As filed with the Securities and Exchange Commission on August 22, 1997
Registration No. 333-_____
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------------------------
HIGH COUNTRY BANCORP, INC.
----------------------------------------------
(Name of Small Business Issuer in Its Charter)
Colorado 6035 Requested
--------------- ---------------------------- ----------------------
(State or other (Primary standard industrial (I.R.S. employer
jurisdiction of classification code number) identification number)
incorporation or
organization)
130 West 2nd Street, Salida, Colorado 81201
(719) 539-2516
- --------------------------------------------------------------------------------
(Address and telephone number of principal executive offices
and principal place of business)
Mr. Larry D. Smith, President
High Country Bancorp, Inc.
130 West 2nd Street
Salida, Colorado 81201
(719) 539-2516
- --------------------------------------------------------------------------------
(Name, address, and telephone number of agent for service)
Please send copies of all communications to:
Allan D. Housley, Esquire
Howard S. Parris, Esquire
Peter R. Lee, Esquire
Housley Kantarian & Bronstein, P.C.
1220 19th Street, N.W., Suite 700
Washington, D.C. 20036
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this registration statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
Proposed Proposed
Dollar Maximum Maximum
Title of Each Class Amount Offering Aggregate Amount of
of Securities to be Price Per Offering Registration
to be Registered Registered Unit Price (1) Fee
- --------------------------------------------------------------------------------
Common Stock, par value
$.01 per share.......... $11,902,500 $10.00 $11,902,500 $3,606.46
- --------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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PROSPECTUS
High Country Bancorp, Inc.
(HOLDING COMPANY FOR
SALIDA BUILDING AND LOAN ASSOCIATION)
Up to 1,035,000 Shares of Common Stock
(Anticipated Maximum)
$10.00 Per Share
High Country Bancorp, Inc. (the "Company"), a Colorado corporation, is
offering up to 1,035,000 shares, subject to adjustment, of its common stock, par
value $.01 per share (the "Common Stock"), in connection with the conversion of
Salida Building and Loan Association (the "Association") from a federal mutual
savings and loan association to a federal stock savings and loan association
(the "Converted Association") and the issuance of the Converted Association's
capital stock to the Company pursuant to the Plan of Conversion (the "Plan") of
the Association. The conversion of the Association to the Converted Association,
the acquisition of control of the Converted Association by the Company and the
issuance and sale of the Common Stock are collectively referred to herein as the
"Conversion."
The shares of the Common Stock are being offered pursuant to
nontransferable subscription rights ("Subscription Rights") in a subscription
offering (the "Subscription Offering"). Subscription Rights are not
transferable, and persons who attempt to transfer their Subscription Rights may
lose the right to subscribe for stock in the Conversion and may be subject to
other sanctions and penalties imposed by the Office of Thrift Supervision
("OTS"). The Company may offer any shares of Common Stock not subscribed for in
the Subscription Offering in a community offering (the "Community Offering") to
certain members of the general public to whom the Company delivers a copy of
this Prospectus and a stock order form (the "Stock Order Form"), with preference
given to natural persons and trusts of natural persons who are permanent
residents of Chaffee, Lake, Fremont and Saguache Counties in Colorado (the
"Local Community"). The Association and the Company may, in their absolute
discretion, reject orders in the Community Offering in whole or in part. It is
anticipated that shares of the Common Stock not otherwise subscribed for in the
Subscription and Community Offerings may be offered at the discretion of the
Company
(continued on following page)
For information on how to subscribe, call the Stock Information
Center at (719) ____-_______.
PROSPECTIVE INVESTORS SHOULD CAREFULLY REVIEW AND CONSIDER
THE DISCUSSION UNDER "RISK FACTORS" BEGINNING ON PAGE 1.
THESE SHARES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY STATE SECURITIES COMMISSION,
NOR HAS SUCH COMMISSION, OFFICE OR CORPORATION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS ARE NOT SAVINGS
ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE BANK INSURANCE FUND, THE
SAVINGS ASSOCIATION INSURANCE FUND OR ANY
OTHER GOVERNMENTAL AGENCY.
=============================================================================================================================
Estimated Fees
and Expenses,
Including
Underwriting
Purchase Discounts and Estimated Net
Price (1) Commissions (2) Proceeds (3)
- ------------------------------------------------------- --------------------- ------------------------ ----------------------
Per Share (4)......................................... $10.00 $.58 $9.42
- ------------------------------------------------------- --------------------- ------------------------ ----------------------
Total Minimum......................................... $7,650,000 $499,000 $7,151,000
- ------------------------------------------------------- --------------------- ------------------------ ----------------------
Total Midpoint........................................ $9,000,000 $520,000 $8,480,000
- ------------------------------------------------------- --------------------- ------------------------ ----------------------
Total Maximum......................................... $10,350,000 $541,000 $9,809,000
- ------------------------------------------------------- --------------------- ------------------------ ----------------------
Total Maximum, as adjusted (5)........................ $11,902,500 $565,000 $11,337,500
======================================================= ===================== ======================== ======================
(footnotes on following page)
TRIDENT SECURITIES, INC.
The date of this Prospectus is ___________, 1997
(continued from preceding page)
to certain members of the general public as part of a community offering on a
best efforts basis by a selling group of selected broker-dealers to be managed
by Trident Securities, Inc. (the "Syndicated Community Offering"). Neither
Trident Securities, Inc. nor any selected broker-dealers will have any
obligation to purchase any shares of the Common Stock. See "The Conversion --
Offering of Common Stock," " -- Subscription Offering," " -- Community
Offering," and " -- Syndicated Community Offering."
The total number of shares to be issued in the Conversion may be
significantly increased or decreased to reflect market and financial conditions
at the completion of the Conversion. The aggregate purchase price of all shares
of the Common Stock will be based on the estimated pro forma market value of the
Association, as converted, as determined by an independent appraisal. All shares
of the Common Stock will be sold for $10.00 per share (the "Purchase Price").
With the exception of the ESOP, which intends to purchase 8.0% of the total
number of shares of Common Stock issued in the Conversion, no Eligible Account
Holder, Supplemental Eligible Account Holder or Other Member, nor person
(together with associates of and persons acting in concert therewith) in the
Community Offering and Syndicated Community Offering may purchase more than
$250,000 of the shares of Common Stock issued in the Conversion. In addition, no
person (together with associates and persons acting in concert therewith) may
purchase in the aggregate more than $250,000 of the shares of Common Stock
issued in the Conversion. The maximum overall purchase limitation and the amount
permitted to be subscribed for may be increased or decreased under certain
circumstances in the sole discretion of the Company. The minimum purchase is 25
shares. See "The Conversion -- Limitations on Purchase of Shares."
The Subscription Offering will expire at 12:00 Noon, local time, on
___________, 1997, unless extended by the Company for up to an additional __
days. The Community Offering, if any, may commence without notice at any time
after the commencement of the Subscription Offering and may terminate at any
time without notice,
(continued on following page)
(footnotes from preceding table)
- ---------------
(1) The estimated aggregate value of the Common Stock is based on an
independent appraisal by Ferguson & Company ("Ferguson") as of August
8, 1997. See "The Conversion -- Stock Pricing and Number of Shares to
be Issued." Based on such appraisal, the Company has determined to
offer up to 1,035,000 shares, subject to adjustment, at a purchase
price of $10.00 per share (the "Purchase Price"). The final aggregate
value will be determined at the time of closing of the Conversion and
is subject to change due to changing market conditions and other
factors. If a change in the final valuation is required, an appropriate
adjustment will be made in the number of shares being offered within a
range of 765,000 shares at the minimum of the Estimated Valuation Range
(defined herein) to 1,035,000 shares at the maximum of the Estimated
Valuation Range and, with OTS approval, to 1,190,250 shares at
approximately 15% above the maximum of the Estimated Valuation Range.
(2) Includes estimated printing, postage, legal, accounting and
miscellaneous expenses which will be incurred in connection with the
Conversion. Also includes estimated fees, sales commissions and
reimbursable expenses to be paid to Trident Securities, Inc. ("Trident
Securities") in connection with the Subscription and Community
Offerings, estimated to be $152,000, $173,000, $194,000 and $218,000 at
the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Valuation Range. The actual fees and expenses may vary from
the estimates. See "Pro Forma Data" for the assumptions underlying
these estimates. Trident Securities may be deemed to be an underwriter,
and certain amounts to be paid to Trident Securities may be deemed to
be underwriting compensation for purposes of the Securities Act of
1933, as amended. The Company and the Association have agreed to
indemnify Trident Securities against certain liabilities arising out of
its services as financial and sales advisor.
(3) Includes the ESOP's expected purchase of 8% of the shares sold in the
Conversion with funds borrowed from the Company. Does not reflect a
possible purchase by a management recognition plan of a number of
shares equal to up to 4% of the shares to be issued in the Conversion
with funds contributed by the Converted Association. See
"Capitalization" and "Pro Forma Data."
(4) Based on the midpoint of the Estimated Valuation Range. At the minimum,
maximum and 15% above the maximum of the Estimated Valuation Range, the
estimated fees and expenses, including underwriting discounts and
commissions, per share are expected to be $.65, $.52 and $.48,
respectively, and the estimated net proceeds per share are expected to
be $9.35, $9.48 and $9.52, respectively.
(5) Gives effect to an increase in the number of shares which could occur
without a resolicitation of subscribers or any right of cancellation
due to an increase in the Estimated Valuation Range of up to 15% above
the maximum of the Estimated Valuation Range to reflect changes in
market and financial conditions. See "The Conversion -- Stock Pricing
and Number of Shares to be Issued."
(continued from preceding page)
but may not terminate later than ___________, 1997. An executed Stock Order
Form, once received by the Association, may not be modified, amended or
rescinded without the consent of the Association. Subscriptions paid by check,
cash or money order will be held in a separate account at the Association
established specifically for this purpose, and interest will be paid at the
Association's passbook rate from the date payment is received until the
Conversion is completed or terminated. In the case of payments to be made
through withdrawal from deposit accounts at the Association, all sums authorized
for withdrawal will continue to earn interest at the contract rate until the
date of the completion of the Conversion but, following completion of the
Conversion, funds withdrawn from deposit accounts and used to purchase Common
Stock will no longer be deposit accounts and will not be insured by the Federal
Deposit Insurance Corporation, the Bank Insurance Fund, the Savings Association
Insurance Fund or any other governmental agency. If the Conversion is not
completed within 45 days after the last day of the Subscription Offering (which
date will be no later than ________________, 199_) and the OTS consents to an
extension of time to complete the Conversion, subscribers must affirmatively
reconfirm their subscriptions prior to the expiration of the resolicitation
offering and may, in the alternative, modify or cancel their subscriptions. See
"The Conversion -- Subscription for Stock in Subscription and Community
Offerings."
The Association has retained Trident Securities, a broker-dealer
registered with the Securities and Exchange Commission ("SEC") and a member of
the National Association of Securities Dealers, Inc. ("NASD"), to provide
financial advisory and sales assistance in connection with the Subscription and
Community Offerings. Trident Securities has agreed to use its best efforts to
assist the Company and the Association with the sale of the Common Stock in the
Subscription Offering, the Community Offering and the Syndicated Community
Offering, if any.
HIGH COUNTRY BANCORP, INC.
SALIDA BUILDING AND LOAN ASSOCIATION
Salida, Colorado
[INSERT MAP]
THE ASSOCIATION'S CONVERSION TO A STOCK ORGANIZATION IS CONTINGENT UPON APPROVAL
OF THE PLAN OF CONVERSION BY ITS MEMBERS, THE SALE OF AT LEAST THE MINIMUM
NUMBER OF SHARES OFFERED PURSUANT TO THE PLAN OF CONVERSION AND THE SATISFACTION
OF CERTAIN OTHER CONDITIONS IMPOSED BY THE OTS IN ITS APPROVAL.
PROSPECTUS SUMMARY
The following summary does not purport to be complete and is qualified
in its entirety by the more detailed information and the Financial Statements
and accompanying Notes appearing elsewhere in this Prospectus. This Prospectus
contains forward-looking statements which involve risks and uncertainties. The
Company's results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in "Risk Factors" beginning on page 1 of
this Prospectus.
High Country Bancorp, Inc. The Company was incorporated under the laws
of the State of Colorado in August 1997 at
the direction of the Board of Directors of
the Association for the purpose of serving
as a holding company of the Converted
Association upon its conversion from mutual
to stock form. The Company has received
approval from the Office of Thrift
Supervision ("OTS") to acquire control of
the Converted Association subject to
satisfaction of certain conditions. Prior to
the Conversion, the Company has not engaged
and will not engage in any material
operations. Upon consummation of the
Conversion, the Company will have no
significant assets other than the
outstanding capital stock of the Converted
Association, a portion of the net proceeds
of the Conversion and a note receivable from
the ESOP. Following the Conversion, the
Company's principal business will be
overseeing and directing the business of the
Converted Association and investing the net
Conversion proceeds retained by it. The
Company will register with the OTS as a
savings and loan holding company.
Salida Building and Loan
Association The Association is a federal mutual savings
and loan association operating through
offices located in Salida, Colorado, Buena
Vista, Colorado and Leadville, Colorado and
serving Chaffee, Lake, Western Fremont and
Saguache Counties in Colorado (the
Association's "primary market area"). The
Association was chartered in 1886 as the
first state-chartered building and loan
association in Colorado. The Association
received federal insurance of deposit
accounts in 1937, became a member of the
Federal Home Loan Bank System in 1937, and
converted to a federally-chartered
association in 1993. At June 30, 1997, the
Association had total assets of $76.3
million, loans receivable (net) of $63.1
million, total deposits of $56.2 million and
retained earnings of $6.0 million. The
Association is subject to examination and
comprehensive regulation by the OTS, and the
Association's savings deposits are insured
up to applicable limits by the Savings
Association Insurance Fund ("SAIF"), which
is administered by the Federal Deposit
Insurance Corporation ("FDIC"). The
Association is a member of and owns capital
stock in the Federal Home Loan Bank ("FHLB")
of Topeka, which is one of 12 regional banks
in the FHLB System. The Association is
further subject to regulations of the
Federal Reserve Board governing reserves to
be maintained and certain other matters.
Regulations significantly affect the
operations of the Association. See
"Regulation -- Depository Institution
Regulation."
Historically, the Association has operated
as a traditional savings institution by
emphasizing the origination of loans secured
by one- to four-family (or "single-family")
residences. At June 30, 1997, $49.6 million,
or 78.57% of the Association's loan
portfolio, consisted of one- to four-family
residential mortgage loans, all of which
were originated on properties in its market
area. Substantially all of these loans have
terms of 15 to 25 years, and a majority are
fixed-rate loans. Since fiscal 1996, the
Association has significantly increased its
origination of consumer, commercial business
and commercial real estate loans, including
loans for the purchase and development of
raw land, all of which loans have been
(i)
originated in its primary market area. Such
loans provide for higher interest rates and
have shorter terms than traditional one- to
four-family residential mortgage loans.
However, these types of loans also carry
significantly greater risks than residential
mortgage loans. While all of the
Association's non-residential real estate
loans are currently performing, potential
investors should be aware of the additional
risks associated with these types of
lending. For more information, see "Risk
Factors--Risks Posed by Certain Lending
Activities."
Financial and operating characteristics of
the Association include the following:
Community Orientation: The Association has
been committed to meeting the financial
needs of the communities in which it has
operated for over 110 years. The Board of
Directors believes that with its long-term
presence in the community, the Association
is well positioned to provide financial
services on a personalized and efficient
basis. The Association effectively services
its customers and provides quick responses
to customer needs and inquiries. Management
plans to continue to emphasize the community
orientation of the Association and believes
that this emphasis will represent a
continuing competitive advantage for the
Association.
Capital Strength: At June 30, 1997, the
Association had $6.0 million of retained
earnings, representing 7.81% of total
assets. At such date, the Association
exceeded all of its minimum regulatory
capital requirements, with tangible and core
capital of 7.80% of adjusted total assets
and risk-based capital of 13.73% of total
risk-weighted assets. See "Regulation --
Depository Institution Regulation -- Capital
Requirements." As a result of the
Conversion, assuming the Company retains 50%
of the net proceeds of the Conversion at the
midpoint of the Estimated Valuation Range,
at June 30, 1997, the Association would have
had pro forma stockholders' equity of
approximately $9.1 million, or 11.37% of pro
forma total assets, and the Company would
have had pro forma consolidated
stockholders' equity of $13.4 million, or
approximately 15.95%, of total pro forma
consolidated assets. See "Historical and Pro
Forma Regulatory Capital Compliance."
Asset Quality: At June 30, 1997, the
Association had $175,000 in nonperforming
assets representing .23% of total assets.
The Association's allowance for loan losses
at June 30, 1997 totaled $604,000 or .96% of
net loans.
The information set forth above should be
considered in the context of the detailed
information contained elsewhere herein. For
additional information, see "Risk Factors"
and "Business of the Association."
The Conversion The Board of Directors of the Association
adopted the Plan on May 15, 1997, pursuant
to which the Association will convert from a
federally chartered mutual savings and loan
association to a federally chartered stock
savings and loan association, (i.e., the
Converted Association), and will thereafter
operate as a wholly owned subsidiary of the
Company. See "The Conversion -- General."
Upon consummation of the Conversion, the
Converted Association will issue all of its
outstanding capital stock to the Company in
exchange for at least 50% of the net
proceeds from the sale of the Common Stock
in the Conversion.
The OTS has approved the Plan, subject to
member approval and satisfaction of certain
other conditions. The OTS has also approved
the Company's application
(ii)
to acquire all of the capital stock of the
Converted Association and thereby become a
savings and loan holding company, as part of
the Conversion.
The Conversion is subject to certain
conditions, including the prior approval of
the Plan at a special meeting of members to
be held on _________, 1997 (the "Special
Meeting").
The portion of the net proceeds from the
sale of Common Stock in the Conversion to be
distributed to the Converted Association by
the Company will substantially increase the
Converted Association's capital position,
which will in turn increase the amount of
funds available for lending and investment
and provide greater resources to support
current operations by the Converted
Association. This capital will also provide
the Association with additional liquid
assets for investment in adjustable-rate
mortgage-backed securities, which
investments would improve the Association's
interest rate risk position and reduce the
effect of a significant increase in interest
rates. The holding company structure will
provide greater flexibility than the
Association alone would have for
diversification of business activities and
geographic expansion. Management believes
that this increased capital will enable the
Converted Association to compete more
effectively with other types of financial
services organizations. In addition, the
Conversion will enhance the future access of
the Company and the Converted Association to
the capital markets and will afford
depositors and others the opportunity to
become stockholders of the Company and
thereby participate in any future growth of
the Converted Association.
Stock Pricing and Number Federal regulations require that the
of Shares to be Issued aggregate purchase price of the Common Stock
to be issued in the Conversion be consistent
with an independent appraisal of the
estimated pro forma market value of the
Common Stock following the Conversion.
Ferguson, a firm experienced in valuing
savings institutions, has made an
independent appraisal of the estimated
aggregate pro forma market value of the
Common Stock to be issued in the Conversion.
Ferguson has determined that as of August 8,
1997, such estimated pro forma market value
was $9,000,000. See "The Conversion -- Stock
Pricing and Number of Shares to be Issued."
The resulting valuation range in Ferguson's
appraisal, which under OTS regulations
extends 15% below and above the estimated
value, is from $7,650,000 to $10,350,000
(the "Estimated Valuation Range"). The
Company, in consultation with its advisors,
has determined to offer the shares of Common
Stock in the Conversion at the Purchase
Price of $10.00 per share. Such appraisal is
not intended and must not be construed as a
recommendation of any kind as to the
advisability of purchasing such shares or as
any form of assurance that, after the
Conversion, such shares may be resold at or
above the Purchase Price. The appraisal
considered a number of factors and was based
upon estimates derived from those factors,
all of which are subject to change from time
to time. In preparing the valuation,
Ferguson relied upon and assumed the
accuracy and completeness of financial and
statistical information provided by the
Association and the Company. Ferguson did
not verify the financial statements provided
or independently value the assets of the
Association. The appraisal will be further
updated immediately prior to the completion
of the Conversion and could be increased to
up to $11,902,500 without a resolicitation
of subscribers based on market and financial
conditions at the completion of the
Conversion. Ferguson will receive fees and
reimbursement of out-of-pocket expenses
totaling not more
(iii)
than $32,500 for its appraisal and for
assisting in the preparation of the
Company's business plan.
The total number of shares to be issued in
the Conversion may be increased or decreased
without a resolicitation of subscribers so
long as the aggregate purchase price is not
less than the minimum or more than 15% above
the maximum of the Estimated Valuation
Range. Based on the Purchase Price of $10.00
per share, the total number of shares which
may be issued without a resolicitation of
subscribers is from 765,000 to 1,035,000
(and up to 1,190,250 shares as adjusted).
For further information, see "The Conversion
-- Stock Pricing and Number of Shares to be
Issued."
The Subscription, Community The shares of Common Stock to be issued in
and Syndicated Community the Conversion are being offered at the
Offerings Purchase Price of $10.00 per share in the
Subscription Offering pursuant to non-
transferable Subscription Rights in the
following order of priority: (i) Eligible
Account Holders (the term "Eligible Account
Holders" shall hereinafter mean depositors
whose accounts in the Association totaled
$50.00 or more on December 31, 1995); (ii)
the ESOP (i.e., the Company's tax-qualified
stock benefit plan); (iii) Supplemental
Eligible Account Holders (i.e., depositors
whose accounts in the Association totaled
$50.00 or more on September 30, 1997, other
than Eligible Account Holders); and (iv)
Other Members (i.e., certain depositors and
borrower members of the Association as of
________, 1997, other than Eligible Account
Holders and Supplemental Eligible Account
Holders). Subscription Rights received in
any of the foregoing categories will be
subordinated to the Subscription Rights
received by those in a prior category, with
the exception that any shares of Common
Stock sold in excess of the maximum of the
Estimated Valuation Range may first be sold
to the ESOP.
The Company may offer any shares of Common
Stock not subscribed for in the Subscription
Offering at the same price in the Community
Offering to members of the general public to
whom the Company delivers a copy of this
Prospectus and the Stock Order Form. In the
Community Offering, preference will be given
to natural persons and trusts of natural
persons who are permanent residents of the
Local Community. Subscription Rights will
expire if not exercised by 12:00 Noon, local
time, on __________, 1997, unless extended
(the "Expiration Date"). The Company and the
Association reserve the absolute right to
accept or reject any orders in the Community
Offering, in whole or in part, either at the
time of receipt of an order or as soon as
practicable following the Expiration Date.
It is anticipated that shares of Common
Stock not otherwise subscribed for in the
Subscription Offering and Community
Offering, if any, may be offered at the
discretion of the Company to certain members
of the general public as part of a
Syndicated Community Offering on a best
efforts basis by a selling group of selected
broker-dealers to be managed by Trident
Securities. See "The Conversion --
Syndicated Community Offering." The
Subscription and Community Offerings and
Syndicated Community Offering are referred
to collectively herein as the "Offerings."
The Association and the Company have engaged
Trident Securities to consult with and
advise the Company and the Association with
respect to the Offerings, and Trident
Securities has agreed to solicit
subscriptions and purchase orders for shares
of Common Stock in the Offerings. Trident
Securities will receive sales
(iv)
commissions with respect to shares sold in
the Subscription and Community Offerings and
Syndicated Community Offering, if necessary.
The Company and the Association have agreed
to indemnify Trident Securities against
certain liabilities, including certain
liabilities under the Securities Act of
1933, as amended (the "Securities Act"). See
"The Conversion -- Plan of Distribution and
Marketing Agent."
The Association has established a Stock
Information Center, which will be managed by
Trident Securities, to coordinate the
Offerings, including tabulation of orders
and answering questions about the Offerings
by telephone. All subscribers will be
instructed to mail payment to the Stock
Information Center or deliver payment
directly to any office of the Association.
Payment for shares of Common Stock may be
made by cash (if delivered in person), check
or money order or by authorization of
withdrawal from deposit accounts maintained
with the Association. If payment is made
through such deposit account authorization,
funds in the account to be used for such
payment will not be available for withdrawal
and will not be released until the
Conversion is completed or terminated or if
the subscriber fails to affirmatively
confirm his or her order in the event of a
resolicitation. See "The Conversion --
Subscriptions for Stock in Subscription and
Community Offerings."
The Plan provides that the Conversion must
be completed within 24 months after the date
of the approval of the Plan by the members
of the Association. The Plan has been
approved by the OTS and is subject to the
approval of the Association's members at the
Special Meeting to be held on _______, 1997.
Purchase Limitations With the exception of the ESOP, which
intends to purchase 8.0% of the total number
of shares of Common Stock issued in the
Conversion, no Eligible Account Holder,
Supplemental Eligible Account Holder or
Other Member nor person (together with
associations of and persons acting in
concert therewith) in the Community Offering
and Syndicated Community Offering may
purchase more than $250,000 of the shares of
Common Stock sold in the Conversion. In
addition, no person (together with
associates and persons acting in concert
therewith) may purchase in the aggregate
more than $250,000 of the shares of Common
Stock issued in the Conversion. The maximum
overall purchase limitation and the amount
permitted to be subscribed for may be
increased or decreased under certain
circumstances in the sole discretion of the
Company. The minimum purchase is 25 shares.
See "The Conversion -- Limitations on
Purchase of Shares." In the event of an over
subscription, shares will be allocated as
provided in the Plan. See "The Conversion --
Subscription Offering," " --Community
Offering" and "-- Syndicated Community
Offering." In the event of an increase in
the total number of shares up to the number
issuable at 15% above the maximum of the
Estimated Valuation Range, the additional
shares may be distributed and allocated
without the resolicitation of subscribers.
See "The Conversion -- Limitations on
Purchase of Shares."
The term "acting in concert" is defined in
the Plan of Conversion to mean: (i) knowing
participation in a joint activity or
interdependent conscious parallel action
towards a common goal whether or not
pursuant to an express agreement; or (ii) a
combination or pooling of voting or other
interests in the securities of an issuer for
a common purpose pursuant to any contract,
understanding, relationship, agreement or
other arrangement, whether written or
otherwise. The term
(v)
"associate" of a person is defined in the
Plan of Conversion to mean: (i) any
corporation or organization (other than the
Association or a majority-owned subsidiary
of the Association) of which such person is
an officer or partner or is, directly or
indirectly, the beneficial owner of 10% or
more of any class of equity securities; (ii)
any trust or other estate in which such
person has a substantial beneficial interest
or as to which such person serves as trustee
or in a similar fiduciary capacity
(excluding tax-qualified employee plans);
and (iii) any relative or spouse of such
person, or any relative of such spouse, who
either has the same home as such person or
who is a director or officer of the
Association or any of its parents or
subsidiaries. The Company and the
Association may presume that certain persons
are acting in concert based upon, among
other things, joint account relationships
and the fact that such persons have filed
joint Schedules 13D with the SEC with
respect to other companies.
Potential Benefits of Option Plan. The Board of Directors of the
Conversion to Management Company intends to implement the Option
Plan, contingent upon receipt of OTS non-
objection and stockholder approval at a
meeting held no earlier than six months
following completion of the Conversion, but
which may be held more than one year
following completion of the Conversion.
Assuming 900,000 shares are issued in the
Conversion (at the midpoint of the Estimated
Valuation Range) and receipt of the required
approvals, the Company currently plans to
grant options to purchase 22,500 shares of
the Common Stock to Larry D. Smith, Chief
Executive Officer, and ______ shares of the
Common Stock to all executive officers and
directors as a group (7 persons, including
the chief executive officer), respectively,
under the Option Plan in the year following
the Conversion. The exercise price of the
options, which would be granted at no cost
to the recipient thereof, would be the fair
market value of the Common Stock subject to
the option on the date the option is
granted. See "Management of the
Association --Certain Benefit Plans and
Agreements."
MRP. The Board of Directors of the Company
intends to implement the High Country
Bancorp, Inc. Management Recognition Plan
("MRP"), subject to receipt of OTS approval
and to stockholder approval at a meeting of
the Company's stockholders which may be held
within one year but no earlier than six
months following the Conversion or may be
held more than one year following completion
of the Conversion. Subject to such
approvals, the MRP will purchase an amount
of shares after the Conversion equal to up
to 4% of the shares issued in the Conversion
(36,000 shares at the midpoint of the
Estimated Valuation Range), for issuance to
executive officers and directors of the
Association and the Company. At the Purchase
Price in the Conversion of $10.00 per share,
the shares to be awarded by the MRP to the
directors and executive officers of the
Company would have a value of $360,000. No
shares will be awarded under the MRP prior
to receipt of regulatory and stockholder
approval. Awards under the MRP would be
granted at no cost to the recipients
thereof. See "Management of the Association
-- Certain Benefit Plans and Agreements."
Other Benefits. In addition to the Option
Plan and the MRP, the following benefits may
or will be realized as a result of the
Conversion, subject in certain cases to
approval of such plans by the OTS: (i) under
the Association's Long-Term, Incentive
Compensation Plan, each director will
receive, after terminating service on the
Board, an amount equal to their plan account
balance, plus earnings over the distribution
period; (ii) under the ESOP, employees of
the Association, including the executive
officers, will have shares of Common Stock
allocated to their
(vi)
respective accounts in the ESOP; (iii) under
the Association's Incentive Compensation
Plan, annual cash bonuses based on the
Association's performance; and (iv) the
President and Vice President of the
Association have entered into employment
agreements with the Association, benefits
which are guaranteed by the Company. In
addition to the possible financial benefits
under the benefit plans, management could
benefit from certain statutory and
regulatory provisions, as well as certain
provisions in the Company's Articles of
Incorporation and Bylaws, that may tend to
promote the continuity of existing
management. See "Management of the
Association -- Director Compensation,"
"-- Executive Compensation" and " --Certain
Benefit Plans and Agreements," "Certain
Restrictions on Acquisitions of the Company
and the Association" and "Certain Anti-
takeover Provisions in the Certificate of
Incorporation and Bylaws."
Prospectus Delivery and To ensure that each subscriber receives a
Procedure for Purchasing Prospectus at least 48 hours prior to the
Shares Expiration Date in accordance with Rule
15c2-8 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), no
Prospectus will be mailed any later than
five days prior to the Expiration Date or
hand delivered any later than two days prior
to such date. Neither the Company, the
Association, nor any of their agents shall
be obligated to deliver a Prospectus and
Stock Order Form by any means other than the
U.S. Postal Service. Execution of a Stock
Order Form will confirm receipt or delivery
in accordance with Rule 15c2-8. Stock Order
Form will be distributed only with a
Prospectus. The executed Stock Order Form
must be accompanied by payment by check,
money order, bank draft or withdrawal
authorization to an existing account at the
Association. The Company is not obligated to
accept orders submitted on photocopied or
telecopied Stock Order Forms.
To ensure that Eligible Account Holders,
Supplemental Eligible Account Holders and
Other Members are properly identified as to
their stock purchase priorities, as well as
for purposes of allocating shares based on
subscribers' deposit balances in the event
of over subscription, such persons must list
all of their deposit accounts at the
Association as of such qualifying record
date on the Stock Order Form. Failure to
list all such deposit accounts may result in
the inability of the Company or the
Association to fill all or part of a
subscription order. Neither the Company, the
Association nor any of their agents shall be
responsible for any order on which all
deposit accounts of the subscriber have not
been fully and accurately disclosed. The
Company will not accept orders registered
"in care of," or instructed to be mailed to,
a third party.
Non-transferability of Applicable federal regulations provide that
Subscription Rights prior to the completion of the Conver-sion,
no person shall transfer or enter into any
agreement or understanding to transfer the
legal or beneficial ownership of the
Subscription Rights issued under the Plan or
the shares of Common Stock to be issued upon
their exercise. Persons violating such
prohibition may lose their right to
subscribe for stock in the Conversion and
may be subject to sanctions by the OTS. Each
person exercising Subscription Rights will
be required to certify that his or her
purchase of Common Stock is solely for the
purchaser's own account and that there is no
agreement or understanding regarding the
sale or transfer of such shares.
Use of Proceeds The amount of proceeds from the sale of the
Common Stock in the Conversion will depend
upon the total number of shares actually
sold, the number of shares of
(vii)
Common Stock sold in the Subscription
Offering and the Community Offering and
Syndicated Community Offering, if any, and
the actual expenses of the Conversion. As a
result, the actual net proceeds from the
sale of the Common Stock cannot be
determined until the Conversion is
completed. Based on the sale of $9,000,000
of Common Stock at the midpoint of the
Estimated Valuation Range, the net proceeds
are estimated to be approximately
$8,480,000. It is anticipated, however, that
the net proceeds will be between
approximately $7,151,000 and $9,809,000 if
the aggregate purchase price is within the
Estimated Valuation Range and the net
proceeds will be approximately $11,337,500
if the aggregate purchase price is increased
to 15% above the maximum of the Estimated
Valuation Range. See "Pro Forma Data."
The Company has received OTS approval to
purchase all of the capital stock of the
Converted Association to be issued in the
Conversion in exchange for at least 50% of
the net proceeds. Assuming the sale of
900,000 shares of the Common Stock at the
midpoint, of the Estimated Valuation Range
and the purchase of 8% of such shares by the
ESOP, the Association would receive $4.2
million in cash, and the Company would
retain approximately $3.5 million in cash
and $720,000 in the form of a note
receivable from the ESOP. The ESOP note
receivable will be for a ten-year term and
carry an interest rate, which adjusts
annually, equal to the prime rate as
published in The Wall Street Journal plus
-----------------------
one percent.
The proceeds retained by the Company after
funding the ESOP initially will be invested
in short-term and intermediate-term
securities, including cash and cash
equivalents and U.S. government and agency
obligations. Also, such proceeds will be
available for a variety of corporate
purposes, including funding the MRP, if the
MRP is implemented, future acquisitions and
diversification of business, additional
capital contributions, dividends to
stockholders and future repurchases of the
Common Stock to the extent permitted by
applicable regulations. The Company
currently has no specific plans, intentions,
arrangements or understanding regarding any
acquisitions, dividends or repurchases.
The proceeds contributed to the Converted
Association will substantially increase the
capital of the Converted Association. The
Converted Association intends to use such
funds for general corporate purposes, such
as the origination of loans (including
consumer, commercial business and commercial
real estate loans) and investment in
securities (including adjustable-rate
mortgage-backed securities.) It is expected
that in the interim all or part of the
proceeds will be invested in short-term and
intermediate-term securities, including cash
and cash equivalents and U.S. government and
agency obligations.
Market for the The Company has never issued capital stock
Common Stock to the public and, consequently, there is no
existing market for the Common Stock.
Although the Company has received
conditional approval to trade its Common
Stock on the Nasdaq SmallCap Market under
the symbol "_____" there can be no assurance
that the Company will meet Nasdaq SmallCap
Market listing requirements, which currently
include a minimum of two market makers in
the Common Stock. Trident Securities has
indicated its intention to make a market in
the Common Stock, and the Association
anticipates that it will be able to secure
at least one additional market maker for the
Common Stock.
(viii)
The Nasdaq has proposed substantial changes
to its listing requirements on the Nasdaq
SmallCap Market which would, among other
things, increase the minimum capitalization,
stockholder and market maker requirements.
If the proposed changes are approved by the
SEC, the Company's Common Stock may not
qualify for listing on the Nasdaq SmallCap
Market. In the event, the Company's Common
Stock would be traded on the
over-the-counter market through the OTC
"Electronic Bulletin Board." However,
purchasers of Common Stock should have a
long-term investment intent and recognize
that the absence of an active and liquid
trading market may make it difficult to sell
the Common Stock, and may have an adverse
effect on the price. The development of a
public trading market depends upon the
existence of willing buyers and sellers, the
presence of which is not within the control
of the Company, the Association or any
market maker. There can be no assurance that
an active and liquid market for the Common
Stock will develop in the foreseeable future
or, once developed, will continue. Even if a
market develops, there can be no assurance
that stockholders will be able to sell their
shares at or above the initial Purchase
Price after the completion of the Stock
Conversion. Purchasers of Common Stock
should consider the potentially illiquid and
long-term nature of their investment in the
shares being offered hereby. See "Risk
Factors -- Potentially Limited and Illiquid
Market for the Common Stock" and "Market for
the Common Stock."
Dividends The Board of Directors currently intends to
adopt a policy of paying regular quarterly
cash dividends on the Common Stock at an
initial annual rate of 3.0% of the $10.00
per share purchase price of the Common Stock
in the Conversion ($.30 per share), with the
first dividend being declared and paid no
earlier than for the quarter ending March
31, 1998. However, there can be no assurance
that dividends will be paid or, if paid
initially, will continue to be paid in the
future. In addition, subject to regulatory
approval, the Board of Directors may
determine to pay special cash dividends.
Special cash dividends, if paid, may be paid
in addition to, or in lieu of, regular cash
dividends. Like all possible dividend
payments, there can be no assurance that
special dividends will ever be paid. The
payment of regular or special dividends will
be subject to the requirements of applicable
law and the determination by the Board of
Directors of the Company that the net
income, capital and financial condition of
the Company and the Association, thrift
industry trends and general economic
conditions justify the payment of dividends.
See "Dividend Policy" and "Regulation --
Depository Institution Regulation --
Dividend Restrictions."
Risk Factors See "Risk Factors" for a discussion of
certain factors that should be considered by
prospective investors.
(ix)
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA
The following summary of selected consolidated financial information
and other data does not purport to be complete and is qualified in its entirety
by reference to the detailed information and Financial Statements and
accompanying Notes appearing elsewhere in this Prospectus.
Selected Financial Condition Data:
At June 30,
---------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- ------
(Dollars in thousands)
Total assets................................. $ 76,324 $ 63,185 $ 54,813 $ 49,204 $ 47,142
Cash......................................... 895 511 1,355 1,463 2,463
Interest bearing deposits.................... 2,381 1,577 513 639 1,882
Securities available for sale................ -- 989 1,385 1,454 2,169
Securities held to maturity................. 5,340 6,843 8,368 9,910 9,748
Loans receivable, net........................ 63,127 50,076 41,537 34,456 30,049
Savings deposits............................. 56,152 49,537 45,914 43,965 42,478
Retained earnings, substantially restricted.. 5,958 5,907 5,379 4,792 4,072
Number of:
Real estate loans outstanding............ 1,137 1,054 965 890 867
Savings accounts......................... 9,126 7,828 7,324 7,217 7,238
Full-service offices..................... 3 2 2 2 2
Selected Operations Data:
Year Ended June 30,
---------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- ------
(In thousands)
Interest income.............................. $ 5,764 $ 4,948 $ 3,911 $ 3,557 $ 3,858
Interest expense............................. 2,813 2,293 1,603 1,401 1,714
------- -------- ------- -------- --------
Net interest income ..................... 2,951 2,655 2,308 2,156 2,144
Provision for loan losses.................... 282 59 59 60 62
------- -------- ------- -------- --------
Net interest income after provision
for loan losses........................ 2,669 2,596 2,249 2,096 2,082
------- -------- ------- -------- --------
Noninterest income........................... 141 146 146 122 198
------- -------- ------- -------- --------
Subtotal................................. 2,810 2,742 2,395 2,218 2,280
------- -------- ------- -------- --------
Noninterest expense:
Compensation and benefits.................. 1,345 868 730 626 544
Other...................................... 1,410 948 771 661 725
------- -------- ------- -------- --------
Total noninterest expense.................. 2,755 1,816 1,501 1,287 1,269
------- -------- ------- -------- --------
Income before taxes...................... 55 926 894 931 1,011
Income tax expense........................... 11 407 327 347 367
------- -------- ------- -------- --------
Net income............................... $ 44 $ 519 $ 567 $ 584 $ 644
======= ======== ======= ======== ========
(x)
Operating Ratios
At or for the
Year Ended June 30,
----------------------------------
1997 1996 1995
---- ---- ----
Performance Ratios:
Return on assets (ratio of net earnings
to average total assets) .......................................... 0.06% 0.86% 1.17%
Return on equity (ratio of net earnings
to average equity) ................................................ 0.75% 9.15% 11.94%
Ratio of average interest-earning assets to
average interest-bearing liabilities .............................. 104.64% 106.15% 110.81%
Ratio of net interest income, after provision
for loan losses, to noninterest expense ........................... 96.88% 142.95% 149.83%
Net interest rate spread (difference between weighted average yield on
interest-earning assets and weighted
average cost of interest-bearing liabilities) .................... 4.19% 4.41% 4.48%
Net yield on average interest-earning assets ......................... 4.38% 4.65% 4.71%
Quality Ratios:
Non-performing loans to total loans
at end of period .................................................. 0.21% 0.14% 0.25%
Non-performing loans to total assets ................................. 0.18% 0.12% 0.19%
Non-performing assets to total assets
at end of period .................................................. 0.23% 0.12% 0.19%
Allowance for loan losses to non-performing
loans at end of period ............................................ 431% 563% 379%
Allowance for loan losses to total loans ............................. 0.93% 0.79% 0.93%
Capital Ratios:
Equity to total assets at end of period .............................. 7.81% 9.35% 9.81%
Average equity to average assets ..................................... 8.32% 9.42% 9.77%
(xi)
RISK FACTORS
Before investing in the shares of the Common Stock offered by this
Prospectus, prospective investors should carefully consider the matters
presented below.
Risks Posed by Certain Lending Activities
The Association's primary lending activity is the origination of
single-family residential mortgage loans. However, at June 30, 1997, $18.7
million, or 29% of the Association's gross loan portfolio at June 30, 1997
consisted of loans other than single-family mortgage loans. Such loans included
$1.6 million in loans secured by commercial real estate, $2.4 million in loans
for the development of raw land into single-family residential building lots,
$4.3 million in commercial business loans and $6.5 million in consumer loans,
$5.4 million of which are automobile loans. During recent years, the Association
has significantly increased its level of commercial real estate, land
development and commercial business lending, and consumer loans, all of which
have been made in the Association's Primary Market Area, in order to increase
interest income and make its loan portfolio more interest rate sensitive.
Although these loans generally provide for higher interest rates and shorter
terms than permanent single-family residential real estate loans, these loans
generally have a higher degree of credit and other risks. Nonresidential real
estate lending often involves larger loan balances to single borrowers or groups
of related borrowers as compared to residential real estate lending. The payment
experience on such loans typically is dependent on the successful operation of
the real estate project or marketing of the residential building lots. These
risks can be significantly affected by supply and demand conditions in the
market for office and retail space and the residential real estate market, and,
as such, may be subject to a greater extent to adverse conditions in the economy
generally. The Association may be exposed to risk of loss on land development or
construction loans if its initial estimate of the property's value at completion
of development or construction proves to be inaccurate. Commercial business
loans involve a greater degree of risk than other types of lending as payments
on such loans are often dependent on the successful operation of the business
involved which may be subject to a greater extent to adverse conditions in the
economy. At June 30, 1997, however, none of the Association's nonresidential
real estate, construction or land development, and commercial business loans
were in nonaccrual status (except for $3,000 in nonaccrual commercial business
loans). Consumer loans also entail greater risk than single-family residential
loans, particularly in the case of consumer loans which are unsecured or secured
by rapidly depreciable assets, such as automobiles. In such cases, any
repossessed collateral for a defaulted consumer loans may not provide an
adequate source of repayment of the outstanding loan balance as a result of the
greater likelihood of damage, loss or depreciation. At June 30, 1997, the
Association had $137,000 in consumer loans which were non-performing. Also, as a
result of the growth in the Association's loan portfolio in recent years, the
Association's loan portfolio at June 30, 1997 includes a significant portion of
relatively new loans. Although the Association currently has low levels of
nonperforming assets, due to the increased level of nonresidential loans and the
unseasoned nature of many of these loans, there can be no guarantee that the
level of nonperforming assets will not increase in the future, and that
corresponding losses from such activities may result therefrom.
Anticipated Low Return on Equity Following Conversion
As a result of the Conversion, the Association's equity will be
substantially increased. At June 30, 1997, the Association's ratio of total
equity to total assets was 7.81%, and, assuming the sale of 900,000 shares in
the Conversion (i.e., the midpoint of the Estimated Valuation Range), such ratio
is expected to increase to 15.95%. Absent an increase in consolidated net income
that corresponds to the increase in the consolidated equity of the Company and
the Association from the Conversion, the Company and the Association are
unlikely to maintain a return on average equity (i.e., net income divided by
average equity) at historical levels and, as a result, it is expected that the
Company's return on equity initially will be below industry norms. Additionally,
the increased costs resulting from the obligations associated with being a
public company, including increased professional costs and compensation-related
expenses, will have a negative effect on net income. Consequently, investors
should carefully evaluate and consider the effect of a subpar return on equity
on the market price of the Common Stock. Further, there can be no assurance that
the Company
1
will be able to increase net income following the Conversion in amounts
commensurate with the increase in equity resulting from the Conversion.
Future of Thrift Industry
The U.S. Congress has taken up legislation, and certain Congressional
committees have passed proposed legislation, that may eliminate savings
associations as a separate industry. Legislation enacted in September 1996
provides that the SAIF, the current federal insurer of the Association's deposit
accounts, will be merged with the Bank Insurance Fund (the "BIF") which insures
the deposits of commercial banks on January 1, 1999 but only if there are no
thrift institutions left. The legislation directs the Department of the Treasury
to submit a report to the Congress by March 31, 1997 with its findings with
respect to the development of a common charter for banks and thrifts. This
report has been submitted, but no action has, as yet, been taken. The
Association cannot predict what the attributes of any such common charter would
be or whether any legislation will result from this study. It is possible,
however, that the common charter may not offer all the advantages which the
Association now enjoys such as unrestricted nationwide branching and the absence
of activities restrictions on savings and loan holding companies which do not
control more than one savings association. If the Association were to become
subject to the restrictions applicable to branching by banks headquartered in
Colorado, its branching would generally be restricted to Colorado. If the
Company were to become subject to the restrictions on bank holding companies,
its activities would be limited to activities that have been determined by the
Board of Governors of the Federal Reserve System to be so closely related to
banking as to be a proper incident thereto. If Congress fails to take action to
create a common charter for banks and thrift institutions or otherwise fails to
end the thrift industry's separate existence, the currently contemplated merger
of the deposit insurance funds would not take place and a shrinking thrift
industry would be required to support a separate deposit fund with certain fixed
costs with a shrinking assessment base.
Potential Effects of Changes in Interest Rates and the Current Interest Rate
Environment
Effect on Net Interest Income. The operations of the Association are
substantially dependent on its net interest income, which is the difference
between the interest income earned on its interest-earning assets and the
interest expense paid on its interest-bearing liabilities. Like most savings
institutions, the Association's earnings are affected by changes in market
interest rates and other economic factors beyond its control. Substantially all
of the Association's residential mortgage loans have terms of 15 to 25 years,
while deposit accounts have significantly shorter terms to maturity. If an
institution's interest-earning assets (primarily loans) have longer effective
maturities than its interest-bearing liabilities (deposits), the yield on the
institution's interest-earning assets generally will adjust more slowly than the
cost of its interest-bearing liabilities and, as a result, the institution's net
interest income generally would be adversely affected by material and prolonged
increases in interest rates and positively affected by comparable declines in
interest rates. In addition, rising interest rates may negatively affect the
Association's earnings due to diminished loan demand. At June 30, 1997, the
Association's interest-bearing liabilities which were estimated to mature or
reprice within one year exceeded the Association's interest-earning assets with
the same characteristics by $34.7 million or 43.95%. This significant negative
gap position exposes the Association to severe and adverse effects in the event
of a prolonged and material increase in interest rates. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Asset and Liability Management" and "Business of the Association -- Lending
Activities" and " -- Deposit Activities and Other Sources of Funds."
Prepayment Risk. Changes in interest rates also can affect the average
life of loans and mortgage-backed securities. Lower interest rates in recent
periods have resulted in increased prepayments of loans and mortgage-backed
securities, as borrowers refinanced to reduce borrowing costs. Under these
circumstances, the Association is subject to reinvestment risk to the extent
that it is not able to reinvest such prepayments at rates which are comparable
to the rates on the maturing loans or securities. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
2
Limited and Illiquid Market for the Common Stock
Based on the midpoint of the Estimated Valuation Range, it is
anticipated that, following completion of the Conversion, the Company will have
approximately 900,000 shares of Common Stock issued and outstanding. Of such
amount, 72,000 of such shares will be held by the ESOP and an additional 145,000
shares will be held by directors and executive officers of the Association and
the Company, limiting the number of shares held by the general public. The
Company has never issued stock before and, due to the relatively small size of
the offering and the significant amount of stock expected to be held by
Management and the ESOP, it is highly unlikely that an active market for the
Common Stock will develop or, if developed, will be maintained, or that
quotations for the Common Stock will be available. The presence of a sufficient
number of buyers and sellers at any given time is a factor over which neither
the Company nor any market maker has control. The Company intends to list the
Common Stock on the Nasdaq SmallCap Market, subject to meeting the listing
requirements. If the Company does not meet these listing requirements, the
Company anticipates that the Common Stock will be traded on the over-the-counter
market through the OTC "Electronic Bulletin Board." Trident Securities (and one
other market maker, if a SmallCap listing is obtained) intends to make a market
in the Common Stock. Such efforts are expected to include solicitation of
potential buyers and sellers in order to match buy and sell orders. However,
Trident Securities will not be subject to any continuing obligation to continue
such efforts in the future.
The development of a liquid public market depends on the existence of
willing buyers and sellers, the presence of which is not within the control of
the Company, the Association or any market maker. Due to the size of the
Offering it is highly unlikely that a stockholder base sufficiently large to
create an active trading market will develop and be maintained. Investors in the
Common Stock could have difficulty disposing of their shares and should not view
the Common Stock as a short-term and liquid investment. The absence of an active
and liquid trading market for the Common Stock could affect the price and
liquidity of the Common Stock. See "Market for the Common Stock."
Articles of Incorporation, Bylaw and Statutory Provisions That Could Discourage
Hostile Acquisitions of Control
The Company's Articles of Incorporation and Bylaws contain certain
provisions that could discourage nonnegotiated takeover attempts that certain
stockholders might deem to be in their interests or through which stockholders
might otherwise receive a premium for their shares over the then current market
price and that may tend to perpetuate existing management. These provisions
include: the classification of the terms of the members of the Board of
Directors; supermajority voting provisions for the approval of certain business
combinations; elimination of cumulative voting by stockholders in the election
of directors; certain provisions relating to meetings of stockholders;
restrictions on the acquisition of the Company's equity securities; and
provisions allowing the Board of Directors to consider nonmonetary factors in
evaluating a business combination or a tender or exchange offer. The provisions
in the Company's Articles of Incorporation requiring a supermajority vote for
the approval of certain business combinations and containing restrictions on
acquisitions of the Company's equity securities provide that the supermajority
voting requirements or acquisition restrictions do not apply to business
combinations or acquisitions meeting specified Board of Directors approval
requirements. The Articles of Incorporation also authorizes the issuance of
1,000,000 shares of serial preferred stock as well as additional shares of
Common Stock up to a total of 4,000,000 outstanding shares of capital stock.
These shares could be issued without stockholder approval on terms or in
circumstances that could deter a future takeover attempt.
The Articles of Incorporation, Bylaw and statutory provisions, as well
as certain other provisions of state and federal law and certain provisions in
the Company's and the Association's employee benefit plans and employment
agreements and change in control severance agreements, may have the effect of
discouraging or preventing a future takeover attempt in which stockholders of
the Company otherwise might receive a substantial premium for their shares over
then current market prices. For a detailed discussion of those provisions, see
"Management of the Association -- Certain Benefit Plans and Agreements,"
"Description of Capital Stock," "Certain Restrictions on Acquisition of the
Company, the Converted Association and the Association" and "Certain
Anti-Takeover Provisions in the Articles of Incorporation and Bylaws."
3
Possible Income Tax Consequences of Distribution of Subscription Rights
If the Subscription Rights granted to Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members are deemed to have an
ascertainable value, the receipt of such rights would be taxable to recipients
who exercise the Subscription Rights in an amount equal to such value and the
Association could recognize a gain on such distribution. Whether Subscription
Rights are considered to have ascertainable value is an inherently factual
determination. The Association has received an opinion of Ferguson that such
rights have no value. The opinion of Ferguson is not binding on the IRS. See
"The Conversion -- Effect of Conversion to Stock Form on Depositors and
Borrowers of the Association -- Tax Effects."
Possible Dilutive Effect of MRP and Stock Options
It is expected that, following the consummation of the Conversion, the
Company will adopt the Option Plan and the MRP, both of which would be subject
to stockholder approval, and that such plans would be considered and voted upon
at a meeting of the Company's stockholders to be held within one year but not
less than six months after the Conversion. Under the MRP, employees and
directors could be awarded an aggregate amount of Common Stock equal to 4% of
the shares issued in the Conversion, and under the Option Plan, employees and
directors could be granted options to purchase an aggregate amount of Common
Stock equal to 10% of the shares issued in the Conversion at exercise prices
equal to the market price of the Common Stock on the date of grant. Under the
MRP, the shares issued to directors and employees could be newly issued shares
or shares purchased in the open market. In the event the shares issued under the
MRP and the Option Plan consist of newly issued shares of Common Stock, the
interests of existing stockholders would be diluted. If the shares to fund the
MRP and Option Plan are assumed to come from newly issued shares purchased
directly from the Company, and further assuming that all options granted under
the Option Plan are exercised, existing stockholders' ownership interests will
be diluted by 12.0%. At the midpoint of the Estimated Valuation Range, if all
shares under the MRP and the Option Plan were newly issued and the exercise
price for the option shares were equal to the Purchase Price per share in the
Conversion, the number of outstanding shares of Common Stock would increase from
900,000 to 1,026,000, the pro forma stockholders' equity per share of the
outstanding Common Stock at June 30, 1997 would have been $14.25, compared with
$14.84 without such plans, and the pro forma net income per share of the
outstanding Common Stock for the year ended June 30, 1997 would have been $.27,
compared with $.26 without such plans. See "Pro Forma Data" and "Management of
the Association -- Certain Benefit Plans and Agreements -- Management
Recognition Plan" and "-- Stock Option and Incentive Plan."
Potential Impact on Voting Control of Purchases by Management
The level of ownership or control of the Common Stock after the
Conversion by directors and officers of the Company is expected to be
sufficiently high such that, if each member of management were to act
consistently with each other, management as a whole would have significant
influence over the outcome of any stockholder vote requiring a majority vote and
in the election of directors, and would have veto power in matters requiring the
approval of 80% of the Company's outstanding Common Stock. Thus, such level of
ownership may tend to promote the continuity of existing management. Further,
under such circumstances, management might have the power to authorize actions
that could be viewed as contrary to the best interests of non-affiliated holders
of the Common Stock and might have veto power over actions that such holders may
deem to be in their best interests.
In particular, it is currently expected that directors and executive
officers will subscribe for approximately 145,000 shares, or 16.11% of the
Common Stock (assuming the sale of 900,000 shares at the midpoint of the
Estimated Valuation Range). Based upon the ESOP's purchase of 8.0% of the Common
Stock in the Conversion (72,000 shares at the midpoint of the Estimated
Valuation Range) and assuming the issuance to the MRP of newly issued shares of
Common Stock equal to 4.0% of the Common Stock issued in the Conversion (36,000
shares at the midpoint of the Estimated Valuation Range), management would
initially control 28.11% of the Common Stock outstanding (based upon the
midpoint of the Estimated Valuation Range). If all of the options currently
expected to be granted under the Option Plan (options for 90,000 shares at the
midpoint of the Estimated Valuation Range) were exercised, the percentage
4
of shares controlled by such persons would be _____% of the total number of
shares of Common Stock outstanding (based upon the midpoint of the Estimated
Valuation Range). See "Pro Forma Data," "Proposed Management Purchases,"
"Management of the Association -- Certain Benefit Plans and Agreements," "The
Conversion --Regulatory Restrictions on Acquisition of the Common Stock,"
"Certain Restrictions on Acquisition of the Company and the Association" and
"Certain Anti-Takeover Provisions in the Articles of Incorporation and
Bylaws."
Potential Cost of ESOP and MRP
It is anticipated that the ESOP will purchase 8% of the Common Stock
sold in the Conversion with funds borrowed from the Company. The cost of
acquiring the ESOP shares will be $612,000, $720,000, $828,000 and $952,000 at
the minimum, midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range, respectively. In addition, following the Conversion, and
subject to regulatory and stockholder approval, the Company intends to implement
the MRP, under which employees and directors could be awarded (at no cost to
them) an aggregate amount of Common Stock equal to 4% of the shares issued in
the Conversion. Assuming the sale in the Conversion of the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range, and assuming
the shares of Common Stock to be awarded under the MRP have a cost equal to the
Purchase Price of $10.00 per share, the reduction to stockholders' equity of
funding the MRP would be $306,000, $360,000, $414,000 and $476,000,
respectively.
Accounting practices require an employer such as the Company to record
compensation expense in an amount equal to the fair value of shares committed to
be released from plans such as the ESOP. If shares of Common Stock appreciate in
price over time, compensation expense related to the ESOP may be materially
increased as a result, although the extent of such an increase in expense cannot
be accurately quantified at this time. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Impact of New Accounting
Standards."
HIGH COUNTRY BANCORP, INC.
High Country Bancorp, Inc. was incorporated under the laws of the
State of Colorado in August 1997 at the direction of the Board of Directors of
the Association for the purpose of serving as a savings and loan holding company
of the Converted Association upon the acquisition of all of the capital stock
issued by the Converted Association in the Conversion. The Company has received
approval from the OTS to acquire control of the Converted Association, subject
to satisfaction of certain conditions. Prior to the Conversion, the Company has
not engaged and will not engage in any material operations. Upon consummation of
the Conversion, the Company will have no significant assets other than the
outstanding capital stock of the Converted Association, up to 50% of the net
proceeds of the Conversion (after deducting amounts infused into the Association
and used to fund the ESOP) and a note receivable from the ESOP. Upon
consummation of the Conversion, the Company's principal business will be
overseeing the business of the Converted Association and investing the portion
of the net Conversion proceeds retained by it, and the Company will register
with the OTS as a savings and loan holding company.
As a holding company, the Company will have greater flexibility than
the Association to diversify its business activities through existing or newly
formed subsidiaries or through acquisition or merger with other financial
institutions, although the Company currently does not have any plans,
agreements, arrangements or understandings with respect to any such acquisitions
or mergers. After the Conversion, the Company will be classified as a unitary
savings and loan holding company and will be subject to regulation by the OTS.
The Company's executive offices are located at 130 W. 2nd Street,
Salida, Colorado 81201-0309, and its main telephone number is (719) 539-2516.
SALIDA BUILDING AND LOAN ASSOCIATION
The Association is a federal mutual savings and loan association
operating through offices located in Salida, Colorado, Buena Vista, Colorado and
Leadville, Colorado and serving Chaffee, Lake, Western Fremont and Saguache
5
Counties in Colorado. The Association was chartered in 1886 as the first
state-chartered building and loan association in Colorado. The Association
received federal insurance of its deposit accounts and became a member of the
FHLB in 1937. The Association became a federally-chartered association on August
16, 1993 under its current name of Salida Building and Loan Association. At June
30, 1997, the Association had total assets of $76.3 million, loans receivable
(net) of $63.1 million, total deposits of $56.1 million and equity of $6.0
million.
Historically, the Association has operated as a traditional savings
institution by emphasizing the origination of loans secured by one- to
four-family residences. Since fiscal 1996, the Association has significantly
increased its origination of consumer, commercial business and commercial real
estate loans, including loans for the purchase and development of raw land, all
of which loans have been originated in its market area. For more information,
see "Risk Factors -- Risks Posed by Certain Lending Activities" and "Business of
the Association."
The Association is subject to examination and comprehensive regulation
by the OTS, and the Association's savings deposits are insured up to applicable
limits by the SAIF, which is administered by the FDIC. The Association is a
member of and owns capital stock in the FHLB of Topeka, which is one of 12
regional banks in the FHLB System. The Association is further subject to
regulations of the Federal Reserve Board governing reserves to be maintained and
certain other matters. Regulations significantly affect the operations of the
Association. See "Regulation -- Depository Institution Regulation."
The Association's executive offices are located at 130 W. 2nd Street,
Salida, Colorado 81201-0309, and its main telephone number is (719) 539-2516.
USE OF PROCEEDS
The amount of proceeds from the sale of the Common Stock in the
Conversion will depend upon the total number of shares actually sold in the
Subscription Offering and the Community Offering and the Syndicated Community
Offering, if any, and the actual expenses of the Conversion. As a result, the
actual net proceeds from the sale of the Common Stock cannot be determined until
the Conversion is completed. Based on the sale of $9,000,000 of Common Stock at
the midpoint of the Estimated Valuation Range, the net proceeds from the sale of
the Common Stock are estimated to be approximately $8,480,000. The Company has
received regulatory approval from the OTS to purchase all of the capital stock
of the Converted Association to be issued in the Conversion in exchange for at
least 50% of the net proceeds. Based on the foregoing assumption and the
purchase of 8% of the shares to be issued in the Conversion by the ESOP, the
Association would receive approximately $4,240,000 in cash, and the Company
would retain approximately $3,520,000 in cash and $720,000 in the form of a note
receivable from the ESOP. The ESOP note receivable will be for a ten-year term
and carry an interest rate, which adjusts annually, equal to the prime rate as
published in The Wall Street Journal plus one percent.
-----------------------
The proceeds retained by the Company, after funding the ESOP,
initially will be invested in short-term and intermediate-term securities
including cash and cash equivalents and U.S. government and agency obligations.
Such proceeds will be available for a variety of corporate purposes, including
funding the MRP, if implemented, future acquisitions and diversification of
business, additional capital contributions, dividends to stockholders and future
repurchases of the Common Stock to the extent permitted by applicable
regulations. The Company currently has no specific plans, intentions,
arrangements or understandings regarding acquisitions, capital contributions,
dividends or repurchases. Due to the limited nature of the Company's business
activities, the Company believes that the net proceeds retained after the
Conversion, earnings on such proceeds and payments on the ESOP note receivable
will be adequate to meet the Company's financial needs until dividends are paid
by the Converted Association. However, no assurance can be given that the
Company will not have a need for additional funds in the future. For additional
information, see "Regulation -- Depository Institution Regulation -- Dividend
Restrictions."
The proceeds contributed to the Converted Association will ultimately
become part of the Converted Association's general corporate funds to be used
for its business activities, such as the origination of loans (including
consumer, commercial business and commercial real estate loans) and investments
in securities (including adjustable-
6
rate mortgage-backed securities). Initially it is expected that the proceeds
will be invested in short-term and intermediate-term securities including cash
and cash equivalents and U.S. government and agency obligations. The additional
capital will also provide the Association with additional liquidity to improve
the Association's interest rate risk position and moderate the effect of a
significant increase in interest rates.
Following the one-year anniversary of the completion of the Conversion
(or sooner if permitted by the OTS), and based upon then existing facts and
circumstances, the Company's Board of Directors may determine to repurchase
shares of Common Stock, subject to any applicable statutory and regulatory
requirements. Such facts and circumstances may include, but are not limited to:
(i) market and economic factors such as the price at which the stock is trading
in the market, the volume of trading, the attractiveness of other investment
alternatives in terms of the rate of return and risk involved in the investment,
the ability to increase the book value and/or earnings per share of the
remaining outstanding shares, and an improvement in the Company's return on
equity; (ii) the avoidance of dilution to stockholders by not having to issue
additional shares to cover the exercise of stock options or to fund employee
stock benefit plans; and (iii) any other circumstances in which repurchases
would be in the best interests of the Company and its stockholders. Any stock
repurchases will be subject to the determination of the Company's Board of
Directors that the Company and the Association will be capitalized in excess of
all applicable regulatory requirements after any such repurchases. The payment
of dividends or repurchasing of stock, however, would be prohibited if
stockholders' equity would be reduced below the amount required for the
liquidation account. See "Dividend Policy" and "The Conversion -- Certain
Restrictions on Purchase or Transfer of Shares After the Conversion."
Set forth below are the estimated investable net proceeds from the
Conversion, assuming the sale of the Common Stock at the minimum, midpoint,
maximum and maximum, as adjusted, of the Estimated Valuation Range and assuming
that the ESOP purchases 8% of the shares issued in the Conversion and the MRP
purchases 4% of the shares issued in the Conversion.
Maximum, as
Minimum of Midpoint of Maximum of Adjusted, of
765,000 Shares 900,000 Shares 1,035,000 Shares 1,190,250 Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share
--------- --------- --------- ---------
(In thousands)
Gross offering proceeds................ $ 7,650,000 $ 9,000,000 $10,350,000 $ 11,902,500
Less estimated offering expenses....... 499,000 520,000 541,000 565,000
------------ ----------- ----------- ------------
Estimated net offering
proceeds........................... 7,151,000 8,480,000 9,809,000 11,337,100
Less: ESOP funded by the Company...... 612,000 720,000 828,000 952,000
MRP............................ 306,000 360,000 414,000 476,000
------------ ----------- ----------- ------------
Estimated investable net
proceeds........................... $ 6,233,000 $ 7,400,000 $ 8,567,000 $ 9,909,000
============ =========== =========== ============
DIVIDEND POLICY
General
The payment of dividends on the Common Stock will be subject to
determination and declaration by the Board of Directors of the Company. The
Board of Directors currently intends to establish a policy of paying regular
semi-annual cash dividends on the Common Stock at an initial annual rate of 3.0%
of the $10.00 per share purchase price of the Common Stock in the Conversion
($0.30 per share), with the first dividend being declared and paid no earlier
than for the quarter ending March 31, 1998. In addition, from time to time, the
Board of Directors may determine to pay special cash dividends. Special cash
dividends, if paid, may be paid in addition to, or in lieu of, regular cash
dividends. The payment of dividends, however, will be subject to the
requirements of applicable law and the determination by the Board of Directors
of the Company that the net income, capital and financial condition of the
Company and the Association, thrift industry trends and general economic
conditions justify the payment of dividends, and there can be no assurance that
dividends will be paid or, if paid, will continue to be paid in the future.
7
Since the Company initially will have no significant source of income
other than dividends from the Converted Association, principal and interest
payments on the note payable from the ESOP and earnings from investment of the
cash proceeds of the Conversion retained by the Company, the payment of
dividends by the Company will depend in large part upon the amount of the
proceeds from the Conversion retained by the Company and the Company's earnings
thereon and the receipt of dividends from the Converted Association, which is
subject to various tax and regulatory restrictions on the payment of dividends.
At June 30, 1997, assuming the Association was a stock association and that the
Conversion was completed at the midpoint of the Valuation Range, the amount that
would have been available to be paid by the Association to the Company in the
form of dividends under existing regulatory limitations and restrictions was
approximately $2.8 million (this does not consider the need for the Association
to maintain the liquidation account for Association members). Unlike the
Converted Association, the Company is not subject to regulatory restrictions on
the payment of dividends to stockholders. Under the Colorado General Corporation
Law, dividends may be paid either out of surplus or, if there is no surplus, out
of net profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year. For additional information, see "Regulation -- Depository
Institution Regulation -- Capital Requirements," " -- Dividend Restrictions" and
"Taxation."
Tax Considerations
In addition to the foregoing, earnings of the Association or the
Converted Association appropriated for bad debt reserves and deducted for
federal income tax purposes cannot be used by the Converted Association to pay
cash dividends to the Company without the payment of federal income taxes by the
Association at the then current income tax rate on the amount deemed
distributed, which would include the amount of any federal income taxes
attributable to the distribution. See "Taxation -- Federal Income Taxation" and
Note 9 of the Notes to Financial Statements included elsewhere herein. The
Company does not contemplate any distribution by the Association that would
result in a recapture of the Association's bad debt reserve or create the
above-mentioned federal tax liabilities.
MARKET FOR THE COMMON STOCK
It is anticipated that following completion of the Conversion the
Company will have approximately 900,000 shares of Common Stock issued and
outstanding based on the midpoint of the Estimated Valuation Range. The Company
has never issued capital stock to the public and, consequently, there is no
existing market for the Common Stock. Although the Company has received
conditional approval to trade its Common Stock on the Nasdaq SmallCap Market
under the symbol "_____" there can be no assurance that the Company will meet
Nasdaq SmallCap Market listing requirements, which currently include a minimum
of two market makers in the Common Stock. Trident Securities has indicated its
intention to make a market in the Common Stock, and the Association anticipates
that it will be able to secure at least one additional market maker for the
Common Stock. The Nasdaq has proposed substantial changes to its listing
requirements on the Nasdaq SmallCap Market which would, among other things,
increase the minimum capitalization, stockholder and market maker requirements.
If the proposed changes are approved by the SEC, the Company's Common Stock may
not qualify for listing on the Nasdaq SmallCap Market. In the event, the
Company's Common Stock would be traded on the over-the-counter market through
the OTC "Electronize Bulletin Board." However, purchasers of Common Stock should
have a long-term investment intent and recognize that the absence of an active
and liquid trading market may make it difficult to sell the Common Stock, and
may have an adverse effect on the price.
8
CAPITALIZATION
The following table sets forth information regarding the historical
capitalization, including deposits, of the Association at June 30, 1997 and the
pro forma consolidated capitalization of the Company giving effect to the sale
of the Common Stock at the minimum, midpoint, maximum and 15% above the maximum
of the Estimated Valuation Range based upon the assumptions set forth under "Use
of Proceeds" and below. For additional financial information regarding the
Association, see the Financial Statements and related Notes appearing elsewhere
herein. Depending on market and financial conditions, the total number of shares
to be issued in the Conversion may be significantly increased or decreased above
or below the midpoint of the Estimated Valuation Range. No resolicitation of
subscribers and other purchasers will be made unless the aggregate purchase
price of the Common Stock sold in the Conversion is below the minimum of the
Estimated Valuation Range or is above 15% above the maximum of the Estimated
Valuation Range. A change in the number of shares to be issued in the Conversion
may materially affect the Company's pro forma capitalization. See "Pro Forma
Data" and "The Conversion -- Stock Pricing and Number of Shares to be Issued."
Capitalization Pro Forma Consolidated Capitalization of
of the the Company at June 30, 1997 Based on the Sale of
-----------------------------------------------------------------
Association at 765,000 Shares 900,000 Shares 1,035,000 Shares 1,190,250 Shares
June 30, at $10.00 at $10.00 at $10.00 at $10.00
1997 Per Share Per Share Per Share Per Share
------------ ----------- ----------- ----------- -----------
(Dollars in thousands)
Deposits (1)....................................... $ 56,152 $ 56,152 $ 56,152 $ 56,152 $ 56,152
FHLB advances...................................... 13,520 13,520 13,520 13,520 13,520
--------- ---------- ---------- ---------- ----------
Total deposits and borrowed funds.............. $ 69,672 $ 69,672 $ 69,672 $ 69,672 $ 69,672
========= ========== ========== ========== ==========
Capital stock:
Preferred stock, par value $.01 per share:
authorized - 1,000,000 shares;
assumed outstanding - none................... $ -- $ -- $ -- $ -- $ --
Common Stock, par value $.01 per share
authorized - 3,000,000 shares;
shares to be outstanding - as shown (2)(3)... -- 8 9 10 12
Paid-in capital (2)(3)........................... -- 7,143 8,471 9,799 11,325
Less: Common Stock acquired by ESOP (4)......... -- (612) (720) (828) (952)
Common Stock acquired by MRP (3)....... -- (306) (360) (414) (476)
Retained earnings (5)........................... 5,958 5,958 5,958 5,958 5,958
--------- ---------- ---------- ---------- ----------
Total stockholders' equity (6)............... $ 5,958 $ 12,191 $ 13,358 $ 14,525 $ 15,867
========= ========== ========== ========== ==========
(footnotes on following page)
9
- -----------
(1) Does not reflect withdrawals from savings accounts for the purchase of
Common Stock in the Conversion; any withdrawals will reduce pro forma
capitalization by the amount of such withdrawals.
(2) Does not reflect additional shares of Common Stock that possibly could
be purchased by participants in the Option Plan, if implemented, under
which directors, executive officers and other employees could be
granted options to purchase an aggregate amount of Common Stock equal
to 10% of the shares issued in the Conversion (90,000 shares at the
midpoint of the Estimated Valuation Range) at exercise prices equal to
the market price of the Common Stock on the date of grant.
Implementation of the Option Plan will require regulatory and
stockholder approval. See "Management of the Association -- Certain
Benefit Plans and Agreements -- Stock Option and Incentive Plan" and
"Risk Factors -- Possible Dilutive Effect of MRP and Stock Options."
(3) Assumes a number of shares of Common Stock equal to 4% of the Common
Stock to be sold in the Conversion will be purchased by the MRP through
open market purchases. The dollar amount of the Common Stock to be
purchased by the MRP is based on the $10.00 per share Purchase Price in
the Conversion, represents unearned compensation and is reflected as a
reduction of capital. Such amount does not reflect possible increases
or decreases in the value of such stock relative to the Purchase Price
in the Conversion. As the Association accrues compensation expense to
reflect the vesting of such shares pursuant to the MRP, the charge
against capital will be reduced accordingly. Implementation of the MRP
will require regulatory and stockholder approval. If the shares to fund
the MRP are assumed to come from authorized but unissued shares
purchased by the MRP from the Company at the Purchase Price within the
year following the Conversion, at the minimum, midpoint, maximum and
15% above the maximum of the Estimated Valuation Range, the number of
outstanding shares would be 795,600 shares, 936,000 shares, 1,076,400
shares and 1,237,860 shares, respectively, and total stockholders'
equity would be $15.71, $14.66, $13.88 and $13.20, respectively. If the
MRP acquires authorized but unissued shares from the Company,
stockholders' ownership in the Company would be diluted by
approximately 3.8%. See "Management of the Association -- Certain
Benefit Plans and Agreements -- Management Recognition Plan," "Pro
Forma Data" and "Risk Factors -- Possible Dilutive Effect of MRP and
Stock Options."
(4) Assumes 8% of the shares of Common Stock to be sold in the Conversion
are purchased by the ESOP, and that the funds used to purchase such
shares are borrowed from the Company out of net proceeds. Although
repayment of such debt will be secured solely by the shares purchased
by the ESOP, the Association or the Company expects to make
discretionary contributions to the ESOP in an amount at least equal to
the principal and interest payments on the ESOP debt. The approximate
amount expected to be borrowed by the ESOP is not reflected in this
table as borrowed funds but is reflected as a reduction of capital. As
the Association accrues compensation expense to reflect the allocation
of such shares pursuant to the ESOP, the charge against capital will be
reduced accordingly. See "Management of the Association -- Certain
Benefit Plans and Agreements -- Employee Stock Ownership Plan."
(5) The retained earnings of the Association are substantially restricted.
All capital distributions by the Association are subject to regulatory
restrictions tied to its regulatory capital level. In addition, after
the Conversion, the Association will be prohibited from paying any
dividend that would reduce its regulatory capital below the amount in
the liquidation account to be provided for the benefit of the
Association's Eligible Account Holders and Supplemental Eligible
Account Holders at the time of the Conversion and adjusted downward
thereafter. See "Regulation -- Depository Institution Regulation --
Dividend Restrictions" and "The Conversion -- Effect of Conversion to
Stock Form on Depositors and Borrowers of the Association --
Liquidation Account."
(6) Pro forma stockholders' equity information is not intended to represent
the fair market value of the Common Stock, the current value of the
Association's assets or liabilities or the amounts, if any, that would
be available for distribution to stockholders in the event of
liquidation. Such pro forma data may be materially affected by a change
in the number of shares to be sold in the Conversion and by other
factors. See "Pro Forma Data."
10
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE
The table below presents the Association's historical and pro forma capital
position relative to its various minimum statutory and regulatory capital
requirements at June 30, 1997 at the minimum, midpoint, maximum and maximum, as
adjusted, of the Estimated Valuation Range. For a discussion of the assumptions
underlying the pro forma capital calculations presented below, see "Use of
Proceeds," "Capitalization," "Pro Forma Data" and the financial statements and
related notes appearing elsewhere herein. For a detailed description of the
regulatory capital requirements applicable to the Association, see
"Regulation -- Regulation of the Association -- Regulatory Capital
Requirements."
Pro Forma at June 30, 1997 (1)
Assuming Issuance of Shares of Common Stock at the:
------------------------------------------------------------------------
Minimum of Midpoint of
Historical at 765,000 Shares 900,000 Shares
June 30, 1997 at $ Per Share at $ Per Share
----------------- --------------------- ---------------------
Percent of Percent of Percent of
Amount Assets (2) Amount Assets (2) Amount Assets (2)
------ ---------- -------------------- ------ ----------
(Dollars in thousands)
Capital under generally accepted
accounting principles................. $ 5,958 7.81% $ 8,616 10.82% $ 9,118 11.37%
======= ====== ======== ===== ========= =====
Tangible capital........................ $ 5,955 7.80% $ 8,613 10.82% $ 9,115 11.37%
Tangible capital requirement............ 1,145 1.50 1,194 1.50 1,203 1.50
------- ------ -------- ------ --------- ------
Excess............................... $ 4,810 6.30% $ 7,419 9.32% $ 7,912 9.87%
======= ====== ======== ====== ========= ======
Core capital............................ $ 5,955 7.80% $ 8,613 10.82% $ 9,115 11.37%
Core capital requirement (3)............ 2,290 3.00 2,388 3.00 2,406 3.00
------- ------ -------- ------ --------- ------
Excess............................... $ 3,665 4.80% $ 6,225 7.82% $ 6,709 8.37%
======= ====== ======== ====== ========= ======
Risk-based capital...................... $ 6,552 13.73% $ 9,208 18.55% $ 9,710 19.41%
Risk-based capital requirement.......... 3,818 8.00 3,972 8.00 4,002 8.00
------- ------ -------- ------ --------- ------
Excess............................... $ 2,734 5.73% $ 5,236 10.55 % $ 5,708 11.41%
======= ====== ======== ====== ========= =====
Pro Forma at June 30, 1997 (1)
Assuming Issuance of Shares of Common Stock at the:
---------------------------------------------------
Maximum of Maximum, as Adjusted,
1,035,000 Shares of 1,190,250 Shares
at $ Per Share at $ Per Share
----------------------- ------------------------
Percent of Percent of
Amount Assets (2) Amount Assets (2)
------ ---------- ------ ----------
Capital under generally accepted
accounting principles................. $ 9,621 11.90% $10,199 12.51%
======== ===== ======= =====
Tangible capital........................ $ 9,618 11.90% $10,196 12.51%
Tangible capital requirement............ 1,212 1.50 1,223 1.50
-------- ------ ------- ------
Excess............................... $ 8,406 10.40% $ 8,973 9.51%
======== ===== ======= ======
Core capital............................ $ 9,618 11.90% $10,196 12.51%
Core capital requirement (3)............ 2,424 3.00 2,445 3.00
-------- ------ ------- ------
Excess............................... $ 7,194 8.90% $ 7,751 9.51%
======== ====== ======= ======
Risk-based capital...................... $ 10,213 20.26% $10,791 21.23%
Risk-based capital requirement.......... 4,032 8.00 4,067 8.00
-------- ------ ------- ------
Excess............................... $ 6,181 12.26% $ 6,724 13.23 %
======== ===== ======= ======
- ------------------
(1) Assumes that the Company will purchase all of the capital stock of the
Association to be issued upon Conversion in exchange for 50% of the net
proceeds. Also assumes net proceeds distributed to the Association are
initially invested in assets with an average risk weight of 62%. Further
assumes that 8% of the Common Stock to be sold in the Conversion is acquired
by the ESOP, and that the funds used to acquire such shares are borrowed
from the Company. The amount of Common Stock to be purchased by the ESOP
represents unearned compensation and is reflected in this table as a
reduction of capital. Although repayment of such debt will be secured solely
by the Common Stock purchased by the ESOP, the Association or the Company
expects to make discretionary contributions to the ESOP in an amount at
least equal to the principal and interest payments on the ESOP debt. As the
Association makes contributions to the ESOP for simultaneous payment in an
equal amount on the ESOP debt, there will be a corresponding reduction in
the charge against capital. See "Management of the Association -- Certain
Benefit Plans and Agreements -- Employee Stock Ownership Plan." Also assumes
that the MRP will purchase in the open market Common Stock in an amount
equal to 4% of the Common Stock issued in the Conversion. The implementation
of the MRP is subject to regulatory and stockholder approvals. For purposes
of this table, the cost of the Common Stock to be purchased by the MRP is
assumed to be equal to the $10 price per share being offered in the
Conversion. Such price may increase or decrease between the date of
consummation of the Conversion and the date that, following receipt of
regulatory and stockholder approvals, the shares are actually purchased by
the MRP. The purchase of shares of Common Stock by the MRP following receipt
of such approvals may be from authorized but unissued shares of Common Stock
or in the open market. The amount of Common Stock to be purchased by the MRP
represents unearned compensation and is reflected in this table as a
reduction of capital. As the Association accrues compensation expense over
the five year period following such purchase in accordance with generally
accepted accounting principles to reflect the vesting of such shares of
Common Stock pursuant to the MRP, there will be a corresponding reduction in
the charge against capital. See "Management of the Association -- Certain
Benefit Plans and Agreements --Management Recognition Plan."
(2) Based on the Association's adjusted total assets for the purpose of the
tangible and core capital requirements and risk-weighted assets for the
purpose of the risk-based capital requirement. See "Regulation -- Depository
Institution Regulation -- Capital Requirements."
(3) Does not reflect potential increases in the Association's core capital
requirement to between 4% and 5% of adjusted total assets in the event the
OTS amends its capital requirements to conform to the more stringent
leverage ratio adopted by the Office of the Comptroller of the Currency for
national banks as described in "Regulation."
11
PRO FORMA DATA
The following table sets forth the actual and, after giving effect to
the Conversion for the periods and at the dates indicated, pro forma
consolidated income, stockholders' equity and other data of the Association
prior to the Conversion and of the Company following the Conversion. Unaudited
pro forma consolidated income and related data have been calculated for the year
ended June 30, 1997 as if the Common Stock had been sold at the beginning of
such periods, and the estimated net proceeds had been invested at 5.65% at the
beginning of the period. The foregoing yield approximates the yield on the
One-Year U.S. Treasury bill at June 30, 1997. (While OTS regulations provide for
the use of a yield representing the arithmetic average of the average yield on
the Association's interest-earning assets and the average cost of deposits, the
Association believes that the use of the One-year Treasury bill rate is more
relevant in the current interest rate environment). The pro forma after-tax
yield for the Company and the Association is assumed to be 3.50% for the year
ended June 30, 1997, based on the effective tax rate of 38%. Unaudited pro forma
consolidated stockholders' equity and related data have been calculated as if
the Common Stock had been sold and was outstanding at the end of the periods,
without any adjustment of historical or pro forma equity to reflect assumed
earnings on estimated net proceeds. Per share amounts have been computed as if
the Common Stock had been outstanding at the beginning of the period or at the
dates shown, but without any adjustment of historical or pro forma stockholders'
equity to reflect the earnings on estimated net proceeds. The pro forma data set
forth below do not reflect withdrawals from deposit accounts to purchase shares,
accruals expected to be made by the Association with regard to employee benefit
plans to be adopted in connection with the Conversion or increases in capital
and, in the case of newly issued shares, outstanding Common Stock upon the
exercise of options by participants in the Option Plan, under which an aggregate
amount of Common Stock equal to 10% of the shares issued in the Conversion
(90,000 shares at the midpoint of the Estimated Valuation Range) are expected to
be reserved for issuance to directors, executive officers and employees upon the
exercise of stock options at exercise prices equal to the market price of the
Common Stock on the date of grant. See "Management of the Association -- Certain
Benefit Plans and Agreements."
The estimated net proceeds to the Company, as set forth in the
following tables, assume the sale of the Common Stock at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range. The actual
net proceeds from the sale of the Common Stock cannot be determined until the
Conversion is completed. However, net proceeds set forth on the following tables
are estimated based upon the following assumptions: (i) 100% of the shares of
Common Stock will be sold in the Subscription and Community Offerings as
follows: (a) 8% will be sold to the ESOP and 145,000 shares will be sold to
directors and officers of the Association and their associates, for which
commissions will not be paid; and (b) the remaining shares will be sold to
others in the Subscription and Community Offerings; and (ii) other Conversion
expenses, not including sales commissions, will be approximately $392,000. The
foregoing assumptions regarding estimated purchases in the Subscription and
Community Offerings are based on reasonable market assumptions, market
conditions, consultations between the Association and Trident Securities and
planned purchases by the ESOP. Actual expenses may vary from those estimated.
The stockholders' equity and related data presented herein are not
intended to represent the fair market value of the Common Stock, the current
value of assets or liabilities, or the amounts, if any, that would be available
for distribution to stockholders in the event of liquidation. For additional
information regarding the liquidation account, see "The Conversion -- Effect of
Conversion to Stock Form on Depositors and Borrowers of the Association --
Liquidation Account." The pro forma income and related data derived from the
assumptions set forth above should not be considered indicative of the actual
results of operations of the Converted Association and the Company for any
period. Such pro forma data may be materially affected by a change in the number
of shares to be issued in the Conversion and other factors. See "The Conversion
- -- Stock Pricing and Number of Shares to be Issued."
12
At or for the Year Ended June 30, 1997
----------------------------------------------------------
765,000 900,000 1,035,000 1,190,250
Shares Shares Shares Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share
--------- --------- --------- ---------
(Dollars in thousands, except share and per share amounts)
Gross offering proceeds................................ $ 7,650 $ 9,000 $ 10,350 $ 11,903
Less estimated offering expenses....................... (499) (520) (541) (565)
---------- --------- ---------- ----------
Estimated net offering proceeds..................... 7,151 8,480 9,809 11,337
Less Common Stock acquired by ESOP.................. (612) (720) (828) (952)
Less Common Stock acquired by MRP................... (306) (360) (414) (476)
---------- --------- ---------- ----------
Estimated investable net proceeds................... $ 6,233 $ 7,400 $ 8,567 $ 9,909
========== ========= ========== ==========
Net income
Historical net income............................... $ 44 $ 44 $ 44 $ 44
Pro forma adjustments:
Net income from proceeds.......................... 218 259 300 347
ESOP (1).......................................... (38) (45) (51) (59)
MRP (2)........................................... (38) (45) (51) (59)
---------- --------- ---------- ----------
Pro Forma Net Income................................ $ 186 $ 214 $ 241 $ 273
========== ========= ========== ==========
Net Income Per share
Historical.......................................... $ 0.06 $ 0.05 $ 0.05 $ 0.04
Pro forma adjustments:
Net income from proceeds.......................... 0.31 0.31 0.31 0.31
ESOP (1).......................................... (0.05) (0.05) (0.05) (0.05)
MRP (2)........................................... (0.05) (0.05) (0.05) (0.05)
---------- --------- ---------- ----------
Pro Forma -- Net Income
Per Share..................................... $ 0.26 $ 0.26 $ 0.25 $ 0.25
========== ========= ========== ==========
Number of shares used in calculating earnings
per share (1)(2)..................................... 709,920 835,200 960,480 1,104,552
========== ========= ========== ==========
Stockholders' equity (book value) (3)
Historical........................................... $ 5,958 $ 5,958 $ 5,958 $ 5,958
Estimated net proceeds............................... 7,151 8,480 9,809 11,337
Less Common Stock acquired by:
ESOP (1)........................................... (612) (720) (828) (952)
MRP (2)............................................ (306) (360) (414) (476)
---------- --------- ---------- ----------
Pro Forma........................................ $ 12,191 $ 13,358 $ 14,525 $ 15,867
========== ========= ========== ==========
Per Share
Historical........................................... $ 7.79 $ 6.62 $ 5.76 $ 5.01
Estimated net proceeds................................. 9.35 9.42 9.48 9.52
Less Common Stock acquired by:
ESOP (1)............................................. (0.80) (0.80) (0.80) (0.80)
MRP (2) ............................................. (0.40) (0.40) (0.40) (0.40)
---------- --------- ---------- ----------
Pro Forma.......................................... $ 15.94 $ 14.84 $ 14.03 $ 13.33
========== ========= ========== ==========
Number of shares used in calculating
equity per share..................................... 765,000 900,000 1,035,000 1,190,250
========== ========= ========== ==========
Pro forma price to book value.......................... 62.8% 67.4% 71.3% 75.0%
========== ========= ========== ==========
Pro forma price to earnings (P/E ratio)................ 38.5 38.5 40.0 40.0
========== ========= ========== ==========
(Footnotes on succeeding page)
13
- -----------
(1) Assumes 8% of the shares to be sold in the Conversion are purchased by
the ESOP under all circumstances, and that the funds used to purchase
such shares are borrowed from the Company. The approximate amount
expected to be borrowed by the ESOP is reflected as a reduction of
capital. Although repayment of such debt will be secured solely by the
shares purchased by the ESOP, the Association expects to make
discretionary contributions to the ESOP in an amount at least equal to
the principal and interest payments on the ESOP debt. Pro forma net
income has been adjusted to give effect to such contributions, based
upon a fully amortizing debt with a ten-year term. Because the Company
will be providing the ESOP loan, only principal payments on the ESOP
loan are reflected as employee compensation and benefits expense. For
purposes of this table the Purchase Price of $10.00 was utilized to
calculate the ESOP expense. The Association intends to record
compensation expense related to the ESOP in accordance with American
Institute of Certified Public Accountants ("AICPA") Statement of
Position ("SOP") No. 93-6. As a result, to the extent the value of the
Common Stock appreciates over time, compensation expense related to the
ESOP will increase. SOP 93-6 also changes the earnings per share
computations for leveraged ESOPs to include as outstanding only shares
that have been committed to be released to participants. For purposes
of the preceding table, it was assumed that 10% of the ESOP shares
purchased in the Conversion were committed to be released at the
beginning of the fiscal year. If it is assumed that 100% of the ESOP
shares were committed to be released at the beginning of the fiscal
year, the application of SOP 93-6 would result in net income per share
of $.82, $.73, $.66 and $.60, respectively, based on the sale of shares
at the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Valuation Range. See "Management of the Association --
Certain Benefit Plans and Agreements -- Employee Stock Ownership Plan."
(2) Assumes a number of shares of Common Stock equal to 4% of the Common
Stock to be sold in the Conversion will be purchased by the MRP in the
open market in the year following the Conversion. The dollar amount of
the Common Stock to be purchased by the MRP is based on the Purchase
Price in the Conversion and represents unearned compensation and is
reflected as a reduction of capital. Such amount does not reflect
possible increases or decreases in the value of such stock relative to
the Purchase Price in the Conversion. As the Association accrues
compensation expense to reflect the vesting of such shares pursuant to
the MRP, the charge against capital will be reduced accordingly. MRP
adjustment is based on amortization of the MRP over five years.
Implementation of the MRP would require stockholder approval at a
meeting of the Company's stockholders to be held within one year but no
earlier than six months after the Conversion. For purposes of this
table, it is assumed that the MRP will be adopted by the Association's
Board of Directors and approved by the Company's stockholders, and that
the MRP will purchase the shares of Common Stock in the open market
within the year following the Conversion. If the shares to be purchased
by the MRP are assumed to be newly issued shares purchased from the
Company by the MRP at the Purchase Price, at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range, the
offering price as a percentage of pro forma stockholders' equity per
share would be 63.6%, 68.2%, 72.0% and 75.8%, respectively, and pro
forma net income per share would have been $.27, $.26, $.26 and $.25,
respectively. As a result of the MRP, stockholders' interests will be
diluted by approximately 3.8%. See "Management of the Association --
Certain Benefit Plans and Agreements -- Management Recognition Plan"
and "Risk Factors -- Dilutive Effect of MRP and Stock Options."
(3) Consolidated stockholders' equity represents the excess of the carrying
value of the assets of the Company over its liabilities. The amounts
shown do not reflect the federal income tax consequences of the
potential restoration to income of the bad debt reserves for income tax
purposes, which would be required in the event of liquidation. The
amounts shown also do not reflect the amounts required to be
distributed in the event of liquidation to eligible depositors from the
liquidation account which will be established upon the consummation of
the Conversion. Pro forma stockholders' equity information is not
intended to represent the fair market value of the Common Stock, the
current value of the Association's assets or liabilities or the
amounts, if any, that would be available for distribution to
stockholders in the event of liquidation. Such pro forma data may be
materially affected by a change in the number of shares to be sold in
the Conversion and by other factors.
(4) It is expected that following the consummation of the Conversion the
Company will adopt the Option Plan, which would be subject to
stockholder approval, and that such plan would be considered and voted
upon at a meeting of the Company's stockholders to be held within one
year but no earlier than six months after the Conversion. Upon adoption
of the Option Plan, employees and directors could be granted options to
purchase an aggregate amount of Common Stock equal to 10% of the shares
issued in the Conversion at exercise prices equal to the market price
of the Common Stock on the date of grant. In the event the shares
issued under the Option Plan consist of newly issued shares of Common
Stock and all options available for award under the Option Plan were
awarded, the interests of existing stockholders would be diluted. At
the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Valuation Range, if all shares under the Option Plan were
newly issued and the exercise price for the option shares were equal to
the Purchase Price in the Conversion, net income per share would be
$.27, $.27, $.26 and $.26, respectively, and the stockholders' equity
per share would be $15.40, $14.40, $13.67 and $13.03, respectively.
14
PROPOSED MANAGEMENT PURCHASES
The following table sets forth information regarding the approximate
number of shares of the Common Stock intended to be purchased by each of the
directors and executive officers of the Association and by all directors and
executive officers as a group, including their associates. For purposes of the
following table, it has been assumed that 900,000 shares of the Common Stock
will be sold at $10.00 per share, the midpoint of the Estimated Valuation Range
(see "-- Stock Pricing and Number of Shares to be Issued") and that sufficient
shares will be available to satisfy subscriptions in all categories.
Percent Aggregate Purchase
Total of Price of
Name and Position Shares Total Proposed Purchases
----------------- ------ ----- ------------------
Robert B. Mitchell, Chairman of the Board 20,000 2.22% $ 200,000
Larry D. Smith, President and Director 25,000 2.78 250,000
Scott G. Erchul, Vice President and Director 12,500 1.39 125,000
Timothy G. Glenn, Director 25,000 2.78 250,000
Phillip W. Harsh, Director 25,000 2.78 250,000
Richard A. Young, Director 25,000 2.78 250,000
Frank L. DeLay, Chief Financial Officer 12,500 1.39 125,000
------ ---- ---------
All directors and executive officers, as a
group (7 persons) and their associates 145,000 16.11 1,450,000
ESOP (1) 72,000 8.00 720,000
MRP (2) 36,000 4.00 360,000
------- ----- ----------
Total (3) 253,000 28.11% $2,530,000
======= ===== ==========
(Differences due to rounding)
- ----------
(1) Consists of shares that could be allocated to participants in the ESOP,
under which executive officers and other employees would be allocated in
the aggregate 8% of the Common Stock issued in the Conversion. See
"Management of the Association -- Certain Benefit Plans and Agreements --
Employee Stock Ownership Plan."
(2) Consists of shares that are expected to be awarded to participants in
the MRP, if implemented, under which directors, executive officers and
other employees would be awarded an aggregate number of shares equal to
4% of the Common Stock sold in the Conversion (36,000 shares at the
midpoint of the Estimated Valuation Range). The dollar amount of the
Common Stock to be purchased by the MRP is based on the Purchase Price in
the Conversion and does not reflect possible increases or decreases in
the value of such stock relative to the Purchase Price per share in the
Conversion. Implementation of the MRP would require stockholder approval.
See "Management of the Association -- Certain Benefit Plans and
Agreements -- Management Recognition Plan." Such shares could be newly
issued shares or shares purchased in the open market following
implementation of the MRP, in the sole discretion of the Company's Board
of Directors. The percentage shown assumes the shares are purchased in
the open market. If all shares acquired by the MRP are newly issued
shares, the percentage of the outstanding Common Stock owned by the MRP
would be 3.8%. Any sale of newly issued shares to the MRP would be
dilutive to existing stockholders. See "Risk Factors --Possible Dilutive
Effect of MRP and Stock Options."
(3) Does not include shares that might be purchased by participants in an
Option Plan, intended to be implemented, under which directors, executive
officers and other employees would be granted options to purchase an
aggregate amount of Common Stock equal to 10% of the shares issued in the
Conversion (90,000 shares at the midpoint of the Estimated Valuation
Range) at exercise prices equal to the market price of the Common Stock
on the date of grant. Shares issued pursuant to the exercise of options
could be from treasury stock or newly issued shares. Implementation of
the Option Plan would require stockholder approval. See "Management of
the Association -- Certain Benefit Plans and Agreements -- Stock Option
and Incentive Plan."
15
SALIDA BUILDING AND LOAN ASSOCIATION
STATEMENTS OF INCOME
The following Statements of Income of Salida Building & Loan
Association for each of the years in the two-year period ended June 30, 1997
have been audited by Grimsley, White & Company, independent certified public
accountants, whose report thereon appears elsewhere herein. The Statements of
Income should be read in conjunction with the Financial Statements and related
notes included elsewhere in this Prospectus.
Year Ended June 30,
-----------------------------
1997 1996
---------- ----------
Interest Income
Interest on loans........................................................ $5,249,291 $4,326,277
Interest on securities available-for-sale................................ 18,171 73,845
Interest on securities held-to-maturity.................................. 412,386 506,463
Interest on other interest-bearing assets................................ 84,302 40,960
---------- -----------
Total interest income............................................. 5,764,150 4,947,545
---------- -----------
Interest Expense
Deposits................................................................. 2,179,408 1,966,757
Federal Home Loan Bank advances.......................................... 633,923 325,843
---------- -----------
Total interest expense............................................ 2,813,331 2,292,600
---------- -----------
Net interest income.......................................................... 2,950,819 2,654,945
Provision for losses on loans................................................ 282,000 59,450
---------- -----------
Net interest income after provision for loan losses....................... 2,668,819 2,595,495
---------- -----------
Noninterest Income
Service charges on deposits............................................... 123,955 118,798
Other..................................................................... 17,980 27,421
---------- -----------
Total noninterest income........................................... 141,935 146,219
---------- -----------
Noninterest Expense
Compensation and benefits................................................. 1,345,030 868,903
Occupancy and equipment................................................... 482,360 355,699
Insurance and professional fees........................................... 169,937 205,298
Other..................................................................... 405,163 293,559
SAIF special assessment................................................... 296,578 --
Loss on sale of loans..................................................... 56,185 92,535
---------- -----------
Total noninterest expense............................................ 2,755,253 1,815,994
---------- -----------
Income before income taxes................................................... 55,501 925,720
Income tax expense........................................................... 11,085 407,018
---------- -----------
Net income................................................................... $ 44,416 $ 518,702
========== ===========
See Notes to Financial Statements
16
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company has only recently been formed and, accordingly, has no results
of operations at this time. As a result, this discussion relates to the
financial condition and results of operations of the Association. The principal
business of the Association consists of accepting deposits from the general
public and investing these funds primarily in loans and in investment securities
and mortgage-backed securities. The Association's loan portfolio consists
primarily of loans secured by residential real estate located in its market
area, with terms of 15 to 25 years, as well as commercial real estate,
commercial business, land development and consumer loans. See "Business of the
Association."
The Association's net income is dependent primarily on its net interest
income, which is the difference between interest income earned on its loan,
investment securities and mortgage-backed securities portfolio and interest paid
on interest-bearing liabilities. Net interest income is determined by (i) the
difference between yields earned on interest-earning assets and rates paid on
interest-bearing liabilities ("interest rate spread") and (ii) the relative
amounts of interest-earning assets and interest-bearing liabilities. The
Association's interest rate spread is affected by regulatory, economic and
competitive factors that influence interest rates, loan demand and deposit
flows. To a lesser extent, the Association's net income also is affected by the
level of noninterest expenses such as compensation and employee benefits and
FDIC insurance premiums.
The operations of the Association are significantly affected by prevailing
economic conditions, competition and the monetary, fiscal and regulatory
policies of governmental agencies. Lending activities are influenced by the
demand for and supply of housing, competition among lenders, the level of
interest rates and the availability of funds. Deposit flows and costs of funds
are influenced by prevailing market rates of interest, primarily on competing
investments, account maturities and the levels of personal income and savings in
the Association's market area.
Asset/Liability Management
The Association seeks to reduce its exposure to changes in interest
rates by originating shorter term consumer and commercial business loans with
maturities of no more than 10 years and by investing in adjustable-rate
mortgage-backed securities. The matching of the Association's assets and
liabilities may be analyzed by examining the extent to which its assets and
liabilities are interest rate sensitive and by monitoring the expected effects
of interest rate changes on the Association's net interest income.
An asset or liability is interest rate sensitive within a specific time
period if it will mature or reprice within that time period. If the
Association's assets mature or reprice more quickly or to a greater extent than
its liabilities, the Association's net portfolio value and net interest income
would tend to increase during periods of rising interest rates but decrease
during periods of falling interest rates. If the Association's assets mature or
reprice more slowly or to a lesser extent than its liabilities, the
Association's net portfolio value and net interest income would tend to decrease
during periods of rising interest rates but increase during periods of falling
interest rates. As a result of the interest rate risk inherent in the historical
savings institution business of originating long-term loans funded by short-term
deposits, the Association has pursued certain strategies designed to decrease
the vulnerability of its earnings to material and prolonged changes in interest
rates.
17
Interest Rate Sensitivity Analysis
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific period if it
will mature or reprice within that period. The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets maturing
or repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that time period. A gap is considered
positive when the amount of interest rate sensitive assets exceeds the amount of
interest rate sensitive liabilities, and is considered negative when the amount
of interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets.
Generally, during a period of rising interest rates, a negative gap would
be expected to adversely affect net interest income while a positive gap would
be expected to result in an increase in net interest income, while conversely
during a period of declining interest rates, a negative gap would be expected to
result in an increase in net interest income and a positive gap would be
expected to adversely affect net interest income. As noted above, the
Association is attempting to improve its significant negative gap by emphasizing
the origination of shorter-term consumer and commercial business loans, and by
investing a portion of the net proceeds of the Conversion in adjustable-rate
mortgage-backed securities.
Net Portfolio Value. In recent years, the Association has measured its
interest rate sensitivity by computing the "gap" between the assets and
liabilities which were expected to mature or reprice within certain periods,
based on assumptions regarding loan prepayment and deposit decay rates formerly
provided by the OTS. However, the OTS now requires the computation of amounts by
which the net present value of an institution's cash flows from assets,
liabilities and off balance sheet items (the institution's net portfolio value,
or "NPV") would change in the event of a range of assumed changes in market
interest rates. These computations estimate the effect on an institution's NPV
from instantaneous and permanent 1% to 4% increases and decreases in market
interest rates. In the Association's interest rate sensitive policy, the Board
of Directors has established a maximum decrease in net interest income and
maximum decreases in NPV given these instantaneous changes in interest rates.
The following table sets forth the interest rate sensitivity of the
Association's net portfolio value as of June 30, 1997 in the event of 1%, 2%, 3%
and 4% instantaneous and permanent increases and decreases in market interest
rates, respectively. These changes are set forth below as basis points, where
100 basis points equals one percentage point.
Net Portfolio Value NPV as % of Portfolio Value of Assets
Change ------------------------------------ -------------------------------------
in Rates $ Amount $ Change % Change NPV Ratio Basis Point Change
-------- -------- -------- -------- --------- ------------------
(Dollars in thousands)
+ 400 bp
+ 300 bp
+ 200 bp
+ 100 bp
0 bp [Table to be completed in amendment]
- 100 bp
- 200 bp
- 300 bp
- 400 bp
18
The following table sets forth the interest rate risk capital component
for the Association at June 30, 1997 given a hypothetical 200 basis point rate
change in market interest rates. See "Regulation -- Depository Institution
Regulation -- Capital Requirements."
June 30, 1997
-------------
Pre-shock NPV Ratio: NPV as % of Portfolio Value of Assets....... %
Exposure Measure: Post-Shock NPV Ratio........................... %
Sensitivity Measure: Change in NPV Ratio......................... bp
Interest Rate Risk Capital Component ($000)...................... (1)
- ----------
(1) Although this calculation is not applicable to the Association, the
Association has a negative interest rate sensitivity gap which would
adversely affect net interest income during a period of rising interest
rates. The Association believes its high level of liquid assets would,
however, allow the Association to address this negative impact.
Computations of prospective effects of hypothetical interest rate
changes are based on numerous assumptions, including relative levels of market
interest rates and loan prepayments, and should not be relied upon as indicative
of actual results. Further, the computations do not contemplate any actions the
Association may undertake in response to changes in interest rates.
Certain shortcomings are inherent in the method of analysis presented
in both the computation of NPV and in the analysis presented in prior tables
setting forth the maturing and repricing of interest-earning assets and
interest-bearing liabilities. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may react
in differing degrees to changes in market interest rates. The interest rates on
certain of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other assets and liabilities may lag
behind changes in market rates. Based on the above, net interest income should
decline with instantaneous increases in interest rates while net interest income
should increase with instantaneous declines in interest rates. Further, in the
event of a change in interest rates, prepayment and early withdrawal levels
would likely deviate significantly from those assumed in the tables.
The Association originates fixed-rate and variable-rate real estate
loans and holds most loans in portfolio until maturity, except as may be
appropriate for asset/liability management purposes. Because the Association's
interest-bearing liabilities which mature or reprice within short periods
substantially exceed its earning assets with similar characteristics, material
and prolonged increases in interest rates generally would adversely affect net
interest income, while material and prolonged decreases in interest rates
generally, but to a lesser extent because of their historically low levels,
would have the opposite effect.
Average Balance, Interest and Average Yields and Rates
The following table sets forth certain information relating to the
Association's average interest-earning assets and interest-bearing liabilities
and reflects the average yield on assets and average cost of liabilities for the
periods and at the date indicated. Such yields and costs are derived by dividing
income or expense by the average monthly balance of assets or liabilities,
respectively, for the periods presented. Management does not believe that the
use of month-end balances instead of daily balances has caused any material
difference in the information presented.
The table also presents information for the periods and at the date
indicated with respect to the difference between the average yield earned on
interest-earning assets and average rate paid on interest-bearing liabilities,
or "interest rate spread," which savings institutions have traditionally used as
an indicator of profitability. Another indicator of an institution's net
interest income is its "net yield on interest-earning assets," which is its net
interest income divided by the average balance of interest-earning assets. Net
interest income is affected by the interest rate spread and by the relative
amounts of interest-earning assets and interest-bearing liabilities. When
interest-earning assets approximate or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income.
19
Year Ended June 30,
---------------------------------------------------------------
At June 30, 1997 1996
1997 ----------------------------- -------------------------------
------------------ Average Average
Yield/ Average Yield/ Average Yield/
Balance Cost Balance Interest Cost Balance Interest Cost
------- ----- ------- -------- ------- ------- -------- -------
(Dollars in thousands)
Interest-earning assets:
Interest-bearing deposits................ $ 2,381 3.53% $ 1,398 $ 84 6.01% $ 543 $ 41 7.55%
Investments.............................. 6,328 6.81 7,234 431 5.96 9,081 581 6.40
Loans.................................... 63,129 8.31 58,752 5,249 8.93 47,442 4,326 9.12
---------- ---------- ---------- --------- ----------
Total interest-earning assets ............. 71,836 8.02 67,384 5,764 8.55 57,066 4,948 8.67
---------- ----------
Non-interest-earning assets................ 4,488 3,845 3,120
---------- ---------- ---------
Total assets............................... $ 76,324 $ 71,229 $ 60,186
========== ========== =========
Interest-bearing liabilities:
Savings deposits......................... $ 56,152 3.88 $ 53,890 2,179 4.04 $ 48,451 $ 1,967 4.06
FHLB advances............................ 13,520 4.69 10,508 634 6.03 5,308 326 6.14
---------- ---------- ---------- --------- ----------
Total interest-bearing liabilities......... 69,672 4.04 64,398 2,813 4.37 53,759 2,293 4.27
---------- ----------
Non-interest bearing liabilities........... 694 908 760
---------- ---------- ---------
Total liabilities.......................... 70,366 65,306 54,519
Equity..................................... 5,958 5,923 5,667
---------- ---------- ---------
Total liabilities and equity............... $ 76,324 $ 71,229 $ 60,186
========== ========== =========
Net interest income........................ $ 2,951 $ 2,655
========== ==========
Net interest rate spread (1)............... 3.98% 4,19% 4.41%
==== ==== ====
Net interest\dividend earning assets....... $ 2,986 3,307
========== =========
Net interest margin (2).................... 4.38% 4.65%
==== ====
Average interest-earning assets to
average interest-bearing liabilities..... 104.64% 106.15%
========= =========
- --------------------
(1) Net interest rate spread represents the difference between the average yield
on interest-earning assets and the average rate on interest-bearing
liabilities.
(2) Net interest margin represents net interest income divided by average
interest-earning assets.
20
Rate/Volume Analysis
The following table sets forth certain information regarding changes in
interest income and interest expense of the Association for the periods
indicated. For each category of interest-earning asset and interest-bearing
liability, information is provided on changes attributable to: (i) changes in
volume (changes in volume multiplied by old rate); (ii) changes in rate (changes
in rate multiplied by old volume); and (iii) changes in rate/volume (changes in
rate multiplied by changes in volume).
Year Ended June 30,
-----------------------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
--------------------------------------- ---------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
--------------------------------------- ---------------------------------------
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
------ ---- ------ ----- ------ ---- ------ -----
(In thousands)
Interest-earning assets:
Interest-bearing deposits ................ $ 66 $ (8) $ (13) $ 45 $ (8) $ -- $ -- $ (8)
Investments .............................. (118) (40) 8 (150) (82) 81 (12) (13)
Loans .................................... 1,033 (90) (21) 922 837 176 45 1,058
------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning assets .......... 981 (138) (26) 817 747 257 33 1,037
------- ------- ------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
Deposits ................................. 221 (9) (1) 211 125 282 23 430
FHLB advances ............................ 321 (6) (5) 310 273 (3) (11) 259
------- ------- ------- ------- ------- ------- ------- -------
Total interest-bearing liabilities .... 542 (15) (6) 521 398 279 12 689
------- ------- ------- ------- ------- ------- ------- -------
Increase (decrease) in net interest
income ................................. $ 439 $ (123) $ (20) $ 296 $ 349 $ (22) $ 21 $ 348
======= ======= ======= ======= ======= ======= ======= =======
21
Comparison of Financial Condition at June 30, 1997 and June 30, 1996
The Association's total assets increased by $13.1 million from $63.2
million at June 30, 1996 to $76.3 million at June 30, 1997, with $13.0 million
of the increase reported in loans receivable. The Association's market area is
experiencing favorable population growth, resulting in increasing loan demand.
The allowance for loan losses totaled $604,000 and $411,000 at June 30,
1997. and 1996. The loans charged off, net of recoveries, during the years ended
June 30, 1997 and 1996 amounted to $89,000 and $53,000. At June 30, 1997, the
ratio of the allowance for loan losses to net loans was .96%. as compared to
.82% at June 30, 1996. The increase in the ratio is attributed to loan growth,
and additional allowances established due to the increase in consumer,
commercial real estate, commercial business and land development loans.
At June 30, 1997 the Association's investment portfolio consisted of
mortgage-backed securities and Federal Home Loan Bank stock. The mortgage-backed
securities were reported as securities held-to-maturity, carried at amortized
cost of $5.3 million, with an estimated fair value of $5.4 million. The Federal
Home Loan Bank stock is carried at cost which is assumed to be equal to its
market value, based on the fact the stock is only redeemable at par from the
FHLB or another member institution. During the year ended June 30, 1997, the
FHLB declared a stock dividend of $42,000.
The Association completed construction of two new buildings located at
the Association's two branch sites. The cost of the buildings and related
equipment was approximately $1.3 million.
At June 30, 1997 deposits had increased to $56.2 million, from $49.5
million at June 30, 1996 or a net increase of 13.5%. Part of the increase is
attributed to the new branch building in Buena Vista, Colorado, and increased
activity in the Association's market area.
Certificates of deposit at June 30, 1997 and 1996 included
approximately $8.7 million and $9.2 million of deposits with balances of
$100,000 or more. Such time deposits may be risky because their continued
presence in the Association is dependent partially upon the rates paid by the
Association rather than any customer relationship and, therefore, may be
withdrawn upon maturity if another institution offers higher interest rates. The
Association may be required to resort to other funding sources such as borrowing
or sales of its securities if the Association believes that increasing its rates
to maintain such deposits would adversely affect its operating results. At this
time, the Association does not believe that it will need to significantly
increase its deposit rates to maintain such certificates of deposit, and
therefore, does not anticipate resorting to alternative funding sources.
Advances from the FHLB went from $7.2 million as of June 30, 1996 to
$13.5 million as of June 30, 1997. The increase was used to fund the growth in
loans originated during the year.
Accounts payable and other liabilities increased by approximately
$230,000 for the year ended June 30, 1997, due to the implementation of certain
benefit plans.
Comparison of Operating Results for the Year Ended June 30, 1997 to the Year
Ended June 30, 1996
Net Income. The Association's net income for the year ended June 30,
1997 was $44,000 compared to $519,000 for the year ended June 30, 1996. The
decrease for 1997 is attributed to the special SAIF assessment of $297,000, the
adoption of certain benefit plans resulting in a one-time charge of $237,000,
and an increase in the provision for losses on loans of approximately $223,000,
which was offset by an increase in net interest income of approximately
$296,000.
Interest Income. Interest income increased by $817,000 from $5.0
million to $5.8 million or by 16.5%, during fiscal 1997. This change resulted in
part from an overall increase of average interest-earning assets by $10.3
million from $57.1 million to $67.4 million or by 18.1% from fiscal 1996 to
fiscal 1997. The Association experienced a decrease in the average yield on the
interest-earning assets from 8.67% for fiscal 1996 to 8.55% for fiscal 1997.
22
Although loans were made at lower rates during fiscal 1997, it provided the
Association with a competitive product that lead to growth in residential and
other lending and earned a comparatively higher yield than short-term
investments.
Interest Expense. Interest expense increased $521,000 or 22.7% to $2.8
million for the year ended June 30 1997 from $2.3 million for the year ended
June 30, 1996. For the year ended June 30, 1997, the average cost of deposits
was 4.04%., compared to 4.06% for the year ended June 30, 1996. The interest
expense for FHLB advances increased from $326,000 for the year ended June 30,
1996, to $634,000 for the year ended June 30, 1997. The increase is attributable
to increased borrowings of $6.4 million.
Provision for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and the general economy. Such evaluation
considers numerous factors including, general economic conditions, loan
portfolio composition, prior loss experience, the estimated fair value of the
underlying collateral and other factors that warrant recognition in providing
for an adequate loan loss allowance.
The provision for loan losses increased approximately $223,000 or 378%
to $282,000 for the year ended June 30, 1997 from $59,000 for the year ended
June 30, 1996. The increase in the provision for loan losses was the result of
the increase in the Association's loan portfolio, including significant
increases in: one- to four-family loans of $8.4 million; land development loans
of $900,000; consumer loans (primarily auto loans) of $1.7 million; and
commercial business loans of $2.0 million. Consumer, commercial business, and
land development loans are generally considered to involve a higher degree of
credit risk than one- to four-family residential mortgage loans. See "Risk
Factors -- Risks Posed by Certain Lending Activities" and "Business of the
Association."
Noninterest Expense. Noninterest expense increased by $939,000 or 51.7%
to $2.76 million for the year ended June 30, 1997 from $1.82 million for the
year ended June 30, 1996. Compensation and benefits expenses increased by
$476,000 or 54.8% to $1.34 million at June 30, 1997 from $869,000 at June 30,
1996. The increase in compensation and benefits expenses at June 30, 1997 was
primarily the result of newly implemented benefit plans. Occupancy and equipment
expense increased by $126,000 or 35.3%, to $482,000 at June 30, 1997 from
$356,000 at June 30, 1996. The increase in occupancy and equipment expense was
the result of the new branch office facilities in Leadville and Buena Vista.
Pursuant to the Economic Growth and Paperwork Reduction Act of 1996 (the "Act"),
the FDIC imposed a special assessment on SAIF members to capitalize the SAIF at
the designated reserve level of 1.25% as of October 31, 1996. Based on the
Association's deposits as of March 31, 1995, the date for measuring the amount
of the special assessment pursuant to the Act, the Association's special
assessment was $297,000. The assessment rate for the SAIF special assessment was
65.7 basis points, compared to 23 basis points for the regular assessment for
the six months ended September 30, 1996, and 6.48 basis points for the regular
assessment for the last two quarters of fiscal 1997.
Income Taxes. The Association's effective tax rate for the years ended June
30, 1997 and 1996 was 20% and 44%, respectively. The change was due to rates
used for the higher income level and State credits that were available.
Liquidity and Capital Resources
Following the completion of the Conversion, the Company initially will
have no business other than that of the Converted Association and investing the
net proceeds retained by it. Management believes that the net proceeds to be
retained by the Company, earnings on such proceeds and principal and interest
payments on the ESOP loan, together with dividends that may be paid from the
Converted Association to the Company following the conversion, will provide
sufficient funds for its initial operations and liquidity needs; however, no
assurance can be given that the Company will not have a need for additional
funds in the future. The Converted Association will be subject to certain
regulatory limitations with respect to the payment of dividends to the Company.
See "Dividend Policy " and "Regulation Depository Institution Regulation -
Dividend Restrictions." The Company intends to lend a portion of the net
proceeds retained from the Conversion to the ESOP to permit its purchase of
Common Stock in the Conversion. See "Use of Proceeds."
23
At June 30, 1997, the Association exceeded all regulatory minimum
capital requirements. For a detailed discussion of the OTS regulatory capital
requirements, and for a tabular presentation of the Association's compliance
with such requirements, see "Regulation - Depository Institution Regulation -
Capital Requirements," and Note 11 of Notes to Financial Statements.
The Association's primary sources of funds consists of deposits,
repayment of loans and mortgage-backed securities, maturities of investments and
interest-bearing deposits, and funds provided from operations. While scheduled
repayments of loans and mortgage-backed securities and maturities of investment
securities are predicable sources of funds, deposit flows and loan prepayments
are greatly influenced by the general level of interest rates, economic
conditions and competition. The Association uses its liquidity resources
principally to fund existing and future loan commitments, to fund maturing
certificates of deposit and demand deposit withdrawals, to invest in other
interest-earning assets, to maintain liquidity, and to meet operating expenses.
Management believes that loan repayments and other sources of funds will be
adequate to meet the Association's liquidity needs for the immediate future.
The Association is required to maintain minimum levels of liquid assets
as defined by OTS regulations. This requirement, which may be varied at the
direction of the OTS depending upon economic conditions and deposit flows, is
based upon a percentage of deposits and short-term borrowings. The required
minimum ratio is currently 5%. The Association has historically maintained a
level of liquid assets in excess of regulatory requirements. The Association's
liquidity ratios at June 30, 1997 and 1996 were 5.51% and 6.90%, respectively.
The Association's liquidity ratios at June 30, 1997 and 1996 were reflective of
the demand for new loans.
A major portion of the Association's liquidity consists of cash and
cash equivalents, which include investments in highly liquid, short-term
deposits. The level of these assets is dependent on the Association's operating,
investing, lending and financing activities during any given period. At June 30,
1997, cash and cash equivalents totaled $3.3 million.
The primary investing activities of the Association include origination
of loans and purchase of investment securities. During the year ended June 30,
1997 loan originations totaled $36.4 million. These originations were funded in
part by loan and mortgage-backed prepayments, deposit growth, and by advances
from the FHLB.
Liquidity management is both a daily and long-term function of business
management. If the Association requires funds beyond its ability to generate
them internally, the Association borrows funds from the FHLB. At June 30, 1997,
the Association had outstanding advances from the FHLB of $13.5 million.
At June 30, 1997, the Association had $740,000 in outstanding
commitments to originate loans. The Association anticipates that it will have
sufficient funds available to meet its current loan origination commitments.
Certificates of deposit which are scheduled to mature in one year or less
totaled $25.3 million at June 30, 1997. Based on historical experience,
management believes that a significant portion of such deposits will remain with
the Association.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and results of operations in terms
of historical dollars without considering changes in the relative purchasing
power of money over time because of inflation. Unlike most industrial companies,
virtually all of the assets and liabilities of the Association are monetary in
nature. As a result, interest rates have a more significant impact on the
Association's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the extent as
the price of goods and services.
Impact of New Accounting Standards
Accounting for ESOP. The Accounting Standards Division of the American
Institute of Certified Public Accountants approved Statement of Position ("SOP")
93-6, "Employers' Accounting for Employee Stock Ownership
24
Plans," which is effective for fiscal years beginning after December 15, 1993.
SOP 93-6 changed, among other things, the measure of compensation recorded by
employers from the cost of ESOP shares to the fair value of ESOP shares. To the
extent that the fair value of the common stock held by the ESOP that are
committed to be released directly to compensate employees, differs from the cost
of such shares, compensation expenses and a related charge or credit to
additional paid-in capital will be reported in the Association's financial
statements. The adoption of the ESOP by the Association and the application of
SOP 93-6 is likely to result in fluctuations in compensation expense as a result
of changes in the fair value of the common stock. However, any such compensation
expense fluctuations will result in an offsetting adjustment to paid-in capital,
and therefore, total capital will not be affected.
Disclosure of Derivative Financial Instruments. In October, 1994, the
Financial Accounting Standards Board ("FASB) issued SFAS No. 119 "Disclosure
about Derivative Financial Instruments and Fair Value of Financial Instruments."
This statement addresses the disclosure of derivative financial instruments
including the face amount, nature and terms. For derivatives held for trading,
disclosure of objectives, strategies, policies on reporting and income
recognition method is required. This statement is effective for financial
statements for fiscal years ending after December 15, 1995. Currently the
Association does not own any derivative financial instruments and therefore SFAS
No. 119 does not have any impact on the financial statements.
Accounting for Stock-Based Compensation. In October, 1995, the
Financial Accounting Standards Board issued SFAS No. 123, "Accounting for
Stock-Based Compensation to Employees." This statement encourages entities to
adopt the fair value based method of accounting for employee stock options or
other stock compensation plans. However, it allows an entity to measure
compensation cost for those plans using the intrinsic value based method of
accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Under the fair value based method, compensation cost is measured at
the grant date based on the value of the award and is recognized over the
service period, which is usually the vesting period. Under the intrinsic value
based method, compensation cost is the excess of the quoted market price of the
stock at the grant date over the amount an employee must pay to acquire the
stock. Most fixed stock option plans - the most common type of stock
compensation plan - have no intrinsic value at grant date and under Opinion No.
25 no compensation cost is recognized for them.
Compensation cost is recognized for other types of stock based
compensation plans under Opinion No. 25, including plans with variable, usually
performance-based features. This Statement requires that an employer's financial
statements include certain disclosures about stock-based employee compensation
arrangements regardless of the method used to account for them. This Statement
is effective for transactions entered into in fiscal years that begin after
December 15, 1995. The Association will adopt the Statement on the date the
Association converts from a federal mutual to a federal stock savings and loan
association. The Association has not determined which method it will use to
account for the options at this time and has not estimated the effect of
adoption on the Association's financial statements.
Earnings Per Share. In March 1997, the Financial Accounting Standards
Board ("FASB") issued Statement No. 128. The Statement establishes standards for
computing and presenting earnings per share and applies to entities with
publicly held common stock or potential common stock. This Statement simplifies
the standards for computing earnings per share and makes them comparable to
international EPS standards. It replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentations of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. Basic EPS excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Diluted EPS is computed
similarly to fully diluted EPS pursuant to APB Opinion No. 15. This statement
supersedes Opinion 15 and AICPA Accounting Interpretation 1-102 of Opinion 15.
This statement is effective for financial statements issued for periods ending
after December 15, 1997. Management believes that the impact of adopting SFAS
No. 128 will not be material to the financial statements.
25
Disclosure of Information about Capital Structure. In February 1997,
the Financial Accounting Standards Board issued Statement No. 129. The Statement
incorporates the disclosure requirements of APB Opinion No. 15, Earnings Per
Share and makes them applicable to all public and nonpublic entities that have
issued securities addressed by the Statement. APB Opinion No. 15 requires
disclosure of descriptive information about securities that is not necessarily
related to the computation of earnings per share.
This statement continues the previous requirements to disclose certain
information about an entity's capital structure found in APB Opinions No. 10,
Omnibus Opinion - 1966, and No. 15, Earnings Per Share, and FASB Statement No.
47, Disclosure of Long-Term Obligations, for entities that were subject to the
requirements of those standards. This Statement eliminates the exemption of
nonpublic entities from certain disclosure requirements of Opinion No. 15 as
provided by FASB Statement No. 21, Suspension of the Reporting of Earnings per
Share and Segment Information by Nonpublic Enterprises. It supersedes specific
disclosure requirements of Opinions 10 and 15 and Statement 47 and consolidates
them in this statement for ease of retrieval and for greater visibility to
nonpublic entities. The Statement is effective for financial statements for
periods ending after December 15, 1997. SFAS No. 129 will be adopted by the
Association after December 15, 1997, the impact of adopting the Statement will
not be material to the financial statements.
Reporting Comprehensive Income. In June 1997, the Financial Accounting
Standards board issued Statement No. 130. The Statement establishes standards
for reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. This Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income to
be reported in a financial statement that is displayed with the same prominence
as other financial statements. This Statement does not require a specific format
for that financial statement but requires that an enterprise display an amount
representing total comprehensive income for the period in that financial
statement.
This Statement requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position.
This Statement is effective for fiscal years beginning after December
15, 1997. FASB Statement No. 130 will be adopted by the Association after
December 15, 1997, the impact of adopting the Statement will not be material to
the financial statements.
Disclosures about Segments of an Enterprise and Related Information. In
June 1997 the Financial Accounting Standards board issued Statement No. 131. The
Statement establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. This Statement supersedes FASB Statement
No. 14, Financial reporting for segments of Business Enterprise, but retains the
requirement to report information about major customers. It amends FASB
Statement No. 94, Consolidation of all Majority-owned Subsidiaries, to remove
the special disclosure requirements for previously unconsolidated subsidiaries.
The Statement requires that a public business enterprise report
financial and descriptive information about its reportable operating segments.
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. Generally, financial information is required to be reported on the
basis that is used internally for evaluating segment performance and deciding
how to allocate resources to segments.
The Statement requires that a public business enterprise report a
measure of segment profit or loss, certain specific revenue and expense items,
and segment assets. It requires reconciliations of total segment revenues, total
segment profit or loss, total segment assets and other amounts disclosed for
segments to corresponding amounts in the enterprise's general-purpose financial
statements. It requires that all public business enterprises report information
about the revenues derived from the enterprise's products or services (or groups
of similar products and services), about the
26
countries in which the enterprise earns revenues and holds assets, and about
major customers regardless of whether that information is used in making
operating decisions.
The Statement also requires that a public business enterprise report
descriptive information about the way that the operating segments were
determined, the products and services provided by the operating segments,
differences between the measurements used in reporting segment information and
those used in the enterprise's general-purpose financial statements, and changes
in the measurement of segment amounts from period to period.
This Statement is effective for fiscal years beginning after December
15, 1997. FASB Statement No. 131 will be adopted by the Association after
December 15, 1997, the impact of adopting the Statement will not be material to
the financial statements.
BUSINESS OF THE COMPANY
The Company was organized at the direction of the Board of Directors of
the Association in August 1997 for the purpose of becoming a holding company to
own all of the outstanding capital stock of the Association. Upon completion of
the Conversion, the Association will become a wholly owned subsidiary of the
Company. For additional information, see "High Country Bancorp, Inc."
The Company currently is not an operating company. Following the
Conversion, the Company will be engaged primarily in the business of directing,
planning and coordinating the business activities of the Association. In the
future, the Company may become an operating company or acquire or organize other
operating subsidiaries, including other financial institutions, though there are
no current plans in this regard. Initially, the Company will not maintain
offices separate from those of the Association or employ any persons other than
its officers (all of whom are officers of the Association) who will not be
separately compensated for such service.
BUSINESS OF THE ASSOCIATION
General
Historically, the Association's principal business has consisted of
attracting deposits from the general public and investing these funds in loans
secured by first mortgages on owner-occupied, one- to four-family residences in
the Association's market area. Since 1996, the Association has significantly
increased its origination of consumer, commercial business and commercial real
estate loans, including loans for the purchase and development of raw land, all
of which loans have been originated in its market area. These types of loans
carry significantly greater risks than one- to four-family residential real
estate loans. While all of these loans are currently performing, potential
investors should be aware of the additional risks inherent in these types of
loans. For more information, see "Risk Factors--Risks Posed by Certain Lending
Activities."
The Association derives its income principally from interest earned on
loans, as well as interest earned on mortgage-backed securities and other
investments. The Association's principal expenses are interest expense on
deposits and borrowings and noninterest expenses such as compensation and
employee benefits, deposit insurance and other miscellaneous expenses. Funds for
these activities are provided principally by deposits, repayments of outstanding
loans and mortgage-backed securities and operating revenues.
Market Area
The Association's market area for gathering deposits and making loans
is Chaffee, Lake, Western Fremont and Saguache Counties in Colorado, which is
located in central Colorado.
Tourism related businesses are the base of the market area's economy. The
primary employers in the market area are the tourism industry and the
government. As of 1990, the market area had a population of approximately
23,000. Major employers in the area include the Colorado Department of
Corrections, the Heart of the Rockies Medical Center, Asarco mines, local school
districts and governments and Wal Mart. In addition, the area is a frequent
destination for retirees, self-employed individuals and telecommuters who wish
to take advantage of the recreation and
27
beauty that the Rocky Mountains offer. Major towns (population) in the market
area include Salida (4,737), Buena Vista (1,752) and Leadville (2,659).
Lending Activities
General. The Association's loan portfolio, net, totaled $63.1 million
at June 30, 1997, representing 82.71% of total assets at that date.
Substantially all loans are originated in the market area. At June 30, 1997,
$49.6 million, or 78.57% of the Association's gross loan portfolio consisted of
one- to four-family, residential mortgage loans. Other loans secured by real
estate include commercial real estate loans which amounted to $1.6 million or
2.60% of the gross loan portfolio and land development loans, which amounted to
$2.4 million or 3.79% of the gross loan portfolio at June 30, 1997. The
Association also originates consumer loans, most of which are automobile loans,
and commercial business loans. At June 30, 1997, consumer loans totaled $6.5
million, or 10.26% of the gross loan portfolio, and commercial business loans
totaled $4.3 million or 6.79% of the gross loan portfolio.
Analysis of Loan Portfolio
Set forth below is selected data relating to the composition of the
Association's loan portfolio by type of loan at the dates indicated. At June 30,
1997, the Association had no concentrations of loans exceeding 10% of total
loans other than as disclosed below.
At June 30,
--------------------------------------------------------
1997 1996
----------------------------- ------------------------
Amount % Amount %
------ ----- ------ -----
(Dollars in thousands)
Mortgage Loans:
One- to four-family..................................... $ 46,510 73.68% $ 38,704 77.29%
Commercial.............................................. 1,644 2.60 1,381 2.76
Construction............................................ 3,092 4.90 2,544 5.08
Land development........................................ 2,390 3.79 1,500 3.00
---------- ------- --------- -------
Total mortgage loans................................. 53,636 84.97 44,129 88.12
---------- ------- --------- -------
Consumer loans............................................ 6,476 10.26 4,770 9.53
Loans on savings accounts................................. 765 1.21 824 1.65
Commercial loans.......................................... 4,287 6.79 2,285 4.56
Other loans............................................... 98 0.16 92 0.18
---------- ------- --------- -------
Total loans............................................... 65,262 103.38 52,100 104.04
---------- ------- --------- -------
Less:
Undisbursed loans in process............................ 1,123 1.78 1,247 2.49
Deferred fees and discounts............................ 408 0.65 366 0.73
Allowance for losses.................................... 604 0.96 411 0.82
---------- ------- --------- -------
Loan portfolio, net....................................... $ 63,127 100.00% $ 50,076 100.00%
========== ======= ========= =======
28
Loan Maturity Schedule
The following table sets forth certain information at June 30, 1997
regarding the dollar amount of loans maturing in the Association's portfolio
based on their contractual terms to maturity. Demand loans, loans having no
stated schedule of repayments and no stated maturity, and overdrafts are
reported as due in one year or less.
Three Three to One to Three to Five to Over
Months Twelve Months Three Years Five Years Ten Years Ten Years Total
------ ------------- ----------- ---------- --------- --------- -----
(In thousands)
Mortgage loans ................... $ 4,934 $ 8,340 $ 1,322 $ 2,222 $ 6,929 $28,783 $52,530
Commercial loans ................. 1,436 1,543 600 1,127 250 -- 4,956
Consumer loans ................... 232 941 2,022 3,214 244 -- 6,653
------- ------- ------- ------- ------- ------- -------
Total ....................... $ 6,602 $10,824 $ 3,944 $ 6,563 $ 7,423 $28,783 $64,139
======= ======= ======= ======= ======= ======= =======
The next table sets forth at June 30, 1997, the dollar amount of all loans
which have predetermined interest rates and have floating or adjustable interest
rates.
Predetermined Floating or
Rate Adjustable Rates
----------- ----------------
(In thousands)
Mortgage loans
One- to four-family .................... $ 42,986 $ 5,510
Non-residential ........................ 3,278 756
Commercial ................................. 4,956 --
Consumer ................................... 6,653 --
--------- ---------
Total .............................. $ 57,873 $ 6,266
========= =========
29
Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of loans is substantially less than
their contractual terms because of prepayments. In addition, due-on-sale clauses
on loans generally give the Association the right to declare a loan immediately
due and payable in the event, among other things, that the borrower sells the
real property subject to the mortgage and the loan is not repaid. The average
life of mortgage loans tends to increase when current mortgage loan market rates
are substantially higher than rates on existing mortgage loans and, conversely,
decrease when current mortgage loan market rates are substantially lower than
rates on existing mortgage loans.
One-to Four-Family Real Estate Loans. The Association's primary
lending activity consists of the origination of loans secured by owner-occupied,
one- to four-family residential properties located in its primary market area.
At June 30, 1997, $49.6 million, or 78.57%, of the Association's loan portfolio
consisted of loans secured by one- to four-family residential properties, of
which $5.5 million or 11.09% carried adjustable interest rates. The Association
estimates that the average size of the residential mortgages that it currently
originates is $85,000.
The Association originates both fixed-rate mortgage loans and
adjustable-rate mortgage loans ("ARMs"). Due to customer preferences for
fixed-rate loans, the Association has had difficulty originating a large volume
of ARMs in recent years. Most fixed-rate mortgage loans are originated for terms
of 15 or 25 years. ARMs are originated for terms of up to 25 years. The
Association's ARMs have interest rates that adjust every one year, with a
maximum adjustment of two percentage points for any adjustment period and up to
six percentage points over the life of the loan. These loans are indexed to the
rate on one-year U.S. Treasury securities, adjusted to a constant maturity. The
current margin is two and one-half percentage points. Historically, all loans
originated by the Association have been retained in the Association's loan
portfolio. However, in June 1997 and June, 1996, the Association sold two large
blocks of fixed-rate loans of $3.9 million and $5.8 million, respectively, in
order to manage interest rate risk. In future years, the Association may
increase its origination and sale of mortgage loans, while retaining the
servicing of such loans to generate fee income.
The Association's lending policies generally limit the maximum
loan-to-value ratio on residential mortgage loans to a maximum of 80% of the
lesser of the appraised value of the underlying property or its purchase price.
For those few loans where the loan-to-value ratio exceeds 80%, the Association
requires private mortgage insurance. Originated loans in the Association's
portfolio include due-on-sale clauses which provide the Association with the
contractual right to deem the loan immediately due and payable in the event that
the borrower transfers ownership of the property without the Association's
consent.
The retention of ARMs in portfolio helps reduce the Association's
exposure to increases in interest rates. There are, however, unquantifiable
credit risks resulting from potential increased costs to the borrower as a
result of upward repricing of ARMs. It is possible that during periods of rising
interest rates, the risk of default on ARMs may increase due to the upward
adjustment of interest costs to the borrower. The Association does not originate
ARM loans which provide for negative amortization. Although ARMs allow the
Association to increase the sensitivity of its asset base to changes in interest
rates, the extent of this interest sensitivity is limited by the periodic and
lifetime interest rate ceilings contained in ARM contracts. In addition, since
ARM interest rates can be adjusted no more frequently than annually, the yield
on the Association's ARM portfolio does not adjust as rapidly as market interest
rates. Accordingly, there can be no assurance that yields on the Association's
ARMs will adjust sufficiently to compensate for increases in its cost of funds.
The Association also originates second mortgage loans primarily for its
existing one-to four-family first mortgage customers. At June 30, 1997, $4.6
million or 7.22% of the Association's loan portfolio consisted of second
mortgage loans and home equity lines of credit. Second mortgage loans are
generally underwritten on a fixed-rate basis with terms of up to 15 years and
are fully amortizing over the term of the loan. Second mortgages are generally
subject to an 80% combined loan-to-value limitation, including all other
outstanding mortgages or liens.
Construction Loans. The Association offers construction financing to
qualified borrowers for construction primarily of single-family residential
properties and to qualified developers for construction of small residential
developments. The Association provides financing to one builder for the
construction of no more than four homes at
30
a time. Construction loans are generally limited to a maximum loan-to-value
ratio of 75% of the appraised value of the property on an "as-completed" basis.
The Association attempts to structure its residential construction loans so that
they convert to a permanent loan, although this is not necessarily the case.
Loans to finance the construction of residential property on a speculative basis
are offered on a fixed-rate basis only, with the rate indexed to the prime rate
plus a negotiated increment. The Association limits the origination of
construction loans to borrowers and developers with whom the Association has had
substantial prior experience due to the significant time and other requirements
associated with originating and monitoring construction loans.
Loan proceeds are disbursed during the construction phase (a maximum of
12 months) according to a draw schedule based on the stage of completion.
Construction loans are underwritten on the basis of the estimated value of the
property as completed and loan-to-value ratios must conform to the requirements
for the permanent loan. At June 30, 1997, $4.0 million, or 6.14% of the
Association's gross loan portfolio consisted of construction loans to fund the
construction of one- to four-family properties. The Association had an
additional $200,000, or .31% of the Association's gross loan portfolio, in loans
to finance the construction of commercial properties at June 30, 1997.
Approximately 95% of all construction loans originated by the Association
convert into permanent loans upon completion of the construction phase.
Construction financing generally is considered to involve a higher
degree of risk of loss than long-term financing on improved, occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development and the estimated cost (including interest) of
construction. During the construction phase, a number of factors could result in
delays and cost overruns. If the estimate of construction cost proves to be
inaccurate, the Association may be required to advance funds beyond the amount
originally committed to permit completion of the development. If the estimate of
the value proves to be inaccurate, the Association may be confronted, at or
prior to the maturity of the loan, with a project having a value which is
insufficient to assure full repayment. The ability of a developer to sell
developed lots or completed dwelling units will depend on, among other things,
demand, pricing, availability of comparable properties and economic conditions.
The Association has sought to minimize this risk by limiting construction
lending to qualified borrowers in the Association's market area, limiting the
aggregate amount of outstanding construction loans and imposing a stricter
loan-to-value ratio requirement than required for one- to four-family mortgage
loans.
Land Development Loans. The Association originates land loans to local
developers for the purpose of developing the land (i.e., roads, sewer and water)
for sale, and loans secured by raw land, such as cattle ranching acreage. Such
loans are secured by a lien on the property, are generally limited to 70% of the
developed value of the secured property and are typically made for a period of
one-year, renewable based on negotiations with the Association. Most land
development loans are expected to be fully paid off five years after the
original date of the loan. The Association generally requires semi-annual
interest payments during the term of the land loan. The amount of funds
available under the Association's land loans usually include an amount from
which the borrower can pay the stated interest due thereon until completion of
the loan term. The principal of the loan is reduced as lots are developed, sold
and released. All of the Association's land loans are secured by property
located in its primary market area. In addition, the Association obtains
personal guarantees from its borrowers and originates such loans to developers
with whom it has established relationships. At June 30, 1997, the Association
had $2.4 million of land development loans, which constituted 3.79% of the gross
loan portfolio at such date. This total includes three loans of $545,000,
$417,0000 and $413,000, respectively, which are three of the Association's four
largest loans (the motel loan described below is the fourth). The Association
originated $1.8 million and $1.6 million in land development loans during fiscal
1997 and fiscal 1996, respectively. Land development loans generally involve a
higher degree of risk than residential mortgage lending in that there are large
loan balances to single borrowers, and the initial estimate of the property
value at completion may be inaccurate due to market variations and the
difficulty in selling lots for home building. The success of such land
development projects is sensitive to changes in supply and demand conditions in
the local housing market, as well as regional and economic conditions generally.
Although the Association has attempted to reduce these risks, as noted above,
potential investors should be aware of these factors in making their investment
decision. See "Risk Factors -- Risks Posed by Certain Lending Activities."
31
Commercial Real Estate Loans. At June 30, 1997, loans secured by
commercial real estate properties totaled $1.6 million, and represented 2.60% of
the Association's loan portfolio. Commercial real estate loans are secured by
motels, small office buildings and retail stores and other non-residential
property. Some of the Association's commercial real estate loans are made to
local businesses connected to the tourism and recreational rafting industries,
which predominate in the Association's primary market area. At June 30, 1997,
the Association's largest outstanding commercial real estate loan was a $427,000
loan secured by a motel in Salida, Colorado. Substantially all of the
Association's commercial real estate loans are secured by property located
within the Association's market area and were current and performing at June 30,
1997.
Commercial real estate loans generally have terms of up to 10 years and
are underwritten on either a fixed or adjustable-rate basis. Commercial real
estate loans have a maximum 20-year amortizing, although the term of the loan
may be a fixed ten-year balloon loan. Adjustable-rate commercial and
multi-family mortgages are indexed to the prime rate and adjust on an annual
basis. Loan-to-value ratios may not exceed 70% of the appraised value of the
underlying property. It is the Association's policy to obtain personal
guarantees from all principals obtaining commercial real estate loans. In
assessing the value of such guarantees, the Association reviews the individuals'
personal financial statements, credit reports, tax returns and other financial
information.
Commercial real estate lending entails significant additional risks
compared to residential property lending. These loans typically involve large
loan balances to single borrowers or groups of related borrowers. The payment
experience on such loans typically is dependent on the successful operation of
the real estate project or business. These risks can be significantly affected
by business conditions and by supply and demand conditions in the market for
office and retail space, and, as such, may be subject to a greater extent to
adverse conditions in the economy generally. To minimize these risks, the
Association generally limits this type of lending to its market area and to
borrowers with which it has substantial experience or who are otherwise well
known to management.
With certain limited exceptions, the maximum amount that the
Association may lend to any borrower (including certain related entities of the
borrower) at any one time may not exceed 15% of the unimpaired capital and
surplus of the institution, plus an additional 10% of unimpaired capital and
surplus for loans fully secured by readily marketable collateral. At June 30,
1997, the maximum amount that the Association could have loaned to any one
borrower without prior OTS approval was $983,000. At June 30, 1997, the largest
aggregate amount of loans that the Association had outstanding to any one
borrower and their related interests was $930,000 and consisted of ten loans
including two loans of $300,000 and $350,000, both secured by cattle ranching
properties. The largest single commercial loan outstanding was a $427,000 loan
secured by a motel discussed above.
Commercial Business Loans. At June 30, 1997, the Association had $4.3
million in commercial business loans which represented 6.79% of the
Association's gross loan portfolio. The Association is permitted to invest up to
20% of its assets in commercial loans. The Association's commercial business
lending activities are directed towards small businesses located in its market
area, including those connected to the tourism industry, such as recreational
vehicle ("RV") dealers, rafting companies and other tourist-related businesses.
Generally, the Association's commercial business loans are secured by assets
such as inventory, equipment or other assets and are guaranteed by the
principals of the business. From time to time, the Association has engaged in
dealer floor-plan lending with a limited number of dealerships with which the
Association has had substantial experience. Commercial business loans usually
carry a fixed rate and generally are underwritten for a maximum of five years.
The Association underwrites its commercial business loans on the basis
of the borrower's cash flow and ability to service the debt from earnings rather
than on the basis of the underlying collateral value, and seeks to structure
such loans to have more than one source of repayment. The borrower is required
to provide the Association with sufficient information to allow the Association
to make its lending determination. In most instances, this information consists
of at least three years of financial statements, a statement of projected cash
flows, current financial information on any guarantor and any additional
information on the collateral. For information regarding the risks associated
with commercial lending, see "Risk Factors -- Risks Associated with Certain
Lending Activities."
32
Consumer Loans. The Association's consumer loans, which totaled $7.3
million or 11.25% of the gross loan portfolio at June 30, 1997, includes
primarily loans secured by deposit accounts, automobile loans and other personal
loans, which represented 1.21%, 8.62%, and 1.80% of its total loan portfolio,
respectively, at June 30, 1997. The Association also makes RV and boat loans,
tractor loans and home improvement loans pursuant to its consumer lending
authority. The Association has recently emphasized consumer lending because of
the higher yields and shorter-terms of such loans.
The Association makes deposit account loans up to 95% of the
depositor's account balance. The interest rate is normally 2.0% above the rate
paid on the account and the account must be pledged as collateral to secure the
loan. Savings account loans are secured by demand notes and interest is due on a
quarterly basis. The Association's automobile loans are generally underwritten
in amount up to the purchase price of the automobile or the trading-in value as
published by the National Automobile Dealers Association. The terms of such
loans generally do not exceed 60 months and vary depending on the age of the
vehicle securing the loan. The Association requires the borrower to insure the
automobile under a policy listing the Association as loss payee. The Association
also makes unsecured personal loans of up to $10,000. The terms of such loans do
not exceed 12 months.
Since fiscal 1995, the Association has increased its consumer lending
by hiring a consumer loan officer. The Association intends to continue to
emphasize the origination of consumer loans, especially automobile loans.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciable assets such as automobiles, RVs, boats and tractors. In such
cases, any repossessed collateral for a defaulted consumer loan may not provide
an adequate source of repayment of the outstanding loan balance as a result of
the greater likelihood of damage, loss or depreciation. The remaining deficiency
often does not warrant further substantial collection efforts against the
borrower. In addition, consumer loan collections are dependent on the borrower's
continuing financial stability, and thus are more likely to be adversely
affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the
application of various federal and state laws, including federal and state
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans. Such loans may also give rise to claims and defenses by a consumer
loan borrower against an assignee of such loans such as the Association, and a
borrower may be able to assert against such assignee claims and defenses which
it has against the seller of the underlying collateral.
Loan Solicitation and Processing. The Association's mortgage loans have
generally been originated by its loan officers, branch managers and senior
management officials. Loan originations are obtained from a number of sources,
including existing and past customers, members of the local community and
established builders and realtors within the Association's market area. Upon
receipt of a loan application from a prospective borrower, the Association
reviews the information provided and makes an initial determination as to
whether certain basic underwriting standards regarding the type of property,
debt-to-income ratios and other credit concerns are satisfied. A credit report
and employment and other verifications are obtained to verify certain specific
information relating to the loan applicant's employment, income and credit
standing. For real estate loans, an appraisal of the property intended to secure
the loan is undertaken by an independent appraiser approved by the Association.
It is the Association's policy to obtain appropriate insurance protection on all
real estate first mortgage loans and to obtain a lawyer's opinion of title which
insures that the property is free of prior encumbrances. The borrower must also
obtain paid flood insurance when the property is located in a flood plain as
designated by the Federal Government. It is the Association's policy to record a
lien on the real estate securing the loan. Borrowers generally are required to
advance funds for certain items such as real estate taxes, flood insurance and
private mortgage insurance, when applicable.
Secured loans in amounts of up to $200,000 may be approved by two
members of the Association's loan committee. All loans in excess of $200,000
must be approved by the Board of Directors. Branch Managers may approve consumer
loans of up to $10,000, or up to $20,000 with the approval of the consumer loan
officer. Consumer loans of $20,000 to $100,000 may be approved by two members of
the loan committee, while consumer loans over $100,000 must be approved by the
full Board of Directors. Commercial loans of up to $100,000 may be approved by
two members of the loan committee, while such loans over $100,000 to $200,000
are approved by two loan committee members and one outside Director and loans of
$200,000 or over go to the full Board.
33
Loan applicants are promptly notified in writing of the Association's
decision. If the loan is approved, the notification will provide that the
Association's commitment will generally terminate within 30 days of the
approval. It has been the Association's experience that substantially all
approved loans are funded.
Loan Originations, Purchases and Sales. Most loans originated by the
Association are intended to be held in the Association's portfolio until
maturity. The Association is a qualified seller/servicer for the Federal Home
Loan Mortgage Corporation ("FHLMC"). The Association uses FHLMC documentation
for its residential mortgages, and most of the loans in its portfolio would
generally qualify for sale to FHLMC under standard programs. The Association,
however, has selectively sold blocks of loans when appropriate for
asset/liability management purposes. In June 1997 and June 1996, the Association
sold $3.9 million and $5.8 million, respectively, in fixed-rate loans to FHLMC
for this reason.
The following table sets forth certain information with respect to the
Association's loan origination activity for the periods indicated. The
Association has not purchased any loans in the periods presented.
Year Ended June 30,
----------------------------
1997 1996
---------- ----------
(In thousands)
Net loans, beginning of period................................. $ 50,076 $ 41,537
Origination by type:
- -------------------
Mortgage loans:
One- to four-family......................................... $ 19,174 $ 18,973
Commercial.................................................. 981 1,898
Land development............................................ 1,813 1,641
Consumer loans................................................. 9,179 6,323
Loans on savings accounts...................................... 604 694
Commercial loans............................................... 4,669 2,906
--------- ---------
Total loans originated.................................... 36,420 32,435
--------- ---------
Loans sold..................................................... 3,968 5,777
--------- ---------
Repayments..................................................... 19,636 18,092
--------- ---------
Decrease (increase) in other items, net........................ 235 (27)
--------- ---------
Net increase (decrease) in loans receivable, net.......... 13,051 8,539
--------- ---------
Net loans, end of period....................................... $ 63,127 $ 50,076
========= =========
Nonperforming Loans and Other Problem Assets. It is management's policy to
continually monitor its loan portfolio to anticipate and address potential and
actual delinquencies. When a borrower fails to make a payment on a loan, the
Association takes immediate steps to have the delinquency cured and the loan
restored to current status. Loans which are delinquent 15 days incur a late fee
of 5.0% of principal and interest due. As a matter of policy, the Association
will contact the borrower after the loan has been delinquent 30 days. If payment
is not promptly received, the borrower is contacted again, and efforts are made
to formulate an affirmative plan to cure the delinquency. Generally, after any
loan is delinquent 90 days or more, formal legal proceedings are commenced to
collect amounts owed. Loans are placed on nonaccrual status if the loan becomes
past due more than 90 days unless such loans are well-secured and in the process
of collection. Loans are charged off when management concludes that they are
uncollectible. See Note 1 of Notes to Financial Statements.
34
Real estate acquired by the Association as a result of foreclosure is
classified as real estate acquired through foreclosure until such time as it is
sold. When such property is acquired, it is initially recorded at estimated fair
value and subsequently at the lower of book value or fair value, less estimated
costs to sell. Costs relating to holding such real estate are charged against
income in the current period, while costs relating to improving such real estate
are capitalized until a saleable condition is reached. Any required write-down
of the loan to its fair value less estimated selling costs upon foreclosure is
charged against the allowance for loan losses. See Note 1 of Notes to Financial
Statements.
The following table sets forth information with respect to the
Association's nonperforming assets at the dates indicated. Further, no loans
were recorded as restructured loans within the meaning of SFAS No. 15 at the
dates indicated.
At June 30,
---------------------------
1997 1996
-------- --------
(In thousands)
Loans accounted for on a non-accrual basis: (1)
Real estate:
One-to four-family......................................... $ -- $ --
Commercial................................................. -- --
Land development........................................... -- --
Consumer....................................................... 137 73
Commercial..................................................... 3 --
Other.......................................................... -- --
-------- --------
Total.................................................. 140 73
-------- --------
Accruing loans delinquent 90 days or more:
Real estate:
One-to four-family......................................... $ -- $ --
Commercial................................................. -- --
Land development........................................... -- --
Consumer..................................................... -- --
Commercial..................................................... -- --
Other.......................................................... -- --
-------- --------
Total.................................................. -- --
-------- --------
Total nonperforming loans.......................... 140 73
-------- --------
Repossed assets................................................ 35 --
-------- --------
Total non-performing assets.................................... $ 175 $ 73
======== ========
Total non-performing loans as a
percentage of total net loans................................ 0.22% 0.15%
======== ========
Total non-performing assets as a
percentage of total assets................................... 0.23% 0.12%
======== ========
At June 30, 1997, the Association had $140,000 in loans outstanding that
were classified as non-accrual, of which $137,000 were consumer loans, including
$77,000 in automobile loans. At that date, the Association had no loans
outstanding that were not classified as non-accrual, 90 days past due or
restructured, but as to which known information about possible credit problems
of borrowers caused management to have serious concerns as to the ability of the
borrowers to comply with present loan repayment terms and may result in
disclosure as non-accrual, 90 days past due or restructured.
35
Federal regulations require savings institutions to classify their
assets on the basis of quality on a regular basis. An asset meeting one of the
classification definitions set forth below may be classified and still be a
performing loan. An asset is classified as substandard if it is determined to be
inadequately protected by the current retained earnings and paying capacity of
the obligor or of the collateral pledged, if any. An asset is classified as
doubtful if full collection is highly questionable or improbable. An asset is
classified as loss if it is considered uncollectible, even if a partial recovery
could be expected in the future. The regulations also provide for a special
mention designation, described as assets which do not currently expose a savings
institution to a sufficient degree of risk to warrant classification but do
possess credit deficiencies or potential weaknesses deserving management's close
attention. Such assets designated as special mention may include nonperforming
loans consistent with the above definition. Assets classified as substandard or
doubtful require a savings institution to establish general allowances for loan
losses. If an asset or portion thereof is classified loss, a savings institution
must either establish a specific allowance for loss in the amount of the portion
of the asset classified loss, or charge off such amount. Federal examiners may
disagree with a savings institution's classifications. If a savings institution
does not agree with an examiner's classification of an asset, it may appeal this
determination to the OTS Regional Director. The Association regularly reviews
its assets to determine whether any assets require classification or re-
classification. At June 30, 1997, the Association had $514,000 in assets
classified as special mention, $420,000 in assets classified as substandard, $0
in assets classified as doubtful and no assets classified as loss. The special
mention classification is primarily used by management as a "watch list" to
monitor loans that exhibit any potential deviation in performance from the
contractual terms of the loan.
Allowance for Loan Losses. In originating loans, the Association
recognizes that credit losses will be experienced and that the risk of loss will
vary with, among other things, the type of loan being made, the creditworthiness
of the borrower over the term of the loan, general economic conditions and, in
the case of a secured loan, the quality of the security for the loan. It is
management's policy to maintain an adequate allowance for loan losses based on,
among other things, the Association's and the industry's historical loan loss
experience, evaluation of economic conditions, regular reviews of delinquencies
and loan portfolio quality and evolving standards imposed by federal bank
examiners. The Association increases its allowance for loan losses by charging
provisions for loan losses against the Association's income. During fiscal 1997,
the Association increased its allowance for loan losses by $282,000 to $604,000
at June 30, 1997. The Association took this action due to the significant
increase in commercial real estate, commercial business, consumer and land
development loans originated by the Association during fiscal 1997, and due to
the additional risks inherent in these types of lending. For more information
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Management will continue to actively monitor the Association's asset
quality and allowance for loan losses. Management will charge off loans and
properties acquired in settlement of loans against the allowances for losses on
such loans and such properties when appropriate and will provide specific loss
allowances when necessary. Although management believes it uses the best
information available to make determinations with respect to the allowances for
losses and believes such allowances are adequate, future adjustments may be
necessary if economic conditions differ substantially from the economic
conditions in the assumptions used in making the initial determinations.
The Association's methodology for establishing the allowance for loan
losses takes into consideration probable losses that have been identified in
connection with specific assets as well as losses that have not been identified
but can be expected to occur. Management conducts regular reviews of the
Association's assets and evaluates the need to establish allowances on the basis
of this review. Allowances are established by the Board of Directors on a
quarterly basis based on an assessment of risk in the Association's assets
taking into consideration the composition and quality of the portfolio,
delinquency trends, current charge-off and loss experience, loan concentrations,
the state of the real estate market, regulatory reviews conducted in the
regulatory examination process and economic conditions generally. Specific
reserves will be provided for individual assets, or portions of assets, when
ultimate collection is considered improbable by management based on the current
payment status of the assets and the fair value of the security. At the date of
foreclosure or other repossession, the Association would transfer the property
to real estate acquired in settlement of loans initially at the lower of cost or
estimated fair value and subsequently at the lower of book value or fair value
less estimated selling costs. Any portion of the outstanding loan balance in
excess of fair value less estimated selling costs would be charged off against
the allowance for loan losses. If, upon ultimate disposition of the property,
net sales proceeds exceed the net carrying value of the property, a gain on sale
of real estate would be recorded.
36
Banking regulatory agencies, including the OTS, have adopted a policy
statement regarding maintenance of an adequate allowance for loan and lease
losses and an effective loan review system. This policy includes an arithmetic
formula for determining the reasonableness of an institution's allowance for
loan loss estimate compared to the average loss experience of the industry as a
whole. Examiners will review an institution's allowance for loan losses and
compare it against the sum of: (i) 50% of the portfolio that is classified
doubtful; (ii) 15% of the portfolio that is classified as substandard; and (iii)
for the portions of the portfolio that have not been classified (including those
loans designated as special mention), estimated credit losses over the upcoming
12 months given the facts and circumstances as of the evaluation date. This
amount is considered neither a "floor" nor a "safe harbor" of the level of
allowance for loan losses an institution should maintain, but examiners will
view a shortfall relative to the amount as an indication that they should review
management's policy on allocating these allowances to determine whether it is
reasonable based on all relevant factors.
The following table sets forth an analysis of the Association's
allowance for loan losses for the periods indicated.
Year Ended June 30,
----------------------------
1997 1996
-------- --------
(Dollars in thousands)
Balance at beginning of period................................. $ 411 $ 405
-------- ---------
Charge-offs:
One- to four-family.......................................... (32) (26)
Multi-family................................................. -- --
Non-residential.............................................. -- --
Construction................................................. -- --
Consumer..................................................... (64) (27)
Commercial................................................... -- --
Other........................................................ -- --
-------- ---------
(96) (53)
-------- ---------
Recoveries..................................................... 7 --
-------- ---------
Net recoveries (charge-offs)................................... (89) (53)
-------- ---------
Additions charged to operations................................ 282 59
-------- ---------
Balance at end of period....................................... $ 604 $ 411
======== =========
Allowance for loan losses to total
non-performing loans at end of period........................ 431.00% 563.00%
======== =========
Allowance for loan losses to net loans
at end of period............................................. 0.96% 0.82%
======== =========
37
The following table allocates the allowance for loan losses by loan
category at the dates indicated. The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any category.
June 30,
----------------------------------------------------
1997 1996
----------------------- -----------------------
Percent Percent
of Loans of Loans
in Category in Category
to Total to Total
Amount Loans Amount Loans
------ ------- ------ -------
(Dollars in thousands)
Mortgage loans:
Residential..................................... $ 143 30.82% $ 184 80.72%
Commercial...................................... 40 8.62 26 4.02
Land............................................ 120 25.86 -- --
Consumer loans..................................... 161 34.70 137 15.26
------- ------ ------- ------
$ 464 100.00% $ 411 100.00%
======= ====== ======= ======
Loan Delinquencies at June 30, 1997
June 30,
----------------------------------------------------
1997 1996
----------------------- -----------------------
Percent Percent
of Gross of Gross
Amount Loans Amount Loans
------ ------- ------ -------
(Dollars in thousands)
Mortgage loans..................................... $ -- --% $ -- --%
Non-residential................................. -- -- -- --
Consumer........................................... 137 0.21 73 0.14
Commercial loans................................... 3 -- -- --
Other loans........................................ -- -- -- --
------- ------ ------- -----
Total allowance for loan losses................ $ 140 0.21% $ 73 0.14%
======= ====== ======= =====
Investment Activities
General. The Association is permitted under federal law to make certain
investments, including investments in securities issued by various federal
agencies and state and municipal governments, deposits at the FHLB of Topeka,
certificates of deposit in federally insured institutions, certain bankers'
acceptances and federal funds. It may also invest, subject to certain
limitations, in commercial paper rated in one of the two highest investment
rating categories of a nationally recognized credit rating agency, and certain
other types of corporate debt securities and mutual funds. Federal regulations
require the Association to maintain an investment in FHLB stock and a minimum
amount of liquid assets which may be invested in cash and specified securities.
From time to time, the OTS adjusts the percentage of liquid assets which savings
banks are required to maintain. See "Regulation -- Depository Institution
Regulation -- Liquidity Requirements."
The Association makes investments in order to maintain the levels of
liquid assets required by regulatory authorities and manage cash flow, diversify
its assets, obtain yield, for asset/liability management purposes and to satisfy
certain requirements for favorable tax treatment. The investment activities of
the Association consist primarily of investments in mortgage-backed securities
and other investment securities, consisting primarily of interest-bearing
deposits and securities issued by the U.S. Treasury. Typical investments include
federally sponsored agency mortgage pass-through and federally sponsored agency
and mortgage-related securities. Investment and aggregate investment limitations
and credit quality parameters of each class of investment are prescribed in the
Association's investment
38
policy. The Association performs analyses on mortgage-related securities prior
to purchase and on an ongoing basis to determine the impact on earnings and
market value under various interest rate and prepayment conditions. Under the
Association's current investment policy, securities purchases must be approved
by the Association's Investment Committee. The Board of Directors reviews all
securities transactions on a monthly basis.
Pursuant to SFAS No. 115, the Association has classified securities
with an amortized cost of $1.0 million and an approximate market value of
$990,000 at June 30, 1996 as available for sale. The Association had no
securities classified as "available for sale" at June 30, 1997. Management of
the Association presently does not intend to sell such securities and, based on
the Association's current liquidity level and the Association's access to
borrowings through the FHLB of Topeka, management currently does not anticipate
that the Association will be placed in a position of having to sell securities
with material unrealized losses.
Securities designated as "held to maturity" are those assets which the
Association has the ability and intent to hold to maturity. Upon acquisition,
securities are classified as to the Association's intent, and a sale would only
be effected due to deteriorating investment quality. The held to maturity
investment portfolio is not used for speculative purposes and is carried at
amortized cost. In the event the Association sells securities from this
portfolio for other than credit quality reasons, all securities within the
investment portfolio with matching characteristics may be reclassified as assets
available for sale. Securities designated as "available for sale" are those
assets which the Association may not hold to maturity and thus are carried at
market value with unrealized gains or losses, net of tax effect, recognized in
retained earnings.
Mortgage-Backed and Related Securities. Mortgage-backed securities
represent a participation interest in a pool of single-family or multi-family
mortgages, the principal and interest payments on which are passed from the
mortgage originators through intermediaries that pool and repackage the
participation interest in the form of securities to investors such as the
Association. Such intermediaries include quasi-governmental agencies such as
FHLMC, FNMA and GNMA which guarantee the payment of principal and interest to
investors, and from all of whom the Association has purchased mortgage-backed
securities. Mortgage-backed securities generally increase the quality of the
Association's assets by virtue of the guarantees that back them, are more liquid
than individual mortgage loans and may be used to collaterize borrowings or
other obligations of the Association.
Mortgage-related securities typically are issued with stated principal
amounts and the securities are backed by pools of mortgages that have loans with
interest rates that are within a range and have similar maturities. The
underlying pool of mortgages can be composed of either fixed-rate or
adjustable-rate mortgage loans. Mortgage-backed securities generally are
referred to as mortgage participation certificates or pass-through certificates.
As a result, the interest rate risk characteristics of the underlying pool of
mortgages, i.e., fixed-rate or adjustable-rate, as well as 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.
The actual maturity of a mortgage-backed security varies, depending on
when the mortgagors prepay or repay the underlying mortgages. Prepayments of the
underlying mortgages may shorten the life of the investment, thereby adversely
affecting its yield to maturity and the related market value of the
mortgage-backed security. The yield is based upon the interest income and the
amortization of the premium or accretion of the discount related to the
mortgage-backed security. Premiums and discounts on mortgage-backed securities
are amortized or accredited over the estimated term of the securities using a
level yield method. The prepayment assumptions used to determine the
amortization period for premiums and discounts can significantly affect the
yield of the mortgage-backed security, and these assumptions are reviewed
periodically to reflect the actual prepayment. The actual prepayments of the
underlying mortgages depend on many factors, including the type of mortgage, the
coupon rate, the age of the mortgages, the geographical location of the
underlying real estate collateralizing the mortgages and general levels of
market interest rates. The difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates is an important
determinant in the rate of prepayments. During periods of falling mortgage
interest rates, prepayments generally increase, and, conversely, during periods
of rising mortgage interest rates, prepayments generally decrease. If the coupon
rate of the underlying mortgage significantly exceeds the prevailing market
interest rates offered for
39
mortgage loans, refinancing generally increases and accelerates the prepayment
of the underlying mortgages. Prepayment experience is more difficult to estimate
for adjustable-rate mortgage-backed securities.
The Association's mortgage-backed securities portfolio consists solely
of $5.3 million in mortgage-backed securities of which $300,000 had fixed
interest rates and $5.0 million had adjustable interest rates at June 30, 1997.
The Association makes such investments in order to manage cash flow, mitigate
interest rate risk, diversify assets, obtain yield, to satisfy certain
requirements for favorable tax treatment and to satisfy the qualified thrift
lender test. See "Regulation -- Depository Institution Regulation -- Qualified
Thrift Lender Test."
The following table sets forth the carrying value of the Association's
investment securities at the dates indicated.
At June 30,
---------------------------------
1997 1996
-------- --------
(In thousands)
U.S. Treasury securities.................................................... $ -- $ 989
Interest-bearing deposits................................................... 2,381 1,577
Mortgage-backed securities.................................................. 5,340 6,843
Federal Home Loan Bank stock................................................ 988 564
-------- --------
Total................................................................. $ 8,709 $ 9,973
======== ========
The following table sets forth information in the scheduled maturities,
amortized cost, market values and average yields for the Association's
investment portfolio at June 30, 1997.
One Year or Less One to Five Years Five to Ten Years
----------------------- ---------------------- -----------------------
Weighted Weighted Weighted
Book Average Book Average Book Average
Value Yield Value Yield Value Yield
----- ------- ----- ------- ----- -------
(Dollars in thousands)
Interest-bearing deposits.............. $ 2,381 5.50% $ -- --% $ -- --%
Mortgage-backed securities............. 460 6.77 1,340 6.77 3,540 6.77
Federal Home Loan Bank stock........... -- -- -- -- 988 6.68
-------- ------- -------
Total investment securities............ $ 2,841 5.71 $ 1,340 6.77 $ 4,528 6.76
======== ======= =======
Total Investment Portfolio
--------------------------
Weighted
Book Average
Value Yield
----- -------
(Dollars in thousands)
Interest-bearing deposits.............. $2,381 5.56%
Mortgage-backed securities............. 5,340 6.77
Federal Home Loan Bank stock........... 988 6.68
------
Total investment securities............ $8,709 6.41
======
The Association is required to maintain average daily balances of
liquid assets (cash, deposits maintained pursuant to Federal Reserve Board
requirements, time and savings deposits in certain institutions, obligations of
state and political subdivisions thereof, shares in mutual funds with certain
restricted investment policies, highly rated corporate debt, and mortgage loans
and mortgage-backed securities with less than one year to maturity or subject to
repurchase within one year) equal to a monthly average of not less than a
specified percentage (currently 5%) of its net withdrawable savings deposits
plus short-term borrowings. Monetary penalties may be imposed for failure to
meet liquidity requirements. The average liquidity ratio of the Association for
the month ending June 30, 1997 was 5.51%. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Deposit Activity and Other Sources of Funds
General. Deposits are the primary source of the Association's funds for
lending, investment activities and general operational purposes. In addition to
deposits, the Association derives funds from loan principal and interest
repayments, maturities of investment securities and mortgage-backed securities
and interest payments thereon. Although loan repayments are a relatively stable
source of funds, deposit inflows and outflows are significantly influenced by
40
general interest rates and money market conditions. Borrowings may be used on a
short-term basis to compensate for reductions in the availability of funds, or
on a longer term basis for general operational purposes. The Association has
access to borrow from the FHLB of Topeka, and the Converted Association will
continue to have access to FHLB of Topeka advances.
Deposits. The Association attracts deposits principally from within its
market area by offering competitive rates on its deposit instruments, including
money market accounts, passbook savings accounts, Individual Retirement
Accounts, and certificates of deposit which range in maturity from three months
to eight years. Deposit terms vary according to the minimum balance required,
the length of time the funds must remain on deposit and the interest rate.
Maturities, terms, service fees and withdrawal penalties for its deposit
accounts are established by the Association on a periodic basis. The Association
reviews its deposit mix and pricing on a weekly basis. In determining the
characteristics of its deposit accounts, the Association considers the rates
offered by competing institutions, lending and liquidity requirements, growth
goals and federal regulations. The Association does not accept brokered
deposits, but does accept jumbo deposits from its regular customers.
The Association attempts to compete for deposits with other
institutions in its market area by offering competitively priced deposit
instruments that are tailored to the needs of its customers. Additionally, the
Association seeks to meet customers' needs by providing convenient customer
service to the community, efficient staff and convenient hours of service.
Substantially all of the Association's depositors are Colorado residents who
reside in the Association's market area.
Savings deposits in the Association at June 30, 1997 were represented
by the various types of savings programs described below.
Interest Minimum Minimum Percentage of
Rate(1) Term Category Amount Balances Total Savings
- ------- ------- -------- ------ -------- -------------
Savings and Transactions Accounts
---------------------------------
1.67 % None NOW accounts $ 0 $ 8,225 14.65%
2.97 None Passbook accounts 10 10,691 19.04
0.00 None Demand 0 2,361 4.20
2.93 None Money market accounts 0 3,347 5.96
---------- -------
24,624 43.85
---------- -------
Certificates of Deposit
-----------------------
3.70 3 months Fixed-Term, Fixed-Rate 2,500 187 0.33
5.16 6 months Fixed-Term, Fixed-Rate 1,000 4,039 7.19
5.19 9 months Fixed-Term, Fixed-Rate 10,000 1,586 2.82
5.45 10 months Fixed-Term, Fixed-Rate 10,000 3,963 7.06
5.78 12 months Fixed-Term, Fixed-Rate 500 7,958 14.17
5.53 15 months Fixed-Term, Fixed-Rate 10,000 2,893 5.15
5.38 18 months Fixed-Term, Fixed-Rate 500 4,590 8.17
6.37 24 months Fixed-Term, Fixed-Rate 500 536 1.07
5.64 30 months Fixed-Term, Fixed-Rate 500 2,295 4.09
6.40 36 months Fixed-Term, Fixed-Rate 500 306 0.54
5.88 48 months Fixed-Term, Fixed-Rate 500 2,458 4.38
7.20 Other varies 717 1.28
---------- --------
Total certificates of deposit 31,528 56.15
---------- -------
Total savings deposits $ 56,152 100.00%
========== ======
- -----------------
(1) Indicates weighted average interest rate at June 30, 1997.
41
The following table sets forth the change in dollar amount of deposits in
the various types of accounts offered by the Association between the dates
indicated.
Balance at Balance at
June 30, % of Increase June 30, % of
1997 Deposits (Decrease) 1996 Deposits
---------- -------- ---------- ---------- --------
(Dollars in thousands)
NOW accounts........................... $ 10,586 18.85% $ 2,836 $ 7,750 15.64%
Money market deposit................... 14,038 25.00 875 13,163 26.57
Certificates of deposit................ 22,860 40.71 3,423 19,437 39.24
Jumbo certificates..................... 8,668 15.44 (519) 9,187 18.55
-------- ------- --------- --------- -------
$ 56,152 100.00% $ 6,615 $ 49,537 100.00%
======== ====== ========= ========= ======
The following table sets forth the time deposits in the Association
classified by rates at the dates indicated.
At June 30,
--------------------------
1997 1996
------ ------
(In thousands)
3.00 - 4.00%............................... $ 187 $ 906
4.01 - 5.00%............................... 3,156 5,948
5.01 - 6.00%............................... 22,629 17,788
6.01 - 7.00%............................... 4,946 3,111
Over 7.00%................................. 610 871
---------- ----------
$ 31,528 $ 28,624
========== ==========
The following table sets forth the amount and maturities of time deposits
at June 30, 1997.
3.00- 4.01- 5.01- Over Percent
4.00% 5.00% 7.00% 7.00% Total of Total
----- ----- ----- ----- ----- --------
(In thousands)
Certificate maturing in:
One year....................... $ 187 $ 2,996 $ 18,468 $ 3,659 $ 25,310 80.28%
One to two years............... -- 161 3,123 1,042 4,326 13.72
Two to three years............. -- -- 768 300 1,068 3.39
Over three years............... -- -- 604 220 824 2.61
------ -------- -------- -------- -------- -------
Total............... $ 187 $ 3,157 $ 22,963 $ 5,221 $ 31,528 100.00%
====== ======== ======== ======== ======== ======
Percent of total......... 0.59% 10.01% 72.83% 16.56% 100.00%
====== ======== ======== ======== ========
The following table indicates the amount of the Association's certificates
of deposit of $100,000 or more by time remaining until maturity as of June 30,
1997.
Certificates
Maturity Period of Deposits
--------------- -----------
(In thousands)
Three months or less....................... $ 2,562
Over three through six months.............. 2,411
Over six through 12 months................. 2,347
Over 12 months............................. 1,348
-------
Total.... ............................... $ 8,668
=======
42
The following table sets forth the savings activities of the Association
for the periods indicated.
Year Ended June 30,
------------------
1997 1996
------ ------
(Dollars in thousands)
Opening balance ...................................... $ 49,537 $ 45,914
Net increase (decrease) before interest credited ..... 4,797 2,026
Interest credited .................................... 1,818 1,597
-------- --------
Ending balance ................................... $ 56,152 $ 49,537
======== ========
Net increase (decrease) .............................. $ 6,615 $ 3,623
======== ========
Percent increase (decrease) .......................... 13.35% 7.89%
======== ========
In the unlikely event the Association is liquidated after the Conversion,
depositors will be entitled to full payment of their deposit accounts prior to
any payment being made to the sole stockholder of the Converted Association or
the Association, which is the Company.
Borrowings. Savings deposits historically have been the primary source of
funds for the Association's lending, investments and general operating
activities. The Association is authorized, however, to use advances from the
FHLB of Topeka to supplement its supply of lendable funds and to meet deposit
withdrawal requirements. The FHLB of Topeka functions as a central reserve bank
providing credit for savings institutions and certain other member financial
institutions. As a member of the FHLB System, the Association is required to own
stock in the FHLB of Topeka and is authorized to apply for advances. Advances
are pursuant to several different programs, each of which has its own interest
rate and range of maturities. The Association has a Blanket Agreement for
advances with the FHLB under which the Association may borrow up to 25% of
assets (approximately $19 million), subject to normal collateral and
underwriting requirements. Advances from the FHLB of Topeka are secured by
mortgage-backed securities, investments and residential first mortgage loans.
At June 30, 1997, the Association had an approved line of credit for $10.0
million with the FHLB, of which the Association had drawn on $1.0 million at
that date. In addition, as of June 30, 1997, the Association had $12.5 million
in FHLB advances outstanding of which $8.5 million was at interest rates which
range from $5.81% to 8.12% and mature within one year; $3.0 million were at
interest rates which range from 5.81% to 6.72% and mature in 1999; $500,000 were
at an interest rate of 6.79% and mature in 2000; and $520,000 were at an
interest rate of 6.80% and mature in 2001.
Subsidiary Activities
As a federally chartered savings bank, the Association is permitted to
invest an amount equal to 2% of its assets in subsidiaries, with an additional
investment of 1% of assets where such investment serves primarily community,
inner-city and community development purposes. Under such limitations, as of
June 30, 1997, the Association was authorized to invest up to approximately $2.3
million in the stock of or loans to subsidiaries, including the additional 1%
investment for community inner-city and community development purposes.
Institutions meeting their applicable minimum regulatory capital requirements
may invest up to 50% of their regulatory capital in conforming first mortgage
loans to subsidiaries in which they own 10% or more of the capital stock. The
Association does not have any subsidiaries.
43
Competition
The Association faces strong competition both in originating real estate
and consumer loans and in attracting deposits. The Association competes for real
estate and other loans principally on the basis of interest rates, the types of
loans it originates, the deposit products it offers and the quality of services
it provides to borrowers. The Association also competes by offering products
which are tailored to the local community. Its competition in originating real
estate loans comes primarily from other commercial banks and mortgage bankers
making loans secured by real estate located in the Association's market area.
Commercial banks, credit unions and finance companies provide vigorous
competition in consumer lending. Competition may increase as a result of the
continuing reduction of restrictions on the interstate operations of financial
institutions.
The Association attracts its deposits through its offices primarily from
the local communities of the offices. Consequently, competition for deposits is
principally from other savings institutions, commercial banks and brokers in the
local communities as well as from the corporate credit unions sponsored by the
large private employers in the Association's market area. The Association
competes for deposits and loans by offering what it believes to be a variety of
deposit accounts at competitive rates, convenient business hours, a commitment
to outstanding customer service and a well-trained staff. The Association
believes it has developed strong relationships with local realtors and the
community in general.
Management considers its market area for gathering deposits to be Chaffee,
Lake, Western Fremont and Saguache counties in Colorado. The Association
estimates that it competes with six banks, and two credit unions for deposits
and loans. Based on data provided by a private marketing firm, the Association
estimates that as of June 1996, the latest date for which information was
available, it had 21.76% of deposits held by all financial institutions in its
market area.
Offices and Other Material Properties
The following table sets forth information regarding the Association's
offices at June 30, 1997.
Book Value at
Year Owned or June 30, Approximate
Opened Leased 1997 (1) Square Footage
------ ------ ------------- --------------
Main Office
130 West 2nd
Salida, Colorado 1886 (2) Owned $763 10,750
Branch Offices
600 Harrison (3)
Leadville, Colorado 1978 Owned 805 3,800
713 East Main (3)
Buena Vista, Colorado 1996 Owned 480 2,400
- ---------
(1) Cost less accumulated depreciation and amortization.
(2) The current location and building in Salida, Colorado was occupied in 1974.
(3) The Association constructed new building facilities at each of these
locations in 1996.
The book value of the Association's investment in premises and equipment
totaled approximately $2.5 million at June 30, 1997. See Note 6 of Notes to
Financial Statements.
44
Employees
As of June 30, 1997, the Association had 36 full-time and one part-time
employees, none of whom were represented by a collective bargaining agreement.
Management considers the Association's relationships with its employees to be
good.
Legal Proceedings
From time to time, the Association is a party to various legal proceedings
incident to its business. At June 30, 1997, there were no legal proceedings to
which the Company or the Association was a party, or to which any of their
property was subject, which were expected by management to result in a material
loss to the Company or the Association. There are no pending regulatory
proceedings to which the Company, the Association or its subsidiaries is a party
or to which any of their properties is subject which are currently expected to
result in a material loss.
REGULATION
General
As a federally chartered savings association, the Association is subject to
extensive regulation by the OTS. The lending activities and other investments of
the Association must comply with such regulatory requirements, and the OTS
periodically examines the Association for compliance with various regulatory
requirements. The FDIC also has the authority to conduct special examinations.
The Association must file reports with the OTS describing its activities and
financial condition and is also subject to certain reserve requirements
promulgated by the Federal Reserve Board. This supervision and regulation is
intended primarily for the protection of depositors. Certain of these regulatory
requirements are referred to below or appear elsewhere herein.
Regulation of the Association
Regulatory Capital Requirements. Under OTS capital standards, savings
associations must maintain "tangible" capital equal to 1.5% of adjusted total
assets, "core" capital equal to 3.0% of adjusted total assets and a combination
of core and "supplementary" capital equal to 8.0% of "risk-weighted" assets. In
addition, the OTS has recently adopted regulations which impose certain
restrictions on savings associations that have a total risk-based capital ratio
that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted assets of
less than 4.0% or a ratio of Tier 1 capital to adjusted total assets of less
than 4.0% (or 3.0% if the institution is rated Composite 1 under the OTS
examination rating system). See " -- Prompt Corrective Regulatory Action." For
purposes of this regulation, Tier 1 capital has the same definition as core
capital, which is defined as common stockholders' equity (including retained
earnings), noncumulative perpetual preferred stock and related surplus, minority
interests in the equity accounts of fully consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits and "qualifying supervisory
goodwill." Core capital is generally reduced by the amount of the savings
association's intangible assets for which no market exists. Limited exceptions
to the deduction of intangible assets are provided for purchased mortgage
servicing rights and qualifying supervisory goodwill. Tangible capital is given
the same definition as core capital but does not include an exception for
qualifying supervisory goodwill and is reduced by the amount of all the savings
association's intangible assets with only a limited exception for purchased
mortgage servicing rights and purchased credit card relationship. Both core and
tangible capital are further reduced by an amount equal to a savings
association's debt and equity investments in subsidiaries engaged in activities
not permissible to national banks, other than subsidiaries engaged in activities
undertaken as agent for customers, or in mortgage banking activities and
subsidiary depository institutions or their holding companies. At June 30, 1997,
the Association had no such investments.
Adjusted total assets are a savings association's total assets as
determined under GAAP, adjusted for certain goodwill amounts and increased by a
pro rated portion of the assets of subsidiaries in which the savings association
holds a minority interest, and which are not engaged in activities for which the
capital rules require deduction of its debt
45
and equity investments. Adjusted total assets are reduced by the amount of
assets that have been deducted from capital, the portion of the savings
association's investments in subsidiaries that must be netted against capital
under the capital rules and, for purposes of the core capital requirement,
qualifying supervisory goodwill.
In determining compliance with the risk-based capital requirement, a
savings association is allowed to use both core capital and supplementary
capital provided the amount of supplementary capital used does not exceed the
savings association's core capital. Supplementary capital is defined to include
certain preferred stock issues, nonwithdrawable accounts and pledged deposits
that do not qualify as core capital, certain approved subordinated debt, certain
other capital instruments and a portion of the savings association's general
loss allowances. Total core and supplementary capital are reduced by the amount
of capital instruments held by other depository institutions pursuant to
reciprocal arrangements, the savings association's high loan-to-value ratio land
loans and non-residential construction loans and equity investments other than
those deducted from core and tangible capital. At June 30, 1997, the Association
had no high ratio land or nonresidential construction loans and had no equity
investments for which OTS regulations require a deduction from total capital.
The risk-based capital requirement is measured against risk-weighted
assets, which equal the sum of each asset, and the credit-equivalent amount of
each off-balance sheet item after being multiplied by an assigned risk weight.
Under the OTS risk-weighting system, one-to four-family first mortgages that
are not more than 90 days past due with loan-to-value ratios under 80% are
assigned a risk weight of 50%. Consumer and residential construction loans are
assigned a risk weight of 100%. Mortgage-backed securities issued, or fully
guaranteed as to principal and interest by the FHLMC, are assigned a 20% risk
weight. Cash and U.S. Government securities backed by the full faith and credit
of the U.S. Government are given a 0% risk weight.
The table below presents the Association's capital position relative to its
various regulatory capital requirements at June 30, 1997.
Percent of
Amount Assets(1)
------ ---------
(Dollars in thousands)
Tangible capital............................ $ 5,955 7.80%
Tangible capital requirement................ 1,145 1.50
--------- ------
Excess (deficit)......................... $ 4,810 6.30%
========= ======
Core capital................................ $ 5,955 7.80%
Core capital requirement.................... 2,290 3.00
--------- ------
Excess (deficit)......................... $ 3,665 4.80%
========= ======
Risk-based capital.......................... $ 6,552 13.73%
Risk-based capital requirement.............. 3,818 8.00
--------- ------
Excess (deficit)......................... $ 2,734 5.73%
========= ======
- ------------------
(1) Based on adjusted total assets for purposes of the tangible capital and
core capital requirements and risk-weighted assets for purpose of the risk-based
capital requirement.
The OTS requires savings institutions with more than a "normal" level of
interest rate risk to maintain additional total capital. A savings institution's
interest rate risk is measured in terms of the sensitivity of its "net portfolio
value" to changes in interest rates. Net portfolio value is defined, generally,
as the present value of expected cash inflows from existing assets and off-
balance sheet contracts less the present value of expected cash outflows from
existing liabilities. A savings institution will be considered to have a
"normal" level of interest rate risk exposure if the
46
decline in its net portfolio value, after an immediate 200 basis point increase
or decrease in market interest rates (whichever results in the greater decline),
is less than two percent of the current estimated economic value of its assets.
A savings institution with a greater than normal interest rate risk is required
to deduct from total capital, for purposes of calculating its risk-based capital
requirement, an amount (the "interest rate risk component") equal to one-half
the difference between the institution's measured interest rate risk and the
normal level of interest rate risk, multiplied by the economic value of its
total assets.
The OTS calculates the sensitivity of a savings institution's net portfolio
value based on data submitted by the institution in a schedule to its quarterly
Thrift Financial Report, and using the interest rate risk measurement model
adopted by the OTS. The amount of the interest rate risk component, if any, to
be deducted from a savings institution's total capital is based on the
institution's Thrift Financial Report filed two quarters earlier. Savings
institutions with less than $300 million in assets and a risk-based capital
ratio above 12% are generally exempt from filing the interest rate risk schedule
with their Thrift Financial Reports. However, the OTS will require any exempt
savings institution that it determines may have a high level of interest rate
risk exposure to file such schedule on a quarterly basis. The OTS has not yet
implemented these requirements.
In addition to requiring generally applicable capital standards for savings
institutions, the OTS is authorized to establish the minimum level of capital
for a savings institution at such amount or at such ratio of capital-to-assets
as the OTS determines to be necessary or appropriate for such institution in
light of the particular circumstances of the institution. The OTS may treat the
failure of any savings institution to maintain capital at or above such level as
an unsafe or unsound practice, and may issue a directive requiring any savings
institution which fails to maintain capital at or above the minimum level
required by the OTS to submit and adhere to a plan for increasing capital. Such
an order may be enforced in the same manner as an order issued by the FDIC.
Prompt Corrective Regulatory Action. Under the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), the federal banking regulators
are required to take prompt corrective action if an insured depository
institution fails to satisfy certain minimum capital requirements. All
institutions, regardless of their capital levels, are restricted from making any
capital distribution or paying any management fees if the institution would
thereafter fail to satisfy the minimum levels for any of its capital
requirements. An institution that fails to meet the minimum level for any
relevant capital measure (an "undercapitalized institution") may be: (i) subject
to increased monitoring by the appropriate federal banking regulator; (ii)
required to submit an acceptable capital restoration plan within 45 days; (iii)
subject to asset growth limits; and (iv) required to obtain prior regulatory
approval for acquisitions, branching and new lines of businesses. A
"significantly undercapitalized" institution, as well as any undercapitalized
institution that does not submit an acceptable capital restoration plan, may be
subject to regulatory demands for recapitalization, broader application of
restrictions on transactions with affiliates, limitations on interest rates paid
on deposits, asset growth and other activities, possible replacement of
directors and officers, and restrictions on capital distributions by any bank
holding company controlling the institution. Any company controlling the
institution could also be required to divest the institution, or the institution
could be required to divest subsidiaries. The senior executive officers of a
significantly undercapitalized institution may not receive bonuses or increases
in compensation without prior approval and the institution is prohibited from
making payments of principal or interest on its subordinated debt. In their
discretion, the federal banking regulators may also impose the foregoing
sanctions on an undercapitalized institution if the regulators determine that
such actions are necessary to carry out the purposes of the prompt corrective
action provisions. If an institution's ratio of tangible capital to total assets
falls below a "critical capital level," the institution will be subject to
conservatorship or receivership within 90 days, unless periodic determinations
are made that forbearance from such action would better protect the deposit
insurance fund. Unless appropriate findings and certifications are made by the
appropriate federal bank regulatory agencies, a critically undercapitalized
institution must be placed in receivership if it remains critically
undercapitalized on average during the calendar quarter, beginning 270 days
after the date it became critically undercapitalized.
Under implementing regulations, the federal banking regulators, including
the OTS, generally measure a depository institution's capital adequacy on the
basis of the institution's total risk-based capital ratio (the ratio of its
total
47
capital to risk-weighted assets), Tier 1 risk-based capital ratio (the ratio of
its core capital to risk-weighted assets) and leverage ratio (the ratio of its
core capital to adjusted total assets). Under the regulations, a savings
institution that is not subject to an order or written directive to meet or
maintain a specific capital level will be deemed "well capitalized" if it also
has: (i) a total risk-based capital ratio of 10% or greater; (ii) a Tier 1 risk-
based capital ratio of 6.0% or greater; and (iii) a leverage ratio of 5.0% or
greater. An "adequately capitalized" savings institution is a savings
institution that does not meet the definition of well capitalized and has: (i) a
total risk-based capital ratio of 8.0% or greater; (ii) a Tier 1 capital risk-
based ratio of 4.0% or greater; and (iii) a leverage ratio of 4.0% or greater
(or 3.0% or greater if the savings institution has a composite 1 CAMEL rating).
An "undercapitalized institution" is a savings institution that has (i) a total
risk-based capital ratio less than 8.0%; or (ii) a Tier 1 risk-based capital
ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0% (or 3.0% if
the institution has a composite 1 CAMEL rating). A "significantly
undercapitalized" institution is defined as a savings institution that has: (i)
a total risk-based capital ratio of less than 6.0%; or (ii) a Tier 1 risk-based
capital ratio of less than 3.0%; or (iii) a leverage ratio of less than 3.0%. A
"critically undercapitalized" savings institution is defined as a savings
institution that has a ratio of "tangible equity" to total assets of less than
2.0%. Tangible equity is defined as core capital plus cumulative perpetual
preferred stock (and related surplus) less all intangibles other than qualifying
supervisory goodwill and certain purchased mortgage servicing rights. The OTS
may reclassify a well capitalized savings institution as adequately capitalized
and may require an adequately capitalized or undercapitalized institution to
comply with the supervisory actions applicable to institutions in the next lower
capital category (but may not reclassify a significantly undercapitalized
institution as critically under-capitalized) if the OTS determines, after notice
and an opportunity for a hearing, that the savings institution is in an unsafe
or unsound condition or that the institution has received and not corrected a
less-than-satisfactory rating for any CAMEL rating category. At June 30, 1997
the Association was classified as "well capitalized" under OTS Regulations, and
Management of the Association believes that the Converted Association will,
immediately after the Conversion, also be classified as "well capitalized."
Qualified Thrift Lender Test. A savings institution that does not meet the
Qualified Thrift Lender test ("QTL Test") must either convert to a bank charter
or comply with the following restrictions on its operations: (i) the institution
may not engage in any new activity or make any new investment, directly or
indirectly, unless such activity or investment is permissible for a national
bank; (ii) the branching powers of the institution shall be restricted to those
of a national bank; (iii) the institution shall not be eligible to obtain any
advances from its FHLB; and (iv) payment of dividends by the institution shall
be subject to the rules regarding payment of dividends by a national bank. Upon
the expiration of three years from the date the institution ceases to be a QTL,
it must cease any activity, and not retain any investment not permissible for a
national bank and immediately repay any outstanding FHLB advances (subject to
safety and soundness considerations).
To qualify as a QTL, a savings institution must either qualify as a
"domestic building and loan association" under the Internal Revenue Code or
maintain at least 65% of its "portfolio" assets in Qualified Thrift Investments.
Portfolio assets are defined as total assets less intangibles, property used by
a savings institution in its business and liquidity investments in an amount not
exceeding 20% of assets. Qualified Thrift Investments consist of: (i) loans,
equity positions, or securities related to domestic, residential real estate or
manufactured housing, and educational, small business and credit card loans;
(ii) 50% of the dollar amount of residential mortgage loans subject to sale
under certain conditions but do not include any intangible assets. Subject to a
20% of portfolio assets limit, however, savings institutions are able to treat
as Qualified Thrift Investments 200% of their investments in loans to finance
"starter homes" and loans for construction, development or improvement of
housing and community service facilities or for financing small businesses in
"credit-needy" areas.
A savings institution must maintain its status as a QTL on a monthly basis
in nine out of every 12 months. A savings institution that fails to maintain
Qualified Thrift Lender status will be permitted to requalify once, and if it
fails the QTL Test a second time, it will become immediately subject to all
penalties as if all time limits on such penalties had expired. Failure to
qualify as a QTL results in a number of sanctions, including the imposition of
certain operating
48
restrictions imposed on national banks and a restriction on obtaining additional
advances from the FHLB System. Upon failure to qualify as a QTL for two years, a
savings association must convert to a commercial bank. At June 30, 1997,
approximately 96.54% of the Association's assets were invested in Qualified
Thrift Investments.
Dividend Limitations. Under OTS regulations, the Association is not
permitted to pay dividends on its capital stock if its regulatory capital would
thereby be reduced below the amount then required for the liquidation account
established for the benefit of certain depositors of the Association at the time
of its conversion to stock form. In addition, savings institution subsidiaries
of savings and loan holding companies are required to give the OTS 30 days'
prior notice of any proposed declaration of dividends to the holding company.
Federal regulations impose limitations on the payment of dividends and
other capital distributions (including stock repurchases and cash mergers) by
the Association. Under these regulations, a savings institution that,
immediately prior to, and on a pro forma basis after giving effect to a proposed
capital distribution, has total capital (as defined by OTS regulation) that is
equal to or greater than the amount of its fully phased-in capital requirements
(a "Tier 1 Association"), is generally permitted without OTS approval, after
notice, to make capital distributions during a calendar year in the amount equal
to the greater of (i) 75% of net income for the previous four quarters or (ii)
up to 100% of its net income to date during the calendar year plus an amount
that would reduce by one-half the amount by which its capital-to-assets ratio
exceeded its fully phased-in capital requirement to assets ratio at the
beginning of the calendar year. A savings institution with total capital in
excess of current minimum capital requirements but not in excess of the fully
phased-in requirements (a "Tier 2 Association") is permitted, after notice, to
make capital distributions without OTS approval of up to 75% of its net income
for the previous four quarters, less dividends already paid for such period. A
savings institution that fails to meet current minimum capital requirements (a
"Tier 3 Association") is prohibited from making any capital distributions
without the prior approval of the OTS. Tier 1 Associations that have been
notified by the OTS that they are in need of more than normal supervision will
be treated as either a Tier 2 or Tier 3 Association. Unless the OTS determines
that the Association is an institution requiring more than normal supervision,
the Association is authorized to pay dividends, in accordance with the
provisions of the OTS regulations discussed above, as a Tier 1 Association.
Under the OTS' prompt corrective action regulations, the Association is
also prohibited from making any capital distributions if, after making the
distribution, the Association would have: (i) a total risk-based capital ratio
of less than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or
(iii) a leverage ratio of less than 4.0%. However, the OTS, after consultation
with the FDIC, may permit an otherwise prohibited stock repurchase if it is made
in connection with the issuance of additional shares in an equivalent amount,
and the repurchase will reduce the institution's financial obligations or
otherwise improve the institution's financial condition.
In addition to the foregoing, earnings of the Association appropriated to
bad debt reserves and deducted for Federal income tax purposes are not available
for payment of cash dividends or other distributions to stockholders without
payment of taxes at the then current tax rate by the Association on the amount
of earnings removed from the reserves for such distributions. See "Taxation."
Safety and Soundness Standards. Under FDICIA, as amended by the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "CDRI Act"),
each Federal banking agency is required to establish safety and soundness
standards for institutions under its authority. On July 10, 1995, the Federal
banking agencies, including the OTS, released Interagency Guidelines
Establishing Standards for Safety and Soundness and published a final rule
establishing deadlines for submission and review of safety and soundness
compliance plans. The final rule and the guidelines went into effect on August
9, 1995. The guidelines require savings institutions to maintain internal
controls, information systems and audit systems that are appropriate for the
size, nature and scope of the institution's business. The guidelines also
establish certain basic standards for loan documentation, credit underwriting,
interest rate risk exposure, and asset growth. The guidelines further provide
that savings institutions should maintain safeguards to prevent the payment of
compensation, fees and benefits that are excessive or that could lead to
material financial loss,
49
and should take into account factors such as comparable compensation practices
at comparable institutions. If the OTS determines that a savings institution is
not in compliance with the safety and soundness guidelines, it may require the
institution to submit an acceptable plan to achieve compliance with the
guidelines. A savings institution must submit an acceptable compliance plan to
the OTS within 30 days of receipt of a request for such a plan. Failure to
submit or implement a compliance plan may subject the institution to regulatory
sanctions. Management believes that the Association already meets substantially
all the standards adopted in the interagency guidelines, and therefore does not
believe that implementation of these regulatory standards will materially affect
the Association's operations.
Additionally, under FDICIA, as amended by the CDRI Act, the Federal banking
agencies are required to establish standards relating to the asset quality and
earnings that the agencies determine to be appropriate. On July 10, 1995, the
federal banking agencies, including the OTS, issued proposed guidelines relating
to asset quality and earnings. Under the proposed guidelines, a savings
institution should maintain systems, commensurate with its size and the nature
and scope of its operations, to identify problem assets and prevent
deterioration in those assets, as well as to evaluate and monitor earnings and
ensure that earnings are sufficient to maintain adequate capital and reserves.
Management believes that the asset quality and earnings standards, in the form
proposed by the banking agencies, would not have a material effect on the
Association's operations.
Deposit Insurance. The Association is required to pay assessments, based on
a percentage of its insured deposits, to the FDIC for insurance of its deposits
by the FDIC through the SAIF. Under the Federal Deposit Insurance Act, the FDIC
is required to set semi-annual assessments for SAIF-insured institutions at a
level necessary to maintain the designated reserve ratio of the SAIF at 1.25% of
estimated insured deposits, or at a higher percentage of estimated insured
deposits that the FDIC determines to be justified for that year by circumstances
indicating a significant risk of substantial future losses to the SAIF.
Under the FDIC's risk-based deposit insurance assessment system, the
assessment rate for an insured depository institution depends on the assessment
risk classification assigned to the institution by the FDIC, which is determined
by the institution's capital level and supervisory evaluations. Based on the
data reported to regulators for the date closest to the last day of the seventh
month preceding the semi-annual assessment period, institutions are assigned to
one of three capital groups -- well capitalized, adequately capitalized or
undercapitalized -- using the same percentage criteria as under the prompt
corrective action regulations. See " -- Prompt Corrective Regulatory Action."
Within each capital group, institutions are assigned to one of three subgroups
on the basis of supervisory evaluations by the institution's primary supervisory
authority, and such other information as the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance fund. Subgroup A consists of financially sound institutions with only
a few minor weaknesses. Subgroup B consists of institutions that demonstrate
weaknesses which, if not corrected, could result in significant deterioration of
the institution and increased risk of loss to the deposit insurance fund.
Subgroup C consists of institutions that pose a substantial probability of loss
to the deposit insurance fund unless effective corrective action is taken.
For the past several semi-annual periods, institutions with SAIF-assessable
deposits, like the Association, have been required to pay higher deposit
insurance premiums than institutions with deposits insured by the BIF. In order
to recapitalize the SAIF and address the premium disparity, the recently-enacted
Deposit Insurance Funds Act of 1996 authorized the FDIC to impose a one-time
special assessment on institutions with SAIF-assessable deposits, based on the
amount determined by the FDIC to be necessary to increase the reserve levels of
the SAIF to the designated reserve ratio of 1.25% of insured deposits.
Institutions were assessed at the rate of 65.7 basis points based on the amount
of their SAIF-assessable deposits as of March 31, 1995. As a result of the
special assessment the Association incurred a pre-tax expense of $297,000,
during the fiscal year ended June 30, 1997.
The FDIC has proposed a rule that would lower the regular semi-annual SAIF
assessment rates by establishing a base assessment rate schedule ranging from 4
to 31 basis points effective October 1, 1996. The rule widens the range between
the lowest and highest assessment rates among healthy and troubled institutions
with the intent of creating an incentive for savings institutions to control
risk-taking behavior. The rule also prevents the FDIC from collecting more funds
than needed to maintain the SAIF's capitalization at 1.25% of insured deposits.
Until December 31, 1999, however, SAIF-insured institutions will be required to
pay assessments to the FDIC at the rate of 6.44 basis points to
50
help fund interest payments on certain bonds issued by the Financing Corporation
("FICO"), an agency of the federal government established to finance takeovers
of insolvent thrifts. During this period, BIF members will be assessed for these
obligations at the rate of 1.3 basis points. After December 31, 1999, both BIF
and SAIF members will be assessed at the same rate for FICO payments.
SAIF members are generally prohibited from converting to BIF, also
administered by the FDIC, or merging with or transferring assets to a BIF member
before the date on which the SAIF first meets or exceeds the designated reserve
ratio of 1.25% of insured deposits. However, the FDIC may approve such a
transaction in the case of a SAIF member in default or if the transaction
involves an insubstantial portion of the deposits of each participant. In
addition, mergers, transfers of assets and assumptions of liabilities may be
approved by the appropriate bank regulator so long as deposit insurance premiums
continue to be paid to the SAIF for deposits attributable to the SAIF members,
plus an adjustment for the annual rate of growth of deposits in the surviving
bank without regard to subsequent acquisitions. Each depository institution
participating in a SAIF-to-BIF conversion transaction is required to pay an exit
fee to SAIF equal to 0.90% of the deposits transferred and an entrance fee to
BIF based on the current reserve ratio of the BIF. A savings institution is not
prohibited from adopting a commercial bank or savings bank charter if the
resulting bank remains a SAIF member.
Transactions with Affiliates. Transactions between savings institutions and
any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act.
An affiliate of a savings institution is any company or entity which controls,
is controlled by or is under common control with the savings institution. In a
holding company context, the parent holding company of a savings institution
(such as the Company) and any companies which are controlled by such parent
holding company are affiliates of the savings institution. Generally, Sections
23A and 23B (i) limit the extent to which the savings institution or its
subsidiaries may engage in "covered transactions" with any one affiliate to an
amount equal to 10% of such institution's capital stock and surplus, and contain
an aggregate limit on all such transactions with all affiliates to an amount
equal to 20% of such capital stock and surplus, and (ii) require that all such
transactions be on terms substantially the same, or at least as favorable, to
the institution or subsidiary as those provided to a non-affiliate. The term
"covered transaction" includes the making of loans, purchase of assets, issuance
of a guarantee and other similar types of transactions. In addition to the
restrictions imposed by Sections 23A and 23B, no savings institution may (i)
loan or otherwise extend credit to an affiliate (except for any affiliate which
engages only in activities which are permissible for savings and loan holding
companies), or (ii) purchase or invest in any stocks, bonds, debentures, notes
or similar obligations of any affiliate (except for affiliates which are
subsidiaries of the savings institution). Section 106 of the Bank Holding
Company Act ("BHCA"), which also applies to the Association, prohibits the
Association from extending credit to or offering any other services, or fixing
or varying the consideration for such extension of credit or service, on the
condition that the customer obtain some additional service from the institution
or certain of its affiliates or not obtain services of a competitor of the
institution, subject to certain exceptions.
Loans to Directors, Executive Officers and Principal Stockholders. Savings
institutions are also subject to the restrictions contained in Section 22(h) of
the Federal Reserve Act on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to an executive officer and to a
greater than 10% stockholder of a savings institution, and certain affiliated
entities of either, may not exceed, together with all other outstanding loans to
such person and affiliated entities, the institution's loan to one borrower
limit (generally equal to 15% of the institution's unimpaired capital and
surplus and an additional 10% of such capital and surplus for loans fully
secured by certain readily marketable collateral). Section 22(h) also prohibits
loans, above amounts prescribed by the appropriate federal banking agency, to
directors, executive officers and greater than 10% stockholders of a savings
institution, and their respective affiliates, unless such loan is approved in
advance by a majority of the board of directors of the institution with any
"interested" director not participating in the voting. The Federal Reserve Board
has prescribed the loan amount (which includes all other outstanding loans to
such person), as to which such prior board of director approval is required, as
being the greater of $25,000 or 5% of capital and surplus (up to $500,000).
Further, the Federal Reserve Board, pursuant to Section 22(h), requires that
loans to directors, executive officers and principal stockholders be made on
terms substantially the same as offered in comparable transactions to other
persons. Section 22(h) also generally prohibits a depository institution from
paying the overdrafts of any of its executive officers or directors. Section
22(g) of the Federal Reserve Act requires that loans to executive officers of
depository institutions not be made on terms more favorable than those afforded
to other borrowers, requires approval for such extensions of credit by the board
of
51
directors of the institution, and imposes reporting requirements for and
additional restrictions on the type, amount and terms of credits to such
officers. In addition, Section 106 of the BHCA prohibits extensions of credit to
executive officers, directors, and greater than 10% stockholders of a depository
institution by any other institution which has a correspondent banking
relationship with the institution, unless such extension of credit is on
substantially the same terms as those prevailing at the time for comparable
transactions with other persons and does not involve more than the normal risk
of repayment or present other unfavorable features.
Liquidity Requirements. The Association is required to maintain average
daily balances of liquid assets (cash, certain time deposits, bankers'
acceptances, highly rated corporate debt and commercial paper, securities of
certain mutual funds, and specified United States government, state or federal
agency obligations) equal to the monthly average of not less than a specified
percentage (currently 5%) of its net withdrawable savings deposits plus short-
term borrowings. The Association is also required to maintain average daily
balances of short-term liquid assets at a specified percentage (currently 1%) of
the total of its net withdrawable savings accounts and borrowings payable in one
year or less. Monetary penalties may be imposed for failure to meet liquidity
requirements. The average regulatory liquidity ratio of the Association for the
month of June 1997 was 5.51%.
Federal Home Loan Bank System. The Association is a member of the FHLB,
which consists of 12 Federal Home Loan Banks subject to supervision and
regulation by the Federal Housing Finance Board ("FHFB"). The FHLBs provide a
central credit facility primarily for member institutions. As a member of the
FHLB of Topeka, the Association is required to acquire and hold shares of
capital stock in the FHLB of Topeka in an amount at least equal to 1% of the
aggregate unpaid principal of its home mortgage loans, home purchase contracts
and similar obligations at the beginning of each year, or 1/20 of its advances
from the FHLB of Topeka, whichever is greater. The Association was in compliance
with this requirement with investment in FHLB of Topeka stock at June 30, 1997,
of $988,500. The FHLB of Topeka is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes advances to
members in accordance with policies and procedures established by the FHFB and
the Board of Directors of the FHLB of Topeka. As of June 30, 1997, the
Association had $13.5 million in advances and other borrowings from the FHLB of
Topeka. See "Business of the Association -- Deposit Activities and Other Sources
of Funds -- Borrowings."
Federal Reserve System. Pursuant to regulations of the Federal Reserve
Board, a thrift institution must maintain average daily reserves equal to 3% on
the first $49.3 million of transaction accounts, plus 10% on the remainder. This
percentage is subject to adjustment by the Federal Reserve Board. Because
required reserves must be maintained in the form of vault cash or in a non-
interest bearing account at a Federal Reserve Bank, the effect of the reserve
requirement is to reduce the amount of the institution's interest-earning
assets. As of June 30, 1997, the Association met its reserve requirements.
Regulation of the Company
General. Following the Conversion, the Company will be a savings and loan
holding company within the meaning of the Home Owners' Loan Act, as amended
("HOLA"). As such, the Company will be registered with the OTS and subject to
OTS regulations, examinations, supervision and reporting requirements. As a
subsidiary of a savings and loan holding company, the Association will be
subject to certain restrictions in its dealings with the Company and affiliates
thereof. The Company also will be required to file certain reports with, and
otherwise comply with the rules and regulations of the SEC under the federal
securities laws.
Activities Restrictions. The Board of Directors of the Company presently
intends to operate the Company as a unitary savings and loan holding company.
There are generally no restrictions on the activities of a unitary savings and
loan holding company. However, if the Director of OTS determines that there is
reasonable cause to believe that the continuation by a savings and loan holding
company of an activity constitutes a serious risk to the financial safety,
soundness, or stability of its subsidiary savings association, the Director of
OTS may impose such restrictions as deemed necessary to address such risk,
including limiting: (i) payment of dividends by the savings institution, (ii)
transactions between the savings institution and its affiliates; and (iii) any
activities of the savings institution that might create a serious risk that the
liabilities of the holding company and its affiliates may be imposing on the
savings institution.
52
Notwithstanding the above rules as to permissible business activities of unitary
savings and loan holding companies, if the savings institution subsidiary of
such a holding company fails to meet the QTL Test, then such unitary holding
company shall also presently become subject to the activities restrictions
applicable to multiple holding companies and unless the savings association
requalifies as a QTL within one year thereafter, register as, and become subject
to, the restrictions applicable to a bank holding company. See " -- Regulation
of the Association -- Qualified Thrift Lender Test."
If the Company were to acquire control of another savings association,
other than through merger or other business combination with the Association,
the Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings institution meets the QTL
Test, the activities of the Company and any of its subsidiaries (other than the
Association or other subsidiary savings institutions) would thereafter be
subject to further restrictions. Among other things, no multiple savings and
loan holding company, or subsidiary thereof which is not a savings institution,
may commence or continue for a limited period of time after becoming a multiple
savings and loan holding company or subsidiary thereof, any business activity,
upon prior notice to, and no objection by the OTS, other than: (i) furnishing or
performing management services for a subsidiary savings institution; (ii)
conducting an insurance agency or escrow business; (iii) holding, managing, or
liquidating assets owned by or acquired from a subsidiary savings institution;
(iv) holding or managing properties used or occupied by a subsidiary savings
institution; (v) acting as trustee under deeds of trust; (vi) those activities
previously directly authorized by regulation as of March 5, 1987 to be engaged
in by multiple holding companies; or (vii) those activities authorized by the
Federal Reserve Board as permissible for savings and loan holding companies,
unless the Director of OTS by regulation prohibits or limits such activities for
savings and loan holding companies. Those activities described in (vii) above
must also be approved by the Director of OTS prior to being engaged in by a
multiple holding company.
Restrictions on Acquisitions. The HOLA generally prohibits savings and loan
holding companies from acquiring, without prior approval of the Director of OTS,
(i) control of any other savings institution or savings and loan holding company
or substantially all the assets thereof, or (ii) more than 5% of the voting
shares of a savings institution or holding company thereof which is not a
subsidiary. Except with the prior approval of the Director of OTS, no director
or officer of a savings and loan holding company or person owning or controlling
by proxy or otherwise more than 25% of such company's stock, may also acquire
control of any savings institution, other than a subsidiary savings institution,
or of any other savings and loan holding company.
The Director of OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
institutions in more than one state if: (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office in the state of the institution to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act; or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by state-chartered institutions or savings and loan holding companies
located in the state where the acquiring entity is located (or by a holding
company that controls such state-chartered savings institutions).
The OTS regulations permit federal associations to branch in any state or
states of the United States and its territories. Except in supervisory cases, or
when interstate branching is otherwise permitted by state law or other statutory
provision, a federal association may not establish an out-of-state branch unless
(i) the federal association qualifies as a QTL or as a "domestic building and
loan association" under ss.7701(a)(19) of the Code and the total assets
attributable to all branches of the association in the state would qualify such
branches taken as a whole as a QTL or for treatment as a domestic building and
loan association and (ii) such branch would not result in (a) formation of a
prohibited multi-state multiple savings and loan holding company or (b) a
violation of certain statutory restrictions on branching by savings association
subsidiaries of banking holding companies. Federal associations generally may
not establish new branches unless the association meets or exceeds minimum
regulatory capital requirements. The OTS will also consider the association's
record of compliance with the Community Reinvestment Act of 1977 in connection
with any branch application.
53
Under the BHCA, bank holding companies are specifically authorized to
acquire control of any savings association. Pursuant to rules promulgated by the
Federal Reserve Board, owning, controlling or operating a savings institution is
a permissible activity for savings and loan holding companies, if the savings
institution engages only in deposit-taking activities and lending and other
activities that are permissible for bank holding companies. A bank holding
company that controls a savings institution may merge or consolidate the assets
and liabilities of the savings institution with, or transfer assets and
liabilities to, any subsidiary bank which is a member of the BIF with the
approval of the appropriate federal banking agency and the Federal Reserve
Board. The resulting bank will be required to continue to pay assessments to the
SAIF at the rates prescribed for SAIF members on the deposits attributable to
the merged savings institution plus an annual growth increment. In addition, the
transaction must comply with the restrictions on interstate acquisitions of
commercial banks under the BHCA.
Federal Securities Law. The Company has filed with the SEC a Registration
Statement under the Securities Act of 1933, as amended (the "Securities Act"),
for the registration of the Common Stock to be issued in the Conversion. Upon
completion of the Conversion, the Common Stock will be registered with the SEC
under the Exchange Act and, under OTS regulations, generally may not be
deregistered for at least three years thereafter. The Company will be subject to
the information, proxy solicitation, insider trading restrictions and other
requirements of the Exchange Act.
The registration under the Securities Act of the Common Stock does not
cover the resale of such shares. Shares of the Common Stock purchased by persons
who are not affiliates of the Company may be resold without registration. Shares
purchased by an affiliate of the Company will be subject to the resale
restrictions of Rule 144 under the Securities Act. If the Company meets the
current public information requirements of Rule 144 under the Securities Act,
each affiliate of the Company who complies with the other conditions of Rule 144
(including those that require the affiliate's sale to be aggregated with those
of certain other persons) would be able to sell in the public market, without
registration, a number of shares not to exceed, in any three-month period, the
greater of (i) 1% of the outstanding shares of the Company or (ii) the average
weekly volume of trading in such shares during the preceding four calendar
weeks. Provision may be made in the future by the Company to permit affiliates
to have their shares registered for sale under the Securities Act under certain
circumstances. There are currently no demand registration rights outstanding.
However, in the event the Company at some future time determines to issue
additional shares from its authorized but unissued shares, the Company might
offer registration rights to certain of its affiliates who want to sell their
shares.
TAXATION
General
The Association files a consolidated federal income tax return based on the
fiscal year. After the Conversion, it is expected that the Company and the
Association, together with the Association's subsidiary, will file a
consolidated federal income tax return based on a fiscal year ending June 30.
Consolidated returns have the effect of deferring gain or loss on intercompany
transactions and allowing companies included within the consolidated return to
offset income against losses under certain circumstances.
Federal Income Taxation
The Company and the Association will file a consolidated federal income tax
return.
Thrift institutions are subject to the provisions of the Code in the same
general manner as other corporations. Prior to recent legislation, institutions
such as the Association which met certain definitional tests and other
conditions prescribed by the Code benefitted from certain favorable provisions
regarding their deductions from taxable income for annual additions to their bad
debt reserve. For purposes of the bad debt reserve deduction, loans were
separated into "qualifying real property loans," which generally are loans
secured by interests in certain real property, and nonqualifying loans, which
are all other loans. The bad debt reserve deduction with respect to
nonqualifying loans was based on actual loss experience, however, the amount of
the bad debt reserve deduction with respect to qualifying real property loans
could be based upon actual loss experience (the "experience method") or a
percentage of taxable income determined without regard to such deduction (the
"percentage of taxable income method"). Legislation recently signed
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by the President repealed the percentage of taxable income method of calculating
the bad debt reserve. The Association historically has elected to use the
percentage method.
Earnings appropriated to an institution's bad debt reserve and claimed
as a tax deduction were not available for the payment of cash dividends or for
distribution to shareholders (including distributions made on dissolution or
liquidation), unless such amount was included in taxable income, along with the
amount deemed necessary to pay the resulting federal income tax.
Beginning with the first taxable year beginning after December 31,
1995, savings institutions, such as the Association, will be treated the same as
commercial banks. Institutions with $500 million or more in assets will only be
able to take a tax deduction when a loan is actually charged off. Institutions
with less than $500 million in assets will still be permitted to make deductible
bad debt additions to reserves, but only using the experience method.
In 1996 the Association's federal corporate income tax returns for 1995
were audited with no significant correction. The Association's tax returns have
not been otherwise audited in the last five years.
Under provisions of the Revenue Reconciliation Act of 1993 ("RRA"),
enacted on August 10, 1993, the maximum federal corporate income tax rate was
increased from 34% to 35% for taxable income over $10.0 million, with a 3%
surtax imposed on taxable income over $15.0 million. Also under provisions of
RRA, a separate depreciation calculation requirement has been eliminated in the
determination of adjusted current earnings for purposes of determining
alternative minimum taxable income, rules relating to payment of estimated
corporate income taxes were revised, and certain acquired intangible assets such
as goodwill and customer-based intangibles were allowed a 15-year amortization
period. Beginning with tax years ending on or after January 1, 1993, RRA also
provides that securities dealers must use mark-to-market accounting and
generally reflect changes in value during the year or upon sale as taxable gains
or losses. The IRS has indicated that financial institutions which originate and
sell loans will be subject to the rule.
State Income Taxation
The State of Colorado imposes no income or franchise taxes on savings
institutions. The State of Colorado taxes the Association's federal taxable
income, adjusted for interest income received directly from federal agencies, at
a 5% rate.
MANAGEMENT OF THE COMPANY
The Board of Directors of the Company consists of the same individuals
who serve as directors of the Association. Their biographical information is set
forth under "Management of the Association." The Board of Directors of the
Company is divided into three classes. Directors of the Company will serve for
three year terms or until their successors are elected and qualified, with
approximately one-third of the directors being elected at each annual meeting of
stockholders, beginning with the first annual meeting of stockholders following
the Conversion.
The following individuals hold the offices in the Company set forth
below opposite their names.
Name Title
---- -----
Larry D. Smith President
Scott G. Erchul Vice President
Frank L. DeLay Chief Financial Officer
The executive officers of the Company are elected annually and hold
office until their respective successors have been elected and qualified or
until death, resignation or removal by the Board of Directors of the Company.
55
Since the formation of the Company, none of the executive officers,
directors or other personnel have received remuneration from the Company.
Information concerning the principal occupations, employment and compensation of
the directors and officers of the Company during the past five years is set
forth under "Management of the Association." Executive officers and directors of
the Company will be compensated as described below under "Management of the
Association."
MANAGEMENT OF THE ASSOCIATION
Directors
Because the Association is a mutual savings and loan association, its
members have elected its Board of Directors. Upon completion of the Conversion,
each director of the Association immediately prior to the Conversion will
continue to serve as directors of the Converted Association. The term of each
director is three years, and approximately one-third of the members of the Board
of Directors are elected each year. The Conversion will not affect the classes
or terms of the existing directors. Because the Company will own all the issued
and outstanding capital stock of the Converted Association following the
Conversion, the Board of Directors of the Company will elect the directors of
the Converted Association. Following the Conversion, Mr. Mitchell, who currently
serves as Chairman of the Board of Directors of the Association, will become
Chairman of the Board of Directors of the Converted Association. Mr. Smith, who
currently serves as President of the Association, will become President and
Chief Executive Officer of the Converted Association. They each will serve in
these same capacities for the Company.
The following table sets forth certain information with respect to the
individuals who serve currently as members of the Association's Board of
Directors. There are no arrangements or understandings between the Association
and any director pursuant to which such person has been elected a director of
the Association, and no director is related to any other director or executive
officer by blood, marriage or adoption.
Age at
June 30,
Name 1997 Director Since Term to Expire
- ---- ------- -------------- --------------
Richard A. Young 43 1992 1998
Philip W. Harsh 52 1995 1998
Larry D. Smith 39 1987 1999
Robert B. Mitchell 71 1972 2000
Timothy R. Glenn 39 1991 2000
Scott G. Erchul 35 1997 2000
Presented below is certain information concerning the directors of the
Association. Unless otherwise stated, all directors have held the positions
indicated for at least the past five years.
Richard A. Young has served as a Director of the Association since 1992
and will serve as Secretary and Treasurer of the Company and the Converted
Association. He is a Certified Public Accountant and a partner in the accounting
firm of Swartz & Young P.C. He is a high school football coach, treasurer and
board member of the local Pop Warner Football League and youth leader for a LDS
church scouting troop.
Philip W. Harsh has been an owner and agent of the Fredrickson Brown
Insurance Agency since 1990 and a Director of the Association since 1995. He is
a member of the Salida Chamber of Commerce and the Chamber of Commerce Business
Development Group. Also, he has served as President of the ruling group for the
Salida Public Golf Course and is active in the Independent Insurance Agents of
America's Insurance Youth Golf Classic.
Larry D. Smith has been President of the Association since 1991 and a
Director of the Association since 1987. He will serve as the President and Chief
Executive Officer of the Company and the Converted Association. From 1978 to
1991, he served as Controller of the Association. He is active in the Salida
school system and youth sports by serving
56
as a coach for various sports teams and by serving on the High School Building
Accountability and Business Advisory Committees. He is also involved with
several organizations which promote the academic and athletic development of the
youth of Salida.
Robert B. Mitchell has served as a Director of the Association since
1972. He is retired after 20 years as the Post Master of Salida, Colorado.
Timothy R. Glenn has served as a Director of the Association since
1991. He is the Funeral Director and Owner of the Lewis & Glenn Funeral Home and
the Coroner for Chaffee County, Colorado. His civic activities include the
Salida Rotary Club, Elks Lodge, 4-H Club and the St. Joseph Catholic Church. He
has also served as President and a member of the Board of Directors of the
Colorado Association of Cemeteries.
Scott G. Erchul has been a member of the Board of Directors of the
Association since 1997. He has served as Vice President of the Association since
1991 and will serve as Vice President of the Company and the Converted
Association. His past and current community involvement include the Rotary Club,
Academic Booster Club committee member and youth sports coach for football,
baseball and soccer.
Executive Officers Who Are Not Directors
Frank L. DeLay has served as the Chief Financial Officer of the
Association since 1992 and he will serve in a similar capacity for the Company.
He is a member and current President of the Kiwanis Club. Also, he is a member
of the Board of Directors of the Heart of the Rockies Chamber of Commerce.
Committees of the Board of Directors
The Board of Directors of the Association meets monthly and may have
additional special meetings, as required. During the year ended June 30, 1997,
the Board met 28 times. No director attended fewer than 75% in the aggregate of
the total number of Board meetings held during the year ended June 30, 1997 and
the total number of meetings held by committees on which he served during such
fiscal year.
The Board of Directors' Audit Committee consists of Directors Mitchell
and Young. The Audit Committee, met two times during the year ended June 30,
1997 to examine and approve the audit report prepared by the independent
auditors of the Association to review and recommend the independent auditors to
be engaged by the Association, to review the internal audit function and
internal accounting controls, and to review and approve conflict of interest and
audit policies. Following the Conversion, it is expected that the Audit
Committee will be comprised of two non-employee directors.
The Association's full Board of Directors serves as the Nominating
Committee, and is responsible for considering potential nominees to the Board of
Directors. During the year ended June 30, 1997, the Board of Directors met one
time as a nominating committee. Following the Conversion, it is expected that
the Company's full Board of Directors will act as a nominating committee for
selecting the management nominees for election as directors of the Company in
accordance with the Company's Bylaws.
The Board of Directors' Compensation Committee consists of the full
Board of Directors. The Compensation Committee evaluates the compensation and
benefits of the directors, officers and employees, recommends changes, and
monitors and evaluates employee performance. All compensation decisions are made
by the full Board of Directors. The Board of Directors met four times as the
Compensation Committee during the fiscal year ended June 30, 1997.
57
Executive Compensation
The following table sets forth the cash and noncash compensation for
the last fiscal year awarded to or earned by the Chief Executive Officer. No
executive officer of the Company earned salary and bonus in fiscal year 1997
exceeding $100,000 for services rendered in all capacities to the Association.
Annual Compensation
----------------------------------------
Other Annual All Other
Name Year Salary Bonus Compensation(1) Compensation
- ---- --- ------ ----- --------------- ------------
Larry D. Smith 1997 $70,142 $ 7,500 $7,000 (2) $ --
President
- ---------------
(1) Executive officers of the Association receive indirect compensation in
the form of certain perquisites and other personal benefits. The amount
of such benefits received by the named executive officers in fiscal
1997 did not exceed 10% of each of the executive officer's respective
salary and bonus.
(2) Compensation for serving on the Board of Directors.
Director Compensation
Effective May 1997, the Association's directors receive fees of $1,000
per month. It is expected that Directors will receive no additional fees for
serving on the Board of Directors of the Company as well as the Board of
Directors of the Converted Association. Prior to May 1997, directors received
fees of $500 per month. No fees are paid for serving on committees of the Board
of Directors. During fiscal year 1997, the Association's directors' fees paid
totaled $65,500.
Certain Benefit Plans and Agreements
In connection with the Conversion, the Company's and the Association's
Boards of Directors have approved certain stock incentive plans, employment
agreements, change-in-control severance agreements, and incentive compensation
plans.
Basis for Awards of Benefits and Compensation. The Company's and the
Association's Boards of Directors have evaluated and approved the terms of the
employment agreements and other benefits described below. In its review of the
benefits and compensation of the executive officers and the terms of the
employment agreements, the Boards of Directors considered a number of factors,
including the experience, tenure and ability of the executive officers, their
performance for the Association during their tenure and the various legal and
regulatory requirements regarding the levels of compensation which may be paid
to employees of savings associations.
Stock Option Plan. The Board of Directors of the Company intends to
implement the Option Plan more than six months after completion of the
Conversion. The purpose of the Option Plan is to provide additional incentive to
directors and employees by facilitating their acquisition of Common Stock. The
Option Plan will have a term of ten years, after which no awards may be made.
A number of shares equal to 10% of the shares of Conversion Stock sold
to the public in the Offering would be reserved for future issuance by the
Company -- in the form of newly issued shares, or treasury shares, or shares
held in a grantor trust -- upon exercise of stock options ("Options") or stock
appreciation rights ("SARs"). Options and SARs are collectively referred to
herein as "Awards." The exercise price of shares subject to outstanding Awards
will be equitably adjusted upon a stock split, recapitalization, or similar
event (including a return of capital). If Awards should expire, become
unexercisable, or be forfeited for any reason without having been exercised or
having become vested in full, the shares of Common Stock subject to such Awards
would be available for the grant of additional Awards under the Option Plan.
58
It is expected that the Option Plan will be administered by a committee
(the "Option Committee") of at least two directors who are designated by the
Board of Directors and are "non-employee directors" within the meaning of the
federal securities laws. Directors Mitchell, Glenn, Harsh, and Young are
currently expected to serve as the Option Committee. Directors and employees
will be eligible to receive Awards, and the Option Committee will select the
recipients of Awards, the number of shares to be subject to such Awards, and the
terms and conditions of such Awards (subject to the terms of the Option Plan).
The Options to be awarded to employees pursuant to the Option Plan may or may
not qualify as incentive stock options ("ISOs") that afford favorable tax
treatment to recipients upon compliance with certain restrictions pursuant to
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") and
that do not result in tax deductions to the Company unless optionees fail to
comply with Section 422 of the Code.
Subject to the regulatory requirements explained below under the
heading "OTS Rules Applicable to the Option Plan and MRP" each Option will have
an exercise price not less than 50% of the market value of the underlying shares
on the date of the grant, will become exercisable upon terms determined by the
Option Committee, and will become immediately exercisable upon a change in
control (within the meaning of the Employment Agreements) or an optionee's
termination of employment due to retirement, death, or disability. Nevertheless,
each Option will expire no later than ten years from the date it is granted, and
will expire earlier, unless otherwise determined by the Option Committee, upon
(i) an employee's termination of employment for "just cause" (as defined in the
Option Plan), (ii) the date two years after termination of such service due to
the employee's death, (iii) the date one year after an employee terminates
service due to disability, or (iv) the date one year after an employee
terminates service for a reason other than just cause, death, or disability.
Otherwise unexpired Options granted to non-employee directors will automatically
expire one year after termination of service on the Board of Directors (two
years in the event of death).
An SAR may be granted in tandem with all or any part of any Option or
without any relationship to any Option. Whether or not an SAR is granted in
tandem with an Option, exercise of the SAR will entitle the optionee to receive,
as the Option Committee prescribes in the grant, all or a percentage of the
excess of the then fair market value of the shares of Common Stock subject to
the SAR at the time of its exercise over the aggregate exercise price of the
shares subject to the SAR when granted. Payment to the optionee may be made in
cash or shares of Common Stock, as determined by the Option Committee.
The Company will receive no monetary consideration for the granting of
Awards under the Option Plan, and will receive no monetary consideration other
than the Option exercise price for each share issued to optionees upon the
exercise of Options. The Option Committee will have the discretion to impose
transfer restrictions, such as a right of first refusal, on the Common Stock
subject to Awards. Optionees will be permitted to transfer Awards to family
members or trusts under specified circumstances, but awards may not otherwise be
sold, pledged, assigned, hypothecated, transferred or disposed of in any manner
other than by will or by the laws of descent and distribution. Upon an
optionee's exercise of an Option, the Company may, if provided by the Option
Committee in the underlying Option agreement, pay to the optionee a cash amount
up to but not exceeding the amount of dividends, if any, declared on the
underlying shares between the date of grant and the date of exercise of the
Option.
It is expected that upon the implementation of the Option Plan, Mr.
Smith will receive an Award with respect to 25% of the shares of Conversion
Stock reserved under the Option Plan, and each director at that time who is not
then an employee will receive an Award with respect to 5% of such shares. No
SARs are expected to be granted when the Option Plan becomes effective. At any
time following consummation of the Conversion, the Bank or the Company may
contribute sufficient funds to a grantor trust to purchase, and such trust may
purchase, a number of shares of Common Stock equal to 10% of the shares sold to
the public in the Offering. Such shares would be held by the trust for issuance
to Option holders upon the exercise of Options in the event the Option Plan is
implemented. Whether such shares are purchased, and the timing of such
purchases, will depend on market and other conditions and the alternative uses
of capital available to the Company.
Management Recognition Plan. The Board of Directors of the Company
intends to implement the MRP more than six months after completion of the
Conversion. The purpose of the MRP is to enable the Company and the Bank to
retain personnel of experience and ability in key positions of responsibility.
59
A number of shares equal to 4% of the shares of Conversion Stock sold
in the Offering would be reserved for future issuance under the MRP. The same
non-employee directors who are appointed to the Option Committee are expected to
act, by majority, as the committee (the "MRP Committee") responsible for
selecting the directors and employees who will receive MRP awards, as well as
making general decisions associated with the MRP's operation. The directors
serving as the MRP Committee are also expected to serve as trustee of the trust
associated with the MRP (the "MRP Trust"). In that capacity, they will have the
responsibility to hold and invest all funds contributed to the MRP Trust. Shares
held in the MRP Trust will be voted by the MRP trustees in the same proportion
as the shares held by the Company's employee stock ownership plan, and will be
distributed as each award vests. The compensation expense for the Company for
MRP awards will equal the fair market value of the Common Stock on the date of
the grant pro rated over the years during which vesting occurs. The Company's
Board of Directors can terminate the MRP at any time, and, if it does so, any
shares not subject to outstanding awards will revert to the Company.
The shares awarded pursuant to the MRP will be in the form of awards
which may be transferred to family members or trusts under specified
circumstances, but may not otherwise be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent and distribution. Subject to the regulatory requirements explained below
under the heading "OTS Rules Applicable to the Option Plan and MRP" each MRP
award will vest in accordance with conditions determined by the MRP Committee,
with an acceleration of vesting to 100% upon a participant's death, disability,
or retirement or a "change in control" within the meaning of the Employment
Agreement. Dividends on unvested shares will be held in the MRP Trust for
payment as vesting occurs. Participants in the MRP may elect to defer all or a
percentage of their MRP awards that would have otherwise been transferred to the
participants upon vesting of said awards. If, however, a participant terminates
employment before becoming fully vested in an MRP award, he or she forfeits all
rights to the allocated shares under restriction.
It is expected that upon the implementation of the MRP, Mr. Smith will
receive an award with respect to 25% of the shares reserved for MRP awards, and
each director who is not an employee but is a director on the effective date
shall receive an award with respect to 5% of such shares. At any time following
consummation of the Conversion the Bank or the Company will contribute
sufficient funds to the MRP Trust so that the trust can purchase a number of
shares of Common Stock equal to 4% of those sold in the Offering. Whether those
shares will be purchased in the open market or newly issued by the Company, and
the timing of such purchases, will depend on market and other conditions and the
alternative uses of capital available to the Company.
OTS Rules Applicable to the Option Plan and MRP. Current OTS
regulations require that, if the Option Plan or MRP is implemented within one
year following completion of the Conversion, (i) no employee will receive awards
covering more than 25% of the shares subject to the plan, (ii) non-employee
directors will not receive awards exceeding 30% in the aggregate, and 5%
individually, of such shares, (iii) awards will vest over a period of at least
five years and vesting will not accelerate upon an individual's retirement or a
corporate change in control, (iv) the exercise price for Options will at least
equal the fair market value of the underlying shares on its grant date, and
(v) the plan will not be implemented before, or in the absence of, its receipt
of stockholder approval, and no awards will be made prior to the receipt of such
approval.
401(k) Plan. The Association maintains a defined contribution plan,
which is designed to qualify under Sections 401(a) and 401(k) of the Code (the
"401(k) Plan"). An employee is eligible to participate in the 401(k) Plan on or
after attaining age 18 and completion of one year of service. The 401(k) Plan
permits a participant to make before-tax contributions through regular salary
reductions of up to 15% of salary payable. The 401(k) Plan is intended to comply
with all the rights and protection afforded employees pursuant to the Employee
Retirement Income Security Act of 1974, as amended.
Participants are at all times fully vested in their elective salary
deferrals under the 401(k) Plan. Employer matching and discretionary
contributions to the 401(k) Plan vest based on years of service, with
participants becoming 20% vested after 3 years of service, 40% after 4 years of
service, 60% after 5 years of service, 80% after 6 years of service, and 100%
after 7 years of service. Benefits are paid following a participant's
termination of employment.
60
Participants will be permitted to direct, on a one-time basis, that all
or part of their 401(k) Plan account balances be invested in Common Stock.
Voting rights for such stock, to be held in trust for participants, are expected
to be exercisable by participants.
Employee Stock Ownership Plan. In connection with the Conversion, the
Company's Board of Directors intends to adopt an employee stock ownership plan
("ESOP"), effective as of July 1, 1997. Employees of the Company and its
subsidiaries who have attained age 18 and completed one year of service will be
eligible to participate in the ESOP. The Company will submit an application to
the IRS for a letter of determination as to the tax-qualified status of the
ESOP. Although no assurances can be given, the Company expects the ESOP to
receive a favorable letter of determination from the IRS.
The ESOP is to be funded by contributions made by the Company or the
Association in cash or shares of Common Stock. The ESOP intends to borrow funds
from the Company in an amount sufficient to purchase 8% of the Common Stock
issued in the Conversion. This loan will be secured by the shares of Common
Stock purchased and earnings thereon. Shares purchased with such loan proceeds
will be held in a suspense account for allocation among participants as the loan
is repaid. The Company expects to contribute sufficient funds to the ESOP to
repay such loan over a ten-year period, plus such other amounts as the Company's
Board of Directors may determine in its discretion.
Upon the occurrence of a "change in control" (as defined in the ESOP),
the outstanding balance of any outstanding securities acquisition loans under
the ESOP will be discharged through a transfer or sale of shares held as
collateral under such loan, with any remaining shares allocated to participant
accounts pro rata based on their account balances. Participants terminating
employment on or after the change in control will be entitled to receive a cash
payment from the Company equal to the amount, if any, plus earnings thereon,
which would have been allocated to the participant's account immediately
following the change in control but was precluded from allocation based on
allocation limits applicable under federal tax laws.
Contributions to the ESOP and shares released from the suspense account
will be allocated among participants on the basis of their annual wages subject
to federal income tax withholding, plus any amounts withheld under a plan
qualified under Sections 125 or 401(k) of the Code and sponsored by the Company
or the Association. Participants must be employed at least 500 hours in a plan
year in order to receive an allocation. Each participant's interest under the
ESOP becomes vested at the rate of 20% for each of the participant's years of
service with the company or the Association, and thereby becomes 100% vested
upon a participant's completion of five years of service. For vesting purposes,
a year of service means any plan year in which an employee completes at least
1,000 hours of service (whether before or after the ESOP's July 1, 1997
effective date). Vesting accelerates to 100% upon a participant's attainment of
age 65, death or disability. Forfeitures will be reallocated to participants on
the same basis as other contributions. Benefits are payable upon a participant's
retirement, death, disability or separation from service and will be paid in a
lump sum in whole shares of Common Stock (with cash paid in lieu of fractional
shares). Benefits paid to a participant in Common Stock that is not publicly
traded on an established securities market will be subject both to a right of
first refusal by the Company and to a put option by the participant. Dividends
paid on allocated shares are expected to be paid to participants or used to
repay the ESOP loan, and dividends on unallocated shares are expected to be used
to repay the ESOP loan.
It is expected that the Company will administer the ESOP and that
Directors Mitchell, Glenn, Harsh, and Young will be appointed as trustees of the
ESOP (the "ESOP Trustees"). The ESOP Trustees must vote all allocated shares
held in the ESOP in accordance with the instructions of the participants.
Unallocated shares and allocated shares for which no timely direction is
received are expected to be voted by the ESOP Trustees in the same proportion as
the participant-directed voting of allocated shares.
Long-Term Incentive Plan. The Association's Board of Directors has
adopted the Salida Building and Loan Association Long-Term Incentive Plan (the
"LTIP") effective June 10, 1997 (the "Effective Date"), for its directors who
are members of the Association's Board of Directors (the "Board") at some time
on or after the plan's effective date.
61
On the Effective Date, a bookkeeping account was established by the
Association in the name of each participant, and each participant who was a
non-employee director on the Effective Date had his account credited with an
amount equal to the product of (i) $2,846, and (ii) his full years of service as
a director prior to the Effective Date. On each June 30 following the Effective
Date, each participant who is a non-employee director on such date shall have
his or her account credited with an amount equal to the product of $2,846 and
the safe performance factor. The safe performance factor is determined based on
the Association's actual performance as compared to budgeted goals for return on
average assets, non-performing assets, and CAMEL rating, provided that the safe
performance factor may not exceed 1.2. Also on the Effective Date, the LTIP
accounts of Messrs. Smith and Erchul (the "Employee Directors"), were credited
with amounts equal to $11,076 and $5,342, respectively, (the "Annual Credits")
for each full year of their service with the Association prior to such date. On
the June 30 occurring during each of the years following 1997 until termination
of employment, each Employee Director's account will be credited with an
additional amount equal to the Annual Credit times the safe performance factor.
Amounts credited to participants' accounts will be fully vested at all times.
Until distributed in accordance with the terms of the LTIP, each participant's
account will be credited with a rate of return on any amounts previously
credited. Prior to the Conversion, this rate of return equals the highest rate
of interest paid by the Association on certificates of deposit having a term of
one year. After the Conversion that rate of return will equal the
dividend-adjusted rate of return on the Company's common stock.
In the event of an Employee Director's disability or death, his account
will be credited with an amount equal to the difference (if any) between (i) 50%
of the present value of all benefits which would have been credited to his
account if he had otherwise remained employed by the Association to age 65, and
(ii) the benefits which are actually credited to his account at the time of his
termination. If his employment terminates in connection with or following a
change in control, his account will be credited with an amount equal to the
difference (if any) between (i) 100% of the present value of all benefits which
would have been credited to his account if he had otherwise remained employed by
the Association to age 65, and (ii) the benefits which are actually credited to
his account at the time of his termination, subject to applicable "golden
parachute" limitations under (S)280G of the Internal Revenue Code. "Change in
control" is defined the same as under the Employment Agreement described below.
Participants' accounts under the LTIP will be paid, in cash, in ten
substantially equal annual installments, beginning during the first quarter of
the calendar year which next follows the calendar year in which the participant
ceases to be a director. Notwithstanding the foregoing, a participant may elect
to receive LTIP benefits in a lump sum or over a period shorter than ten years.
In the event of a participants' death, the balance of his LTIP account will be
paid in a lump sum (unless the participant elects a distribution period up to
ten years) to his designated beneficiary, or if none, his estate.
Any benefits accrued under the LTIP will be paid from the Association's
general assets. The Association has established a trust in order to hold assets
with which to pay benefits. Trust assets will be subject to the claims of the
Association's general creditors. In the event a participant prevails over the
Association in a legal dispute as to the terms or interpretation of the LTIP, he
or she will be reimbursed for his or her legal and other expenses.
Incentive Compensation Plan. The Association's Board of Directors
adopted the Incentive Compensation Plan, effective July 1, 1997. The Incentive
Compensation Plan is administered by a committee (the "Incentive Compensation
Committee") which is expected to consist of the Association's non-employee
directors. Under the plan, employees will receive annual cash bonus awards from
a bonus pool determined under a performance-based formula. The bonus pool will
equal the multiple of (i) 30% of net income in excess of 80% of targeted net
income, times (ii) the NPA factor, times (iii) the CAMEL factor. The NPA factor
will equal 1.0 as long as the ratio of the Association's non-performing assets
and real-estate-owned to its total loans and real-estate-owned ("NPA Ratio") is
less than or equal to 1%, and will be reduced ratably to 0 for NPA Ratios
equaling or exceeding 2%. The CAMEL Factor will equal 1.2 for a CAMEL rating of
1, 1.0 for a CAMEL rating of 2, and 0 for CAMEL ratings of 3 or higher. In
determining performance for a fiscal year, the Incentive Compensation Committee
will have the discretion to take into account or disregard extraordinary
financial events. Mr. Smith is expected to receive approximately 25% of the
annual bonus pool, with the remaining 75% divided among the Association's other
employees, based on a schedule approved by the Incentive Compensation Committee.
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The Incentive Compensation Plan has an indefinite term, and the
Association has the right at any time to terminate or amend the Incentive
Compensation Plan for any reason; provided, that no amendment or termination
may, without the consent of the participant or, if applicable, the participant's
beneficiary, adversely affect such participant's or beneficiary's rights with
respect to benefits accrued as of the date of such amendment or termination.
Employment Agreements. The Company and the Association has entered into
employment agreements (the "Employment Agreements") under which Larry D. Smith
would serve as President and Scott G. Erchul will serve as Vice President of the
Association and the Company (the "Employees"). In such capacities, the Employees
are responsible for overseeing all operations of the Association and the
Company, and for implementing the policies adopted by the Boards of Directors.
Such Boards believe that the Employment Agreements assure fair treatment of the
Employees in their career with the Company and the Association by assuring them
of some financial security.
The Employment Agreements will become effective upon their execution
and will provide for a term of three years, with an annual base salary equal to
each Employee's existing base salary rate in effect on the effective date. On
each anniversary date of the commencement of the Employment Agreements, the term
of each Employee's employment may be extended for an additional one-year period
beyond the then effective expiration date, upon a determination by the Board of
Directors that the performance of the Employee has met the required performance
standards and that such Employment Agreements should be extended. The Employment
Agreements provide each Employee with a salary review by the Board of Directors
not less often than annually, as well as with inclusion in any discretionary
bonus plans, retirement and medical plans, customary fringe benefits, vacation
and sick leave. An Employment Agreement shall terminate upon the Employee's
death, may terminate upon the Employee's disability and are terminable by the
Association for "just cause" (as defined in the Employment Agreements). In the
event of termination for just cause, no severance benefits are available. If the
Company or the Association terminates an Employee without just cause, the
Employee will be entitled to a continuation of his salary and benefits from the
date of termination through the remaining term of the Employment Agreements plus
an additional 12 month's salary and, at the Employee's election, either
continued participation in benefit plans which the Employee would have been
eligible to participate in through the Employment Agreements' expiration date or
the cash equivalent thereof. If the Employment Agreements are terminated due to
the Employee's "disability" (as defined in the Employment Agreements), the
Employee will be entitled to a continuation of his salary and benefits through
the date of such termination, including any period prior to the establishment of
the Employee's disability. In the event of an Employee's death during the term
of his Employment Agreement, his estate will be entitled to receive his salary
through the last day of the calendar month in which the Employee's death
occurred. An Employee is able to voluntarily terminate his Employment Agreement
by providing 90 days' written notice to the Boards of Directors of the
Association and the Company, in which case the Employee is entitled to receive
only his compensation, vested rights, and benefits up to the date of
termination. If an Employee's employment terminates for a reason other than just
cause, the Employee will, until he first becomes eligible for Medicare, be
entitled to purchase from the Association, at a rate not greater than that
applicable under COBRA, family medical insurance through any group health plan
maintained by the Association.
In the event of (i) the Employee's involuntary termination of
employment other than for "just cause" during the period beginning six months
before a change in control and ending on the later of the first anniversary of
the change in control or the expiration date of the Employment Agreements (the
"Protected Period"), (ii) the Employee's voluntary termination within 90 days of
the occurrence of certain specified events occurring during the Protected Period
which have not been consented to by the Employee, or (iii) the Employee's
voluntary termination of employment for any reason within the 30-day period
beginning on the date of the change in control, the Employee will be paid within
10 days of such termination (or the date of the change in control, whichever is
later) an amount equal to the difference between (i) 2.99 times his "base
amount," as defined in Section 280G(b)(3) of the Internal Revenue Code, and (ii)
the sum of any other parachute payments, as defined under Section 280G(b)(2) of
the Internal Revenue Code, that the Employee receives on account of the change
in control.
"Change in Control" means any one of the following events: (i) the
acquisition of ownership, holding or power to vote more than 25% of the voting
stock of the Association or the Holding Company thereof, (ii) the acquisition of
the ability to control the election of a majority of the Association's or the
Company's Directors, (iii) the acquisition of a controlling influence over the
management or policies of the Association or of the Company by any person or by
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persons acting as a "group" (within the meaning of Section 13(d) of the
Securities Exchange Act of 1934), or (iv) during any period of two consecutive
years, individuals (the "Continuing Directors") who at the beginning of such
period constitute the Board of Directors of the Association or of the Company
(the "Existing Board") cease for any reason to constitute at least two-thirds
thereof, provided that any individual whose election or nomination for election
as a member of the Existing Board was approved by a vote of at least two-thirds
of the Continuing Directors then in office shall be considered a Continuing
Director. Notwithstanding the foregoing, the Company's ownership of the
Association shall not of itself constitute a Change in Control for purposes of
the Agreement. For purposes of this paragraph only, the term "person" refers to
an individual or a corporation, partnership, trust, association, joint venture,
pool, syndicate, sole proprietorship, unincorporated organization or any other
form of entity not specifically listed herein. Notwithstanding the foregoing, a
"Change in Control" shall not be deemed to occur solely by reason of a
transaction in which the Association converts to the stock form of organization,
or creates an independent holding company in connection therewith. The decision
of the Board as to whether a Change in Control has occurred shall be conclusive
and binding.
Each Employment Agreement with the Association provides that within 10
business days of a change in control, the Association shall fund, or cause to be
funded, a trust in the amount of 2.99 times the Employee's base amount, that
will be used to pay the Employee amounts owed to him. The payments that would be
made to Messrs. Smith and Erchul assuming their termination of employment under
the foregoing circumstances at June 30, 1997 would have been approximately
$197,000 and $127,000, respectively. These provisions may have an anti-takeover
effect by making it more expensive for a potential acquiror to obtain control of
the Company. For more information, see "Certain Anti-Takeover Provisions in the
Articles of Incorporation and Bylaws -- Additional Anti-Takeover Provisions."
In the event that the Employee prevails over the Company and the Association, or
obtains a written settlement, in a legal dispute as to the Employment Agreement,
he will be reimbursed for his legal and other expenses.
Change-in-Control Protective Agreements. The Company and the
Association intend to enter into change-in-control severance agreements (the
"Severance Agreements") with Frank L. DeLay, and Linda C. Rush (collectively,
the "Employees"), effective upon the closing of the Conversion.
The Severance Agreements will have a term beginning on the date of
completion of the Conversion and ending on the earlier of (a) three years after
the date of completion of the Conversion, and (b) the date on which one of these
individuals terminates employment with the Company and the Association, provided
that the Employee's rights under the Severance Agreement will continue, provided
the Agreement is in effect upon a Change in Control through the later of (i) the
first annual anniversary of the Change in Control, or (ii) the expiration of the
term of the Severance Agreement. On each annual anniversary date from the date
of commencement of the Severance Agreements, the term of the Severance
Agreements may be extended for additional one-year periods beyond the then
effective expiration date, upon a determination by the Board of Directors that
the performance of these individuals has met the required performance standards
and that such Severance Agreements should be extended.
Under the Severance Agreements, in the event of an Employee's
involuntary termination of employment in connection with, or within one year
after, any change in control of the Association or the Company, other than for
"just cause," the Employee will be paid within 10 days of such termination an
amount equal to his or her annual salary then in effect provided that no amount
shall be paid in excess of the difference between (i) 2.99 times his or her
"base amount" as defined in Section 280G(b)(3) of the Internal Revenue Code, and
(ii) the sum of any other parachute payments, as defined under Section
280G(b)(2) of the Internal Revenue Code, that he or she receives on account of
the change in control. "Change in Control" has the same meaning under the
Severance Agreements that it has under the Employment Agreements (see above).
Each Severance Agreement also provides for a similar lump sum payment to be made
in the event of an Employee's voluntary termination of employment within one
year following a change in control, upon the occurrence, or within 90 days
thereafter, of certain specified events following the change in control, which
have not been consented to in writing by one of them.
The Severance Agreements with the Association provides that within 10
business days of a change in control, the Association shall fund, or cause to be
funded, a trust in the amount of 2.99 times the base amount that will be used to
pay amounts owed to him or her upon termination other than for just cause within
one year of the change in control. The amount to be paid to an employee from
this trust upon his or her termination is determined according to the
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procedures outlined in the Severance Agreements with the Association, and any
money not paid to the employee is returned to the Association.
The aggregate payments that would be made to Employees DeLay and Rush,
assuming termination of employment under the foregoing circumstances at June 30,
1997, would have been approximately $________ and $________, respectively. These
provisions may have an anti-takeover effect by making it more expensive for a
potential acquiror to obtain control of the Company. For more information, see
"Certain Anti-Takeover Provisions in the Charter and Bylaws -- Additional
Anti-Takeover Provisions." In the event that one of these individuals prevails
over the Company and the Association in a legal dispute as to the Severance
Agreement, he or she will be reimbursed for his or her legal and other expenses.
Transactions with Management
The Association offers loans to its directors and officers. These loans
currently are made in the ordinary course of business with the same collateral,
interest rates and underwriting criteria as those of comparable transactions
prevailing at the time and to not involve more than the normal risk of
collectibility or present other unfavorable features. Under current law, the
Association's loans to directors and executive officers are required to be made
on substantially the same terms, including interest rates, as those prevailing
for comparable transactions and must not involve more than the normal risk of
repayment or present other unfavorable features. Furthermore, all loans to such
persons must be approved in advance by a disinterested majority of the Board of
Directors. At June 30, 1997, the Association had $689,000 in loans outstanding
to directors and executive officers, which is 5.61% of pro forma stockholders
equity at the midpoint of the Estimated Valuation Range. None of these loans had
favorable terms.
THE CONVERSION
The OTS has approved the Plan, subject to the Plan's approval by the
members of the Association entitled to vote on the matter and subject to the
satisfaction of certain other conditions imposed by the OTS in its approval.
Approval by the OTS, however, does not constitute a recommendation or
endorsement of the Plan.
General
On May 15, 1997, the Board of Directors of the Association unanimously
adopted, subject to approval by the OTS and the members of the Association, the
Plan, pursuant to which the Association would convert from a federal mutual
savings and loan association to a federal capital stock savings and loan
association as a wholly owned subsidiary of the Company. The OTS has approved
the Plan, subject to its approval by the members of the Association at the
Special Meeting called for that purpose to be held on _________, 1997.
The Conversion will be accomplished through the amendment of the
Association's existing Federal Mutual Charter and Bylaws to read in the form of
a Federal Stock Charter and Bylaws to authorize the issuance of capital stock by
the Converted Association, the issuance of all the Converted Association's
capital stock to be outstanding upon consummation of the Conversion to the
Company and the offer and sale of the Common Stock of the Company. Upon issuance
of the Converted Association's shares of capital stock to the Company, the
Converted Association will be a wholly owned subsidiary of the Company.
The Company has received approval from the OTS to become the holding
company of the Converted Association subject to the satisfaction of certain
conditions and to acquire all of the common stock of the Converted Association
to be issued in the Conversion in exchange for at least 50% of the net proceeds
from the sale of Common Stock in the Conversion. The Conversion will be effected
only upon completion of the sale of all of the shares of Common Stock to be
issued by the Company pursuant to the Plan.
The aggregate purchase price of the Common Stock to be issued in the
Conversion will be within the Estimated Valuation Range of between $7,650,000
and $10,350,000, which may be increased to $11,902,500, based upon an
independent appraisal of the estimated pro forma market value of the Common
Stock prepared by Ferguson. All shares
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of the Common Stock to be issued and sold in the Conversion will be sold at the
same price. The independent appraisal will be updated, if necessary, and the
final price of the shares of the Common Stock will be determined at the
completion of the Subscription and Community Offerings. Ferguson is experienced
in the valuation and appraisal of financial institutions. For additional
information, see " -- Stock Pricing and Number of Shares to be Issued."
The following is a brief summary of material aspects of the Conversion.
The summary is qualified in its entirety by reference to the provisions of the
Plan. A copy of the Plan is available for inspection at the office of the
Association and at the office of the OTS. The Plan is also filed as an exhibit
to the Registration Statement of which this Prospectus is a part, copies of
which may be obtained from the SEC. See "Additional Information."
Offering of Common Stock
Under the Plan, the Company is offering shares of the Common Stock
first to the Association's Eligible Account Holders, second to the ESOP, third
to Supplemental Eligible Account Holders and fourth to its Other Members who are
not Eligible Account Holders or Supplemental Eligible Account Holders in the
Subscription Offering. Subscription Rights received in any of the foregoing
categories will be subordinated to the Subscription Rights received by those in
a prior category, with the exception that any shares of Common Stock sold in
excess of the maximum of the Estimated Valuation Range may first be sold to the
ESOP. To the extent shares remain available for purchase after the Subscription
Offering, the Company may offer any such remaining shares to the general public
in the Community Offering. In the Community Offering, preference will be given
to natural persons and trusts of natural persons who are permanent residents of
the Local Community. The term "resident" as used in relation to the preference
afforded natural persons in the Local Community means any natural person who
occupies a dwelling within the Local Community, has an intention to remain
within the Local Community for a period of time (manifested by establishing a
physical, ongoing, nontransitory presence within the Local Community) and
continues to reside in the Local Community at the time of the Subscription and
Community Offerings. The Association may utilize deposit or loan records or such
other evidence provided to it to make the determination whether a person is
residing in the Local Community. To the extent the person is a corporation or
other business entity, the principal place of business or headquarters shall be
within the Local Community. To the extent the person is a personal benefit plan,
the circumstance of the beneficiary shall apply with respect to this definition.
In the case of all other benefit plans, circumstances of the trustee shall be
examined for purposes of this definition. In all cases, however, such
determination shall be in the sole discretion of the Association. The occurrence
of the Community Offering is subject to the availability of shares of the Common
Stock for purchase after satisfaction of all subscriptions in the Subscription
Offering. Additionally, all purchases in the Community Offering are subject to
the maximum and minimum purchase limitations set forth in the Plan and the right
of the Company to reject any such orders, in whole or in part.
As part of the Community Offering, the Plan provides that, if feasible,
all shares of Common Stock not purchased in the Subscription and Community
Offerings, if any, may be offered for sale to the general public in a Syndicated
Community Offering through selected dealers to be formed and managed by Trident
Securities. See " -- Syndicated Community Offering."
If the Community Offering and Syndicated Community Offering are
determined not to be feasible, the Association will immediately consult with the
OTS to determine the most viable alternative available to effect the completion
of the Conversion. Should no viable alternative exist, the Association may
terminate the Conversion with the concurrence of OTS. The Plan provides that the
Conversion must be completed within 24 months after the date of the approval of
the Plan by the members of the Association. In the event that the Conversion is
not effected, the Association will remain a federal mutual savings and loan
association, all subscription funds will be promptly returned to subscribers
with interest earned thereon and all withdrawal authorizations will be
cancelled. The completion of the Conversion is subject to market conditions and
other factors beyond the Association's control. No assurance can be given as to
the length of time after approval of the Plan at the Special Meeting that will
be required to complete the sale of the Common Stock to be offered in the
Conversion. If delays are experienced, significant changes may occur in the
estimated pro forma market value of the Company and the Converted Association
upon consummation of the Conversion, together with corresponding changes in the
offering price and the net proceeds realized by the Association from the sale of
the Common Stock. The Association would also incur substantial additional
printing, legal and
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accounting expenses in completing the Conversion. In the event the Conversion is
terminated, the Association would be required to charge all Conversion-related
expenses against current income.
Business Purposes
The Association's Board of Directors has formed the Company to serve
upon consummation of the Conversion as a holding company with the Converted
Association as its subsidiary. The portion of the net proceeds from the sale of
the Common Stock in the Conversion to be distributed to the Converted
Association by the Company will substantially increase the Converted
Association's capital position which will in turn increase the amount of funds
available for lending and investment, provide a "cushion" to compensate for the
Association's negative interest rate risk position, and provide greater
resources to support both current operations and future expansion by the
Association, although there are no current agreements or understandings for such
expansion. The holding company structure will provide greater flexibility than
the Association alone would have for diversification of business activities and
geographic expansion. Management believes that this increased capital and
operating flexibility will enable the Association to compete more effectively
with other types of financial services organizations. In addition, the
Conversion will also enhance the future access of the Company and the
Association to the capital markets.
The potential impact of Conversion upon the Association's capital base
is significant. The Association had retained earnings in accordance with
generally accepted accounting principles of $6.0 million, or 7.81% of assets, at
June 30, 1997. Assuming approximately $8.5 million (based on the sale of 900,000
shares of Common Stock at the midpoint of the Estimated Valuation Range) of net
proceeds are realized from the sale of the Common Stock (see "Pro Forma Data"),
and after deducting amounts necessary to fund the ESOP and MRP, the Company's
consolidated stockholders' equity would have been approximately $13.4 million as
of June 30, 1997. The Company's ratio of tangible capital to total assets would
increase to 15.95% after the Conversion. See "Historical and Pro Forma
Regulatory Capital Compliance." The investment of the net proceeds from the sale
of the Common Stock will provide the Converted Association with additional
income to further increase its capital position. The additional capital may also
assist the Converted Association in offering new programs and expanded services
to its customers.
After completion of the Conversion, the unissued Common Stock and
preferred stock authorized by the Company's Articles of Incorporation will
permit the Company, subject to market conditions, to raise additional equity
capital through further sales of securities and to issue securities in
connection with possible acquisitions. At the present time, the Company has no
plans with respect to additional offerings of securities, other than the
issuance of additional shares under the MRP or Option Plan, if implemented.
Following completion of Conversion, the Company also will be able to use
stock-related incentive programs to attract and retain executive and other
personnel for itself and its subsidiaries. See "Management of the Association--
Certain Benefit Plans and Agreements."
Effect of Conversion to Stock Form on Depositors and Borrowers of the
Association
General. Each depositor in a mutual savings institution such as the
Association has both a deposit account and a pro rata interest in the retained
earnings of that institution based upon the balance in his or her deposit
account. However, this interest is tied to the depositor's account and has no
tangible market value separate from such deposit account. Any other depositor
who opens a deposit account obtains a pro rata interest in the retained earnings
of the institution without any additional payment beyond the amount of the
deposit. A depositor who reduces or closes his or her account receives a portion
or all of the balance in the account but nothing for his or her ownership
interest, which is lost to the extent that the balance in the account is
reduced.
Consequently, depositors normally do not have a way to realize the
value of their ownership, which has realizable value only in the unlikely event
that the mutual institution is liquidated. In such event, the depositors of
record at that time, as owners, would share pro rata if any residual retained
earnings remained, after other claims are paid.
Upon consummation of the Conversion, permanent nonwithdrawable capital
stock will be created to represent the ownership of the institution. The stock
is separate and apart from deposit accounts and is not and cannot be insured
67
by the FDIC. Transferable certificates will be issued to evidence ownership of
the stock, which will enable the stock to be sold or traded, if a purchaser is
available, with no effect on any account held in the Association. Under the
Plan, all of the capital stock of the Converted Association will be acquired by
the Company in exchange for a portion of the net proceeds from the sale of the
Common Stock in the Conversion. The Common Stock will represent an ownership
interest in the Company and will be issued upon consummation of the Conversion
to persons who elect to participate in the Conversion by purchasing the shares
being offered.
Continuity. During the Conversion process, the normal business of the
Association of accepting deposits and making loans will continue without
interruption. The Converted Association will continue to be subject to
regulation by the OTS and the FDIC, and FDIC insurance of accounts will continue
without interruption. After the Conversion, the Converted Association will
continue to provide services for depositors and borrowers under current policies
and by its present management and staff.
The Board of Directors serving the Association at the time of the
Conversion will serve as the Board of Directors of the Converted Association
after the Conversion. Following the Conversion, the Board of Directors of the
Company will consist of the individuals serving on the Board of Directors of the
Association. All officers of the Association at the time of the Conversion will
retain their positions with the Converted Association after the Conversion.
Voting Rights. Upon the completion of the Conversion, depositor and
borrower members as such will have no voting rights in the Converted Association
or the Company and, therefore, will not be able to elect directors of the
Converted Association or the Company or to control their affairs. Currently
these rights are accorded to depositors of the Association. Subsequent to the
Conversion, voting rights will be vested exclusively in the stockholders of the
Company which, in turn, will own all of the stock of the Converted Association.
Each holder of Common Stock shall be entitled to vote on any matter to be
considered by the stockholders of the Company, subject to the provisions of the
Company's Articles of Incorporation.
After the Conversion, holders of Savings Accounts in and obligors on
loans of the Converted Association will not have voting rights in the
Association. Exclusive voting rights with respect to the Company shall be vested
in the holders of the Common Stock, holders of Savings Accounts in and obligors
on loans of the Converted Association and the Association will not have any
voting rights in the Company except and to the extent that such persons become
stockholders of the Company, and the Company will have exclusive voting rights
with respect to the Converted Association's capital stock.
Deposit Accounts and Loans. The Association's deposit accounts, the
balances of individual accounts and existing federal deposit insurance coverage
will not be affected by the Conversion. Furthermore, the Conversion will not
affect the loan accounts, the balances of these accounts and the obligations of
the borrowers under their individual contractual arrangements with the
Association.
Tax Effects. The Association has received an opinion from its special
counsel, Housley Kantarian & Bronstein, P.C., Washington, D.C., as to the
material federal income tax consequences of the Conversion to the Association,
and as to the generally applicable material federal income tax consequences of
the Conversion to the Association's account holders and to persons who purchase
Common Stock in the Conversion. The opinion provides that the Conversion will
constitute a reorganization for federal income tax purposes under Section
368(a)(1)(F) of the Internal Revenue Code of 1986, as amended ("Code"). Among
other things, the opinion also provides that: (i) no gain or loss will be
recognized by the Association in its mutual or stock form by reason of the
Conversion; (ii) no gain or loss will be recognized by its account holders upon
the issuance to them of accounts in the Converted Association in stock form
immediately after the Conversion, in the same dollar amounts and on the same
terms and conditions as their accounts at the Association immediately prior to
the Conversion; (iii) the tax basis of each account holder's interest in the
liquidation account will be equal to the value, if any, of that interest;
(iv) the tax basis of the Common Stock purchased in the Conversion will be equal
to the amount paid therefor increased, in the case of Common Stock acquired
pursuant to the exercise of Subscription Rights, by the fair market value, if
any, of the Subscription Rights exercised; (v) the holding period for the Common
Stock purchased in the Conversion will commence upon the exercise of such
holder's Subscription Rights and otherwise on the day following the date of such
purchase; and (vi) gain or loss will be recognized to account holders
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upon the receipt of liquidation rights or the receipt or exercise of
Subscription Rights in the Conversion, to the extent such liquidation rights and
Subscription Rights are deemed to have value, as discussed below.
The opinion of Housley Kantarian & Bronstein, P.C., is based in part
upon, and subject to the continuing validity in all material respects through
the date of the Conversion of, various representations of the Association and
upon certain assumptions and qualifications, including that the Conversion is
consummated in the manner and according to the terms provided in the Plan. Such
opinion is also based upon the Code, regulations now in effect or proposed
thereunder, current administrative rulings and practice and judicial authority,
all of which are subject to change and such change may be made with retroactive
effect. Unlike private letter rulings received from the Internal Revenue Service
("IRS"), an opinion is not binding upon the IRS and there can be no assurance
that the IRS will not take a position contrary to the positions reflected in
such opinion, or that such opinion will be upheld by the courts if challenged by
the IRS.
Housley Kantarian & Bronstein, P.C. has advised the Association that an
interest in a liquidation account has been treated by the IRS, in a series of
private letter rulings which do not constitute formal precedent, as having
nominal, if any, fair market value and therefore it is likely that the interests
in the liquidation account established by the Association as part of the
Conversion will similarly be treated as having nominal, if any, fair market
value. Accordingly, it is likely that such depositors of the Association who
receive an interest in such liquidation account established by the Association
pursuant to the Conversion will not recognize any gain or loss upon such
receipt.
Housley Kantarian & Bronstein, P.C. has further advised the Association
that the federal income tax treatment of the receipt of Subscription Rights
pursuant to the Conversion is uncertain, and recent private letter rulings
issued by the IRS have been in conflict. For instance, the IRS adopted the
position in one private ruling that Subscription Rights will be deemed to have
been received to the extent of the minimum pro rata distribution of such rights,
together with the rights actually exercised in excess of such pro rata
distribution, and with gain recognized to the extent of the combined fair market
value of the pro rata distribution of Subscription Rights plus the Subscription
Rights actually exercised. Persons who do not exercise their Subscription Rights
under this analysis would recognize gain upon receipt of rights equal to the
fair market value of such rights, regardless of exercise, and would recognize a
corresponding loss upon the expiration of unexercised rights that may be
available to offset the previously recognized gain. Under another IRS private
ruling, Subscription Rights were deemed to have been received only to the extent
actually exercised. This private ruling required that gain be recognized only if
the holder of such rights exercised such rights, and that no loss be recognized
if such rights were allowed to expire unexercised. There is no authority that
clearly resolves this conflict among these private rulings, which may not be
relied upon for precedential effect. However, based upon express provisions of
the Code and in the absence of contrary authoritative guidance, Housley
Kantarian & Bronstein, P.C. has provided in its opinion that gain will be
recognized upon the receipt rather than the exercise of Subscription Rights.
Further, also based upon a published IRS ruling and consistent with recognition
of gain upon receipt rather than exercise of the Subscription Rights, Housley
Kantarian & Bronstein, P.C. has provided in its opinion that the subsequent
exercise of the Subscription Rights will not give rise to gain or loss.
Regardless of the position eventually adopted by the IRS, the tax consequences
of the receipt of the Subscription Rights will depend, in part, upon their
valuation for federal income tax purposes.
If the Subscription Rights are deemed to have a fair market value, the
receipt of such rights will be taxable to Eligible Account Holders, Supplemental
Eligible Account Holders and other eligible members who exercise their
Subscription Rights, even though such persons would not have received any cash
from which to pay taxes on such taxable income. The Association could also
recognize a gain on the distribution of such Subscription Rights in an amount
equal to their aggregate value. In the opinion of Ferguson & Company, whose
opinion is not binding upon the IRS, the Subscription Rights do not have any
value, based on the fact that such rights are acquired by the recipients without
cost, are non-transferable and of short duration and afford the recipients the
right only to purchase shares of the Common Stock at a price equal to its
estimated fair market value, which will be the same price as the price paid by
purchasers in the Community Offering for unsubscribed shares of Common Stock.
Eligible Account Holders, Supplemental Eligible Account Holders and Other
Members are encouraged to consult with their own tax advisors as to the tax
consequences in the event that the Subscription Rights are deemed to have a fair
market value. Because the fair market value, if any, of the Subscription Rights
issued in the Conversion depends primarily upon the existence of
69
certain facts rather than the resolution of legal issues, Housley Kantarian &
Bronstein, P.C., has neither adopted the opinion of Ferguson & Company, as its
own nor incorporated such opinion of Ferguson & Company in its opinion issued in
connection with Conversion.
The Association has also received the opinion of Grimsley, White &
Company that no gain or loss will be recognized as a result of the Conversion
for purposes of Colorado income tax laws.
THE FEDERAL AND STATE INCOME TAX DISCUSSION SET FORTH ABOVE DOES NOT
PURPORT TO CONSIDER ALL ASPECTS OF FEDERAL AND STATE INCOME TAXATION WHICH MAY
BE RELEVANT TO EACH ELIGIBLE ACCOUNT HOLDER, SUPPLEMENTAL ACCOUNT HOLDER AND
OTHER MEMBER ENTITLED TO SPECIAL TREATMENT UNDER THE INTERNAL REVENUE CODE, SUCH
AS TRUSTS, INDIVIDUAL RETIREMENT ACCOUNTS, OTHER EMPLOYEE BENEFIT PLANS,
INSURANCE COMPANIES AND ELIGIBLE ACCOUNT HOLDERS, SUPPLEMENTAL ELIGIBLE ACCOUNT
HOLDERS AND OTHER MEMBERS WHO ARE NOT CITIZENS OR RESIDENTS OF THE UNITED
STATES. DUE TO THE INDIVIDUAL NATURE OF TAX CONSEQUENCES, EACH ELIGIBLE ACCOUNT
HOLDER, SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDER AND OTHER MEMBER IS URGED TO
CONSULT HIS OR HER OWN TAX AND FINANCIAL ADVISOR AS TO THE EFFECT OF SUCH
FEDERAL AND STATE INCOME TAX CONSEQUENCES ON HIS OR HER OWN PARTICULAR FACTS AND
CIRCUMSTANCES, INCLUDING THE RECEIPT AND EXERCISE OF SUBSCRIPTION RIGHTS, AND
ALSO AS TO ANY OTHER TAX CONSEQUENCES ARISING OUT OF THE CONVERSION.
Liquidation Account. In the unlikely event of a complete liquidation of
the Association in its present mutual form, each holder of a deposit account in
the Association would receive his pro rata share of any assets of the
Association remaining after payment of claims of all creditors (including the
claims of all depositors to the withdrawal value of their accounts). His pro
rata share of such remaining assets would be the same proportion of such assets
as the value of his deposit account was to the total of the value of all deposit
accounts in the Association at the time of liquidation.
After the Conversion, each deposit account holder on a complete
liquidation would have a claim of the same general priority as the claims of all
other general creditors of the Association. Therefore, except as described
below, a claim of such account holder would be solely in the amount of the
balance in the related deposit account plus accrued interest, and the account
holder would not have any interest in the value of the Association above that
amount.
The Plan provides for the establishment, upon the completion of the
Conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in an amount equal to
the net worth of the Association as of the date of its latest statement of
financial condition contained in the final Prospectus. Each Eligible Account
Holder (a qualifying depositor of the Association on December 31, 1995) and each
Supplemental Eligible Account Holder (a person with a qualifying deposit in the
Association on September 30, 1997) would be entitled, on a complete liquidation
of the Converted Association after completion of the Conversion, to an interest
in the liquidation account. Each Eligible Account Holder would have an initial
interest in such liquidation account for each deposit account held in the
Association on December 31, 1995 and each Supplemental Eligible Account Holder
would have an initial interest in such liquidation account for each qualifying
deposit held in the Association on September 30, 1997. The interest as to each
qualifying deposit account would be in the same proportion of the total
liquidation account as the balance of such qualifying deposit account was to the
balance in all deposit accounts of Eligible Account Holders and Supplemental
Eligible Account Holders on such respective date. However, if the amount in the
qualifying deposit account on any annual closing date (September 30) of the
Association subsequent to the relevant eligibility date is less than the amount
in such account on the relevant eligibility date, or any subsequent closing
date, then the Eligible Account Holder's or Supplemental Eligible Account
Holder's interest in the liquidation account would be reduced from time to time
by an amount proportionate to any such reductions, and such interest would cease
to exist if he or she ceases to maintain an account at the Converted Association
that has the same Social Security number as appeared on his or her account(s) at
the relevant eligibility date. The interest in the liquidation account would
never be increased, notwithstanding any increase in the related deposit account
after the Conversion.
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Any assets remaining after the above liquidation rights of Eligible
Account Holders and Supplemental Eligible Account Holders were satisfied would
be distributed to the entity or persons holding the Converted Association's
capital stock at that time.
A merger, consolidation, sale of bulk assets or similar combination or
transaction with an FDIC-insured institution in which the Converted Association
is not the surviving insured institution would not be considered to be a
"liquidation" under which distribution of the liquidation account could be made.
In such a transaction, the liquidation account would be assumed by the surviving
institution.
The creation and maintenance of the liquidation account will not
restrict the use or application of any of the capital accounts of the Converted
Association, except that the Converted Association may not declare or pay a cash
dividend on, or repurchase any of, its capital stock if the effect of such
dividend or repurchase would be to cause its retained earnings to be reduced
below the aggregate amount then required for the liquidation account.
Subscription Offering
Nontransferable Subscription Rights to subscribe for shares of the
Common Stock have been issued to all persons entitled to subscribe for stock in
the Subscription Offering at no cost to such persons. The amount of the Common
Stock which these parties may subscribe for will be determined, in part, by the
total stock to be issued, and the availability of stock for purchase under the
categories set forth in the Plan.
Preference categories have been established for the allocation of the
Common Stock to the extent that shares are available. These categories are as
follows:
Subscription Category No. 1 is reserved for the Association's
Eligible Account Holders, (i.e., qualifying depositors of the
Association on December 31, 1995) who will each receive nontransferable
Subscription Rights to subscribe for Common Stock in the Subscription
Offering. Pursuant to the Plan, an Eligible Account Holder may purchase
Common Stock in the Conversion in an amount equal to the greater of
(i) $250,000 of the Common Stock, (ii) one-tenth of one percent of the
total offering of shares of Common Stock, or (iii) 15 times the product
(rounded down to the next whole number) obtained by multiplying the
total number of shares of Common Stock to be issued by a fraction of
which the numerator is the amount of the Qualifying Deposit of the
Eligible Account Holder and the denominator is the total amount of
Qualifying Deposits of all Eligible Account Holders in the Converted
Association in each case on the Eligibility Record Date (i.e.,
December 31, 1995). The Plan further provides that no person (together
with associates and persons acting in concert therewith) may purchase
in the aggregate more than $250,000 of the aggregate value of shares of
Common Stock offered in the Conversion. See "-- Limitations on
Purchases of Shares." If the exercise of Subscription Rights in this
category results in an oversubscription, shares shall be allocated
among subscribing Eligible Account Holders so as to permit each such
Eligible Account Holder, to the extent possible, to purchase a number
of shares sufficient to make his total allocation equal 100 shares or
the amount subscribed for, whichever is less. Any shares not so
allocated shall be allocated among the subscribing Eligible Account
Holders on an equitable basis related to the amounts of their
respective qualifying deposits, as compared to the total qualifying
deposits of all subscribing Eligible Account Holders. To ensure a
proper allocation of Common Stock, each Eligible Account Holder must
list on his Stock Order Form all accounts in which he has an ownership
interest as of December 31, 1995. Failure to list all such qualifying
deposit accounts may result in the inability of the Company or the
Association to fill all or part of a subscription order. Neither the
Company, the Association nor any of their agents shall be responsible
for orders on which all qualifying deposit accounts have not been fully
and accurately disclosed. A qualifying deposit is the amount (required
to be at least $50.00) contained in a deposit account in the
Association on December 31, 1995. Subscription Rights received by
directors and officers of the Association in this category based on
their increased deposits in the Association in the one-year period
preceding December 31, 1995 are subordinated to the Subscription Rights
of other Eligible Account Holders.
71
Subscription Category No. 2 is reserved for the Association's
tax-qualified employee stock benefit plans, i.e., the ESOP, which shall
receive nontransferable Subscription Rights to purchase in the
aggregate up to 10% of the shares issued in the Conversion and which is
expected to purchase 8% of the Common Stock offered in the Conversion.
Any shares of Common Stock sold in excess of the maximum of the
Estimated Valuation Range may be first sold to the ESOP.
Subscription Category No. 3 is reserved for the Association's
Supplemental Eligible Account Holders, i.e., qualifying depositors of
the Association on the last day of the calendar quarter preceding OTS
approval of the Plan (September 30, 1997) who will each receive
nontransferable Subscription Rights to subscribe for Common Stock in
the Subscription Offering. Pursuant to the Plan, a Supplemental
Eligible Account Holder may purchase Common Stock in the Conversion in
an amount equal to the greater of (i) $250,000 of the Common Stock,
(ii) one-tenth of one percent of the total offering of shares of Common
Stock, or (iii) 15 times the product (rounded down to the next whole
number) obtained by multiplying the total number of shares of Common
Stock to be issued by a fraction of which the numerator is the amount
of the Qualifying Deposit of the Supplemental Eligible Account Holder
and the denominator is the total amount of Qualifying Deposits of all
Supplemental Eligible Account Holders in the Converted Association in
each case on the Supplemental Eligibility Record Date (i.e.,
September 30, 1997). The Plan further provides that no person (together
with associates and persons acting in concert therewith) may purchase
in the aggregate more than $250,000 of the aggregate value of shares of
Common Stock offered in the Conversion. See " -- Limitations on
Purchases of Shares." If the exercise of Subscription Rights in this
category results in an oversubscription, shares shall be allocated
among subscribing Supplemental Eligible Account Holders, so as to
permit each such Supplemental Eligible Account Holder, to the extent
possible, to purchase a number of shares sufficient to make his total
allocation equal 100 shares or the amount subscribed for, whichever is
less, and any shares not so allocated shall be allocated among the
subscribing Supplemental Eligible Account Holders on an equitable basis
related to the amounts of their respective qualifying deposits, as
compared to the total qualifying deposits of all subscribing
Supplemental Eligible Account Holders. To ensure a proper allocation of
Common Stock, each Supplemental Eligible Account Holder must list on
his Stock Order Form all accounts in which he has an ownership interest
as of September 30, 1997. Failure to list all such deposit accounts may
result in the inability of the Company or the Association to fill all
or part of a subscription order. Neither the Company, the Association
nor any of their agents shall be responsible for orders on which all
qualifying deposit accounts have not been fully and accurately
disclosed. A qualifying deposit is the amount (required to be at least
$50.00) contained in a deposit account in the Association on September
30, 1997. Subscription Rights received by directors and officers of the
Association in this category based on their increased deposits in the
Association in the one-year period preceding September 30, 1997 are
subordinated to the Subscription Rights of other Supplemental Eligible
Account Holders. Subscriptions in this Category No. 3 will be filled
only to the extent that there are sufficient shares of Common Stock
remaining after satisfaction of subscriptions by Category Nos. 1 and 2.
Subscription Category No. 4 is reserved for Other Members,
i.e., certain depositors and borrowers who are members of the
Association as of the Voting Record Date entitled to vote at the
Special Meeting but who are not otherwise Eligible Account Holders or
Supplemental Eligible Account Holders. To the extent then available
following subscriptions by Eligible Account Holders, tax-qualified
employee stock benefit plans and Supplemental Eligible Account Holders,
Other Members will receive, without payment therefor, nontransferable
Subscription Rights to subscribe for Common Stock in the Subscription
Offering up to $250,000 of the Common Stock. See "-- Limitations on
Purchases of Shares." In the event that Other Members subscribe for a
number of shares which, when added to the shares subscribed for by
Eligible Account Holders, tax-qualified employee stock benefit plans
and Supplemental Eligible Account Holders, is in excess of the total
number of shares offered in the Conversion, the subscriptions of such
Other Members will be allocated pro rata among subscribing Other
Members on an equitable basis as determined by the Board of Directors.
The Company will make reasonable efforts to comply with the securities
laws of all states in the United States in which persons entitled to subscribe
for the Common Stock pursuant to the Plan reside. However, no person will be
72
offered or allowed to purchase any Common Stock under the Plan if he resides in
a foreign country or in a state of the United States with respect to which any
or all of the following apply: (i) a small number of persons otherwise eligible
to subscribe for shares under the Plan reside in such state or foreign country;
(ii) the granting of Subscription Rights or the offer or sale of shares of
Common Stock to such persons would require the Company or the Association or
their employees or agents to register, under the securities laws of such state,
as a broker, dealer, salesman or agent or to register or otherwise qualify its
securities for sale in such state or foreign country; and (iii) such
registration or qualification would be impracticable for reasons of cost or
otherwise. No payments will be made in lieu of the granting of Subscription
Rights to any such person.
Community Offering
To the extent shares remain available for purchase after the
Subscription Offering, the Company may offer any such remaining shares of the
Common Stock to members of the general public to whom the Company delivers a
copy of this Prospectus and a Stock Order Form in the Community Offering. The
occurrence of the Community Offering is subject to the availability of shares of
Common Stock for purchase after satisfaction of all orders received in the
Subscription Offering. The Community Offering, if any, may commence without
notice at any time after the commencement of the Subscription Offering and may
terminate at any time without notice, but may not terminate later than
____________, 1997. The right of any person to purchase shares in the Community
Offering, if any, is subject to the absolute right of the Company and the
Association to accept or reject such purchases in whole or in part. The Company
presently intends to terminate the Community Offering, if any, as soon as it has
received orders for sufficient shares available for purchase in the Conversion.
If all of the Common Stock offered in the Subscription Offering is
subscribed for, there will be no Community Offering. In the event an
insufficient number of shares are available to fill orders in the Community
Offering, the available shares will be allocated by the Company in its
discretion and a preference shall be given to natural persons and trusts of
natural persons who are permanent residents of the Local Community. If the
Community Offering extends beyond 45 days following the expiration of the
Subscription Offering, subscribers will have the right to increase, decrease or
rescind subscriptions for stock previously submitted. Purchasers in the
Community Offering, together with their associates and groups acting in concert,
are each eligible to purchase up to $250,000 of the Common Stock issued in the
Conversion.
Except as noted below, cash and checks received in the Community
Offering will be placed in segregated savings accounts (each insured by the FDIC
up to the applicable $100,000 limit) established specifically for this purpose.
Interest will be paid on orders made by check, in cash or by money order at the
Association's passbook rate from the date the payment is received by the Company
until the consummation of the Conversion. In the event that the Conversion is
not consummated for any reason, all funds submitted pursuant to the Community
Offering will be promptly refunded with interest as described above.
Syndicated Community Offering
As part of the Community Offering, all shares of Common Stock not
purchased in the Subscription and Community Offerings, if any, may be offered
for sale to the general public in a Syndicated Community Offering through
selected dealers to be formed and managed by Trident Securities. The Syndicated
Community Offering, if any, will be conducted to achieve the widest distribution
of Common Stock subject to the Company and the Association having the right to
reject orders in whole or in part in their sole discretion in the Syndicated
Community Offering. Neither Trident Securities nor any registered broker-dealer
shall have any obligation to take or purchase any shares of the Common Stock in
the Syndicated Community Offering. Common Stock sold in the Syndicated Community
Offering will be sold at the same price as in the Subscription and Community
Offerings.
Individual purchasers in the Syndicated Community Offering may purchase
up to $250,000 of the Common Stock in the Conversion when aggregated with any
associate or group of persons acting in concert. The Association shall be
responsible for the payment of selling commissions to other NASD firms and
licensed brokers participating in the Syndicated Community Offering. Other firms
may participate under selected dealers agreements, and Trident
73
Securities and such selected dealers may receive fees which are not expected to
exceed 4.5% of the amount of the stock sold by the selected dealers in the
Syndicated Community Offering. In addition, Trident would receive a fee of 1.0%
for managing the Syndicated Community Offering.
During the Syndicated Community Offering, selected dealers may only
solicit indications of interest from their customers to place orders with the
Company as of a certain date ("Order Date") for the purchase of shares of common
Stock. When and if Trident Securities and the Company believe that enough
indications and orders have been received in the Offerings to consummate the
Conversion, Trident Securities will request, as of the Order Date, selected
dealers to submit orders to purchase shares for which they have received
indications of interest from their customers. Selected dealers will send
confirmations of the orders to such customers on the next business day after the
Order Date. Selected dealers may debit the accounts of their customers on a date
which will be three business days from the Order Date ("Settlement Date").
Customers who authorize selected dealers to debit their brokerage accounts are
required to have the funds for payment in their account on but not before the
Settlement Date. On the Settlement Date, selected dealers will remit funds to
the account that the Company established for each selected dealer. After payment
has been received by the Company from selected dealers, funds will earn interest
at the Association's passbook savings rate until the consummation of the
Conversion. In the event the Conversion is not consummated as described above,
funds with interest will be returned promptly to the selected dealers, who, in
turn, will promptly credit its customers' brokerage account.
The Syndicated Community Offering, if any, will terminate no more than
45 days following the completion of the Subscription Offering, unless extended
by the Company with the approval of the OTS. The Syndicated Community Offering
may run concurrently with the Subscription and Community Offerings or subsequent
to such offerings.
Subscriptions for Stock in Subscription and Community Offerings
Expiration Date. The Subscription Offering will expire at 12:00 Noon,
local time, on ________, 1997 unless extended by the Board of Directors of the
Association for up to an additional ___ days, to no later than ________, 1997.
Such date and time are referred to herein as the "Expiration Date." Subscription
rights not exercised prior to the Expiration Date will be void. The Community
Offering, if any, may terminate at any time without notice, but may not
terminate later than _________, 1998.
Orders will not be executed by the Company until at least the minimum
number of shares of Common Stock offered hereby have been subscribed for or
sold. If all shares of Common Stock have not been subscribed for or sold within
45 days of the end of the Subscription Offering (unless such period is extended
with consent of the OTS), all funds delivered to the Company pursuant to the
Subscription Offering will be promptly returned to the subscribers with interest
and all charges to savings accounts will be rescinded.
Use of Stock Order Forms and Certification Forms. Rights to subscribe
may only be exercised by completion of Stock Order Forms and certification
forms. Any person receiving a Stock Order Form who desires to subscribe for
shares of stock must do so prior to the Expiration Date by delivering (by mail
or in person) to the office of the Association a properly executed and completed
Stock Order Form and certification form, together with full payment for all
shares for which the subscription is made. All checks or money orders must be
made payable to "High Country Bancorp, Inc." The Stock Order Form and
certification form must be received by the Expiration Date. All subscription
rights under the Plan will expire on the Expiration Date, whether or not the
Company has been able to locate each person entitled to such subscription
rights. Once tendered, subscription orders cannot be revoked.
Each subscription right may be exercised only by the person to whom it
is issued and only for his or her own account. The subscription rights granted
under the Plan are nontransferable; persons who attempt to transfer their
subscription rights may lose the right to subscribe for stock in the Conversion
and may be subject to other sanctions and penalties imposed by the OTS. Each
person subscribing for shares is required to represent to the Company that he or
she is purchasing such shares for his or her own account and that he or she has
no agreement or understanding with any other person for the sale or transfer of
such shares.
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In the event Stock Order Forms (i) are not delivered and are returned
to the Company by the United States Postal Service or the Company is unable to
locate the addressee, or (ii) are not returned or are received after the
Expiration Date, or (iii) are defectively completed or executed, or (iv) are not
accompanied by the full required payment for the shares subscribed for
(including instances where a savings account or certificate balance from which
withdrawal is authorized is insufficient to fund the amount of such required
payment), the subscription rights of the person to whom such rights have been
granted will lapse as though such person failed to return the completed Stock
Order Form within the time period specified. However, the Company or the
Association may, but will not be required to, waive any irregularity on any
Stock Order Form or require the submission of corrected Stock Order Forms or the
remittance of full payment for subscribed shares by such date as the Company or
the Association may specify. The interpretation by the Company and the
Association of the terms and conditions of the Plan and of the Stock Order Form
will be final.
Payment for Shares. Payment for all subscribed shares of Common Stock
will be required to accompany all completed Stock Order Forms for subscriptions
to be valid. Payment for subscribed shares may be made (i) in cash, if delivered
in person, (ii) by check or money order, or (iii) by authorization of withdrawal
from deposit accounts maintained with the Association. Appropriate means by
which such withdrawals may be authorized are provided in the Stock Order Form.
Once such a withdrawal has been authorized, none of the designated withdrawal
amount may be used by a subscriber for any purpose other than to purchase stock
for which subscription has been made while the Plan remains in effect. In the
case of payments authorized to be made through withdrawal from deposit accounts,
all sums authorized for withdrawal will continue to earn interest at the
contract rate until the date of consummation of the sale. In the case of
payments made in cash or by check or money order such funds will be placed in a
segregated savings account established for each subscriber specifically for this
purpose (each insured by the FDIC up to the applicable $100,000 limit) and
interest will be paid at the Association's passbook rate from the date payment
is received until the Conversion is completed or terminated. Interest penalties
for early withdrawal applicable to certificate accounts will not apply to
withdrawals authorized for the purchase of shares; however, if a partial
withdrawal results in a certificate account with a balance less than the
applicable minimum balance requirement, the certificate evidencing the remaining
balance will earn interest at the Association's passbook rate subsequent to the
withdrawal. An executed Stock Order Form, once received by the Company, may not
be modified, amended or rescinded without the consent of the Company, unless the
Conversion is not completed within 45 days of the termination of the
Subscription Offering. If an extension of the period of time to complete the
Conversion is approved by the OTS, subscribers will be resolicited and must
affirmatively reconfirm their orders prior to the expiration of the
resolicitation offering, or their subscription funds will be promptly refunded.
Subscribers may, through such extension, also modify or cancel their
subscriptions. Interest will be paid on such funds at the Association's passbook
rate during the 45-day period and any approved extension period. Wired funds
will not be accepted for the payment for shares of Common Stock.
Owners of self-directed IRAs or other self-directed tax-qualified
retirement plans, may use the assets of such IRAs or plans to purchase shares of
Common Stock in the Subscription and Community Offerings, provided that such
IRAs or plans are not maintained at the Association. Persons with IRAs or plans
maintained at the Association must have their accounts transferred to an
unaffiliated institution or broker to purchase shares of Common Stock in the
Subscription and Community Offerings. Depositors interested in using funds in an
Association IRA or plan to purchase Common Stock should contact the
Association's Stock Information Center at (719) __________ as soon as possible
but in no event later than seven days prior to closing of the offering period,
so that the necessary forms may be forwarded for execution and returned at least
one week prior to the Expiration Date of the Subscription Offering.
The ESOP will not be required to pay for the shares subscribed for at
the time it subscribes, but may pay for such shares upon consummation of the
Subscription and Community Offerings, if all shares are sold, or upon
consummation of any subsequent offering, if shares remain to be sold in such an
offering.
Shares Purchased. Certificates representing shares of the Common Stock
will be delivered to subscribers as soon as practicable after closing of the
Conversion. Purchasers may not be able to sell the shares of Common Stock which
they purchased until certificates for the Common Stock are available and
delivered to them, even though trading of the Common Stock may have commenced.
Shares sold prior to the receipt of a stock certificate are the responsibility
of the purchaser.
75
Plan of Distribution and Marketing Agent
Officers of the Association are available at the Association's office
to provide offering materials to prospective investors, to answer their
questions (but only to the extent such information is derived from this
Prospectus) and to receive completed Stock Order Forms and certification forms
from prospective investors interested in subscribing for shares of the Common
Stock. None of the Association's directors, officers or employees will receive
any commissions or other compensation for their efforts in connection with sales
of shares of the Common Stock. Although information regarding the stock offering
is available at the Association's office, an investment in the Common Stock is
not a deposit, and the Common Stock is not federally insured.
The directors, officers and employees of the Association who will be
involved in selling stock are expected to be exempt from the requirement to
register with the SEC as broker-dealers within the meaning of Rule 3a4-1 under
the Exchange Act. Such persons will qualify under the safe harbor provisions of
that rule on the basis of paragraphs (a)(4)(ii) and/or (iii), i.e., management
of the Association expects that such persons either (x) will perform substantial
duties for the Company in its business, will not otherwise be broker-dealers and
are not expected to participate in another offering in the next twelve months or
(y) will limit their activities to preparing written communications, responding
to customer inquiries and/or performing ministerial/clerical functions.
The Association and the Company have engaged Trident Securities as
financial advisor to provide sales assistance in connection with the
Subscription and Community Offerings of the Common Stock. The services of
Trident Securities will include, but are not limited to, (i) training and
educating the Association's employees who will be performing certain ministerial
functions in the Subscription and Community Offerings regarding the mechanics
and regulatory requirements of the stock sales process and the solicitation of
proxies from members, (ii) providing employees to manage the Stock Information
Center, assisting Association customers and interested stock purchasers and
keeping records of orders for shares of Common Stock, and (iii) supervising the
Association's sales efforts, including preparation of marketing materials. For
all its services rendered in the Conversion, Trident Securities will receive a
commission equal to 1.70% of the aggregate dollar amount of Common Stock sold to
residents of Colorado, and 1.20% of the aggregate dollar amount of Common Stock
sold to non-residents of Colorado, excluding any shares of stock sold to the
Association's directors, executive officers, and the ESOP. Additionally,
commissions will be excluded on shares sold to "associates" (as defined in the
Plan) of the Association's directors and executive officers. In the event Common
Stock is sold by other NASD member firms under selected dealer's agreements, the
aggregate commissions to be received by Trident Securities and selected dealers
shall not exceed a fee to be set by the Association to reflect market
requirements at the time of the stock allocation in a Syndicated Community
Offering. Trident Securities will also be reimbursed for its reasonable
out-of-pocket expenses in an amount not to exceed $10,000 and its legal fees in
an amount not to exceed $25,000. The Company and the Association have agreed to
indemnify Trident Securities for reasonable costs and expenses in connection
with certain claims or liabilities, including certain liabilities under the
Securities Act.
Stock Pricing and Number of Shares to be Issued
Ferguson, which is experienced in the evaluation and appraisal of
savings institutions involved in the conversion process, has been retained by
the Association to prepare an appraisal of the estimated pro forma market value
of the Common Stock to be sold pursuant to the Conversion. Prior to the
Conversion, the Association did not have any business relationship with
Ferguson. Ferguson will receive a fixed fee of $27,500 for its appraisal and
other services, and reimbursement for related expenses up to $5,000. The
Association has agreed to indemnify Ferguson under certain circumstances against
any losses, damages, expenses or liability arising out of the Association's
engagement of Ferguson for the appraisal.
Ferguson has determined as of August 5, 1997 that the estimated pro
forma market value of the stock to be issued by the Company in the Conversion
was $9,000,000. In determining the reasonableness and adequacy of the appraisal
submitted by Ferguson, the Boards of Directors of the Association and the
Company reviewed with Ferguson the methodology and the appropriateness of
assumptions used by Ferguson in preparing the appraisal. The Company, in
consultation with Trident Securities, has determined to offer the shares in the
Conversion at the Purchase Price of
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$10.00 per share. The price per share was determined based on a number of
factors, including the market price per share of the stock of other financial
institutions. Regulations administered by the OTS require, however, that the
appraiser establish a range of value for the stock of approximately 15% on
either side of the estimated value to allow for fluctuations in the aggregate
value of the stock due to changes in the market and other factors from the time
of commencement of the Subscription Offering until completion of the Community
Offering. Accordingly, Ferguson has established a range of value of from
$7,650,000 to $10,350,000 for the Conversion. Ferguson will either confirm the
continuing validity of its appraisal or provide an updated appraisal immediately
prior to the completion of the Conversion.
Should it be determined at the close of the offering that the aggregate
pro forma market value of the Common Stock is higher or lower than $9,000,000,
but is nonetheless within the Estimated Valuation Range or within 15% of the
maximum of such range, the Company will make an appropriate adjustment by
raising or lowering by no more than 15% the total number of shares being offered
(within a range from 765,000 shares to 1,035,000 shares). Unless permitted by
the Company or otherwise required by the OTS, no resolicitation of subscribers
and other purchasers will be made because of any such change in the number of
shares to be issued unless the aggregate purchase price of the Common Stock sold
in the Conversion is below the minimum of the Estimated Valuation Range or is
more than $11,902,500 (i.e., 15% above the maximum of the Estimated Valuation
Range). If the aggregate purchase price falls outside the range of from
$7,650,000 to $11,902,500, subscribers and other purchasers will be resolicited
and given the opportunity to continue their orders, in which case they will need
to affirmatively reconfirm their subscriptions prior to the expiration of the
resolicitation, or their subscription funds will be promptly refunded with
interest at the Association's passbook rate. Subscribers will also be given the
opportunity to increase, decrease or rescind their orders. Any change in the
Estimated Valuation Range must be approved by the OTS. The establishment of any
new price range may be effected without a resolicitation of votes from the
Association's members to approve the Conversion.
The appraisal is not intended, and must not be construed, as a
recommendation of any kind as to the advisability of purchasing the Common
Stock. In preparing the valuation, Ferguson has relied upon and assumed the
accuracy and completeness of financial and statistical information provided by
the Association and the Company. Ferguson did not independently verify the
financial statements and other information provided by the Association and the
Company, nor did Ferguson value independently the assets and liabilities of the
Association and the Company. The valuation considers the Association and the
Company only as a going concern and should not be considered as an indication of
the liquidation value of the Association and the Company. Moreover, because such
valuation is necessarily based upon estimates and projections of a number of
matters, all of which are subject to change from time to time, no assurance can
be given that persons purchasing the Common Stock will thereafter be able to
sell such shares at prices equal to or above the price or prices paid for it.
Copies of the appraisal report of Ferguson setting forth the method and
assumptions for such appraisal are on file and available for inspection at the
offices set forth in "Additional Information" and at the office of the
Association. Further, any subsequent updated appraisal also will be filed with
the SEC and will be available for inspection.
Limitations on Purchase of Shares
Purchases of shares of Common Stock are subject to limitations as set
forth in the Plan. All shares are offered to persons subscribing in the
Subscription Offering, and shares are only offered to persons in the Community
Offering and Syndicated Community Offering, if any, to the extent available
after filling subscriptions in the Subscription Offering.
Within the Subscription Offering, the maximum purchases by subscribers
are limited under the Plan. Eligible Account Holders may only subscribe up to an
amount equal to the greater (i) $250,000 of the Common Stock, (ii) one-tenth of
one percent of the total offering of shares of Common Stock, or (iii) 15 times
the product (rounded down to the next whole number) obtained by multiplying the
total number of shares of Common Stock to be issued by a fraction of which the
numerator is the amount of the Qualifying Deposit of the Eligible Account Holder
and the denominator is the total amount of Qualifying Deposits of all Eligible
Account Holders in the Converted Association in each case on the Eligibility
Record Date (i.e., December 31, 1995). Supplemental Eligible Account Holders may
only subscribe
77
up to an amount equal to the greater of (i) $250,000 of the Common Stock,
(ii) one-tenth of one percent of the total offering of shares of Common Stock,
or (iii) 15 times the product (rounded down to the next whole number) obtained
by multiplying the total number of shares of Common Stock to be issued by a
fraction of which the numerator is the amount of the Qualifying Deposit of the
Supplemental Eligible Account Holder and the denominator is the total amount of
Qualifying Deposits of all Supplemental Eligible Account Holders in the
Converted Association in each case on the Supplemental Eligibility Record Date
(i.e., September 30, 1997). The Plan further provides that no person (together
with associates and persons acting in concert therewith) may purchase in the
aggregate more than $250,000 of the aggregate value of shares of Common Stock
offered in the Conversion.
The Plan provides for certain additional limitations to be placed upon
the purchase of shares by eligible subscribers and others in the Conversion.
Each subscriber must subscribe for a minimum of 25 shares. The ESOP may purchase
up to an aggregate of 10% of the shares of the Common Stock to be issued in the
Conversion and is expected to purchase 8% of such shares. No person, including
associates (as defined below) of and persons acting in concert (as defined
below) with such person (other than the ESOP), may purchase in the Subscription
or Community Offerings more than $250,000 of the Common Stock. Shares purchased
by the ESOP and attributable to a participant thereunder shall not be aggregated
with shares purchased by such participant or any other purchaser of Common Stock
in the Conversion. Officers and directors and their associates may not purchase,
in the aggregate, more than 35% of the shares to be issued in the Conversion.
For purposes of the Plan, the directors of the Company and the Association are
not deemed to be associates or a group acting in concert solely by reason of
their Board membership.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the
Association's members, purchase limitations may be increased or decreased at the
sole discretion of the Company and the Association at any time. If such amount
is increased, subscribers for the maximum amount will be given the opportunity
to increase their subscriptions up to the then applicable limit, subject to the
rights and preferences of any person who has priority Subscription Rights. In
the event that the purchase limitation is decreased after commencement of the
Subscription and Community Offerings, the orders of any person who subscribed
for the maximum number of shares of Common Stock shall be decreased by the
minimum amount necessary so that such person shall be in compliance with the
then maximum number of shares permitted to be subscribed for by such person.
The term "acting in concert" is defined in the Plan to mean (i) knowing
participation in a joint activity or interdependent conscious parallel action
towards a common goal, whether or not pursuant to an express agreement, or
(ii) a combination or pooling of voting or other interests in the securities of
an issuer for a common purpose pursuant to any contract, understanding,
relationship, agreement or other arrangement, whether written or otherwise. The
Company and the Association may presume that certain persons are acting in
concert based upon, among other things, joint account relationships and the fact
that such persons have filed joint Schedules 13D with the SEC with respect to
other companies. The term "associate" of a person is defined in the Plan to
mean: (i) any corporation or organization (other than the Association, the
Company, or a majority-owned subsidiary of the Association or the Company) of
which such person is an officer or partner or is directly or indirectly the
beneficial owner of 10% or more of any equity securities; (ii) any trust or
other estate in which such person has a substantial beneficial interest or as to
which such person serves as a trustee or in a similar fiduciary capacity,
provided, however, such term shall not include any employee stock benefit plan
of the Association in which such person has a substantial beneficial interest or
serves as a trustee or in a similar fiduciary capacity; and (iii) any relative
or spouse of such person, or any relative of such spouse, who either has the
same home as such person or who is a director of the Association or the Company
or any of their subsidiaries. Directors are not treated as associates solely
because of their Board membership.
Each person purchasing Common Stock in the Conversion shall be deemed
to confirm that such purchase does not conflict with the purchase limitations
under the Plan or otherwise imposed by law, rule or regulation. In the event
that such purchase limitations are violated by any person (including any
associate or group of persons affiliated or otherwise acting in concert with
such person), the Company shall have the right to purchase from such person at
the aggregate purchase price all shares acquired by such person in excess of
such purchase limitations or, if such excess shares have been sold by such
person, to receive the difference between the aggregate purchase price paid for
such excess shares and the price at which such excess shares were sold by such
person. This right of the Company to
78
purchase such excess shares shall be assignable by the Company. In addition,
persons who violate the purchase limitations may be subject to sanctions and
penalties imposed by the OTS.
Stock purchased pursuant to the Conversion will be freely transferable,
except for shares purchased by directors and officers of the Association and
the Company. See "-- Limitations on Resales by Management."
In addition, under guidelines of the NASD, members of the NASD and
their associates are subject to certain restrictions on the transfer of
securities purchased in accordance with Subscription Rights and to certain
reporting requirements upon purchase of such securities.
Depending upon market conditions, the Boards of Directors of the
Company and the Association, with the approval of the OTS, may increase or
decrease any of the above purchase limitations. In the event of such an increase
or decrease, no further approval of members of the Association would be
required. OTS regulations authorize a plan of conversion to provide a minimum
purchase limitation of a percentage as low as 1% and a maximum purchase
limitation of a percentage not to exceed 10%, provided that orders for shares
exceeding 5% of the shares being offered in the Conversion shall not exceed in
the aggregate 10% of the shares being offered in the Conversion.
Regulatory Restrictions on Acquisition of the Common Stock
Current federal regulations prohibit any person from making an offer,
announcing an intent to make an offer, entering into any other arrangement to
purchase Common Stock or acquiring Common Stock or Subscription Rights in the
Company from another person prior to completion of the Conversion. Further, no
person may make an offer or announcement of an offer to purchase shares or
actually acquire shares in the Company for a period of three years from the date
of the completion of the Conversion, if, upon the completion of such offer or
acquisition, that person would become the beneficial owner of more than 10% of
the Company's outstanding stock, without the prior written approval of the OTS.
The OTS has defined the word "person" to include any individual, group acting in
concert, corporation, partnership, association, joint stock company, trust,
unincorporated organization or similar company, a syndicate or any group formed
for the purpose of acquiring, holding or disposing of securities of an insured
institution. However, offers made exclusively to the Company or underwriters or
members of a selling group acting on behalf of the Company for resale to the
general public are excepted. The regulations also provide civil penalties for
willful violation or assistance of any such violation of the regulation by any
person connected with the management of the Company following the Conversion.
Moreover, when any person, directly or indirectly, acquires beneficial ownership
of more than 10% of the Company's capital stock following the Conversion within
such three-year period without the prior approval of the OTS, the Company's
Common Stock beneficially owned by such person in excess of 10% shall not be
counted as shares entitled to vote and shall not be voted by any person or
counted as voting shares in connection with any matter submitted to the
stockholders for a vote. The Articles of Incorporation of the Company include
a similar 10% beneficial ownership limitation. See "Certain Anti-Takeover
Provisions in the Articles of Incorporation and Bylaws."
In addition to the foregoing restrictions, any person or group of
persons acting in concert who propose to acquire 10% or more of the Company's
outstanding shares will be presumed under OTS regulations, to be acquiring
control of the Company and will be required to submit prior notice to the OTS
under the Change in Control Act.
Restrictions on Repurchase of Stock
Subject to the exceptions described herein, for a period of three years
following the Conversion, the Company may not repurchase any of its stock from
any person, except (i) repurchases on a pro rata basis pursuant to an offer,
approved by the OTS, made to all stockholders, and (ii) repurchases of
qualifying shares of a director. However, upon 10 days' written notification to
the OTS Regional Director for the Converted Association and the Chief Counsel of
the Business Transactions Division of the OTS, if the Regional Director and
Chief Counsel do not object, the Company may make open market repurchases of its
outstanding Common Stock, provided that: (i) no repurchases may occur in the
first year following the Conversion without OTS approval; (ii) in the second and
third years after the Conversion, repurchases must be part of an open-market
program that does not allow for the repurchase of more than 5% of the Company's
outstanding Common Stock during a 12-month (a waiver may be obtained from the
OTS which would allow
79
for additional purchases); (iii) the repurchases would not cause the Converted
Association to become "undercapitalized" (as defined for regulatory purposes);
(iv) the repurchases would not materially adversely affect the Converted
Association's financial condition; and (v) there is a valid business purpose for
the repurchases. The Company may not repurchase any of its stock if the effect
thereof would cause the Converted Association's regulatory capital to be reduced
below the amount required for the liquidation account. Regulatory dividend
limitations may provide further restrictions on stock repurchases.
Limitations on Resales by Management
Shares of the Common Stock purchased by directors or officers of the
Company and the Association in the Conversion will be subject to the restriction
that such shares may not be sold for a period of one year following completion
of the Conversion, except in the event of the death of the original purchaser or
in any exchange of such shares in connection with a merger or acquisition of the
Company approved by the OTS. Accordingly, shares of the Common Stock issued by
the Company to directors and officers shall bear a legend giving appropriate
notice of the restriction imposed upon it and, in addition, the Company will
give appropriate instructions to the transfer agent for the Common Stock with
respect to the applicable restriction for transfer of any restricted stock. Any
shares issued to directors and officers as a stock dividend, stock split or
otherwise with respect to restricted stock shall be subject to the same
restrictions. Shares acquired otherwise than in the Conversion, such as under
the Company's Option Plan, would not be subject to such restrictions. To the
extent directors and officers are deemed affiliates of the Company, all shares
of the Common Stock acquired by such directors and officers will be subject to
certain resale restrictions and may be resold pursuant to Rule 144 under the
Securities Act. See "Regulation -- Regulation of the Company Following the
Conversion -- Federal Securities Law."
Interpretation and Amendment of the Plan
To the extent permitted by law, all interpretations of the Plan by the
Association will be final. The Plan provides that the Association's Board of
Directors shall have the sole discretion to interpret and apply the provisions
of the Plan to particular facts and circumstances and to make all determinations
necessary or desirable to implement such provisions, including but not limited
to matters with respect to giving preference in the Community Offering to
natural persons and trusts of natural persons who are permanent residents of the
Local Community, and any and all interpretations, applications and
determinations made by the Board of Directors in good faith and on the basis of
such information and assistance as was then reasonably available for such
purpose shall be conclusive and binding upon the Association and its members and
subscribers in the Subscription and Community Offerings, subject to the
authority of the OTS.
The Plan provides that, if deemed necessary or desirable by the Board
of Directors, the Plan may be substantively amended by a two-thirds vote of the
Board of Directors at any time prior to submission of the Plan and proxy
materials to the Association's members. After submission of the Plan and proxy
materials to the members, the Plan may be amended by a two-thirds vote of the
Board of Directors at any time prior to the Special Meeting and at any time
following the Special Meeting with the concurrence of the OTS. In its
discretion, the Board of Directors may generally modify or terminate the Plan
upon the order of the regulatory authorities without resoliciting proxies or
otherwise obtaining approval of the amended Plan by members at another Special
Meeting. However, any modification of the Plan that results in a material change
in the terms of the Conversion would require such a resolicitation of proxies
and another meeting of members.
The Plan further provides that in the event that mandatory new
regulations pertaining to conversions are adopted by the OTS or any successor
agency prior to completion of the Conversion, the Plan will be amended to
conform to such regulations without a resolicitation of proxies or another
Special Meeting. In the event that such new conversion regulations contain
optional provisions, the Plan may be amended to utilize such optional provisions
at the discretion of the Board of Directors without a resolicitation of proxies
or another Special Meeting. By adoption of the Plan, the Association's members
will be deemed to have authorized amendment of the Plan under the circumstances
described above.
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Conditions and Termination
Completion of the Conversion requires the approval of the Plan by the
affirmative vote of not less than a majority of the total outstanding votes of
the members of the Association and the sale of all shares of the Common Stock
within 24 months following approval of the Plan by the members. If these
conditions are not satisfied, the Plan will be terminated, and the Association
will continue its business in the mutual form of organization. The Plan may be
terminated by the Board of Directors at any time prior to the Special Meeting
and, with the approval of the OTS, by the Board of Directors at any time
thereafter.
CERTAIN RESTRICTIONS ON ACQUISITION OF THE COMPANY AND THE ASSOCIATION
Conversion Regulations
OTS regulations prohibit a person from making an offer, announcing an
intent to make an offer or other arrangement to purchase stock, or acquiring
stock or subscription rights in the Association or the Company from another
person prior to completion of the Conversion. Further, no person may make such
an offer or announcement of an offer to purchase shares or actually acquire
shares in the Association or the Company for a period of three years from the
date of the completion of the Conversion if, upon the completion of such offer
or acquisition, that person would become the beneficial owner of more than 10%
of the stock of the Association or the Company without the prior written
approval of the Director of the OTS. For purposes of the regulations, "person"
is defined to include any individual, group acting in concert, corporation,
partnership, association, joint stock company, trust, unincorporated
organization or similar company, a syndicate or any other group formed for the
purpose of acquiring, holding or disposing of securities of the Association or
the Company. Offers made exclusively to the Association or the Company, however,
or underwriters or members of a selling group acting on the Association's or
Company's behalf for resale to the general public, are excepted.
Change in Association Control Act and Savings and Loan Holding Company
Provisions of Home Owners' Loan Act
Federal laws and regulations contain a number of provisions which
affect the acquisition of insured institutions such as the Association,
including a savings and loan holding company such as the Company. The Change in
Bank Control Act provides that no person, acting directly or indirectly or
through or in concert with one or more persons, may acquire control of a savings
association unless the OTS has been given 60 days' prior written notice and the
OTS does not issue a notice disapproving the proposed acquisition. In addition,
certain provisions of the Home Owners Loan Act provide that no company may
acquire control of a thrift without the prior approval of the OTS. Any company
that acquires such control becomes a "savings and loan holding company" subject
to registration, examination and regulation by the OTS.
Pursuant to applicable regulations, control of a savings association is
conclusively deemed to have been acquired by, among other things, the
acquisition of more than 25% of any class of voting stock of a savings
association or the ability to control the election of a majority of the
directors of an institution. Moreover, control is presumed to have been
acquired, subject to rebuttal, upon the acquisition of more than 10% of any
class of voting stock, or more than 25% of any class of stock, of a savings
association, where one or more enumerated "control factors" are also present in
the acquisition. The OTS may prohibit an acquisition of control if it finds,
among other things, that (i) the acquisition would result in a monopoly or
substantially lessen competition, (ii) the financial condition of the acquiring
person might jeopardize the financial stability of the savings association, or
(iii) the competence, experience, or integrity of the acquiring person indicates
that it would not be in the interest of the depositors or the public to permit
the acquisition of control by such person. The foregoing restrictions do not
apply to the acquisition of the Company's capital stock by one or more
tax-qualified employee stock benefit plans, provided that the plan or plans do
not have beneficial ownership in the aggregate of more than 25% of any class of
equity security.
81
CERTAIN ANTI-TAKEOVER PROVISIONS
IN THE ARTICLES OF INCORPORATION AND BYLAWS
While the Boards of Directors of the Association and the Company are
not aware of any effort that might be made to obtain control of the Company
after Conversion, the Board of Directors, as discussed below, believes that it
is appropriate to include certain provisions as part of the Company's Articles
of Incorporation to protect the interests of the Company and its stockholders
from hostile takeovers which the Board of Directors might conclude are not in
the best interests of the Association, the Company or the Company's
stockholders. These provisions may have the effect of discouraging a future
takeover attempt which is not approved by the Board of Directors but which
individual 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 an opportunity to do so. Such provisions will
also render the removal of the current Board of Directors or management of the
Company more difficult.
The following discussion is a general summary of the material
provisions of the Articles of Incorporation and Bylaws of the Company which may
be deemed to have such an "anti-takeover" effect. The description of these
provisions is necessarily general and reference should be made in each case to
the Articles of Incorporation and Bylaws of the Company. For information
regarding how to obtain a copy of these documents without charge, see
"Additional Information."
Board of Directors
Certain provisions of the Company's Articles of Incorporation and
Bylaws will impede changes in control of the Board of Directors of the Company.
The Articles of Incorporation provides that the Board of Directors is to be
divided into three classes, as nearly equal in number as possible, which shall
be elected for staggered three-year terms.
The Company's Articles of Incorporation provides that a director may be
removed only for cause by the affirmative vote of the holders of at least 80% of
the outstanding shares entitled to vote and that the size of the Board of
Directors may be changed only by a vote of two-thirds of the directors then in
office. The Articles of Incorporation further provides that any vacancy
occurring in the Board of Directors, including a vacancy created by an increase
in the number of directors, shall be filled for the remainder of the unexpired
term by a two-thirds vote of the directors then in office.
Stockholder Vote Required to Approve Business Combinations with Principal
Stockholders
The Company's Articles of Incorporation requires the approval of the
holders of (i) at least 80% of the Company's outstanding shares of voting stock,
and (ii) at least a majority of the Company's outstanding shares of voting
stock, not including shares held by a "Related Person," to approve certain
"Business Combinations" as defined therein, and related transactions. The
increased voting requirements in the Company's Articles of Incorporation apply
in connection with business combinations involving a "Related Person," except in
cases where the proposed transaction has been approved in advance by two-thirds
of those members of the Company's Board of Directors who are unaffiliated with
the Related Person and who were directors prior to the time when the Related
Person became a Related Person (the "Continuing Directors"). The term "Related
Person" is defined to include any individual, corporation, partnership or other
entity which owns beneficially or controls, directly or indirectly, 10% or more
of the outstanding shares of voting stock of the Company. A "Business
Combination" is defined to include (i) any merger or consolidation of the
Company with or into any Related Person; (ii) any sale, lease exchange,
mortgage, transfer, or other disposition of all or a substantial part of the
assets of the Company or of a subsidiary to any Related Person (the term
"substantial part" is defined to include more than 25% of the Company's total
assets); (iii) any merger or consolidation of a Related Person with or into the
Company or a subsidiary of the Company; (iv) any sale, lease, exchange, transfer
or other disposition of all or any substantial part of the assets of a Related
Person to the Company or a subsidiary of the Company; (v) the issuance of any
securities of the Company or a subsidiary of the Company to a Related Person;
(vi) the acquisition by the Company of any securities of the Related Person;
(vii) any reclassification of the Common Stock, or any
82
recapitalization involving the Common Stock; and (viii) any agreement, contract
or other arrangement providing for any of the above transactions.
Limitations on Call of Meetings of Stockholders
The Company's Articles of Incorporation provides that special meetings
of stockholders may only be called by the Company's Board of Directors or an
appropriate committee appointed by the Board of Directors. Stockholders are not
authorized to call a special meeting, and stockholder action may be taken only
at a special or annual meeting of stockholders and not by written consent.
Absence of Cumulative Voting
The Company's Articles of Incorporation provides that there shall not
be cumulative voting by stockholders for the election of the Company's
directors. The absence of cumulative voting rights effectively means that the
holders of a majority of the shares voted at a meeting of stockholders may, if
they so choose, elect all directors of the Company to be selected at that
meeting, thus precluding minority stockholder representation on the Company's
Board of Directors.
Restrictions on Acquisitions of Securities
The Articles of Incorporation provides that for a period of five years
from the effective date of the Conversion, no person may acquire directly or
indirectly acquire the beneficial ownership of more than 10% of any class of
equity security of the Company, unless such offer or acquisition shall have been
approved in advance by a two-thirds vote of the Company's Continuing Directors.
This provision does not apply to any employee stock benefit plan of the Company.
In addition, during such five-year period, no shares beneficially owned in
violation of the foregoing percentage limitation, as determined by the Company's
Board of Directors, shall be entitled to vote in connection with any matter
submitted to stockholders for a vote. Additionally, the Articles of
Incorporation provides for further restrictions on voting rights of shares owned
in excess of 10% of any class of equity security of the Company beyond five
years after the Conversion of the Association. Specifically, the Articles of
Incorporation provides that if, at any time after five years from the
Association's conversion to stock form, any person acquires the beneficial
ownership of more than 10% of any class of equity security of the Company, then,
with respect to each vote in excess of 10%, such person shall be entitled to
cast only one-hundredth of one vote. An exception from the restriction is
provided if the acquisition of more than 10% of the securities received the
prior approval by a two-thirds vote of the Company's Continuing Directors. Under
the Company's Articles of Incorporation, the restriction on voting shares
beneficially owned in violation of the foregoing limitations is imposed
automatically. In order to prevent the imposition of such restrictions, the
Board of Directors must take affirmative action approving in advance a
particular offer to acquire or acquisition. Unless the Board took such
affirmative action, the provision would operate to restrict the voting by
beneficial owners of more than 10% of the Company's Common Stock in a proxy
contest.
Board Consideration of Certain Nonmonetary Factors in the Event of an Offer by
Another Party
The Articles of Incorporation of the Company permits the Board of
Directors, in evaluating a Business Combination or a tender or exchange offer,
to consider, in addition to the adequacy of the amount to be paid in connection
with any such transaction, certain specified factors and any other factors the
Board deems relevant, including (i) the social and economic effects of the
transaction on the Company and its subsidiaries, employees, depositors, loan and
other customers, creditors and other elements of the communities in which the
Company and its subsidiaries operate or are located; (ii) the business and
financial condition and earnings prospects of the acquiring party or parties;
and (iii) the competence, experience and integrity of the acquiring party or
parties and its or their management. By having the standards in the Articles of
Incorporation of the Company, the Board of Directors may be in a stronger
position to oppose any proposed business combination, tender or exchange offer
if the Board concludes that the transaction would not be in the best interest of
the Company, even if the price offered is significantly greater than the then
market price of any equity security of the Company.
83
Authorization of Preferred Stock
The Company's Articles of Incorporation authorizes the issuance of up
to 1,000,000 shares of preferred stock, which conceivably would represent an
additional class of stock required to approve any proposed acquisition. The
Company is authorized to issue preferred stock from time to time in one or more
series subject to applicable provisions of law, and the Board of Directors is
authorized to fix the designations, powers, preferences and relative
participating, optional and other special rights of such shares, including
voting rights (which could be multiple or as a separate class) and conversion
rights. Issuance of the preferred stock could adversely affect the relative
voting rights of holders of the Common Stock. In the event of a proposed merger,
tender offer or other attempt to gain control of the Company that the Board of
Directors does not approve, it might be possible for the Board of Directors to
authorize the issuance of a series of preferred stock with rights and
preferences that would impede the completion of such a transaction. An effect of
the possible issuance of preferred stock, therefore, may be to deter a future
takeover attempt. The Board of Directors has no present plans or understandings
for the issuance of any preferred stock and does not intend to issue any
preferred stock except on terms which the Board of Directors deems to be in the
best interests of the Company and its stockholders. This preferred stock, none
of which has been issued by the Company, together with authorized but unissued
shares of Common Stock (the Articles of Incorporation authorizes the issuance of
up to 3,000,000 shares of Common Stock), also could represent additional capital
required to be purchased by the acquiror.
Procedures for Stockholder Nominations
The Company's Articles of Incorporation provides that any stockholder
desiring to make a nomination for the election of directors or a proposal for
new business at a meeting of stockholders must submit written notice to the
Secretary of the Company not less than 30 or more than 60 days in advance of the
meeting. "New business" within the meaning of this provision will be interpreted
by the Company to exclude shareholder proposals which have been included in the
Company's proxy solicitation materials pursuant to Rule 14a-8 under the Exchange
Act.
Amendment of Bylaws
The Company's Articles of Incorporation provides that the Company's
Bylaws may be amended either by a two-thirds vote of the Company's Board of
Directors or by the affirmative vote of the holders of not less than 80% of the
outstanding shares of the Company's stock entitled to vote generally in the
election of directors, after giving effect to any limits on voting rights.
Absent this provision, Colorado law provides that a corporation's bylaws may be
amended by the holders of a majority of a corporation's outstanding capital
stock. The Company's Bylaws contain numerous provisions concerning the Company's
governance, such as fixing the number of directors and determining the number of
directors constituting a quorum. By reducing the ability of a potential
corporate raider to make changes in the Company's Bylaws and to reduce the
authority of the Board of Directors or impede its ability to manage the Company,
this provision could have the effect of discouraging a tender offer or other
takeover attempt where the ability to make fundamental changes through bylaw
amendments is an important element of the takeover strategy of the acquiror.
Amendment of Articles of Incorporation
The Company's Articles of Incorporation provides that specified
provisions contained in the Articles of Incorporation may not be repealed or
amended except upon the affirmative vote of not less than 80% of the outstanding
shares of the Company's stock entitled to vote generally in the election of
directors, after giving effect to any limits on voting rights. This requirement
exceeds the majority vote of the outstanding stock that would otherwise be
required by Colorado law for the repeal or amendment of an Articles of
Incorporation provision. The specific provisions are those (i) governing the
calling of special meetings, the absence of cumulative voting rights and the
requirement that stockholder action be taken only at annual or special meetings,
(ii) requiring written notice to the Company of nominations for the election of
directors and new business proposals, (iii) governing the number of the
Company's Board of Directors, the filling of vacancies on the Board of Directors
and classification of the Board of Directors, (iv) providing the mechanism for
removing directors, (v) limiting the acquisition of more than 10% of the capital
stock of the Company or the Association (except, with the prior approval of the
Continuing Directors of the Company), (vi) governing the requirement for the
approval of certain Business Combinations involving a "Related Person," (vii)
84
regarding the consideration of certain nonmonetary factors in the event of an
offer by another party, (viii) providing for the indemnification of directors,
officers, employees and agents of the Company, (ix) pertaining to the
elimination of the liability of the directors to the Company and its
stockholders for monetary damages, with certain exceptions, for breach of
fiduciary duty, and (x) governing the required stockholder vote for amending the
Articles of Incorporation or Bylaws of the Company. This provision is intended
to prevent the holders of less than 80% of the outstanding stock of the Company
from circumventing any of the foregoing provisions by amending the Articles of
Incorporation to delete or modify one of such provisions. This provision would
enable the holders of more than 20% of the Company's voting stock to prevent
amendments to the Company's Articles of Incorporation or Bylaws, even if such
amendments were favored by the holders of a majority of the voting stock.
Benefit Plans
In addition to the provisions of the Company's Articles of
Incorporation and Bylaws described above, certain benefit plans of the Company
and the Association adopted in connection with the Conversion contain provisions
which also may discourage hostile takeover attempts which the Boards of
Directors of the Company and the Association might conclude are not in the best
interests of the Company, the Association or the Company's stockholders. For a
description of the benefit plans and the provisions of such plans relating to
changes in control of the Company or the Association, see "Management of the
Association -- Certain Benefit Plans and Agreements."
The Purpose of and Anti-Takeover Effect of the Company's Articles of
Incorporation and Bylaws
The Boards of Directors of the Company and the Association believe that
the provisions described above reduce the Company's vulnerability to takeover
attempts and certain other transactions which have not been negotiated with and
approved by its Board of Directors. These provisions will also assist the
Company and the Association in the orderly deployment of the net proceeds of the
Conversion into productive assets during the initial period after the
Conversion. The Boards of Directors of the Company and the Association believe
these provisions are in the best interests of the Association and of the Company
and its stockholders. In the judgment of the Boards of Directors of the Company
and the Association, the Company's Board is in the best position to consider all
relevant factors and to negotiate for what is in the best interests of the
stockholders and the Company's other constituents. Accordingly, the Boards of
Directors of the Company and the Association believe that it is in the best
interests of the Company and its stockholders to encourage potential acquirors
to negotiate directly with the Company's Board of Directors and that these
provisions will encourage such negotiations and discourage nonnegotiated
takeover attempts. It is also the view of the Board of Directors that these
provisions should not discourage persons from proposing a merger or other
transaction at prices reflective of the true value of the Company and which is
in the best interests of all stockholders.
Attempts to acquire control of financial institutions and their holding
companies have recently become increasingly common. Takeover attempts which have
not been negotiated with and approved by the Board of Directors present to
stockholders the risk of a takeover on terms which may be less favorable than
might otherwise be available. A transaction which is negotiated and approved by
the Board of Directors, on the other hand, can be carefully planned and
undertaken at an opportune time in order to obtain maximum value for the Company
and stockholders, with due consideration given to matters such as the management
and business of the acquiring corporation and maximum strategic development of
the Company's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause great expense. Although a tender offer or
other takeover attempt may be made at a price substantially above then current
market prices, such offers are sometimes made for less than all the outstanding
shares of a target company. As a result, stockholders may be presented with the
alternative of partially liquidating their investment at a time that may be
disadvantageous, or retaining their investment in an enterprise which is under
different management and whose objectives may not be similar to those of the
remaining stockholders.
Despite the belief of the Association and the Company as to the
benefits to stockholders of these provisions of the Company's Articles of
Incorporation and Bylaws, these provisions may also have the effect of
discouraging a future takeover attempt which would not be approved by the
Company's Board, but pursuant to which the stockholders
85
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 any opportunity to do so. Such provisions will also
render the removal of the Company's Board of Directors and management more
difficult and may tend to stabilize the Company's stock price, thus limiting
gains which might otherwise be reflected in price increases due to a potential
merger or acquisition. The Board of Directors, however, has concluded that the
potential benefits of these provisions outweigh the possible disadvantages.
Pursuant to applicable regulations, at any annual or special meeting of its
stockholders after the Conversion, the Company may adopt additional Articles of
Incorporation provisions regarding the acquisition of its equity securities that
would be permitted to a Colorado corporation.
DESCRIPTION OF CAPITAL STOCK
General
The Company is authorized to issue 3,000,000 shares of Common Stock,
par value $0.01 per share, and 1,000,000 shares of serial preferred stock, par
value $0.01 per share. The Company currently expects to issue between 765,000
and 1,035,000 shares, subject to adjustment, of the Common Stock and no shares
of serial preferred stock in the Conversion. The Company has reserved for future
issuance under the Option Plan an amount of authorized but unissued shares of
Common Stock equal to 10% of the shares to be issued in the Conversion. The
capital stock of the Company will represent nonwithdrawable capital, will not be
an account of an insurable type, and will not be insured by the FDIC or any
other federal or state governmental agency.
Common Stock
Voting Rights. Each share of the Common Stock will have the same
relative rights and will be identical in all respects with every other share of
the Common Stock. The holders of the Common Stock will possess exclusive voting
rights in the Company, except to the extent that shares of serial preferred
stock issued in the future may have voting rights, if any. Each holder of shares
of the Common Stock will be entitled to one vote for each share held of record
on all matters submitted to a vote of holders of shares of the Common Stock. For
information regarding a possible reduction in voting rights, see "Certain
Anti-Takeover Provisions in the Articles of Incorporation and Bylaws --
Restrictions on Acquisitions of Securities."
Dividends. The Company may, from time to time, declare dividends to the
holders of the Common Stock, who will be entitled to share equally in any such
dividends. For information as to cash dividends, see "Dividend Policy,"
"Regulation -- Dividend Restrictions," and "Taxation."
Liquidation. In the event of any liquidation, dissolution or winding up
of the Converted Association, the Company, as holder of all of the Association's
capital stock, would be entitled to receive all assets of the Converted
Association after payment of all debts and liabilities of the Converted
Association and after distribution of the balance in the liquidation account to
Eligible Account Holders and Supplemental Eligible Account Holders. In the event
of a liquidation, dissolution or winding up of the Company, each holder of
shares of the Common Stock would be entitled to receive, after payment of all
debts and liabilities of the Company, a pro rata portion of all assets of the
Company available for distribution to holders of the Common Stock. If any serial
preferred stock is issued, the holders thereof may have a priority in
liquidation or dissolution over the holders of the Common Stock.
Restrictions on Acquisition of the Common Stock. For information
regarding limitations on acquisition of shares of the Common Stock, see "Certain
Restrictions on Acquisition of the Company, the Converted Association and the
Association," "Certain Anti-Takeover Provisions in the Articles of Incorporation
and Bylaws" and "The Conversion -- Regulatory Restrictions on Acquisition of the
Common Stock."
Other Characteristics. Holders of the Common Stock will not have
preemptive rights with respect to any additional shares of the Common Stock
which may be issued. The Common Stock is not subject to call for redemption, and
the outstanding shares of the Common Stock, when issued and upon receipt by the
Company of the full purchase price therefor, will be fully paid and
nonassessable.
86
Serial Preferred Stock
None of the 1,000,000 authorized shares of serial preferred stock of
the Company will be issued in the Conversion. After the Conversion is completed,
the Board of Directors of the Company will be authorized to issue serial
preferred stock and to fix and state voting powers, designations, preferences or
other special rights of such shares and the qualifications, limitations and
restrictions thereof. The serial preferred stock may rank prior to the Common
Stock as to dividend rights or liquidation preferences, or both, and may have
full or limited voting rights. The Board of Directors has no present intention
to issue any of the serial preferred stock. Should the Board of Directors of the
Company subsequently issue serial preferred stock, no holder of any such stock
shall have any preemptive right to subscribe for or purchase any stock or any
other securities of the Company other than such, if any, as the Board of
Directors, in its sole discretion, may determine and at such price or prices and
upon such other terms as the Board of Directors, in its sole discretion, may
fix.
REGISTRATION REQUIREMENTS
The Company will register its Common Stock with the SEC pursuant to the
Exchange Act upon the completion of the Conversion and will not deregister said
shares for a period of at least three years following the completion of the
Conversion. Upon such registration, the proxy and tender offer rules, insider
trading reporting and restrictions, annual and periodic reporting and other
requirements of the Exchange Act will be applicable. The Company intends to have
a June 30 fiscal year end.
LEGAL OPINIONS
The legality of the Common Stock will be passed upon for the Company by
Housley Kantarian & Bronstein, P.C., Washington, D.C., which has consented to
the references herein to its opinion. Certain legal matters will be passed upon
for Trident Securities by Malizia, Spidi, Sloane & Fisch, P.C., Washington,
D.C.
TAX OPINIONS
The federal income tax consequences of the Conversion will be passed
upon by Housley Kantarian & Bronstein, P.C., Washington, D.C., which has
consented to the references herein to its opinion. The Colorado income tax
consequences of the Conversion will be opined upon by Grimsley, White & Company,
which has consented to the references herein to its opinion.
EXPERTS
The financial statements of Salida Building and Loan Association at
June 30, 1997 and 1996 and for the two years then ended have been included
herein and elsewhere in the registration statement and the Association's
application for conversion in reliance upon the report of Grimsley, White &
Company, independent certified public accountants, appearing elsewhere herein,
and upon the authority of said firm as experts in accounting and auditing.
Ferguson has consented to the publication herein of the summary of its
letter to the Association setting forth its opinion as to the estimated pro
forma aggregate market value of the Common Stock to be issued in the Conversion
and the value of Subscription Rights to purchase the Common Stock and to the use
of its name and statements with respect to it appearing herein.
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement with
respect to the Common Stock offered hereby. This Prospectus does not contain all
the information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the SEC. Such
information may be inspected at the public reference facilities maintained by
the SEC at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549.
87
Copies may be obtained at prescribed rates from the Public Reference Section of
the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. The SEC also
maintains an internet address ("Web site") that contains reports, proxy and
information statements and other information regarding registrants, including
the Company, that file electronically with the SEC. The address for this Web
site is "http://www.sec.gov."
The Association has filed with the OTS an Application for Conversion.
This document omits certain information contained in such application. The
Application for Conversion can be inspected, without charge, at the offices of
the OTS, 1700 G Street, N.W., Washington, D.C. 20552, and at the office of the
OTS Regional Director, Midwest Regional Office, at 122 West John Carpenter
Freeway, Irving, Texas 75039.
88
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report F-1
Statements of Financial Condition as of June 30, 1997 and 1996 F-2
Statements of Income for the Years Ended June 30, 1997 and 1996 16
Statements of Equity for the Years Ended June 30, 1997 and 1996 F-3
Statement of Cash Flows for the Years Ended June 30, 1997 and 1996 F-4
Notes to Financial Statements F-5
Schedules - All schedules are omitted because the required information is not
applicable or is presented in the financial statements or accompanying notes.
All financial statements of High Country Bancorp, Inc. have been omitted
because High Country Bancorp, Inc. has not yet issued any stock, has no assets
and no liabilities and has not conducted any business other than of an
organizational nature.
89
[Letterhead of Grimsley, White & Company Appears Here]
INDEPENDENT AUDITORS' REPORT
Board of Directors
Salida Building and Loan Association
Salida, Colorado
We have audited the accompanying statements of financial condition of Salida
Building and Loan Association as of June 30, 1997 and 1996, and the related
statements of income, equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Association's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Salida Building and Loan
Association as of June 30, 1997 and 1996 and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ GRIMSLEY, WHITE & COMPANY
------------------------------
GRIMSLEY, WHITE & COMPANY
July 31, 1997
F-1
SALIDA BUILDING AND LOAN ASSOCIATION
STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1997 AND 1996
ASSETS
1997 1996
----------- -----------
Cash and amounts due from banks $ 894,995 $ 511,119
Interest-bearing deposits at other institutions 2,381,315 1,576,878
Securities available-for-sale - 989,085
Securities held-to-maturity 5,339,762 6,843,218
Loans receivable, net 63,126,864 50,075,541
Federal Home Loan Bank stock 988,500 563,500
Accrued interest receivable 595,007 438,580
Property and equipment, net 2,507,398 2,060,920
Mortgage servicing rights 35,352 -
Prepaid expenses and other assets 454,909 126,229
----------- -----------
Total Assets $76,324,102 $63,185,070
=========== ===========
LIABILITIES AND EQUITY
Liabilities
Deposits $56,152,178 $49,537,369
Advances by borrowers for taxes and insurance 127,175 134,075
Accounts payable and other liabilities 491,929 214,638
Advances from Federal Home Loan Bank 13,520,000 7,150,000
Deferred income taxes 74,600 242,000
----------- -----------
Total Liabilities 70,365,882 57,278,082
----------- -----------
Commitments
Equity
Retained earnings, substantially restricted 5,958,220 5,913,804
Net unrealized depreciation on securities available-for-sale,
net of tax of $4,900 (1996) - (6,816)
----------- -----------
Total Equity 5,958,220 5,906,988
----------- -----------
Total Liabilities and Equity $76,324,102 $63,185,070
=========== ===========
See Notes To Financial Statements
F-2
SALIDA BUILDING AND LOAN ASSOCIATION
STATEMENTS OF EQUITY
JUNE 30, 1997 AND 1996
NET
UNREALIZED
LOSS ON
SECURITIES
RETAINED AVAILABLE
EARNINGS FOR-SALE TOTAL
---------- ----------- ----------
BALANCES JULY 1, 1995 $5,395,102 $ (16,217) $5,378,885
Net income for the year 518,702 518,702
Change in net urealized loss on securities available -
for - sale 9,401 9,401
---------- ----------- ----------
BALANCES JUNE 30, 1996 5,913,804 (6,816) 5,906,988
Net income for the year 44,416 44,416
Change in net unrealized loss on securities available -
for - sale 6,816 6,816
---------- ----------- ----------
BALANCES JUNE 30, 1997 $5,958,220 $ - $5,958,220
========== =========== ==========
See Notes To Financial Statements
F-3
SALIDA BUILDING AND LOAN ASSOCIATION
STATEMENT OF CASH FLOWS
JUNE 30, 1997 AND 1996
1997 1996
------------ -----------
Operating Activities
Net income $ 44,416 $ 518,702
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 158,415 96,936
Net amortization of premiums and discounts on investments10,349 10,349 36,413
Net loss on sale of loans 56,185 92,535
Amortization of loan fees (109,739) (180,534)
FHLB stock dividends (42,200) (21,400)
Provision for losses on loans 282,000 59,450
Net loss on assets disposition 4,226 10,889
Deferred income taxes (162,500) 70,100
Net change in miscellaneous assets (460,107) (99,725)
Net change in miscellaneous liabilities 277,291 45,437
------------ -----------
Net cash provided by operating activities 58,336 628,803
------------ -----------
Investing Activities
Net change in loans receivable (17,192,492) (14,213,259)
Proceeds from sale of loans 3,878,889 5,702,942
Proceeds from sale of securities available-for-sale 1,000,000 -
Principal repayments of mortgage-backed securities held-to-maturity 1,482,590 1,487,979
Purchase of Federal Home Loan Bank stock (382,800) (130,900)
Purchase of property and equipment (609,119) (988,042)
Sale of assets - 8,200
------------ -----------
Net cash used by investing activities (11,822,932) (8,133,080)
------------ -----------
Financing Activities
Net increase in deposit accounts 6,614,809 3,623,530
Net increase (decrease) in mortgage escrow funds (6,900) (49,824)
Conversion costs incurred (25,000) -
Proceeds from borrowings 6,370,000 4,150,000
------------ -----------
Net cash provided by financing activities 12,952,909 7,723,706
------------ -----------
Net increase in cash and cash equivalents 1,188,313 219,429
Cash and cash equivalents, beginning of year 2,087,997 1,868,568
------------ -----------
Cash and cash equivalents, end of year $ 3,276,310 $ 2,087,997
============ ===========
Supplemental disclosure of cash flow information
Interest paid on deposits and borrowings $ 2,813,211 $ 2,289,500
Income taxes paid $ 208,624 $ 355,320
See Notes To Financial Statements
F-4
SALIDA BUILDING AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE -1 OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Salida Building and Loan Association (the Association) is a federally
chartered mutual association with its main office in Salida, Colorado
and with branch offices in Leadville and Buena Vista, Colorado. The
Association provides a variety of financial services to the area it
serves. Its primary deposit products are interest-bearing checking
accounts and certificates of deposit, and its primary lending products
are real estate mortgages, consumer and commercial loans.
A summary of significant accounting policies follows:
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
Securities Held to Maturity
Bonds and notes for which the Association has the positive intent and
ability to hold to maturity are reported at cost, adjusted for premiums
and discounts that are recognized in interest income using the interest
method over the period to maturity.
Securities Available for Sale
Available-for-sale securities consist of bonds and notes not classified
as trading securities nor as held-to-maturity securities.
Unrealized holding gains and losses, net of tax, on available-for-sale
securities are reported as a net amount in a separate component of
shareholders' equity until realized.
Gains and losses on the sale of available-for-sale securities are
determined using the specific-identification method.
Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their cost that are other than
temporary would result in write-downs of the individual securities to
their fair value. Should the Association incur write-downs they will be
included in earnings as realized losses.
Premiums and discounts are recognized in interest income using the
interest method over the period to maturity.
F-5
SALIDA BUILDING AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE -1 OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Federal Home Loan Bank Stock
The stock is an equity interest in the Federal Home Loan Bank of
Topeka. The Association, as a member of the FHLB, is required to
maintain an investment in capital stock of the FHLB. The stock is
carried at cost, as its cost is assumed to equal its market value. FHLB
stock can only be sold at par value to the FHLB or to another member
institution. The FHLB declares cash and stock dividends. The stock
dividends are recognized as income due to the fact they are redeemable
at par value ($100 per share) from the FHLBs or another member
institution.
Loans
Loans are stated at unpaid principal balances, less the allowance for
loan losses, net of deferred loan fees and loans in process.
Loan origination and commitment fees, as well as certain direct
origination costs, are deferred and amortized as a yield adjustment
over the lives of the related loans using the interest method.
Amortization of deferred loan fees is discontinued when a loan is
placed on nonaccrual status.
Loans are placed on nonaccrual status when principal and interest is
delinquent for 90 days or more. Uncollectible interest on these loans
is charged off, or an allowance is established, based on management's
periodic evaluation, by a charge to interest income equal to all
interest previously accrued. Income is subsequently recognized only to
the extent that cash payments are received.
Effective July 1995, the Association adopted Statement of Financial
Accounting Standards No. 114, Accounting by Creditors for Impairment of
a Loan, as amended by Statement No. 118, Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures. These
Statements prescribe recognition criteria for loan impairment,
generally related to commercial loans, and multifamily real estate
loans, and measurement methods for certain impaired loans and all loans
whose terms are modified in trouble debt restructuring subsequent to
the adoption of these statements. A loan is considered impaired when it
is probable that the borrower will not repay the loan according to the
original contractual terms of the loan agreement.
Management has determined that first mortgage loans on one-to-four
family properties, home equity, second mortgage loans, and all consumer
loans are large groups of smaller-balance homogenous loans that are
collectively evaluated. Accordingly, such loans are outside the scope
of Statement Nos. 114 and 118.
F-6
SALIDA BUILDING AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE -1 OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Loans (continued)
Management considers an insignificant delay, which is determined as 90
days by the Association, will not cause a loan to be classified as
impaired. A loan is not impaired during a period of delay in payment if
the Association expects to collect all amounts due including interest
accrued at the contractual interest rate for the period of delay. All
loans identified as impaired are evaluated independently by
management.
Under this Standard, the Association estimates credit losses on
impaired loans based on the present value of expected cash flows or the
fair value of the underlying collateral if the loan repayment is
expected to come from the sale or operation of such collateral.
Statement No. 118 amends Statement No. 114 to permit a creditor to use
existing methods for recognizing interest income on impaired loans
eliminating the income recognition provisions of Statement No. 114.
Prior to adoption of this Standard the credit losses related to these
loans were estimated based on undiscounted cash flows or the fair value
of the underlying collateral. The adoption of the statements did not
have a material effect on the Association's financial condition or
results of operations.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb potential losses inherent
in the loan portfolio. The amount of the allowance is based on
management's evaluation of the collectibility of the loan portfolio,
including the nature of the portfolio, credit concentrations, specific
impaired loans, and economic conditions. The allowance is increased by
a provision for loan losses, which is charged to expense, and reduced
by charge-offs, net of recoveries. Such provisions are based on
management's estimate of net realizable value or fair value of the
collateral, as applicable. These estimates are susceptible to economic
changes that could result in a material adjustment to results of
operations in the near term. Recovery of the carrying value of such
loans is dependent to a great extent on economic, operation, and other
conditions that may be beyond the Association's control.
Loan Servicing
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. Fair values are estimated using discounted cash flows based on
a current market interest rate.
F-7
SALIDA BUILDING AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE -1 OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and Equipment
Property and equipment are stated at cost less accumulated
depreciation. Depreciation is calculated using primarily the straight-
line method over the estimated useful lives of the related assets.
Estimated useful lives of furniture, fixtures, and equipment range from
two to ten years; buildings and improvements range from five to forty
years.
Income Taxes
Income taxes are provided in accordance with SFAS No. 109, Accounting
for Income Taxes (See Note 9). Under the provisions of SFAS No. 109,
deferred tax assets and liabilities are recorded based on the
differences between the financial statement and tax bases of assets and
liabilities and the tax rates which will be in effect when these
differences are expected to reverse. If appropriate, deferred tax
assets are reduced by a valuation allowance which reflects expectations
of the extent to which such assets will be realized.
Financial Instruments
Off-balance sheet instruments. In the ordinary course of business the
Association has entered into off-balance sheet financial instruments
consisting of commitments to extend credit, and standby letters of
credit. Such financial instruments are recorded in the financial
statements when they are funded.
Fair Values of Financial Instruments
The following methods and assumptions were used by the Association in
estimating fair values of financial instruments as disclosed herein:
Cash and short-term instruments. The carrying amounts of cash and
short-term instruments approximate fair values.
Available-for-sale and held-to-maturity securities. Fair values for
securities, excluding restricted equity securities, are based on quoted
market prices. The carrying values of restricted equity securities
approximate fair values.
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 mortgage loans, consumer loans,
commercial real estate and commercial loans are estimated using
discounted cash flow analysis, 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 analysis or underlying collateral values, where applicable.
F-8
SALIDA BUILDING AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE -1 OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Deposit Liabilities. The fair values disclosed for demand deposits are,
by definition, equal to the amount payable on demand at the reporting
date. The carrying amounts of variable-rate, fixed-term money-market
accounts and certificates of deposit (CDs) approximate their fair
values at the reporting date. Fair values for fixed-rate CDs 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.
Advances from Federal Home Loan Bank. The fair values are based on the
borrowing rates and remaining maturities.
Cash Equivalents
For the purpose of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks, and interest-bearing
deposits at other institutions. The Association considers all highly
liquid debt instruments with original maturities of three months or
less to be cash equivalents.
Reclassifications
Certain amounts in 1996 have been reclassified to conform with the 1997
presentation.
NOTE -2 SECURITIES
Securities are classified in three categories and accounted for as
follows: debt securities that the Association has the positive intent
and ability to hold to maturity are classified as held-to-maturity and
are measured at amortized cost; debt and equity securities bought and
held principally for the purpose of selling in the near term are
classified as trading securities and are measured at fair value, with
unrealized gains and losses included in earnings; debt and equity
securities not classified as either held-to-maturity or trading
securities are deemed available-for-sale and are measured at fair-
value, with unrealized gains and losses, net of applicable taxes,
reported in a separate component of equity.
Held-to-Maturity Securities
The amortized cost and estimated fair value of held-to-maturity
securities at June 30, 1997 and 1996 are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
1997 Cost Gains Losses Value
---------- ---------- ---------- ---------- ----------
Mortgage-backed securities
GNMA certificates $1,708,760 $22,801 $ 0 $1,731,561
FHLMC certificates 1,305,265 32,939 (12,170) 1,326,034
FNMA certificates 2,325,737 33,659 (4,855) 2,354,541
---------- ---------- ---------- ----------
$5,339,762 $ 89,399 $ (17,025) $5,412,136
========== ========== ========== ==========
F-9
SALIDA BUILDING AND LOAN ASSOCIATION
====================================
NOTES TO FINANCIAL STATEMENTS
NOTE -2 SECURITIES (Continued)
Held-to-Maturity Securities (Continued)
Gross Gross
Amortized Unrealized Unrealized Fair
1996 Cost Gains Losses Value
---------- ---------- ---------- ---------- ----------
Mortgage-backed securities
GNMA certificates $2,011,893 $ 1,127 $(14,602) $1,998,418
FHLMC certificates 1,775,407 31,314 (21,160) 1,785,561
FNMA certificates 3,055,918 49,396 (9,415) 3,095,899
---------- ---------- ---------- ----------
$6,843,218 $ 81,837 $ (45,177) $6,879,878
========== ========== ========== ==========
Available-for-Sale Securities
The amortized cost and estimated fair value of available-for-sale
securities at June 30, 1996, were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
1996 Cost Gains Losses Value
---------- ---------- ---------- ---------- ----------
U.S. Government and Federal
Agency Obligations:
U.S. Agencies $ 999,501 $ 0 $ (10,416) $ 989,085
========== ========== ========== ==========
The amortized cost and fair value of debt securities at June 30, 1997,
by contractual maturity, are shown below. The Association's debt
securities held-to-maturity are mortgage-backed securities whose
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
Held-to-Maturity Debt Securities Cost Value
-------------------------------- ---------- ----------
Due after one year through five years $ 260,817 $ 258,729
Due after ten years 5,078,945 5,153,407
---------- ----------
Total Held-to-Maturity Securities $5,339,762 $5,412,136
========== ==========
Proceeds from the maturity or sale of securities available-for-sale
during the years ended June 30 were $1,000,000 (1997) and $0 (1996)
with no gains or losses realized.
At June 30, investments with a carrying value of $1,744,847 (1997) and
$609,524 (1996) were pledged as collateral for deposits of public
funds.
F-10
SALIDA BUILDING AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE -3 LOANS RECEIVABLE
Loans receivable at June 30, are summarized as follows
1997 1996
----------- -----------
Loans secured by real estate:
Residential real estate $46,509,985 $38,011,308
Commercial real estate 1,643,468 2,095,187
Construction 3,092,469 2,544,200
Land 2,390,040 1,500,311
----------- -----------
Total Loans Secured by Real Estate 53,635,962 44,151,006
Consumer loans, net of discounts 6,476,354 3,926,450
Loans collateralized by savings accounts 764,450 849,183
Commercial loans 4,287,400 3,080,228
Other loans 98,427 92,093
----------- -----------
Total Loans 65,262,593 52,098,960
Less:
Undisbursed portion of loans in process 1,123,281 1,246,388
Deferred loan origination fees 408,043 365,906
Allowance for loan losses 604,405 411,125
----------- -----------
Loans Receivable, Net $63,126,864 $50,075,541
=========== ===========
The changes in the allowance for loan losses were as follows:
1997 1996
----------- -----------
Balance, beginning of year $ 411,125 $ 404,595
Provision for losses 282,000 60,000
Recoveries 7,450 16
Losses incurred (96,170) (53,486)
----------- -----------
Balance, end of year $ 604,405 $ 411,125
=========== ===========
At June 30, the Association had adjustable interest rate loans of
approximately $6,266,000 (1997) and $6,145,000 (1996). The adjustable
rate loans have interest rate adjustment limitations and are generally
indexed to the 1-year U.S. Treasury Note rate. Future market factors
may affect the correlation of the interest rate adjustment with the
rates the Association pays on the short-term deposits that have been
primarily utilized to fund these loans.
Loans for which interest accruals had been discontinued at June 30 were
approximately $140,000 (1997) and $73,000 (1996). If interest on these
loans had been accrued, such interest would have increased income by
immaterial amounts.
Loans receivable at June 30 include loans to officers and directors of
approximately $839,000 (1997) and $761,000 (1996).
F-11
SALIDA BUILDING AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE -4 LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
statements of financial condition. The unpaid principal balances of
these loans at June 30 are summarized as follows:
1997 1996
---------- ----------
Mortgage loan portfolios serviced for:
FHLMC $9,353,814 $6,260,125
Other investors 27,868 206,224
---------- ----------
$9,381,682 $6,466,349
========== ==========
In connection with these loans serviced for others at June 30, the
Association held borrowers' escrow balances of $23,837 (1997) and
$19,939 (1996).
NOTE -5 ACCRUED INTEREST RECEIVABLE
Interest receivable at June 30, relates to the following:
1997 1996
---------- ----------
Loans $ 556,692 $ 379,647
Mortgage-backed securities 38,315 49,783
Other investments 0 9,150
---------- ----------
$ 595,007 $ 438,580
========== ==========
NOTE -6 PROPERTY AND EQUIPMENT
Property and equipment and the related accumulated depreciation at
June 30, are summarized as follows:
1997 1996
---------- ----------
Land and improvements $ 316,035 $ 255,847
Buildings and improvements 2,043,519 940,032
Furniture, fixtures and equipment 783,742 628,012
Construction-in-progress 0 745,847
---------- ----------
3,143,296 2,569,738
Less accumulated depreciation (635,898) (508,818)
---------- ----------
$2,507,398 $2,060,920
========== ==========
Depreciation expense for the years ended June 30, totaled $158,415
(1997) and $96,936 (1996).
F-12
SALIDA BUILDING AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE -7 DEPOSIT ACCOUNTS
Deposit accounts at June 30 are summarized as follows:
1997 1996
----------------------- ------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
----------- ---------- ------------ ----------
NOW accounts, including
non-interest bearing
deposits of $2,361,034
(1997) and $2,275,661
(1996) $10,586,504 1.30% $ 7,749,722 1.35%
Money market and
savings accounts 14,037,595 2.96% 13,163,710 2.91%
Certificate accounts 31,528,079 5.58% 28,623,937 5.43%
----------- ------------
$56,152,178 $ 49,537,369
=========== ============
At June 30, 1997, scheduled maturities of the above certificate
accounts are summarized as follows:
Year ending June 30,
--------------------------------------------------------------
2002 and
1998 1999 2000 2001 thereafter
----------- ----------- ---------- ----------- ----------
3.01-4.00 $ 187,271
4.01-5.00 2,995,455 $ 161,026
5.01-6.00 18,467,799 3,123,389 $ 618,764 $ 418,900
6.01-7.00 3,659,417 951,879 149,238 52,694 $ 132,400
7.01-8.00 90,000 300,000 5,211 214,636
----------- ----------- ---------- ----------- ----------
$25,309,942 $ 4,326,294 $1,068,002 $ 476,805 $ 347,036
=========== =========== ========== =========== ==========
The aggregate amount of certificates of deposits with a minimum
denomination of $100,000 at June 30, was $8,668,062 (1997) and
$9,186,927 (1996).
Deposits in excess of $100,000 are not insured by the Savings
Association Insurance Fund (SAIF).
Interest expense on deposits for the years ended June 30 is summarized
as follows:
1997 1996
---------- ----------
NOW and money market deposit accounts $ 224,126 $ 196,031
Passbook savings and certificate accounts 1,955,282 1,770,726
---------- ----------
$2,179,408 $1,966,757
========== ==========
F-13
SALIDA BUILDING AND LOAN ASSOCIATION
------------------------------------
NOTES TO FINANCIAL STATEMENTS
NOTE -8 ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank (FHLB) at June 30 are
summarized as follows:
Interest
Rate 1997 1996
---------- ----------- -----------
Maturing within one year 5.81-8.12% $ 9,500,000 $2,000,000
Maturing in 1999 5.81-6.72% 3,000,000 500,000
Maturing in 2000 6.79% 500,000 4,000,000
Maturing in 2001 6.80% 520,000 650,000
----------- ----------
$13,520,000 $7,150,000
=========== ==========
Pursuant to collateral agreements with the FHLB, advances are secured
by a blanket pledge agreement with the FHLB which includes real estate
loans and other non-pledged securities.
At June 30, 1996, the Association had an approved line of credit of
$6,000,000 with the FHLB which expired May 5, 1997. At June 30, 1997,
the Association has an approved line of credit for $10,000,000 with the
FHLB. No amount was drawn on the line of credit at June 30, 1996. As of
June 30, 1997, the Association had drawn $1,000,000 on the line of
credit.
NOTE -9 INCOME TAXES
The provision for income taxes consists of the following:
1997 1996
---------- --------
Current $ 182,085 $336,918
Deferred (171,000) 70,100
--------- --------
$ 11,085 $407,018
========= ========
The effective tax rate on income before the provisions for income taxes
differs from the federal statutory income tax rate for the following
reasons:
1997 1996
-------- --------
Provision for income taxes at statutory rate $ 18,900 $314,700
Excess tax provision for bad debts over
book provisions 0 49,800
State income taxes, net of federal income
tax benefit 7,200 16,200
Other, net (15,015) 26,318
-------- --------
$ 11,085 $407,018
======== ========
F-14
SALIDA BUILDING AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE -9 INCOME TAXES (Continued)
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. The net deferred tax liabilities as of June 30, are as
follows:
1997 1996
--------- ---------
Difference between tax basis and
carrying basis of FHLB stock $ 127,100 $ 111,900
Tax depreciation in excess of
financial statement amounts 76,700 75,400
Difference between tax basis and
carrying basis of investments 0 4,900
Difference between tax basis and carrying
basis of long term incentive plan (87,700) 0
Loan loss reserve (41,500) 49,800
--------- ---------
$ 74,600 $ 242,000
========= =========
The deferred tax expense (benefit) results from timing differences in
the recognition of income and expense for tax and financial purposes.
The sources and tax effects of these temporary timing differences are
as follows:
1997 1996
--------- ---------
FHLB stock dividends $ 15,500 $ 15,400
Accumulated depreciation 1,400 13,100
Allowance for loan losses - net (91,300) 49,800
Long-term incentive plan (87,700) 0
Other (8,900) (8,200)
--------- ---------
$(171,000) $ 70,100
========= =========
The Association is permitted under the Internal Revenue Code to deduct
an annual addition to reserve for bad debts in determining taxable
income, subject to certain limitations. This deduction differs from the
bad debt provision used for financial accounting purposes. Bad debt
deductions for income tax purposes are included in taxable income of
later years only if the bad debt reserve is used subsequently for
purposes other than to absorb bad debt losses. Because the Association
does not intend to use the reserve for purposes other than to absorb
losses, no deferred income taxes have been provided. Retained earnings
at June 30, 1997, includes approximately $1,169,000, representing such
bad debt deductions for which no income taxes have been provided.
NOTE -10 CONTINGENCIES
In the normal course of business, the Association is involved in
various legal actions arising in the ordinary course of business. In
the opinion of management, after consultation with legal counsel, the
ultimate disposition of these matters is not expected to have a
material adverse effect on the financial position of the Association.
F-15
SALIDA BUILDING AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE -11 REGULATORY CAPITAL REQUIREMENTS
The Association is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain actions by regulators that,
if undertaken, could have a direct material effect on the Association's
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Association must
meet specific guidelines that involve quantitative measures of the
Association's assets, liabilities, and certain off-balance sheet items
as calculated under regulatory accounting practices. The Association'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 Association to maintain minimum amounts and ratios
as outlined below. Management believes, as of June 30, 1997. The
Association meet all capital adequacy requirements to which it is
subject.
As of November 14, 1995, the most recent notification from Office of
Thrift Supervision categorized the Association as well capitalized
under the regulatory framework for prompt corrective action. To be well
capitalized the Association must maintain minimum total risk-based,
Tier I risk-based, and Tier I leverage ratios. There are no conditions
or events since that notification that management believes have changed
the institution's category.
The following is a reconciliation of capital computed under generally
accepted accounting principles (GAAP) to regulatory capital. OTS
regulations specify minimum capital requirements for the Association.
The following reconciliation also compares the capital requirements as
computed to the minimum capital requirements for the Association, as of
June 30.
1997 1996
----------- -----------
Equity Per GAAP $5,958,220 $5,913,804
Less Servicing Rights Plus Valuations (3,535) 2,000
---------- ----------
Equity Per GAAP- Tier I Capital 5,954,685 5,915,804
Valuation Allowance 604,405 411,125
---------- ----------
Regulatory Capital $6,559,090 $6,326,929
========== ==========
F-16
SALIDA BUILDING AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE -11 REGULATORY CAPITAL REQUIREMENTS (Continued)
Minimum Required To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
Amount Ratio Amount Ratio Amount Ratio
----------- ------- ----------- ---------- -------------- --------
1997
----
Total Capital
(to Risk
Weighted
Assets) $6,559,090 13.76% $3,814,320 8.00% $4,767,900 10.00%
Tier I Capital
(to Risk
Weighted
Assets) 5,954,685 12.49 1,430,370 3.00 2,860,740 6.00
Tier I Capital
(to Average
Assets) 5,954,685 8.25 1,082,820 1.50 3,609,400 5.00
Tangible Capital
(to Tangible
Assets) 5,954,685 8.25 1,082,820 1.50 N/A
1996
----
Total Capital
(to Risk
Weighted
Assets) $6,326,929 16.99% $2,979,360 8.00% $3,724,200 10.00%
Tier I Capital
(to Risk
Weighted
Assets) 5,915,804 15.88 1,117,260 3.00 2,234,520 6.00
Tier I Capital
(to Average
Assets) 5,915,804 9.69 919,170 1.50 3,053,900 5.00
Tangible Capital
(to Tangible
Assets) 5,915,804 9.69 919,170 1.50 N/A
F-17
SALIDA BUILDING AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE -11 REGULATORY CAPITAL REQUIREMENTS (Continued)
The Association's management believes that, under the current
regulations, the Association will continue to meet its minimum capital
requirements in the coming year. However, events beyond the control of
the Association, such as increased interest rates or a downturn in the
economy in the Association's operating area, could adversely affect
future earnings and, consequently, the ability of the Association to
meet its future minimum capital requirements.
NOTE -12 BENEFIT PLANS
The Association has a defined contribution plan (the Plan) for
employees who have completed one year of service. The Association
matches covered employee's contributions up to 5% of their
compensation. In addition, the Association's Board of Directors may
elect to contribute an additional amount based upon the Association's
profit. Contributions to the Plan were $54,100 (1997) and $49,800
(1996).
The Association adopted a Long-Term Incentive Plan in June, 1997
covering the directors and key employees of the Association. On June 30
of each year following 1997 the participants will have a contribution
made to their account providing the participant continues to be an
employee or director of the Association. Prior to distribution under
the terms of the Plan, each participant's account shall be credited
with a rate of return, on any amounts previously credited, equal to the
highest rate of interest paid by the Association on one-year
certificates of deposit, or after conversion the rate of return will
equal the dividend-adjusted rate of return on the common stock.
Amounts credited to Participant's Accounts on the effective date and
thereafter shall be fully vested. Account balances shall be paid, in
cash, in ten equal annual installments beginning during the first
quarter of the calendar year which next follows the calendar year in
which the participant ceases to be a director or employee for any
reason, with subsequent payments being made by the last day of the
first quarter of each subsequent calendar year until the participant
has received the entire amount of his account. Notwithstanding the
foregoing a participant may elect to have his account paid in lump sum
distribution or in annual payments over a period less than ten years.
Any benefits accrued under the plan will be paid from the Association's
general assets. The Association has established a trust in order to
hold assets with which to pay benefits. Trust assets will be subject to
the claims of the Association's general creditors. The Association
recognized an expense of $237,031 in the year ended June 30, 1997,
which represented the funding of the plan for past services.
F-18
SALIDA BUILDING AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE -13 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
The Association is a party to financial instruments with off-balance
sheet risk in the normal course of business to meet the financing needs
of its customers. At June 30, 1997, the Association has commitments to
fund mortgage loans of $740,300, unfunded lines of credit of $978,900,
and letters of credit of $270,400. The Association makes contractual
commitments to extend credit, which are legally binding agreements to
lend money to customers at prevailing interest rates for specified
periods of time. The credit risk involved in issuing these commitments
is essentially the same as that involved in extending loan facilities
to customers.
As such, the Association's exposure to credit loss, in the event of
non-performance by the counterparty to the financial instrument, is
represented by the contractual amount of those instruments. However,
the Association applies the same credit standards used in the lending
process when extending these commitments, and periodically reassesses
the customers' credit worthiness. Additional risks associated with
these commitments arise when they are drawn upon, such as the demands
on liquidity that the Association could experience if a significant
portion were drawn down at once. This is considered unlikely, however,
as commitments may expire without having been drawn upon.
The Association originates loans primarily in Chaffee and Lake
Counties, Colorado. Although the Association has a diversified loan
portfolio, a substantial portion of its borrower's ability to repay
their loans is dependent upon economic conditions in the Association's
market area.
NOTE -14 FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Association's financial instruments,
as of June 30, 1997, are as follows:
Carrying Fair
Amount Value
----------- ----------
Financial Assets:
Cash and amounts due from banks $ 894,995 $ 894,995
Interest bearing deposits 2,381,315 2,381,315
Securities held-to-maturity 5,339,762 5,412,136
FHLB stock 988,500 988,500
Loans receivable - net 63,126,864
Financial liabilities:
Deposits 56,152,178
Advances from FHLB 13,520,000
F-19
SALIDA BUILDING AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE -15 OTHER NON-INTEREST EXPENSE
1997 1996
-------- --------
Advertising $ 74,292 $ 46,544
Stationery Supplies 90,893 60,202
Postage 66,675 48,737
Telephone 17,990 12,775
Dues and Subscriptions 22,102 21,477
Other 133,211 103,824
-------- --------
$405,163 $293,559
======== ========
NOTE -16 PLAN OF CONVERSION
On May 15, 1997, the Board of Directors of Salida Building and Loan
Association adopted a Plan of Conversion whereby the Association would
convert from a mutual savings institution to a stock savings and loan
pursuant to the Rules and Regulations of the OTS. The Plan includes, as
part of the conversion, the concurrent formation of a holding company.
The Plan provides that non-transferable subscription rights to purchase
holding company conversion stock will be offered first to eligible
account holders of record as of the eligibility record date, then to
the Association's tax qualified employee plan, then to other
supplemental eligible account holders of record as of the supplemental
eligibility record date, then to other members, and then to directors,
officers and employees. Concurrently with, at any time during, or
promptly after the subscription offering, and on a lowest priority
basis, an opportunity to subscribe may also be offered to the general
public in a direct community offering. The price of the holding company
conversion stock will be based upon an independent appraisal of the
Association and will reflect its estimated pro forma market value, as
converted. It is the desire of the Board of Directors of the
Association to attract new capital to the Association in order to
increase its capital, support future savings growth and increase the
amount of funds available for residential and other mortgage lending.
The converted Association is also expected to benefit from its
management and other personnel having a stock ownership in its
business, since stock ownership is viewed as an effective performance
incentive an a means of attracting, retaining and compensating
management and other personnel. No change will be made in the Board of
Directors or management as a result of the conversion. Upon consumption
of the conversion, the Association will issue all of its outstanding
capital stock to the holding company in exchange for at least 50% of
the net proceeds from the sale of the common stock.
The cost of issuing the common stock will be deferred and deducted from
the sale proceeds. If the offering is unsuccessful for any reason, the
deferred costs will be charged to operations. At June 30, 1997, the
Association had incurred $25,000 of such costs.
F-20
SALIDA BUILDING AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE -16 PLAN OF CONVERSION (Continued)
For the purpose of granting eligible members of the Association a
priority in the event of future liquidation, the Association will, at
the time of conversion, establish a liquidation account equal to its
regulatory capital as of the date of the latest balance sheet used in
the final conversion offering circular. In the event (and only in such
event) of future liquidation of the converted Association, an eligible
savings account holder who continues to maintain a savings account
shall be entitled to receive a distribution from the liquidation
account, in the proportionate amount of then-current adjusted balance
of the savings deposits then held, before any distributions may be made
with respect to capital stock.
Present regulations provide that the Association may not declare or pay
a cash dividend on or repurchase any of its capital stock if the result
thereof would be to reduce the regulatory capital of the Association
below the amount required for the liquidation account or the regulatory
capital requirement. Further, any dividend declared or paid on or
repurchase of, the Association's capital stock shall be in compliance
with the rules and regulations of the Office of Thrift Supervision, or
other applicable regulations.
NOTE -17 IMPACT OF NEW ACCOUNTING STANDARDS
Accounting for ESOP. The Accounting Standards Division of the American
Institute of Certified Public Accountants approved Statement of
Position ("SOP") 93-6, "Employers' Accounting for Employee Stock
Ownership Plans," which is effective for fiscal years beginning after
December 15, 1993. SOP 93-6 changed, among other things, the measure of
compensation recorded by employers from the cost of ESOP shares to the
fair value of ESOP shares. To the extent that the fair value of the
common stock held by the ESOP that are committed to be released
directly to compensate employees, differs from the cost of such shares,
compensation expenses and a related charge or credit to additional
paid-in capital will be reported in the Association's financial
statements. The adoption of the ESOP by the Association and the
application of SOP 93-6 is likely to result in fluctuations in
compensation expense as a result of changes in the fair value of the
common stock. However, any such compensation expense fluctuations will
result in an offsetting adjustment to paid-in capital, and therefore,
total capital will not be affected.
Disclosure of Derivative Financial Instruments. In October, 1994, the
Financial Accounting Standards Board ("FASB) issued SFAS No. 119
"Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments." This statement addresses the disclosure of
derivative financial instruments including the face amount, nature and
terms.
F-21
SALIDA BUILDING AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE -17 IMPACT OF NEW ACCOUNTING STANDARDS (Continued)
For derivatives held for trading, disclosure of objectives, strategies,
policies on reporting and income recognition method is required. This
statement is effective for financial statements for fiscal years ending
after December 15, 1995. Currently the Association does not own any
derivative financial instruments and therefore SFAS No. 119 does not
have any impact on the financial statements.
Impairment of Long-Lived Assets. In March 1995, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets to be Disposed of." This
statement establishes accounting standards for the impairment of long-
lived assets and certain identifiable intangibles, and goodwill related
to those assets to held and used and for long-lived assets and certain
identifiable intangibles to be disposed of.
This Statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicated that the carrying
amount of an asset may not be recoverable. In performing the review for
recoverability, the entity should estimate the future cash flows
expected to result from the use of the asset and eventual disposition.
If the sum of the expected future cash flows (undiscounted and without
interest charges) is less than the carrying amount of the asset, an
impairment loss is recognized. Otherwise, and impairment loss is not
recognized. Measurement of an impairment loss for long-lived assets and
identifiable intangibles that an entity expects to hold and use should
be based on the fair value of the assets. The Association adopted this
statement in July, 1996 and it did not have an affect on the financial
statements.
Accounting for Stock-Based Compensation. In October, 1995, the
Financial Accounting Standards Board issued SFAS No. 123, "Accounting
for Stock-Based Compensation to Employees." This statement encourages
entities to adopt the fair value based method of accounting for
employee stock options or other stock compensation plans. However, it
allows an entity to measure compensation cost for those plans using the
intrinsic value based method of accounting prescribed by APB Opinion
No. 25, "Accounting for Stock Issued to Employees." Under the fair
value based method, compensation cost is measured at the grant date
based on the value of the award and is recognized over the service
period, which is usually the vesting period. Under the intrinsic value
based method, compensation cost is the excess of the quoted market
price of the stock at the grant date over the amount an employee must
pay to acquire the stock
F-22
SALIDA BUILDING AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE -17 IMPACT OF NEW ACCOUNTING STANDARDS (Continued)
Most fixed stock option plans - the most common type of stock
compensation plan - have no intrinsic value at grant date and under
Opinion No. 25 no compensation cost is reconized for them.
Compensation cost is recognized for other types of stock based
compensation plans under Opinion No. 25, including plans with variable,
usually performance-based features. This Statement requires that an
employer's financial statements include certain disclosures about
stock-based employee compensation arrangements regardless of the
method used to account for them. This Statement is effective for
transactions entered into in fiscal years that begin after December 15,
1995. The Association will adopt the Statement on the date the
Association converts from a federal mutual to a federal stock savings
and loan association. The Association has not determined which method
it will use to account for the options at this time and has not
estimated the effect of adoption on the Association's financial
statements.
Earnings Per Share. In March 1997, the Financial Accounting Standards
Board ("FASB") issued Statement No. 128. The Statement establishes
standards for computing and presenting earnings per share and applies
to entities with publicly held common stock or potential common stock.
This Statement simplifies the standards for computing earnings per
share and makes them comparable to international EPS standards. It
replaces the presentation of primary EPS with a presentation of basic
EPS.
It also requires dual presentations of basic and diluted EPS on the
face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. Basic EPS excludes dilution
and is computed by dividing income available to common stockholders by
the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock
that then shared in the earnings of the entity. Diluted EPS is computed
similarly to fully diluted EPS pursuant to APB Opinion No. 15. This
statement supersedes Opinion 15 and AICPA Accounting Interpretation 1-
102 of Opinion 15. This statement is effective for financial statements
issued for periods ending after December 15, 1997. Management believes
that the impact of adopting SFAS No. 128 will not be material to the
financial statements.
Disclosure of Information about Capital Structure. In February 1997,
the Financial Accounting Standards Board issued Statement No. 129.
F-23
SALIDA BUILDING AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE -17 IMPACT OF NEW ACCOUNTING STANDARDS (Continued)
The Statement incorporates the disclosure requirements of APB Opinion
No. 15, Earnings Per Share and makes them applicable to all public and
nonpublic entities that have issued securities addressed by the
Statement. APB Opinion No. 15 requires disclosure of descriptive
information about securities that is not necessarily related to the
computation of earnings per share.
This statement continues the previous requirements to disclose certain
information about an entity's capital structure found in APB Opinions
No. 10, Omnibus Opinion - 1966, and No. 15, Earnings Per Share, and
FASB Statement No. 47, Disclosure of Long-Term Obligations, for
entities that were subject to the requirements of those standards. This
Statement eliminates the exemption of nonpublic entities from certain
disclosure requirements of Opinion No. 15 as provided by FASB Statement
No. 21, Suspension of the Reporting of Earnings per Share and Segment
Information by Nonpublic Enterprises. It supersedes specific disclosure
requirements of Opinions 10 and 15 and Statement 47 and consolidates
them in this statement for ease of retrieval and for greater visibility
to nonpublic entities. The Statement is effective for financial
statements for periods ending after December 15, 1997. SFAS No. 129
will be adopted by the Association after December 15, 1997, the impact
of adopting the Statement will not be material to the financial
statements.
Reporting Comprehensive Income. In June 1997, the Financial Accounting
Standards board issued Statement No. 130. The Statement establishes
standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements. This Statement requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income to be reported in a financial
statement that is displayed with the same prominence as other financial
statements. This Statement does not require a specific format for that
financial statement but requires that an enterprise display an amount
representing total comprehensive income for the period in that
financial statement.
This Statement requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the
equity section of a statement of financial position.
This Statement is effective for fiscal years beginning after December
15, 1997. FASB Statement No. 130 will be adopted by the Association
after December 15, 1997, the impact of adopting the Statement will not
be material to the financial statements.
F-24
SALIDA BUILDING AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE -17 IMPACT OF NEW ACCOUNTING STANDARDS (Continued)
Disclosures about Segments of an Enterprise and Related Information. In
June 1997 the Financial Accounting Standards board issued Statement No.
131. The Statement establishes standards for the way that public
business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas, and
major customers. This Statement supersedes FASB Statement No. 14,
Financial reporting for segments of Business Enterprise, but retains
the requirement to report information about major customers. It amends
FASB Statement No. 94, Consolidation of all Majority-owned
Subsidiaries, to remove the special disclosure requirements for
previously unconsolidated subsidiaries.
The Statement requires that a public business enterprise report
financial and descriptive information about its reportable operating
segments. Operating segments are components of an enterprise about
which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance.
Generally, financial information is required to be reported on the
basis that is used internally for evaluating segment performance and
deciding how to allocate resources to segments.
The Statement requires that a public business enterprise report a
measure of segment profit or loss, certain specific revenue and expense
items, and segment assets. It requires reconciliations of total segment
revenues, total segment profit or loss, total segment assets and other
amounts disclosed for segments to corresponding amounts in the
enterprise's general-purpose financial statements. It requires that all
public business enterprises report information about the revenues
derived from the enterprise's products or services (or groups of
similar products and services), about the countries in which the
enterprise earns revenues and holds assets, and about major customers
regardless of whether that information is used in making operating
decisions.
The Statement also requires that a public business enterprise report
descriptive information about the way that the operating segments were
determined, the products and services provided by the operating
segments, differences between the measurements used in reporting
segment information and those used in the enterprise's general-purpose
financial statements, and changes in the measurement of segment amounts
from period to period.
F-25
SALIDA BUILDING AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
NOTE -17 IMPACT OF NEW ACCOUNTING STANDARDS (Continued)
This Statement is effective for fiscal years beginning after December
15, 1997. FASB Statement No. 131 will be adopted by the Association
after December 15, 1997, the impact of adopting the Statement will not
be material to the financial statements.
F-26
No dealer, salesman or any other person has been authorized to give any
information or to make any representation other than as contained in this
Prospectus in connection with the offering made hereby, and, if given or made,
such information shall not be relied upon as having been authorized by the
Company, the Association or Trident Securities, Inc. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered hereby to any person in any jurisdiction in which such offer
or solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so, or to any person to whom it is unlawful.
Neither the delivery of this Prospectus nor any sale hereunder shall under any
circumstances create any implication that there has been no change in the
affairs of the Company or the Association since any of the dates as of which
information is furnished herein or since the date hereof.
TABLE OF CONTENTS
Page
----
PROSPECTUS SUMMARY..................................................... (i)
SELECTED CONSOLIDATED FINANCIAL INFORMATION
AND OTHER DATA....................................................... (x)
RISK FACTORS........................................................... 1
HIGH COUNTRY BANCORP, INC.............................................. 5
SALIDA BUILDING AND LOAN ASSOCIATION................................... 5
USE OF PROCEEDS........................................................ 6
DIVIDEND POLICY........................................................ 7
MARKET FOR THE COMMON STOCK............................................ 8
CAPITALIZATION......................................................... 9
HISTORICAL AND PRO FORMA REGULATORY
CAPITAL COMPLIANCE................................................... 11
PRO FORMA DATA......................................................... 12
PROPOSED MANAGEMENT PURCHASES.......................................... 15
STATEMENTS OF INCOME................................................... 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................ 17
BUSINESS OF THE COMPANY................................................ 27
BUSINESS OF THE ASSOCIATION............................................ 27
REGULATION............................................................. 45
TAXATION............................................................... 54
MANAGEMENT OF THE COMPANY.............................................. 55
MANAGEMENT OF THE ASSOCIATION.......................................... 56
THE CONVERSION......................................................... 65
CERTAIN RESTRICTIONS ON ACQUISITION OF THE
COMPANY AND THE ASSOCIATION.......................................... 81
CERTAIN ANTI-TAKEOVER PROVISIONS
IN THE ARTICLES OF INCORPORATION AND BYLAWS.......................... 82
DESCRIPTION OF CAPITAL STOCK........................................... 86
REGISTRATION REQUIREMENTS.............................................. 87
LEGAL OPINIONS......................................................... 87
TAX OPINIONS........................................................... 87
EXPERTS................................................................ 87
ADDITIONAL INFORMATION................................................. 87
INDEX TO FINANCIAL STATEMENTS.......................................... 89
Until __________, 1997 (90 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
HIGH COUNTRY BANCORP, INC.
(Holding Company for
Salida Building & Loan Association)
Up to 1,035,000 Shares
COMMON STOCK
----------
PROSPECTUS
----------
TRIDENT SECURITIES, INC.
__________, 1997
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Directors, officers and employees of the Company and/or the Association may be
entitled to benefit from the indemnification provisions contained in the
Colorado Business Corporation Act (the "CBCA"), the Company's Articles of
Incorporation and federal regulations applicable to the Association. The general
effect of these provisions is summarized below:
Colorado Business Corporation Act
Sections 7-109-102 and 7-109-107 of the CBCA permit a Colorado corporation to
indemnify any person who was or is a party or is threatened to be made a party
to any proceeding of any type, (other than an action by or in the right of the
corporation) by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, may not, of itself, create a presumption that these standards
have not been met.
A Colorado corporation may also indemnify any person who was or is a party or
is threatened to be made a party to any proceeding by or in the right of the
corporation by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation. However, no indemnification may be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought
determines upon application that such person is fairly and reasonably entitled
to be indemnified.
To the extent that a director, officer, employee or agent of a corporation has
been successful on the merits or otherwise in defense of any proceeding
described above indemnification against expenses (including attorneys' fees)
actually and reasonably incurred by him is mandatory.
Any determination that indemnification of the director, officer, employee or
agent is proper in the circumstances because he has met the applicable standard
of conduct set forth in subsections (a) and (b) must be made by a majority of
the board of directors by a majority vote of a quorum consisting of directors
who were not parties to such action, suit or proceeding, or if such a quorum is
not obtainable, or, even if obtainable a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or by the
stockholders.
Expenses (including attorneys' fees) incurred by an officer or director in
defending any civil, criminal, administrative or investigative action, suit or
proceeding may be paid by the corporation in advance of the final disposition of
or proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the corporation.
The indemnification and advancement of expenses provided by, or granted
pursuant to, the other subsections of this section is not exclusive.
In addition, a corporation shall have power to purchase and maintain insurance
against any liability of individuals whom the corporation is required to
indemnify.
II-1
Article XVII of the Articles of Incorporation
A. Persons. The Corporation shall indemnify, to the extent provided in
-------
paragraphs B, D or F:
(1) any person who is or was a director, officer, employee, or agent
of the Corporation; and
(2) any person who served or served at the Corporation's request as a
director, officer, employee, agent, partner or trustee of another
corporation, partnership, joint venture, trust or other enterprise.
B. Extent -- Derivative Suits. In case of a threatened, pending or
--------------------------
completed action or suit by or in the right of the Corporation against a person
named in paragraph A by reason of his holding a position named in paragraph A,
the Corporation shall indemnify him if he satisfies the standard in paragraph C,
for expenses (including attorneys' fees but excluding amounts paid in
settlement) actually and reasonably incurred by him in connection with the
defense or settlement of the action or suit.
C. Standard -- Derivative Suits. In case of a threatened, pending or
----------------------------
completed action or suit by or in the right of the Corporation, a person named
in paragraph A shall be indemnified only if:
(1) he is successful on the merits or otherwise; or
(2) he acted in good faith in the transaction which is the subject of
the suit or action, and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the Corporation, including, but not
limited to, the taking of any and all actions in connection with the
Corporation's response to any tender offer or any offer or proposal of
another party to engage in a Business Combination (as defined in Article
XV) not approved by the board of directors. However, he shall not be
indemnified in respect of any claim, issue or matter as to which he has
been adjudged liable to the Corporation unless (and only to the extent
that) the court in which the suit was brought shall determine, upon
application, that despite the adjudication but in view of all the
circumstances, he is fairly and reasonably entitled to indemnity for such
expenses as the court shall deem proper.
D. Extent -- Nonderivative Suits. In case of a threatened, pending or
------------------------------
completed suit, action or proceeding (whether civil, criminal, administrative or
investigative), other than a suit by or in the right of the Corporation,
together hereafter referred to as a nonderivative suit, against a person named
in paragraph A by reason of his holding a position named in paragraph A, the
Corporation shall indemnify him if he satisfies the standard in paragraph E, for
amounts actually and reasonably incurred by him in connection with the defense
or settlement of the nonderivative suit, including, but not limited to (i)
expenses (including attorneys' fees), (ii) amounts paid in settlement, (iii)
judgments, and (iv) fines.
E. Standard -- Nonderivative Suits. In case of a nonderivative suit, a
-------------------------------
person named in paragraph A shall be indemnified only if:
(1) he is successful on the merits or otherwise; or
(2) he acted in good faith in the transaction which is the subject of the
nonderivative suit and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the Corporation, including, but not limited
to, the taking of any and all actions in connection with the Corporation's
response to any tender offer or any offer or proposal of another party to engage
in a Business Combination (as defined in Article XV) not approved by the board
of directors and, with respect to any criminal action or proceeding, he had no
reasonable cause to believe his conduct was unlawful. The termination of a
nonderivative suit by judgment, order, settlement, conviction, or upon a plea of
nolo contendere or its equivalent shall not, in itself, create a presumption
- ---- ----------
that the person failed to satisfy the standard of this subparagraph E(2).
II-2
F. Determination That Standard Has Been Met. A determination that the
----------------------------------------
standard of paragraph C or E has been satisfied may be made by a court, or,
except as stated in subparagraph C(2) (second sentence), the determination may
be made by:
(1) the board of directors by a majority vote of a quorum consisting
of directors of the Corporation who were not parties to the action, suit or
proceeding; or
(2) independent legal counsel (appointed by a majority of the
disinterested directors of the Corporation, whether or not a quorum) in a
written opinion; or
(3) the stockholders of the Corporation.
G. Proration. Anyone making a determination under paragraph F may
---------
determine that a person has met the standard as to some matters but not as to
others, and may reasonably prorate amounts to be indemnified.
H. Advance Payment. The Corporation shall pay in advance any expenses
---------------
(including attorneys' fees) which may become subject to indemnification under
paragraphs A through G if:
(1) the board of directors authorizes the specific payment; and
(2) the person receiving the payment undertakes in writing to repay
the same if it is ultimately determined that he is not entitled to
indemnification by the Corporation under paragraphs A through G.
I. Nonexclusive. The indemnification and advance payment of expenses
-------------
provided by paragraphs A through H shall not be exclusive of any other rights to
which a person may be entitled by law, bylaw, agreement, vote of stockholders or
disinterested directors, or otherwise.
J. Continuation. The indemnification provided by this Article XVII
------------
shall be deemed to be a contract between the Corporation and the persons
entitled to indemnification thereunder, and any repeal or modification of this
Article XVII shall not affect any rights or obligations then existing with
respect to any state of facts then or theretofore existing or any action, suit
or proceeding theretofore or thereafter brought based in whole or in part upon
any such state of facts. The indemnification and advance payment provided by
paragraphs A through H shall continue as to a person who has ceased to hold a
position named in paragraph A and shall inure to his heirs, executors and
administrators.
K. Insurance. The Corporation may purchase and maintain insurance on
---------
behalf of any person who holds or who has held any position named in paragraph
A, against any liability incurred by him in any such position, or arising out of
his status as such, whether or not the Corporation would have power to indemnify
him against such liability under paragraphs A through H.
L. Intention and Savings Clause. It is the intention of this Article
----------------------------
XVII to provide for indemnification to the fullest extent permitted by the
Business Corporation Act of the State of Colorado, and this Article XVII shall
be interpreted accordingly. If this Article XVII or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each director, officer, employee, and
agent of the Corporation as to costs, charges, and expenses (including
attorneys' fees), judgments, fines, and amounts paid in settlement with respect
to any action, suit, or proceeding, whether civil, criminal, administrative, or
investigative, including an action by or in the right of the Corporation to the
full extent permitted by any applicable portion of this Article XVII that shall
not have been invalidated and to the full extent permitted by applicable law. If
the Business Corporation Act of the State of Colorado is amended, or other
Colorado law is enacted, to permit further or additional indemnification of the
persons defined in this Article XVII A, then the indemnification of such persons
shall be to the fullest extent permitted by the Business Corporation Act of the
State of Colorado, as so amended, or such other Colorado law.
II-3
Federal Regulations Providing for Indemnification of Directors and Officers of
- ------------------------------------------------------------------------------
Salida Building & Loan Association
- ----------------------------------
Federal regulations require that Salida Building & Loan Association (the
"Association") indemnify any person against whom an action is brought by reason
of that person's role as a director or officer of the Association for (i) any
judgments resulting from the action; (ii) reasonable costs and expenses
(including attorney's fees) incurred in connection with the defense or
settlement of such action; and (iii) reasonable costs and expenses (including
attorney's fees) incurred in connection with enforcing the individual's
indemnification rights against the Association, assuming a final judgment is
obtained in his favor.
The mandatory indemnification provided for by federal regulations is
limited to (i) actions where a final judgment on the merits is in favor of the
officer or director and (ii) in the case of a settlement, final judgment against
the director or officer or final judgment not on the merits, except as to where
the director or officer is found negligent or to have committed misconduct in
the performance of his or her duties, where a majority of the Board of Directors
of the Association determines that the director or officer was acting in good
faith within what he was reasonably entitled to believe was the scope of his or
her employment or authority for a purpose that was in the best interests of the
Association or its members or stockholders.
In addition, the Association has a directors' and officers' liability
policy providing for insurance against certain liabilities incurred by directors
and officers of the Association while serving in their capacities as such.
Item 25. Other Expenses of Issuance and Distribution *
Underwriting Fees and Expenses................... $ 173,010
Legal Fees and Expenses.......................... 110,000
Printing, Postage and Mailing.................... 65,000
Accounting Fees and Expenses..................... 75,000
Appraisal and Business Plan Fees and Expenses.... 32,500
Blue Sky Filing Fees and Expenses
(including legal counsel)...................... 25,000
Federal Filing Fees (OTS and SEC)................ 15,000
Conversion Agent Fees............................ 7,500
Stock Transfer Agent fees and certificates....... 7,500
Other Expenses................................... 9,490
---------
Total........................................ $ 520,000
=========
-------------
* Estimated at the midpoint of the Estimated Valuation Range.
Item 26. Recent Sales of Unregistered Securities.
Not applicable.
Item 27. Exhibits:
The exhibits schedules filed as a part of this registration statement are
as follows:
1.1 Engagement Letter with Trident Securities, Inc.
1.2 Form of Agency Agreement with Trident Securities, Inc.
2 Plan of Conversion (Exhibit A to Proxy Statement filed as Exhibit
99.1)
3.1 Articles of Incorporation of High Country Bancorp, Inc.
3.2 Bylaws of High Country Bancorp, Inc.
II-4
4 Form of Common Stock Certificate of High Country Bancorp, Inc.
5 Opinion of Housley Kantarian & Bronstein, P.C. regarding legality of securities being registered
8.1 Federal Tax Opinion of Housley Kantarian & Bronstein, P.C.
8.2 State Tax Opinion
8.3 Opinion of Ferguson & Co., LLP as to the value of subscription rights for tax purposes
10.1 Proposed Employment Agreement between Salida Building & Loan Association and Larry D. Smith
10.2 Proposed Guaranty Agreement between High Country Bancorp, Inc. and Larry D. Smith
10.3 Proposed High Country Bancorp, Inc. 1997 Stock Option and Incentive Plan
10.4 Proposed High Country Bancorp, Inc. Management Recognition Plan and Trust
10.5 Salida Building & Loan Association Long-Term Incentive Plan
10.6 Proposed Salida Building & Loan Association Incentive Compensation Plan
10.7 Proposed Employment Agreement between Salida Building & Loan Association and Scott G. Erchul
10.8 Proposed Guaranty Agreement between High Country Bancorp, Inc. and Scott G. Erchul
23.1 Consent of Grimsley, White & Company
23.2 Consent of Housley Kantarian & Bronstein, P.C. (in opinion filed as Exhibit 5)
23.3 Consent of Ferguson & Co., LLP
24 Power of Attorney (reference is made to the signature page)
27 Financial Data Schedule
99.1 Proxy Statement and Form of Proxy for Solicitation of Members of Salida Building & Loan Association
* 99.2 Proposed Stock Order Form and Form of Certification
99.3 Miscellaneous Marketing Materials
99.4 Appraisal Report
- ---------------
* To be filed by amendment.
II-5
Item 28. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Act") may be permitted to directors, officers and controlling persons
of the small business issuer pursuant to the foregoing provisions, or otherwise,
the small business issuer has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act, and is therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-6
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the Town of Salida,
State of Colorado, on August 21, 1997.
HIGH COUNTRY BANCORP, INC.
By: /s/ Larry D. Smith
-------------------------------
Larry D. Smith
President
(Duly Authorized Representative)
We, the undersigned Directors of High Country Bancorp, Inc., hereby severally
constitute and appoint Larry D. Smith, who may act, with full power of
substitution, our true and lawful attorney and agent, to do any and all things
in our names in the capacities indicated below which said Larry D. Smith, who
may act, may deem necessary or advisable to enable High Country Bancorp, Inc. to
comply with the Securities Act of 1933, as amended, and any rules, regulations
and requirements of the Securities and Exchange Commission, in connection with
the registration of High Country Bancorp, Inc. common stock, including
specifically, but not limited to, power and authority to sign for 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 Larry D. Smith shall do or cause to be done by
virtue thereof.
In accordance with 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 stated.
Signatures Title Date
---------- ----- ----
/s/ Larry D. Smith President and Chief August 21, 1997
- ------------------------ Executive Officer and Director
Larry D. Smith (Principal Executive Officer)
/s/ Frank L. DeLay Chief Financial Officer August 21, 1997
- ------------------------ (Principal Financial and
Frank L. DeLay Accounting Officer)
/s/ Scott G. Erchul Vice President and Director August 21, 1997
- ------------------------
Scott G. Erchul
/s/ Robert B. Mitchell Chairman of the Board August 21, 1997
- ------------------------ of Directors
Robert B. Mitchell
/s/ Timothy R. Glenn Director August 21, 1997
- ------------------------
Timothy R. Glenn
/s/ Richard A. Young Director August 21, 1997
- ------------------------
Richard A. Young
/s/ Philip W. Harsh Director August 21, 1997
- ------------------------
Philip W. Harsh
II-7