines the Bank and prepares reports for the
consideration of the Bank's Board of Directors on any deficiencies that are
found in the Bank's operations. The Bank's relationship with its depositors and
borrowers is also regulated to a great extent by federal and state law,
especially in such matters as the ownership of savings accounts and the form and
content of the Bank's mortgage documents.
The Bank must file reports with the OTS concerning its activities and
financial condition, in addition to obtaining regulatory approvals prior to
entering into certain transactions such as mergers with or acquisitions of other
savings institutions. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the SAIF and depositors. The regulatory
structure also gives the regulatory authorities extensive discretion in
connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes.
Insurance of Deposit Accounts. The deposit accounts held by the Bank
are insured by the SAIF to a maximum of $100,000 for each insured member (as
defined by law and regulation). Insurance of deposits may be terminated by the
FDIC upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by the
FDIC or the institution's primary regulator.
The Bank is required to pay insurance premiums based on a percentage of
its insured deposits to the FDIC for insurance of its deposits by the SAIF.
Under the risk-based system established by the FDIC for setting deposit
insurance premiums, the 2004 insurance assessment rates for SAIF-member
institutions range from 0% to 0.27% of insured deposits on an annualized basis,
with the assessment rate for most savings institutions set at 0%. The Bank
currently qualifies for the lowest assessment rate under the risk-based
assessment system and, accordingly, did not pay any deposit insurance
assessments during the past fiscal year.
In addition, all FDIC-insured institutions are required through 2017 to
pay assessments to the FDIC to fund interest payments on bonds issued by the
Financing Corporation ("FICO"), an agency of the Federal government established
to recapitalize the predecessor to the SAIF. For calendar 2004, the annual
assessment rate has been approximately 0.154% of insured deposits.
Loans to One Borrower. A savings association may not make a loan or
extend credit to a single or related group of borrowers in excess of 15% of the
associations's unimpaired capital and surplus. An additional amount may be lent,
equal to 10% of the unimpaired capital and surplus, under certain circumstances.
At June 30, 2004, the Company's lending limit for loans to one borrower was
17
approximately $2,766,702 and the Company had no outstanding commitments that
exceeded the loans to one borrower limit at the time originated or committed.
Regulatory Capital Requirements. OTS capital regulations require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted assets, (2) core capital equal to at least 3% of total
adjusted assets for savings institutions that receive the highest supervisory
rating for safety and soundness and 4% of total adjusted assets for all other
thrifts, and (3) risk-based capital equal to 8% of total risk-weighted assets.
At June 30, 2004, the Bank was in compliance with its regulatory capital
requirements.
For purposes of the OTS capital regulations, tangible capital is
defined as core capital less all intangible assets, except for certain mortgage
servicing rights, and less certain investments. Core, or Tier 1, capital is
defined as common stockholders' equity, noncumulative perpetual preferred stock
and minority interests in the equity accounts of consolidated subsidiaries,
certain nonwithdrawable accounts and pledged deposits of mutual savings
associations and qualifying supervisory goodwill, less nonqualifying intangible
assets, certain mortgage servicing rights and certain investments.
The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital of 8% of risk-weighted assets.
Risk-based capital equals the sum of core and supplementary capital. The
components of supplementary capital include, among other items, cumulative
perpetual preferred stock, perpetual subordinated debt, mandatory convertible
subordinated debt, intermediate-term preferred stock, general valuation loan and
lease loss allowances up to a maximum of 1.25% of risk-weighted assets, and up
to 45% of unrealized gains on equity securities. Overall, supplementary capital
is limited to 100% of core capital. A savings association must calculate its
risk-weighted assets by multiplying each asset and off-balance sheet item by
various risk factors as determined by the OTS, which range from 0% for cash to
100% for delinquent loans, property acquired through foreclosure, commercial
loans, and other assets.
In addition to the above regulatory capital requirements, the OTS's
prompt corrective action regulation classifies savings associations by capital
levels and provides that the OTS will take various corrective actions, including
imposing significant operational restrictions, against any thrift that fails to
meet the regulation's capital standards. Under this regulation, a "well
capitalized" savings association is one that has a total risk-based capital
ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 6% and a
leverage capital ratio of 5%, and is not subject to any capital order or
directive. A thrift is deemed "adequately capitalized" category if it has a
total risk-based capital ratio of at least 8%, a Tier 1 risk-based capital ratio
of at least 4%, and a leverage capital ratio of at least 4%. Institutions with
lower capital levels are deemed to be "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized," depending on their capital
levels. A thrift that falls within any of the three undercapitalized categories
is subject to severe regulatory sanctions under the prompt corrective action
regulation. At June 30, 2004, the Bank was classified as "well capitalized.
Dividend and Other Capital Distribution Limitations. The OTS imposes
various restrictions or requirements on the ability of savings institutions to
make capital distributions, including cash dividends.
A savings association, such as the Bank, that is a subsidiary of a
savings and loan holding company must file an application or a notice with the
OTS at least 30 days before making a capital distribution. Savings associations
are not required to file an application for permission to make a capital
distribution and need only file a notice if the following conditions are met:
(1) they are eligible for expedited treatment under OTS regulations, (2) they
would remain adequately capitalized after the distribution, (3) the annual
amount of capital distribution does not exceed net income for that year to date
added to retained net income
18
for the two preceding years, and (4) the capital distribution would not violate
any agreements between the OTS and the savings association or any OTS
regulations. Any other situation would require an application to the OTS.
The OTS may disapprove an application or notice if the proposed capital
distribution would: (i) make the savings association undercapitalized,
significantly undercapitalized, or critically undercapitalized; (ii) raise
safety or soundness concerns; or (iii) violate a statue, regulation, or
agreement with the OTS (or with the FDIC), or a condition imposed in an
OTS-approved application or notice. Further, a federal savings association, like
the Bank, cannot distribute regulatory capital that is needed for its
liquidation account.
Qualified Thrift Lender Test. Federal savings institutions must meet
one of two Qualified Thrift Lender ("QTL") tests. To qualify as a QTL, a savings
institution must either (i) be deemed a "domestic building and loan association"
under the Internal Revenue Code by maintaining at least 60% of its total assets
in specified types of assets, including cash, certain government securities,
loans secured by and other assets related to residential real property,
educational loans and investments in premises of the institution or (ii) satisfy
the statutory QTL test set forth in the Home Owner's Loan Act by maintaining at
least 65% of its "portfolio assets" in certain"Qualified Thrift Investments".
Qualified thrift investments consist primarily of an institution's residential
mortgage loans and other loans and investments relating to residential real
estate and manufactured housing and also include student, credit card and small
business loans, stock issued by a Federal Home Loan Bank, the FHLMC and the
FNMA, and other enumerated assets. For purposes of the statutory QTL test,
portfolio assets are defined as total assets minus intangible assets, property
used by the institution in conducting its business, and liquid assets equal to
10% of total assets. A savings institution must maintain its status as a QTL on
a monthly basis in at least nine out of every 12 months. A failure to qualify as
a QTL would result in a number of sanctions, including certain operating
restrictions. At June 30, 2004, the Bank was in compliance with its QTL
requirement, with 81.58% of its assets invested in Qualified Thrift Investments.
Federal Home Loan Bank System. The Bank is a member of the FHLB of Dallas, which
is one of 12 regional FHLBs that administers the home financing credit function
of savings associations. Each FHLB serves as a reserve or central bank for its
members within its assigned region. It is funded primarily from proceeds derived
from the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the Board of Directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Dallas in an amount equal to the greater of 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year or 5% of the Bank's advances from the FHLB. At June
30, 2004, the Bank was in compliance with this requirement.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW, and Super
NOW checking accounts) and non-personal time deposits. The balances maintained
to meet the reserve requirements imposed by the Federal Reserve Board may be
used to satisfy the liquidity requirements that are imposed by the OTS. At June
30, 2004, the Bank was in compliance with these Federal Reserve Board
requirements.
19
Item 2. Description of Property.
- ------- ------------------------
(a) The Company owns its main office and branch office located at 221
West Aztec Avenue, Gallup, New Mexico and 1501 San Juan Boulevard, Farmington,
New Mexico, respectively. During the fiscal year ended June 30, 2004, the
Company purchased property to be used for a possible future branch site on the
north side of Gallup, New Mexico for $424,000 and is liable for a non-interest
bearing note payable to the seller with one final payment of $137,000 due in
January 2005. The Company also leases additional office space across the street
from its main office. The lease expires December 31, 2007 and the Company has an
option, upon notification of the lessor by August 1, 2007, to purchase the
building for $275,000 or to extend the lease for an additional 10 years.
(b) Investment Policies. See "Item 1. Business" above for a general
description of the Company's investment policies and any regulatory or Board of
Directors' percentage of assets limitations regarding certain investments. The
Company's investments are primarily acquired to produce income, and to a lesser
extent, possible capital gain.
(1) Investments in Real Estate or Interests in Real Estate. See
"Item 1. Business - Lending Activities and - Regulation of
the Bank," and "Item 2. Description of Property."
(2) Investments in Real Estate Mortgages. See "Item 1. Business
- Lending Activities and - Regulation of the Bank."
(3) Investments in Securities of or Interests in Persons
Primarily Engaged in Real Estate Activities. See "Item 1.
Business - Lending Activities and - Regulation of the Bank."
(c) Description of Real Estate and Operating Data. Not Applicable.
Item 3. Legal Proceedings
- ------- -----------------
Neither the Company nor the Bank are engaged in any legal proceedings
of a material nature at the present time. From time to time the Bank is a party
to legal proceedings in the ordinary course of business wherein it enforces its
security interest in mortgage loans made by it.
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year.
20
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
(a) Market Information. Since its initial issuance on June 29, 1995,
the Company's common stock has been traded on the Nasdaq SmallCap Market under
the symbol "GUPB." The following table reflects the high and low bid prices for
the Common Stock as published by the Nasdaq SmallCap Market as well as dividends
declared per share for each quarter during the most recent two fiscal years. The
quotations reflect inter-dealer prices, without retail mark-up, markdown, or
commission, and may not represent actual transactions.
Dividends
Quarter Ended High Low Declared
------------- ---- --- --------
June 30, 2004 $23.18 $21.00 $0.125
March 31, 2004 23.75 21.06 0.125
December 31, 2003 21.34 16.75 0.125
September 30, 2003 17.00 16.03 0.11
June 30, 2003 17.63 15.94 0.11
March 31, 2003 17.55 14.32 0.11
December 31, 2002 15.99 12.76 0.11
September 30, 2002 15.15 13.78 0.10
As of June 30, 2004, there were 1,146,645 shares of the Common Stock
outstanding and 211 stockholders of record. This number does not reflect the
number of persons or entities who held stock in nominee or "street" name through
various brokerage firms.
The Company's ability to pay dividends to stockholders is subject to
the requirements of Delaware law. No dividend may be paid by the Company unless
its board of directors determines that the Company will be able to pay its debts
in the ordinary course of business after payment of the dividend. In addition,
the Company's ability to pay dividends is dependent, in part, upon the dividends
it receives from the Bank. The Bank may not declare or pay a cash dividend on
any of its stock if the effect thereof would be to cause the Bank's regulatory
capital to be reduced below (1) the amount required for the liquidation account
established in connection with the Bank's conversion from mutual to stock form,
or (2) the regulatory capital requirements imposed by the Office of Thrift
Supervision.
(b) Application of Proceeds. Not applicable.
(c) Issuer Purchases of Equity Securities. During the fiscal year 2004,
the Company made no purchases of its Common Stock.
On June 20, 2002 the Company issued a press release announcing its
authorization to repurchase 115,010 shares (10% of its 1,150,106 outstanding
shares on that date) of its common stock. The maximum number of shares that may
yet be purchased under the plan is 106,374 shares.
21
Item 6. Management's Discussion and Analysis or Plan of Operation
- ------- ---------------------------------------------------------
General
The Private Securities Litigation Reform Act of 1995 contains safe
harbor provisions regarding forward-looking statements. When used in this
discussion, the words "believes", "anticipates", "contemplates", "expects", and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected. Those risks and
uncertainties include changes in interest rates, risks associated with the
ability to control costs, expenses, and general economic conditions. We
undertake no obligation to publicly release the results of any revisions to
those forward-looking statements which may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Overview
GFSB Bancorp, Inc. is a unitary savings and loan holding company
headquartered in Gallup, New Mexico, which provides a full range of deposits and
traditional mortgage loan products through its wholly-owned banking subsidiary,
Gallup Federal Savings Bank (Bank). All references refer collectively to the
Company and the Bank, unless the context indicates otherwise.
During fiscal 2002, to provide opportunity for growth, the Bank opened
an office in Farmington, New Mexico under the trade name of Farmington Savings
Bank, a Branch of Gallup Federal Savings Bank. Because of operating an
additional branch, non-interest expense increased during fiscal 2003.
Proposed Merger
On August 25, 2004, The Company announced that it had signed a
definitive merger agreement with First Federal Banc of the Southwest, Inc.
("FFBSW"), the holding company for First Federal Bank, Roswell, New Mexico,
pursuant to which the Company will merge with and into FFBSW.
Under the terms of the agreement, upon consummation of the merger of
the Company into FFBSW, each outstanding share of the Company's common stock
will be converted into the right to receive either $20.00 in cash or FFBSW
common stock, at the election of the holder, subject to an overall requirement
that 51% of the Company's total outstanding common stock be exchanged for stock.
The transaction is subject to various conditions, including stockholder approval
of both the Company and FFBSW, and approval by the applicable banking regulatory
agencies.
Pursuant to the terms of the merger agreement, FFBSW has agreed to
register FFBSW's common stock under the Securities Exchange Act of 1934 and it
will file reports with the Securities and Exchange Commission. In addition, upon
the completion of the merger, its shares are expected to be listed on the
NASDAQ.
Critical Accounting Policies, Judgments and Estimates
The Company's accounting and reporting policies conform with the
accounting principles generally accepted in the United States of America and
general practices within the financial services industry. The preparation of the
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 amounts
22
reported in the financial statements and the accompanying notes. Actual results
could differ from those estimates. These policies are critical because they are
highly dependent upon subjective or complex judgments, assumptions and
estimates.
Management bases its estimates and judgments on historical experience
and on various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. There can be no assurance that actual results will not differ
from those estimates. If actual results are different than management's
judgments and estimates, the Company's financial results could change, and such
change could be material to the Company.
Allowance for Loan Losses. Determining the amount of the allowance for
loan losses necessarily involves a high degree of judgment. The allowance for
loan losses is the estimated amount considered necessary to cover credit losses
inherent in the loan portfolio at the balance sheet date. The allowance is
established through the provision for loan losses, which is charged against
income. Management performs an evaluation of the adequacy of the allowance for
loan losses on a quarterly basis, at a minimum. The balance in the allowance for
loan losses is determined based on management's review and evaluation of the
loan portfolio in relation to past loss experience, the size and composition of
the portfolio, current economic conditions, delinquency statistics, the adequacy
of the underlying collateral, the financial strength of the borrowers, results
of internal loan reviews, geographic and industry concentrations, and other
factors related to the collectibility of the loan portfolio. All of these
factors may be susceptible to significant change. To the extent actual outcomes
differ from management's estimates, additional provisions for loan losses may be
required that would adversely impact earnings in future periods.
For purposes of the Company's allowance for loan loss methodology, all
criticized loans, meaning all loans classified as "substandard", "doubtful" or
"loss" or designated "special mention", are divided into two primary categories:
(1) loans secured by real estate and (2) other loans. Within these two
categories loss allocation percentages are assigned based on the severity of the
classification or designation. All other loans are segregated into one of seven
general categories: (1) consumer residential mortgages, (2) commercial
residential mortgages, (3) residential mortgage loan participations purchased,
(4) commercial loans, (5) commercial real estate loans, (6) consumer loans, and
(7) loans secured by deposit accounts. Loss allocation percentages are assigned
to each of these seven categories. An additional loss allocation percentage is
assigned to all loans within these seven categories that have been designated
"pass/watch", meaning loans that have been identified as having potential credit
concerns less severe than criticized loans. Finally an additional loss
allocation is assigned to unfunded commitments on existing loans.
Credit losses are an inherent part of the Company's business and,
although management believes the methodologies for determining the allowance for
loan losses and the current level of the allowance are adequate, it is possible
that there may be unidentified losses in the portfolio that may become evident
only at a future date. Additional provisions for such losses, if necessary,
would negatively impact earnings.
Management of Interest Rate Risk and Market Risk
Because the majority of the Company's assets and liabilities are
sensitive to changes in interest rates, its most significant form of market risk
is interest rate risk, or changes in interest rates. The Company is vulnerable
to an increase in interest rates to the extent that its interest-bearing
liabilities mature or reprice more rapidly than its interest-earning assets. The
Company's lending activities have emphasized the purchase or the origination of
fixed rate loans secured by one-to four family residences and the
23
purchase of mortgage backed securities and available-for-sale investment
securities. The primary source of funds has been deposits with maturities
substantially shorter than the related assets. While having interest-bearing
liabilities that reprice more frequently than interest-earning assets is
generally beneficial to net interest income during a period of declining
interest rates, this type of an asset/liability mismatch is generally
detrimental during periods of rising interest rates.
Senior management of the Company reviews loan and deposit pricing and
production volumes, interest rate risk analysis, liquidity and borrowing needs,
and a variety of other asset and liability management topics on a weekly basis.
The Company's Investment Committee meets on a monthly basis to review these same
items. On behalf of the Investment Committee, the Chairman reports to the Board
of Directors.
To reduce the effect of interest rate changes on net interest income,
the Company has adopted various strategies to enable it to improve the matching
of interest-earning asset maturities to interest-bearing liability maturities.
The principal elements of these strategies include seeking to:
o sell new originated long-term fixed rate mortgage loans that
conform to Federal National Mortgage Association guidelines when
sales can be achieved on terms favorable to the Company;
o lengthen the maturities of liabilities when it would be cost
effective through the pricing and promotion of higher rate
certificates of deposit and utilization of FHLB advances;
o attract low cost checking and transaction accounts which tend to
be less interest rate sensitive when interest rates rise;
o maintain interest-bearing deposits, federal funds and U.S.
government securities with short to intermediate terms to
maturities; and
o maintain an investment portfolio that provides a stable cash
flow, thereby providing investable funds in varying interest rate
cycles.
Although the maintenance of a large percentage of the Company's assets
in short-term and intermediate-term assets, such as cash equivalents,
mortgage-backed securities and investment securities, reduces interest rate
risk, it adversely affects interest income and net earnings. The Company has
made a significant effort to maintain its level of lower cost deposits as a
method of enhancing profitability. At June 30, 2004, the Company had
approximately $50 million, or 38%, of its deposits in low-cost savings, checking
and money market accounts. These deposits have traditionally remained relatively
stable and are expected to be only moderately affected in a period of rising
interest rates. This stability has enabled the Company to offset the impact of
rising rates in other deposit accounts.
Net Portfolio Value
Management activity monitors exposure to interest rate risk. The
Company's objective is to maintain a consistent level of profitability within
acceptable risk tolerances across a broad range of potential interest rate
environments. The Bank uses the OTS Net Portfolio Value ("NPV") Model to monitor
its exposure to interest rate risk, which calculates changes in net portfolio
value. The NPV model, in addition to management's suggestions, are reviewed by
the Investment Committee and reported to the Board of Directors quarterly.
24
The Bank computes amounts by which the net present value of cash flow
from assets, liabilities and off balance sheet items ("net portfolio value" or
"NPV") would change in the event of a range of assumed changes in market
interest rates. Based upon OTS assumptions, the following table presents the
Bank's percentage change in NPV, assuming an immediate change in interest rates
of plus or minus 300 basis points from the level at June 30, 2004. Changes due
to a 200 and 300 basis point decline are not presented due to the low interest
rate environment.
Change in
Interest Rates
In Basis Points NPV
("BP") Ratio (2) Change(3)
------ --------- ---------
+300 bp 8.07% -193 bp
+200 bp(1) 8.95% -106 bp
+100 bp 9.62% - 39 bp
0 10.00% -- bp
-100 bp 9.87% - 13 bp
- ---------------
(1) Denotes the rate shock used to compute the NPV capital ratios.
(2) Calculated as the estimated NPV divided by present value of assets.
(3) Calculated as the excess (deficiency) of the NPV ratio assuming the
indicated change in interest rates over the estimated NPV ratio assuming no
change in interest rates.
These calculations indicate that the Bank's NPV could be adversely
affected by increases in interest rates and could also be somewhat adversely
affected by decreases in interest rates. In addition, the Bank could be deemed
to have more than a normal level of interest rate risk under applicable
regulatory capital requirements if interest market rates increase.
Computations of prospective effects of hypothetical interest rate
changes are based on numerous assumptions, including relative levels of market
interest rates, prepayments and deposit run-offs and should not be relied upon
as indicative of actual results. Certain shortcomings are inherent in such
computations. Although certain assets and liabilities may have similar maturity
or periods of repricing, they may react at different times and in different
degrees to changes in the market interest rates. The interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while rates on other types of assets and liabilities may lag
behind changes in market interest rates. Certain assets, such as adjustable rate
mortgages, generally have features which restrict changes in interest rates on a
short-term basis and over the life of the asset. In the event of a change in
interest rates, prepayments and early withdrawal levels could deviate
significantly from those assumed in making calculations set forth above.
Additionally, an increased credit risk may result as the ability of many
borrowers to service their debt may decrease in the event of an interest rate
increase.
25
Average Balance Sheet
The following table sets forth certain information relating to the Company's
average balance sheet and reflects the yield on assets and cost of liabilities
for the periods indicated and the yields earned and rates paid. Such yields
and costs are derived by dividing income or expense by the average balance of
assets or liabilities, respectively, for the periods presented. Average
balances are derived from month-end balances. Management does not believe that
the use of month-end balances instead of daily average balances has caused any
material differences in the information presented.
Year Ended June 30,
-------------------------------------------------------------------------------------------
2004 2003 2002
------------------------------ ------------------------------ ---------------------------
Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
Interest-earning assets
Loans receivable (1) $155,587 $9,973 6.41% $144,841 $10,324 7.13% $137,754 $10,358 7.53%
Investment securities and
mortgage-backed securities 66,181 2,059 3.11 56,387 2,285 4.05 56,365 2,997 5.32
Other interest-earning assets (2) 5,164 83 1.16 5,141 134 2.61 4,837 149 3.08
-------- ------ -------- ------- --------
Total interest-earning assets 226,932 12,115 5.30% 206,369 12,743 6.17% 198,956 13,504 6.79%
------ -------
Non-interest-earning assets 10,756 9,307 7,255
-------- -------- --------
Total assets $237,688 $215,676 $206,211
======== ======== ========
Interest-bearing liabilities
Interest-bearing demand
and NOW deposits $ 10,877 $ 30 0.28 $ 8,830 $ 66 0.75 $ 8,081 $ 76 0.94
Passbook savings 7,338 65 0.89 5,910 64 1.08 8,271 61 0.74
Money market accounts 12,723 105 0.83 11,421 129 1.93 10,465 164 1.57
Time deposits 89,923 2,590 2.88 77,180 2,741 3.55 75,510 3,759 4.98
Other liabilities (3) 81,044 2,679 3.31 79,864 3,162 3.96 80,206 3,415 4.26
-------- ------ -------- ------- -------- ------
Total interest-bearing
liabilities 201,905 5,469 2.71% 183,205 6,162 3.36% 182,533 7,475 4.10%
------ ------- ------
Non-interest-bearing liabilities 17,738 15,275 7,861
-------- -------- --------
Total liabilities $219,643 $198,480 $190,394
Stockholders' equity 18,045 17,196 15,817
-------- -------- --------
Total liabilities and
stockholders' equity $237,688 $215,676 $206,211
======== ======== ========
Net interest income $6,646 $ 6,581
====== =======
$6,029
======
Interest rate spread (4) 2.59% 2.81% 2.69%
Net interest margin (5) 2.93% 3.19% 3.03%
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.12x 1.13x 1.09x
- --------------------
(1) Average balances include non-accrual loans.
(2) Includes interest-bearing deposits in other financial institutions.
(3) Other liabilities include FHLB advances, repurchase agreements and other
secured borrowings.
(4) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net interest margin represents net interest income as a percentage of
average interest earning assets.
26
Rate/Volume Analysis
The table below sets forth certain information regarding changes in interest
income and interest expense of the Company for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to: (i) changes in volume
(changes in average volume multiplied by old rate); (ii) changes in rates
(changes in rate multiplied by old average volume); and (iii) changes in rate
(volume changes in rate multiplied by the change in average volume).
Year ended June 30, Year ended June 30,
2004 vs. 2003 2003 vs. 2002
Increase (Decrease) Increase (Decrease)
Due to Due to
------------------------------------- ---------------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------ ---- ------ --- ------ ---- ------ ---
(In thousands) (In thousands)
Interest income
Loans receivable $ 766 $(1,043) $ (74) $ (351) $ 696 $ (677) $ (53) $ (34)
Mortgage-backed securities and
investment securities 397 (530) (93) (226) 1 (716) 3 (712)
Other interest-earning assets 1 (51) (1) (51) 9 (23) (1) (15)
------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning assets 1,164 (1,624) (168) (628) 706 (1,416) (51) (761)
------- ------- ------- ------- ------- ------- ------- -------
Interest expense
Transaction accounts 15 (42) (9) (36) 7 (15) (2) (10)
Savings accounts 15 (11) (3) 1 (17) 28 (8) 3
Money markets 15 (34) (5) (24) 15 (46) (4) (35)
Certificates of deposit 452 (517) (86) (151) 88 (1,079) (22) (1,013)
Other liabilities 47 (519) (11) (483) 68 (315) (6) (253)
------- ------- ------- ------- ------- ------- ------- -------
Total interest-bearing
liabilities 544 (1,123) (114) (693) 161 (1,427) (42) (1,308)
------- ------- ------- ------- ------- ------- ------- -------
Net change in interest income $ 620 $ (501) $ (54) $ 65 $ 545 $ 11 $ (9) $ 547
======= ======= ======= ======= ======= ======= ======= =======
Selected Operating Ratios:
Year Ended June 30,
---------------------------
2004 2003 2002
------ ------ ------
Return on average assets........................... 0.57% 0.78% 0.89%
Return on average equity........................... 7.48 9.84 10.19
Average equity to average assets................... 7.59 7.97 7.67
Dividend payout ratio.............................. 41.18 29.22 27.84
27
Financial Condition
General. The Company's total assets increased $2,132,000, or 0.93%, to
$232,087,000 at June 30, 2004 from $229,955,000 at June 30, 2003. This increase
was primarily the result of a $6,166,000 increase in the Company's net loan
portfolio, an increase in cash and due from banks of $1,055,000, partially
offset by a $6,874,000 decrease in the Company's security portfolio. Other
contributing factors include increases in interest bearing deposits with banks,
prepaid assets, loans held for sale, deferred tax asset, premises and equipment
and other assets.
Loans receivable, net, increased $6,166,000 to $152,430,000 at June 30,
2004 from $146,264,000 at June 30, 2003. The increase in loans receivable, net,
was primarily the result of increases of $12,882,000 in loans secured by other
real estate properties and $2,381,000 in commercial business loans, partially
offset by decreases of $3,800,000 in loans on one-to-four family residences,
$2,666,000 in construction loans, $2,420,000 in loan participations purchased,
and $201,000 in consumer loans.
The $6,874,000 decrease in the Company's security portfolio was
primarily the result of a $7,837,000 decrease in available-for-sale
mortgage-backed securities and a $277,000 decrease in held-to-maturity
securities partially offset by a $1,240,000 increase in available-for-sale
investment securities. The decreases in available-for-sale mortgage backed
securities and held-to-maturity securities is primarily the result of principal
payments received and a decrease in purchases. The increase in
available-for-sale investment securities in primarily the result of an increase
in purchases of collateralized mortgage obligations.
At June 30, 2004, total liabilities increased $1,745,000 to
$213,955,000 from $212,210,000 at June 30, 2003. The increase in total
liabilities was primarily attributable to an increase in deposits of $4,100,000,
an increase in other secured borrowings of $1,157,000 partially offset by a
$2,990,000 decrease in advances from the Federal Home Loan Bank.
The increase in deposits was primarily the result of growth in the
Company's Transaction and NOW accounts and Savings deposits offset by a decrease
in Time deposits. Transactions and NOW accounts increased $4,050,000 from
$24,938,000 to $28,988,000 and Savings deposits increased $4,237,000 from
$17,265,000 to $21,502,000. The increase is primarily due to an increase in the
Farmington Branch's deposit volume. Time deposits decreased $4,187,000 from
$87,557,000 to $83,370,000 primarily due to a $5,000,000 decrease in brokered
accounts. Funds from the growth of deposits were used to repay Federal Home Loan
Bank advances. The increase in other secured borrowings was primarily due to an
increase in participation loans sold under agreements to purchase.
The Company offers its corporate customers an investment product
fashioned in the form of a repurchase agreement. Under the terms of the
agreement, deposits in designated demand accounts of the customers are swept
daily into an investment vehicle, through which the funds are used to purchase
an interest in designated marketable securities. The Company in turn agrees to
repurchase these investments on a daily basis, paying the customer the daily
interest earned based on current market rates. At June 30, 2004, repurchase
agreements totaled $157,000, a decrease of $428,000 from $585,000 at June 30,
2003.
Total stockholders' equity at June 30, 2004 increased $388,000 to
$18,132,000 from $17,744,000 at June 30, 2003. The increase in stockholders'
equity reflects net income of $1,350,000, plus minor changes in additional
paid-in-capital and unearned ESOP stock for the year ended June 30, 2004, less
dividends paid to stockholders of $543,000. Other comprehensive earnings
decreased $733,000 due to unrealized investment losses, net of tax benefit.
28
Comparison of Operating Results for Years Ended June 30, 2004 and 2003
General. Net earnings decreased $340,000 or 20.1% to $1,350,000 ($1.14
per diluted share) for the year ended June 30, 2004 from $1,690,000 ($1.46 per
diluted share) for the year ended June 30, 2004. The decrease in net earnings
was primarily the result of a $260,000 increase in non-interest expense and a
$517,000 increase in the provision for loan losses, partially offset by an
increase in net interest earnings of $65,000, an increase in non-interest
earnings of $244,000 and a $128,000 decrease in income tax expense.
Interest Earnings. Total interest earnings totaled $12,115,000 for the
year ended June 30, 2004, a decrease of $628,000 from the $12,743,000 for the
year ended June 30, 2003. The decrease is primarily due to a decline in rates on
the Bank's lending and investment activities. Please refer to "Average Balance
Sheets" for an analysis of the change in interest earnings for the year ended
June 30, 2004 compared to the same period in 2003.
Interest Expense. Total interest expense decreased $693,000 from
$6,162,000 for the year ended June 30, 2003 to $5,469,000 for the year ended
June 30, 2004, primarily due to a decline in rates on time deposits, money
market deposits and FHLB borrowings. Please refer to "Average Balance Sheets"
for an analysis of the change in interest earnings for the year ended June 30,
2004 compared to the same period in 2003.
Provision for Losses on Loans. The Company maintains an allowance for
loan losses based upon management's periodic evaluation of known and inherent
risks in the loan portfolio, past loss experience, adverse situations that may
affect the borrower's ability to repay loans, estimated value of the underlying
collateral and current and expected market conditions. The provision for loan
losses was $969,000 and $452,000 for the years ended June 30, 2004 and 2003,
respectively. The increase in the provisions for loan losses was primarily the
result of an increase in classified loans, an increase in charge-offs and loan
growth in commercial business loans and commercial real estate loans, which tend
to have greater credit risk than residential real estate loans. The increase in
classified loans is primarily attributable to two loans, each with unique credit
quality concerns.
Non-Interest Earnings. Total non-interest earnings increased by
$244,000 or 39.2% to $867,000 for the year ended June 30, 2004 from $623,000 for
the year ended June 30, 2003. This increase was primarily due to an increase in
service charge income of $263,000 and an increase in miscellaneous income of
$44,000, partially offset by a decrease in net gains from sales of loans of
$62,000. The increase in miscellaneous income is primarily due to gains on the
sale of other real estate owned. The increase in service charge income is
primarily due to increased insufficient funds charges collected on NOW and
checking accounts because of increased volume of insufficient funds checks.
Non-Interest Expense. Total non-interest expense increased $260,000 or
5.9% to $4,631,000 for the year ended June 30, 2004 from $4,371,000 for the year
ended June 30, 2003. The increase in non-interest expense was primarily
attributable to increases in professional fees, compensation and benefits, data
processing, ATM expense, postage and other operating expenses, partially offset
by a decrease in stationary, printing and office supplies. The $82,000 increase
in professional fees is primarily attributable to $52,000 in fees paid to
consultants for strategic planning services and a $30,000 increase in legal
fees, audit expense and accounting fees largely due to the Company's efforts to
comply with requirements of the Sarbanes-Oxley Act. The $72,000 increase in
compensation and benefits is primarily attributable to a $74,000 increase in
general salaries and benefits due to the hiring of two additional employees,
general salary increases and an increase in retirement benefits expenses, a
$44,000 increase in expense associated with employee stock compensation plans,
and an increase of $21,000 in director's fees, partially offset by a $68,000
reduction in performance bonus accruals, due to operating results below
expectations for the Company during the six months ended June 30, 2004. Data
29
processing expense increased $38,000, primarily due to increases in expenses
resulting from the processing cost associated with the growth in the volume of
deposit accounts, statement processing, servicing for the online home banking
system and an increase in the number of transactions processed. ATM expense
increased $25,000, primarily due to the installation and operation of one
additional ATM and transaction volume increases. Postage expense increased
$19,000 due to the mailing costs associated with the growth in the volume of
deposit accounts and statement processing. Other operating expenses increased
$31,000, primarily due to increases in charitable contributions, armored transit
expense, supervisory exam fees, correspondent bank expense and franchise taxes.
Stationary, printing and office supplies decreased $32,000, since a substantial
portion of such expenses the previous year were attributable to the start-up
costs during the first year of operation of the Farmington branch.
Income Tax Expense. Income tax expense decreased $128,000 or 18.5% from
$691,000 for the year ended June 30, 2003 to $563,000 for the year ended June
30, 2004. The decrease was primarily due to the recognition of certain permanent
tax differences.
Off-Balance Sheet Arrangements
At June 30, 2004, the Company was not party to any off-balance sheet
arrangements that are reasonably likely to have a material effect on our
financial condition, results of operations or cash flows.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, borrowings,
amortization and prepayment of loans and mortgage-backed securities, maturities
of investment securities, and funds provided from operations. While scheduled
loan repayments are a relatively predictable source of funds, deposit flows and
loan and mortgage-backed security prepayments are significantly influenced by
general interest rates, economic conditions, and competition. In addition, the
Company invests excess funds in overnight deposits, which provide liquidity to
meet lending requirements and deposit fluctuations.
The Bank's most liquid assets are cash and cash equivalents, which
include investments in highly liquid short-term investments. The level of these
assets is dependent on the Company's operating, financing, and investing
activities during any given period. At June 30, 2004, cash and cash equivalents
totaled $8,707,000. The Bank has an additional source of liquidity if a need for
additional funds should arise, that being FHLB of Dallas advances. The Bank also
has the ability to borrow against mortgage-backed and other securities. At June
30, 2004, the Bank had outstanding borrowings from the FHLB of Dallas of
$73,652,000. Some of these outstanding borrowings were used to fund loans and
purchase additional investment securities.
The primary investment activity of the Bank is the origination of
loans; primarily mortgage loans. During the year ended June 30, 2004, the Bank
originated $67,877,000 in total loans (including loan participations purchased),
of which $47,046,000 were mortgage loans. Another investment activity of the
Bank is the investment of funds in U.S. Government agency securities,
mortgage-backed securities, collateralized mortgage obligations, readily
marketable equity securities, municipal bonds, and FHLB of Dallas overnight
funds. During periods when the Bank's loan demand is limited, the Bank may
purchase short-term investment securities to obtain a higher yield than
otherwise available.
The Company's cash flows are comprised of three primary
classifications: cash flows from operating activities, investing activities and
financing activities. Cash flows from operating activities, consisting
principally of net earnings, provision for loan losses depreciation of premises
and equipment, amortization of investment and mortgage-backed securities
premiums, stock based compensation costs and net changes in various operating
30
assets and liabilities less deferred loan origination fees, gain on sale of
loans and securities, stock dividend on FHLB stock and (benefit) provision for
deferred income taxes, were $1,930,000 and $2,038,000 for the years ended June
30, 2004 and 2003, respectively. Net cash used for investing activities
consisting primarily of loan origination and principal repayments on loans,
change in secured borrowings and purchases of securities offset by proceeds from
the sale of loans, principal payments on securities and maturities and proceeds
from sale of securities were $785,000 and $18,843,000 for the years ended June
30, 2004 and 2003, respectively. Net cash provided from financing activities
consisting primarily of net activity in deposit and escrow accounts and
repurchase agreements, proceeds and repayments of FHLB advances and payment of
dividends, were $309,000 and $18,406,000 for the years ended June 30, 2004 and
2003, respectively.
The Bank anticipates that it will have sufficient funds available to
meet its current commitments. As of June 30, 2004, the Bank had commitments to
fund loans of $19,292,000. The Bank has sufficient collateral available to
provide for approximately $37,381,000 in additional FHLB advances. Certificates
of deposit scheduled to mature in one year or less totaled $51,506,000. Based on
historical withdrawals and outflows, and on internal monthly deposit reports
monitored by management, management believes that a majority of deposits will
remain with the Bank. As a result, no adverse liquidity effects are expected.
Item 7. Financial Statements
- ------- --------------------
The Company's financial statements are contained in this Annual
Report on Form 10-KSB immediately following Item 14.
Item 8. Changes in and Disagreements with Accountants on Accounting and
- -------- ----------------------------------------------------------------------
Financial Disclosure
--------------------
Not Applicable.
Item 8A. Controls and Procedures
- -------- -----------------------
(a) Evaluation of disclosure controls and procedures. Based on their
--------------------------------------------------
evaluation of the Company's disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"))
the Company's principal executive officer and principal financial officer have
concluded that as of the end of the period covered by this Annual Report on Form
10-KSB such disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
(b) Changes in internal control over financial reporting. During the
------------------------------------------------------
last quarter of the fiscal year under report, there was no change in the
Company's internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
Item 8B. Other Information.
- -------- ------------------
Not applicable.
31
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
- ------- ------------------------------------------------------------------------
with Section 16(a) of the Exchange Act
--------------------------------------
The information required under this item is incorporated herein by
reference to the Proxy Statement for the 2004 Annual Meeting (the "Proxy
Statement") contained under the sections captioned "Section 16(a) Beneficial
Ownership Reporting Compliance," "Proposal I - Election of Directors," and "-
Biographical Information."
The Company has adopted a Code of Ethics that applies to its principal
executive officer, principal financial officer, principal accounting officer or
controller or persons performing similar functions. A copy of the Company's Code
of Ethics will be provided to any person without charge upon written request to
Jerry R. Spurlin, Chief Financial Officer, GFSB Bancorp, Inc., 221 West Aztec
Avenue, Gallup, New Mexico 87301.
Item 10. Executive Compensation
- -------- ----------------------
The information required by this item is incorporated by reference to
the Proxy Statement contained under the section captioned "Director and
Executive Officer Compensation."
Item 11. Security Ownership of Certain Beneficial Owners and Management and
- ------- ----------------------------------------------------------------------
Related Stockholder Matters
---------------------------
(a) Security Ownership of Certain Beneficial Owners
(b) Security Ownership of Management
The information required by items (a) and (b) is incorporated herein by
reference to the Proxy Statement contained under the sections captioned
"Principal Holders" and "Proposal I - Election of Directors."
(c) Changes in Control. On August 25, 2004, the Company announced that it had
signed a definitive merger agreement with First Federal Banc of the Southwest,
Inc. ("FFBSW"), the holding company for First Federal Bank, Roswell, New Mexico,
pursuant to which the Company will merge with and into FFBSW.
Under the terms of the agreement, upon consummation of the merger of
the Company into FFBSW, each outstanding share of the Company's common stock
will be converted into the right to receive either $20.00 in cash or FFBSW
common stock, at the election of the holder, subject to an overall requirement
that 51% of the Company's total outstanding common stock be exchanged for stock.
The transaction is subject to various conditions, including stockholder approval
of both the Company and FFBSW, and approval by the applicable banking regulatory
agencies.
Pursuant to the terms of the merger agreement, FFBSW has agreed to
register FFBSW's common stock under the Securities Exchange Act of 1934 and it
will file reports with the Securities and Exchange Commission. In addition, upon
the completion of the merger, its shares are expected to be listed on the
NASDAQ.
Management of the Company knows of no other arrangements, including any
pledge by any person of securities of the Company, the operation of which may at
a subsequent date result in a change in control of the Company.
32
(d) Securities Authorized for Issuance Under Equity Compensation Plans
Set forth below is information as of June 30, 2004 with respect to
compensation plans under which equity securities of the Company are authorized
for issuance.
EQUITY COMPENSATION PLAN INFORMATION
(a) (b) (c)
Number of securities
Number of securities Weighted-average remaining available for
to be issued upon exercise price of future issuance under equity
exercise of outstanding compensation plans (excluding
outstanding options, options, warrants securities reflected in
warrants and rights and rights column (a))
------------------- ---------- -----------
Equity compensation plans approved by
shareholder:
1995 Stock Option Plan............. 88,349 $ 8.48 58,680
Management Stock
Bonus Plan.................... 5,135 -- 20,077
2000 Stock Option Plan............. -- N/A 58,500
Equity compensation plans
not approved by shareholders:
Directors Stock
Compensation Plan(1).......... 11,946 11.00 --
------- ------ -------
TOTAL 105,430 $ 8.35 137,257
======= ====== =======
- ---------------
(1) Plan approved by the Company's board of directors on March 22, 2000.
Item 12. Certain Relationships and Related Transactions
- -------- ----------------------------------------------
The information required by this item is incorporated herein by
reference to the Proxy Statement contained under the section captioned "Certain
Relationships and Related Transactions."
Item 13. Exhibits
- -------- --------
The following exhibits are included in this Report or are incorporated
herein by reference.
2.1 Agreement and Plan of Merger, dated as of August 25, 2004, between
GFSB Bancorp, Inc. and First Federal Banc of the Southwest, Inc.*
3.1 Certificate of Incorporation of GFSB Bancorp, Inc.**
3.2 Bylaws of GFSB Bancorp, Inc.**
10.1+ 1995 Stock Option Plan***
10.2+ Management Stock Bonus Plan***
10.3+ Form of Directors Deferred Compensation Agreement between the Bank
and Directors****
33
10.4+ Form of Directors Stock Compensation Plan between the Company and
Directors of the Company****
10.5+ 2000 Stock Option Plan*****
10.6+ Change-in-Control Severance Agreement with Richard P. Gallegos
10.7+ Change-in-Control Severance Agreement with Jerry R. Spurlin
10.8+ Change-in-Control Severance Agreement with William W. Head, Jr.
10.9+ Change-in-Control Severance Agreement with Leonard C. Salzi
21 Subsidiaries of the Company (See "Item 1 - Description of Business")
23 Consent of Neff + Ricci LLP
31.1 Rule 13a-14(a)/15d-14(a) Certification
31.2 Rule 13a-14(a)/15d-14(a) Certification
32 Section 1350 Certification
- --------------
+ Management contract or compensatory plan or arrangement.
* Incorporated herein by reference to the identically numbered exhibit to
the current report on Form 8-K filed with the SEC on August 26, 2004.
** Incorporated herein by reference to the Registration Statement on Form
S-1 of the Company (File No. 33-90400) initially filed with the
Commission on March 17, 1995.
*** Incorporated by reference to the identically numbered exhibits of the
Annual Report on Form 10-KSB for the fiscal year ended June 30, 1997
(File No. 0-25854) filed with the SEC.
**** Incorporated by reference to the identically numbered exhibits of the
Quarterly Report on Form 10-QSB for the quarter ended March 31, 2001
filed with the SEC.
***** Incorporated by reference to Exhibit 4.1 to the Registration Statement on
Form S-8 (File No. 333-51498) filed with the SEC on December 8, 2000.
Item 14. Principal Accountant Fees and Services
The information set forth under the caption "Ratification of
Independent Auditors" in the Proxy Statement is incorporated herein by
reference.
GFSB BANCORP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition....................F-2
Consolidated Statements of Earnings and
Comprehensive Earnings............................................F-4
Consolidated Statements of Changes in Stockholders' Equity........F-6
Consolidated Statements of Cash Flows.............................F-8
Notes to Consolidated Financial Statements........................F-10
[NEFF + RICCI LLP LETTERHEAD]
Report of Independent Registered Public Accounting Firm
Board of Directors
GFSB Bancorp, Inc.
Gallup, New Mexico
We have audited the accompanying consolidated statements of financial condition
of GFSB Bancorp, Inc. (a Delaware corporation) and Subsidiary as of June 30,
2004 and 2003, and the related consolidated statements of earnings and
comprehensive earnings, changes in 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 standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of GFSB Bancorp, Inc.
and Subsidiary as of June 30, 2004 and 2003, and the 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.
/s/Neff + Ricci LLP
Albuquerque, New Mexico
July 30, 2004, except for note 19, as to which the date is August 25, 2004.
F-1
GFSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 2004 and 2003
ASSETS
2004 2003
Cash and due from banks $ 7,840,712 6,785,410
Interest-bearing deposits with banks 866,281 466,948
Available-for-sale investment securities 30,518,828 29,279,417
Available-for-sale mortgage-backed securities 30,680,195 38,517,103
Held-to-maturity investment securities 398,999 675,997
Stock of Federal Home Loan Bank, at cost, restricted 4,409,200 4,332,800
Loans receivable, net, substantially pledged 152,430,322 146,264,291
Loans held-for-sale 411,400 132,000
Accrued interest and dividends receivable 859,298 844,722
Premises and equipment 2,513,992 2,313,815
Prepaid and other assets 883,058 342,150
Deferred tax asset 275,125 --
---------------------------
Total assets $232,087,410 229,954,653
===========================
See Notes to Consolidated Financial Statements.
F-2
LIABILITIES AND STOCKHOLDERS' EQUITY
2004 2003
Transaction and NOW accounts $ 28,987,811 24,937,782
Savings deposits 21,501,954 17,264,978
Time deposits 83,369,991 87,556,558
Advances from the Federal Home Loan Bank 73,652,218 76,641,834
Other secured borrowings 4,814,763 3,657,911
Repurchase agreements 157,119 584,902
Accrued interest payable 460,520 515,872
Advances from borrowers for taxes and insurance 499,998 365,193
Accounts payable and accrued liabilities 369,595 250,015
Deferred tax liability -- 312,796
Dividends declared and payable 140,895 122,467
------------------------------
Total liabilities 213,954,864 212,210,308
------------------------------
Commitments and Contingencies
Stockholders' Equity
Preferred stock, $.10 par value, 500,000 shares authorized;
no shares issued or outstanding -- --
Common stock, $.10 par value, 1,500,000 shares authorized;
1,146,645 and 1,146,270 shares in 2004 and 2003,
respectively, issued and outstanding 114,665 114,627
Additional paid-in capital 3,095,718 2,853,446
Unearned ESOP stock (68,048) (139,882)
Retained earnings, substantially restricted 14,440,118 13,633,421
Accumulated other comprehensive earnings 550,093 1,282,733
------------------------------
Total stockholders' equity 18,132,546 17,744,345
------------------------------
Total liabilities and stockholders' equity $ 232,087,410 229,954,653
==============================
F-3
GFSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE EARNINGS
Years Ended June 30, 2004 and 2003
2004 2003
Interest Earnings
Loans receivable
Mortgage loans $ 7,610,021 7,972,501
Commercial loans 1,402,333 1,332,818
Share and consumer loans 402,975 404,669
Service fee income 557,229 613,825
Investment and mortgage-backed securities 2,059,471 2,284,798
Other interest-earning assets 82,749 134,508
----------------------------
Total interest earnings 12,114,778 12,743,119
----------------------------
Interest Expense
Deposits 2,789,603 2,999,831
Advances from Federal Home Loan Bank 2,679,009 3,158,101
Repurchase agreements 147 3,871
----------------------------
Total interest expense 5,468,759 6,161,803
----------------------------
Net interest earnings 6,646,019 6,581,316
Provision for Loan Losses 969,003 452,137
----------------------------
Net interest earnings after provision
for loan losses 5,677,016 6,129,179
----------------------------
Non-Interest Earnings
Service charge income 697,875 434,514
Miscellaneous income 102,554 58,971
Gain from sale of loans 67,743 129,858
Loss on sale of available-for-sale securities (1,417) --
----------------------------
Total non-interest earnings 866,755 623,343
----------------------------
Non-Interest Expense
Compensation and benefits 2,402,684 2,330,217
Insurance and SAIF Premiums 74,950 70,254
Stationery, printing, and office supplies 117,722 155,937
ATM expense 78,916 53,569
Supervisory exam fees 61,255 55,954
Postage 81,882 63,056
See Notes to Consolidated Financial Statements
F-4
GFSB BANCORP, INC
CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE EARNINGS (CONTINUED)
Years Ended June 30, 2004 and 2003
2004 2003
Non-Interest Expense - Continued
Other $ 430,118 399,610
Occupancy 553,695 545,599
Data processing 375,481 337,845
Professional fees 217,024 134,980
Advertising 206,764 199,485
Stock services 29,904 24,389
----------------------------
Total non-interest expense 4,630,395 4,370,895
----------------------------
Earnings before Income Taxes 1,913,376 2,381,627
----------------------------
Income Tax Expense
Currently payable 773,802 941,568
Deferred benefit (210,501) (250,000)
----------------------------
Total income tax expense 563,301 691,568
----------------------------
Net earnings 1,350,075 1,690,059
Other Comprehensive Earnings
Unrealized investment losses, net of tax benefit of
$377,420 in 2004 and $5,933 in 2003 (732,640) (11,515)
----------------------------
Net comprehensive earnings $ 617,435 1,678,544
============================
Basic Net Earnings per Share 1.20 1.52
Dilutive Net Earnings per Share 1.14 1.46
Weighted average number of common shares
outstanding-basic 1,126,964 1,115,076
Weighted average number of common shares
outstanding-dilutive 1,183,099 1,159,917
See Notes to Consolidated Financial Statements.
F-5
GFSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
Years Ended June 30, 2004 and 2003
Accumulated
Common Stock Additional Unearned Other
--------------------- Paid-in ESOP Retained Comprehensive
Shares Amount Capital Stock Earnings Earnings Total
------ ------ ------- ----- -------- -------- -----
Balances, June 30, 2002 1,150,106 $ 115,011 $ 2,761,251 (207,926) 12,420,358 1,294,248 $ 16,382,942
------------
Comprehensive earnings
Net earnings - - - - 1,690,059 - 1,690,059
Unrealized gain on
available-for-sale securities,
net of taxes - - - - - (11,515) (11,515)
------------
Total comprehensive earnings 1,678,544
------------
Distribution of stock vested under the
management stock bonus plan - - 17,893 - - - 17,893
Stock issued upon exercise of
stock options 4,800 480 43,965 44,445
Expense incurred by the Company for
stock purchased within six months
of exercise of related options - - 34,264 - - - 34,264
Acquisition of common stock by the
Company under the stock
repurchase plan (8,636) (864) (142,423) - - - (143,287)
Released and committed to be released
18,810.4264 shares of common
stock owned by the ESOP - - 138,496 68,044 - - 206,540
Dividends declared and paid to
stockholders - - - - (476,996) - (476,996)
---------------------- -------------------------------------------------------------
Balances, June 30, 2003 1,146,270 114,627 2,853,446 (139,882) 13,633,421 1,282,733 17,744,345
-------------
Comprehensive earnings
Net earnings - - - - 1,350,075 - 1,350,075
Unrealized gain on available for
sale securities, net of taxes - - - - - (732,640) (732,640)
-------------
Total comprehensive earnings 617,435
-------------
Distribution of stock vested under the
management stock bonus plan - - - - - - -
Stock issued upon exercise of
stock options 375 38 34,860 - - - 34,898
Released and committed to be released
20,176.9392 shares of common
stock owned by the ESOP - - 207,412 71,834 - - 279,246
Dividends declared and paid to
stockholders - - - - (543,378) - (543,378)
---------------------- -------------------------------------------------------------
Balances, June 30, 2004 1,146,645 $ 114,665 $ 3,095,718 (68,048) 14,440,118 550,093 18,132,546
====================== =============================================================
See Notes to Consolidated Financial Statements.
F-6 and F-7
GFSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 2004 and 2003
2004 2003
Cash Flows from Operating Activities
Net earnings $ 1,350,075 1,690,059
Adjustments to reconcile net earnings to net cash
provided by operations
Deferred loan origination fees (557,229) (613,825)
Gain on sale of loans and securities (66,326) (129,858)
Provision for loan losses 969,003 452,137
Depreciation of premises and equipment 293,990 296,831
Amortization of investment and mortgage-backed
securities premiums 420,863 224,230
Stock dividend on FHLB stock (76,400) (114,300)
Release of ESOP stock 279,246 206,540
Stock compensation under management bonus stock plan -- 17,893
Stock compensation resulting from stock purchased by
the Company within six months of exercise
of related options -- 34,264
Benefit for deferred income taxes (210,501) (250,000)
Net changes in operating assets and liabilities
Accrued interest and dividends receivable (14,576) 228,479
Prepaid and other assets (208,410) (68,737)
Income taxes receivable (332,498) (1,168)
Accrued interest payable (55,352) 66,918
Accounts payable and other accrued liabilities 119,580 (13,287)
Dividends declared and payable 18,428 11,961
----------------------------------
Net cash provided by operating activities 1,929,893 2,038,137
----------------------------------
Cash Flows from Investing Activities
Purchase of premises and equipment (494,167) (99,473)
Loan origination and principal repayment on loans, net (10,580,846) (10,523,156)
Change in secured borrowings 1,156,852 (275,222)
Proceeds from the sale of loans 3,791,384 8,099,732
Principal payments on mortgage-backed securities 14,498,176 11,246,417
Principal payments on available-for-sale securities 2,906,236 6,214,437
Principal payments on held-to-maturity securities 6,998 4,000
Purchases of mortgage-backed securities (7,071,196) (22,490,693)
Purchases of available-for-sale securities (5,968,059) (13,412,658)
Purchases of held-to-maturity securities -- (274,594)
Maturities and proceeds from sale of available-for-sale
securities 700,000 1,668,000
Maturities and proceeds from sale of available-for-sale
mortgage-backed securities -- --
Maturities and proceeds from sale of held-to-maturity securities 270,000 1,000,000
----------------------------------
Net cash used by investing activities (784,622) (18,843,210)
----------------------------------
See Notes to Consolidated Financial Statements
F-8
GFSB BANCORP, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended June 30, 2004 and 2003
2004 2003
Cash Flows from Financing Activities
Net increase in transaction accounts, passbook savings,
money market accounts, and certificates of deposit $ 4,100,438 19,409,843
Repurchase agreements (427,783) (649,955)
Net increase (decrease) in mortgage escrow finds 134,805 (51,382)
Proceeds from FHLB advance 1,383,164,296 808,623,387
Repayments on FHLB advances (1,386,153,912) (808,368,008)
Purchase of GFSB Bancorp stock under the stock
repurchase plan in cash -- (143,287)
Dividends paid or to be paid in cash (543,378) (476,996)
Proceeds from exercise of stock options 34,898 44,445
Price paid for vested management bonus stock plan stock -- 17,893
----------------------------------
Net cash provided by financing activities 309,364 18,405,940
----------------------------------
Increase in cash and cash equivalents 1,454,635 1,600,867
Cash and cash equivalents at beginning of year 7,252,358 5,651,491
----------------------------------
Cash and cash equivalents at end of year $ 8,706,993 7,252,358
==================================
Supplemental disclosures
Cash paid during the year for
Interest on deposits and advances $ 5,524,111 6,091,015
Income taxes 743,501 943,200
Change in market value, net of deferred taxes on
available-for-sale securities (other comprehensive
earnings) (732,640) (11,515)
See Notes to Consolidated Financial Statements.
F-9
GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies consistently applied in the
preparation of the accompanying statements follows:
Organization and Operations. Effective June 29, 1995, Gallup Federal Savings and
Loan Association (Association) converted from a federal mutual savings and loan
association to a federal stock savings bank with the formation of a holding
company (GFSB Bancorp, Inc.). The conversion was accomplished through amendment
of the Association's federal charter and the sale of the Holding Company's
common stock. The Association also changed its name to Gallup Federal Savings
Bank (Bank).
GFSB Bancorp, Inc. (Company) is a unitary savings and loan holding company
incorporated under the laws of the State of Delaware. The Company acquired all
of the common stock of the Bank on June 29, 1995 and the Company also made its
initial public offering of common stock.
Basis of Presentation. The accompanying consolidated financial statements
include the accounts of the Company and the Bank. All significant balances and
transactions between entities have been eliminated.
Cash and Cash Equivalents. Cash and cash equivalents include cash on hand, cash
items, amounts due from banks, amounts held with the Federal Reserve Bank,
interest bearing deposits with the Federal Home Loan Bank, and time deposits.
For purposes of the statements of cash flows, the Company considers all highly
liquid debt instruments with original maturities of three months or less to be
cash equivalents. The amounts in each of these above categories are as follows:
2004 2003
Cash on hand $3,328,677 2,522,184
Cash items 18,838 (6,340)
Amounts due from banks 4,125,108 3,614,410
Interest bearing deposits 866,281 268,948
Time deposits -- 198,000
Federal Reserve Bank deposits 368,089 655,156
-----------------------
Total cash and cash equivalents $8,706,993 7,252,358
=======================
The amounts due from banks includes $85,050 and $78,250 for the years ended June
30, 2004 and 2003, respectively, held in trust by the Company for the employees
awarded stock under the Management Stock Bonus Plan. The amount represents
dividends earned on non-vested shares.
F-10
GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Available-for-Sale Investment Securities. All available-for-sale investment
securities are stated at fair value. The Company has recorded a net unrealized
gain, net of deferred income taxes, as accumulated comprehensive income.
Realized gains and losses on the sale of investment securities are determined
using the specific identification method when such sales occur. The amortization
of premiums and accretion of discounts are recognized in interest income using
methods approximating the interest method over the period of maturity.
Available-for-Sale Mortgage-Backed Securities. All mortgaged-backed and related
securities are stated at fair value. The Company has recorded a net unrealized
gain, net of deferred income taxes, as accumulated comprehensive income.
Realized gains and losses on the sale of mortgage-backed securities are
determined using the specific identification method when such sales occur. All
sales are made without recourse. The amortization of premiums and accretion of
discounts are recognized in interest income using methods approximating the
interest method over the remaining period of maturity.
Held-to-Maturity Securities. Government, Federal agency, and corporate debt
securities that management has the positive intent and ability to hold to
maturity are reported at cost, adjusted for amortization of premiums and
accretion of discounts that are recognized in interest income using methods
approximating the interest method over the period to maturity. All
held-to-maturity securities are recorded at amortized cost.
Loans Receivable. Loans receivable that management has the intent and ability to
hold for the foreseeable future or until maturity or payoff are stated at unpaid
principal balances, less the allowance for loan losses, and net deferred loan
origination fees and discounts.
The allowance for loan losses is increased by charges to income and decreased by
charge-offs (net of recoveries). Management's periodic evaluation of the
adequacy of the allowance is based on past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, estimated value of any underlying collateral, and
current economic conditions.
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
Company 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
F-11
GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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.
Transfers of Financial Assets. The Company accounts for transfers of financial
assets by recognizing the financial assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been surrendered,
and derecognizes liabilities when extinguished. The statement also distinguishes
transfers of financial assets that are sales from transfers of financial assets
that are secured borrowings.
Loans Held-For-Sale. Loans held-for-sale are those loans the Company has the
intent to sell in the foreseeable future. Loans held-for-sale are carried at the
lower of aggregate cost or market value. Gains and losses on sales of loans are
recognized at settlement dates and are determined by the difference between
sales proceeds and carrying value of the loans.
Mortgage loans sold to others are not included in the accompanying statements of
financial condition. For the years ended June 30, 2004 and 2003, $3,791,384 and
$8,099,732, respectively, of loans have been sold. No servicing rights were
retained on these loans. Gains on the sale of these loans were $67,743 and
$129,858 for the years ended June 30, 2004 and 2003, respectively.
Loan Origination Fees and Related Costs. Loan fees and certain direct loan
origination costs are deferred, and the net fee is recognized as an adjustment
to interest income using the interest method over the contractual life of the
loans. Historical prepayment experience for the Company is minimal for purposes
of adjusting the contractual life of the loans.
Foreclosed Real Estate. Real estate properties acquired through, or in lieu of,
loan foreclosure are initially recorded at fair value at the date of
foreclosure. The Company generally holds foreclosed assets as held for sale, and
accordingly, after foreclosure, such assets are carried at the lower of fair
value minus estimated costs to sell, or cost. Valuations are periodically
performed by management, and an allowance for losses is established by a charge
to operations if the fair value of a property does not exceed its cost.
F-12
GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Premises and Equipment. Land is carried at cost. Building, furniture,
improvements, fixtures, and equipment are carried at cost, less accumulated
depreciation. Maintenance and repairs are charged to earnings in the period
incurred. Building, improvements, furniture, fixtures, and equipment are
depreciated using a straight-line method over the following estimated useful
lives of the assets:
Buildings 40 years
Furniture, fixtures and equipment 5 - 10 years
Parking lot improvements 5 years
Leasehold improvements 5 - 10 years
Income Taxes. Deferred income taxes are provided on temporary differences in the
recognition of income and expense for tax and financial reporting purposes.
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities as
measured by the enacted tax rates that will be in effect when these differences
reverse. As changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes in the period of
enactment.
Earnings Per Share. Earnings per share have been computed on the basis of the
weighted average number of shares of common stock and common stock equivalents
outstanding for the year. The Company accounts for the shares acquired by its
ESOP in accordance with Statement of Position 93-6; shares controlled by the
ESOP are not considered in the weighted average number of shares outstanding
until the shares are committed for allocation to an employee's individual
account.
Fair Value of Financial Instruments. The following methods and assumptions were
used by the Company in estimating fair values of financial instruments as
disclosed herein:
Cash and cash equivalents. - The carrying amount of cash and cash
equivalents approximate their fair value.
Available-for-sale and held-to-maturity securities. - Fair values
for securities are based on quoted market prices.
Loans receivable. - For variable-rate loans that reprice
frequently and have no significant change in credit risk, fair
values are based on carrying values. Fair values for certain
mortgage loans are based on quoted market prices of similar loans
sold in conjunction with securitization transactions. Fair values
F-13
GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
for commercial real estate and commercial loans are estimated
using discounted cash flow analyses, using interest rates
currently being offered for loans with similar terms to borrowers
of similar credit quality. Fair values for impaired loans are
estimated using discounted cash flow analyses or underlying
collateral values, where applicable.
Deposit liabilities. - The fair values disclosed for demand
deposits are, by definition, materially equal to the amount
payable on demand at the reporting date (that is, their carrying
amounts). The carrying amounts of fixed-term money market
accounts approximate their fair values at the reporting date.
Fair values for fixed-rate certificates of deposits 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.
Short-term borrowings. - The carrying amounts of short-term
borrowings approximate their fair values given that the
borrowings are at the Bank's current incremental borrowing rate.
Off-balance sheet instruments. - Fair values for
off-balance-sheet lending commitments are based on fees currently
charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counter parties' credit
standings.
Financial Instruments. In the ordinary course of business the Company has
entered into off-balance sheet financial instruments consisting of commitments
to extend credit and commercial letters of credit. Such financial instruments
are recorded in the financial statements when they are funded or related fees
are incurred or received.
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 effect certain reported
amounts and disclosures. Accordingly, actual results could differ from those
estimates.
A substantial estimate for the Company is the allowance for loan losses. This
estimate could change substantially within a year if borrowers' ability to repay
or the estimated value of underlying collateral should decline dramatically.
F-14
GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 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 stock option plans. No compensation cost has been recognized
for its stock option plans. Had compensation cost for the stock option plans
been determined based on the fair value 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) $ 1,350,075 1,690,059
Net income (pro-forma) 1,339,903 1,682,112
Basic earnings per share (as reported) 1.20 1.52
Basic earnings per share (pro-forma) 1.19 1.51
Diluted earnings per share (as reported) 1.14 1.46
Diluted earnings per share (pro-forma) 1.13 1.45
The fair value of each option grant was estimated using the Black-Scholes option
pricing model with the following assumptions:
2004 2003
Expected dividend yield 2.1062% 2.3644%
Expected stock price volatility 22% 14%
Risk free rate of return 4.6% 4.4%
Expected life of options 10 years 10 years
Investment in Federal Home Loan Bank Stock. The Bank, as a member of the Federal
Home Loan Bank System, is required to maintain an investment in its capital
stock of the Federal Home Loan Bank (FHLB) in an amount equal to the greater of
1% of its outstanding home loans or 5% of advances from the FHLB. No ready
market exists for the Federal Home Loan Bank Stock, and it has no quoted market
value.
Segment Reporting. The Company is required to report information about operating
segments in and related disclosures about products and services, geographic
areas and major customers. The Company only has one operating segment.
F-15
GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Recent Accounting Developments. In December 2003 the Financial Accounting
Standards Board (the "FASB") revised Statement of Financial Accounting Standards
("SFAS") No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits.". The provisions of this statement do not change the
measurement and recognition provisions of previous statements, but adds
disclosures about retirement plan assets, employer obligations, key assumptions
in these measurements and the measurement date(s) used to determine pensions and
other postretirement benefit measurements that make up at least the majority of
plan assets and benefit obligations. These provisions are effective for annual
and interim financial statements for periods beginning after December 15, 2003.
The adoption of this statement as of January 1, 2004 did not have a significant
impact on the Company's financial statements.
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 and applies to all nongovernmental entities, including
not-for-profit organizations. The SOP does not apply to loans originated by the
entity. Adoption of this SOP is not expected to have a significant impact on the
Company's financial statements.
On March 31, 2004, the FASB ratified a consensus opinion of the Emerging Issues
Task Force (EITF), issue 03-1, The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments. A consensus was reached regarding
disclosures about unrealized losses on available-for-sale debt and equity
securities accounted for under FASB Statements No. 115, Accounting for Certain
Investments in Debt and Equity Securities, and No. 124, Accounting for Certain
Investments Held by Not-for-Profit Organizations. The guidance for evaluating
whether an investment is other-than-temporarily impaired should be applied in
other-than-temporary impairment evaluations made in reporting periods beginning
after June 15, 2004. The disclosures are effective in annual financial
statements for fiscal years ending after December 15, 2003, for investments
accounted for under Statements 115 and 124. For all other investments within the
scope of this Issue, the disclosures are effective in annual financial
statements for fiscal years ending after June 15, 2004. The additional
disclosures for cost method investments are effective for fiscal years ending
after June 15, 2004. Adoption of the
F-16
GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
provisions of this opinion that are effective as of this report date did not
have a significant impact on the Company's financial statements. Adoption of
further provisions when they are effective is not expected to have a significant
impact on the Company's financial statements.
In March, 2004 the Securities and Exchange Commission (the "SEC") issued Staff
Accounting Bulletin ("SAB") 105, "Application of Accounting Principles to Loan
Commitments." This SAB summarizes the views of the SEC regarding the application
of generally accepted accounting principles to loan commitments accounted for as
derivative instruments. Under this SAB, banks will no longer be able to record
interest rate lock commitments (IRLCs) as assets, but only record any
liabilities resulting from these IRLCs. Through March 31, 2004, the Company
followed industry practice in recording these IRLCs as assets or liabilities,
depending on the net position the Company had on these IRLCs. As of April 1,
2004, the Company has adopted this SAB. This did not have a significant effect
on the Company's financial statements.
On June 17, 2004, the SEC issued a Proposed Rule in which it described the
parameters under which banks may sell securities to their customers without
having to register as broker-dealers with the SEC in accordance with Title II of
the Gramm-Leach-Bliley Act of 1999. The proposal, which is designated as
Regulation B, clarifies, among other things: (i) the limitations on the amount
that unregistered bank employees may be compensated for making referrals in
connection with a third-party brokerage arrangement; (ii) the manner by which
banks may be compensated for effecting securities transactions for its customers
in a fiduciary capacity; and (iii) the extent to which banks may engage in
certain securities transactions as a custodian. At this time, it appears as
though this proposed regulation, if adopted, will have no material effect on the
Company's activities or financial results.
F-17
GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
NOTE 2. AVAILABLE-FOR-SALE MORTGAGE-BACKED SECURITIES
The carrying values and estimated fair values of available-for-sale
mortgage-backed securities are summarized as follows:
Gross Gross
Unamortized Unrealized Unrealized
Principal Premiums Amortized Holding Holding Fair
June 30, 2004 Balance (Discounts) Cost Gains Losses Value
FNMA ARM
Certificates $ 19,898,238 489,300 20,387,538 42,233 (248,661) 20,181,110
FHLMC ARM
Certificates 5,094,086 76,486 5,170,572 15,411 (44,592) 5,141,391
GNMA ARM
Certificates 5,357,260 149,209 5,506,469 301 (149,076) 5,357,694
SBA - - - - - -
Mortgage Pass-
through
Certificates - - - - - -
------------------------------------------------------------------------------------
$ 30,349,584 714,995 31,064,579 57,945 (442,329) 30,680,195
====================================================================================
June 30, 2003
FNMA ARM
Certificates $ 26,015,268 690,736 26,706,004 225,397 (50,279) 26,881,122
FHLMC ARM
Certificates 5,017,296 125,255 5,142,551 42,716 (26,536) 5,158,731
GNMA ARM
Certificates 5,152,408 157,441 5,309,849 2,407 (24,628) 5,287,628
SBA 334,870 - 334,870 26,789 - 361,659
Mortgage Pass-
through
Certificates 811,339 (14,533) 796,806 31,157 - 827,963
------------------------------------------------------------------------------------
$ 37,331,181 958,899 38,290,080 328,466 (101,443) 38,517,103
====================================================================================
During the years ended June 30, 2004 and 2003, the Company did not have any
proceeds from the sales of mortgage-backed securities. The Company had pledged
$16,902,868 (current face) and $14,710,776 (current face) at June 30, 2004 and
2003, respectively, in mortgage-backed and investment securities to public
entities that have on deposit amounts in excess of the federally insured limit.
The Company also had pledged $276,220 and $309,378 at June 30, 2004 and 2003,
respectively, in mortgage-backed securities to the Federal Reserve Bank for its
Treasury Tax and Loan Account.
F-18
GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
NOTE 3. INVESTMENTS
The amortized cost and fair values of investment securities are summarized as
follows:
Available-for-sale
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
June 30, 2004
Mutual funds $ 9,949,093 - (149,523) 9,799,570
US agency securities 5,017,198 5,754 (7,324) 5,015,628
FHLMC stock 7,786 1,390,736 (6,935) 1,391,587
Tax-exempt securities 5,197,245 331,227 (5,404) 5,523,068
FNMA/SLMA preferred 1,500,000 - (300,000) 1,200,000
CMO 6,326,875 30,112 (68,129) 6,288,858
SLMA asset-backed note 1,295,960 4,157 - 1,300,117
--------------------------------------------------------------------
$ 29,294,157 1,961,986 (537,315) 30,518,828
====================================================================
June 30, 2003
Mutual funds $ 9,937,752 5,645 - 9,943,397
US agency securities 5,555,404 69,998 - 5,625,402
FHLMC stock 7,786 1,108,341 - 1,116,127
Tax-exempt securities 4,856,181 586,466 - 5,442,647
FNMA/SLMA preferred 1,500,000 - (75,000) 1,425,000
CMO 3,854,101 31,147 (16,493) 3,868,755
SLMA asset-backed note 1,851,683 6,406 - 1,858,089
--------------------------------------------------------------------
$ 27,562,907 1,808,003 (91,493) 29,279,417
====================================================================
Held-to-maturity
June 30, 2004
US Agency Securities $ 144,999 4,837 - 149,836
Tax-exempt securities 254,000 3,934 - 257,934
--------------------------------------------------------------------
$ 398,999 8,771 - 407,770
====================================================================
June 30, 2003
Tax-exempt securities $ 675,997 21,096 - 697,093
====================================================================
F-19
GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
NOTE 3. INVESTMENTS (CONTINUED)
The amortized cost and fair value of all debt securities by contractual
maturity, 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.
Amortized Fair
Cost Value
Available-for-sale
Due within one year $ 3,005,185 3,010,939
Due after one year through five years 3,043,207 3,052,600
Due after five years through ten years -- --
Due after ten years 4,166,051 4,475,157
Mutual funds 9,949,093 9,799,570
FHLMC stock 7,786 1,391,587
FNMA 1,500,000 1,200,000
SLMA asset-backed note 1,295,960 1,300,117
CMO 6,326,875 6,288,858
Mortgage-backed securities 31,064,579 30,680,195
-----------------------------
$60,358,736 61,199,023
=============================
Held-to-maturity
Due within one year $ 144,999 149,836
Due after one year through five years -- --
Due after five years through ten years -- --
Due after ten years 254,000 257,934
-----------------------------
$ 398,999 407,770
=============================
$200,000 in mutual fund investments were sold during the year ended June 30,
2004, No investments were sold during the year ended June 30, 2003.
F-20
GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
NOTE 4. LOANS RECEIVABLE
Loans receivable are summarized as follows:
2004 2003
First mortgage loans (principally conventional)
Principal balances
Secured by one-to-four family residences $ 73,664,930 77,464,489
Secured by other properties 38,909,272 26,027,088
Construction loans 2,517,887 5,183,423
Loan participations purchased 7,886,097 10,306,393
Commercial loans 26,573,325 24,192,171
Consumer loans
Unsecured 315,752 320,330
Loans secured by deposits 1,636,914 1,212,031
Secured by vehicles 1,257,875 1,527,815
Home equity lines 1,603,047 1,766,753
Other consumer 743,044 930,450
---------------------------------
155,108,143 148,930,943
Loan participations sold (41,285) (474,486)
Net deferred loan origination fees (922,449) (795,738)
Allowance for loan losses (1,714,087) (1,396,428)
----------------------------------
Total loans receivable $ 152,430,322 146,264,291
==================================
Activity in the allowance for loan losses is summarized as follows:
Balance at beginning of year $ 1,396,428 984,071
Provision charged to income 969,003 452,137
Charge-offs, recoveries and other, net (651,344) (39,780)
---------------------------------
Balance at end of year $ 1,714,087 1,396,428
=================================
The Company has commitments to fund new loans, lines, and letters of credit as
follows:
Fixed rate $ 4,427,916 1,120,000
Variable rate 12,967,169 8,964,000
Commitments for new originations 1,897,000 10,956,000
---------------------------------
Total $ 19,292,085 21,040,000
=================================
F-21
GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
NOTE 4. LOANS RECEIVABLE (CONTINUED)
Fixed rate commitments at June 30, 2004 and 2003, had interest rates that ranged
from 7.45% to 5.88%. Total loans with fixed rates were $102,172,015 and
$107,678,913 at June 30, 2004 and 2003, respectively. Total loans with variable
rates were $52,936,128 and $40,113,806 at June 30, 2004 and 2003, respectively.
Non-accrual loans for which interest has been reduced totaled $1,350,677 and
$2,320,562 at June 30, 2004 and 2003, respectively. Interest income that was
foregone amounted to $59,037 and $95,962 at June 30, 2004 and 2003,
respectively. Restructured loans at June 30, 2004 totaled $305,758, there were
no restructured loans at June 30, 2003.
The weighted average rate for the loan portfolio was 6.09% and 6.54% at June 30,
2004 and 2003, respectively.
There were no impaired loans at June 30, 2004 or 2003.
NOTE 5. ACCRUED INTEREST AND DIVIDENDS RECEIVABLE
Accrued interest and dividends receivable is summarized as follows:
2004 2003
Loans receivable $ 582,212 521,885
Available-for-sale investment securities 131,931 145,561
Available-for-sale mortgage-backed securities 135,600 170,532
Dividends 9,555 5,863
Time deposits - 881
----------------------
Total accrued interest and dividends $ 859,298 844,722
======================
F-22
GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
NOTE 6. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
2004 2003
Buildings $ 1,506,206 1,506,206
Furniture, fixtures, and equipment 1,231,499 1,181,694
Parking lot improvements 5,265 5,265
Leasehold improvements 573,939 563,328
Land 867,300 443,550
---------------------------------
4,184,209 3,700,043
Allowance for depreciation (1,670,217) (1,386,228)
---------------------------------
Total premises and equipment $ 2,513,992 2,313,815
=================================
NOTE 7. DEPOSITS
Deposits are summarized as follows:
Weighted
Average
Rate at
June 30, June 30, 2004
2004 Amount Percent
Passbook savings accounts .89% $ 8,621,424 6.44%
Money market accounts .83 12,880,530 9.62
Transaction and NOW accounts .28 28,987,811 21.66
-------------------------
50,489,765 37.72
-------------------------
Certificates of deposit:
1.00%-3.00% 1.86 60,830,615 45.43
3.01%-6.00% 4.26 20,677,624 15.45
6.01%-7.00% 6.34 1,861,752 1.40
-------------------------
Total certificates of deposit 83,369,991 62.28
-------------------------
Total deposits $133,859,756 100%
=========================
F-23
GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
NOTE 7. DEPOSITS (CONTINUED)
Weighted
Average
Rate at
June 30, June 30, 2003
2003 --------------------------------
Amount Percent
Passbook savings accounts 1.08% $ 6,319,124 4.87%
Money market accounts 1.13 10,945,854 8.43
Transaction and NOW accounts .75 24,937,782 19.22
----------------------------
42,202,760 32.52
----------------------------
Certificates of deposit:
1.00%-3.00% 2.41 55,761,113 42.97
3.01%-6.00% 4.75 27,416,892 21.13
6.01%-7.00% 6.43 4,378,553 3.38
----------------------------
Total certificates of deposit 87,556,558 67.48
----------------------------
Total deposits $ 129,759,318 100%
============================
The aggregate amount of jumbo certificates with a minimum denomination of
$100,000 was $45,103,483 and $45,260,872 at June 30, 2004 and 2003,
respectively.
Certificates of deposit by remaining maturity are as follows:
2004 2003
Less than 1 year $ 51,506,421 58,998,082
1 year to 2 years 17,910,580 14,147,760
2 years to 3 years 4,357,659 4,992,188
3 years to 4 years 4,221,923 1,692,720
4 years to 5 years 1,930,785 3,990,563
Thereafter 3,442,623 3,735,245
------------------------------
$ 83,369,991 87,556,558
==============================
F-24
GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
NOTE 7. DEPOSITS (CONTINUED)
Interest expense on deposits is summarized as follows:
2004 2003
Certificates of deposit $ 2,589,808 2,740,664
Money market accounts 104,613 128,743
Passbook savings 65,402 64,125
Transaction and NOW deposits 29,780 66,299
------------------------------
$ 2,789,603 2,999,831
==============================
NOTE 8. REPURCHASE AGREEMENTS
Under the terms of the repurchase agreement, deposits in designated demand
accounts of the customer are put into an investment vehicle which is used daily
to purchase an interest in designated marketable securities owned by the Bank.
The Bank in turn agrees to repurchase these investments on a daily basis and pay
the customer the daily interest earned on them. The amount of repurchase
agreements was $157,119 and $584,902 at June 30, 2004 and 2003, respectively.
NOTE 9. REGULATORY MATTERS AND RESTRICTIONS ON RETAINED
EARNINGS
The Bank is subject to certain restrictions on the amount of dividends that it
may declare without prior regulatory approval. The Bank is also subject to
various regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios set forth in the table
below. Management believes, as of June 30, 2004, that the Bank meets all capital
adequacy requirements to which it is subject.
F-25
GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
NOTE 9. REGULATORY MATTERS AND RESTRICTIONS ON RETAINED
EARNINGS (CONTINUED)
Current regulations require institutions to have a minimum regulatory tangible
capital equal to 1.5% of total assets, a minimum 4% leverage capital ratio and
an 8% risk-based capital ratio.
The Bank at June 30, 2004, meets the regulatory tangible capital and core
(leverage) capital requirements and the risk-based capital requirement of 8% of
total risk-weighted assets.
The following is a reconciliation of the Bank's capital in accordance with
accounting principles generally accepted in the United States of America (GAAP)
to the three components of regulatory capital calculated under regulatory
requirements at June 30, 2004:
Tangible Capital Core Capital Risk-Based Capital
------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
GAAP Capital $ 17,316,520 $ 17,316,520 $17,316,520
Disallowed servicing
assets, disallowed
deferred tax assets,
and other disallowed
assets (275,125) (275,125) (275,125)
Accumulated losses
(gains) on certain
available-for-sale
securities (648,778) (648,778) (648,778)
Unrealized (gains)
losses on available-
for-sale equity securities 420,425
Other disallowed
deferred tax
liabilities - - -
Qualifying general
loan loss allowance - - 1,631,637
---------------------------------------------------------------------------
Regulatory capital
computed 16,392,617 7.11% 16,392,617 7.11% 18,444,679 13.59%
Minimum capital
requirement 3,478,200 1.50% 9,225,276 4.00% 10,856,720 8.00%
---------------------------------------------------------------------------
Regulatory capital
excess $ 12,914,417 5.61% $ 7,167,341 3.11% $ 7,587,959 5.59%
===========================================================================
F-26
GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
NOTE 10. RELATED PARTY TRANSACTIONS
The Company has several loans receivable outstanding to related parties. The
Company's policy is that all such loan transactions be on the same terms,
including underwriting criteria and collateral, as those prevailing at the same
time for comparable transactions with others. The Company offers a 1% reduction
in interest rates from those prevailing at the same time for comparable
transactions with others for loans to employees, officers and directors for
personal purposes.
A summary of the activity for outstanding loans receivable to related parties is
as follows:
2004 2003
Balance, beginning of year $ 2,722,235 2,250,533
New loans 210,500 1,000,925
Repayments (566,294) (529,223)
---------------------------------
Balance, end of year $ 2,366,441 2,722,235
=================================
The Company also has several deposits from related parties. Outstanding deposits
from related parties amounted to $5,071,616 and $3,316,172 at June 30, 2004 and
2003, respectively. The Company also expensed $175,679 and $154,187 for the
years ended June 30, 2004 and 2003, respectively, for directors' fees.
In 2004, the Company purchased its insurance, including property and casualty,
general liability, workers' compensation, umbrella, and group medical, life,
disability and dental insurance, through a company owned by a board member. All
purchases were completed through a competitive bid process. For the year ended
June 30, 2004, total insurance products purchased through the related party was
$263,104.
NOTE 11. CONCENTRATIONS OF CREDIT RISK
The Company is active in originating primarily first mortgage loans primarily in
San Juan and McKinley County, New Mexico. Significant loans are approved by the
Board of Directors through its loan committee. Collateral is required on all
real estate loans, substantially all commercial loans, and the majority of
consumer loans. Real estate exposure is primarily limited to the counties in
which the Company operates. The Company generally maintains loan to value ratios
of no greater than 80%.
The Company maintains its cash balances with other financial institutions. The
balances on deposit with other banks are insured by the Federal Deposit
Insurance Corporation up to $100,000. The Company's uninsured cash balances
totaled $1,431,909 and $932,301 at June 30, 2004 and 2003, respectively. The
Company is required to maintain reserve balances in cash or on deposit with the
Federal Reserve Bank, based on a percentage of deposits. The Company met or
exceeded the minimum reserve balances for the years ended June 30, 2004 and
2003.
F-27
GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
NOTE 12. INCOME TAXES
Income tax expense consists of:
2004 2003
Current
Federal $ 642,387 809,096
State 131,415 132,472
---------------------------------
773,802 941,568
---------------------------------
Deferred benefit
Federal (185,577) (237,500)
State (24,924) (12,500)
---------------------------------
(210,501) (250,000)
---------------------------------
Total income tax expense $ 563,301 691,568
=================================
Temporary differences create deferred tax assets and (liabilities) that are
detailed below as of June 30, 2004 and 2003:
2004 2003
Loan loss allowance $ 516,093 390,276
Depreciation on premises and equipment (18,404) (5,586)
Employee Stock Ownership Plan compensation 169,133 97,767
Management Bonus Stock Plan compensation 14,866 13,549
Net unrealized gain on available-for-sale securities (283,381) (660,801)
Federal Home Loan Bank Stock dividends (146,216) (179,780)
Non accrual interest income 23,034 31,779
-----------------------
$ 275,125 (312,796)
=======================
The deferred tax liability for unrealized holding gains on available-for-sale
securities has reduced the unrealized holding gains reported as accumulated
other comprehensive earnings within stockholders' equity.
F-28
GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
NOTE 12. INCOME TAXES (CONTINUED)
The reconciliation of income tax computed at the U.S. federal statutory rate to
income tax expense is:
2004 2003
Tax at statutory rate of 34% $ 650,548 809,753
State income taxes, net of federal
tax benefit 61,810 72,349
Non-taxable interest and dividends (123,874) (177,107)
Other, net (25,183) (13,427)
----------------------------
$ 563,301 691,568
============================
Effective tax rate 29% 29%
NOTE 13. EMPLOYEE STOCK OWNERSHIP PLAN
In connection with the conversion, referred to in Note 1, the Company adopted an
Employee Stock Ownership Plan (ESOP) for the benefit of all of its full time
employees. Contributions to the Plan are determined at the discretion of the
Company and are limited to the maximum amount deductible for income tax
purposes. Eligible employees include all full-time employees with a minimum of
one year of service as of any anniversary date of the Plan. The ESOP purchased
105,000 (as adjusted for previous stock dividends) common shares of the
Company's stock issued in the conversion, which was funded by a $560,000 loan
from the Company. Per Statement of Position 93-6, Employer's Accounting for
Employee Stock Ownership Plans, the unpaid balance of the ESOP loan has not been
reported in the Consolidated Statements of Financial Position. Stockholders'
equity has been reduced by the aggregate purchase price of the shares owned by
the ESOP, net of the shares committed to be released. Contributions to the ESOP
by the Company are made to fund the principal and interest payments on the debt
of the ESOP. As of June 30, 2004, 77,414.2068 ESOP shares were allocated to
participants, and for the year ended June 30, 2004, $279,646 in contributions
was made to the ESOP by the Company. As of June 30, 2003, 63,962.2115 ESOP
shares were released and contributions of $206,537 were made to the Plan by the
Company. The remaining unallocated ESOP shares at June 30, 2004 were
19,481.7932. The fair value of the remaining unallocated shares at June 30, 2004
is $452,952. Dividends on unallocated ESOP shares are recorded as additional
contributions to the ESOP by the Company to prepay principal on the ESOP loan
and release additional shares. Dividends on allocated shares are charged to
retained earnings.
F-29
GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
NOTE 14. STOCK PLANS
At June 30, 2004, the Company has four stock-based compensation plans, which are
described below.
On January 5, 1996, the Board of Directors of the Company adopted a Stock Option
Plan. Pursuant to the Plan, an amount of stock equal to 10% of the shares of
common stock (177,891 shares as adjusted for previous stock dividends) of the
Corporation issued and outstanding is reserved for issuance by the Company upon
exercise of stock options which may be granted to directors, officers, and other
key employees from time to time. The Plan provides for both incentive stock
options and non-incentive stock options. The options vest at a rate of one-fifth
of the award per year and have an exercise date of ten years from the date of
grant. In connection with the adoption of the Plan, the Company has granted
34,982 incentive stock options and 53,366 non-incentive stock options to its
directors, officers, and other key employees. The weighted average remaining
life of common stock options at June 30, 2004 and 2003 is 5.72 and 6.60 years,
respectively. During the year, no incentive stock options were forfeited and 375
incentive stock options were exercised. Remaining options available to be
granted in the future amount to 58,680 shares.
A summary of common stock options under the Stock Option Plan for the years
ended June 30, 2004 and 2003 follows:
Weighted
Price Average Options
Options Range Price Exercisable
Balance, June 30, 2002 93,523 $ 7.40 - 12.95 $ 8.48 77,149
========
Granted - - -
Forfeited - - -
Exercised (4,800) 7.40 - 11.37 9.26
---------
Balance, June 30, 2003 88,723 7.40 - 12.95 8.44 77,724
========
Granted - - -
Forfeited - - -
Exercised (375) 11.37 10.71
---------
Balance, June 30, 2004 88,348 $ 7.40 - 12.95 $ 8.48 85,248
========= ====== ========
On January 5, 1996, the Company also adopted a Management Stock Bonus Plan.
Sufficient funds were contributed to the Plan representing up to 4% of the
aggregate number of shares issued in the conversion. Awards under the Plan are
determined based on the position and responsibilities of the employees, the
length and value of their services, and the compensation paid to employees. From
January 5, 1996 to June 30, 2004, the Company made awards under the Plan (less
forfeited shares) in the amount of 55,804 shares. The value of the stock is
determined
F-30
GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
NOTE 14. STOCK PLANS (CONTINUED)
(less forfeited shares and shares withheld for taxes) annually as vested (and
paid), based on the current market value. At June 30, 2004 and 2003, 20,077 and
19,032 shares, respectively, remain to be awarded under the Plan in the future.
Awards under the Plan are earned at the rate of one-fifth of the award per year
as of the one-year anniversary of the effective date of the Plan. Total
compensation expense recorded under the management stock bonus plan was $36,589
and $17,893 for the years ended June 30, 2004 and 2003, respectively.
On March 22, 2000, the Board of Directors of the Company adopted a Director's
Stock Compensation Plan. Pursuant to the Plan an amount of stock equal to 1% of
the shares of common stock of the corporation issued and outstanding is reserved
for issuance by the Company upon exercise of stock options which are to be
issued to Directors of the Company. The options vest upon date of grant and have
an exercise date of ten years from date of grant. In connection with the
adoption of the Plan, the Company has granted all 11,946 shares available under
the Plan to its Directors. The option price established for the shares upon
exercise is $11.00 per share.
On October 27, 2000, the Board of Directors adopted the 2000 stock option plan.
Pursuant to the Plan, an amount equal to 5% of the shares of common stock
(58,500 shares) of the Corporation issued and outstanding is reserved for
issuance by the Company upon exercise of stock options which may be granted to
directors, officers, and other key employees from time to time. The Plan
provides for both incentive stock options and non- incentive stock options. The
options vest at a rate of one-fifth of the award per year and have an exercise
date of ten years from the date of grant. No options were issued during the year
ended June 30, 2004.
During the 1997 fiscal year, the Company began a stock repurchase program.
During the year ended June 30, 2004, the Company did not repurchase any shares.
During the year ended June 30, 2003, the Company repurchased 8,636 shares of its
common stock for $143,287.
NOTE 15. FEDERAL HOME LOAN BANK ADVANCES
In October 1995, the Bank entered into an "Advances, Collateral Pledge and
Security Agreement" (Agreement) with the Federal Home Loan Bank of Dallas
(FHLB). The purpose of the Agreement is to allow the Bank to obtain extensions
of credit from the FHLB to use in its operations. At June 30, 2004, the Bank has
$73,652,218 in outstanding advances with the FHLB. The advances bear interest at
a fixed rate, which range from 1.09% to 6.97%, and mature as follows:
F-31
GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
NOTE 15. FEDERAL HOME LOAN BANK ADVANCES (CONTINUED)
Maturities for the fiscal years ending June 30:
2005 $ 30,756,838
2006 9,290,000
2007 13,228,626
2008 4,540,000
2009 7,289,156
Thereafter 8,547,598
--------------
$ 73,652,218
==============
Several of the advances due in July were subsequently refinanced after year-end.
The advances are secured by the Bank's investments in FHLB stock of $2,014,376
and mortgage-backed securities of $30,680,195. In addition, the advances are
secured under a "blanket credit facility" whereby the entire Bank's 1-4 family
and commercial real estate loans are also collateral under the advance
agreement.
NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is required to disclose the estimated fair value of its financial
instruments in accordance with SFAS No. 107, Disclosures about Fair Value of
Financial Instruments. These disclosures do not attempt to estimate or represent
the Company's fair value as a whole. The disclosure excludes assets and
liabilities that are not financial instruments as well as the significant
unrecognized value associated with core deposits relationships.
Fair value amounts disclosed represent point-in-time estimates that may change
in subsequent reporting periods due to market conditions or other factors.
Estimated fair value amounts in theory represent the amounts at which financial
instruments could be exchanged or settled in a current transaction between
willing parties. In practice, however, this may not be the case due to inherent
limitations in the methodologies and assumptions used to estimate fair value.
For example, quoted market prices may not be realized because the financial
instrument may be traded in a market that lacks liquidity; or a fair value
derived using a discounted cash flow approach may not be the amount realized
because of the subjectivity involved in selecting underlying assumptions, such
as projecting cash flows or selecting a discount rate. The fair value amount
also may not be realized because it ignores transaction costs and does not
include potential tax effects. The Company does not plan to dispose of, either
through sale or settlement, the majority of its financial instruments at these
estimated fair values.
F-32
GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of the Company's financial instruments as of June 30,
2004 were as follows:
Carrying Fair
Value Value
Financial Assets
Cash and due from banks $ 7,840,712 7,840,712
Interest-bearing deposits with banks 866,281 866,281
Available-for-sale-investment securities 30,518,828 30,518,828
Available-for-sale mortgage-backed securities 30,680,195 30,680,195
Held-to-maturity investment securities 398,999 407,770
Loans receivable, net 152,841,722 155,756,000
Accrued interest receivable 859,298 859,298
Financial Liabilities
Transaction and NOW deposits 28,987,811 29,010,000
Savings deposits 21,501,954 21,547,000
Time deposits 83,369,991 83,708,000
Advances from the FHLB 73,652,218 80,151,000
Accrued interest payable 460,520 460,520
Off-Balance Sheet Liabilities
Commitments to extend credit 19,292,085 19,292,085
June 30, 2003
----------------------------------
Carrying Fair
Value Value
Financial Assets
Cash and due from banks $ 6,785,410 6,785,410
Interest-bearing deposits with banks 466,948 466,948
Available-for-sale-investment securities 29,279,417 29,279,417
Available-for-sale mortgage-backed securities 38,517,103 38,517,103
Held-to-maturity investment securities 675,997 697,093
Loans receivable, net 146,396,291 155,564,645
Accrued interest receivable 844,722 844,722
Financial Liabilities
Transaction and NOW deposits 24,937,782 24,962,000
Savings deposits 17,264,978 17,432,000
Time deposits 87,556,558 90,109,000
Advances from the FHLB 76,641,834 85,940,000
Accrued interest payable 515,872 515,872
Off-Balance Sheet Liabilities
Commitments to extend credit 21,040,000 21,040,000
F-33
GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
NOTE 17. EARNINGS PER SHARE
Basic earnings per share are computed by dividing earnings available to common
stockholders by the weighted average number of common shares outstanding during
the period. Diluted earnings per share reflect per share amounts that would have
resulted if dilutive potential common stock had been converted to common stock.
The following reconciles amounts reported in the financial statements:
For the Year Ended June 30, 2004
------------------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
Income available to common stockholders -
basic earnings per share $ 1,350,076 1,126,964 $ 1.20
==================
Effect of dilutive securities
Options - 56,135
--------------------------------
Income available to common stockholders -
diluted earnings per share $ 1,350,076 1,183,099 $ 1.14
=====================================================
For the Year Ended June 30, 2003
-----------------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
Income available to common stockholders -
basic earnings per share $ 1,690,059 1,115,076 $ 1.52
==================
Effect of dilutive securities
Options - 44,841
--------------------------------
Income available to common stockholders -
diluted earnings per share $ 1,690,059 1,159,917 $ 1.46
=====================================================
F-34
GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
NOTE 18. LEASES
The Company is obligated under a lease agreement entered into on December 30,
1997 for the building across the street from its offices, which is the Bank's
loan center. Rental expense for the years ended June 30, 2004 and 2003 was
$35,254 and $30,000, respectively.
The following is a schedule of non-cancelable future minimum lease payments
required under the operating lease:
Years Ending June 30, Amount
2005 $ 30,000
2006 30,000
2007 15,000
The lease expires December 31, 2007. The Company has an option, upon
notification of the lessor by August 1, 2007, to purchase the building for
$275,000 or to extend the lease for an additional 10 years. Effective January 1,
2003, and each year thereafter during the term of the lease or any renewals,
there is a cost of living adjustment. In no event will the rent be less than
$30,000 a year. The above schedule does not contain any cost of living
increases.
NOTE 19. SUBSEQUENT EVENT - PROPOSED MERGER
On August 25, 2004, GFSB Bancorp, Inc. (GFSB) announced that it had signed a
definitive merger agreement with First Federal Banc of the Southwest, Inc.
(FFBSW), the holding company for First Federal Bank, Roswell, New Mexico,
pursuant to which GFSB will merge with and into FFBSW.
Under the terms of the agreement, upon consummation of the merger of GFSB into
FFBSW, each outstanding share of GFSB common stock will be converted into the
right to receive either $20.00 in cash or FFBSW common stock, at the election of
the holder, subject to an overall requirement that 51% of the total outstanding
GFSB common stock be exchanged for stock. The transaction is subject to various
conditions, including stockholder approval of both GFSB and FFBSW, and approval
by the applicable banking regulatory agencies.
Pursuant to the terms of the merger agreement, FFBSW has agreed to register
FFBSW's common stock under the Securities Exchange Act of 1934 and it will file
reports with the Securities and Exchange Commission. In addition, upon the
completion of the merger, its shares are expected to be listed on the NASDAQ.
Through the date of the completion of the expected merger, the Company
anticipates incurring between $1,100,000 and $1,400,000 in merger related
expenses. Total merger related expenses through June 30, 2004 were approximately
$52,000.
F-35
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Company
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized on September 27, 2004.
GFSB BANCORP, INC.
By: /s/Richard C. Kauzlaric
-----------------------------------
Richard C. Kauzlaric
President
(Duly Authorized Representative)
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Company and in the capacities
indicated on September 27, 2004.
/s/Richard C. Kauzlaric
- ---------------------------------- --------------------------------------------
James Nechero, Jr. Richard C. Kauzlaric
Director and Chairman of the Board President and Director
(Principal Executive Officer)
/s/Vernon I. Hamilton /s/Jerry R. Spurlin
- ---------------------------------- --------------------------------------------
Vernon I. Hamilton Jerry R. Spurlin
Director Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/Charles L. Parker, Jr. /s/Michael P. Mataya
- ---------------------------------- --------------------------------------------
Charles L. Parker, Jr. Michael P. Mataya
Director Treasurer and Director
- ----------------------------------
George S. Perce
Secretary and Director
CHANGE IN CONTROL SEVERANCE AGREEMENT
-------------------------------------
Amended and Restated
THIS CHANGE IN CONTROL SEVERANCE AGREEMENT ("Agreement") entered into
this 22nd day of August 2003 ("Effective Date"), by and between Gallup Federal
Savings Bank, Gallup, New Mexico (the "Bank") and Richard P. Gallegos (the
"Employee").
WHEREAS, the Employee is currently employed by the Bank as President
and Chief Executive Officer and is experienced in certain phases of the business
of the Bank; and
WHEREAS, the parties have previously entered into a Change in Control Severance
Agreement, dated June 29, 1999; and
WHEREAS, the parties desire by this writing to set forth the continuing
rights and responsibilities of the Bank and Employee if the Bank should undergo
a change in control (as defined hereinafter in the Agreement) after the
Effective Date.
NOW, THEREFORE, it is AGREED as follows:
1. Employment. The Employee is employed in the capacity as the
----------
President and Chief Executive Officer of the Bank. The Employee shall render
such administrative and management services to the Bank and GFSB Bancorp, Inc.,
its parent savings and loan holding company ("Parent") as are currently rendered
and as are customarily performed by persons situated in a similar executive
capacity. The Employee's other duties shall be such as the Board of Directors
for the Bank (the "Board of Directors" or "Board") may from time to time
reasonably direct, including normal duties as an officer of the Bank and the
Parent.
2. Term of Agreement. The term of this Agreement shall be for the
------------------
period commencing on the Effective Date and ending thirty-six (36) months
thereafter ("Term").
3. Termination of Employment in Connection with or Subsequent to a
-------------------------------------------------------------------
Change in Control.
- -----------------
(a) Notwithstanding any provision herein to the contrary, in the event
of the involuntary termination of Employee's employment under this Agreement,
absent Just Cause, in connection with, or within twenty-four (24) months after,
any Change in Control of the Bank or Parent, Employee shall be paid an amount
equal to 200% times the base annual salary in effect as of the end of the
calendar year prior to the date of termination of employment and the costs
associated with maintaining coverage under the Bank's medical and dental
insurance reimbursement plans similar to that in effect on the date of
termination of employment for a period of one year thereafter. Said sum shall be
paid in one (1) lump sum not later than the date of such termination of
employment and such payments shall be in lieu of any other future payments which
the Employee would be otherwise entitled to receive. Notwithstanding the
forgoing, all sums
1
payable hereunder shall be reduced in such manner and to such extent so that no
such payments made hereunder when aggregated with all other payments to be made
to the Employee by the Bank or the Parent shall be deemed an "excess parachute
payment" in accordance with Section 280G of the Internal Revenue Code of 1986,
as amended (the "Code") and be subject to the excise tax provided at Section
4999(a) of the Code. The term "Change in Control" shall refer to (i) the sale of
all, or a material portion, of the assets of the Bank or the Parent; (ii) the
merger or recapitalization of the Bank or the Parent whereby the Bank or the
Parent is not the surviving entity; (iii) a change in control of the Bank or the
Parent, as otherwise defined or determined by the Office of Thrift Supervision
or regulations promulgated by it; or (iv) the acquisition, directly or
indirectly, of the beneficial ownership (within the meaning of that term as it
is used in Section 13(d) of the Securities Exchange Act of 1934 and the rules
and regulations promulgated thereunder) of twenty-five percent (25%) or more of
the outstanding voting securities of the Bank or the Parent by any person,
trust, entity or group. The term "person" means an individual other than the
Employee, or a corporation, partnership, trust, association, joint venture,
pool, syndicate, sole proprietorship, unincorporated organization or any other
form of entity not specifically listed herein.
(b) Notwithstanding any other provision of this Agreement to the
contrary except as provided at Sections 4 and 5, Employee may voluntarily
terminate his employment under this Agreement within twenty-four months
following a Change in Control of the Bank or Parent, and Employee shall
thereupon be entitled to receive the payment and benefits described in Section
3(a) of this Agreement, upon the occurrence, or within 120 day of any of the
following events, which have not been consented to in advance by the Employee in
writing: (i) if Employee would be required to move his personal residence or
perform his principal executive functions more than thirty-five (35) miles from
the Employee's primary office as of the signing of this Agreement; (ii) if the
Bank or Parent should fail to maintain the Employee's base compensation in
effect as of the date of the Change in Control and existing employee benefits
plans, including material fringe benefit, stock option and retirement plans,
except to the extent that such reduction in benefit programs is part of an
overall adjustment in benefits for all employees of the Bank or Parent and does
not disproportionately adversely impact the Employee; or (iii) if Employee would
be assigned duties and responsibilities other than those normally associated
with his position as referenced at Section 1, herein, or other comparable senior
management position.
4. Other Changes in Employment Status.
----------------------------------
Except as provided for at Section 3, herein, the Board of Directors may
terminate the Employee's employment at any time with or without Just Cause
within its sole discretion. This Agreement shall not be deemed to give Employee
any right to be retained in the employment or service of the Bank, or to
interfere with the right of the Bank to terminate the employment of the Employee
at any time. The Employee shall have no right to receive compensation or other
benefits for any period after termination for Just Cause. Termination for "Just
Cause" shall include termination because of the Employee's personal dishonesty,
incompetence, willful misconduct, breach of fiduciary duty involving personal
profit, intentional failure to perform
2
stated duties, willful violation of any law, rule or regulation (other than
traffic violations or similar offenses) or final cease-and-desist order, or
material breach of any provision of the Agreement.
5. Regulatory Exclusions.
---------------------
(a) If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA") (12
U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Bank under this Agreement
shall terminate, as of the effective date of the order, but the vested rights of
the contracting parties shall not be affected.
(b) If the Bank is in default (as defined in Section 3(x)(1) of FDIA)
all obligations under this Agreement shall terminate as of the date of default,
but this paragraph shall not affect any vested rights of the contracting
parties.
(c) All obligations under this Agreement shall be terminated, except to
the extent determined that continuation of this Agreement is necessary for the
continued operation of the Bank: (i) by the Director of the Office of Thrift
Supervision ("Director of OTS"), or his or her designee, at the time that the
Federal Deposit Insurance Corporation ("FDIC") enters into an agreement to
provide assistance to or on behalf of the Bank under the authority contained in
Section 13(c) of FDIA; or (ii) by the Director of the OTS, or his or her
designee, at the time that the Director of the OTS, or his or her designee
approves a supervisory merger to resolve problems related to operation of the
Bank or when the Bank is determined by the Director of the OTS to be in an
unsafe or unsound condition. Any rights of the parties that have already vested,
however, shall not be affected by such action.
(d) If the Employee is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(3) and (g)(1)), the
Bank's obligations under the Agreement shall be suspended as of the date of
service, unless stayed by appropriate proceedings. If the charges in the notice
are dismissed, the Bank may within its discretion (i) pay the Employee all or
part of the compensation withheld while its contract obligations were suspended
and (ii) reinstate (in whole or in part) any of its obligations which were
suspended.
(e) Notwithstanding anything herein to the contrary, any payments made
to the Employee pursuant to the Agreement, or otherwise, shall be subject to and
conditioned upon compliance with 12 USC ss.1828(k) and any regulations
promulgated thereunder.
3
6. Successors and Assigns.
----------------------
(a) This Agreement shall inure to the benefit of and be binding upon
any corporate or other successor of the Bank which shall acquire, directly or
indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of the Bank or Parent.
(b) The Employee shall be precluded from assigning or delegating his
rights or duties hereunder without first obtaining the written consent of the
Bank.
7. Amendments. No amendments or additions to this Agreement shall be
----------
binding upon the parties hereto unless made in writing and signed by both
parties, except as herein otherwise specifically provided.
8. Applicable Law. This agreement shall be governed by all respects
---------------
whether as to validity, construction, capacity, performance or otherwise, by the
laws of the State of New Mexico, except to the extent that Federal law shall be
deemed to apply.
9. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
10. Arbitration. Any controversy or claim arising out of or relating to
-----------
this Agreement, or the breach thereof, shall be settled by arbitration in
accordance with the rules then in effect of the district office of the American
Arbitration Association ("AAA") nearest to the home office of the Bank, and
judgment upon the award rendered may be entered in any court having jurisdiction
thereof, except to the extent that the parties may otherwise reach a mutual
settlement of such issue. Further, the settlement of the dispute to be approved
by the Board of the Bank may include a provision for the reimbursement by the
Bank to the Employee for all reasonable costs and expenses, including reasonable
attorneys' fees, arising from such dispute, proceedings or actions, or the Board
of the Bank or the Parent may authorize such reimbursement of such reasonable
costs and expenses by separate action upon a written action and determination of
the Board following settlement of the dispute. Such reimbursement shall be paid
within ten (10) days of Employee furnishing to the Bank or Parent evidence,
which may be in the form, among other things, of a canceled check or receipt, of
any costs or expenses incurred by Employee.
11. Confidential Information. The Employee acknowledges that during his
------------------------
or her employment he or she will learn and have access to confidential
information regarding the Bank and the Parent and its customers and businesses
("Confidential Information"). The Employee agrees and covenants not to disclose
or use for his or her own benefit, or the benefit of any other person or entity,
any such Confidential Information, unless or until the Bank or tthe Parent
consents to such disclosure or use or such information becomes common knowledge
in the industry or is otherwise legally in the public domain. The Employee shall
not knowingly disclose or reveal to any unauthorized person any Confidential
Information relating to the Bank, the
4
Parent, or any subsidiaries or affiliates, or to any of the businesses operated
by them, and the Employee confirms that such information constitutes the
exclusive property of the Bank and the Parent. The Employee shall not otherwise
knowingly act or conduct himself (a) to the material detriment of the Bank or
the Parent, or its subsidiaries, or affiliates, or (b) in a manner which is
inimical or contrary to the interests of the Bank or the Parent. Employee
acknowledges and agrees that the existence of this Agreement and its terms and
conditions constitutes Confidential Information of the Bank, and the Employee
agrees not to disclose the Agreement or its contents without the prior written
consent of the Bank. Notwithstanding the foregoing, the Bank reserves the right
in its sole discretion to make disclosure of this Agreement as it deems
necessary or appropriate in compliance with its regulatory reporting
requirements. Notwithstanding anything herein to the contrary, failure by the
Employee to comply with the provisions of this Section may result in the
immediate termination of the Agreement within the sole discretion of the Bank,
disciplinary action against the Employee taken by the Bank, including but not
limited to the termination of employment of the Employee for breach of the
Agreement and the provisions of this Section, and other remedies that may be
available in law or in equity.
12. Entire Agreement. This Agreement together with any understanding or
----------------
modifications thereof as agreed to in writing by the parties, shall constitute
the entire agreement between the parties hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and first hereinabove written.
Gallup Federal Savings Bank
ATTEST: By: /s/Richard C. Kauzlaric
------------------------------
Richard C. Kauzlaric, Chairman
/s/G.S. Perce
- ------------------------------
G.S. Perce
Secretary
WITNESS:
/s/Richard P. Gallegos
------------------------------
Richard P. Gallegos, Employee
/s/Jerry R. Spurlin
- ------------------------------
Jerry R. Spurlin
CHANGE IN CONTROL SEVERANCE AGREEMENT
-------------------------------------
Amended and Restated
THIS CHANGE IN CONTROL SEVERANCE AGREEMENT ("Agreement") entered into
this 22nd day of August 2003 ("Effective Date"), by and between Gallup Federal
Savings Bank, Gallup, New Mexico (the "Bank") and Jerry R. Spurlin (the
"Employee").
WHEREAS, the Employee is currently employed by the Bank as Chief
Financial Officer and is experienced in certain phases of the business of the
Bank; and
WHEREAS, the parties have previously entered into a Change in Control Severance
Agreement, dated June 14, 2001; and
WHEREAS, the parties desire by this writing to set forth the continuing
rights and responsibilities of the Bank and Employee if the Bank should undergo
a change in control (as defined hereinafter in the Agreement) after the
Effective Date.
NOW, THEREFORE, it is AGREED as follows:
1. Employment. The Employee is employed in the capacity as the
----------
Chief Financial Officer of the Bank. The Employee shall render such
administrative and management services to the Bank and GFSB Bancorp, Inc., its
parent savings and loan holding company ("Parent") as are currently rendered and
as are customarily performed by persons situated in a similar executive
capacity. The Employee's other duties shall be such as the Board of Directors
for the Bank (the "Board of Directors" or "Board") may from time to time
reasonably direct, including normal duties as an officer of the Bank and the
Parent.
2. Term of Agreement. The term of this Agreement shall be for the
------------------
period commencing on the Effective Date and ending thirty-six (36) months
thereafter ("Term").
3. Termination of Employment in Connection with or Subsequent to a
-------------------------------------------------------------------
Change in Control.
- -----------------
(a) Notwithstanding any provision herein to the contrary, in the event
of the involuntary termination of Employee's employment under this Agreement,
absent Just Cause, in connection with, or within twenty-four (24) months after,
any Change in Control of the Bank or Parent, Employee shall be paid an amount
equal to 200% times the base annual salary in effect as of the end of the
calendar year prior to the date of termination of employment and the costs
associated with maintaining coverage under the Bank's medical and dental
insurance reimbursement plans similar to that in effect on the date of
termination of employment for a period of one year thereafter. Said sum shall be
paid in one (1) lump sum not later than the date of such termination of
employment and such payments shall be in lieu of any other future payments which
the Employee would be otherwise entitled to receive. Notwithstanding the
forgoing, all sums
1
payable hereunder shall be reduced in such manner and to such extent so that no
such payments made hereunder when aggregated with all other payments to be made
to the Employee by the Bank or the Parent shall be deemed an "excess parachute
payment" in accordance with Section 280G of the Internal Revenue Code of 1986,
as amended (the "Code") and be subject to the excise tax provided at Section
4999(a) of the Code. The term "Change in Control" shall refer to (i) the sale of
all, or a material portion, of the assets of the Bank or the Parent; (ii) the
merger or recapitalization of the Bank or the Parent whereby the Bank or the
Parent is not the surviving entity; (iii) a change in control of the Bank or the
Parent, as otherwise defined or determined by the Office of Thrift Supervision
or regulations promulgated by it; or (iv) the acquisition, directly or
indirectly, of the beneficial ownership (within the meaning of that term as it
is used in Section 13(d) of the Securities Exchange Act of 1934 and the rules
and regulations promulgated thereunder) of twenty-five percent (25%) or more of
the outstanding voting securities of the Bank or the Parent by any person,
trust, entity or group. The term "person" means an individual other than the
Employee, or a corporation, partnership, trust, association, joint venture,
pool, syndicate, sole proprietorship, unincorporated organization or any other
form of entity not specifically listed herein.
(b) Notwithstanding any other provision of this Agreement to the
contrary except as provided at Sections 4 and 5, Employee may voluntarily
terminate his employment under this Agreement within twenty-four months
following a Change in Control of the Bank or Parent, and Employee shall
thereupon be entitled to receive the payment and benefits described in Section
3(a) of this Agreement, upon the occurrence, or within 120 day of any of the
following events, which have not been consented to in advance by the Employee in
writing: (i) if Employee would be required to move his personal residence or
perform his principal executive functions more than thirty-five (35) miles from
the Employee's primary office as of the signing of this Agreement; (ii) if the
Bank or Parent should fail to maintain the Employee's base compensation in
effect as of the date of the Change in Control and existing employee benefits
plans, including material fringe benefit, stock option and retirement plans,
except to the extent that such reduction in benefit programs is part of an
overall adjustment in benefits for all employees of the Bank or Parent and does
not disproportionately adversely impact the Employee; or (iii) if Employee would
be assigned duties and responsibilities other than those normally associated
with his position as referenced at Section 1, herein, or other comparable senior
management position.
4. Other Changes in Employment Status.
----------------------------------
Except as provided for at Section 3, herein, the Board of Directors may
terminate the Employee's employment at any time with or without Just Cause
within its sole discretion. This Agreement shall not be deemed to give Employee
any right to be retained in the employment or service of the Bank, or to
interfere with the right of the Bank to terminate the employment of the Employee
at any time. The Employee shall have no right to receive compensation or other
benefits for any period after termination for Just Cause. Termination for "Just
Cause" shall include termination because of the Employee's personal dishonesty,
incompetence, willful misconduct, breach of fiduciary duty involving personal
profit, intentional failure to perform
2
stated duties, willful violation of any law, rule or regulation (other than
traffic violations or similar offenses) or final cease-and-desist order, or
material breach of any provision of the Agreement.
5. Regulatory Exclusions.
---------------------
(a) If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA") (12
U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Bank under this Agreement
shall terminate, as of the effective date of the order, but the vested rights of
the contracting parties shall not be affected.
(b) If the Bank is in default (as defined in Section 3(x)(1) of FDIA)
all obligations under this Agreement shall terminate as of the date of default,
but this paragraph shall not affect any vested rights of the contracting
parties.
(c) All obligations under this Agreement shall be terminated, except to
the extent determined that continuation of this Agreement is necessary for the
continued operation of the Bank: (i) by the Director of the Office of Thrift
Supervision ("Director of OTS"), or his or her designee, at the time that the
Federal Deposit Insurance Corporation ("FDIC") enters into an agreement to
provide assistance to or on behalf of the Bank under the authority contained in
Section 13(c) of FDIA; or (ii) by the Director of the OTS, or his or her
designee, at the time that the Director of the OTS, or his or her designee
approves a supervisory merger to resolve problems related to operation of the
Bank or when the Bank is determined by the Director of the OTS to be in an
unsafe or unsound condition. Any rights of the parties that have already vested,
however, shall not be affected by such action.
(d) If the Employee is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(3) and (g)(1)), the
Bank's obligations under the Agreement shall be suspended as of the date of
service, unless stayed by appropriate proceedings. If the charges in the notice
are dismissed, the Bank may within its discretion (i) pay the Employee all or
part of the compensation withheld while its contract obligations were suspended
and (ii) reinstate (in whole or in part) any of its obligations which were
suspended.
(e) Notwithstanding anything herein to the contrary, any payments made
to the Employee pursuant to the Agreement, or otherwise, shall be subject to and
conditioned upon compliance with 12 USC ss.1828(k) and any regulations
promulgated thereunder.
3
6. Successors and Assigns.
----------------------
(a) This Agreement shall inure to the benefit of and be binding upon
any corporate or other successor of the Bank which shall acquire, directly or
indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of the Bank or Parent.
(b) The Employee shall be precluded from assigning or delegating his
rights or duties hereunder without first obtaining the written consent of the
Bank.
7. Amendments. No amendments or additions to this Agreement shall be
----------
binding upon the parties hereto unless made in writing and signed by both
parties, except as herein otherwise specifically provided.
8. Applicable Law. This agreement shall be governed by all respects
---------------
whether as to validity, construction, capacity, performance or otherwise, by the
laws of the State of New Mexico, except to the extent that Federal law shall be
deemed to apply.
9. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
10. Arbitration. Any controversy or claim arising out of or relating to
-----------
this Agreement, or the breach thereof, shall be settled by arbitration in
accordance with the rules then in effect of the district office of the American
Arbitration Association ("AAA") nearest to the home office of the Bank, and
judgment upon the award rendered may be entered in any court having jurisdiction
thereof, except to the extent that the parties may otherwise reach a mutual
settlement of such issue. Further, the settlement of the dispute to be approved
by the Board of the Bank may include a provision for the reimbursement by the
Bank to the Employee for all reasonable costs and expenses, including reasonable
attorneys' fees, arising from such dispute, proceedings or actions, or the Board
of the Bank or the Parent may authorize such reimbursement of such reasonable
costs and expenses by separate action upon a written action and determination of
the Board following settlement of the dispute. Such reimbursement shall be paid
within ten (10) days of Employee furnishing to the Bank or Parent evidence,
which may be in the form, among other things, of a canceled check or receipt, of
any costs or expenses incurred by Employee.
11. Confidential Information. The Employee acknowledges that during his
------------------------
or her employment he or she will learn and have access to confidential
information regarding the Bank and the Parent and its customers and businesses
("Confidential Information"). The Employee agrees and covenants not to disclose
or use for his or her own benefit, or the benefit of any other person or entity,
any such Confidential Information, unless or until the Bank or tthe Parent
consents to such disclosure or use or such information becomes common knowledge
in the industry or is otherwise legally in the public domain. The Employee shall
not knowingly disclose or reveal to any unauthorized person any Confidential
Information relating to the Bank, the
4
Parent, or any subsidiaries or affiliates, or to any of the businesses operated
by them, and the Employee confirms that such information constitutes the
exclusive property of the Bank and the Parent. The Employee shall not otherwise
knowingly act or conduct himself (a) to the material detriment of the Bank or
the Parent, or its subsidiaries, or affiliates, or (b) in a manner which is
inimical or contrary to the interests of the Bank or the Parent. Employee
acknowledges and agrees that the existence of this Agreement and its terms and
conditions constitutes Confidential Information of the Bank, and the Employee
agrees not to disclose the Agreement or its contents without the prior written
consent of the Bank. Notwithstanding the foregoing, the Bank reserves the right
in its sole discretion to make disclosure of this Agreement as it deems
necessary or appropriate in compliance with its regulatory reporting
requirements. Notwithstanding anything herein to the contrary, failure by the
Employee to comply with the provisions of this Section may result in the
immediate termination of the Agreement within the sole discretion of the Bank,
disciplinary action against the Employee taken by the Bank, including but not
limited to the termination of employment of the Employee for breach of the
Agreement and the provisions of this Section, and other remedies that may be
available in law or in equity.
12. Entire Agreement. This Agreement together with any understanding or
----------------
modifications thereof as agreed to in writing by the parties, shall constitute
the entire agreement between the parties hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and first hereinabove written.
Gallup Federal Savings Bank
ATTEST: By: /s/Richard P. Gallegos
------------------------------
Richard P. Gallegos, President
/s/G.S. Perce
- ------------------------------
G.S. Perce
Secretary
WITNESS:
/s/Jerry R. Spurlin
------------------------------
Jerry R. Spurlin, Employee
/s/Debra S. Fischer
- ------------------------------
Debra S. Fischer
CHANGE IN CONTROL SEVERANCE AGREEMENT
-------------------------------------
Amended and Restated
THIS CHANGE IN CONTROL SEVERANCE AGREEMENT ("Agreement") entered into
this 22nd day of August 2003 ("Effective Date"), by and between Gallup Federal
Savings Bank, Gallup, New Mexico (the "Bank") and William W. Head, Jr. (the
"Employee").
WHEREAS, the Employee is currently employed by the Bank as Chief
Lending Officer and is experienced in certain phases of the business of the
Bank; and
WHEREAS, the parties have previously entered into a Change in Control Severance
Agreement, dated June 14, 2001; and
WHEREAS, the parties desire by this writing to set forth the continuing
rights and responsibilities of the Bank and Employee if the Bank should undergo
a change in control (as defined hereinafter in the Agreement) after the
Effective Date.
NOW, THEREFORE, it is AGREED as follows:
1. Employment. The Employee is employed in the capacity as the
----------
Chief Lending Officer of the Bank. The Employee shall render such administrative
and management services to the Bank and GFSB Bancorp, Inc., its parent savings
and loan holding company ("Parent") as are currently rendered and as are
customarily performed by persons situated in a similar executive capacity. The
Employee's other duties shall be such as the Board of Directors for the Bank
(the "Board of Directors" or "Board") may from time to time reasonably direct,
including normal duties as an officer of the Bank and the Parent.
2. Term of Agreement. The term of this Agreement shall be for the
------------------
period commencing on the Effective Date and ending thirty-six (36) months
thereafter ("Term").
3. Termination of Employment in Connection with or Subsequent to a
-------------------------------------------------------------------
Change in Control.
- -----------------
(a) Notwithstanding any provision herein to the contrary, in the event
of the involuntary termination of Employee's employment under this Agreement,
absent Just Cause, in connection with, or within twenty-four (24) months after,
any Change in Control of the Bank or Parent, Employee shall be paid an amount
equal to 200% times the base annual salary in effect as of the end of the
calendar year prior to the date of termination of employment and the costs
associated with maintaining coverage under the Bank's medical and dental
insurance reimbursement plans similar to that in effect on the date of
termination of employment for a period of one year thereafter. Said sum shall be
paid in one (1) lump sum not later than the date of such termination of
employment and such payments shall be in lieu of any other future payments which
the Employee would be otherwise entitled to receive. Notwithstanding the
forgoing, all sums
1
payable hereunder shall be reduced in such manner and to such extent so that no
such payments made hereunder when aggregated with all other payments to be made
to the Employee by the Bank or the Parent shall be deemed an "excess parachute
payment" in accordance with Section 280G of the Internal Revenue Code of 1986,
as amended (the "Code") and be subject to the excise tax provided at Section
4999(a) of the Code. The term "Change in Control" shall refer to (i) the sale of
all, or a material portion, of the assets of the Bank or the Parent; (ii) the
merger or recapitalization of the Bank or the Parent whereby the Bank or the
Parent is not the surviving entity; (iii) a change in control of the Bank or the
Parent, as otherwise defined or determined by the Office of Thrift Supervision
or regulations promulgated by it; or (iv) the acquisition, directly or
indirectly, of the beneficial ownership (within the meaning of that term as it
is used in Section 13(d) of the Securities Exchange Act of 1934 and the rules
and regulations promulgated thereunder) of twenty-five percent (25%) or more of
the outstanding voting securities of the Bank or the Parent by any person,
trust, entity or group. The term "person" means an individual other than the
Employee, or a corporation, partnership, trust, association, joint venture,
pool, syndicate, sole proprietorship, unincorporated organization or any other
form of entity not specifically listed herein.
(b) Notwithstanding any other provision of this Agreement to the
contrary except as provided at Sections 4 and 5, Employee may voluntarily
terminate his employment under this Agreement within twenty-four months
following a Change in Control of the Bank or Parent, and Employee shall
thereupon be entitled to receive the payment and benefits described in Section
3(a) of this Agreement, upon the occurrence, or within 120 day of any of the
following events, which have not been consented to in advance by the Employee in
writing: (i) if Employee would be required to move his personal residence or
perform his principal executive functions more than thirty-five (35) miles from
the Employee's primary office as of the signing of this Agreement; (ii) if the
Bank or Parent should fail to maintain the Employee's base compensation in
effect as of the date of the Change in Control and existing employee benefits
plans, including material fringe benefit, stock option and retirement plans,
except to the extent that such reduction in benefit programs is part of an
overall adjustment in benefits for all employees of the Bank or Parent and does
not disproportionately adversely impact the Employee; or (iii) if Employee would
be assigned duties and responsibilities other than those normally associated
with his position as referenced at Section 1, herein, or other comparable senior
management position.
4. Other Changes in Employment Status.
----------------------------------
Except as provided for at Section 3, herein, the Board of Directors may
terminate the Employee's employment at any time with or without Just Cause
within its sole discretion. This Agreement shall not be deemed to give Employee
any right to be retained in the employment or service of the Bank, or to
interfere with the right of the Bank to terminate the employment of the Employee
at any time. The Employee shall have no right to receive compensation or other
benefits for any period after termination for Just Cause. Termination for "Just
Cause" shall include termination because of the Employee's personal dishonesty,
incompetence, willful misconduct, breach of fiduciary duty involving personal
profit, intentional failure to perform
2
stated duties, willful violation of any law, rule or regulation (other than
traffic violations or similar offenses) or final cease-and-desist order, or
material breach of any provision of the Agreement.
5. Regulatory Exclusions.
---------------------
(a) If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA") (12
U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Bank under this Agreement
shall terminate, as of the effective date of the order, but the vested rights of
the contracting parties shall not be affected.
(b) If the Bank is in default (as defined in Section 3(x)(1) of FDIA)
all obligations under this Agreement shall terminate as of the date of default,
but this paragraph shall not affect any vested rights of the contracting
parties.
(c) All obligations under this Agreement shall be terminated, except to
the extent determined that continuation of this Agreement is necessary for the
continued operation of the Bank: (i) by the Director of the Office of Thrift
Supervision ("Director of OTS"), or his or her designee, at the time that the
Federal Deposit Insurance Corporation ("FDIC") enters into an agreement to
provide assistance to or on behalf of the Bank under the authority contained in
Section 13(c) of FDIA; or (ii) by the Director of the OTS, or his or her
designee, at the time that the Director of the OTS, or his or her designee
approves a supervisory merger to resolve problems related to operation of the
Bank or when the Bank is determined by the Director of the OTS to be in an
unsafe or unsound condition. Any rights of the parties that have already vested,
however, shall not be affected by such action.
(d) If the Employee is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(3) and (g)(1)), the
Bank's obligations under the Agreement shall be suspended as of the date of
service, unless stayed by appropriate proceedings. If the charges in the notice
are dismissed, the Bank may within its discretion (i) pay the Employee all or
part of the compensation withheld while its contract obligations were suspended
and (ii) reinstate (in whole or in part) any of its obligations which were
suspended.
(e) Notwithstanding anything herein to the contrary, any payments made
to the Employee pursuant to the Agreement, or otherwise, shall be subject to and
conditioned upon compliance with 12 USC ss.1828(k) and any regulations
promulgated thereunder.
3
6. Successors and Assigns.
----------------------
(a) This Agreement shall inure to the benefit of and be binding upon
any corporate or other successor of the Bank which shall acquire, directly or
indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of the Bank or Parent.
(b) The Employee shall be precluded from assigning or delegating his
rights or duties hereunder without first obtaining the written consent of the
Bank.
7. Amendments. No amendments or additions to this Agreement shall be
----------
binding upon the parties hereto unless made in writing and signed by both
parties, except as herein otherwise specifically provided.
8. Applicable Law. This agreement shall be governed by all respects
---------------
whether as to validity, construction, capacity, performance or otherwise, by the
laws of the State of New Mexico, except to the extent that Federal law shall be
deemed to apply.
9. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
10. Arbitration. Any controversy or claim arising out of or relating to
-----------
this Agreement, or the breach thereof, shall be settled by arbitration in
accordance with the rules then in effect of the district office of the American
Arbitration Association ("AAA") nearest to the home office of the Bank, and
judgment upon the award rendered may be entered in any court having jurisdiction
thereof, except to the extent that the parties may otherwise reach a mutual
settlement of such issue. Further, the settlement of the dispute to be approved
by the Board of the Bank may include a provision for the reimbursement by the
Bank to the Employee for all reasonable costs and expenses, including reasonable
attorneys' fees, arising from such dispute, proceedings or actions, or the Board
of the Bank or the Parent may authorize such reimbursement of such reasonable
costs and expenses by separate action upon a written action and determination of
the Board following settlement of the dispute. Such reimbursement shall be paid
within ten (10) days of Employee furnishing to the Bank or Parent evidence,
which may be in the form, among other things, of a canceled check or receipt, of
any costs or expenses incurred by Employee.
11. Confidential Information. The Employee acknowledges that during his
------------------------
or her employment he or she will learn and have access to confidential
information regarding the Bank and the Parent and its customers and businesses
("Confidential Information"). The Employee agrees and covenants not to disclose
or use for his or her own benefit, or the benefit of any other person or entity,
any such Confidential Information, unless or until the Bank or tthe Parent
consents to such disclosure or use or such information becomes common knowledge
in the industry or is otherwise legally in the public domain. The Employee shall
not knowingly disclose or reveal to any unauthorized person any Confidential
Information relating to the Bank, the
4
Parent, or any subsidiaries or affiliates, or to any of the businesses operated
by them, and the Employee confirms that such information constitutes the
exclusive property of the Bank and the Parent. The Employee shall not otherwise
knowingly act or conduct himself (a) to the material detriment of the Bank or
the Parent, or its subsidiaries, or affiliates, or (b) in a manner which is
inimical or contrary to the interests of the Bank or the Parent. Employee
acknowledges and agrees that the existence of this Agreement and its terms and
conditions constitutes Confidential Information of the Bank, and the Employee
agrees not to disclose the Agreement or its contents without the prior written
consent of the Bank. Notwithstanding the foregoing, the Bank reserves the right
in its sole discretion to make disclosure of this Agreement as it deems
necessary or appropriate in compliance with its regulatory reporting
requirements. Notwithstanding anything herein to the contrary, failure by the
Employee to comply with the provisions of this Section may result in the
immediate termination of the Agreement within the sole discretion of the Bank,
disciplinary action against the Employee taken by the Bank, including but not
limited to the termination of employment of the Employee for breach of the
Agreement and the provisions of this Section, and other remedies that may be
available in law or in equity.
12. Entire Agreement. This Agreement together with any understanding or
----------------
modifications thereof as agreed to in writing by the parties, shall constitute
the entire agreement between the parties hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and first hereinabove written.
Gallup Federal Savings Bank
ATTEST: By: /s/Richard P. Gallegos
------------------------------
Richard P. Gallegos, President
/s/G.S. Perce
- ------------------------------
G.S. Perce
Secretary
WITNESS:
/s/William W. Head, Jr.
------------------------------
William W. Head, Jr., Employee
/s/Debra S. Fischer
- ------------------------------
Debra S. Fischer
CHANGE IN CONTROL SEVERANCE AGREEMENT
-------------------------------------
Amended and Restated
THIS CHANGE IN CONTROL SEVERANCE AGREEMENT ("Agreement") entered into
this 22nd day of August 2003 ("Effective Date"), by and between Gallup Federal
Savings Bank, Gallup, New Mexico (the "Bank") and Leonard C. Scalzi (the
"Employee").
WHEREAS, the Employee is currently employed by the Bank as Senior Vice
President and is experienced in certain phases of the business of the Bank; and
WHEREAS, the parties have previously entered into a Change in Control Severance
Agreement, dated June 14, 2001; and
WHEREAS, the parties desire by this writing to set forth the continuing
rights and responsibilities of the Bank and Employee if the Bank should undergo
a change in control (as defined hereinafter in the Agreement) after the
Effective Date.
NOW, THEREFORE, it is AGREED as follows:
1. Employment. The Employee is employed in the capacity as the
----------
Senior Vice President of the Bank. The Employee shall render such administrative
and management services to the Bank and GFSB Bancorp, Inc., its parent savings
and loan holding company ("Parent") as are currently rendered and as are
customarily performed by persons situated in a similar executive capacity. The
Employee's other duties shall be such as the Board of Directors for the Bank
(the "Board of Directors" or "Board") may from time to time reasonably direct,
including normal duties as an officer of the Bank and the Parent.
2. Term of Agreement. The term of this Agreement shall be for the
------------------
period commencing on the Effective Date and ending thirty-six (36) months
thereafter ("Term").
3. Termination of Employment in Connection with or Subsequent to a
-------------------------------------------------------------------
Change in Control.
- -----------------
(a) Notwithstanding any provision herein to the contrary, in the event
of the involuntary termination of Employee's employment under this Agreement,
absent Just Cause, in connection with, or within twenty-four (24) months after,
any Change in Control of the Bank or Parent, Employee shall be paid an amount
equal to 200% times the base annual salary in effect as of the end of the
calendar year prior to the date of termination of employment and the costs
associated with maintaining coverage under the Bank's medical and dental
insurance reimbursement plans similar to that in effect on the date of
termination of employment for a period of one year thereafter. Said sum shall be
paid in one (1) lump sum not later than the date of such termination of
employment and such payments shall be in lieu of any other future payments which
the Employee would be otherwise entitled to receive. Notwithstanding the
forgoing, all sums
1
payable hereunder shall be reduced in such manner and to such extent so that no
such payments made hereunder when aggregated with all other payments to be made
to the Employee by the Bank or the Parent shall be deemed an "excess parachute
payment" in accordance with Section 280G of the Internal Revenue Code of 1986,
as amended (the "Code") and be subject to the excise tax provided at Section
4999(a) of the Code. The term "Change in Control" shall refer to (i) the sale of
all, or a material portion, of the assets of the Bank or the Parent; (ii) the
merger or recapitalization of the Bank or the Parent whereby the Bank or the
Parent is not the surviving entity; (iii) a change in control of the Bank or the
Parent, as otherwise defined or determined by the Office of Thrift Supervision
or regulations promulgated by it; or (iv) the acquisition, directly or
indirectly, of the beneficial ownership (within the meaning of that term as it
is used in Section 13(d) of the Securities Exchange Act of 1934 and the rules
and regulations promulgated thereunder) of twenty-five percent (25%) or more of
the outstanding voting securities of the Bank or the Parent by any person,
trust, entity or group. The term "person" means an individual other than the
Employee, or a corporation, partnership, trust, association, joint venture,
pool, syndicate, sole proprietorship, unincorporated organization or any other
form of entity not specifically listed herein.
(b) Notwithstanding any other provision of this Agreement to the
contrary except as provided at Sections 4 and 5, Employee may voluntarily
terminate his employment under this Agreement within twenty-four months
following a Change in Control of the Bank or Parent, and Employee shall
thereupon be entitled to receive the payment and benefits described in Section
3(a) of this Agreement, upon the occurrence, or within 120 day of any of the
following events, which have not been consented to in advance by the Employee in
writing: (i) if Employee would be required to move his personal residence or
perform his principal executive functions more than thirty-five (35) miles from
the Employee's primary office as of the signing of this Agreement; (ii) if the
Bank or Parent should fail to maintain the Employee's base compensation in
effect as of the date of the Change in Control and existing employee benefits
plans, including material fringe benefit, stock option and retirement plans,
except to the extent that such reduction in benefit programs is part of an
overall adjustment in benefits for all employees of the Bank or Parent and does
not disproportionately adversely impact the Employee; or (iii) if Employee would
be assigned duties and responsibilities other than those normally associated
with his position as referenced at Section 1, herein, or other comparable senior
management position.
4. Other Changes in Employment Status.
----------------------------------
Except as provided for at Section 3, herein, the Board of Directors may
terminate the Employee's employment at any time with or without Just Cause
within its sole discretion. This Agreement shall not be deemed to give Employee
any right to be retained in the employment or service of the Bank, or to
interfere with the right of the Bank to terminate the employment of the Employee
at any time. The Employee shall have no right to receive compensation or other
benefits for any period after termination for Just Cause. Termination for "Just
Cause" shall include termination because of the Employee's personal dishonesty,
incompetence, willful misconduct, breach of fiduciary duty involving personal
profit, intentional failure to perform
2
stated duties, willful violation of any law, rule or regulation (other than
traffic violations or similar offenses) or final cease-and-desist order, or
material breach of any provision of the Agreement.
5. Regulatory Exclusions.
---------------------
(a) If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA") (12
U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Bank under this Agreement
shall terminate, as of the effective date of the order, but the vested rights of
the contracting parties shall not be affected.
(b) If the Bank is in default (as defined in Section 3(x)(1) of FDIA)
all obligations under this Agreement shall terminate as of the date of default,
but this paragraph shall not affect any vested rights of the contracting
parties.
(c) All obligations under this Agreement shall be terminated, except to
the extent determined that continuation of this Agreement is necessary for the
continued operation of the Bank: (i) by the Director of the Office of Thrift
Supervision ("Director of OTS"), or his or her designee, at the time that the
Federal Deposit Insurance Corporation ("FDIC") enters into an agreement to
provide assistance to or on behalf of the Bank under the authority contained in
Section 13(c) of FDIA; or (ii) by the Director of the OTS, or his or her
designee, at the time that the Director of the OTS, or his or her designee
approves a supervisory merger to resolve problems related to operation of the
Bank or when the Bank is determined by the Director of the OTS to be in an
unsafe or unsound condition. Any rights of the parties that have already vested,
however, shall not be affected by such action.
(d) If the Employee is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(3) and (g)(1)), the
Bank's obligations under the Agreement shall be suspended as of the date of
service, unless stayed by appropriate proceedings. If the charges in the notice
are dismissed, the Bank may within its discretion (i) pay the Employee all or
part of the compensation withheld while its contract obligations were suspended
and (ii) reinstate (in whole or in part) any of its obligations which were
suspended.
(e) Notwithstanding anything herein to the contrary, any payments made
to the Employee pursuant to the Agreement, or otherwise, shall be subject to and
conditioned upon compliance with 12 USC ss.1828(k) and any regulations
promulgated thereunder.
3
6. Successors and Assigns.
----------------------
(a) This Agreement shall inure to the benefit of and be binding upon
any corporate or other successor of the Bank which shall acquire, directly or
indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of the Bank or Parent.
(b) The Employee shall be precluded from assigning or delegating his
rights or duties hereunder without first obtaining the written consent of the
Bank.
7. Amendments. No amendments or additions to this Agreement shall be
----------
binding upon the parties hereto unless made in writing and signed by both
parties, except as herein otherwise specifically provided.
8. Applicable Law. This agreement shall be governed by all respects
---------------
whether as to validity, construction, capacity, performance or otherwise, by the
laws of the State of New Mexico, except to the extent that Federal law shall be
deemed to apply.
9. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
10. Arbitration. Any controversy or claim arising out of or relating to
-----------
this Agreement, or the breach thereof, shall be settled by arbitration in
accordance with the rules then in effect of the district office of the American
Arbitration Association ("AAA") nearest to the home office of the Bank, and
judgment upon the award rendered may be entered in any court having jurisdiction
thereof, except to the extent that the parties may otherwise reach a mutual
settlement of such issue. Further, the settlement of the dispute to be approved
by the Board of the Bank may include a provision for the reimbursement by the
Bank to the Employee for all reasonable costs and expenses, including reasonable
attorneys' fees, arising from such dispute, proceedings or actions, or the Board
of the Bank or the Parent may authorize such reimbursement of such reasonable
costs and expenses by separate action upon a written action and determination of
the Board following settlement of the dispute. Such reimbursement shall be paid
within ten (10) days of Employee furnishing to the Bank or Parent evidence,
which may be in the form, among other things, of a canceled check or receipt, of
any costs or expenses incurred by Employee.
11. Confidential Information. The Employee acknowledges that during his
------------------------
or her employment he or she will learn and have access to confidential
information regarding the Bank and the Parent and its customers and businesses
("Confidential Information"). The Employee agrees and covenants not to disclose
or use for his or her own benefit, or the benefit of any other person or entity,
any such Confidential Information, unless or until the Bank or tthe Parent
consents to such disclosure or use or such information becomes common knowledge
in the industry or is otherwise legally in the public domain. The Employee shall
not knowingly disclose or reveal to any unauthorized person any Confidential
Information relating to the Bank, the
4
Parent, or any subsidiaries or affiliates, or to any of the businesses operated
by them, and the Employee confirms that such information constitutes the
exclusive property of the Bank and the Parent. The Employee shall not otherwise
knowingly act or conduct himself (a) to the material detriment of the Bank or
the Parent, or its subsidiaries, or affiliates, or (b) in a manner which is
inimical or contrary to the interests of the Bank or the Parent. Employee
acknowledges and agrees that the existence of this Agreement and its terms and
conditions constitutes Confidential Information of the Bank, and the Employee
agrees not to disclose the Agreement or its contents without the prior written
consent of the Bank. Notwithstanding the foregoing, the Bank reserves the right
in its sole discretion to make disclosure of this Agreement as it deems
necessary or appropriate in compliance with its regulatory reporting
requirements. Notwithstanding anything herein to the contrary, failure by the
Employee to comply with the provisions of this Section may result in the
immediate termination of the Agreement within the sole discretion of the Bank,
disciplinary action against the Employee taken by the Bank, including but not
limited to the termination of employment of the Employee for breach of the
Agreement and the provisions of this Section, and other remedies that may be
available in law or in equity.
12. Entire Agreement. This Agreement together with any understanding or
----------------
modifications thereof as agreed to in writing by the parties, shall constitute
the entire agreement between the parties hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and first hereinabove written.
Gallup Federal Savings Bank
ATTEST: By: /s/Richard P. Gallegos
------------------------------
Richard P. Gallegos, President
/s/G.S. Perce
- ------------------------------
G.S. Perce
Secretary
WITNESS:
/s/Leonard C. Scalzi
------------------------------
Leonard C. Scalzi, Employee
/s/Ginger R. Palmer
- ------------------------------
Ginger R. Palmer
[NEFF + RICCI LLP LETTERHEAD]
CONSENT OF INDEPENDENT ACCOUNTANTS
Board of Directors
GFSB Bancorp, Inc.
We consent to incorporation by reference in the registration statements (Nos.
333-07131 and 333-51498) on Form S-8 of GFSB Bancorp, Inc. of our report dated
July 30, 2004, except for note 19, as to which the date is August 25, 2004,
relating to the consolidated statement of financial condition of GFSB Bancorp,
Inc. as of June 30, 2004 and 2003, and the related consolidated statements of
earnings and comprehensive earnings, changes in stockholders' equity and cash
flows for the years ending June 30, 2004 and 2003, which report appears in the
June 30, 2004 annual report on Form 10-KSB of GFSB Bancorp, Inc.
/s/ NEFF + RICCI LLP
September 27, 2004
Albuquerque, New Mexico
CERTIFICATION
I, Richard C. Kauzlaric, certify that:
1. I have reviewed this Form 10-KSB of GFSB Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Company as of, and for, the periods presented in this report;
4. The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rule 13a-15(e)) for the Company and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
Company, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared; and
(b) Evaluated the effectiveness of the Company's disclosure controls
and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report
based on such evaluation.
(c) Disclosed in this report any change in the Company's internal
control over financial reporting that occurred during the
Company's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting; and
5. The issuer's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f)), to the issuer's auditors and
the audit committee of the issuer's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the issuer's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the issuer's
internal control over financial reporting.
Date: September 27, 2004 /s/Richard C. Kauzlaric
-----------------------------------
Richard C. Kauzlaric
President
CERTIFICATION
I, Jerry R. Spurlin, certify that:
1. I have reviewed this Form 10-KSB of GFSB Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Company as of, and for, the periods presented in this report;
4. The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rule 13a-15(e)) for the Company and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
Company, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared; and
(b) Evaluated the effectiveness of the Company's disclosure controls
and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report
based on such evaluation.
(c) Disclosed in this report any change in the Company's internal
control over financial reporting that occurred during the
Company's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting; and
5. The issuer's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f)), to the issuer's auditors and
the audit committee of the issuer's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the issuer's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the issuer's
internal control over financial reporting.
Date: September 27, 2004 /s/Jerry R. Spurlin
---------------------------
Jerry R. Spurlin
Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of GFSB Bancorp, Inc. (the "Company") on
Form 10-KSB for the year ended June 30, 2004 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), we, Richard C. Kauzlaric,
President, and Jerry R. Spurlin, Chief Financial Officer, certify, pursuant to
18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of section 13(a) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/Richard C. Kauzlaric /s/Jerry R. Spurlin
- -------------------------------- -------------------------------------
Richard C. Kauzlaric Jerry R. Spurlin
President Chief Financial Officer
September 27, 2004
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A-1
(Amendment No. 1)
(Mark One):
[X] ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended June 30, 2004.
OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to .
--------------- ---------------
Commission File Number: 0-25854
-------
GFSB BANCORP, INC.
----------------------------------------------
(Name of Small Business Issuer in its Charter)
Delaware 04-2095007
- ---------------------------- ------------------------------------
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
221 West Aztec Avenue, Gallup, New Mexico 87301
- ------------------------------------------ ------------
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number: (505) 722-4361
--------------
Securities Registered Under Section 12(b) of the Exchange Act: None
----
Securities Registered Under Section 12(g) of the Exchange Act:
Common Stock, par value $0.10 per share
---------------------------------------
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. YES X NO .
--- ---
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $12,981,533
-----------
The aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant, based on the average of the bid and
asked price for the registrant's Common Stock on the Nasdaq SmallCap Market at
September 15, 2004, was $11,348,682. Solely for purposes of this calculation,
the term "affiliate" refers to directors and executive officers and the
beneficial owners of more than 10% of the issuer's Common Stock.
As of September 15, 2004, there were issued and outstanding 1,146,645
shares of the issuer's Common Stock.
Transitional Small Business Disclosure format (check one): Yes No X
--- ---
================================================================================
EXPLANATION FOR AMENDMENT:
The Annual Report on Form 10-KSB of GFSB Bancorp, Inc. (the "Company")
for the fiscal year ended June 30, 2004 (the "2004 Form 10-KSB") filed with the
Securities and Exchange Commission (the "Commission") on September 27, 2004 is
being amended hereby to include the items listed below:
Item Description
---- -----------
Item 9 Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Item 10 Executive Compensation
Item 11 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
Item 12 Certain Relationships and Related Transactions
Item 14 Principal Accountant Fees and Services
As originally filed, the Company's 2004 Form 10-KSB incorporated the
information required by Items 9, 10, 11, 12 and 14 of Form 10-KSB by reference
to the Company's Definitive Proxy Statement for its 2004 Annual Meeting of
Stockholders (the "Proxy Statement") as permitted by Instruction E.(3). Since
the Proxy Statement is not expected to be filed with the Commission within 120
days of the close of the Company's fiscal year ended June 30, 2004 as required
by Instruction E.(3), Items 9, 10, 11, 12, 13 and 14 in Part III of the 2004
Form 10-KSB are hereby amended by deleting the texts thereof in their entirety
and substituting therefor the following:
1
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
- --------------------------------------------------------------------------------
with Section 16(a) of the Exchange Act
- --------------------------------------
The following table sets forth information with respect to the
directors and executive officers of the Company, including for each their name,
age, the year they first became a director of the Company or the Bank, and the
expiration date of their current term as a director. The Certificate of
Incorporation requires that directors be divided into three classes, as nearly
equal in number as possible, with each class to serve for a three-year period
and approximately one-third of the directors elected each year. The Board of
Directors currently consists of six members, each of whom also serves as a
director of Gallup Federal Savings Bank (the "Bank"). The Board of Directors has
determined that Messrs. Parker and Hamilton are independent within the meaning
of the listing requirements of The Nasdaq Stock Market.
Year First
Positions Elected or Current
with Appointed Term to
Name Company Age(1) Director(2) Expire
- ---- ------- ------ ----------- ------
Michael P. Mataya Director and Treasurer 54 1994 2006
Charles L. Parker, Jr. Director 42 1994 2006
George S. Perce Director and Secretary 65 1990 2006
Richard C. Kauzlaric President, Chief Executive Officer 66 1983 2004
and Director
Vernon I. Hamilton Director 74 1990 2005
James Nechero, Jr. Director 70 1976 2005
Richard P. Gallegos Senior Vice President and 53 -- --
President of the Bank
Jerry R. Spurlin Chief Financial Officer and 62 -- --
Assistant Secretary
Leonard C. Scalzi Senior Vice President of the Bank 56 -- --
William W. Head, Jr. Chief Lending Officer and 64 -- --
Assistant Secretary
- ------------------
(1) At June 30, 2004.
(2) Refers to the year the individual first became a director of the Company or
the Bank. All such directors became directors of the Company when the
Company was incorporated in March 1995.
Biographical Information
Set forth below is certain information with respect to the directors
and executive officers of the Company. All directors and executive officers have
held their present positions for five years unless otherwise stated.
2
Directors:
Michael P. Mataya is 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.
Charles L. Parker, Jr., C.F.A., currently serves as President of
Sanders Trading Corp., Twin Lakes Trading Corp. and Chambers Trading Corp. Mr.
Parker also serves as Vice President of Allifer, Inc. These corporations are
privately held and engaged in retail and real estate investment activities. Mr.
Parker is Director of KERA Public Television.
George S. Perce is a Professional Engineer, a Professional Surveyer,
the retired owner of Perce Engineering and owner of Perce Farms of Deming, a
producing pecan grove.
Richard C. Kauzlaric was appointed President of the Company on October
28, 2002. 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. Mr. Kauzlaric served as Chairman of the Board of the Bank from
1989 to 2000 and was appointed again in October 2002.
Vernon I. Hamilton is President of V.I. Hamilton Construction Co., Inc.
Mr. Hamilton is a member of the United Methodist Church, the Elks, the Masons,
and the Community Concert Association.
James Nechero, Jr. was President of the Company until October 28, 2002.
Mr. Nechero is the President of Eagle Energy, Inc., a real estate investment
company and is a member of the New Mexico Amigos.
Executive Officers:
Richard P. Gallegos joined the Bank as its President on November 16,
1998 and was appointed Vice President of the Company in 2000 and became a member
of the Board of Directors of the Bank in 2002. Prior to his joining the Bank,
Mr. Gallegos was a President and Vice President of a financial institution in
Gallup, New Mexico and Albuquerque, New Mexico, respectively. Mr. Gallegos is a
committee member of the McKinley/Cibola/San Juan Counties Enterprise Loan Fund
and a member of the Gallup Rotary Club. Previously, Mr. Gallegos served on the
board of Consumer Credit Counseling of New Mexico.
Jerry R. Spurlin has been with the Bank since September of 1990 and
served as President from February 1991 to November 1998. Mr. Spurlin currently
serves as Chief Financial Officer and Assistant Secretary of the Company and is
Treasurer and a member of the Board of Directors of the Bank. Previously, he was
an Executive Vice President, Senior Vice President and Vice President at a
financial institution in Alamogordo, New Mexico. He has served twice as
President of the Gallup-McKinley County Chamber of Commerce, and is the Chairman
of the Staff Parish Relations Committee for the First United Methodist Church of
Gallup. Mr. Spurlin is Secretary/Treasurer of New Mexico Western University
Gallup Foundation, a former director of the Gallup Downtown Development Group
and a member of the Gallup Rotary Club. He is President of Habitat For Humanity
of Gallup.
3
Leonard C. Scalzi joined the Bank on May 1, 2000 as Senior Vice
President - Commercial Lending. Previously, Mr. Scalzi served as a senior lender
for two New Mexico financial institutions. He is a member of the New Mexico
Amigos, a director for Childhaven, a director of the San Juan College
Foundation, a director of Independent Community Bankers Association of New
Mexico and a former president and director of the San Juan Country Club.
William W. Head, Jr. is the Chief Lending Officer of the Bank.
Previously Mr. Head was a lawyer in private practice with an emphasis in
banking, commercial, real estate and probate law. Currently, Mr. Head is a
director of the Housing Authority of the City of Gallup. He has been a member of
the Board of Directors and President of the Inter-Tribal Indian Ceremonial
Association.
Audit Committee
The Audit Committee is comprised of Directors Parker, Nechero and
Hamilton. The Board of Directors has determined that the members of the Audit
Committee other than Mr. Nechero are independent within the meaning of the
listing requirements for The Nasdaq Stock Market. The Board of Directors has
determined that Mr. Parker is an "audit committee financial expert" and that he
is independent.
Code of Ethics
The Company has adopted a Code of Ethics that applies to its principal
executive officer, principal financial officer, principal accounting officer or
controller or persons performing similar functions. A copy of the Company's Code
of Ethics will be provided to any person without charge upon written request to
Jerry R. Spurlin, Chief Financial Officer, GFSB Bancorp, Inc., 221 West Aztec
Avenue, Gallup, New Mexico 87301.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors and executive officers to file
reports of ownership and changes in ownership of their equity securities of the
Company with the Securities and Exchange Commission and to furnish the Company
with copies of such reports. To the best of the Company's knowledge, all of the
filings by the Company's directors and executive officers were made on a timely
basis during the 2004 fiscal year.
4
Item 10. Executive Compensation
- -------- ----------------------
Summary Compensation Table. The following table sets forth information
concerning the compensation for services in all capacities for the fiscal years
provided below of those persons who were, at June 30, 2004, (a) our chief
executive officer and (b) our other most highly compensated officers whose
salary and bonus earned during fiscal year 2004 exceeded $100,000 (collectively,
the "named executive officers"). No other executive officer of the Company or
the Bank earned cash compensation (salary and bonus) in excess of $100,000 for
the year ended June 30, 2004.
Long Term Compensation
Annual Compensation Awards
----------------------------------------------- --------------------------
Securities
Restricted Underlying
Name and Other Annual Stock Options/ All Other
Principal Position Year Salary($) Bonus($) Compensation($)(1) Awards($) SARs(#) Compensation($)
- ------------------- ---- --------- -------- ------------------ --------- -------- ---------------
Richard Kauzlaric 2004 $ -- $ -- $27,750 $ -- $ -- $ --
President and Chief 2003 -- 19,500 -- -- --
Executive Officer of --
the Company
Richard P. Gallegos 2004 $127,420 $ -- $ -- $ -- $ -- $12,518(5)
Senior Vice President 2003 122,420 32,500 -- -- -- 14,009
and President of the 2002 117,420 32,500 -- --(2) -- 13,397
Bank
Jerry R. Spurlin 2004 $ 91,600 $15,000 $ -- $ -- $ -- $17,047(6)
Chief Financial 2003 89,000 20,000 -- -- -- 18,038
Officer 2002 86,400 20,000 -- 61,413(3) -- 17,993
Leonard C. Scalzi 2004 $ 81,500 $18,000 $ -- $ -- $ -- $7,640(7)
Senior Vice President 2003 77,500 32,500 -- -- -- 8,948
2002 73,500 30,000 -- --(4) -- 6,102
- -------------
(1) Represents directors fees.
(2) In fiscal 1999, Mr. Gallegos was awarded 7,500 shares of Common Stock under
the Management Stock Bonus Plan ("MSBP") with a value of $10.90 per share
based on the value of the stock as of the date of such award. This stock
award becomes non-forfeitable at the rate of 1,500 shares per year
commencing on November 16, 1999. Dividend rights associated with such stock
are accrued and held in arrears to be paid at the time that such stock
becomes non-forfeitable. At June 30, 2004, no shares remain unvested.
(3) In fiscal 2002, Mr. Spurlin was awarded 4,250 shares of Common Stock under
the Management Stock Bonus Plan ("MSBP") with a value of $14.45 per share
based on the value of the stock as of the date of such award. This stock
award becomes non-forfeitable at the rate of 850 shares per year commencing
on May 15, 2002. Dividend rights associated with such stock are accrued and
held in arrears to be paid at the time that such stock becomes
non-forfeitable. At June 30, 2004, 1,700 shares with a market value of
$38,250 at such date (based on the closing price of Common Stock of $22.50
at such date) remain unvested.
(4) In fiscal 2000, Mr. Scalzi was awarded 3,750 shares of Common Stock under
the Management Stock Bonus Plan ("MSBP") with a value of $11.11 per share
based on the value of the stock as of the date of such award. This stock
award becomes non-forfeitable at the rate of 750 shares per year commencing
on May 1, 2001. Dividend rights associated with such stock are accrued and
held in arrears to be paid at the time that such stock becomes
non-forfeitable. At June 30, 2004, 750 shares with a market value of
$16,875 at such date (based on the closing price of Common Stock of $22.50
at such date) remain unvested.
(5) Includes $5,733 for the Company matching share in an employee 401-K plan
and an allocation of 1273 shares of Common Stock (at a cost basis of $5.33
per share) under the ESOP. As of June 30, 2004, the market value of the
ESOP shares was $28,643.
(6) Includes $4,122 for the Company matching share in an employee 401-K plan
and an allocation of 2425 shares of Common Stock (at a cost basis of $5.33
per share) under the ESOP. As of June 30, 2004, the market value of the
ESOP shares was $54,563.
(7) Includes $3,706 for the Company matching share in an employee 401-K plan
and an allocation of 738 shares of Common Stock (at a cost basis of $5.33
per share) under the ESOP. As of June 30, 2004, the market value of the
ESOP shares was $16,605.
5
Stock Awards. The following table sets forth information with respect
to previously awarded stock options to purchase the Common Stock granted to the
named executive officers and held by them as of June 30, 2004. The Company has
not granted to those named executive officers any stock appreciation rights.
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
- -------------------------------------------------------------------------------------------------------
Number of Securities
Shares Underlying Unexercised Value of Unexercised
Acquired Options in-the-Money Options
on Value at FY-End (#) at FY-End ($)
Exercise Realized ------------------------------------------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- -------------------------------------------------------------------------------------------------------
Richard Kauzlaric -- -- 10,180 -- $144,513(1) (2) --(1)(2)
Richard P. Gallegos -- -- 12,500 -- $145,000(3) --(3)
Jerry R. Spurlin -- -- -- -- -- --
Leonard C. Scalzi -- -- 7,000 1,750 $ 80,500(4) 20,125(4)
- -------------------------
(1) Based upon an exercise price of $7.40 per share for 7,623 exercisable
shares and a closing price of $22.50 at June 30, 2004.
(2) Based upon an exercise price of $11.00 per share for 2,557 exercisable
shares and a closing price of $22.50 at June 30, 2004.
(3) Based upon an exercise price of $10.90 per share and a closing price of
$22.50 at June 30, 2004.
(4) Based upon an exercise price of $11.00 per share and a closing price of
$22.50 at June 30, 2004.
Change in Control Agreements. The Bank entered into separate change in
control severance agreements with Messrs Gallegos, Spurlin and Scalzi for a term
of three years. If the Bank terminates any of these three executives absent a
change in control of the Bank, such individuals will not be entitled to any
severance payments. In the event of the termination of employment in connection
with any change in control of the Bank or the Company, such individuals will
each be paid a lump sum amount equal to 200% times the base annual salary in
effect as of the end of the calendar year prior to the date of termination of
employment. In the event of a change of control as of June 30, 2004, Messrs.
Gallegos, Spurlin and Scalzi would have received approximately $254,840,
$183,200, and $163,000, respectively.
Director Compensation. Each member of the Board of Directors of the
Company receives an annual retainer of $3,000 plus $100 per regular or special
board meeting attended. Each member of the Board of Directors of the Bank who
attends a minimum of ten regular meetings receives an annual fee of $14,400. The
Chairman of the Board of the Bank receives an additional fee of $6,000.
Committee members receive fees of $100 per meeting attended with the exceptions
of the Audit Committee, for which members receive $300 per meeting attended, and
the Management Loan Committee, for which members receive $250 per meeting
attended. No board or committee fees are paid to board members who are also
employees. During the fiscal year ended June 30, 2004, the Company paid a total
of $152,650 in director fees.
Item 11. Security Ownership of Certain Beneficial Owners and Management and
- --------------------------------------------------------------------------------
Related Stockholder Matters
---------------------------
(a) Security Ownership of Certain Beneficial Owners
Persons and groups owning in excess of 5% of the Common Stock are
required to file certain reports regarding such ownership pursuant to the
Exchange Act. The following table sets forth, as of June 30, 2004, persons or
groups who own more than 5% of the Common Stock. Other than as noted below,
management knows of no person or group that owns more than 5% of the outstanding
shares of Common Stock at June 30, 2004.
6
Percent of Shares of
Amount and Nature of Common Stock
Name and Address of Beneficial Owner Beneficial Ownership Outstanding(%)
- ------------------------------------ -------------------- --------------
Gallup Federal Savings Bank Employee Stock
Ownership Plan (the "ESOP")
221 West Aztec Avenue, Gallup, New Mexico 96,896(1) 8.5
Lance S. Gad
1250 Fence Row Drive
Fairfield, Connecticut 06430 82,126(2) 7.2
Charles L. Parker, Jr.
221 West Aztec Avenue
Gallup, New Mexico 87,313 7.6
Richard C. Kauzlaric
221 West Aztec Avenue
Gallup, New Mexico 129,476 11.3
George S. Perce
221 West Aztec Avenue
Gallup, New Mexico 87,333 7.6
- ----------------------------------
(1) The ESOP purchased such shares for the exclusive benefit of ESOP
participants with funds borrowed from the Company. These shares are held in
a suspense account and are allocated among ESOP participants annually on
the basis of compensation as the ESOP debt is repaid. The ESOP Trustee must
vote all shares allocated to participant accounts under the ESOP as
directed by participants. Unallocated shares and shares for which no timely
voting directors is received will be voted by the ESOP Trustee as directed
by the ESOP Committee. As of the record date, 77,414 shares have been
allocated under the ESOP to participant accounts.
(2) Based on a Schedule 13G filed on February 10, 1998.
7
(b) Security Ownership of Management
The following table sets forth the beneficial ownership of the
Company's common stock as June 30, 2004 by each director and each executive
officer named in the Summary Compensation Table as well as for all directors and
executive officers as a group.
Shares of
Common Stock
Beneficially Percent
Name Owned (1) Owned(%)
- ---- ---------- --------
Michael P. Mataya 29,800 2.6
Charles L. Parker, Jr. 87,313 (2) 7.6
George S. Perce 87,333 (2) 7.6
Richard C. Kauzlaric 129,476 11.3
Vernon I. Hamilton 55,907 4.8
James Nechero, Jr. 56,820 4.9
Richard P. Gallegos 26,497 2.0
Jerry R. Spurlin 38,669 3.2
Leonard C. Scalzi 12,528 1.1
Directors and executive officers as a 588,542 47.5
group (10 persons)
- ---------------
(1) Includes the following number of shares that may be acquired within 60 days
of June 30, 2004 by the exercise of options: Hamilton - 9,096; Nechero -
9,457; Mataya - 8,927; Parker - 9,265; Perce - 9,289; Kauzlaric - 10,180;
Gallegos - 12,500; and Scalzi - 7,000.
(2) Excludes 19,481 shares of Common Stock held under the ESOP for which such
individual serves as either an ESOP Trustee or as a member of the ESOP
Committee. Beneficial ownership is disclaimed with respect to such ESOP
shares held in a fiduciary capacity.
(c) Changes in Control. On August 25, 2004, the Company announced that it
had signed a definitive merger agreement with First Federal Banc of the
Southwest, Inc. ("FFBSW"), the holding company for First Federal Bank,
Roswell, New Mexico, pursuant to which the Company will merge with and
into FFBSW.
Under the terms of the agreement, upon consummation of the merger of
the Company into FFBSW, each outstanding share of the Company's common stock
will be converted into the right to receive either $20.00 in cash or FFBSW
common stock, at the election of the holder, subject to an overall requirement
that 51% of the Company's total outstanding common stock be exchanged for stock.
The transaction is subject to various conditions, including stockholder approval
of both the Company and FFBSW, and approval by the applicable banking regulatory
agencies.
Pursuant to the terms of the merger agreement, FFBSW has agreed to
register FFBSW's common stock under the Securities Exchange Act of 1934 and it
will file reports with the Securities and Exchange Commission. In addition, upon
the completion of the merger, its shares are expected to be listed on the
NASDAQ.
8
Management of the Company knows of no other arrangements, including any
pledge by any person of securities of the Company, the operation of which may at
a subsequent date result in a change in control of the Company.
(d) Securities Authorized for Issuance Under Equity Compensation Plans
Set forth below is information as of June 30, 2004 with respect to
compensation plans under which equity securities of the Company are authorized
for issuance.
EQUITY COMPENSATION PLAN INFORMATION
(a) (b) (c)
Weighted- Number of securities
Number of securities average exercise remaining available for
to be issued upon price of future issuance under
exercise of outstanding equity compensation plans
outstanding options, options, warrants (excluding securities
warrants and rights and rights reflected in column (a))
-------------------- ---------- ------------------------
Equity compensation plans
approved by shareholder:
1995 Stock Option Plan....... 88,349 $ 8.48 58,680
Management Stock
Bonus Plan.............. 5,135 -- 20,077
2000 Stock Option Plan....... -- N/A 58,500
Equity compensation plans
not approved by shareholders:
Directors Stock
Compensation Plan (1).... 11,946 11.00 --
------- ------- -------
TOTAL....................... 105,430 $ 8.35 137,257
======= ======= =======
- ---------------
(1) Plan approved by the Company's board of directors on March 22, 2000.
9
Item 12. Certain Relationships and Related Transactions
- -------- ----------------------------------------------
The Bank, like many financial institutions, grants loans to its
officers and directors. All loans by the Bank to its directors and executive
officers are subject to OTS regulations restricting loans and other transactions
with affiliated persons of the Company. Savings institutions are permitted to
make loans to executive officers, directors and principal shareholders
("insiders") on preferential terms, provided the extension of credit is made
pursuant to a benefit or compensation program of the Bank that is widely
available to employees of the Bank or its affiliates and does not give
preference to any insider over other employees of the Bank or affiliate. As part
of the Bank's compensation program, the Bank sets the interest rate for loans
approved for full-time employees, officers and directors for personal,
non-business purposes at a rate which is 1% lower than the rate for
non-employees for the same type of loan, as long as the resulting interest rate
is not lower than the Bank's cost of funds. Such rates are only effective while
such persons are employees, officers, or directors of the Bank. Upon
termination, resignation or retirement, the rate reverts to the market rate that
existed at the time the loan is granted. All other loans to insiders have been
made in the ordinary course of business, and on substantially the same terms and
conditions, including interest rates and collateral, as those prevailing at the
time for comparable transactions with the Bank's other customers, and do not
involve more than the normal risk of collectibility, nor present other
unfavorable features.
Set forth below is certain information relating to loans made on
preferential terms to executive officers and directors of the Company and the
Bank whose total aggregate loan balances on preferential terms exceeded $60,000
at any time during the year ended June 30, 2004.
Original Prevailing Unpaid
Name of Officer or Date Loan Rate Employee Balance
Director Type of Loan Originated Amount ($) (%)(1) Rate (%) 06/30/04 ($)
- ---------------------- --------------------- ---------- ---------- ------ --------- ------------
James Nechero, Jr. Home Mortgage 03/12/98 112,000 6.63 5.63 0
Michael P. Mataya 196,535
Revocable Trust Home Mortgage 03/04/03 260,000 5.13 4.13
Michael P. Mataya Automobile 02/20/03 9,054 10.50 9.50 0
Jerry R. Spurlin Home Mortgage 03/31/03 129,000 5.63 4.63 126,616
Jerry R. Spurlin Home Equity Line
of Credit 4/23/97 17,000 6.00 5.00 15,967
William W. Head, Jr. Home Mortgage 10/05/01 132,000 6.00 5.00 107,772
William W. Head, Jr. Home Equity Line
of Credit 5/22/00 20,000 6.00 5.00 6,029
William W. Head, Jr. Automobile 6/24/03 22,050 5.50 4.50 0
Charles L. Parker, Jr. Home Mortgage 04/16/03 400,000 5.13 4.13 340,559
Richard P. Gallegos Home Mortgage 04/16/03 124,000 5.13 4.13 107,838
- ---------------
(1) Prevailing rate at time of origination for fixed-rate loans or at last rate
adjustment for variable-rate loans.
10
Item 13. Exhibits
- -------- ---------
The following exhibits are included in this Report or are incorporated
herein by reference.
2.1 Agreement and Plan of Merger, dated as of August 25, 2004, between GFSB Bancorp,
Inc. and First Federal Banc of the Southwest, Inc.*
3.1 Certificate of Incorporation of GFSB Bancorp, Inc.**
3.2 Bylaws of GFSB Bancorp, Inc.**
10.1+ 1995 Stock Option Plan***
10.2+ Management Stock Bonus Plan***
10.3+ Form of Directors Deferred Compensation Agreement between the Bank and
Directors****
10.4+ Form of Directors Stock Compensation Plan between the Company and Directors of
the Company****
10.5+ 2000 Stock Option Plan*****
10.6+ Change-in-Control Severance Agreement with Richard P. Gallegos******
10.7+ Change-in-Control Severance Agreement with Jerry R. Spurlin******
10.8+ Change-in-Control Severance Agreement with William W. Head, Jr.******
10.9+ Change-in-Control Severance Agreement with Leonard C. Salzi******
21 Subsidiaries of the Company (See "Item 1 - Description of Business")
23 Consent of Neff + Ricci LLP******
31.1 Rule 13a-14(a)/15d-14(a) Certification
31.2 Rule 13a-14(a)/15d-14(a) Certification
32 Section 1350 Certification
- --------------
+ Management contract or compensatory plan or arrangement.
* Incorporated herein by reference to the identically numbered exhibit to
the current report on Form 8-K filed with the SEC on August 26, 2004.
** Incorporated herein by reference to the Registration Statement on Form
S-1 of the Company (File No. 33-90400) initially filed with the
Commission on March 17, 1995.
*** Incorporated by reference to the identically numbered exhibits of the
Annual Report on Form 10-KSB for the fiscal year ended June 30, 1997
(File No. 0-25854) filed with the SEC.
**** Incorporated by reference to the identically numbered exhibits of the
Quarterly Report on Form 10- QSB for the quarter ended March 31, 2001
filed with the SEC.
***** Incorporated by reference to Exhibit 4.1 to the Registration Statement
on Form S-8 (File No. 333- 51498) filed with the SEC on December 8,
2000.
****** Incorporated by reference to Annual Report on Form 10-KSB for the
fiscal year ended June 30, 2004 as filed September 27, 2004.
Item 14. Principal Accountant Fees and Services
- -------- --------------------------------------
The aggregate fees billed by Neff + Ricci for professional services
rendered for the audit of the Company's consolidated annual financial statements
and for the reviews of the financial statements included in the Company's
quarterly reports on Forms 10-QSB for the fiscal years ended June 30, 2003 and
June 30, 2004 were $42,102 and $46,511, respectively.
11
Audit Related Fees.
There were no fees billed by Neff + Ricci for assurance and related
services related to the performance of the audit of the Company's annual
financial statements and to the review of the financial statements in the
Company's Form 10-QSB filings for the years ended June 30, 2004 and 2003.
Tax Fees.
The aggregate fees billed by Neff + Ricci for professional services
rendered for tax compliance, tax advice and tax planning for the years ended
June 30, 2004 and 2003 were $5,394 and $6,207, respectively. Such tax-related
services consisted in both years of tax return preparation and consultation.
All Other Fees
The aggregate fees billed by Neff + Ricci to the Company and its
consolidated subsidiary for services or products other than those listed under
the captions "Audit Fees," "Audit Related Fees" and "Tax Fees" totaled $5,299
for the year ended June 30, 2004 and consisted of tax valuations. There were no
"other fees" billed by Neff + Ricci for the year ended June 30, 2003.
12
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Company
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized on October 26, 2004.
GFSB BANCORP, INC.
By: /s/Richard C. Kauzlaric
----------------------------------
Richard C. Kauzlaric
President
(Duly Authorized Representative)
CERTIFICATION
I, Richard C. Kauzlaric, certify that:
1. I have reviewed this Form 10-KSB/A of GFSB Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the Company as of, and for, the periods presented in this report;
4. The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rule 13a-15(e)) for the Company and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the Company, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared; and
(b) Evaluated the effectiveness of the Company's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation.
(c) Disclosed in this report any change in the Company's internal
control over financial reporting that occurred during the
Company's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting; and
5. The issuer's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f)), to the issuer's auditors
and the audit committee of the issuer's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
issuer's ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the issuer's
internal control over financial reporting.
Date: October 26, 2004 /s/Richard C. Kauzlaric
-----------------------------------
Richard C. Kauzlaric
President
CERTIFICATION
I, Jerry R. Spurlin, certify that:
1. I have reviewed this Form 10-KSB/A of GFSB Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the Company as of, and for, the periods presented in this report;
4. The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rule 13a-15(e)) for the Company and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the Company, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared; and
(b) Evaluated the effectiveness of the Company's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation.
(c) Disclosed in this report any change in the Company's internal
control over financial reporting that occurred during the
Company's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting; and
5. The issuer's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f)), to the issuer's auditors
and the audit committee of the issuer's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
issuer's ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the issuer's
internal control over financial reporting.
Date: October 26, 2004 /s/Jerry R. Spurlin
----------------------------------
Jerry R. Spurlin
Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of GFSB Bancorp, Inc. (the "Company") on
Form 10-KSB/A for the year ended June 30, 2004 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), we, Richard C. Kauzlaric,
President, and Jerry R. Spurlin, Chief Financial Officer, certify, pursuant to
18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of section 13(a) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/Richard C. Kauzlaric /s/Jerry R. Spurlin
- ---------------------------------- -----------------------------------
Richard C. Kauzlaric Jerry R. Spurlin
President Chief Financial Officer
October 26, 2004
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2004
-----------------
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE EXCHANGE ACT
For the transition period from ________ to ________
Commission file number: 0-25854
GFSB BANCORP, INC.
----------------------------------------------
(Name of Small Business Issuer in its Charter)
Delaware 85-0430841
- --------------------------------------------- ----------------
(State or Other Jurisdiction of Incorporation (I.R.S. Employer
or Organization) Identification No.)
221 West Aztec Avenue, Gallup, New Mexico 87301
- ----------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (505) 726-6500
--------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
--- ---
As of January 31, 2005, there were issued and outstanding 1,146,645 shares of
the registrant's Common Stock.
Transitional Small Business Disclosure format:
Yes No X
--- ---
GFSB Bancorp, Inc.
Index
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Statements of Financial Condition
December 31, 2004 and June 30, 2004 3
Condensed Consolidated Statements of Earnings and Comprehensive Earnings
Three and six months ended December 31, 2004 and December 31, 2003 4
Condensed Consolidated Statements of Cash Flows
Three and six months ended December 31, 2004 and December 30, 2003 6
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis or Plan of Operation 9
Item 3. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits 18
Signatures 20
2
GFSB Bancorp, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, June 30,
2004 2004
------------- -------------
(Unaudited)
ASSETS
Cash and due from banks $ 6,277,306 $ 7,840,712
Interest-bearing deposits with banks 362,790 866,281
Available-for-sale investment securities 27,909,821 30,518,828
Available-for-sale mortgage-backed securities 26,453,935 30,680,195
Held-to-maturity investment securities 389,999 398,999
Stock of Federal Home Loan Bank, at cost, restricted 3,625,900 4,409,200
Loans receivable, net, substantially pledged 148,419,879 152,430,322
Loans held-for-sale - 411,400
Accrued interest and dividends receivable 807,214 859,298
Premises and equipment 2,410,835 2,513,992
Other real estate and repossessed property 283,405 437,211
Prepaid and other assets 184,230 445,847
Deferred tax asset 131,886 275,125
------------- -------------
TOTAL ASSETS $ 217,257,200 $ 232,087,410
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Transaction and NOW accounts $ 28,571,724 $ 28,987,811
Savings and MMDA deposits 21,128,121 21,501,954
Time deposits 81,889,595 83,369,991
Advances from Federal Home Loan Bank 60,467,614 73,652,218
Other secured borrowings 4,539,209 4,814,763
Repurchase agreements 269,699 157,119
Accrued interest payable 455,225 460,520
Advances from borrowers for taxes and insurance 370,784 499,998
Accounts payable and accrued liabilities 310,734 369,595
Dividends declared and payable 138,459 140,895
------------- -------------
TOTAL LIABILITIES 198,141,164 213,954,864
------------- -------------
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value, 500,000
shares authorized; no shares issued or
outstanding - -
Common stock, $.10 par value, 1,500,000
shares authorized; 1,146,645 issued and outstanding
at December 31, 2004 and June 30, 2004 114,665 114,665
Additional paid-in-capital 3,237,565 3,095,718
Unearned ESOP stock (23,729) (68,048)
Retained earnings, substantially restricted 14,959,391 14,440,118
Accumulated other comprehensive earnings 828,144 550,093
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 19,116,036 18,132,546
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 217,257,200 $ 232,087,410
============= =============
See notes to condensed consolidated financial statements.
3
GFSB Bancorp, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE EARNINGS
Three months ended Six months ended
December 31, December 31,
-------------------------- -------------------------
2004 2003 2004 2003
-------------------------- -------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Interest income
Loans receivable
Mortgage loans $ 1,972,742 $ 2,022,098 $ 3,961,861 $ 4,067,122
Commercial loans 411,366 407,690 801,667 736,528
Share and consumer loans 99,522 106,761 203,975 215,330
Investment and mortgage-backed securities 462,274 526,977 933,614 1,026,179
Other interest-earning assets 23,009 23,106 44,063 48,578
----------- ----------- ----------- -----------
TOTAL INTEREST EARNINGS 2,968,913 3,086,632 5,945,180 6,093,737
Interest expense
Deposits 598,099 746,607 1,206,365 1,499,767
Advances from Federal Home Loan Bank 591,493 671,778 1,208,878 1,377,416
Repurchase agreements 1,019 37 1,258 141
----------- ----------- ----------- -----------
TOTAL INTEREST EXPENSE 1,190,611 1,418,422 2,416,501 2,877,324
----------- ----------- ----------- -----------
NET INTEREST EARNINGS 1,778,302 1,668,210 3,528,679 3,216,413
Provision for loan losses 60,000 70,014 60,000 130,014
----------- ----------- ----------- -----------
NET INTEREST EARNINGS AFTER
PROVISION FOR LOAN LOSSES 1,718,302 1,598,196 3,468,679 3,086,399
----------- ----------- ----------- -----------
Non-interest earnings
Income from real estate operations 5,050 1,350 8,499 3,550
Miscellaneous income 16,304 52,195 36,670 65,876
Net loss from sales of available for sale securities - (1,417) -- (1,417)
Net gains from sales of loans 15,262 19,490 30,337 30,274
Service charge income 219,512 177,542 435,281 348,090
----------- ----------- ----------- -----------
TOTAL NON-INTEREST EARNINGS 256,128 249,160 510,787 446,373
----------- ----------- ----------- -----------
Non-interest expense
Compensation and benefits 683,502 635,466 1,269,394 1,221,589
FDIC insurance 14,535 4,822 29,718 9,552
Insurance 15,107 11,703 32,336 24,911
Stock services 5,379 13,380 9,716 19,965
Occupancy 126,413 138,260 245,796 273,087
Data processing 90,841 94,376 191,673 183,860
Professional fees 127,386 60,353 337,716 105,924
Advertising 41,643 49,506 91,526 106,556
Stationary, printing and office supplies 25,625 30,166 50,546 61,071
ATM expense 23,618 19,462 49,060 34,040
Supervisory exam fees 23,916 14,585 47,832 29,170
Postage 11,328 19,555 24,831 38,841
Other 154,795 96,932 257,731 197,405
----------- ----------- ----------- -----------
TOTAL NON-INTEREST EXPENSE 1,344,088 1,188,566 2,637,875 2,305,971
----------- ----------- ----------- -----------
4
GFSB Bancorp, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE EARNINGS - CONTINUED
Three months ended Six months ended
December 31, December 31,
------------------------- -------------------------
2004 2003 2004 2003
------------------------- -------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
EARNINGS BEFORE INCOME TAXES $ 630,342 $ 658,790 $ 1,341,591 $ 1,226,801
Income tax expense
Currently payable 303,446 263,582 540,527 504,749
Deferred provision - (105,000) - (105,000)
----------- ----------- ----------- -----------
303,446 158,582 540,527 399,749
----------- ----------- ----------- -----------
NET EARNINGS $ 326,896 $ 500,208 $ 801,064 $ 827,052
=========== =========== =========== ===========
Other Comprehensive Earnings
Unrealized (loss) gain, net of tax (56,038) (75,211) 278,051 (272,075)
----------- ----------- ----------- -----------
COMPREHENSIVE EARNINGS $ 270,858 $ 424,997 $ 1,079,115 $ 554,977
=========== =========== =========== ===========
Earnings per common share
Basic $ 0.29 $ 0.44 $ 0.70 $ 0.74
=========== =========== =========== ===========
Weighted average number of common shares outstanding
Basic 1,136,166 1,125,105 1,138,046 1,123,414
=========== =========== =========== ===========
Earnings per common share
Diluted $ 0.27 $ 0.42 $ 0.67 $ 0.70
=========== =========== =========== ===========
Weighted average number of common shares outstanding
Diluted 1,196,326 1,179,896 1,200,122 1,177,867
=========== =========== =========== ===========
Comprehensive earnings per common share
Basic $ 0.24 $ 0.38 $ 0.95 $ 0.49
=========== =========== =========== ===========
Diluted $ 0.23 $ 0.36 $ 0.90 $ 0.47
=========== =========== =========== ===========
Dividends per share $ 0.125 $ 0.125 $ 0.250 $ 0.235
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
5
GFSB Bancorp, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
Six Months Ended
December 31,
----------------------------
2004 2003
------------ ------------
(Unaudited) (Unaudited)
Cash flows from operating activities
Net earnings $ 801,064 $ 827,052
Adjustments to reconcile net earnings to
net cash provided by operations
Deferred loan origination fees (284,187) (281,515)
Gain on sale of loans and securities (30,337) (28,857)
Provision for loan losses 60,000 130,014
Depreciation of premises and equipment 119,076 148,019
Amortization of investment and mortgage-
backed securities premiums 156,002 238,377
Stock dividend on FHLB stock (42,500) (43,700)
Release of ESOP stock 186,167 125,088
Stock compensation under management stock bonus plan 122,539 19,411
(Benefit) for deferred income taxes - (105,000)
Net changes in operating assets and liabilities
Accrued interest and dividends receivable 52,086 (35,791)
Prepaid and other assets 334,688 (6,978)
Accrued interest payable (5,295) (7,085)
Accounts payable and accrued liabilities (181,400) 124,890
Income taxes (receivable) payable (73,072) (38,120)
Dividends declared and payable (2,436) 16,700
------------ ------------
Net cash provided by
operating activities 1,212,395 1,082,505
------------ ------------
Cash flows from investing activities
Purchase of premises and equipment (15,919) (456,714)
Loan originations and principal
repayment on loans, net 4,086,674 (13,044,462)
Change in other secured borrowings (412,428) 2,896,808
Proceeds from the sale of loans 743,500 1,980,073
Principal payments on mortgage-backed
securities 4,158,022 9,006,531
Principal payments on available-for-sale securities 1,938,446 943,672
Principal payments on held-to-maturity securities 9,000 7,000
Purchases of mortgage-backed securities - (3,420,353)
Purchases of available-for-sale securities (2,995,915) (5,277,976)
Maturities and proceeds from sale of
available-for-sale securities 4,000,000 700,000
Maturities and proceeds from sale of held-to-maturity securites - 270,000
Redemption (purchase) of FHLB stock 825,800 -
------------ ------------
Net cash provided (used) by
investing activities 12,337,180 (6,395,421)
------------ ------------
6
GFSB Bancorp, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Increase (decrease) in cash and cash equivalents
Six Months Ended
December 31,
-----------------------------
2004 2003
------------- -------------
(Unaudited) (Unaudited)
Cash flows from financing activities
Net increase (decrease) in transaction accounts, passbook
savings, money market accounts, and
certificates of deposit $ (2,270,317) $ 9,943,018
Net increase in Repurchase agreements 112,580 345,107
Net increase in mortgage escrow funds 7,661 16,050
Proceeds from FHLB advances 397,275,000 773,689,296
Repayments on FHLB advances (410,459,604) (777,932,171)
Net increase (decrease) in note payable - 273,750
Dividends paid or to be paid in cash (281,792) (261,634)
Price paid for vested management bonus
stock plan stock - 7,622
------------- -------------
Net cash (used) provided by
financing activities (15,616,472) 6,081,038
------------- -------------
Increase (decrease) in cash and cash equivalents (2,066,897) 768,122
Cash and cash equivalents at beginning of period 8,706,993 7,252,358
------------- -------------
Cash and cash equivalents at end of period $ 6,640,096 8,020,480
============= =============
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest on deposits and advances $ 2,420,537 $ 2,884,268
Income taxes 281,100 437,869
Change in market value, net of deferred taxes on
available-for-sale securities (other comprehensive earnings) 278,051 (272,075)
Dividends declared not yet paid 138,459 139,167
See notes to condensed consolidated financial statements.
7
GFSB BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. The accompanying unaudited condensed consolidated financial
statements were prepared in accordance with the instructions for Form 10-QSB and
therefore do not include all disclosure necessary for a complete presentation of
the consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America. However, all adjustments,
which are, in the opinion of management, necessary for the fair presentation of
the interim financial statements have been included. All such adjustments are of
a normal recurring nature. The condensed consolidated statements of earnings and
comprehensive earnings are not necessarily indicative of results, which may be
expected for the entire year, or for any other interim period.
Certain information and footnote disclosures normally included in the financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. It is suggested
that these condensed unaudited financial statements be read in conjunction with
the Form 10-KSB for the year ended June 30, 2004.
8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The Private Securities Litigation Reform Act of 1995 contains safe harbor
provisions regarding forward-looking statements. When used in this discussion,
the words "believes", "anticipates", "contemplates", "expects", and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those projected. Those risks and uncertainties include
changes in interest rates, risks associated with the ability to control costs
and expenses, and general economic conditions. We undertake no obligation to
publicly release the results of any revisions to those forward-looking
statements that may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
Overview
GFSB Bancorp, Inc. is a savings and loan holding company headquartered in
Gallup, New Mexico, which provides a full range of deposits and traditional
mortgage loan products through its wholly owned banking subsidiary, Gallup
Federal Savings Bank. All references refer collectively to the Company and the
Bank, unless the context indicates otherwise.
Proposed Merger
On August 25, 2004, the Company announced that it had signed a definitive merger
agreement with First Federal Banc of the Southwest, Inc. ("FFBSW"), the holding
company for First Federal Bank, Roswell, New Mexico, pursuant to which the
Company will merge with and into FFBSW.
Under the terms of the agreement, upon consummation of the merger of the Company
into FFBSW, each outstanding share of the Company's common stock will be
converted into the right to receive either $20.00 in cash or FFBSW common stock,
at the election of the holder, subject to an overall requirement that 51% of the
Company's total outstanding common stock be exchanged for stock. The transaction
is subject to various conditions, including stockholder approval of both the
Company and FFBSW, and approval by the applicable banking regulatory agencies.
Pursuant to the terms of the merger agreement, FFBSW has agreed to register
FFBSW's common stock under the Securities Exchange Act of 1934 and it will file
reports with the Securities and Exchange Commission. In addition, upon the
completion of the merger, its shares are expected to be listed on the NASDAQ.
Comparison of Financial Condition at December 31, 2004 and June 30, 2004
Total assets decreased by $14.8 million, or 6.4%, to $217.3 million at December
31, 2004 from $232.1 million at June 30, 2004 primarily due to decreases in
available-for-sale investment and mortgage-backed securities, net loans
receivable, cash and cash equivalents, stock of the Federal Home Loan Bank
("FHLB"), and loans held for sale. The $6.8 million, or 11.2%, decrease in
available-for-sale investment and mortgage-backed securities to $54.4 million at
December 31, 2004 from $61.2 million at June 30, 2004, was the result of normal
monthly principal payments received on the securities owned. Net loans
receivable decreased $4.0 million, or 2.6%, to $148.4 million, at December 31,
2004, from $152.4 million at June 30, 2004, primarily due to normal monthly
principal payments received on the loans. Cash and cash equivalents of $6.6
million held at December 31, 2004 was $2.1 million or 23.7% less than the June
30, 2004 balance of $8.7 million, primarily due to normal daily fluctuations and
a decision by management to reduce the level of cash for the purpose of
increasing profitability through an increase in the level of interest earning
assets and also for the purpose of reducing cash exposure risk. This decrease in
total cash and cash equivalents included a $0.5 million decrease in
interest-bearing deposits with banks, which primarily consists of the Company's
FHLB demand account. The stock of FHLB decreased $0.8 million, or 18.0%, to $3.6
million at December 31, 2004 from $4.4 million at June 30, 2004, primarily due
to quarterly stock
9
redemptions by the FHLB. There were no loans held for sale at December 31, 2004,
while there were $0.4 million in loans held for sale at June 30, 2004, resulting
in a decrease of $0.4 million, or 100.0%. This change was primarily a matter of
timing, as there has been no change in the Company's plan to sell some
longer-term, fixed-rate one- to four-family loans in the secondary market. The
remaining $0.7 million decrease in assets during the six-month period ended
December 31, 2004 was the result of small changes in various asset accounts
including accrued interest and dividends receivable, premises and equipment,
other real estate and repossessed property, deferred tax asset, and prepaid and
other assets.
Total liabilities decreased $15.8 million, or 7.4% mostly due to a decrease in
FHLB advances of $13.2 million or 17.9% to $60.5 million at December 31, 2004,
from $73.7 million at June 30, 2004. Time deposits decreased $2.3 million, or
1.7% to $131.6 million at December 31, 2004 from $133.9 million at June 30,
2004. There were small decreases in transaction and NOW accounts, savings and
MMDA deposits, and time deposits. The remaining $0.3 million decrease in
liabilities was the result of changes in various liability accounts including
other secured borrowings, repurchase agreements, accrued interest payable,
advances from borrowers for taxes and insurance, dividends payable, and accounts
payable and accrued liabilities.
Stockholders' equity increased $1.0 million, or 5.4% to $19.1 million at
December 31, 2004 from $18.1 million at June 30, 2004, primarily due to income
of $801,000 for the six-month period ended December 31, 2004 and to unrealized
gains, net of taxes, in investment and mortgage-backed securities. The Company
paid a cash dividend of $0.125 per share, or $141,000, in the quarter ended
September 30, 2004, and a cash dividend of $0.125 per share, or $141,000, in the
quarter ended December 31, 2004.
10
RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR QUARTER ENDED DECEMBER 31, 2004 COMPARED TO
QUARTER ENDED DECEMBER 31, 2003.
General
Net earnings for the quarter ended December 31, 2004 decreased $173,000 to
$327,000 ($0.27 per diluted share) from $500,000 ($0.42 per diluted share) for
the quarter ended December 31, 2003. The decrease in net earnings is primarily
attributable to a $156,000 increase in non-interest expense and a $145,000
increase in income tax expense partially offset by a $110,000 increase in net
interest earnings, a $7,000 increase in non-interest earnings, and a $10,000
decrease in provision for loan losses. Please refer to "Average Balance Sheets"
for an analysis of the changes in net interest earnings for the quarter ended
December 31, 2004 compared to the quarter ended December 31, 2003.
Average Balance Sheets
The following table sets forth certain information relating to the Company's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated and the average annual yields earned
and rates paid. Average balances are derived from month-end balances. Management
does not believe that the use of month-end balances instead of daily average
balances has caused any material differences in the information presented.
Quarter ended December 31, 2004 Quarter ended December 31, 2003
------------------------------- -------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
(Dollars in Thousands) (Dollars in Thousands)
Interest-earning assets:
Loans receivable (1) $151,344 $2,484 6.57% $158,656 $2,537 6.39%
Investment securities and
mortgage-backed securities 57,035 462 3.24% 65,866 527 3.20%
Other interest-earning
assets (2) 4,069 23 2.26% 5,772 23 1.59%
-------- ------ -------- ------
Total interest-earning assets 212,448 2,969 5.59% 230,294 3,087 5.36%
Non-interest-earning assets 11,500 ------ 10,307 -------
-------- --------
Total assets $223,948 $240,601
======== ========
Interest-bearing liabilities:
Transaction accounts $ 13,144 $ 12 .37% $ 10,858 $ 8 .29%
Passbook savings 9,353 18 .77% 7,094 18 1.01%
Money market accounts 12,695 30 .95% 13,863 32 .92%
Certificates of deposit 82,679 539 2.61% 92,571 689 2.98%
Other liabilities (3) 68,600 592 3.45% 80,884 672 3.32%
-------- ------ -------- ------
Total interest-bearing
liabilities 186,471 1,191 2.55% 205,270 1,419 2.77%
Non-interest bearing ------ ------
liabilities 18,387 17,392
-------- --------
Total liabilities 204,858 222,662
Stockholders' equity 19,090 17,939
-------- --------
Total liabilities and
stockholders' equity $223,948 $240,601
======== ========
11
Net interest earnings $1,778 $1,668
====== ======
Interest rate spread (4) 3.04% 2.59%
==== ====
Net yield on interest-
earning assets (5) 3.35% 2.90%
==== ====
Ratio of average interest-
Earning assets to average
interest-bearing liabilities 1.14X 1.12X
==== ====
(1) Average balances include non-accrual loans.
(2) Includes interest-bearing deposits in other financial institutions.
(3) Other liabilities include FHLB advances, repurchase agreements and other
secured borrowings.
(4) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net yield on interest - earning assets represents net interest income as a
percentage of average interest-earning assets.
Rate/Volume Analysis
The table below sets forth certain information regarding changes in interest
income and interest expense of the Company for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume; (ii)
changes in rates; (iii) changes in rate/volume.
Quarter ended December 31, 2004 vs. 2003
Increase (Decrease)
Due to
----------------------------------
Rate/
Volume Rate Volume Net
------ ---- ------ ---
(Dollars in Thousands)
Interest income:
Loans receivable $(117) $ 71 $ (7) $ (53)
Mortgage-backed securities and
investment securities (71) 7 (1) (65)
Other interest-earning assets (7) 10 (3) -
------ ----- ------ -----
Total interest-earning assets (195) 88 (11) (118)
Interest expense:
Transaction accounts 2 2 - 4
Savings accounts 6 (4) (2) -
Money markets (3) 1 - (2)
3)
Certificates of deposit (73) (86) 9 (150)
Other liabilities (102) 26 (4) 80)
------ ----- ------ -----
Total interest-bearing liabilities (170) (61) 3 (228)
------ ----- ------ -----
Net change in interest income $ (25) $ 149 $ (14) $ 110
====== ===== ====== =====
Provision for Losses on Loans
The Company maintains an allowance for loan losses based upon management's
periodic evaluation of known and inherent risks in the loan portfolio, past loss
experience, adverse situations that may affect the borrower's ability to repay
loans, estimated value of the underlying collateral and current and expected
market conditions. The provision for loan loss was $60,000 and $70,000 for the
quarter ended December 31, 2004 and 2003, respectively. The decrease in the
provision for loan losses for the current quarter compared to the same quarter a
year earlier is primarily due to improvement in loan quality and the fact that
the Company's loan portfolio decreased during the period. While the Company
maintains its allowance for losses at a level that it considers to be adequate,
there can be no assurance that further additions will not be made to the loss
allowances and that such losses will not exceed the estimated amounts.
12
Non-Interest Earnings
Total non-interest earnings increased by $7,000 or 2.8% to $256,000 for the
quarter ended December 31, 2004 from $249,000 for the quarter ended December 31,
2003. This increase was primarily due to a $42,000 increase in service charge
income and a $4,000 increase in income from real estate operations partially
offset by a $36,000 decrease in miscellaneous income and a $3,000 decrease in
net gains from sales of loans and securities.
Non-Interest Expense
Total non-interest expense increased $156,000 or 13.1% to $1,344,000 for the
quarter ended December 31, 2004 from $1,188,000 for the quarter ended December
31, 2003. The increase in non-interest expense was primarily attributable to
increases in professional fees, other expense, compensation and benefits, FDIC
insurance expense, supervisory exam fees, ATM expense, and insurance expense,
partially offset by decreases in occupancy, stock services, advertising,
postage, stationery, printing and office supplies, and data processing. The
$67,000 increase in professional fees for the quarter ended December 31, 2004 is
primarily attributable to a $47,000 increase in legal fees and a $20,000
increase in other professional services in connection with the Agreement and
Plan of Merger between the Company and First Federal Banc of the Southwest, Inc.
announced on August 25, 2004. The $58,000 increase in other expense is primarily
attributable to a $29,000 increase in loan expense and a $20,000 loss on sale of
other real estate owned. Compensation and benefits increased $48,000, primarily
attributable to early vesting of restricted stock as a result of the filing of
the Agreement and Plan of Merger between the Company and First Federal Banc of
the Southwest, Inc. announced on August 25, 2004. The $10,000 increase in FDIC
insurance was primarily due to an increase in the FDIC assessment. The $9,000
increase in supervisory exam fees was primarily due to an increase in the Office
of Thrift Supervision supervisory exam fees assessment. The $4,000 increase in
ATM expense is primarily attributable to an increase in the volume of ATM
transactions. Insurance expense increased $3,000 due to a general increase in
premium rates for property and casualty insurance. Occupancy expense decreased
$12,000 primarily due to a decrease in depreciation expense for furniture,
fixtures and equipment.
Borrowings
The Company may obtain advances from the FHLB of Dallas to supplement its supply
of funds available for loans and investments. Advances from the FHLB are
typically secured by a pledge of the Company's stock in the FHLB, a portion of
the Company's first mortgage loans and certain other assets. Each FHLB credit
program has its own interest rate, which may be fixed or variable, and range of
maturities. The Company, if the need arises, may also access the Federal Reserve
Bank discount window to supplement its supply of funds available for loans and
investments and to meet deposit withdrawal requirements. For the quarters ended
December 31, 2004 and December 31, 2003, borrowings with the FHLB averaged
$61,510,895 and $72,307,668, respectively. The approximate weighted average rate
paid on borrowings was 3.45% and 3.32% for the quarter ended December 31, 2004
and December 31, 2003, respectively.
13
RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE SIX-MONTH PERIOD ENDED DECEMBER 31, 2004
COMPARED TO THE SIX-MONTH PERIOD ENDED DECEMBER 31, 2003.
General
Net earnings for the six-month period ended December 31, 2004 decreased $26,000
to $801,000 compared to net earnings of $827,000 for the six-month period ended
December 31, 2003. The decrease in net earnings was primarily the result of a
$332,000 increase in non-interest expense and a $141,000 increase in income tax
expense partially offset by increases in net interest earnings of $312,000 and
non-interest earnings of $64,000 and a $70,000 decrease in provision for loan
losses. Please refer to "Average Balance Sheets" for an analysis of the change
in net interest earnings for the six-month period ended December 31, 2004
compared to the six-month period ended December 31, 2003.
Average Balance Sheets
The following table sets forth certain information relating to the Company's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated and the average yields earned and rates
paid. Average balances are derived from month-end balances. Management does not
believe that the use of month-end balances instead of daily average balances has
caused any material differences in the information presented.
Six-month period ended Six-month period ended
---------------------- ----------------------
December 31, 2004 December 31, 2003
----------------- -----------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
(Dollars in Thousands) (Dollars in Thousands)
Interest-earning assets:
Loans receivable (1) $151,770 $4,966 6.54% $155,676 $5,019 6.45%
Investment securities and
Mortgage-backed securities 58,602 934 3.19% 66,611 1,026 3.08%
Other interest-earning
assets (2) 4,496 44 1.96% 5,275 49 1.86%
-------- ------ -------- ------
Total interest-earning assets 214,868 5,944 5.53% 227,562 6,094 5.36%
Non-interest-earning assets 11,649 ------ 10,577 ------
-------- --------
Total assets $226,517 $238,139
======== ========
Interest-bearing liabilities:
Transaction accounts $12,966 $ 23 .35% $10,370 $ 18 .35%
Passbook savings 9,140 35 .77% 6,768 34 1.00%
Money market accounts 12,906 61 .95% 12,767 58 .91%
Certificates of deposit 67,318 1,087 3.23% 90,844 1,389 3.06%
Other liabilities (3) 70,879 1,210 3.41% 82,303 1,378 3.35%
-------- ------ -------- ------
Total interest-bearing
liabilities 173,209 2,416 2.79% 203,052 2,877 2.83%
Non-interest bearing ------ ------
liabilities 34,463 17,326
-------- --------
Total liabilities 207,672 220,378
Stockholders' equity 18,845 17,761
-------- --------
Total liabilities and
Stockholders' equity $226,517 $238,139
======== ========
14
Net interest income $3,528 $3,217
====== ======
Interest rate spread (4) 2.74% 2.53%
==== ====
Net yield on interest-
earning assets (5) 3.28% 2.83%
==== ====
Ratio of average interest-
earning assets to average
interest-bearing liabilities 1.24X 1.12X
==== ====
(1) Average balances include non-accrual loans.
(2) Includes interest-bearing deposits in other financial institutions
(3) Other liabilities include FHLB advances, repurchase agreements and other
secured borrowings. The FHLB borrowings are adversely affecting the
Company's net interest earnings because some of them bear fixed interest
rates that are above current market rates. These borrowings will continue
to adversely affect net interest earnings unless paid off early, at a
significant penalty, or unless market rates increase.
(4) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net yield on interest - earning assets represents net interest income as a
percentage of average interest-earning assets.
Rate/Volume Analysis
The table below sets forth certain information regarding changes in interest
income and interest expense of the Company for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume; (ii)
changes in rates; and (iii) changes in rate/volume.
Six-month period ended
December 31, 2004 vs. 2003
Increase (Decrease)
Due to
-----------------------------------
Rate/
Volume Rate Volume Net
------ ---- ------ ---
(Dollars in Thousands)
Interest income:
Loans receivable $(126) $ 70 $ 3 $ (53)
Mortgage-backed securities and
investment securities (123) 37 (6) (92)
Other interest-earning assets (7) 3 (1) (5)
----- ----- ----- -----
Total interest-earning assets (256) 110 (4) (150)
----- ----- ----- -----
Interest expense:
Transaction accounts 4 - 1 5
Savings accounts 12 (8) (3) 1
Money markets 1 3 (1) 3
Certificates of deposit (360) 77 (19) (302)
Other liabilities (191) 25 (2) (168)
----- ----- ----- -----
Total interest-bearing liabilities (534) 97 (24) (461)
----- ----- ----- -----
Net change in interest income $ 278 $ 13 $ 20 $ 311
===== ===== ===== =====
Provision for Losses on Loans
The Company maintains an allowance for loan losses based upon management's
periodic evaluation of known and inherent risks in the loan portfolio, past loss
experience, adverse situations that may affect the borrower's ability to repay
loans, estimated value of the underlying collateral, and current and expected
market conditions.
15
The provision for loan losses was $60,000 and $130,000 for the six-month period
ended December 31, 2004 and 2003, respectively. See "Comparison of Operating
Results for the quarter ended December 31, 2004 compared to quarter ended
December 31, 2003 - Provision for Losses on Loans."
Non-Interest Earnings
Total non-interest earnings increased by $64,000 or 14.4% to $511,000 for the
six-month period ended December 31, 2004 from $446,000 for the six-month period
ended December 31, 2003. This increase was primarily due to an increase in
service charge income of $87,000 and an increase of $5,000 in income from real
estate operations partially offset by a decrease in miscellaneous income of
$29,000. The decrease in miscellaneous income is primarily due to gains on the
sale of other real estate owned in the six-month period ended December 31, 2003.
The increase in service charge income is primarily due to increased account
analysis service charges and increased insufficient funds charges collected on
NOW and checking accounts.
Non-Interest Expense
Total non-interest expense increased $332,000, or 14.4%, to $2,638,000 for the
six-month period ended December 31, 2004 from $2,306,000 for the six-month
period ended December 31, 2003. The increase in non-interest expense was
primarily attributable to increases in professional fees, other expenses,
compensation and benefits, FDIC insurance, supervisory exam fees, ATM expense,
data processing and insurance, partially offset by decreases in occupancy,
advertising, postage, stationery, printing and office supplies, and stock
services. The $232,000 increase in professional fees for the six-month period
ended December 31, 2004 is primarily attributable to a $156,000 increase in
legal fees and a $71,000 increase in other professional services in connection
with the Agreement and Plan of Merger between the Company and First Federal Banc
of the Southwest, Inc. announced on August 25, 2004 The $60,000 increase in
other expense is primarily attributable to a $45,000 increase in loan expense
and $22,000 in losses on sale of other real estate owned, partially offset by
small decreases in several other expense items. Compensation and benefits
increased $48,000, primarily attributable to early vesting of restricted stock
as a result of the filing of the Agreement and Plan of Merger between the
Company and First Federal Banc of the Southwest, Inc. announced on August 25,
2004. The $20,000 increase in FDIC insurance was primarily due to an increase in
the FDIC assessment. The $19,000 increase in supervisory exam fees was primarily
due to an increase in the Office of Thrift Supervision supervisory exam fees
assessment. The $15,000 increase in ATM expense is primarily attributable to an
increase in the volume of ATM transactions. Data processing costs increased by
$8,000, primarily due to growth in the number of deposit accounts and
transaction volume increases. Insurance expense increased $7,000 due to a
general increase in premium rates for property and casualty insurance. Occupancy
expense decreased $27,000 primarily due to a decrease in depreciation expense
for furniture, fixtures and equipment.
Borrowings
The Company may obtain advances from the FHLB of Dallas to supplement its supply
of funds available for loans and investments. Advances from the FHLB are
typically secured by a pledge of the Company's stock in the FHLB, a portion of
the Company's first mortgage loans and certain other assets. Each FHLB credit
program has its own interest rate, which may be fixed or variable, and range of
maturities. The Company, if the need arises, may also access the Federal Reserve
Bank discount window to supplement its supply of funds available for loans and
investments and to meet deposit withdrawal requirements. For the six-month
period ended December 31, 2004 and December 31, 2003, borrowings with the FHLB
averaged $63,900,571 and $72,573,899, respectively. The approximate weighted
average rate paid on borrowings was 3.41% and 3.35% for the six-month period
ended December 31, 2004 and December 31, 2003, respectively.
16
Item 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. The Company's
management evaluated, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, the effectiveness of
the Company's disclosure controls and procedures as of the end of the
period covered by this report. Based on such evaluation, the Company's
principal executive officer and the principal financial officer have
concluded that such disclosure controls and procedures are effective
to ensure that information required to be disclosed by the Company in
reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms.
(b) Changes in internal control over financial reporting. During the
quarter under report, there was no change in the Company's internal
control over financial reporting that has materially affected, or is
reasonably likely to materially affect, the Company's internal control
over financial reporting.
17
PART II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings
-----------------
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
-----------------------------------------------------------
Not applicable.
Item 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable.
Item 5. Other Information
-----------------
Not applicable.
Item 6. Exhibits
--------
(a) List of Exhibits
2.1 Agreement and Plan of Merger, dated as of August 25, 2004, between
GFSB Bancorp, Inc. and First Federal Banc of the Southwest, Inc.*
3.1 Certificate of Incorporation of GFSB Bancorp, Inc.**
3.2 Bylaws of GFSB Bancorp, Inc.**
10.1+ 1995 Stock Option Plan***
10.2+ Management Stock Bonus Plan***
10.3+ Form of Directors Deferred Compensation Agreement between the Bank
and Directors****
10.4+ Form of Directors Stock Compensation Plan between the Company and
Directors of the Company****
10.5+ 2000 Stock Option Plan*****
10.6+ Change-in-Control Severance Agreement with Richard P. Gallegos******
10.7+ Change-in-Control Severance Agreement with Jerry R. Spurlin******
10.8+ Change-in-Control Severance Agreement with William W. Head, Jr.******
10.9+ Change-in-Control Severance Agreement with Leonard C. Scalzi******
31.1 Rule 13a-14(a)/15d-14(a) Certification
31.2 Rule 13a-14(a)/15d-14(a) Certification
32 Section 1350 Certification
- ---------
+ Management contract or compensatory plan or arrangement.
* Incorporated herein by reference to the identically numbered exhibit to
the current report on Form 8-K filed with the SEC on August 26, 2004.
** Incorporated herein by reference to the Registration Statement on Form
S-1 of the Company (File No. 33-90400) initially filed with the
Commission on March 17, 1995.
*** Incorporated by reference to the identically numbered exhibits of
the Annual Report on Form 10-KSB for the fiscal year ended June 30, 1997
(File No. 0-25854) filed with the SEC.
18
**** Incorporated by reference to the identically numbered exhibits of
the Quarterly Report on Form 10-QSB for the quarter ended March 31, 2001
filed with the SEC.
***** Incorporated by reference to Exhibit 4.1 to the Registration Statement
on Form S-8 (File No. 333-51498) filed with the SEC on December 8, 2000.
****** Incorporated by reference to Annual Report on Form 10-KSB for the fiscal
year ended June 30, 2004 as filed September 27, 2004.
19
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GFSB BANCORP, INC.
Date: February 14, 2005 /s/Jerry R. Spurlin
-----------------------------------------------
Jerry R. Spurlin
Assistant Secretary and Chief Financial Officer
(Duly Authorized Representative and
Principal Financial Officer)
20
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).
99.1 Question and Answer Brochure*
- --------------------------
* Previously filed.
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 March 24, 2005.
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 March 24, 2005
- -------------------------------- Officer (Principal Executive
Aubrey L. Dunn, Jr. Officer)
/s/ George A. Rosenbaum, Jr. Executive Vice President and March 24, 2005
- -------------------------------- Chief Financial Officer
George A. Rosenbaum, Jr. (Principal Financial and
Accounting Officer)
/s/ Edward K. David Chairman of the Board of March 24, 2005
- -------------------------------- Directors
Edward K. David
/s/ Marc Reischman Vice Chairman of the Board of March 24, 2005
- -------------------------------- Directors
Marc Reischman
/s/ Kay R. McMillan Director March 24, 2005
- --------------------------------
Kay R. McMillan
/s/ Michael A. McMillan Director March 24, 2005
- --------------------------------
Michael A. McMillan
/s/ Arturo Jurado Director March 24, 2005
- --------------------------------
Arturo Jurado
/s/ Russell P. Weems Director March 24, 2005
- -------------------------------
Russell P. Weems
/s/ Larry L. Sheffield Director March 24, 2005
- -------------------------------
Larry L. Sheffield
/s/ James E. Paul, Jr. Director March 24, 2005
- -------------------------------
James E. Paul, Jr.
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 24, 2005
REGISTRATION NO. 333-120729
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
EXHIBITS
TO THE
PRE-EFFECTIVE AMENDMENT NO. THREE
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).*
25 Power of attorney (set forth on the signature pages to this Registration
Statement).
99.1 Question and Answer Brochure*
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* Previously filed.