As filed with the Securities and Exchange Commission on September 25, 1996
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
EMPIRE FEDERAL BANCORP, INC.
(Exact name of small business issuer in its charter)
Delaware 6035 [Applied for]
(State or other jurisdiction of (Primary SICC No.) (I.R.S. Employer
incorporation or organization) Identification No.)
123 South Main Street
Livingston, Montana 59047
(406) 222-1981
(Address and telephone number of principal executive offices and place of
business)
John F. Breyer, Jr., Esquire
Victor L. Cangelosi, Esquire
BREYER & AGUGGIA
1300 I Street, N.W.
Suite 470 East
Washington, D.C. 20005
(202) 737-7900
(Name, address and telephone number of agent for service)
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
Title of Each Class of Proposed Maximum Proposed Proposed Maximum Amount of
Securities Being Amount Being Offering Aggregate Offering Registration
Registered Registered(1) Price(1) Price(1) Fee
Common Stock, $0.01 Par 2,592,100 $10.00 $25,921,000 $8,939
Value
(1) Estimated solely for purposes 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.
Cross Reference Sheet showing the location in the Prospectus
of the Items of Form SB-2
1. Front of Registration Front of Registration Statement;
Statement and Outside Front Outside Front Cover Page
Cover of Prospectus
2. Inside Front and Outside Back Inside Front Cover Page; Outside Back
Cover Pages of Prospectus Cover Page
3. Summary Information and Risk
Factors Prospectus Summary; Risk Factors
4. Use of Proceeds Use of Proceeds; Capitalization
5. Determination of Offering Price Market for Common Stock; The
Conversion -- Stock Pricing
and Number of Shares to be Issued
6. Dilution *
7. Selling Security-Holders *
8. Plan of Distribution The Conversion
9. Legal Proceedings Business of the Association -- Legal
Proceedings
10. Directors, Executive Officers, Management of the Holding Company;
Promoters and Control Persons Management of the Association
11. Security Ownership of Certain
Beneficial *
Owners and Management
12. Description of Securities Description of Capital Stock
13. Interest of Named Experts and Legal and Tax Opinions; Experts
Counsel
14. Disclosure of Commission Position Part II - Item 17
on Indemnification for Securities
Act Liabilities
15. Organization Within Last Business of the Association
Five Years
16. Description of Business Business of the Holding Company;
Business of the Association
17. Management's Discussion and Management's Discussion and Analysis of
Analysis or Plan of Operation Financial Condition and Results of
Operations
18. Description of Property Business of the Association - Properties
19. Certain Relationships and Management of the Association --Transactions
Related Transactions with the Savings Bank
20. Market Price for Common Equity Outside Front Cover Page; Market for
and Related Stockholder Matters Common Stock; Dividend Policy
21. Executive Compensation Management of the Association --Executive
Compensation; and -- Benefits
22. Financial Statements Financial Statements; Pro Forma Data
23. Changes in and Disagreements *
with Accountants on Accounting
and Financial Disclosure
*Item is omitted because answer is negative or item inapplicable.
PROSPECTUS
Empire Federal Bancorp, Inc.
(Proposed Holding Company for Empire Federal Savings and Loan Association,
to be known as "Empire Federal Savings Bank")
Up to 2,254,000 Shares of Common Stock (Anticipated Maximum)
Empire Federal Bancorp, Inc. ("Holding Company"), a Delaware corporation,
is offering between 1,666,000 and 2,254,000 shares of its common stock, $.01 par
value per share ("Common Stock"), in connection with the conversion of Empire
Federal Savings and Loan Association ("Association") from a federally chartered
mutual savings and loan association to a federally chartered capital stock
savings bank, the simultaneous issuance of the Association's capital stock to
the Holding Company. The simultaneous conversion of the Association to stock
form, the issuance of the Association's capital stock to the Holding Company and
the offer and sale of the Common Stock by the Holding Company are undertaken
pursuant to a plan of conversion ("Plan" or "Plan of Conversion"), and are
referred to herein as the "Conversion." References herein to the Association
include Empire Federal Savings and Loan Association and Empire Federal Savings
Bank, as indicated by the context.
Pursuant to the Plan, nontransferable rights to subscribe for the Common
Stock ("Subscription Rights") have been granted, in order of priority, to (i)
depositors with $50.00 or more on deposit at the Association as of March 31,
1995 ("Eligible Account Holders"), (ii) the Association's employee stock
ownership plan ("ESOP"), a tax-qualified employee benefit plan, (iii) depositors
with $50.00 or more on deposit at the Association as of ________________
("Supplemental Eligible Account Holders"), and (iv) depositors of the
Association as of ________, 1996 ("Voting Record Date") and borrowers of the
Association with loans outstanding as of ____________, 1996 which continue to be
outstanding as of the Voting Record Date ("Other Members"), subject to the
priorities and purchase limitations set forth in the Plan of Conversion
("Subscription Offering"). Subscription Rights are nontransferable. Persons
selling or otherwise transferring their Subscription Rights to subscribe for
Common Stock in the Subscription Offering or subscribing for Common Stock on
behalf of another person will be subject to forfeiture of such rights and
possible further sanctions and penalties imposed by the Office of Thrift
Supervision ("OTS") or another agency of the U.S. Government. See "THE
CONVERSION -- The Subscription, Direct Community and Syndicated Community
Offerings" and "-- Limitations on Purchases of Shares." Concurrently, but
subject to the prior rights of holders of Subscription Rights, the Holding
Company is offering the Common Stock for sale to members of the general public
through a direct community offering ("Direct Community Offering") with
preference given to natural persons who are permanent residents of Park,
Gallatin and Sweet Grass Counties of Montana ("Local Community"). The
Subscription Offering and the Direct Community Offering are referred to herein
as the "Subscription and Direct Community Offering." It is anticipated that
shares of Common Stock not subscribed for or purchased in the Subscription and
Direct Community Offering will be offered to eligible members of the general
public on a best efforts basis by a selling group of broker-dealers managed by
Charles Webb & Company ("Webb"), a division of Keefe, Bruyette & Woods, Inc.
("Keefe, Bruyette"), in a syndicated offering ("Syndicated Community Offering").
The Subscription and Direct Community Offering and the Syndicated Community
Offering are referred to collectively as the "Offerings." The Holding Company
and the Association reserve the right, in their absolute discretion, to accept
or reject, in whole or in part, any or all orders in the Direct Community
Offering or Syndicated Community Offering either at the time of receipt of an
order or as soon as practicable following the termination of the Offerings. If
an order is rejected in part, the purchaser does not have the right to cancel
the remainder of the order.
FOR INFORMATION ON HOW TO SUBSCRIBE FOR SHARES OF COMMON STOCK, CALL THE STOCK
INFORMATION CENTER AT (406) ________ AND ASK FOR A WEBB REPRESENTATIVE.
FOR A DISCUSSION OF CERTAIN RISKS THAT SHOULD BE CONSIDERED BY EACH PROSPECTIVE
INVESTOR, SEE "RISK FACTORS" BEGINNING ON PAGE 1.
THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS OR ACCOUNTS AND WILL NOT BE
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC"), THE
SAVINGS ASSOCIATION INSURANCE FUND ("SAIF") OR ANY OTHER
GOVERNMENT AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("SEC"), THE OTS, THE FDIC OR ANY OTHER FEDERAL
AGENCY OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SEC, THE
OTS, THE FDIC OR ANY OTHER AGENCY OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Charles Webb & Company,
a Division of Keefe, Bruyette & Woods, Inc.
The date of this Prospectus is _____ __, 1996.
Estimated Underwriting
Purchase and Other Fees and Estimated Net
Price(1) Expenses(2) Proceeds
Minimum Price Per Share $10.00 $0.33 $9.67
Midpoint Price Per Share $10.00 $0.30 $9.70
Maximum Price Per Share $10.00 $0.27 $9.73
Maximum Price Per Share, as adjusted(3) $10.00 $0.24 $9.76
Minimum Total(4) $16,660,000 $545,000 $16,115,000
Midpoint Total(5) $19,600,000 $585,000 $19,015,000
Maximum Total(6) $22,540,000 $619,000 $21,921,000
Maximum Total, as
adjusted(3)(7) $25,921,000 $619,000 $25,302,000
(1)Determined in accordance with an independent appraisal prepared
by Keller & Company, Inc. ("Keller") as of September 6, 1996, which
states that the estimated aggregate pro forma market value of the
Holding Company and the Association, as converted, ranged from
$16,660,000 to $22,540,000 with a midpoint of $19,600,000
("Estimated Valuation Range"). See "THE CONVERSION -- Stock Pricing
and Number of Shares to be Issued." (2)Includes estimated costs to
the Holding Company and the Association arising from the Conversion,
including fees to be paid to Webb in connection with the Offerings.
Such fees may be deemed to be underwriting fees and Webb may be
deemed to be an underwriter. Actual expenses, and thus net proceeds,
may be more or less than estimated amounts. The Holding Company and
the Association have agreed to indemnify Webb against certain
liabilities, including liabilities that may arise under the
Securities Act of 1933, as amended ("Securities Act"). See "USE OF
PROCEEDS" and "THE CONVERSION -- Plan of Distribution for the
Subscription, Direct Community and Syndicated Community Offerings."
(3)Gives effect to an increase in the number of shares sold in the
Offerings due to an increase in the pro forma market value of the
Holding Company and the Association, as converted, up to 15% above
the maximum of the Estimated Valuation Range. Such shares may be
issued without the resolicitation of subscribers or any right of
cancellation. The ESOP shall have a first priority right to
subscribe for such additional shares up to an aggregate of 8% of the
Common Stock issued in the Conversion. See "THE CONVERSION -- Stock
Pricing and Number of Shares to be Issued."
(4) Assumes the issuance of 1,666,000 shares at $10.00 per share.
(5) Assumes the issuance of 1,960,000 shares at $10.00 per share.
(6) Assumes the issuance of 2,254,000 shares at $10.00 per share.
(7) Assumes the issuance of 2,592,100 shares at $10.00 per share.
Except for the ESOP, which is expected to purchase 8% of the
Common Stock issued in the Conversion, subject to the approval of
the OTS, no Eligible Account Holder, Supplemental Eligible Account
Holder or Other Member may subscribe in their capacity as such in
the Subscription Offering for shares of Common Stock having an
aggregate purchase price of more than $125,000 (12,500 shares based
on the Purchase Price); no person may purchase in the Direct
Community Offering shares of Common Stock having an aggregate
purchase price of more than $125,000 (12,500 shares based on the
Purchase Price); no person, together with associates of and persons
acting in concert with such person, may purchase in the Subscription
Offering, Direct Community Offering and the Syndicated Community
Offering shares of Common Stock having an aggregate purchase price
of more than $350,000 (35,000 shares based on the Purchase Price);
and no person, together with associates of and persons acting in
concert with such person, may purchase shares of Common Stock in the
Conversion having an aggregate purchase price of more than $350,000
(35,000 shares based on the Purchase Price). Under certain
circumstances, the maximum purchase limitation may be increased or
decreased at the sole discretion of the Association and the Holding
Company. See "THE CONVERSION -- The Subscription, Direct Community
and Syndicated Community Offerings," "-- Limitations on Purchases of
Shares" and "-- Procedure for Purchasing Shares in the Subscription
and Direct Community Offering" for other purchase and sale
limitations. The minimum purchase is 25 shares.
The Subscription Offering will expire at Noon, Mountain Time,
on _____ __, 1996 ("Expiration Date"), unless extended by the
Association and the Holding Company for up to __ days to ____ __,
1996.
Such extension may be granted without additional notice to
subscribers. The Direct Community Offering is also expected to
terminate at Noon, Mountain Time, on _____ __, 1996 or at a date
thereafter, however, in no event later than ____ __, 1997. The
Holding Company must receive at the Association's office the
accompanying original Stock Order Form (facsimile copies and
photocopies will not be accepted) and a fully executed separate
Certification Form ("Certification Form") along with full payment
(or appropriate instructions authorizing a withdrawal from a deposit
account at the Association) of $10.00 per share ("Purchase Price")
for all shares subscribed for or ordered by the Expiration Date.
Funds so received will be placed in segregated accounts created for
this purpose at the Association, and interest will be paid at the
passbook rate (___% per annum as of the date hereof) from the date
payment is received until the Conversion is consummated or
terminated. These funds will be otherwise unavailable to the
depositor until such time. Payments authorized by withdrawals from
deposit accounts will continue to earn interest at the contractual
rate until the Conversion is consummated or terminated, although
such funds will be unavailable for withdrawal until the Conversion
is consummated or terminated. Shares of Common Stock issued in the
Conversion are not deposit liabilities, will not earn interest, and
will not be insured by the FDIC, the SAIF or any other government
agency. Payment for shares of Common Stock by wire transfer will not
be accepted. Orders submitted are irrevocable until the consummation
of the Conversion. If the Conversion is not consummated within 45
days after the last day of the Subscription and Direct Community
Offering (which date will be no later than ____ __, 1997) and the
OTS consents to an extension of time to consummate the Conversion,
subscribers will be notified in writing of the time period within
which the subscriber must notify the Association of his or her
intention to increase, decrease or rescind his or her subscription.
If an affirmative response to any such resolicitation is not
received by the Holding Company or the Association from subscribers,
such orders will be rescinded and all funds will be returned
promptly with interest. If such period is not extended or, in any
event, if the Conversion is not consummated by _______ __, 1997, all
subscription funds will be promptly returned, together with accrued
interest, and all withdrawal authorizations terminated.
The Association and the Holding Company have engaged Webb as
their financial advisor and to assist the Holding Company in the
sale of the Common Stock in the Offerings. Neither Webb nor any
other registered broker-dealer is obligated to take or purchase any
shares of Common Stock in the Offerings. See "THE CONVERSION -- Plan
of Distribution for the Subscription, Direct Community and
Syndicated Community Offerings."
Prior to the Offerings, the Holding Company has not issued any
capital stock and accordingly there has been no market for the
shares offered hereby. There can be no assurance that an active and
liquid trading market for the Common Stock will develop or, if
developed, will be maintained. See "RISK FACTORS -- Absence of Prior
Market for the Common Stock." The Holding Company has received
conditional approval to list the Common Stock on the National Market
under the symbol "____." Keefe, Bruyette has advised the Holding
Company that it intends to act as a market maker for the Common
Stock following the Conversion. See "MARKET FOR COMMON STOCK."
Empire Federal Savings and Loan Association
Livingston, Montana
[Map to be filed by amendment]
THE CONVERSION IS CONTINGENT UPON APPROVAL OF THE PLAN OF CONVERSION BY AT LEAST
A MAJORITY OF THE ELIGIBLE VOTING MEMBERS OF THE ASSOCIATION, THE SALE OF AT
LEAST 1,666,000 SHARES OF COMMON STOCK PURSUANT TO THE PLAN OF CONVERSION, AND
RECEIPT OF ALL APPLICABLE REGULATORY APPROVALS.
THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS OR ACCOUNTS AND WILL NOT BE
INSURED OR GUARANTEED BY THE FDIC, THE SAIF OR ANY OTHER GOVERNMENT AGENCY.
PROSPECTUS SUMMARY
The information set forth below should be read in conjunction with and is
qualified in its entirety by the more detailed information and Consolidated
Financial Statements (including the Notes thereto) presented elsewhere in this
Prospectus. The purchase of Common Stock is subject to certain risks. See "RISK
FACTORS."
Empire Federal Bancorp, Inc.
The Holding Company is a Delaware corporation organized in September 1996
at the direction of the Association to acquire all of the capital stock that the
Association will issue upon its conversion from the mutual to stock form of
ownership. The Holding Company has not engaged in any significant business to
date. The Holding Company has received OTS approval to become a savings and loan
holding company and to acquire 100% of the capital stock of the Association.
Immediately following the Conversion, the only significant assets of the Holding
Company will be the outstanding capital stock of the Association, that portion
of the net proceeds of the Offerings permitted by the OTS to be retained by the
Holding Company and a note receivable from the ESOP evidencing a loan from the
Holding Company to fund the Association's ESOP. The Holding Company has received
approval from the OTS to retain 50% of the net proceeds of the Offerings, which
will be used for general business activities, including a loan by the Holding
Company directly to the ESOP to enable the ESOP to purchase 8% of the Common
Stock issued in the Conversion. See "USE OF PROCEEDS." Upon consummation of the
Conversion, the Holding Company initially will be a unitary savings and loan
holding company which, under existing laws, generally would not be restricted in
the types of business activities in which it may engage as long as the
Association retains a specified amount of its loans in housing-related
investments. See "REGULATION -- Savings and Loan Holding Company Regulations."
Management believes that the holding company structure and retention of proceeds
would facilitate the expansion and diversification of its operations, should it
decide to do so. There are no present plans, arrangements, agreements, or
understandings, written or oral, however, regarding any such activities or
repurchases. The principal executive office of the Holding Company is located at
123 South Main Street, Livingston, Montana 59047, and its telephone number is
(406) 222-1981.
Empire Federal Savings and Loan Association
The Association is a federally chartered mutual savings and loan
association located in Livingston, Montana, which is approximately 26 miles east
of Bozeman, Montana. Chartered in 1923 as a Montana-chartered mutual building
and loan association under the name "Empire Building and Loan Association," the
Association converted to a federal charter and adopted its current name in 1970.
In connection with the Conversion, the Association will convert to a federal
stock savings bank and change its name to "Empire Federal Savings Bank." The
Association is regulated by the OTS, its primary federal regulator, and the
FDIC, the insurer of its deposits. The Association's deposits are federally
insured by the FDIC under the SAIF. The Association is a member of the Federal
Home Loan Bank ("FHLB") System. At June 30, 1996, the Association had total
assets of $86.8 million, total deposits of $68.6 million and total equity of
$15.9 million, or 18.3% of total assets, on a consolidated basis.
The Association is a community oriented financial institution which has
traditionally offered a variety of savings products to its retail customers
while concentrating its lending activities on real estate mortgage loans.
Lending activities have been focused primarily on the origination of loans
secured by one- to four-family residential
(i)
dwellings, including an emphasis on loans for construction of residential
dwellings. To a lesser extent, lending activities also have included the
origination of multi-family, commercial real estate and home equity loans. The
Association's primary business has been that of a traditional thrift
institution, originating loans in its primary market area for its portfolio. At
June 30, 1996, the Association's gross loan portfolio totaled $43.1 million, of
which 81.7% were one- to four-family residential mortgage loans, 3.2% were
construction loans (most of which related to one- to four-family residences),
5.4% were multi-family loans, and 2.7% were commercial real estate loans. In
addition the Association has maintained a significant portion of its assets in
investment and mortgage-backed securities. Similar to its lending activities,
the Association's investment portfolio has been weighted toward mortgage-backed
securities secured by one- to four-family residential properties. The portfolio
also includes U.S. Government agency securities. Investment securities,
including mortgage-backed securities, totaled $39.1 million, or 45.0% of total
assets, at June 30, 1996. In addition to interest and dividend income on loans
and investments, the Association receives other income from the sale of
insurance products through its wholly-owned subsidiary, Dime Service
Corporation.
The Association's market area is comprised of Park, Gallatin and Sweet
Grass Counties of South Central Montana. The Association faces strong
competition in its market area. See "RISK FACTORS -- Dependence on Local Economy
and Competition Within Market Area." The Association's principal executive
office is located at 123 South Main Street, Livingston, Montana 59047, and its
telephone number is (406) 222-1981.
The Conversion
The Association is converting from a federally chartered mutual savings
and loan association to a federally chartered capital stock savings bank and, in
connection therewith, will issue all of its outstanding capital stock to the
Holding Company in exchange for 50% of the net Conversion proceeds.
Simultaneously, the Holding Company will sell its Common Stock in the Offerings.
The Conversion is subject to the approval of the OTS, as well as the
Association's members at a special meeting to be held on ____ __, 1996. After
the Conversion, depositors and borrowers of the Association will have no voting
rights in the Holding Company, unless they become stockholders.
The Plan of Conversion requires that the aggregate purchase price of the
Common Stock to be issued in the Conversion be based upon an independent
appraisal of the estimated pro forma market value of the Holding Company and the
Association, as converted. Keller has advised the Association that in its
opinion, at September 6, 1996, the aggregate estimated pro forma market value of
the Holding Company and the Association, as converted, ranged from $16,660,000
to $22,540,000, with a midpoint of $19,600,000, or from 1,666,000 shares to
2,254,000 shares, with a midpoint of 1,960,000 shares, assuming a $10.00 per
share Purchase Price. The appraisal of the pro forma market value of the Holding
Company and the Association as converted is based on a number of factors and
should not be considered a recommendation to buy shares of the Common Stock or
any assurance that after the Conversion the shares of Common Stock will be able
to be resold at or above the Purchase Price. The appraisal will be updated or
confirmed prior to the consummation of the Conversion.
The Board of Directors and management of the Association believe that the
stock form of ownership is preferable to the mutual form of organization,
especially in light of the competitive and heavily regulated environment within
which the Association operates. The Board of Directors and management believe
that the Conversion is in the best interests of the Association's members and
its communities. The Conversion is intended to (i) improve the competitive
position of the Association in its market area and support possible future
expansion and diversification of operations (currently, there are no specific
plans, arrangements or understandings, written or oral, regarding any such
activities); (ii) afford members of the Association and others the opportunity
to become stockholders of the Holding Company and thereby participate more
directly in, and contribute to, any future growth of the Holding Company and the
Association; and (iii) provide future access to capital markets. See "THE
CONVERSION -- Purposes of Conversion."
(ii)
Tax Consequences of the Conversion
The Association has received an opinion of counsel that the Conversion
will constitute a nontaxable reorganization under the Internal Revenue Code of
1986, as amended ("Code"), and will not result in any federal income tax
liability to the Association, its account holders, or the Holding Company. The
Association has also received an opinion from Huppert and Swindlehurst, P.C.
that, assuming the Conversion does not result in any federal income tax
liability to such persons and entities, the Conversion will not result in any
Montana income tax liability to such persons or entities. Prospective
investors are urged to consult with their own tax advisors regarding the tax
consequences of the Conversion particular to them. See "RISK FACTORS --
Possible Adverse Income Tax Consequences of the Distribution of Subscription
Rights" and "THE CONVERSION -- Effects of Conversion to Stock Form on
Depositors and Borrowers of the Association -- Tax Effects."
The Subscription, Direct Community and Syndicated Community Offerings
The Holding Company is offering up to 2,254,000 shares of Common Stock at
$10.00 per share to holders of Subscription Rights in the following order of
priority: (i) Eligible Account Holders; (ii) the Association's ESOP; (iii)
Supplemental Eligible Account Holders; and (iv) Other Members. In the event the
number of shares offered in the Conversion is increased above the maximum of the
Estimated Valuation Range, the Association's ESOP shall have a first priority
right to purchase any such shares exceeding the maximum of the Estimated
Valuation Range up to an aggregate of 8% of the Common Stock issued in the
Conversion. Concurrently, and subject to the prior rights of holders of
Subscription Rights, any shares of Common Stock not subscribed for in the
Subscription Offering are being offered in the Direct Community Offering to the
general public with preference being given to natural persons who are permanent
residents of the Local Community. The Holding Company and the Association have
engaged Webb to consult with and advise the Holding Company and the Association
in the Offerings, and Webb has agreed to use its best efforts to assist the
Holding Company with the solicitation of subscriptions and purchase orders for
shares of Common Stock in the Offerings. Webb is not obligated to take or
purchase any shares of Common Stock in the Offerings. If all shares of Common
Stock to be issued in the Conversion are not sold through the Subscription and
Direct Community Offering, then the Holding Company expects to offer the
remaining shares in the Syndicated Community Offering managed by Webb, which
would occur as soon as practicable following the close of the Subscription and
Direct Community Offering but may commence during the Subscription and Direct
Community Offering, subject to the prior rights of subscribers in the
Subscription Offering and to the right of the Holding Company to accept or
reject orders in the Direct Community Offering and the Syndicated Community
Offering in whole or in part. All shares of Common Stock will be sold at the
same price per share in the Syndicated Community Offering as in the Subscription
and Direct Community Offering. Orders submitted are irrevocable until the
consummation of the Conversion. See "USE OF PROCEEDS," "PRO FORMA DATA" and "THE
CONVERSION -- Stock Pricing and Number of Shares to be Issued." The Subscription
Offering will expire at Noon, Mountain Time, on _____ __, 1996, unless extended
by the Association and the Holding Company for up to __ days. The Direct
Community Offering and Syndicated Community Offering, if any, are also expected
to terminate at Noon, Mountain Time, on _____ __, 1996, and may terminate on a
date thereafter, however, in no event later than ____ __, 1997.
Restrictions on Transfer of Subscription Rights
No person may 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 the exercise of
Subscription Rights. Each person exercising Subscription Rights will be required
to certify that a purchase of Common Stock is solely for the purchaser's own
account and there is no agreement or understanding regarding the sale or
transfer of such shares. The Holding Company and the Association may pursue any
and all legal and equitable remedies in the event they become aware of the
transfer of Subscription Rights and will not honor orders known by them to
involve the transfer or purported transfer of Subscription Rights.
(iii)
Prospectus Delivery and Procedure for Purchasing Common Stock
To ensure that each purchaser receives a Prospectus at least 48 hours
prior to the Expiration Date, in accordance with Rule 15c2-8 under the
Securities Exchange Act of 1934, as amended ("Exchange Act"), no Prospectus will
be mailed later than five days or hand delivered later than two days prior to
the Expiration Date. Execution of the Stock Order Form will confirm receipt or
delivery of a Prospectus in accordance with Rule 15c2-8. Stock Order Forms will
be distributed only with a Prospectus.
To ensure that Eligible Account Holders, Supplemental Eligible Account
Holders and Other Members are properly identified as to their stock purchase
priorities, such parties must list all deposit accounts, or in the case of Other
Members who are only borrowers, loans held at the Association, on the Stock
Order Form giving all names on each deposit account and/or loan and the account
and/or loan numbers at the applicable eligibility date.
Full payment by check, cash (only if delivered in person at the
Association), money order, bank draft or withdrawal authorization (payment by
wire transfer will not be accepted) must accompany an original Stock Order Form
(facsimile copies and photocopies will not be accepted) and a fully executed
separate Certification Form. Orders cannot and will not be accepted without a
fully executed separate Certification Form. See "THE CONVERSION -- Procedure for
Purchasing Shares in the Subscription and Direct Community Offering."
Purchase Limitations
Except for the ESOP, which is expected to subscribe for 8% of the shares
of Common Stock issued in the Conversion, no Eligible Account Holder,
Supplemental Eligible Account Holder or Other Member may purchase in their
capacity as such in the Subscription Offering shares of Common Stock having an
aggregate purchase price of more than $125,000 (12,500 shares based on the
Purchase Price); no person may purchase in the Direct Community Offering shares
of Common Stock having an aggregate purchase price of more than $125,000 (12,500
shares based on the Purchase Price); no person, together with associates of and
persons acting in concert with such person, may purchase in the Direct Community
Offering and the Syndicated Community Offering shares of Common Stock having an
aggregate purchase price of more than $350,000 (35,000 shares based on the
Purchase Price); and no person, together with associates of and persons acting
in concert with such person, may purchase shares of Common Stock in the
Conversion having an aggregate purchase price of more than $350,000 (35,000
shares based on the Purchase Price). This maximum purchase limitation may be
increased or decreased as consistent with OTS regulations in the sole discretion
of the Holding Company and the Association, subject to any required regulatory
approval. The minimum purchase is 25 shares. In addition, stock orders received
either through the Direct Community Offering or the Syndicated Community
Offering may be accepted or rejected, in whole or in part, at the discretion of
the Holding Company and the Association. See "THE CONVERSION -- Limitations on
Purchases of Shares." If an order is rejected in part, the purchaser does not
have the right to cancel the remainder of the order. In the event of an
oversubscription, shares will be allocated in accordance with the Plan of
Conversion. See "THE CONVERSION -- The Subscription, Direct Community and
Syndicated Community Offerings."
Stock Pricing and Number of Shares to be Issued in the Conversion
The Purchase Price in the Offerings is a uniform price for all
subscribers, including members of the Holding Company's and the Association's
Boards of Directors and their managements and the Association's ESOP, and was
set by the Boards of Directors of the Holding Company and the Association. The
number of shares to be offered at the Purchase Price is based upon an
independent appraisal of the aggregate pro forma market value of the Holding
Company and the Association, as converted, which was estimated by Keller to
range from $16,660,000 to $22,540,000 as of September 6, 1996, or from 1,660,000
to 2,254,000 shares based on the Purchase Price. See "THE CONVERSION -- Stock
Pricing and Number of Shares to be Issued." The appraisal of the pro forma value
of the Holding Company and the Association as converted will be updated or
confirmed at the completion of the Offerings. The maximum of the Estimated
Valuation Range may be increased by up to 15% and the number of shares of Common
Stock to be issued in the Conversion may be increased to 2,592,100 shares due to
material changes in the
(iv)
financial condition or operations of the Association or changes in market
conditions or general financial and economic conditions. Subscribers will be
resolicited and will not be permitted to modify or cancel their subscriptions
unless the gross proceeds from the sale of the Common Stock are less than the
minimum of the Estimated Valuation Range or more than 15% above the maximum of
the Estimated Valuation Range. The appraisal is not intended and should not be
construed as a recommendation of any kind as to the advisability of purchasing
such stock nor can assurance be given that purchasers of the Common Stock in the
Conversion will be able to sell such shares after the Conversion at a price that
is equal to or above the Purchase Price. Furthermore, the pro forma
stockholders' equity is not intended to represent the fair market value of the
Common Stock and may be greater than amounts that would be available for
distribution to stockholders in the event of liquidation.
Benefits of the Conversion to Management
ESOP. In connection with the Conversion, the Association will adopt the
ESOP, a tax-qualified employee benefit plan, for the benefit of officers and
employees of the Association. The ESOP intends to purchase 8% of the shares of
Common Stock issued in the Offerings (180,320 shares of Common Stock, based on
the issuance of the maximum of the Estimated Valuation Range). In the event that
the ESOP's subscription is not filled in its entirety, the ESOP may purchase
additional shares in the open market or may purchase additional authorized but
unissued shares with cash contributed to it by the Association. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Impact of New Accounting Pronouncements and Regulatory Policies --
Accounting for Employee Stock Ownership Plans" and "MANAGEMENT OF THE
ASSOCIATION -- Benefits -- Employee Stock Ownership Plan."
Management Recognition Plan. The Holding Company expects to seek
stockholder approval of the Management Recognition Plan and Trust ("MRP") at a
meeting of stockholders occurring no earlier than six months following
consummation of the Conversion. The MRP, which will be funded with a number of
shares equal to 4% of the number of shares issued in the Conversion, is a
non-tax-qualified restricted stock plan intended for the benefit of key
employees and directors of the Holding Company and the Association. If
stockholder approval of the MRP is obtained, it is expected that shares of
Common Stock of the Holding Company will be awarded pursuant to such plan to key
employees and directors of the Holding Company and the Association (which shares
will be awarded at no cost to such recipients). Although no specific award
determinations have been made, the Association anticipates that if stockholder
approval is obtained it would provide awards to its directors, officers and
employees to the extent permitted by applicable regulations. OTS regulations
currently provide that no individual officer or employee may receive more than
25% of the shares reserved for issuance under any stock compensation plan and
that non-employee directors may not receive more than 5% of such shares
individually or 30% in the aggregate for all non-employee directors.See
"MANAGEMENT OF THE ASSOCIATION -- Benefits -- Management Recognition Plan."
Stock Option Plan. The Holding Company expects to seek stockholder
approval of the 1996 Stock Option Plan ("Stock Option Plan"), which will reserve
a number of shares equal to 10% of the number of shares issued in the
Conversion, at a meeting of stockholders occurring no earlier than six months
following consummation of the Conversion. If stockholder approval of the Stock
Option Plan is obtained, it is expected that options to acquire up to 259,210
shares of Common Stock of the Holding Company will be available for award to
key employees and directors of the Holding Company and the Association (based
on the issuance of the maximum of the Estimated Valuation Range). The exercise
price of such options will be 100% of the fair market value of the Common Stock
on the date the option is granted. Although no specific award determinations
have been made, the Association anticipates that if stockholder approval is
obtained it would provide awards to its directors, officers and employees to
the extent permitted by applicable regulations. OTS regulations currently
provide that no individual officer or employee may receive more than 25% of the
shares reserved for issuance under any stock compensation plan and that
non-employee directors may not receive more than 5% of such shares
individually or 30% in the aggregate for all non-employee directors. Options
granted to officers and directors are valuable only to the extent that such
options are exercisable and the market price for the underlying share of
common stock is in excess of the exercise price. An option effectively
eliminates the market risk of holding the underlying security since no
consideration is paid for
(v)
the option until it is exercised and, therefore, the recipient may, within the
limits of the term of the option, wait to exercise the option until the market
price exceeds the exercise price. See "MANAGEMENT OF THE ASSOCIATION -- Benefits
- -- 1996 Stock Option Plan."
Employment Agreements. The Holding Company and the Association have agreed
to enter into employment agreements with Mrs. Harris and Mr. Ernest A. Sandberg,
Treasurer, Secretary and Chief Financial Officer of the Holding Company and
Executive Vice President and Secretary of the Association, which provide certain
benefits in the event of their termination following a change in control of the
Holding Company and the Association. In the event of a change in control of the
Holding Company or the Association, as defined in the agreements, Mrs. Harris
and Mr. Sandberg will be entitled to a cash severance amount equal to 2.99 times
her or his average annual compensation during the five-year period preceding the
change in control. Assuming a change of control occurred as of June 30, 1996,
the aggregate amounts payable to Mrs. Harris and Mr. Sandberg under these
agreements would have been approximately $309,000 and $284,000, respectively.
See "MANAGEMENT OF THE ASSOCIATION -- Executive Compensation -- Employment
Agreements."
For information concerning the possible voting control of officers,
directors and employees following the Conversion, see "RISK FACTORS -- Anti-
takeover Considerations -- Voting Control by Insiders."
Use of Proceeds
The net proceeds from the sale of the Common Stock are estimated to range
from $16.2 million to $22.0 million, or to $25.3 million if the Estimated
Valuation Range is increased by 15%, depending upon the number of shares sold
and the expenses of the Conversion. The Holding Company has received the
approval of the OTS to purchase all of the capital stock of the Association to
be issued in the Conversion in exchange for 50% of the net proceeds. This will
result in the Holding Company retaining approximately $8.1 million to $11.0
million of the net proceeds, or up to $12.7 million if the Estimated Valuation
Range is increased by 15%, and the Association receiving an equal amount.
Receipt of 50% of the net proceeds of the sale of the Common Stock will
increase the Association's capital and will support the expansion of the
Association's existing business activities. The Association will use the funds
contributed to it for general corporate purposes, including, initially, local
lending and securities of the type currently held by the Association. Shares of
Common Stock may be purchased with funds on deposit at the Association, which
will reduce deposits by the amounts of such purchases. The net amount of funds
available to the Association for investment following receipt of the Conversion
proceeds will be reduced to the extent shares are purchased with funds on
deposit.
A portion of the net proceeds retained by the Holding Company will be used
for a loan by the Holding Company to the Association's ESOP to enable it to
purchase 8% of the shares of Common Stock issued in the Conversion. Such loan
would fund the entire purchase price of the ESOP shares ($1.8 million at the
maximum of the Estimated Valuation Range) and would be repaid principally from
the Association's contributions to the ESOP and from dividends payable on the
Common Stock held by the ESOP. The remaining proceeds retained by the Holding
Company initially will be invested primarily in certificates of deposit and
securities of the type currently held by the Association. Such proceeds will be
available for additional contributions to the Association in the form of debt or
equity, to support future growth and diversification activities, as a source of
dividends to the stockholders of the Holding Company and for future repurchases
of Common Stock (including possible repurchases to fund the MRP or to provide
shares to be issued upon exercise of stock options) to the extent permitted
under Delaware law and OTS regulations. Currently, as discussed below under "USE
OF PROCEEDS," there are no specific plans, arrangements, agreements or
understandings, written or oral, regarding any of such activities.
(vi)
Market for Common Stock
The Holding Company has never issued capital stock to the public and,
consequently, there is no existing market for the Common Stock. The Holding
Company has received conditional approval to have the Common Stock listed on the
Nasdaq National Market under the symbol "____." Keefe, Bruyette has
indicated its intention to act as a market maker in the Common Stock following
the consummation of the Conversion, depending on trading volume and subject to
compliance with applicable laws and regulatory requirements. Furthermore, Webb
has agreed to use its best efforts to assist the Holding Company in obtaining
additional market makers for the Common Stock. No assurance can be given that an
active and liquid trading market for the Common Stock will develop. Further, no
assurance can be given that purchasers will be able to sell their shares at or
above the Purchase Price after the Conversion. See "RISK FACTORS -- Absence of
Prior Market for the Common Stock" and "MARKET FOR COMMON STOCK."
Dividends
The Board of Directors of the Holding Company will consider a dividend
policy following the consummation of the Conversion. Declarations and payments
of dividends by the Board of Directors will depend upon a number of factors,
including the amount of the net proceeds retained by the Holding Company,
capital requirements, regulatory limitations, the Association's and the Holding
Company's financial condition and results of operations, tax considerations and
general economic conditions. In order to pay such cash dividends, however, the
Holding Company must have available cash either from the net proceeds raised in
the Offerings and retained by the Holding Company, dividends received from the
Association or earnings on Holding Company assets. There are certain limitations
on the payment of dividends from the Association to the Holding Company. See
"REGULATION -- Federal Regulation of Savings Associations -- Limitations on
Capital Distributions." No assurances can be given that any dividends will be
declared or, if declared, what the amount of dividends will be or whether such
dividends, once declared, will continue. See "DIVIDEND POLICY."
Officers' and Directors' Common Stock Purchases and Beneficial Ownership
Officers and directors of the Association (seven persons) are expected to
subscribe for an aggregate of approximately $690,000 of Common Stock, or 3.1%
of the shares based on the maximum of the Estimated Valuation Range. See "THE
CONVERSION -- Shares to be Purchased by Management Pursuant to Subscription
Rights." In addition, purchases by the ESOP and allocations under the MRP, and
the exercise of stock options issued under the Stock Option Plan, will increase
the number of shares beneficially owned by officers, directors and employees.
See "RISK FACTORS -- Anti-takeover Considerations -- Voting Control by
Insiders." The MRP and Stock Option Plan are subject to approval by the
stockholders of the Holding Company at a meeting to be held no earlier than six
months following consummation of the Conversion.
Risk Factors
See "RISK FACTORS" for a discussion of certain risks related to the
Offerings that should be considered by all prospective investors, including,
interest rate risk; declining interest rate spread and return on equity after
Conversion; management succession; recapitalization of SAIF and its impact on
SAIF premiums; certain lending considerations; dependence on local economy and
competition within market area; anti-takeover considerations; absence of prior
market for the Common Stock; dilutive effect of benefit programs; possible
increase in the number of shares issued in the Conversion; possible adverse
income tax consequences of the distribution of Subscription Rights; regulatory
oversight and possible legislation.
(vii)
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following tables set forth certain information concerning the
consolidated financial position and results of operation of the Association at
the dates and for the periods indicated. This information is qualified in its
entirety by reference to the detailed information and Consolidated Financial
Statements and Notes thereto appearing elsewhere in this Prospectus.
At June 30,
1996 1995 1994 1993 1992
(In Thousands)
SELECTED FINANCIAL
CONDITION DATA:
Total assets $86,810 $85,495 $86,143 $83,107 $78,586
Cash and interest-bearing
deposits 2,499 2,196 2,098 1,892 2,857
Investment and
mortgage-backed securities
available for sale 13,877 1,192 1,081 -- --
Investment and
mortgage-backed securities
held-to-maturity 25,196 39,441 38,805 38,010 36,222
Loans receivable, net 41,882 39,432 41,387 40,347 37,038
Deposits 68,548 67,064 68,336 65,234 62,835
Advances from FHLB 1,500 1,751 2,189 4,106 3,513
Total equity 15,876 15,500 14,475 12,792 11,534
Year Ended June 30,
1996 1995 1994 1993 1992
(In Thousands)
SELECTED OPERATING DATA:
Interest income $6,304 $6,305 $6,272 $6,664 $6,627
Interest expense 3,310 2,938 2,641 2,955 3,562
Net interest income 2,994 3,367 3,631 3,709 3,065
Provision for loan losses 55 -- -- 82 31
Net interest income after
provision for loan losses 2,939 3,367 3,631 3,627 3,034
Non-interest income:
Insurance commission income 688 691 589 461 326
Loan origination fees and
service charges 145 130 149 141 145
Other income 45 36 37 25 57
Total other income 878 857 775 627 528
Non-interest expense:
Compensation and
benefits 1,615 1,542 1,385 1,134 955
Occupancy and equipment 340 264 268 262 244
Deposit insurance premiums 185 226 177 139 152
Other general and
administrative 646 651 674 542 477
Provision for losses on real
estate owned -- -- -- 61 406
Total non-interest expense 2,786 2,683 2,504 2,138 2,234
Income before income taxes 1,031 1,541 1,902 2,116 1,328
Income tax expense 399 589 713 857 498
Income before cumulative effect of
change in accounting principle 632 952 1,189 1,259 830
Cumulative effect of change in
accounting for income taxes -- -- 56 -- --
Net income $ 632 $ 952 $ 1,245 $ 1,259 $ 830
(viii)
At or For the Year Ended June 30,
1996 1995 1994 1993 1992
Performance Ratios:
Return on average assets (net income
divided by average total assets) 0.72% 1.12% 1.47% 1.55% 1.10%
Return on average equity (net income
divided by average equity) 3.99 6.33 9.13 10.25 7.42
Average interest-earning assets
to average interest-bearing
liabilities 119.33 118.48 117.34 118.34 116.99
Net interest income after provision
for loan losses to total
other expenses 105.49 125.49 145.02 169.63 135.84
Interest rate spread 2.80 3.33 3.87 3.96 3.31
Net yield on average interest-earning
assets 3.57 3.97 4.43 4.63 4.12
Efficiency ratio (non-interest
expense divided by the sum of net
interest income and non-interest
income) 71.95 63.52 56.83 49.32 62.17
Equity Ratios:
Average equity to average assets
ratio (average equity divided
by average total assets) 18.11 17.07 16.08 15.16 14.80
Equity to assets at year end 18.29 18.13 16.80 15.39 14.68
Asset quality ratios:
Non-performing assets to total
assets -- -- 0.02 0.62 0.65
Non-performing loans to
total assets -- -- 0.02 0.06 0.06
Non-performing loans to
net loans -- -- 0.04 0.13 0.12
Allowance for loan losses, REO and
other repossessed assets to
non-performing assets * * 966.67 117.51 91.36
Allowance for loan losses to total
loans outstanding 0.46 0.36 0.34 0.35 0.17
At June 30,
1996 1995 1994 1993 1992
OTHER DATA:
Number of:
Real estate loans outstanding 744 765 824 853 864
Deposit accounts 10,633 10,623 10,692 10,540 10,613
Full-service offices 3 3 3 3 3
---------
* Not meaningful.
(ix)
RISK FACTORS
Before investing in shares of the Common Stock offered hereby, prospective
investors should carefully consider the matters presented below, in addition to
the matters discussed elsewhere in this Prospectus.
Above Average Interest Rate Risk Associated With Fixed-Rate Loan and Mortgage-
Backed Securities Portfolio
General. The mismatch between maturities and interest rate sensitivities
of balance sheet items results in interest rate risk. The Association is subject
to above average interest rate risk because of its practice of originating
primarily fixed-rate loans, which, unlike adjustable rate loans, do not reprice
in response to changes in interest rates. Like most of the savings industry, the
interest-earning assets of the Association have longer effective maturities than
its deposits, which largely mature or are subject to repricing within a shorter
period of time. Unlike many savings institutions, however, the Association holds
a significant amount of its assets in fixed-rate loans that do not reprice in
response to changes in interest rates. The majority of the Association's
residential mortgage loans are fixed-rate with maturities up to 20 years and are
retained in the Association's loan portfolio. In addition, the Association has
$31.2 million or 35.6% of its total assets in fixed rate mortgaged-backed
securities that do not reprice in response to changes in interest rate.
Accordingly, a material and prolonged increase in interest rates could be
expected to have a greater adverse effect on the net interest income of the
Association relative to that of other savings institutions that hold a
materially larger portion of their assets in adjustable rate loans or in
fixed-rate one- to four-family mortgage loans that are originated for committed
sale in the secondary market, or in a combination thereof. Because of its
capital position, the Association has accepted the above average interest rate
risk associated with fixed-rate loans and fixed-rate mortgage-backed securities
in an effort to maximize yield. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Liquidity and Capital
Resources."
Potential Adverse Impact on Results of Operations. The Association's
profitability is substantially dependent on its net interest income, which is
the difference between the interest income received from its interest-earning
assets and the interest expense incurred in connection with its interest-bearing
liabilities. When an institution's interest-bearing liabilities exceed its
interest-earning assets which mature within a given period of time, material and
prolonged increases in interest rates generally would adversely affect net
interest income, while material and prolonged decreases in interest rates
generally would have a favorable effect on net interest income.
The extent of interest rate risk to which the Association is subject is
monitored by management by modeling the change in net portfolio value ("NPV")
over a variety of interest rate scenarios. NPV is the present value of expected
cash flows from assets, liabilities and off-balance sheet contracts. The
calculation is intended to illustrate the change in NPV that will occur in the
event of an immediate and sustained change in interest rates of at least 200
basis points with no effect given to any steps which management might take to
counter the effect of that interest rate movement. At June 30, 1996, the
Association's NPV as a percent of present value of assets was 20.49%. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Asset and Liability Management and Interest Rate Risk" for a
discussion of the NPV method of analyzing interest rate risk and for an
illustration of the effect of an increase in interest rates on the Association's
earnings.
Changes in interest rates can affect the amount of loans originated by an
institution, as well as the value of its loans and other interest-earning assets
and the resultant ability to realize gains on the sale of such assets. Changes
in interest rates also can result in disintermediation, which is the flow of
funds away from savings associations into direct investments, such as U.S.
Government and corporate securities, and other investment vehicles which,
because of the absence of federal insurance premiums and reserve requirements,
generally can pay higher rates of return than financial intermediaries such as
commercial banks and thrift institutions.
1
Changes in the level of interest rates also affect the Association's
portfolio of mortgage-backed securities. Payments in the Association's
mortgage-backed securities may be affected by declining and rising interest rate
environments. In a low and falling interest rate environment, prepayments could
be expected to increase. The Association's adjustable-rate instruments would be
expected to generate lower yields as a result of the effect of falling interest
rates on the indices for determining payment of interest. Additionally, the
increased principal payments received may be subject to reinvestment at lower
rates. Conversely, in a period of rising interest rates, prepayments would be
expected to decrease, which would make less principal available for reinvestment
at higher rates. In a rising interest rate environment, adjustable-rate
instruments generally would generate higher yields to the extent that the
indices for determining payment of interest did not exceed the lifetime interest
rate caps. Such changing interest rate environment may subject the Association's
fixed and variable rate mortgage-backed securities to yield and price
volatility.
Declining Interest Rate Spread and Return on Equity After Conversion
Return on equity (net income for a given period divided by average equity
during that period) is a ratio used by many investors to compare the performance
of a particular financial institution to its peers. The Holding Company's
post-Conversion pro forma return on equity will be less than the Association's
pre-Conversion return on equity because of the increase in consolidated equity
of the Holding Company that will result from the net proceeds of the Offerings.
See "SELECTED CONSOLIDATED FINANCIAL INFORMATION" for numerical information
regarding the Association's historical returns on equity and "CAPITALIZATION"
for a discussion of the Holding Company's estimated pro forma consolidated
capitalization as a result of the Conversion.
For the three years ended June 30, 1996, 1995 and 1994 the Association's
return on average equity was 3.99%, 6.33%, and 9.13%, respectively. In order for
the Holding Company to achieve a return on equity comparable to the historical
levels achieved by the Association prior to the Conversion, the Holding Company
would have to either increase net income or reduce stockholders' equity, or
both, commensurate with the increase in equity as a result of the Conversion.
Reductions in equity could be achieved by, among other things, the payment of
regular cash dividends or periodic special dividends (although no assurances can
be given as to whether any dividends will be paid or, if paid, their amount and
frequency), the repurchase of shares of Common Stock subject to regulatory
restrictions, the acquisition of other financial institutions (neither the
Holding Company nor the Association has any present plans, arrangements, or
understandings, written or oral, regarding any repurchase or acquisitions), or
distributions to stockholders in the form of returns of capital (neither the
Holding Company nor the Association has any current plans regarding
such distributions). See "DIVIDEND POLICY" and "USE OF PROCEEDS."
Achievement of increased net income levels will depend on several
important factors outside the control of management, such as general economic
conditions, including the level of market interest rates, competition and
related factors, among others. See "-- Dependence on Local Economy and
Competition Within Market Area" and "-- Potential Adverse Impact of Changes in
Interest Rates." The Association has experienced a decrease in its interest rate
spread as the weighted average yield on its loan portfolio has decreased while
the weighted average rate paid on its interest-bearing liabilities has
increased. In addition to the contraction in net interest rate spread that the
Association has experienced in recent periods, and which can be expected to
continue, the expenses associated with the ESOP and the MRP (see "PRO FORMA
DATA") along with other post-Conversion expenses, are expected to contribute
initially to reduced earnings levels. The Association intends to deploy the net
proceeds of the Offerings to increase earnings per share and book value per
share without assuming undue risk, with the goal of maximizing its return on
equity. This goal will likely take a number of years to achieve and no
assurances can be given that this goal can or will be attained.
Management Succession
The Association believes that its success in serving the needs of its
community has been due largely to the local ties established by its directors
and management over the Association's 73-year history. The current members of
the Board of Directors and management of the Association have been affiliated
with the institution for an average
2
of 25 years. There can be no assurance that adequate replacements for Mrs.
Harris and Mr. Sandberg could be found if the Association were to lose their
services. See "MANAGEMENT OF THE HOLDING COMPANY" and "MANAGEMENT OF THE
ASSOCIATION -- Directors and Executive Officers."
Recapitalization of SAIF and its Impact on SAIF Premiums
Effective January 1, 1996, the FDIC substantially reduced deposit
insurance premiums for well-capitalized, well-managed financial institutions
that are members of the Bank Insurance Fund ("BIF"). Under the new assessment
schedule, approximately 92% of BIF members pay only the statutory minimum annual
assessment of $2,000. With respect to SAIF member institutions, the FDIC has
retained the existing rate schedule of 23 to 31 basis points. The Association
is, and after the Conversion will remain, a member of SAIF rather than BIF. SAIF
premiums may not be reduced for several years because SAIF has lower reserves
than BIF. Because deposit insurance premiums are often a significant component
of non-interest expense for insured depository institutions, the reduction in
BIF premiums may place the Association at a competitive disadvantage since
BIF-insured institutions (such as most commercial banks) may be able to offer
more attractive loan rates, deposit rates, or both.
Proposed federal legislation would recapitalize the SAIF and resolve the
current premium disparity by requiring savings institutions such as the
Association to pay a one-time assessment to increase SAIF's reserves to $1.25
per $100 of deposits that is expected to be approximately 80 basis points on the
amount of deposits held by a SAIF-member institution. The payment of a one-time
fee would have the effect of immediately reducing the capital and pre-tax
earnings of SAIF-member institutions by the amount of the fee. Based on the
Association's assessable deposits of $68.5 million at March 31, 1995, a one-time
assessment of 80 basis points would equal approximately $550,000 before taxes.
Although not assured, such assessment is expected to be tax deductible. This
change, if incurred, would represent, on a pro forma basis at June 30, 1996, a
decrease in book value per share of $0.33 and $0.24 based on the sale of shares
at the minimum of the Estimated Valuation Range and at the maximum of the
Estimated Valuation Range, respectively. Management cannot predict whether any
legislation imposing such a fee, will be enacted, or, if enacted, the amount or
timing of any one-time fee or whether ongoing SAIF premiums will be reduced to a
level equal to that of BIF premiums. See "REGULATION."
Certain Lending Considerations
Historically, the Association has been a portfolio lender, maintaining the
residential mortgage loans it originates in its portfolio rather than selling
them in the secondary market to the Federal Home Loan Mortgage Corporation
("FHLMC") or the Federal National Mortgage Association ("FNMA"). The Association
currently intends to continue this practice after the consummation of the
Conversion. A significant portion of the Association's residential mortgage
loans are not readily saleable in the secondary market because they are not
originated in conformity with the purchase requirements of the FHLMC or the FNMA
(i.e. "non-agency-conforming"). Although such loans satisfy the Association's
underwriting requirements, they are non-agency- conforming because they often
have irregular monthly payment dates and do not satisfy various other
requirements imposed by the FHLMC and FNMA. Accordingly, the Association's
non-conforming loans could be sold only after incurring certain costs and/or
discounting the purchase price.
Dependence on Local Economy and Competition Within Market Area
The Association has been and intends to continue to operate as an
independent community-oriented financial institution with a focus on servicing
customers in Park, Gallatin and Sweet Grass Counties. At June 30, 1996, the
Association's loan portfolio consisted of loans made to borrowers and
collateralized by properties located principally in this market area.
Principally all of the Association's depositors reside in this market area as
well.
A downturn in the economy of the Association's market area could have an
adverse effect on the quality of the Association's loan portfolio. In addition,
because the Association operates in a market area with a small population, the
Association's ability to achieve loan and deposit growth is limited. Future
growth opportunities for
3
the Association depend largely on market area growth and the Association's
ability to compete effectively within and outside its market area.
The Association faces strong competition both in originating loans and
attracting deposits. This competition arises from savings institutions,
commercial banks, credit unions, mortgage banks and securities brokerage firms,
which operate within the Association's market area. This competition could
adversely affect the Association's future growth and earnings prospects.
Anti-takeover Considerations
Provisions in the Holding Company's Governing Instruments and Delaware
Law. Certain provisions included in the Holding Company's Certificate of
Incorporation and in the Delaware General Corporation Law ("DGCL") might
discourage potential takeover attempts, particularly those that have not been
negotiated with the Board of Directors. As a result, these provisions might
preclude takeover attempts that certain stockholders may deem to be in their
best interest and might tend to perpetuate existing management. These provisions
include, among other things, a provision limiting voting rights of beneficial
owners of more than 10% of the Common Stock, supermajority voting requirements
for certain business combinations, staggered terms for directors, non-cumulative
voting for directors, limits on the calling of special meetings, and specific
notice requirements for stockholder nominations and proposals. In addition, the
Certificate of Incorporation provides for the election of directors to staggered
terms of three years and for their removal without cause only upon the vote of
holders of 80% of the outstanding voting shares. Certain provisions of the
Certificate of Incorporation of the Holding Company cannot be amended by
stockholders unless an 80% stockholder vote is obtained. The Bylaws of the
Holding Company also contain provisions regarding the timing and content of
stockholder proposals and nominations. The existence of these anti-takeover
provisions could result in the Holding Company being less attractive to a
potential acquiror and in stockholders receiving less for their shares than
otherwise might be available in the event of a takeover attempt. Furthermore,
federal regulations prohibit for three years after consummation of the
Conversion the ownership of more than 10% of the Savings Bank or the Holding
Company without prior OTS approval. Federal law also requires OTS approval prior
to the acquisition of "control" (as defined in OTS regulations) of an insured
institution. See "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY."
Voting Control by Insiders. Directors and officers of the Association and
the Holding Company expect to purchase 69,000 shares of Common Stock, or 3.1%
of the shares issued in the Offerings at the maximum of the Estimated Valuation
Range. Directors and officers are also expected to control indirectly the voting
of approximately 8% of the shares of Common Stock issued in the Conversion
through the ESOP (assuming shares have been allocated under the ESOP). Under the
terms of the ESOP, the unallocated shares will be voted by the independent ESOP
trustee in the same proportion as the votes cast by participants with respect to
the allocated shares.
At a meeting of stockholders to be held no earlier than six months
following the consummation of the Conversion, the Holding Company expects to
seek approval of the Holding Company's MRP, which is a non-tax-qualified
restricted stock plan for the benefit of key employees and directors of the
Holding Company and the Association. Assuming the receipt of stockholder
approval, the Holding Company expects to reserve for issuance common stock of
the Holding Company on behalf of the MRP in an amount equal to 4% of the Common
Stock issued in the Conversion, or 90,160 shares at the maximum of the Estimated
Valuation Range. Under the terms of the MRP, the MRP committee or the MRP
trustees will have the power to vote unallocated and unvested shares. In
addition, the Holding Company intends to reserve for future issuance pursuant to
the Stock Option Plan a number of authorized shares of Common Stock equal to 10%
of the Common Stock issued in the Conversion (225,400 shares at the maximum of
the Estimated Valuation Range). The Holding Company also intends to seek
approval of the Stock Option Plan at a meeting of stockholders to be held no
earlier than six months following the consummation of the Conversion.
Assuming (i) the receipt of stockholder approval for the MRP and the Stock
Option Plan, (ii) the open market purchase of shares on behalf of the MRP, (iii)
the purchase by the ESOP of 8% of the Common Stock sold in the Offerings, and
(iv) the exercise of stock options equal to 10% of the number of shares of
Common Stock
4
issued in the Conversion, directors, officers and employees of the Holding
Company and the Association would have voting control, on a fully diluted basis,
of 9.1% of the Common Stock, based on the issuance of the maximum of the
Estimated Valuation Range. Management's potential voting control alone, as well
as together with additional stockholder support, may preclude or impede takeover
attempts that certain stockholders deem to be in their best interest, and may
tend to perpetuate existing management.
Provisions of Employment Agreements. The employment agreements with Mrs.
Harris and Mr. Sandberg provide for cash severance payments in the event of a
change in control of the Holding Company or the Association in an amount equal
to 2.99 times the executive's average annual compensation during the five-year
period preceding the change in control. Such agreements also provide for the
continuation of certain employee benefits for a three-year period following the
change in control. These provisions may have the effect of increasing the cost
of acquiring the Holding Company, thereby discouraging future attempts to take
over the Holding Company or the Association.
See "MANAGEMENT OF THE ASSOCIATION -- Benefits," "DESCRIPTION OF CAPITAL
STOCK OF THE HOLDING COMPANY" and "RESTRICTIONS ON ACQUISITION OF THE HOLDING
COMPANY."
Regulatory and Statutory Provisions. Federal regulations prohibit for a
period of three years after consummation of the Conversion, the ownership of
more than 10% of the Association or the Holding Company without prior OTS
approval. Federal law also requires OTS approval prior to the acquisition of
"control" (as defined in OTS regulations) of an insured institution.
Absence of Prior Market for the Common Stock
The Holding Company has never issued capital stock and, consequently,
there is no existing market for the Common Stock. Although the Holding Company
has received conditional approval to list the Common Stock on the Nasdaq
National Market, there can be no assurance that the Holding Company will meet
Nasdaq National Market listing requirements upon the consummation of the
Conversion, which include a minimum market capitalization, at least two market
makers and a minimum number of record holders. Keefe, Bruyette has advised the
Holding Company that it intends to act as a market maker for the Common Stock
following the Conversion. Making a market in securities involves maintaining bid
and ask quotations and being able, as principal, to effect transactions in
reasonable quantities at those quoted prices, subject to various securities laws
and other regulatory requirements. 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 Holding Company, the Association or any market
maker. There can be no assurance that purchasers will be able to sell their
shares at or above the Purchase Price. See "MARKET FOR COMMON STOCK."
Dilutive Effect of Benefit Programs
At a meeting held no earlier than six months following consummation of the
Conversion, the Holding Company expects to seek stockholder approval of the MRP.
If approved, the Holding Company intends to reserve for issuance under the MRP
an amount of Common Stock of the Holding Company equal to 4% of the shares
issued in the Conversion. Such shares of Common Stock of the Holding Company may
be acquired by the Holding Company in the open market or from authorized but
unissued shares of Common Stock of the Holding Company. In the event that the
MRP utilizes authorized but unissued shares of Common Stock from the Holding
Company, the voting interests of existing stockholders will be diluted and net
income per share and stockholders' equity per share will be decreased. See "PRO
FORMA DATA" and "MANAGEMENT OF THE ASSOCIATION - - Benefits -- Management
Recognition Plan."
At a meeting held no earlier than six months following consummation of the
Conversion, the Holding Company expects to seek stockholder approval of the
Stock Option Plan. If approved, the Stock Option Plan will provide for options
for up to a number of shares of Common Stock of the Holding Company equal to 10%
of the shares issued in the Conversion. Such shares may be authorized but
unissued shares of Common Stock of the Holding Company and, upon exercise of the
options, will result in the dilution of the voting interests of existing
5
stockholders and will decrease net income per share and stockholders' equity per
share. See "MANAGEMENT OF THE ASSOCIATION -- Benefits -- 1996 Stock Option
Plan."
Possible Increase in the Number of Shares Issued in the Conversion
The number of shares to be issued in the Conversion may be increased as a
result of an increase in the Estimated Valuation Range of up to 15% to reflect
material changes in the financial condition or performance of the Association or
changes in market conditions or general financial and economic conditions prior
to the consummation of the Conversion. In the event that the Estimated Valuation
Range is so increased, the Holding Company expects to issue up to 2,592,100
shares of Common Stock at the Purchase Price for an aggregate price of up to
$25.9 million. An increase in the number of shares issued will decrease the
Holding Company's net income per share and stockholders' equity per share on a
pro forma basis and will increase the Holding Company's consolidated
stockholders' equity and net income. Such an increase will also increase the
Purchase Price as a percentage of pro forma stockholders' equity per share and
net income per share.
The ESOP intends to purchase 8% of the Common Stock issued in the
Conversion. In the event the number of shares issued in the Conversion is
increased as a result of an increase in the Estimated Valuation Range, the ESOP
shall have a first priority right to subscribe for all the shares sold in excess
of 2,254,000 shares, up to an aggregate of 8% of the Common Stock issued in the
Conversion. See "PRO FORMA DATA" and "THE CONVERSION -- Stock Pricing and the
Number of Shares to be Issued."
Possible Adverse Income Tax Consequences of the Distribution of Subscription
Rights
If the Subscription Rights granted to Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members of the Association are
deemed to have an ascertainable value, receipt of such rights may be a taxable
event (either as capital gain or ordinary income), which may be recognizable by
all members or only by those Eligible Account Holders, Supplemental Eligible
Account Holders or Other Members who exercise the Subscription Rights in an
amount equal to such value. Additionally, the Association could be required to
recognize a gain for tax purposes on such distribution. Whether Subscription
Rights are considered to have ascertainable value is an inherently factual
determination. The Association has been advised by Keller that such rights have
no value; however, Keller's conclusion is not binding on the Internal Revenue
Service ("IRS"). See "THE CONVERSION -- Effects of Conversion to Stock Form on
Depositors and Borrowers of the Association -- Tax Effects."
Regulatory Oversight and Possible Legislation
The Association is subject to extensive regulation, supervision and
examination by the OTS, as its chartering authority and primary federal
regulator, and by the FDIC, which insures its deposits up to applicable limits.
The Association is a member of the FHLB System and is subject to certain limited
regulations promulgated by the Board of Governors of the Federal Reserve System
("Federal Reserve"). As the holding company of the Association, the Holding
Company also will be subject to regulation and oversight by the OTS. Such
regulation and supervision govern the activities in which an institution can
engage and are intended primarily for the protection of the insurance fund and
depositors. Regulatory authorities have been granted extensive discretion in
connection with their supervisory and enforcement activities which are intended
to strengthen the financial condition of the banking and thrift industries,
including the imposition of restrictions on the operation of an institution, the
classification of assets by the institution and the adequacy of an institution's
allowance for loan losses. Any change in such regulation and oversight, whether
by the OTS, the FDIC or Congress, could have a material impact on the Holding
Company, the Association and their respective operations. See "REGULATION." In
addition, legislation is proposed periodically providing for a comprehensive
reform of the banking and thrift industries, and has included provisions that
would (i) merge the BIF and the SAIF, at which time thrifts and banks would pay
the same deposit insurance premiums, (ii) require federal savings associations
to convert to a national bank or a state-chartered bank or thrift, (iii) require
all savings and loan holding companies to become bank holding companies and (iv)
abolish the OTS. Included in such proposed legislation may be provisions
imposing material limitations on the non-banking activities of federal savings
associations, particularly insurance activities. Such provisions, if included,
may impose material limitations
6
on the operations of the Association's wholly-owned subsidiary, Dime Service
Corporation, and may have a material adverse effect on the Association's
financial condition and results of operations. See "BUSINESS OF THE ASSOCIATION
- -- Subsidiary Activities." It is uncertain when or if any of this type of
legislation will be passed, and, if passed, in what form the legislation would
be passed. As a result, management cannot accurately predict the possible impact
of such legislation on the Association.
EMPIRE FEDERAL BANCORP, INC.
The Holding Company was organized as a Delaware corporation at the
direction of the Association on September 20, 1996 to acquire all of the
outstanding capital stock of the Association to be issued upon its Conversion.
The Holding Company has received OTS approval to become a savings and loan
holding company and to acquire all of the outstanding capital stock of the
Association. Prior to the Conversion, the Holding Company will not engage in any
material operations. After the Conversion, the Holding Company will be
classified as a unitary savings and loan holding company subject to regulation
by the OTS, and its principal business will be the ownership of the Association.
Immediately following the Conversion, the only significant assets of the Holding
Company will be the capital stock of the Association, that portion of the net
proceeds of the Offerings to be retained by the Holding Company and a note
receivable from the ESOP evidencing a loan from the Holding Company to fund the
Association's ESOP. See "BUSINESS OF THE HOLDING COMPANY."
The management of the Holding Company is set forth under "MANAGEMENT OF
THE HOLDING COMPANY." Initially, the Holding Company will neither own nor lease
any property, but will instead use the premises, equipment and furniture of the
Association in accordance with applicable law and regulations. Presently, the
Holding Company does not intend to employ any persons other than officers who
are also officers of the Association, but will utilize the support staff of the
Association from time to time in accordance with applicable laws and
regulations. Additional employees will be hired as appropriate to the extent the
Holding Company expands or changes its business in the future.
The holding company structure will permit the Holding Company to expand
the financial services currently offered through the Association. Management
believes that the holding company structure and retention of a portion of the
proceeds of the Offerings would facilitate the expansion and diversification of
its operations, should it decide to do so. The holding company structure will
also enable the Holding Company to repurchase its stock without adverse income
tax consequences. There are no present plans, arrangements, agreements, or
understandings, written or oral, regarding any such activities or repurchases.
See "REGULATION -- Savings and Loan Holding Company Regulations."
The Holding Company's principal executive office is located at 123 South
Main Street, Livingston, Montana 59047, and its telephone number is (406) 222-
1981.
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION
The Association is a federally chartered mutual savings and loan
association located in Livingston, Montana. Originally chartered in 1923 as a
Montana mutual building and loan association under the name "Empire Building and
Loan Association," the Association converted to a federal charter and adopted
its current name in 1970. In connection with the Conversion, the Association
will convert to a federally chartered capital stock savings bank under the name
"Empire Federal Savings Bank," and become a wholly-owned subsidiary of the
Holding Company. The Association is regulated by the OTS. The Association's
deposits are federally insured by the FDIC under the SAIF. The Association is a
member of the FHLB System. At June 30, 1996, the Association had total assets of
$86.8 million, total deposits of $68.6 million, and total equity of $15.9
million on a consolidated basis.
The Association is a community oriented financial institution which has
traditionally offered a variety of savings products to its retail customers
while concentrating its lending activities on real estate mortgage loans.
Lending activities have been focused primarily on the origination of loans
secured by one- to four-family residential dwellings, including an emphasis on
loans for construction of residential dwellings. To a lesser extent, lending
7
activities also have included the origination of multi-family, commercial real
estate and consumer loans. The Association's primary business has been that of
a traditional thrift institution, originating loans in its primary market area
for its portfolio. At June 30, 1996, the Association's gross loan portfolio
totaled $43.1 million, of which 81.7% were one- to four-family residential
mortgage loans, 3.2% were construction loans (most of which related to one- to
four-family residences), 5.4% were multi-family loans, and 2.7% were commercial
real estate loans. In addition the Association has maintained a significant
portion of its assets in investments and mortgage-backed securities. Similar to
its lending activities, the Association's investment portfolio has been weighted
toward mortgage-backed securities secured by one- to four-family residential
properties. The balance of the portfolio includes U.S. agency securities.
Investment securities, including mortgage-backed securities, totaled $39.1
million at June 30, 1996. In addition to interest and dividend income on loans
and investments, the Association receives other income from the sale of
insurance products through its wholly owned subsidiary, Dime Service
Corporation.
The Association's principal executive office is located at 123 South Main
Street, Livingston, Montana 59047, and its telephone number is (406) 222- 1981.
USE OF PROCEEDS
The net proceeds from the sale of the Common Stock offered hereby are
estimated to range from $16.2 million to $22.0 million, or up to $25.3 million
if the Estimated Valuation Range is increased by 15%. See "PRO FORMA DATA" for
the assumptions used to arrive at such amounts. The Holding Company has received
OTS approval to purchase all of the capital stock of the Association to be
issued in the Conversion in exchange for 50% of the net proceeds of the
Offerings. This will result in the Holding Company retaining approximately
$8.1 million to $11.0 million of net proceeds, or up to $12.7 million if the
Estimated Valuation Range is increased by 15%, and the Association receiving
an equal amount.
Receipt of 50% of the net proceeds of the sale of the Common Stock will
increase the Association's capital and will support the expansion of the
Association's existing business activities. The Association will use the funds
contributed to it for general corporate purposes, including, initially, local
lending or investment in securities of the type currently held by the
Association.
In connection with the Conversion and the establishment of the ESOP, the
Holding Company intends to loan the ESOP the amount necessary to purchase 8% of
the shares of Common Stock sold in the Conversion. The Holding Company's loan to
fund the ESOP may range from $1.3 million to $1.8 million based on the sale of
133,280 shares to the ESOP (at the minimum of the Estimated Valuation Range) and
180,320 shares (at the maximum of the Estimated Valuation Range), respectively,
at $10.00 per share. If 15% above the maximum of the Estimated Valuation Range,
or 2,592,100 shares, are sold in the Conversion, the Holding Company's loan to
the ESOP would be approximately $2.1 million. It is anticipated that the ESOP
loan will have a 10-year term with interest payable at the prime rate as
published in The Wall Street Journal on the closing date of the Conversion. The
loan will be repaid principally from the Association's contributions to the ESOP
and from any dividends paid on the Common Stock.
The remaining net proceeds retained by the Holding Company initially will
be invested primarily in securities of the type currently held by the
Association. Such proceeds will be available for additional contributions to the
Association in the form of debt or equity, to support future diversification or
acquisition activities, as a source of dividends to the stockholders of the
Holding Company and for future repurchases of Common Stock to the extent
permitted under Delaware law and federal regulations. Currently, there are no
specific plans, arrangements, agreements or understandings, written or oral,
regarding any diversification or acquisition activities.
Upon consummation of the Conversion, the Board of Directors will have the
authority to adopt stock repurchase plans, subject to statutory and regulatory
requirements. Since the Holding Company has not yet issued stock, there is
currently insufficient information upon which an intention to repurchase stock
could be based. The facts and circumstances upon which the Board of Directors
may determine to repurchase stock in the future may include but are not limited
(i) to market and economic factors such as the price at which the stock is
trading in the
8
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 the ability to improve the Holding Company's
return on equity; (ii) to 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) to any other circumstances in which
repurchases would be in the best interests of the Holding Company and its
stockholders. Any stock repurchases will be subject to a determination by the
Board of Directors that both the Holding Company and the Association will be
capitalized in excess of all applicable regulatory requirements after any such
repurchases and that capital will be adequate, taking into account, among other
things, the level of non-performing and other risk assets, the Holding Company's
and the Association's current and projected results of operations and
asset/liability structure, the economic environment and tax and other regulatory
considerations. See "THE CONVERSION -- Restrictions on Repurchase of Stock."
The Holding Company has committed to the OTS not to make any tax-free
distributions to stockholders in the form of a return of capital, or take any
action in contemplation of any such distributions, within the first year
following the consummation of the Conversion.
DIVIDEND POLICY
General
The Board of Directors of the Holding Company will consider a dividend
policy following the consummation of the Conversion. Declarations or payments of
dividends will be subject to determination by the Holding Company's Board of
Directors, which will take into account the amount of the net proceeds retained
by the Holding Company, the Holding Company's financial condition, results of
operations, tax considerations, capital requirements, industry standards,
economic conditions and other factors, including regulatory restrictions that
affect the payment of dividends by the Association to the Holding Company as
discussed below. Under Delaware 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 preceding fiscal year. In order to pay
cash dividends, however, the Holding Company must have available cash either
from the net proceeds raised in the Offerings and retained by the Holding
Company, dividends received from the Association or earnings on Holding Company
assets. No assurances can be given that any dividends will be declared or, if
declared, what the amount of dividends will be or whether such dividends, once
declared, will continue.
Regulatory Restrictions
Dividends from the Holding Company will depend, in part, upon receipt of
dividends from the Association because the Holding Company will have no initial
sources of income other than dividends from the Association and earnings from
the investment of the net proceeds from the Offerings retained by the Holding
Company. OTS regulations require the Association to give the OTS 30 days'
advance notice of any proposed declaration of dividends to the Holding Company,
and the OTS has the authority under its supervisory powers to prohibit the
payment of dividends to the Holding Company. The OTS imposes certain limitations
on the payment of dividends from the Association to the Holding Company which
utilizes a three-tiered approach that permits various levels of distributions
based primarily upon a savings association's capital level. In addition, the
Association may not declare or pay a cash dividend on its capital stock if the
effect thereof would be to reduce the regulatory capital of the Association
below the amount required for the liquidation account to be established pursuant
to the Plan of Conversion. See "REGULATION -- Dividend Limitations," "THE
CONVERSION -- Effects of Conversion to Stock Form on Depositors and Borrowers of
the Association -- Liquidation Account" and Note 17 of Notes to the Consolidated
Financial Statements included elsewhere herein.
The Association currently meets the criteria to be designated a Tier 1
association, as hereinafter defined, and consequently could at its option (after
prior notice to and no objection made by the OTS) distribute up to the higher
of: (i) 100% of its net income during the calendar year plus 50% of its surplus
capital ratio at the beginning
9
of the calendar year less any distributions previously paid during the year or
(ii) 75% of its net income over the most recent four-quarter period less any
distributions previously paid during such period.
Tax Considerations
In addition to the foregoing, retained earnings of the Association
appropriated to bad debt reserves and deducted for federal income tax purposes
cannot be used by the Association to pay cash dividends to the Holding 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 Taxation" and Note 9 of Notes to the Consolidated Financial
Statements included elsewhere herein. The Holding 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 COMMON STOCK
The Holding Company has never issued capital stock and, consequently,
there is no existing market for the Common Stock. Although the Holding Company
has received conditional approval to list the Common Stock on the Nasdaq
National Market, there can be no assurance that the Holding Company will meet
Nasdaq National Market listing requirements, which include a minimum market
capitalization, at least two market makers and a minimum number of record
holders. Making a market involves maintaining bid and ask quotations and being
able, as principal, to effect transactions in reasonable quantities at those
quoted prices, subject to various securities laws and other regulatory
requirements. Keefe, Bruyette has indicated its intention to act as a market
maker in the Common Stock following the consummation of the Conversion,
depending on trading volume and subject to compliance with applicable laws and
regulatory requirements. Furthermore, Webb has agreed to use its best efforts to
assist the Holding Company in obtaining at least one additional market maker for
the Common Stock. There can be no assurance there will be two or more market
makers for the Common Stock. There can be no assurance that purchasers will be
able to sell their shares at or above the Purchase Price.
10
CAPITALIZATION
The following table presents the historical capitalization of the
Association at June 30, 1996, and the pro forma consolidated capitalization of
the Holding Company after giving effect to the assumptions set forth under "PRO
FORMA DATA," based on the sale of the number of shares of Common Stock set forth
below in the Conversion at the minimum, midpoint and maximum of the Estimated
Valuation Range, and based on the sale of 2,592,100 shares (representing the
shares that would be issued in the Conversion after giving effect to an
additional 15% increase in the maximum valuation in the Estimated Valuation
Range, subject to receipt of an updated appraisal confirming such valuation and
OTS approval). A change in the number of shares to be issued in the Conversion
may materially affect pro forma consolidated capitalization.
Holding Company
Pro Forma Consolidated Capitalization
Based Upon the Sale of
1,666,000 1,960,000 2,254,000 2,592,100
Shares at Shares at Shares at Shares at
Association $10.00 $10.00 $10.00 $10.00
Historical Per Share(1) Per Share(1) Per Share(1) Per Share(2)
(In Thousands)
Deposits(3) $68,548 $68,548 $68,548 $68,548 $68,548
FHLB advances 1,500 1,500 1,500 1,500 1,500
ESOP borrowings(4) -- -- -- -- --
Total deposits and
borrowed funds $70,048 $70,048 $70,048 $70,048 $70,048
Stockholders' equity:
Preferred stock:
250,000 shares, $0.01
par value per share,
authorized; none to be issued
or outstanding $ -- $ -- $ -- $ -- $ --
Common Stock:
4,000,000 shares, $0.01 par
value per share, authorized;
specified number of shares
assumed to be issued and
outstanding as
reflected(5) -- 17 20 23 26
Additional paid-in capital -- 16,098 18,995 21,898 25,276
Retained earinings(7) 15,620 15,620 15,620 15,620 15,620
Unrealized gain 256 256 256 256 256
Less:
Common Stock acquired
by ESOP(4) -- 1,333 1,568 1,803 2,074
Common Stock to be acquired
by MRP(6) -- 666 784 902 1,037
Total stockholders' equity 15,876 29,992 32,539 35,092 38,067
(footnotes on following page)
11
---------------
(1) Does not reflect the possible increase in the Estimated Valuation Range to
reflect material changes in the financial condition or performance of the
Association or changes in market conditions or general financial and
economic conditions, or the issuance of shares under the Stock Option Plan.
(2) Represents the pro forma capitalization of the Holding Company in the
event the aggregate number of shares of Common Stock issued in the
Conversion is 15% above the maximum of the Estimated Valuation Range. See
"PRO FORMA DATA" and Footnote 1 thereto.
(3) Withdrawals from deposit accounts for the purchase of Common Stock are not
reflected. Such withdrawals will reduce pro forma deposits by the amounts
thereof.
(4) Assumes that 8% of the Common Stock issued in the Conversion will be
acquired by the ESOP in the Conversion with funds borrowed from the Holding
Company. In accordance with generally accepted accounting principles
("GAAP"), the amount of Common Stock purchased by the ESOP represents
unearned compensation and is, accordingly, reflected as a reduction of
capital. Since the funds are borrowed from the Holding Company, the
borrowing will be eliminated in consolidation and no liability will be
reflected in the consolidated financial statements of the Holding Company.
See "MANAGEMENT OF THE ASSOCIATION -- Benefits -- Employee Stock Ownership
Plan."
(5) The Association's authorized capital will consist solely of 1,000 shares of
common stock, par value $1.00 per share, 1,000 shares of which will be
issued to the Holding Company, and 9,000 shares of preferred stock, no par
value per share, none of which will be issued in connection with the
Conversion.
(6) Assumes the purchase in the open market at the Purchase Price, pursuant to
the proposed MRP, of a number of shares equal to 4% of the shares of Common
Stock issued in the Conversion at the minimum, midpoint, maximum and 15%
above the maximum of the Estimated Valuation Range. The shares assumed to
be purchased in the open market are reflected as a reduction of
stockholders' equity. The issuance of an additional 4% of the shares of
Common Stock for the MRP from authorized but unissued shares of Holding
Company Common Stock would dilute the ownership interest of stockholders
by 3.85%. See "RISK FACTORS -- Dilutive Effect of Benefit Programs,"
"PRO FORMA DATA" and "MANAGEMENT OF THE ASSOCIATION -- Benefits --
Management Recognition Plan." The MRP is subject to stockholder approval
and is expected to be presented to stockholders at a meeting to be held
no earlier than six months following consummation of the Conversion.
(7) Retained earnings are substantially restricted by applicable regulatory
capital requirements and includes unrealized gain on securities available-
for-sale, net of taxes. Additionally, the Association will be prohibited
from paying any dividend that would reduce its regulatory capital below the
amount in the liquidation account, which will be established 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 as such account holders reduce their balances or cease
to be depositors. See "THE CONVERSION -- Effects of Conversion to Stock
Form on Depositors and Borrowers of the Association -- Liquidation
Account."
12
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
The following table presents the Association's historical and pro forma
capital position relative to its capital requirements at June 30, 1996. The
amount of capital infused into the Association for purposes of the following
table is 50% of the net proceeds. For a discussion of the assumptions underlying
the pro forma capital calculations presented below, see "USE OF PROCEEDS,"
"CAPITALIZATION" and "PRO FORMA DATA." The definitions of the terms used in the
table are those provided in the capital regulations issued by the OTS. For a
discussion of the capital standards applicable to the Association, see
"REGULATION -- Federal Regulation of Savings Associations -- Capital
Requirements."
PRO FORMA AT JUNE 30, 1996 (6)
15% above
Minimum of Estimated Midpoint of Estimated Maximum of Estimated Maximum of Estimated
Valuation Range Valuation Range Valuation Range Valuation Range
1,666,000 Shares 1,960,000 Shares 2,254,000 Shares 2,592,100 Shares
June 30, 1996 at $10.00 Per Share at $10.00 Per Share at $10.00 Per Share at $10.00 Per Share
Percent of Percent of Percent of Percent of Percent of
Adjusted Adjusted Adjusted Adjusted Adjusted
Total Total Total Total Total
Amount Assets (1) Amount Assets (1) Amount Assets (1) Amount Assets (1) Amount Assets (1)
(Dollars in Thousands)
GAAP capital $15,876 18.5% $21,934 23.5% $23,032 24.3% $24,132 25.2% $25,416 26.1%
Tangible capital(2) $15,125 17.6% $21,183 22.7% $22,281 23.6% $23,381 24.4% $24,665 25.3%
Tangible capital
requirement 1,288 1.5 1,399 1.5 1,419 1.5 1,439 1.5 1,462 1.5
Excess $13,837 16.1% $19,784 21.2% $20,862 22.1% $21,942 22.9% $23,203 23.8%
Core capital(2) $15,125 17.6% $21,183 22.7% $22,281 23.6% $23,381 24.4% $24,665 25.3%
Core capital
requirement(3) 2,576 3.0 2,798 3.0 2,889 3.0 2,879 3.0 2,925 3.0
Excess $12,549 14.6% $18,385 19.7% $19,442 20.6% $20,502 21.4% $21,740 22.3%
Risk-based capital(4)(5) $15,305 46.7% $21,364 62.3% $22,461 65.0% $23,561 67.7% $24,845 70.8%
Risk-based
capital requirement 2,624 8.0 2,742 8.0 2,763 8.0 2,784 8.0 2,809 8.0
Excess $12,681 38.7% $18,622 54.3% $19,698 57.0% $20,777 59.7% $22,036 62.8%
-------------------
(1) Based upon adjusted total assets for purposes of the tangible capital and
core capital requirements, and risk-weighted assets for purposes of the
risk-based capital requirement.
(2) In accordance with OTS policy, tangible capital and core capital are both
less than GAAP capital at June 30, 1996 as a result of the exclusion of
unrealized gain on securities available-for-sale, net of taxes, of
$256,000 and the investment in Dime Service Corporation of $495,000. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- Impact of New Accounting Pronouncements and Regulatory
Policies -- Accounting for Certain Investments in Debt and Equity
Securities."
(3) The current OTS core capital requirement for savings associations is 3% of
total adjusted assets. The OTS has proposed core capital requirements which
would require a core capital ratio of 3% of total adjusted assets for
thrifts that receive the highest supervisory rating for safety and
soundness and a core capital ratio of 4% to 5% for all other thrifts.
(4) Percentage represents total core and supplementary capital divided by total
risk-weighted assets.
(5) Assumes reinvestment of net proceeds into assets with a risk weighting
equal to 20%.
(6) The pro forma data has been adjusted to reflect reductions in capital that
would result from an assumed 8% purchase of Common Stock by the ESOP and a
4% purchase of Common Stock by the Association for the MRP at June 30,
1996.
13
PRO FORMA DATA
Under the Plan of Conversion, the Common Stock must be sold at a price
equal to the estimated pro forma market value of the Holding Company and the
Association, as converted, based upon an independent valuation. The Estimated
Valuation Range as of September 6, 1996 is from a minimum of $16.7 million to a
maximum of $22.5 million with a midpoint of $19.6 million or, at a price per
share of $10.00, a minimum number of shares of 1,666,000, a maximum number of
shares of 2,254,000 and a midpoint number of shares of 1,960,000. The actual net
proceeds from the sale of the Common Stock cannot be determined until the
Conversion is consummated. However, net proceeds set forth on the following
table are based upon the following assumptions: (i) Webb will receive a
management fee of $25,000, and a success fee of 1.5% of the aggregate Actual
Purchase Price of the shares of Common Stock sold in the Offerings excluding
shares purchased by the ESOP and officers and directors of the Association (such
success fee not to exceed 1.5% of the gross offering proceeds at the midpoint of
the Estimated Valuation Range, or $294,000); (ii) none of the shares will be
sold in the Syndicated Community Offering; and (iii) Conversion expenses will
total approximately $545,000, $585,000, $619,000 and $619,000 at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Valuation Range,
respectively. Actual expenses may vary from this estimate, and the fees paid
will depend upon the percentages and total number of shares sold in the
Offerings and other factors.
The pro forma consolidated net income of the Association for the year
ended June 30, 1996 has been calculated as if the Conversion had been
consummated at the beginning of such period and the estimated net proceeds
received by the Holding Company and the Association had been invested at 5.78%
at the beginning of the period, which represents the one-year U.S. Treasury Bill
yield as of June 30, 1996. While OTS regulations provide for the use of a yield
representing the arithmetic average of the weighted average yield earned by the
Association on its interest-earning assets and the rates paid on its deposits,
the Holding Company believes the U.S. Treasury Bill yield represents a more
realistic yield on the Association's investments. As discussed under "USE OF
PROCEEDS," the Holding Company expects to retain 50% of the net proceeds of the
Offerings from which it will fund the ESOP loan. Pro forma after-tax yields of
3.81% are used for both the Holding Company and the Association for the year
ended June 30, 1996, after giving effect to an incremental rate of 34%.
Historical and pro forma income per share amounts have been calculated by
dividing historical and pro forma amounts by the number of shares of Common
Stock indicated in the table. Pro forma stockholders' equity at June 30, 1996
has been calculated as if the Common Stock had been sold at June 30, 1996.
Historical and pro forma stockholders' equity per share amounts have been
calculated by dividing historical and pro forma amounts by the individual number
of shares of Common Stock issued. No effect has been given in the pro forma
stockholders' equity calculations for the assumed earnings on net proceeds.
The following tables summarize the historical net income and total equity
of the Association and the pro forma consolidated net income and stockholders'
equity of the Holding Company for the periods and at the dates indicated, based
on the minimum, midpoint and maximum of the Estimated Valuation Range and based
on a 15% increase in the maximum of the Estimated Valuation Range. No effect has
been given (i) to the shares to be reserved for issuance under the Holding
Company's Stock Option Plan, which is expected to be presented to stockholders
for approval at a meeting to be held no earlier than six months following
consummation of the Conversion; (ii) to withdrawals from deposit accounts for
the purpose of purchasing Common Stock in the Conversion; (iii) to the issuance
of shares from authorized but unissued shares to the MRP, which is expected to
be presented to stockholders for approval at a meeting to be held no earlier
than six months following consummation of the Conversion; or (iv) to the
establishment of a liquidation account for the benefit of Eligible Account
Holders and Supplemental Eligible Account Holders. See "MANAGEMENT OF THE
ASSOCIATION -- Benefits -- 1996 Stock Option Plan" and "THE CONVERSION -- Stock
Pricing and Number of Shares Issued." Shares of Common Stock may be purchased
with funds on deposit at the Association, which will reduce deposits by the
amounts of such purchases. Accordingly, the net amount of funds available for
investment will be reduced to the extent shares are purchased with funds on
deposit.
The following pro forma information may not be representative of the
financial effects of the Conversion at the date on which the Conversion actually
occurs and should not be taken as indicative of future results of operations.
Stockholders' equity represents the difference between the stated amounts of
consolidated assets and liabilities of the Holding Company computed in
accordance with GAAP. Stockholders' equity has not been increased or decreased
to reflect the difference between the carrying value of assets and liabilities
and market value. Stockholders' equity is not intended to represent fair market
value nor does it represent amounts that would be available for distribution to
stockholders in the event of liquidation.
14
At or For the Year Ended June 30, 1996
Minimum of Midpoint of Maximum of 15% Above
Estimated Estimated Estimated Maximum of
Valuation Valuation Valuation Estimated
Range Range Range Valuation Range
1,666,000 1,960,000 2,254,000 2,592,100
Shares Shares Shares Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share (1)
(In Thousands, Except Per Share Amounts)
Gross proceeds $16,660 $19,600 $22,540 $25,921
Less:
Estimated offering expenses (545) (585) (619) (619)
Estimated net proceeds 16,115 19,015 21,921 25,302
Less:
Common Stock acquired by the ESOP (1,333) (1,568) (1,803) (2,074)
Common Stock to be acquired by MRP (666) (784) (902) (1,037)
Estimated net cash proceeds $14,116 $16,663 $19,216 $22,191
Consolidated net income:
Historical $ 632 $ 632 $ 632 $ 632
Pro forma net income on proceeds(2) 538 636 733 847
Pro forma ESOP adjustments(3) (88) (103) (119) (137)
Pro forma MRP adjustments(4) (88) (103) (119) (137)
Pro forma net income(10) $ 994 $1,062 $ 1,127 $ 1,205
Consolidated net income per share(5)(6):
Historical $ 0.41 $ 0.35 $ 0.30 $ 0.26
Pro forma net income on proceeds 0.35 0.35 0.35 0.35
Pro forma ESOP adjustments(3) (0.06) (0.06) (0.06) (0.06)
Pro forma MRP adjustments(4) (0.06) (0.06) (0.06) (0.06)
Pro forma net income per share(10) $ 0.64 $ 0.58 $ 0.53 $ 0.49
Consolidated stockholders' equity(7):
Historical $ 15,876 $15,876 $15,876 $ 15,876
Estimated net Conversion proceeds 16,115 19,015 21,921 25,302
Less:
Common Stock acquired by ESOP (1,333) (1,568) (1,803) (2,074)
Common Stock to be acquired by MRP(4) (666) (784) (902) (1,037)
Pro forma(7) $29,992 $32,539 $35,092 $ 38,067
Consolidated stockholders' equity per
share(6)(8):
Historical(6) $ 9.53 $ 8.10 $ 7.04 $ 6.12
Estimated net Conversion proceeds 9.67 9.70 9.73 9.76
Common Stock acquired by ESOP (0.80) (0.80) (0.80) (0.80)
Common Stock to be acquired by MRP(4) (0.40) (0.40) (0.40) (0.40)
Pro forma stockholders' equity
per share(9)(11) $ 18.00 $16.60 $ 15.57 $ 14.68
Purchase Price as a percentage of pro forma
stockholders' equity per share 55.56% 60.24% 64.23% 68.12%
Purchase price to pro forma income per share
(P/E ratio) 15.63 x 17.24 x 18.87 x 20.41 x
Shares used in calculating income
per share 1,539,384 1,811,040 2,082,596 2,395,100
15
-------------------
(1) Gives effect to the sale of an additional 338,100 shares in
the Conversion, which may be issued as a result of an increase
in the pro forma market value of the Holding Company and the
Association as converted, without the resolicitation of
subscribers or any right of cancellation. The issuance of such
additional shares will be conditioned on a determination of
the independent appraiser that such issuance is compatible
with its determination of the estimated pro forma market value
of the Holding Company and the Association as converted. See
"THE CONVERSION -- Stock Pricing and Number of Shares to be
Issued."
(2) No effect has been given to withdrawals from accounts for the
purpose of purchasing Common Stock in the Conversion.
(3) It is assumed that 8% of the shares of Common Stock offered in
the Conversion will be purchased by the ESOP. The funds used
to acquire such shares will be borrowed by the ESOP (at an
interest rate equal to the prime rate as published in The Wall
Street Journal on the closing date of the Conversion, which
rate is currently 8.25%), from the net proceeds from the
Conversion retained by the Holding Company. The amount of this
borrowing has been reflected as a reduction from gross
proceeds to determine estimated net proceeds. The Association
intends to make contributions to the ESOP in amounts at least
equal to the principal and interest requirement of the debt.
The Association's payment of the ESOP debt is based upon
equal installments of principal over a 10-year period,
assuming a combined federal and state tax rate of 34%.
Interest income earned by the Holding Company on the ESOP debt
offsets the interest paid by the Association on the ESOP loan.
No reinvestment is assumed on proceeds contributed to fund the
ESOP. The ESOP expense reflects recognition of compensation
expense based upon shares committed to be released and the
exclusion of unallocated shares from income per share
computations. The valuation of shares committed to be released
would be based upon the average market value of the shares
during the year, which, for purposes of this calculation,
was assumed to be equal to the $10.00 per share Purchase
Price. See "MANAGEMENT OF THE ASSOCIATION -- Benefits --
Employee Stock Ownership Plan."
(4) In calculating the pro forma effect of the MRP, it is assumed
that the required stockholder approval has been received and
that the shares were acquired by the MRP at the beginning of
the period presented in open market purchases at the Purchase
Price. The issuance of authorized but unissued shares of the
Common Stock at the date of the consummation of the Conversion
instead of open market purchases would dilute the voting
interests of existing stockholders by approximately 3.9% and
pro forma net income per share would be $0.62, $0.56, $0.52
and $0.48 at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range for the year ended
June 30, 1996, respectively, and pro forma stockholders'
equity per share would be $17.31, $15.96, $14.97 and $14.12
at the minimum, midpoint, maximum and 15% above the maximum
of the Estimated Valuation Range at June 30, 1996,
respectively. Shares issued under the MRP vest 20% per year
and, for purposes of this table, compensation expense is
recognized on a straight-line basis over each vesting period.
In the event the fair market value per share is greater than
$10.00 per share on the date of stockholder approval of the
MRP, total MRP expense would increase. The total estimated
MRP expense was multiplied by 20% (the total percent of
shares for which expense is recognized in the first year)
resulting in pre-tax MRP expense of $133,280, $156,800,
$180,320 and $207,368 at the minimum, midpoint, maximum and
15% above the maximum of the Estimated Valuation Range for
the year ended June 30, 1996, respectively. No effect has
been given to the shares reserved for issuance under the
proposed Stock Option Plan. If stockholders approve the Stock
Option Plan following the Conversion, the Holding Company
will have reserved for issuance under the Stock Option Plan
authorized but unissued shares of Common Stock representing
an amount of shares equal to 10% of the shares sold in the
Conversion. If all of the options were to be exercised
utilizing these authorized but unissued shares rather than
treasury shares (which could be acquired), the voting
interests of existing stockholders would be diluted by
approximately 9.1%. See "MANAGEMENT OF THE ASSOCIATION --
Benefits -- 1996 Stock Option Plan" and "-- Management
Recognition Plan" and "RISK FACTORS -- Dilutive Effect of
Benefit Programs."
(5) Net income per share amounts are based upon
the shares of Common Stock sold in the Conversion less the
average number of shares assumed to be held by the ESOP not
committed to be released during the first year following the
Conversion.
16
(6) Historical per share amounts have been computed as if the
shares of Common Stock expected to be issued in the Conversion
had been outstanding at the beginning of the period or on the
date shown, but without any adjustment of historical net
income or historical retained earnings to reflect the
investment of the estimated net proceeds of the sale of shares
in the Conversion, the additional ESOP expense or the proposed
MRP expense, as described above.
(7) "Consolidated stockholders' equity" represents the difference
between the stated amounts of the Association's assets and
liabilities. The amounts shown do not reflect the liquidation
account that will be established for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in
the Conversion, or the federal income tax consequences of the
restoration to income of the Association's special bad debt
reserves for income tax purposes, which would be required in
the unlikely event of liquidation. See "THE CONVERSION --
Effects of Conversion to Stock Form on Depositors and
Borrowers of the Association" and "TAXATION." The amounts
shown for consolidated stockholders' equity do not represent
fair market values or amounts distributable to stockholders
in the unlikely event of liquidation.
(8) Consolidated stockholders' equity per share amounts are based
upon shares outstanding of 1,666,000, 1,960,000, 2,254,000
and 2,592,000 at the minimum, midpoint, maximum and 15% above
the maximum of the Estimated Valuation Range, respectively.
(9) Neither represents, nor is intended to represent, possible
future price appreciation or depreciation of the Common Stock.
(10) Pro forma consolidated net income per share would be $0.42,
$0.39, $0.37 and $0.35 at the minimum, midpoint, maximum and
15% above the maximum of the Estimated Valuation Range for the
year ended June 30, 1996, respectively, assuming the
implementation of the one-time SAIF assessment based on the
assumptions discussed under "RISK FACTORS -- Recapitalization
of SAIF and its Impact on SAIF Premiums" occurred on June 30,
1996.
(11) Assuming implementation of the proposed SAIF assessment on
June 30, 1996 based on the assumptions discussed under "RISK
FACTORS -- Recapitalization of SAIF and its Impact on SAIF
Premiums," pro forma consolidated stockholders' equity
per share would be $17.80, $16.43, $15.42 and $14.55 at
the minimum, midpoint, maximum and 15% above the maximum of
the Estimated Valuation Range at June 30, 1996,
respectively.
17
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
The following Consolidated Statements of Income of Empire Federal Savings
and Loan Association and Subsidiary for the fiscal years ended June 30, 1996 and
1995 have been audited by KPMG Peat Marwick LLP, independent auditors, whose
report thereon appears elsewhere in this Prospectus. These statements should be
read in conjunction with the Consolidated Financial Statements and related Notes
included elsewhere herein.
Year Ended June 30,
1996 1995
Interest income:
Loans receivable $3,440,793 $3,408,170
Mortgage-backed securities 2,516,854 2,530,329
Investment securities 214,363 142,388
Other 131,543 223,905
Total interest income 6,303,553 6,304,792
Interest expense:
Deposits 3,214,259 2,793,293
Advances from Federal
Home Loan Bank 95,444 144,768
Total interest expense 3,309,703 2,938,061
Net interest income 2,993,850 3,366,731
Provision for loan losses 55,000 --
Net interest income after
provision for loan losses 2,938,850 3,366,731
Non-interest income:
Insurance commission
income 688,166 691,196
Loan origination fees and
service charges 145,456 129,425
Other 45,100 36,247
Total non-interest income 878,722 856,868
Non-interest expense:
Compensation and benefits 1,614,601 1,542,123
Occupancy and equipment 340,114 264,333
Deposit insurance premiums 185,287 225,663
Data processing services 105,986 86,125
Other 540,427 564,794
Total non-interest expense 2,786,415 2,683,038
Income before income taxes 1,031,157 1,540,561
Income taxes 399,480 588,623
Net income $ 631,677 $ 951,938
See accompanying Notes to Consolidated Financial Statements.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operations of the Association. The information contained in this
section should be read in conjunction with the Consolidated Financial Statements
and accompanying Notes thereto and the other sections contained in this
Prospectus.
Operating Strategy
The business of the Association consists principally of attracting
deposits from the general public and using such deposits to originate mortgage
loans secured primarily by one- to four-family residences. The Association also
invests in interest bearing deposits, investment grade federal agency securities
and mortgage-backed securities. The Association plans to continue to fund its
assets primarily with deposits, although FHLB advances have been used as a
supplemental source of funds.
The Association's profitability depends primarily on its net interest
income, which is the difference between the income it receives on its loan and
investment portfolio and its cost of funds, which consists of interest paid on
deposits. Net interest income is also affected by the relative amounts of
interest-earning assets and interest-bearing liabilities. When interest-earning
assets equal or exceed interest-bearing liabilities, any positive interest rate
spread will generate net interest income. The Association's profitability is
also affected by the level of other income and expenses. Other income consists
of service charges on negotiable order of withdrawal ("NOW") accounts, late
charges on loans and other fees, proceeds from the sale of available-for-sale
securities, insurance commissions, and net real estate owned income (expense).
Other expenses include compensation and employee benefits, occupancy expenses,
deposit insurance premiums, equipment and data servicing expenses, professional
fees and other operating costs. The Association's results of operations are also
significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government legislation and
policies concerning monetary and fiscal affairs, housing and financial
institutions and the attendant actions of the regulatory authorities.
The Association's strategy is to operate as a conservative,
well-capitalized, profitable institution dedicated to financing home ownership
and other consumer needs and to provide quality service to all customers. The
Association believes that it has successfully implemented its strategy by (i)
maintaining strong capital levels, (ii) maintaining effective control over
operating expenses to attempt to achieve profitability under differing interest
rate scenarios, (iii) emphasizing local loan originations, and (iv) emphasizing
high-quality customer service with a competitive fee structure.
Financial Condition
Total assets increased by approximately $1.3 million, or 1.5%, from $85.5
million at June 30, 1995 to $86.8 million at June 30, 1996. This increase was
primarily attributable to an increase in net loans receivable.
The composition of the consolidated statements of financial condition was
not materially affected by market conditions between June 30, 1996 and June 30,
1995. Net loans increased $2.5 million, or 6.2%, as a result of increased
originations of one- to four-family and construction loans. Mortgage-backed
securities decreased by $1.7 million during this period primarily as the result
of maturities of mortgage-backed securities of $7.4 million that were partially
offset by purchases of $5.7 million. Premises and equipment increased $177,000
primarily as a result of the remodeling of the Bozeman branch office during
fiscal 1996.
Deposits increased $1.5 million, or 2.2%, to $68.6 million at June 30,
1996 from $67.1 million at June 30, 1995. NOW, regular savings and money market
accounts increased only slightly while time deposits increased by
19
approximately $1.4 million. The weighted average rate on deposits increased from
4.05% during fiscal year 1995 to 4.68% for fiscal year 1996.
Results of Operations
The operating results of the Association depend primarily on its net
interest income. The Association's net interest income is determined by its
interest rate spread, which is the difference between the yields earned on its
interest-earning assets and the rates paid on its interest-bearing liabilities
and the degree of mismatch in the maturity and repricing characteristics of its
interest-earning assets and interest-bearing liabilities. The Association's net
earnings are also affected by the establishment of provisions for loan losses
and the level of its other non-interest income, including insurance commission
income and deposit service charges, as well as its other expenses and income tax
provisions.
Comparison of Results of Operations for the Years Ended June 30, 1996 and 1995
General. Market interest rates are generally measured by the yields on
U.S. Treasury obligations. The yields on the one-year U.S. Treasury Bill and the
30-year U.S. Treasury Bond are the respective benchmarks for short-term and
long-term market interest rates. During the fiscal year ended June 30, 1995, the
yield curve flattened (i.e. short-term and long-term rates converged) as the
yield on the one-year U.S. Treasury Bill increased from 4.22% at June 30, 1994
to 5.57% at June 30, 1995, while the yield on the 30-year U.S. Treasury Bond
decreased from 7.61% at June 30, 1994 to 6.63% at June 30, 1995. During the
fiscal year ended June 30, 1996, the yield curve steepened (i.e. short-term and
long-term rates diverged) as the yield on the one-year U.S. Treasury Bill
decreased to 5.16% at June 30, 1996, while the yield on the 30-year U.S.
Treasury Bond increased to 6.87% at June 30, 1996.
Net Income. Net income decreased $320,000, or 33.6%, to $632,000 for
fiscal 1996 from $952,000 for fiscal 1995. The decline in income was primarily
attributable to an increase in the Association's cost of funds from 4.10% during
the year ended June 30, 1995 to 4.71% for the year ended June 30, 1996. The
average balance of interest-bearing liabilities decreased slightly during this
period from $71.6 million during fiscal 1995 to $70.3 million during fiscal
1996.
Net Interest Income. Net interest income decreased $373,000, or 11.7%, to
$2.9 million for 1996 from $3.4 million for 1995. The decrease in net interest
income primarily reflected a 53 basis point decrease in the interest rate spread
to 2.80% for fiscal 1996 from 3.33% for fiscal 1995.
Interest Income. Total interest income was $6.3 million for both fiscal
1996 and 1995. Interest income from loans receivable decreased $33,000, or 9.6%.
The decrease was primarily attributable to a 7 basis point decrease in the
average yield on loans receivable from 8.51% to 8.44%. The decline in the
average yield on loans receivable was partially offset by an increase in the
average balance of loans receivable from $40.1 million during fiscal 1995 to
$40.8 million during fiscal 1996 as loan originations increased to $12.4 million
during fiscal 1996 compared to loan originations of $4.5 million during fiscal
1995.
Interest income from mortgage-backed securities was $2.5 million during
both periods. The average balance of mortgage-backed securities declined from
$38.1 million during fiscal 1995 to $37.1 million during fiscal 1996 as
principal repayments exceeded purchases. This was offset, however, by an
increase in the yield on mortgage-backed securities from 6.65% during fiscal
1995 to 6.78% during fiscal 1996.
Interest Expense. Interest expense on deposits increased $421,000 to $3.2
million for 1996 from $2.8 million for 1995. The increase is primarily
attributable to an increase in the average cost of deposits which increased from
4.05% during fiscal 1995 to 4.68% during fiscal 1996 which more than offset the
decline in the average balance of deposits. The increase in the cost of deposits
was primarily attributable to an increase in rates paid on certificates of
deposit to meet local competition.
20
The Association utilized FHLB advances to purchase mortgage-backed
securities and to provide an additional source of funds for its lending
activities. During this period the average balance of short term borrowings
decreased $1.1 million from $2.7 million during fiscal 1995 to $1.6 million
during 1996 as traditional deposits were utilized to fund lending activities and
mortgage-backed securities purchases. As a result, the cost of FHLB advances
decreased 34.1% from $145,000 during fiscal 1995 to $95,000 during fiscal 1996.
Provision for Loan Losses. The provision for loan losses for 1996 was
$55,000 compared to no provision for 1995. The increase resulted in part from
management's desire to increase loan loss reserves based on management's
assessment of its loan portfolio (increase in total mortgage loans outstanding)
and the general economy (continued slow economic growth). Management's periodic
evaluation of the adequacy of the allowance is based on factors such as the
Association's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to repay,
estimated value of any underlying collateral, current and prospective economic
conditions, peer group comparisons, and independent appraisals. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Association's allowance for loan losses. Such agencies
may require the Association to provide additions to the allowance based upon
judgments different from management. Assessment of the adequacy of the allowance
for credit losses involves subjective judgements regarding future events, and
thus, there can be no assurance that additional provisions for credit losses
will not be required in future periods. Although management uses the best
information available, future adjustments to the allowance may be necessary due
to economic, operating, regulatory and other conditions that may be beyond the
Association's control. Any increase or decrease in the provision for loan losses
has a corresponding negative or positive effect on net income. At June 30, 1996,
the allowance represented 0.46% of loans receivable as compared to 0.36% of
loans receivable at June 30, 1995.
Non-Interest Income. Non-interest income increased $22,000, or 2.6%, in
fiscal 1996 as compared to fiscal 1995 primarily as the result of a $16,000, or
12.4%, increase in loan origination fees as a result of the increase in the
volume of loan originations and loan prepayments in fiscal 1996 compared to
fiscal 1995.
Insurance commissions that the Association receives from its wholly-owned
subsidiary are the largest component of its non-interest income. The Association
received income from insurance commissions of $688,000 and $691,000 during
fiscal 1996 and 1995, respectively.
Non-Interest Expense. Total non-interest expense increased $103,000, or
3.8%, for 1996 compared to 1995. This increase was primarily the result of a
$72,000, or 4.7%, increase in compensation and benefits and a $76,000, or 28.7%,
increase in occupancy and equipment expense caused primarily by additional
depreciation expense on new equipment and furniture related to the remodeling of
the Bozeman branch, repairs to an elevator and other maintenance costs. Data
processing expenses increased $20,000, or 23.1%. Other non-interest expense
items remained relatively stable.
Included in non-interest expense are direct costs (compensation and
benefits, occupancy and equipment, and other expenses) attributable to the
operations of the Association's wholly-owned subsidiary, Dime Insurance Agency.
Such direct costs totalled $638,000 and $617,000 for the fiscal years ended June
30, 1996 and 1995, respectively.
The Association expects to incur increased expenses following the
Conversion as a result of the costs associated with being a public company and
the ESOP and other stock benefit plans, if adopted.
Income Taxes. Income taxes declined $189,000 from 1995 to 1996 as a result
of the decline in income before income taxes. The effective combined Federal and
state tax rate was 38.74% during 1996 and 38.21% during 1995.
21
Average Balances, Interest and Average Yields/Cost
The following table sets forth certain information for the periods
indicated regarding average balances of assets and liabilities as well as the
total dollar amounts of interest income from average interest-earning assets and
interest expense on average interest-bearing liabilities and average yields and
costs. Such yields and costs for the periods indicated are derived by dividing
income or expense by the average monthly balance of assets or liabilities,
respectively, for the periods presented. Average balances are derived from
month-end balances. Management does not believe that the use of month-end
balances instead of daily balances has caused any material difference in the
information presented.
Year Ended June 30,
At June 30, --------------------------------------------------------------------
1996 1996 1995
---------- ------------------------------------------ -------------------------
Yield/ Average Yield/ Average Yield/
Cost Balance Interest Cost Balance Interest Cost
----- ------- -------- ---- ------- -------- ----
(Dollars in Thousands)
Interest-earning assets:
Loans receivable(1) 8.16% $40,766 $3,441 8.44% $40,069 $3,408 8.51%
Mortgage-backed securities 6.86 37,097 2,517 6.78 38,064 2,531 6.65
Investment securities 5.28 4,020 214 5.32 3,705 142 3.83
Other interest-earning assets(2) 6.18 2,044 132 6.46 3,044 224 7.36
----- ------- ------ ------- ------
Total interest-earning assets 7.42 83,927 6,304 7.51 84,882 6,305 7.43
Non-interest-earning assets 3,567 3,196
------- -------
Total assets $87,494 $88,078
======= =======
Interest-bearing liabilities:
Deposits 4.64 $68,739 3,214 4.68 $68,974 2,793 4.05
Other liabilities 5.98 1,595 96 6.02 2,668 145 5.43
----- ------- ------- ------- ------
Total interest-bearing liabilities 4.67 70,334 3,310 4.71 71,642 2,938 4.10
------ ------
Non-interest-bearing liabilities 1,318 1,400
------- -------
Total liabilities 71,652 73,042
Retained earnings 15,842 15,036
------- -------
Total liabilities and retained earnings $87,494 $88,078
======= =======
Net interest income $2,994 $3,366
====== ======
Interest rate spread(3) 2.75 2.80% 3.33%
==== ====
Net yield on interest earning assets(4) 3.57% 3.97%
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 119.33% 118.48%
====== ======
(1) Average balances include non-accrual loans.
(2) Includes interest-bearing deposits in other financial institutions and
dividends on FHLB stock.
(3) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
22
Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes
on net interest income of the Association. Information is provided with respect
to (i) effects on net interest income attributable to changes in volume (changes
in volume multiplied by prior rate); (ii) effects on net interest income
attributable to changes in rate (changes in rate multiplied by prior volume);
and (iii) the net change. The changes attributed to the combined impact of rate
and volume have been allocated proportionately to the changes due to volume and
the changes due to rate.
Year Ended June 30, Year Ended June 30,
1996 Compared to Year 1995 Compared to Year
Ended June 30, 1995 Ended June 30, 1994
Increase (Decrease) Increase (Decrease)
Due to Due to
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------ ---- ------ --- ------ ---- ------ ---
(In Thousands)
Interest-earning assets:
Loans receivable...................... $ 59 $ (28) $ 2 $ 33 $ (148) $ (54) $ (2) $ (204)
Mortgage-backed securities............ (64) 49 1 (14) 181 (18) -- 163
Investment securities................. 12 55 5 72 98 (60) (41) (3)
Other interest-earning assets......... (74) (27) 9 (92) 17 46 14 77
------- ------- ----- ------- ----- ----- ----- -----
Total interest-earning assets...... (67) (49) 17 (1) 148 (86) (29) 33
------- ------- ------ ------ ----- ------ ------ -----
Interest expense:
Savings accounts...................... (6) 428 (1) 421 74 228 5 307
Other liabilities..................... (58) 15 (6) (49) (13) 3 -- (10)
------- ------ ------- ------- ------ ----- ------ ------
Total interest-bearing liabilities. (64) 443 (7) 372 61 231 5 297
------- ------ ------- ------ ----- ----- ----- -----
Net change in net interest income...... $ (3) $(394) $ 24 $(373) $ 87 $(317) $(34) $264
===== ====== ==== ====== ==== ====== ===== ====
23
Asset and Liability Management and Interest Rate Risk
General. The ability to maximize net interest income depends largely upon
achieving a positive interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Interest rate sensitivity is a
measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities which either reprice or mature within a given
period of time. The difference, or the interest rate repricing "gap," provides
an indication of the extent to which an institution's interest rate spread will
be affected by changes in interest rates. 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 within shorter maturities would result in a decrease in net
interest income. Conversely, during a period of falling interest rates, a
negative gap within shorter maturities would result in an increase in net
interest income.
The Association has perceived its market niche to be that of a traditional
thrift lender that originates fixed rate residential loans for its portfolio and
purchases fixed rate United States agency investment securities and
mortgage-backed securities to supplement its lending activities. The Association
uses its capital position to absorb the adverse consequences of the increased
interest rate risk associated with this strategy. As an integral part of this
strategy, the Association has historically concentrated its lending activity on
the origination of long-term, fixed-rate, residential one- to four-family
mortgage loans and commercial real estate and multi-family loans. As of June 30,
1996, 83.1% of the Association's total loans, were fixed rate loans and 86.2% of
its investments and mortgage-backed securities had fixed interest rates.
The mismatch between maturities and interest rate sensitivities of balance
sheet items results in interest rate risk. The Association has a high level of
interest rate risk, compared to many similar sized thrift institutions, as a
result of its policies to make fixed-rate, residential one- to four-family real
estate loans and to purchase fixed rate investment and mortgage-backed
securities, which are longer term in nature than the short-term characteristics
of its liabilities for customer deposit accounts. See "RISK FACTORS -- Above
Average Interest Rate Risk Associated With Fixed-Rate Loan and Mortgage-Backed
Securities Portfolio"; Because of its capital position, the Association has
accepted the above average interest rate risk associated with fixed-rate loans
and fixed-rate investment and mortgage-backed securities in an effort to
maximize yield. See "-- Liquidity and Capital Resources."
Interest Rate Sensitivity of Net Portfolio Value
The following table is provided to the Association by the OTS and
illustrates the change in NPV, at June 30, 1996 based on OTS assumptions. No
effect has been given to any steps that management of the Association may take
to counter the effect of the interest rate movements presented in the table.
Net Portfolio as %
Basis of Portfolio Value
Point ("bp") Net Portfolio Value of Assets
Change
in Rates $ Amount $ Change % Change NPV Ratio Change
- -------- -------- -------- -------- --------- ------
(Dollars in Thousands)
+400 bp 11,766 (6,495) -36% 14.51% -598 bp
+300 bp 13,403 (4,857) -27 16.13 -436 bp
+200 bp 15,095 (3,165) -17 17.72 -277 bp
+100 bp 16,762 (1,498) -8 19.22 -127 bp
0 bp 18,260 20.49
-100 bp 19,346 1,085 +6 21.35 +86 bp
-200 bp 19,744 1,484 +8 21.59 +110 bp
-300 bp 19,937 1,677 +9 21.64 +115 bp
-400 bp 20,417 2,157 +12 21.93 +144 bp
24
Under the OTS interest rate risk capital rule (implementation of which has
been postponed), those institutions with greater than "normal" levels of
interest rate risk will be subject to an interest rate risk component in
calculating their risk-based capital ratio. An institution with a "normal" level
of interest rate risk is defined as one whose "Measured Interest Rate Risk" is
less than 2.0%.
The following table is provided by the OTS and is based on the
calculations in the previous table. It sets forth the IRR capital component that
will be deducted from risk-based capital in determining the level of risk-based
capital. At June 30, 1996, the change in NPV as a percentage of portfolio value
of total assets in negative 3.55%, which is greater than negative 2.0%,
indicating that the Association has a greater than "normal" level of interest
rate risk. The Association is exempt from any additional capital requirements;
however, had the Association been subject to the IRR capital component, its IRR
capital component at June 30, 1996 would be approximately $670,000.
June 30, March 31, June 30,
1996 1996 1995
RISK MEASURES: 200 BP RATE SHOCK
Pre-Shock NPV Ratio: NPV as % of PV of Assets 20.49% 20.73% 20.06%
Exposure Measure: Post-Shock NPV Ratio 17.72 18.02 17.86
Sensitivity Measure: Change in NPV Ratio (277) bp (270) bp (220) bp
CALCULATION OF CAPITAL COMPONENT
Change in NPV as % of PV of Assets (3.55)% (3.49)% (2.88)%
Interest Rate Risk Capital Component ($000) -- -- --
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as substantially all of the Association's ARM
loans, have features that restrict changes in interest rates on a short-term
basis (1.5% to 2.0% per adjustment period) and over the life of the asset
(generally 5% over the life). Furthermore, in the event of a change in interest
rates, expected rates of prepayments on loans and early withdrawals from
certificates could likely deviate significantly from those assumed in
calculating the table. Therefore, the data presented in the table should not be
relied upon as indicative of actual results.
Liquidity and Capital Resources
The Association's primary sources of funds are proceeds from principal and
interest payments on loans, maturing securities and certificates of deposit. The
proceeds from the sale of available-for-sale securities and FHLB advances are
additional sources of liquidity. While maturities and scheduled amortization of
loans are a predictable source of funds, deposit flows and mortgage prepayments
are greatly influenced by general interest rates, economic conditions and
competition.
The primary investing activity of the Association is the origination of
one- to four-family mortgage loans. During the years ended June 30, 1996 and
1995, the Association originated mortgage loans in the amounts of $12.4 million
and $4.5 million, respectively. During these periods, the Association purchased
mortgage backed securities of $5.7 million and $4.9 million. Other investing
activities include activity in investment grade federal agency and
mortgage-backed securities.
The Association must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to support loan growth and deposit withdrawals,
to satisfy financial commitments and to take advantage of investment
25
opportunities. During fiscal years 1996 and 1995, the Association used its
sources of funds primarily to fund loan commitments and to pay deposit
withdrawals.
The Association uses cash flows generated from operating, investing and
financing activities to meet its liquidity requirements. See Consolidated
Statements of Cash Flows included as part of the Consolidated Financial
Statements appearing elsewhere herein.
Like most thrift institutions, deposits, particularly certificates of
deposit, have been the primary source of external funds for the Association. By
offering interest rates that are competitive with or at a slight premium to the
average rate paid by local competitors, the Association has had limited success
in lengthening the maturity of its certificate of deposit portfolio. At June 30,
1996, certificates of deposit amounted to $40.0 million, or 58.3% of total
deposits, including $12.5 million which were scheduled to mature in more than
one year after June 30, 1996. At June 30, 1996, $27.4 million of certificates of
deposit were scheduled to mature within one year. Historically, the Association
has been able to retain a significant amount of maturing deposits. Management of
the Association believes it has adequate resources to fund all loan commitments
by deposits and, if necessary, FHLB-Seattle advances and that it can adjust the
offering rates of savings certificates to retain deposits in changing interest
rate environments.
The OTS requires a savings institution to maintain an average daily
balance of liquid assets (cash and eligible investments) equal to at least 5.0%
of the average daily balance of its net withdrawable deposits and short-term
borrowings. In addition, short-term liquid assets currently must constitute 1.0%
of the sum of net withdrawable deposit accounts plus short-term borrowings. The
Association's actual short- and long-term liquidity ratios at June 30, 1996 were
23.9% and 3.3%, respectively. The Association consistently maintains liquidity
levels in excess of regulatory requirements, and believes this is an appropriate
strategy for proper asset and liability management.
The Association is required to maintain specific amounts of capital
pursuant to OTS requirements. As of June 30, 1996, the Association was in
compliance with all regulatory capital requirements which were effective as of
such date with tangible, core and risk-based capital ratios of 17.5%, 17.5% and
46.7%, respectively. For a detailed discussion of regulatory capital
requirements, see "REGULATION -- Federal Regulation of Savings Associations --
Capital Requirements." See "HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE" for a
numerical presentation of the Association's historical and pro forma capital
levels at June 30, 1996 relative to regulatory requirements.
Impact of New Accounting Pronouncements and Regulatory Policies
Accounting for Derivative Financial Instruments. SFAS No. 119 requires
disclosures of information such as credit and market risks, cash requirements
and accounting policies about derivative financial instruments. The Association
holds structured notes which have contractual step-up interest rates and call
features. The Association's investment policy does not authorize investments in
interest rate swaps, options and futures contracts.
Accounting by Creditors for Impairment of a Loan. See Note 1 of Notes to
the Consolidated Financial Statements for a discussion of SFAS No. 114, as
amended by SFAS No. 118. The Association's adoption of SFAS No. 114, as amended
by SFAS No. 118, did not have a material impact on the Association's financial
position or results of operations.
Disclosure of Fair Value of Financial Instruments. See Note 16 of Notes to
the Consolidated Financial Statements for a discussion of SFAS No. 107.
Accounting for Impairment of Long-Lived Assets. SFAS No. 121 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
indicate that the carrying amount of an asset may not be recoverable. An
impairment loss is recognized if the sum of the expected future cash flows is
less than the carrying amount of the asset. The
26
Association does not expect the implementation of SFAS No. 121 to have an
material impact on the Association's consolidated financial position or results
of operations. SFAS No. 121 is effective for financial statements issued with
fiscal years beginning after December 15, 1995.
Accounting for Stock-Based Compensation. In October 1995, the FASB issued
SFAS No. 123, establishing financial accounting and reporting standards for
stock-based employee compensation plans. SFAS No. 123 encourages all entities to
adopt a new method of accounting to measure compensation cost of all employee
stock compensation plans based on the estimated fair value of the award at the
date it is granted. Companies are, however, allowed to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting, which generally does not result in compensation expense recognition
for most plans. Companies that elect to remain with the existing accounting are
required to disclose in a footnote to the financial statements pro forma net
income and, if presented, earnings per share, as if SFAS No. 123 had been
adopted. The accounting requirements of SFAS No. 123 are effective for
transactions entered into in fiscal years that begin after December 15, 1995;
however, companies are required to disclose information for awards granted in
their first fiscal year beginning after December 15, 1994.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities. SFAS No. 125 provides guidance on accounting for
transfers and servicing of financial assets, recognition and measurement of
servicing assets and liabilities, financial assets subject to prepayment,
secured borrowings and collateral, and extinguishment of liabilities.
SFAS No. 125 generally requires that the Association recognize as separate
assets the rights to service mortgage loans for others, whether the servicing
rights are acquired through purchases or loan originations. Servicing rights are
initially recorded at fair value based upon the present value of estimated
future cash flows. Subsequently, the servicing rights are assessed for
impairment, which is recognized in the statement of income in the period the
impairment occurs. For purposes of performing the impairment evaluation, the
related portfolio must be stratified on the basis of certain risk
characteristics including loan type and note rate. SFAS No. 125 also specifies
that financial assets subject to prepayment, including loans that can be
contractually prepaid or otherwise settled in such a way that the holder would
not recover substantially all of its recorded investment, be measured like debt
securities available-for-sale or trading securities under SFAS No. 115, as
amended by SFAS No. 125. The provisions of SFAS No. 125 apply to transactions
occurring after December 31, 1996.
Accounting for Employee Stock Ownership Plans. In November 1993, the
American Institute of Certified Public Accountants issued SOP 93-6, which
requires an employer to record compensation expense in an amount equal to the
fair value of shares committed to be released to employees from an employee
stock ownership plan. Assuming shares of Common Stock appreciate in value over
time, the adoption of SOP 93-6 will increase compensation expense relating to
the ESOP to be established in connection with the Conversion. This effect on net
income and book value per share in fiscal 1996 and future periods cannot be
predicted due to the uncertainty of the fair value of the shares of Common Stock
subsequent to their issuance.
Effect of Inflation and Changing Prices
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with GAAP, which generally require the
measurement of financial position and operating results in terms of historical
dollars, without considering the change in the relative purchasing power of
money over time due to inflation. The primary impact of inflation is reflected
in the increased cost of the Association's operations. Unlike most industrial
companies, virtually all the assets and liabilities of a financial institution
are monetary in nature. As a result, interest rates generally have a more
significant impact on a financial institution's performance than do general
levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.
27
BUSINESS OF THE HOLDING COMPANY
General
The Holding Company was organized as a Delaware business corporation at
the direction of the Association in September 1996 for the purpose of becoming a
holding company for the Association upon consummation of the Conversion. Upon
consummation of the Conversion, the Association will be a wholly-owned
subsidiary of the Holding Company.
Business
Prior to the Conversion, the Holding Company will not engage in any
significant operations. Upon consummation of the Conversion, the Holding
Company's sole business activity will be the ownership of all of the capital
stock of the Association. In the future, the Holding Company may acquire or
organize other operating subsidiaries, although there are no current plans,
arrangements, agreements or understandings, written or oral, to do so.
Initially, the Holding Company will neither own nor lease any property but
will instead use the premises, equipment and furniture of the Association with
the payment of appropriate rental fees, as required by applicable law.
Since the Holding Company will only hold the capital stock of the
Association, the competitive conditions applicable to the Holding Company will
be the same as those confronting the Association. See "BUSINESS OF THE
ASSOCIATION -- Competition."
BUSINESS OF THE ASSOCIATION
General
The Association operates as a community oriented financial institution
devoted to serving the needs of its customers in its market area. The
Association's business consists primarily of attracting deposits from the
general public and using those funds to originate residential real estate loans.
In addition, the Association has maintained a significant portion of its assets
in investments and mortgage-backed securities.
Market Area
The Association's primary market area includes the Counties of Park,
Gallatin and Sweet Grass in South Central Montana. This area has similar
economic characteristics, however, there is diversity in some unique industries.
All three counties are located near Yellowstone National Park and offer a number
of recreational activities, which are popular tourist attractions.
The Association's main office is located in Livingston (population
approximately 7,000), which is the county seat of Park County (population
approximately 16,000). The primary economic sources in Park County are
agriculture, tourism, mining and forestry. Park County has experienced an
increase in population during the last few years as individuals and businesses
have relocated to Montana. According to information provided by Livingston Job
Service the largest employers in Park County are the State and local
governments, the local hospital, Livingston Rebuild Center, Livingston
Convalescent Center and Industrial Towel. The Park County unemployment rate for
July 1996 was 3.3%.
Bozeman (population approximately 28,000) is the county seat of Gallatin
County (population approximately 59,500). The primary economic sources in
Gallatin County are agriculture, tourism, services, recreational manufacturing
and natural resource-based industries such as mining and forestry. Gallatin
County has also
28
experienced an increase in population during the last three years. In connection
with this increase in population, Gallatin County has also experienced some
growth in its technology-based companies. Montana State University, which is
located in Bozeman and is the largest single employer, also has a significant
impact on the Gallatin County economy. Other large employers in Gallatin County
include Gibson Guitar, Louisiana Pacific Corp. and Video Lottery Technologies,
Inc. The Gallatin County unemployment rate for July 1996 was 1.9%.
Big Timber (population approximately 1,600) is the county seat of Sweet
Grass County (population approximately 3,300). The primary economic sources in
Sweet Grass County are agriculture, tourism, mining and forestry. Sweet Grass
County has experienced a minimal increase in population during the last few
years. The Sweet Grass County unemployment rate for July 1996 was 1.9%.
Lending Activities
General. As a federally chartered savings and loan association, the
Association has general authority to originate and purchase loans secured by
real estate located throughout the United States. Notwithstanding this
nationwide lending authority, substantially all of the mortgage loans in
the Association's portfolio are secured by properties located in its primary
market area of Park, Gallatin, and Sweet Grass Counties in South Central
Montana.
Permanent residential one- to four-family mortgage loans amounted to $35.2
million, or 81.7%, of the Association's total loan portfolio, before net items,
at June 30, 1996. The Association originates other loans secured by multi-family
residential and commercial real estate, and construction loans. Those loans
amounted to $4.9 million, or 11.4%, of the total loan portfolio, before net
items, (i.e., loans in process, deferred loan origination fees and costs, and
allowance for loan losses), at June 30, 1996. Approximately 2.2%, or $965,000,
of the Association's total loan portfolio, before net items, as of June 30, 1996
consisted of non-real estate loans.
Permissible loans-to-one borrower by the Association are generally limited
to 15% of unimpaired capital and surplus. The Association's loan-to-one borrower
limitation was $2.4 million at June 30, 1996 and would be $5.3 million assuming
gross proceeds from the Offering of $22.5 million at the maximum of the
Estimated Valuation Range, less the adjustment to capital for the ESOP and MRP.
At June 30, 1996, the Association had four borrowing relationships with
outstanding balances in excess of $300,000, the largest of which was $1.3
million and all of which were secured by multiple single family properties,
multi-family or commercial real estate. All of those loans have performed in
accordance with their terms since origination.
Loan Portfolio Analysis. The following table sets forth the composition of
the Association's loan portfolio by type of loan as of the dates indicated. The
Association had no concentration of loans of a given category exceeding 10% of
total gross loans other than as set forth below.
At June 30,
1996 1995
Amount Percent Amount Percent
(Dollars in Thousands)
One- to four-family $35,202 81.66% $33,974 84.67%
Multi-family 2,333 5.41 2,557 6.37
Commercial real estate 1,182 2.74 1,425 3.55
Consumer 2,112 4.90 1,456 3.63
Share loans 901 2.09 455 1.13
Construction 1,380 3.20 257 0.65
-------- ------- ------- -------
Total 43,110 100.00% 40,124 100.00%
====== ======
Less:
Loans in process 770 315
Deferred loan origination
fees and costs 258 232
Allowance for loan losses 200 145
-------- --------
Total loans, net $41,882 $39,432
======= =======
29
Permanent Residential One- to Four-Family Mortgage Loans. The primary
lending activity of the Association is the origination for portfolio of
permanent residential one- to four-family first mortgage loans. Management
believes that this policy of focusing on single-family residential mortgage
loans has been successful in contributing to interest income while keeping
delinquencies and losses to a minimum. At June 30, 1996, $35.2 million, or
81.7%, of the Association's total loan portfolio, before net items, consisted of
permanent residential one- to four-family mortgage loans, with an average
balance of $49,000.
The Association presently originates for portfolio fixed-rate mortgage
loans secured by one- to four- family properties with terms of up to 20 years.
At June 30, 1996, $29.6 million, or 68.6% of the total loans before net items
were fixed rate one- to four-family loans and $5.6 million, or 13.0%, were ARM
loans. The Association has offered two ARM products for portfolio which adjust
annually subject to a limitation on the annual increase of 1.5% to 2.0% and an
overall limitation of 5.0% or to a specific ceiling rate. These ARM products
utilize either the OTS Monthly Median Cost of Funds Index or the Semi-Annual
Cost of Funds Index ("COFI"). Loans based on COFI constitute a majority of the
Association's adjustable rate loans. The COFI is a lagging model index which,
together with the periodic and overall interest rate caps, may cause the yield
on such loans to adjust more slowly than the cost of interest-bearing
liabilities especially in a rapidly rising rate environment. The Association's
ARM loans do not permit negative amortization of principal and carry no
prepayment restrictions. Borrower demand for ARM loans versus fixed-rate
mortgage loans is a function of the level of interest rates, the expectations of
changes in the level of interest rates and the difference between the initial
interest rates and fees charged for each type of loan. The relative amount of
fixed-rate mortgage loans and ARM loans that can be originated at any time is
largely determined by the demand for each in a competitive environment.
ARM loans help reduce the Association's exposure to changes in interest
rates. There are, however, unquantifiable credit risks resulting from the
potential of increased costs due to changed rates to be paid by the customer. It
is possible that, during periods of rising interest rates, the risk of default
on ARM loans may increase as a result of repricing with increased costs to the
borrower. Another consideration is that although ARM loans allow the Association
to increase the sensitivity of its asset base to changes in the interest rates,
the extent of this interest sensitivity is limited by the periodic and lifetime
interest rate adjustment limits. Because of these considerations, the
Association has no assurance that yields on ARM loans will be sufficient to
offset increases in the Association's cost of funds.
The Association's lending policies generally limit the maximum
loan-to-value ratio on mortgage loans secured by owner-occupied properties to
80% of the lesser of the appraised value or the purchase price, however, most
loans have loan-to-value ratios of 75% or less. Appraisals are obtained on all
properties and are made by independent fee appraisers approved by the Board of
Directors.
The Association offers fixed-rate, permanent residential one- to
four-family mortgage loans with terms of up to 30 years. Substantially all
permanent one- to four-family loans have original contractual terms to maturity
of 20 to 25 years and are primarily made for loan amounts of less than $250,000.
Such loans generally are amortized on a monthly basis with principal and
interest due each month and customarily include "due-on-sale" clauses. The
Association enforces due-on-sale clauses to the extent permitted under
applicable laws. Substantially all of the Association's mortgage loan portfolio
consists of conventional loans. The Association has not originated significant
amounts of mortgage loans on second residences.
The Association also originates residential mortgage loans secured by
non-owner occupied rental properties within its primary market area. At June 30,
1996, these loans totaled approximately $_______. Generally, such loans are made
at higher interest rates than owner occupied residential mortgage loans, with a
loan-to-value ratio of 70%, and with a debt coverage ratio of 1.25x.
The Association requires title insurance on all real estate secured loans.
The Association also requires that fire and extended coverage casualty insurance
or homeowners insurance (and, if appropriate, flood insurance) be maintained in
an amount at least equal to the outstanding loan balance.
30
Construction Loans. The Association makes construction loans primarily to
prospective home owners for the construction of their single-family residences,
which generally convert to a permanent loan upon the completion of construction.
Construction loans generally begin to amortize as permanent residential one- to
four-family mortgage loans after the construction period (typically six months)
is completed, unless extended. At June 30, 1996, construction loans amounted to
$1.4 million, or 3.2% of the Association's total loan portfolio, before net
items. In connection with the recent population growth experienced in Bozeman,
Montana, the Association experienced an increase in the origination of
construction loans during fiscal 1996. The balance of the Association's
construction loan portfolio increased from $257,000 at June 30, 1995 to $1.4
million at June 30, 1996. Construction loans have rates and terms which
generally match the non-construction loans then offered by the Association,
except that during the construction phase, the borrower pays only interest on
the loan. The borrower is qualified at the interest rate for the permanent loan.
The Association's construction loan agreements generally provide that loan
proceeds are disbursed in increments as construction progresses. The Association
periodically reviews the progress of the underlying construction project.
Construction lending is generally limited to the Association's primary lending
areas and is underwritten pursuant to the same general guidelines used for
originating permanent one- to four-family loans.
Construction financing is generally considered to involve a higher degree
of risk of loss than financing on improved, owner-occupied real estate because
of the uncertainties of construction and the possibility of costs exceeding the
initial estimates. The Association has sought to minimize the risks associated
with permanent construction lending by limiting construction loans to qualified
owner-occupied borrowers with construction performed by qualified builders
located primarily in the Association's market area.
Multi-Family and Commercial Real Estate Lending. The Association also
originates loans secured by multi-family and commercial real estate. At June 30,
1996, the Association's loan portfolio included $2.3 million in multi-family and
$1.2 million in commercial real estate loans.
Multi-family and commercial real estate lending affords the Association an
opportunity to receive interest at rates higher than those generally available
from one- to four-family residential lending. However, loans secured by such
properties are generally greater in amount, more difficult to evaluate and
monitor and, therefore, involve a greater degree of risk than one- to
four-family residential mortgage loans. Because payments on loans secured by
commercial real estate and multi-family properties are often dependent on the
successful operation and management of the properties, repayment of such loans
may be influenced by adverse conditions in the real estate market or the
economy.
Multi-family and commercial real estate loans originated by the
Association are predominately fixed rate loans with terms to maturity of 15 to
20 years. The Association's commercial real estate portfolio consists of loans
on a variety of properties including office buildings and churches. Multi-family
loans generally are secured by small to medium sized apartment buildings.
Appraisals on properties which secure multi-family and commercial real estate
loans are performed by an independent appraiser engaged by the Association
before the loan is made. Underwriting of commercial and multi-family loans
includes a thorough analysis of the cash flows generated by the real estate to
support the debt service and the financial resources, experience, and income
level of the borrowers. The Association imposes a debt coverage ratio of 1.25x
to ensure that the property securing the loans will generate sufficient cash
flow to adequately cover operating expenses and debt service payments plus
provide an acceptable return to the investor. Operating statements on each
multi-family and commercial real estate loan are required and reviewed by
management on an annual basis.
At June 30, 1996, the average loan balance of the Association's
multi-family loans was $167,000. At June 30, 1996, the Association had four
multi-family loans with one borrower with an aggregate balance of $1.3 million.
All of the properties securing the loans are located in the Association's
primary market area with the exception of one participation loan on a property
located in California with a balance at June 30, 1996 of $324,000. At June 30,
1996, all multi-family and commercial real estate loans were current.
31
Consumer Lending. The Association's consumer loan portfolio consist
primarily of home equity, home improvement, share loans (loans secured by
deposits) and, to a substantially lesser extent, mobile home and automobile
loans. At June 30, 1996, the Association's consumer loans totalled approximately
$3.0 million, or 7.0% of the Association's gross loans of which $2.0 million, or
4.8%, consisted of home equity and home improvement loans.
Consumer loans are made at fixed interest rates and for varying terms.
Home equity and home improvement loans are made for terms up to 15 years for
owner occupied residences. In the case of the majority of home equity loans, the
Association holds a second mortgage behind another financial institution that
holds the first mortgage. When originating a home equity loan, the Association
accounts for both the first and second mortgage liens and generally limits the
loan-to-value ratio to 80%.
32
Maturity of Loan Portfolio. The following table sets forth the maturity of
Association's loan portfolio at June 30, 1996. The table does not include
prepayments or scheduled principal repayments. Prepayments and scheduled
principal repayments on loans totaled $9.4 million and $7.0 million, for the two
years ended June 30, 1996, respectively. Adjustable-rate mortgage loans are
shown as maturing based on contractual maturities.
1-4 Family Multi-family Commercial Construction Consumer Total
(In Thousands)
Amounts Due:
Within 3 months $ 5 $ -- $ -- $ 210 $ 361 $ 576
3 months to 1 year 7 -- -- 1,170 421 1,598
After 1 year:
1 to 3 years 244 190 42 -- 136 612
3 to 5 years 455 40 28 -- 260 783
5 to 10 years 2,392 822 207 -- 571 3,992
10 to 20 years 23,833 1,078 905 -- 1,241 27,057
Over 20 years 8,266 203 -- -- 23 8,492
-------- ------- -------- -------- ------- --------
Total due after one year 35,190 2,333 1,182 -- 2,231 40,936
-------- ------- ------- -------- ------- --------
Total amount due $35,202 $2,333 $1,182 $1,380 $ 3,013 43,110
======= ====== ====== ====== =======
Less:
Allowance for loan loss 200
Loans in process 770
Deferred loan fees 258
--------
Loans receivable, net $41,882
=======
The following table sets forth the dollar amount of all loans due after
June 30, 1996, which have fixed interest rates and have floating or adjustable
interest rates.
Fixed- Floating- or
Rates Adjustable-Rates Total
(In Thousands)
One- to four-family $29,586 $5,616 $35,202
Multi-family 646 1,687 2,333
Non-residential 1,182 -- 1,182
Construction 1,380 -- 1,380
Consumer and share 3,013 -- 3,013
------- -------- --------
Total $35,807 $7,303 $43,110
======= ====== =======
33
Scheduled contractual principal repayments of loans as presented in the
preceding table do not reflect the actual life of such assets. The average life
of loans ordinarily 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 loans 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, however, when current mortgage loan market rates are higher than rates
on existing mortgage loans and, conversely, decrease when rates on existing
mortgage loans are higher than current mortgage loan market rates.
Loan Solicitation and Processing. Loan customers are solicited through
advertising media and contacts with local real estate brokers. Upon receipt of a
loan application from a prospective borrower, a credit report and other data are
obtained to verify specific information relating to the loan applicant's
employment, income and credit standing. All of the Association's lending is
subject to its written nondiscriminatory underwriting standards, loan
origination procedures and lending policies prescribed by the Association's
Board of Directors.
All loans must be approved by the Association's Loan Committee, which
consists of any three members of the Board of Directors. Interest rates are
subject to change if the approved loan is not closed within the time of the
commitment. Because the Association originates loans for its own portfolio, many
of the loans do not comply with all secondary market documentation criteria.
This has enabled the Association to develop an expedited loan application and
approval process which management believes provides it with a competitive
advantage in its primary market area while continuing to maintain its
underwriting standards. Management of the Association also believes its local
decision-making capabilities is an attractive quality to customers within its
market area. The Association's loan approval process allows loans to be approved
and closed in approximately four weeks.
Loan Commitments. Loan commitments typically contain a termination date of
30 days from the date of the commitment letter that is issued at the time the
loan is approved. The Association had outstanding loan commitments of
approximately $304,000 at June 30, 1996 all of which were for fixed rate loans.
See Note 14 of Notes to the Consolidated Financial Statements.
Loan Originations, Sales and Purchases. During the year ended June 30,
1996, the Association's total gross mortgage loan originations were $12.4
million.
The Association has occasionally originated or participated in loans
secured by properties outside the State of Montana. These properties are
primarily located in Northern California but also include loans secured by one-
to four- family properties in the Commonwealth of Massachusetts and the States
of New Mexico, Arizona and Colorado. At June 30, 1996, these loans amounted to
$1.8 million and consisted of (i) $934,826 million in permanent residential
one- to four-family mortgage loans, (ii) $429,000 in multi-family loans, (iii)
a participation interest in a commercial real estate loan for $324,000, and (iv)
two whole loan purchases for $145,000. The Association has purchased loan
participation interests primarily during periods of reduced loan demand in its
market area. At June 30, 1996, the Association had three participations in its
primary market area with a balance of $127,000. Any such purchases are made in
conformance with the Association's underwriting standards. The Association may
decide to purchase additional loans outside its market area in the future
depending upon the demand for mortgage credit in its market area, however, it
has not purchased any participation interests outside of its primary market area
during the past five years.
Historically, the Association has been a portfolio lender, maintaining the
residential mortgage loans its originates in its portfolio rather than selling
them in the secondary market. The Association currently intends to continue this
practice after the consummation of the Conversion. See "RISK FACTORS -- Certain
Lending Considerations."
34
The following table sets forth the Association's originations and loan
sales and principal repayments during the periods indicated. Predominately all
mortgage loan originations during the periods indicated were fixed rate loans.
Year Ended June 30,
----------------------------------------------------
1996 1995 1994 1993
---- ---- ---- ----
(In Thousands)
Total gross loans receivable at
beginning of period $40,124 $42,637 $41,344 $38,120
------- ------- ------- -------
Loans originated:
One- to four-family 7,411 2,857 13,223 13,115
Multi-family 225 57 -- 311
Construction 2,631 641 1,937 1,592
Commercial 47 -- -- 18
Consumer 2,069 899 413 1,200
------- ------ ------- -------
Total loans originated 12,383 4,454 15,578 16,236
Loans sold:
Whole loans -- -- -- --
Participations sold -- -- -- --
Total loans sold -- -- -- --
Loan principal repayments (9,397) (6,967) (14,280) (13,012)
------- ------- -------- --------
Net loan activity 2,986 (2,513) 1,293 3,224
------- ------- -------- --------
Total gross loans receivable
at end of period $43,110 $40,124 $42,637 $41,344
======= ======= ======= =======
Loan Origination and Other Fees. The Association charges loan origination
fees, which are a percentage of the principal amount of the mortgage loan. The
amount of fees charged by the Association is generally up to 1% for mortgage
loans and 2% for construction loans. The Association generally does not charge
fees for home equity loans. Current accounting standards require that
origination fees received (net of certain loan origination costs) be deferred
and amortized into interest income over the contractual life of the loan. Net
deferred fees or costs associated with loans that are prepaid are recognized as
income at the time of prepayment. The Association had $252,000 in net deferred
loan fees at June 30, 1996.
Non-Performing Assets and Delinquencies. When a mortgage loan borrower
fails to make a required loan payment when due, the Association institutes
collection procedures. All loan payments are due on the contractual due date of
the loan, however, a loan is not considered delinquent and collection procedures
are not instituted until after the 30th day of the contractual due date. The
Association does not charge its borrowers late penalty fees on payments made
after the contractual due date. The first notice is mailed to the borrower 30
days after the contractual due date and, if necessary, a second written notice
follows within 30 days thereafter giving the borrower 15 days to respond and
correct the delinquency. Attempts to contact the borrower by telephone generally
begin soon after the first notice is mailed to the borrower. If a satisfactory
response is not obtained, continuous follow-up contacts are attempted until the
loan has been brought current or foreclosure is initiated. Attempts to interview
the borrower, preferably in person, are made to establish (i) the cause of the
delinquency, (ii) whether the cause is temporary, (iii) the attitude of the
borrower toward the debt, and (iv) a mutually satisfactory arrangement for
curing the default.
After such attempts have been made by the Association, or sooner if the
borrower is chronically delinquent and all reasonable means of obtaining payment
on time have been exhausted, foreclosure is initiated according to
35
the terms of the security instrument and applicable law. Interest income on
loans is then reduced by the full amount of accrued and uncollected interest.
When a consumer loan borrower fails to make a required payment on a
consumer loan by the payment due date, the Association institutes the same
collection procedures as for its mortgage loan borrowers.
The Association's Board of Directors is informed monthly as to the status
of all mortgage and consumer loans that are delinquent more than 30 days, the
status on all loans currently in foreclosure, and the status of all foreclosed
and repossessed property owned by the Association.
At June 30, 1996 and 1995, the Association did not have any nonaccrual
loans, accruing loans contractually past due 90 days or more as to principal or
interest payments, or troubled debt restructurings within the meaning of SFAS
No. 15. Loans amounting to $290,000 and $25,000 were past due (30-89 days) but
still accruing at June 30, 1996 and 1995, respectively.
Real Estate Owned. The Association had no real estate acquired through
foreclosure or in satisfaction of loans at June 30, 1996. See Note 1 of Notes to
the Consolidated Financial Statements for a discussion of the Association's
procedures for accounting for real estate owned.
Asset Classification. The OTS has adopted various regulations regarding
problem assets of savings institutions. The regulations require that each
insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, OTS examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are three classifications for problem assets: substandard,
doubtful and loss. Substandard assets have one or more defined weaknesses and
are characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses may make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified as loss is considered uncollectible and
of such little value that continuance as an asset of the institution is not
warranted. If an asset or portion thereof is classified as loss, the insured
institution establishes specific allowances for loan losses for the full amount
of the portion of the asset . All or a portion of general loan loss allowances
established to cover possible losses related to assets classified substandard or
doubtful may be included in determining an institution's regulatory capital,
while specific valuation allowances for loan losses generally do not qualify as
regulatory capital. Assets that do not currently expose the insured institution
to sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are designated "special mention" and are
monitored by the Association.
At June 30, 1996 the Association had two substandard loans totaling
$75,000 and at June 30, 1995 had three substandard loans totaling $81,000.
Allowance for Loan Losses. The Association has established a systematic
methodology for determining provisions for loan losses. The methodology is set
forth in a formal policy and considers the need for an overall general valuation
allowance as well as specific allowances for individual loans.
In originating loans, the Association recognizes that 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. The Association may increase its allowance
for loan losses by charging provisions for loan losses against the Association's
income.
The general valuation allowance is maintained to cover losses inherent in
the portfolio of performing loans. Management reviews the adequacy of the
allowance at least quarterly based on management's assessment of current
economic conditions, past loss and collection experience, and risk
characteristics of the loan portfolio. The amount
36
of the allowance is based on management's evaluation of the collectibility of
the loan portfolio, credit concentrations, trends in historical loss experience,
specific impaired loans, peer group comparisons and economic conditions.
Allowances for impaired loans are generally determined based on collateral
values or the present value of estimated cash flow. Specific valuation
allowances may be established to absorb losses on loans for which full
collectibility may not be reasonably assured. The amount of the allowance is
based on the estimated value of the collateral securing the loan and other
analyses pertinent to each situation.
At June 30, 1996, the Association had an allowance for loan losses of
$200,000, which management believed to be adequate to absorb losses inherent in
the portfolio at that date. Although management believes that it uses the best
information available to make such determinations in accordance with GAAP,
future adjustments to the allowance for loan losses may be necessary and results
of operations could be significantly and adversely affected if circumstances
differ substantially from the assumptions used in making the determinations.
Furthermore, there can be no assurance that regulators, in reviewing the
Association's loan portfolio, will not request the Association to increase
significantly its allowance for loan losses. In addition, because future events
affecting borrowers and collateral cannot be predicted with certainty, there can
be no assurance that the existing allowance for loan losses is adequate or that
substantial increases will not be necessary should the quality of any loans
deteriorate as a result of the factors discussed above. Any material increase in
the allowance for loan losses may adversely affect the Association's financial
condition and results of operations.
The following table sets forth an analysis of the Association's allowance
for loan losses for the periods indicated. As indicated by the table, there has
not been any fluctuations in the allowance for loan losses.
Year Ended June 30,
1996 1995
---- ----
(Dollars in Thousands)
Total loans outstanding before net items $43,110 $40,124
------- -------
Allowance balance at beginning of
year 145 145
------- -------
Provision 55 --
Net charge-offs -- --
-------- --------
Allowance balance at end of year $ 200 $ 145
======= =======
Allowance for loan losses as a percent
of total loans outstanding 0.46% 0.36%
37
The following table sets forth the breakdown of the allowance for loan
losses by loan category for the periods indicated. The portion of the allowance
to each loan category does not necessarily represent the total available for
losses within that category since the total allowance applies to the entire loan
portfolio. 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 other category.
At June 30,
1996 1995
% of % of
Loans Loans
in Each in Each
Category Category
to Total to Total
Amount Loans Amount Loans
(Dollars in Thousands)
One- to four-family $120 81.66% $105 84.67%
Commercial real estate 40 2.74 15 3.55
Multi-family 25 5.41 10 6.37
Construction -- 3.20 -- 0.65
Consumer and share 15 6.99 15 4.76
----- ------- ----- -------
Total allowance $200 100.00% $145 100.00%
==== ====== ==== ======
Investment Activities
The Association is permitted under federal law to invest in various types
of liquid assets, including U.S. Treasury obligations, securities of various
federal agencies and of state and municipal governments, deposits at the
FHLB-Seattle, certificates of deposit of federally insured institutions, certain
bankers' acceptances and federal funds. Subject to various restrictions, the
Association may also invest a portion of its assets in commercial paper and
corporate debt securities. The Association is also required to maintain an
investment in FHLB stock.
The Association is required under federal regulations to maintain a
minimum amount of liquid assets. At June 30, 1996, the Association's regulatory
liquidity of 23.9% was significantly in excess of the 5% required by OTS
regulations. The securities in the Association's investment portfolio provide it
with liquidity for funding loan originations and enables the Association to
improve the match between the maturities and repricing of its interest-rate
sensitive assets and liabilities. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Liquidity and Capital
Resources" and "REGULATION."
The President of the Association determines appropriate investments in
accordance with the Board of Directors' approved investment policies and
procedures. The Association's policies generally limit investments to U.S.
Government and agency securities and mortgage-backed securities issued and
guaranteed by FHLMC, FNMA and Government National Mortgage Association ("GNMA").
The Association's policies provide that investment purchases be ratified at
monthly Board of Directors meetings. Investments are made based on certain
considerations, which include the interest rate, yield, settlement date and
maturity of the investment, the Association's liquidity position, and
anticipated cash needs and sources (which in turn include outstanding
commitments, upcoming maturities, estimated deposits and anticipated loan
amortization and repayments). The effect that the proposed investment would have
on the Association's credit and interest rate risk, and risk-based capital is
also given consideration during the evaluation.
At June 30, 1996, the Association's investment and mortgage-backed
securities portfolio totaled $39.1 million and consisted principally of U.S.
Government and agency obligations and mortgage-backed securities. At June 30,
1996, the Association had investment securities available for sale with an
estimated market value of $1.4
38
million which includes stock in the FHLMC and two mutual funds, the assets of
which consisted of adjustable rate mortgages and U.S. Government and agency
securities. The FHLMC common and preferred stock at June 30, 1996 had an
amortized cost of $68,000 and an estimated market value of $1.0 million. From
time to time, investment levels may be increased or decreased depending upon the
yields on investment alternatives and upon management's judgment as to the
attractiveness of the yields then available in relation to other opportunities
and its expectation of the level of yield that will be available in the future,
as well as management's projections as to the short-term demand for funds to be
used in the Association's loan origination and other activities.
U.S. Government and Agency Obligations. The Association's portfolio of
U.S. Government and agency obligations had a fair value of $2.4 million ($2.5
million at amortized cost) at June 30, 1996. The portfolio consisted of FHLB
bonds that mature between 1998 and 2011, all of which were held in the
Association's held to maturity portfolio. At June 30, 1996, the interest rates
on these obligations ranged from 5.2% to 8.0%.
The Association's investment securities include structured notes in the
form of step-up bonds and bonds that are subject to call. The form of structured
notes in which the Association has invested provides for periodic adjustments in
coupon rates on specified dates or call prior to maturity. The Association
purchases these bonds as part of its investment strategy and will only consider
bonds issued by a governmental agency with maturities of no longer than 15
years. Management of the Association acknowledges the uncertainty that these
instruments may be called before maturity with the initial higher coupon offered
by these bonds. Management of the Association realizes that step-up bonds, or
bonds subject to call, are not as liquid an investment as traditional agency
bonds and thus involve more risk than other investments in the Association's
portfolio. However, as the Association intends to hold the instruments until
their maturity or call, management does not consider this as an obstacle to
purchasing these instruments. At June 30, 1996, the Association had $750,000 in
step-up bonds and all of the FHLB bonds were subject to call prior to maturity.
Mortgage-Backed Securities. The Association purchases mortgage-backed
securities in order to: (i) generate positive interest rate spreads on large
principal balances with minimal administrative expense; (ii) lower the credit
risk of the Association as a result of the guarantees provided by FHLMC, FMNA,
and GNMA; (iii) enable the Association to use mortgage-backed securities as
collateral for financing; and (iv) invest excess funds during periods of reduced
loan demand. Included in the Association's mortgage-backed securities portfolio
are real estate mortgage investment conduits ("REMICs"), which mature in 2023
and have adjusting interest rates based primarily on the rate paid on United
States Treasury Securities and the COFI. At June 30, 1996, net mortgage-backed
securities totaled $35.2 million, or 40.5% of total assets. At June 30, 1996,
$4.0 million of the mortgage-backed securities had adjustable-rates of interest
and $31.2 million had fixed-rates. The mortgage-backed securities portfolio had
coupon rates ranging from 5.50% to 12.75% and had a weighted average yield of
6.78% during the year ended June 30, 1996. At June 30, 1996, the amortized cost
of the Association's mortgage-backed securities held to maturity was $22.6
million.
On November 15, 1995, the FASB issued a FASB Special Report, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities." The Special Report allows for a "one-time
reclassification" of securities as of a single date between November 15, 1995
and December 31, 1995. In December 1995, the Association reclassified
approximately $14.2 million of mortgage-backed securities from the held to
maturity classification to the available for sale classification. The estimated
fair value of the Association's mortgage-backed securities available for sale at
June 30, 1996, was $12.5 million, which is $600,000 less than the amortized cost
of $13.1 million.
Mortgage-backed securities (which also are known as mortgage participation
certificates or pass-through certificates) typically represent a participation
interest in a pool of single-family or multi-family mortgages. The principal and
interest payments on these mortgages are passed from the mortgage originators,
through intermediaries (generally U.S. Government agencies and government
sponsored enterprises) that pool and resell the participation interests in the
form of securities, to investors such as the Association. Such U.S. Government
agencies and government sponsored enterprises, which guarantee the payment of
principal and interest to investors, primarily
39
include the FHLMC, FNMA and the GNMA. Mortgage-backed securities typically are
issued with stated principal amounts, and the securities are backed by pools of
mortgages that have loans with interest rates that fall within a specific range
and have varying maturities. Mortgage-backed securities generally yield less
than the loans that underlie such securities because of the cost of payment
guarantees and credit enhancements. In addition, mortgage-backed securities are
usually more liquid than individual mortgage loans and may be used to
collateralize certain liabilities and obligations of the Association. These
types of securities also permit the Association to optimize its regulatory
capital because they have low risk weighting.
REMICs are generally classified as derivative financial instruments
because they are created by redirecting the cash flows from the pool of
mortgages or mortgage-backed securities underlying these securities to create
two or more classes (or tranches) with different maturity or risk
characteristics designed to meet a variety of investor needs and preferences.
Management believes these securities may represent attractive alternatives
relative to other investments due to the wide variety of maturity, repayment and
interest rate options available. Investment practices of the Association
prohibit the purchase of high risk REMICs. The Association held REMICs with a
net carrying value of $1.9 million at June 30, 1996. REMICs may be sponsored by
private issuers, such as mortgage bankers or money center banks, or by U.S.
Government agencies and government sponsored entities. At June 30, 1996, the
Association did not own any privately issued REMICs.
Thrift Bulletin Number 52 ("TB-52"), the OTS Policy Statement on
securities portfolio policies and unsuitable investment practices, requires that
institutions classify mortgage derivative products acquired, including REMICs
and certain tranches of CMOs, as "high-risk mortgage securities" if such
products exhibit greater price volatility than a benchmark fixed-rate 30-year
mortgage-backed pass-through security. Institutions may only hold high-risk
mortgage securities to reduce interest-rate risk in accordance with safe and
sound practices and must also follow certain prudent safeguards in the purchase
and retention of such securities. At June 30, 1996, the Association did not have
any securities that would be identified under TB-52 as "high-risk mortgage
securities." The Association also evaluates its mortgage-backed securities
portfolio annually for compliance with applicable regulatory requirements,
including testing for identification of high risk investments pursuant to
Federal Financial Institutions Examination Council standards.
Derivatives also include "off balance sheet" financial products whose
value is dependent on the value of an underlying financial asset, such as a
stock, bond, foreign currency, or a reference rate or index. Such derivatives
include "forwards," "futures," "options" or "swaps." The Association's
investment policy does not permit investment in such "off balance sheet"
derivative instruments.
Of the Association's $35.2 million mortgage-backed securities portfolio at
June 30, 1996, $17.1 million had contractual maturities within six years and
$18.1 million with a weighted had contractual maturities over six years. The
actual maturity of a mortgage-backed security may be less than its stated
maturity due to prepayments of the underlying mortgages. Prepayments that are
faster than anticipated may shorten the life of the security and may result in a
loss of any premiums paid and thereby reduce the net yield on such securities.
Although prepayments of underlying mortgages depend on many factors, including
the type of mortgages, the coupon rate, the age of 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 generally is
the most significant determinant of the rate of prepayments. During periods of
declining mortgage interest rates, if the coupon rate of the underlying
mortgages exceeds the prevailing market interest rates offered for mortgage
loans, refinancing generally increases and accelerates the prepayment of the
underlying mortgages and the related security. Under such circumstances, the
Association may be subject to reinvestment risk because, to the extent that the
Association's mortgage-backed securities amortize or prepay faster than
anticipated, the Association may not be able to reinvest the proceeds of such
repayments and prepayments at a comparable rate. In contrast to mortgage-backed
securities in which cash flow is received (and hence, prepayment risk is shared)
pro rata by all securities holders, the cash flow from the mortgages or
mortgage-backed securities underlying REMICs are segmented and paid in
accordance with a predetermined priority to investors holding various
40
tranches of such securities or obligations. A particular tranche of REMICs may
therefore carry prepayment risk that differs from that of both the underlying
collateral and other tranches.
The following table sets forth information regarding the Association's
mortgage-backed securities (including REMICs) activity for the periods
indicated.
Year Ended June 30,
1996 1995
(In Thousands)
Beginning balance $36,943 $37,605
Mortgage-backed securities purchased 5,704 4,870
Amortization of premiums and discounts (31) (42)
Principal repayments (7,428) (5,490)
-------- --------
Ending balance $35,188 $36,943
======= =======
The following table sets forth the composition of the Association's
mortgage-backed securities portfolio at the dates indicated.
At June 30,
---------------------------------------------------------------
1996 1995
---------------------------------- ----------------------------
Percent Percent
Amount of Total Amount of Total
(Dollars in Thousands)
Mortgage-backed securities:
REMIC $ 1,865 5.32% $ 1,865 5.07%
GNMA 996 2.84 1,262 3.43
FNMA 9,042 25.78 11,998 32.61
FHLMC 23,167 66.06 21,670 58.89
-------- ------- -------- -------
Total 35,070 100.00% 36,795 100.00%
====== =======
Net premiums 118 148
------- -------
Net mortgage-backed securities $35,188 $36,943
======= =======
The following table sets forth the contractual maturities of the
Association's mortgage-backed securities portfolio as of June 30, 1996:
Contractual Maturities Due in Year(s) Ended June 30,
2000 2003 2013
to to and
1997 1998 1999 2002 2012 Thereafter
---- ---- ---- ---- ---- ----------
(In Thousands)
Mortgage-backed
securities $1,645 $1,958 $3,204 $10,191 $11,312 $6,760
====== ====== ====== ======= ======= ======
41
The following table sets forth the carrying value of the Association's
investment securities portfolio, securities available for sale portfolio,
short-term investments and FHLB stock at the dates indicated. At June 30, 1996,
the market value of the Association's investment securities portfolio was $2.4
million and securities available for sale portfolio was $1.4 million.
At June 30,
1996 1995
(In Thousands)
Investment securities held to maturity:
U.S. Government securities $ -- $ --
U.S. Agency securities 2,499 2,498
------ ------
Total investment securities 2,499 2,498
Securities available-for-sale(1) 1,385 1,192
Interest-bearing deposits 1,338 1,235
FHLB stock 1,123 1,044
------- -------
Total $6,345 $5,969
====== ======
(1) Excludes mortgage-backed securities.
42
The following table sets forth certain information regarding the carrying
values, weighted average yields and maturities of the Association's investment
securities and securities available for sale portfolios as of June 30, 1996.
More Than More Than
One Year or Less One to Five Years Five to Ten Years More Than Ten Years
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
-------- --------- -------- --------- -------- -------- -------- --------
(In Thousands)
U.S. Agency
obligations $ -- --% $ 1,000 6.28% $ 500 6.00% $ 999 7.31%
Securities
available-for-sale 1,385 -- -- -- -- -- -- --
--------- --------- ------- --------
Total $ 1,385 $ 1,000 $ 500 $ 999
======= ======= ===== =====
Total Investment Securities
Carrying Average Market
Value Yield Value
-------- -------- ------
U.S. Agency
obligations $ 2,499 6.64 $ 2,405
Securities
available-for-sale 1,385 -- 1,385
------- -------
$ 3,884 $ 3,790
Total ======= =======
43
Deposit Activities and Other Sources of Funds
General. Deposits and loan repayments are the major sources of the
Association's funds for lending and other investment purposes. Scheduled loan
repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are influenced significantly by general interest
rates and money market conditions. Borrowings through the FHLB-Seattle may be
used on a short-term basis to compensate for reductions in the availability of
funds from other sources. At June 30, 1996, the Association had no other
borrowing arrangements.
Deposit Accounts. Substantially all of the Association's depositors are
residents of South Central Montana. Deposits are attracted from within the
Association's market area through the offering of a broad selection of deposit
instruments, including NOW accounts, money market accounts, regular savings
accounts, certificates of deposit and retirement savings plans. Deposit account
terms vary, according to the minimum balance required, the time periods the
funds must remain on deposit and the interest rate, among other factors. In
determining the terms of its deposit accounts, the Association considers current
market interest rates, profitability to the Association, matching deposit and
loan products and its customer preferences and concerns. The Association reviews
its deposit mix and pricing weekly.
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 Holding Company, which will own all the
outstanding capital stock that is issued by the Association.
The following table sets forth certain information concerning the
Association's time deposits and other interest-bearing deposits at June 30,
1996.
Weighted Percentage
Average Original Minimum of Total
Interest Rate Term Checking and Savings Deposits Amount Balance Deposits
(In Thousands)
2.50% None NOW accounts $200 $8,673 12.63%
3.25 None Regular savings 5 14,949 21.77
3.50 None Money market accounts 1,000 4,950 7.21
Certificates of deposit:
5.11 1-3 months Fixed term, fixed rate 500 967 1.41
5.18 4-6 months Fixed term, fixed rate 500 6,716 9.78
5.55 7-12 months Fixed term, fixed rate 500 9,172 13.36
6.12 13-24 months Fixed term, fixed rate 500 7,369 10.73
5.88 25-36 months Fixed term, fixed rate 500 7,161 10.43
5.87 36-48 months Fixed term, fixed rate 500 957 1.39
6.35 49-120 months Fixed term, fixed rate 500 4,299 6.26
6.01 -- Jumbo certificates 100,000 3,334 4.87
-------- -------
68,547 --
Accrued interest on deposits 107 .16
-------- -------
4.64 Total $68,654 100.00%
======= ======
44
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, 1996.
Maturity Period Amount
(In Thousands)
Three months or less................... $1,183
Over three through six months.......... 514
Over six through 12 months............. 1,014
Over 12 months......................... 623
-------
Total.......................$3,334
Time Deposits by Rates
The following table sets forth the time deposits in the Association
classified by rates at June 30, 1996.
At June 30,
1996
(In Thousands)
4.00 - 5.99%.................... $28,717
6.00 - 7.99%.................... 10,862
8.00 - 8.99%.................... 396
---------
Total........................ $39,975
=======
The following table sets forth the amount and maturities of time
deposits at June 30, 1996.
Amount Due
After
June 30, June 30, June 30, June 30,
1997 1998 1999 1999 Total
-------- ------ ------ ------ ------
(In Thousands)
4.00 - 5.99%.................... $ 22,828 $ 3,918 $ 1,041 $ 930 $ 28,717
6.00 - 7.99%.................... 4,371 2,484 1,570 2,431 10,862
8.00 - 8.99%.................... 232 33 131 -- 396
--------- -------- ------- ------- --------
Totals..................... $ 27,431 $ 6,435 $ 2,742 $ 3,367 39,975
======== ======= ======= =======
Accrued interest on certificate
accounts....................... 107
--------
Total...................... $40,082
=======
45
Savings Activities
The following table sets forth the deposit activities of the
Association for the periods indicated.
Year Ended June 30,
1996 1995
(In Thousands)
Net decrease before interest
credited.................................. $(1,778) $(3,971)
Interest credited.......................... 3,262 2,699
------- -------
Net increase (decrease) in savings
deposits.................................. $1,484 $(1,272)
====== ========
Borrowings
Savings deposits are the primary source of funds for the Association's
lending and investment activities and for its general business purposes. The
Association also relies upon advances from the FHLB-Seattle to supplement its
supply of lendable funds, to meet deposit withdrawal requirements and to fund
the purchase of investment and mortgage-backed securities. At June 30, 1996, the
Association had $1.5 million of borrowings from the FHLB- Seattle at a weighted
average rate of 5.98%. Such amount represented three borrowings of $750,000,
$500,000 and $250,000 with interest rates of 6.02%, 5.82% and 5.27%,
respectively. These borrowings are secured by a blanket lien on $40.1 million of
one- to four- family residential real estate loans and by certain investment and
mortgage-backed securities having an aggregate carrying value of $38.1 million
at June 30, 1996. These borrowings mature between July and September 1996. See
Note 8 of Notes to Consolidated Financial Statements.
The FHLB-Seattle functions as a central reserve bank providing credit
for savings and loan associations and certain other member financial
institutions. As a member, the Association is required to own capital stock in
the FHLB-Seattle and is authorized to apply for advances on the security of such
stock and certain of its mortgage loans and other assets (principally securities
which are obligations of, or guaranteed by, the United States government)
provided certain creditworthiness standards have been met. Advances are made
pursuant to several different credit programs. Each credit program has its own
interest rate and range of maturities. Depending on the program, limitations on
the amount of advances are based on the financial condition of the member
institution and the adequacy of collateral pledged to secure the credit.
The following table sets forth information concerning only short-term
borrowings (those maturing within one year or less) the Association had during
the periods indicated.
Year Ended June 30,
1996 1995
(In Thousands)
Short-term FHLB advances:
Average balance outstanding................ $ 1,595 $ 2,668
Maximum amount outstanding at any
month-end during the period.............. $ 1,925 $ 4,210
Weighted average interest rate
during the period........................ 5.98% 5.43%
Total short-term borrowings at
end of period.............................. $ 1,500 $ 1,751
46
Competition
The Association operates in a very competitive market for the
attraction of savings deposits (its primary source of lendable funds) and in the
origination of loans. Historically, its most direct competition for savings
deposits has come from commercial banks, thrift institutions and credit unions
operating in its market area. Some of these commercial banks are subsidiaries of
large regional holding companies having vastly greater resources than the
Association at their disposal. At June 30, 1996, there were 14 commercial banks,
two thrift institutions (in addition to the Association) and two credit unions
in Park, Gallatin and Sweet Grass Counties. Particularly in times of high market
interest rates, the Association has faced competition for investors' funds from
short-term money market securities and corporate and U.S. Government securities.
The Association competes for loan originations with mortgage bankers, thrift
institutions, credit unions and commercial banks. Such competition for deposits
and loans may limit the Association's future growth and earnings prospects.
Subsidiary Activities
Federal savings associations generally may invest up to 3% of their
assets in service corporations, provided that at least one-half of any amount in
excess of 1% is used primarily for community, inner-city and community
development projects. The Association's investment in its service corporation,
Dime Service Corporation ("Service Corporation"), did not exceed these limits at
June 30, 1996.
The Service Corporation is a wholly owned subsidiary of the
Association. The Service Corporation was established in 1985 to operate the
insurance agency business started by one of the Association's original founders
in 1886. In 1992 and 1993, the Service Corporation purchased the insurance
business of two local insurance agencies. The Service Corporation presently
engages in full service property and casualty insurance activities under the
name "Dime Insurance Agency." At June 30, 1996, the Association's investment in
the Service Corporation was $495,000. The Service Corporation had total assets
of approximately $714,000 at June 30, 1996 and net income of approximately
$50,000 and $74,000 for the years ended June 30, 1996 and 1995, respectively.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- Comparison of Results of Operations for the Years
Ended June 30, 1996 and 1995."
Properties
The Association has three offices, two of which are owned by the
Association. The Association's main office is located at 123 South Main Street,
Livingston, Montana 59047. The main office was opened in 1923 and the square
footage is approximately 15,000 feet. Beginning in September 1995, the
Association subleased part of this building to the Human Resource Development
Counsel, District IX. This office is leased by the Association through March
1997. The Association's President, Beverly D. Harris, the Association's
Executive Vice President and Chief Financial Officer, Ernest A. Sandberg, and
the Association's general counsel, Joseph T. Swindlehurst, are the owners of
this building. Mrs. Harris and Mr. Swindlehurst are sister and brother and Mr.
Sandberg is their brother-in-law. For information regarding this relationship,
see "MANAGEMENT OF THE ASSOCIATION -- Transactions with the Association." The
Association has negotiated with the owners to purchase the building, which has
been approved by the OTS. If the Association determines not to purchase the
building, it will negotiate and enter into a lease with the owners for the
rental of the building prior to the expiration of the current lease term. At
June 30, 1996, the net book value of the leasehold improvements was $48,000.
The Association has branch offices located at 101 McLeod Street, Big
Timber, Montana 59011 and at 5 West Mendenhall Street, Bozeman, Montana 59715.
The Big Timber branch office consists of approximately 2,000 square feet, was
opened in 1980 in connection with the merger with Big Timber Building and Loan
Association and relocated to its current facility in 1984. At June 30, 1996, the
net book value of the property and equipment was $138,000. The Bozeman branch
office consists of approximately 7,000 square feet, was opened in 1958 in
connection with the merger with Pioneer Building and Loan Association and
relocated to its current facility in 1971.
47
At June 30, 1996, the net book value of the property and equipment was $827,000.
The net book value of the Association's premises and equipment at June 30, 1996
was $1.3 million.
The Association's subsidiary, Dime Service Corporation, leases offices
in Livingston and Big Timber, Montana. The Livingston office is 2,500 square
feet and the Big Timber office is 365 square feet. There are no written lease
agreements for these two offices.
Personnel
As of June 30, 1996, the Association had 36 full-time employees (ten of
which are employed by the Service Corporation) and four part-time employees,
none of whom were represented by a collective bargaining unit. The Association
believes its relationship with its employees is good.
Legal Proceedings
From time to time, the Association is involved in routine legal
proceedings occurring in the ordinary course of business. At June 30, 1996, the
Association was not a party to any legal proceedings that management of the
Association believed would be materially adverse to the financial condition of
the Association.
48
MANAGEMENT OF THE HOLDING COMPANY
The Board of Directors of the Holding Company is divided into three
classes, each of which contains approximately one third of the Board. The
Directors shall be elected by the stockholders of the Holding Company for
staggered three-year terms, or until their successors are elected and qualified.
One class of Directors, consisting of Walter J. Peterson, Jr., Sanroe J.
Kaisler, Jr. and Walter R. Sales, has a term of office expiring at the first
annual meeting of stockholders, a second class, consisting of Beverly D. Harris
and Edwin H. Doig, has a term of office expiring at the second annual meeting of
stockholders, and a third class, consisting of Ernest A. Sandberg and John R.
Boe, has a term of office expiring at the third annual meeting of stockholders.
The executive officers of the Holding 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.
The following individuals are the executive officers of the Holding
Company:
Name Position with Holding Company
Beverly D. Harris President and Chief Executive Officer
Ernest A. Sandberg Treasurer, Chief Financial Officer and Secretary
Since the formation of the Holding Company, none of the executive
officers, directors or other personnel has received remuneration from the
Holding Company. Information concerning the principal occupations, employment
and compensation of the directors and officers of the Holding Company during the
past five years is set forth under "MANAGEMENT OF THE ASSOCIATION --
Biographical Information."
MANAGEMENT OF THE ASSOCIATION
Directors and Executive Officers
The Board of Directors of the Association is presently composed of
seven members who are elected for terms of three years, approximately one third
of whom are elected annually in accordance with the Bylaws of the Association.
The executive officers of the Association are elected annually by the Board of
Directors and serve at the Board's discretion. The following table sets forth
information with respect to the Directors and executive officers of the
Association.
Current
Director Term
Name Age (1) Position with Association Since Expires
- ---- ------- ------------------------- ------- -------
Beverly D. Harris 62 President and Director 1971 1998
Walter J. Peterson, Jr. 73 Chairman of the Board and 1964 1997
Director
Ernest A. Sandberg 60 Executive Vice President, 1971 1999
Secretary and Director
John R. Boe 72 Director 1979 1999
(table continued on following page)
49
Current
Director Term
Name Age (1) Position with Association Since Expires
- ---- ------- ------------------------- ------- -------
Edwin H. Doig 65 Director 1979 1998
Sanroe J. Kaisler, Jr. 71 Director 1964 1997
Walter R. Sales 68 Director 1977 1997
(1) As of June 30, 1996.
Biographical Information
Set forth below is certain information regarding the Directors and
executive officers of the Association. Unless otherwise stated, each Director
and executive officer has held his or her current occupation for the last five
years. All Directors and executive officers reside in Livingston, Montana,
unless otherwise noted. There are no family relationships among or between the
Directors or executive officers, except for Mrs. Harris and Mr. Sandberg who are
sister- and brother-in-law.
Beverly D. Harris has been employed by the Association since 1956, and
has been President since 1972. She is a Director and Treasurer of the Park
County Chapter of American Red Cross, the Livingston Community Trust, the
Livingston Community Concert Association and the Park County Friends of the
Arts. She serves on the Thrift Advisory Council of the Federal Reserve Board.
Mrs. Harris also serves on the Board of Directors of the Association's
service corporation, Dime Service Corporation, the Montana Power Company, and
the Financial Institutions Retirement Fund ("FIRF").
Walter J. Peterson is Vice President and Manager of Dime Service
Corporation. He is a past president of the Montana Association of Insurance
Agents, and a past national director. He co-organized and served as trustee
of the Montana Insurance Education Foundation. Community endeavors have
included serving as president of the Livingston Community Hospital
Association, the Livingston Chamber of Commerce, and the Livingston Golf
and Country Club; as trustee of the Livingston Elks Lodge #245 B.P.O.E., as
alderman on the Livingston City Council, as chairman of the City Water
Board, and as a member of the City-County Planning Board. He is an active
member of the Livingston Rotary Club.
Ernest A. Sandberg has been employed by the Association since 1969 and
been Executive Vice President and Secretary since 1979. Mr. Sandberg is a member
of the Livingston Rotary Club, Chairman of two high school scholarship programs
and has served on the Advisory Committee for the Livingston Block Grant Program.
Mr. Sandberg also serves on the Board of Directors of the Association's service
corporation, Dime Service Corporation.
John R. Boe is retired after 39 years as a teacher and Vice Principal
of the local junior high school. He has been a director of the Association for
17 years. Mr. Boe is a member of the Board of Directors of the Pioneer Medical
Center. Mr. Boe is also a member of the American Legion and the Masonic
Lodge/Scottish Rite. He resides in Big Timber, Montana.
Edwin H. Doig is a registered pharmacist, and has been employed by
Pamida Pharmacy, a retail drugstore, since 1995. From 1972 to 1995, Mr. Doig
was the owner and Manager of Livingston Drug. He is past president of the
Montana State Pharmacy Association, and a member of the American Legion, the
Masonic Lodge, the Elks Lodge, and the Livingston Golf and Country Club.
Sanroe J. Kaisler, Jr., a retired insurance broker, was the partner and
majority stockholder of Waite & Company, an insurance company. He is a volunteer
for the American Red Cross, the American Lung Association and the Diabetes
Association. Mr. Kaisler resides in Bozeman, Montana.
50
Walter R. Sales is a retired rancher who served 10 years in the Montana
legislature. He has been a director of the Association for 19 years. Mr. Sales
resides in Bozeman, Montana.
Meetings and Committees of the Board of Directors
The business of the Association is conducted through meetings and
activities of the Board of Directors and its committees. During the fiscal year
ended June 30, 1996, the Board of Directors held 12 meetings. No Director
attended fewer than 75% of the total meetings of the Board of Directors and of
committees on which such Director served.
The Association's Executive Committee, consisting of Directors Harris,
Peterson and Kaisler, meets as needed. This Committee generally has the power
and authority to act on behalf of the Board of Directors between scheduled Board
meetings, unless specific matters are delegated to it for action by the Board.
The Executive Committee did not meet during the fiscal year ended June 30, 1996.
The Association's Audit Committee, consisting of Directors Peterson,
Kaisler, Sales, Doig and Boe, meets as needed. This Committee is responsible for
reviewing the external auditors' reports and results of their examination. The
Audit Committee met one time during the fiscal year ended June 30, 1996.
The Loan Committee, consisting of any three Directors of the
Association's Board of Directors, meets as needed. This Committee is responsible
for reviewing all loan applications prior to their submission to the Board.
Directors' Compensation
Directors received a fee of $500 per month and a fee of $250 for
attendance at regular Board meetings during the year ended June 30, 1996.
Effective January 1, 1997, directors will receive a retainer of $500 per month
and a fee of $250 for attendance at regular Board meetings of the Association
and a fee of $250 per month, payable quarterly, by the Holding Company. In
addition, Directors residing in Bozeman and Big Timber received $20 per meeting
for travel expenses. No additional fees are paid to Directors for committee
meetings. Directors' fees totalled $84,000 for the year ended June 30, 1996. It
is currently anticipated that after completion of the Conversion directors' fees
will be paid by the Holding Company and no separate fees will be paid for
service on the Board of Directors of the Association.
Executive Compensation
Summary Compensation Table. The following information is furnished for
the President and Chief Executive Officer, and the Executive Vice President
and Secretary of the Association for the year ended June 30, 1996. No other
executive officer of the Association received salary and bonus in excess of
$100,000 during the year ended June 30, 1996.
51
===============================================================================================================================
SUMMARY COMPENSATION TABLE(1)
- -------------------------------------------------------------------------------------------------------------------------------
Annual Compensation
- -------------------------------------------------------------------------------------------------------------------------------
Other
Annual
Name and Position Year Salary Bonus Compensation
- -------------------------------------------------------------------------------------------------------------------------------
Beverly D. Harris 1996 $102,090 $18,724 $11,750
President and Chief Executive
Officer
Ernest A. Sandberg 1996 $93,480 $17,137 $12,250
Executive Vice President and
Secretary
===============================================================================================================================
(1) Compensation information for fiscal years ended June 30, 1995 and 1994
has been omitted because the Association was neither a public company
nor a subsidiary thereof at such times. Excludes certain additional
benefits, the aggregate amounts of which do not exceed 10% of total
salary and bonus.
Employment Agreements. In connection with the Conversion, the Holding
Company and the Association (collectively, the "Employers") will enter into
three-year employment agreements with Mrs. Harris and Mr. Sandberg. Under the
agreements, the initial salary level for Mrs. Harris and Mr. Sandberg will be
$105,000 and $96,000, respectively, which amounts will be paid by the
Association and may be increased at the discretion of the Board of Directors or
an authorized committee of the Board. In determining salary levels for Mrs.
Harris and Mr. Sandberg, the Board will consider compensation levels for
similarly situated executives at comparable institutions, the financial
performance of the Association, as well as their individual performance. On
each anniversary of the commencement date of the agreements, the term of the
agreements may be extended for an additional year. The agreements are terminable
by the Employers at any time or upon the occurrence of certain events specified
by federal regulations.
The employment agreement provides for severance payments and other
benefits in the event of involuntary termination of employment in connection
with any change in control of the Employers. Severance payments also will be
provided on a similar basis in connection with a voluntary termination of
employment where, subsequent to a change in control, Mrs. Harris and Mr.
Sandberg are assigned duties inconsistent with their positions, duties,
responsibilities and status immediately prior to such change in control. The
term "change in control" is defined in the agreements as having occurred when,
among other things, (a) a person other than the Holding Company purchases shares
of Common Stock pursuant to a tender or exchange offer for such shares, (b) any
person (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act)
is or becomes the beneficial owner, directly or indirectly, of securities of the
Holding Company representing 25% or more of the combined voting power of the
Holding Company's then outstanding securities, (c) the membership of the Board
of Directors changes as the result of a contested election, or (d) shareholders
of the Holding Company approve a merger, consolidation, sale or disposition of
all or substantially all of the Holding Company's assets, or a plan of partial
or complete liquidation.
The severance payments from the Employers will equal 2.99 times each
executive's average annual compensation during the five-year period preceding
the change in control. Such amount will be paid in a lump sum within 10 business
days following the termination of employment. Assuming that a change in control
had occurred at June 30, 1996, Mrs. Harris and Mr. Sandberg would be entitled to
severance payments of approximately $309,000 and $284,000, respectively. Section
280G of the Code states that severance payments that equal or exceed three times
the base compensation of the individual are deemed to be "excess parachute
payments" if they are contingent upon a change in control. Individuals receiving
excess parachute payments are subject to a 20% excise tax on the amount of such
excess payments, and the Employers would not be entitled to deduct the amount of
such excess payments.
52
The agreements restrict each executive's right to compete against the
Employers for a period of one year from the date of termination of the agreement
if Mrs. Harris and Mr. Sandberg involuntarily terminate employment, except in
the event of a change in control.
The Board of Directors of the Holding Company or the Association may,
from time to time, also extend employment agreements to other senior executive
officers.
Benefits
General. The Association currently provides health insurance benefits
for full-time employees, subject to certain deductibles.
Defined Benefit Plan. The Association is a participant in the FIRF, a
multi-employer, non-contributory defined benefit retirement plan. The FIRF plan
covers all employees who have completed one year of service and have attained
the age of 21 years and provides for monthly retirement benefits determined
based on the employee's base salary and years of service. The normal retirement
age is 65 and the early retirement age is before age 65, but at least 45. Normal
retirement benefits are equal to 2.0% multiplied by the years of service to the
Association and the employee's average salary for the five highest consecutive
years preceding retirement. Benefits under the plan are not subject to offset
for social security benefits. If an employee elects early retirement, but
defers the receipt of benefits until age 65, the formula for computation of
early retirement benefits is the same as if the employee had
retired at the normal retirement age. However, if the employee elects early
retirement and receives benefits prior to age 65, benefits are reduced by
applying an early retirement factor based on the number of years the early
retirement date precedes age 65. If a participant terminates employment prior to
the normal retirement date or early retirement date as a result of disability,
the participant would receive the vested percentage of benefits at the
participant's normal retirement date. Separate actuarial valuations are not made
for individual members of the plan. The Association contributed $108,000 to the
plan for the fiscal year ended June 30, 1996. As of June 30, 1996, Mrs. Harris
and Mr. Sandberg had 41 and 25 years of credited service under the FIRF,
respectively.
The following table illustrates annual pension benefits payable at
normal retirement age, based on various levels of compensation and years of
service.
Highest Five-Year Years of Service
Average Annual ------------------------------------------------------------------------
Compensation 5 10 15 25 35 40 45
- ----------------- ----- ------ ------ ------ ------ ------ ----
$ 10,000 ..................1,000 2,000 3,000 5,000 7,000 8,000 9,000
20,000 ..................2,000 4,000 6,000 10,000 14,000 16,000 18,000
30,000 ..................3,000 6,000 9,000 15,000 21,000 24,000 27,000
40,000 ..................4,000 8,000 12,000 20,000 28,000 32,000 36,000
60,000 ..................6,000 12,000 18,000 30,000 42,000 48,000 54,000
80,000 ..................8,000 16,000 24,000 40,000 56,000 64,000 72,000
100,000 .................10,000 20,000 30,000 50,000 70,000 80,000 90,000
120,000 .................12,000 24,000 36,000 60,000 84,000 96,000 99,000
Deferred Compensation. The Association has entered into deferred
compensation arrangements with Mrs. Harris and Mr. Sandberg to provide those
individuals $500 per month for at least 132 months beginning at age 65. The
Association has purchased life insurance as an informal funding vehicle for its
obligation under these deferred compensation arrangements.
Employee Stock Ownership Plan. The Board of Directors has authorized
the adoption by the Association of an ESOP for employees of the Association to
become effective upon the consummation of the Conversion. The ESOP is intended
to satisfy the requirements for an employee stock ownership plan under the Code
and the
53
Employee Retirement Income Security Act of 1974, as amended ("ERISA").
Full-time employees of the Holding Company and the Association who have been
credited with at least 1,000 hours of service during a 12-month period and who
have attained age 21 will be eligible to participate in the ESOP.
In order to fund the purchase of up to 8% of the Common Stock to be
issued in the Conversion, it is anticipated that the ESOP will borrow funds from
the Holding Company. Such loan will equal 100% of the aggregate purchase price
of the Common Stock. The loan to the ESOP will be repaid principally from the
Association's contributions to the ESOP and any dividends paid on Common Stock
held by the ESOP over the anticipated 10-year term of the loan. The interest
rate for the ESOP loan is expected to be the prime rate as published in The Wall
Street Journal on the closing date of the Conversion. See "PRO FORMA DATA." In
any plan year, the Association may make additional discretionary contributions
to the ESOP for the benefit of plan participants in either cash or shares of
Common Stock, which may be acquired through the purchase of outstanding shares
in the market or from individual stockholders or which constitute authorized but
unissued shares or shares held in treasury by the Holding Company. The timing,
amount, and manner of such discretionary contributions will be affected by
several factors, including applicable regulatory policies, the requirements of
applicable laws and regulations, and market conditions.
Shares purchased by the ESOP with the proceeds of the loan will be
held in a suspense account and released on a pro rata basis as the loan is
repaid. Discretionary contributions to the ESOP and shares released from the
suspense account will be allocated among participants on the basis of each
participant's proportional share of total compensation. Forfeitures will be
reallocated among the remaining plan participants.
Participants will vest in their accrued benefits under the ESOP upon
the completion of five years of service. Benefits may be payable upon a
participant's retirement, early retirement, death, disability, or termination of
employment. The Association's contributions to the ESOP are not fixed, so
benefits payable under the ESOP cannot be estimated.
_______, ______ and _____ have been appointed by the Board of
Directors of the Association to serve as trustees of the ESOP. Under the ESOP,
the trustees must vote all allocated shares held in the ESOP in accordance with
the instructions of plan participants and allocated shares for which no
instructions are received must be voted in the same ratio on any matter as those
shares for which instructions are given.
Compensation expense for a leveraged employee stock ownership plan,
such as the ESOP, is recorded at the fair market value of the ESOP shares
committed to be released to participants' accounts. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Impact of New
Accounting Pronouncements and Regulatory Policies -- Accounting for Employee
Stock Ownership Plans."
The ESOP will be subject to the requirements of ERISA and the
regulations of the IRS and the Department of Labor issued thereunder. The
Association intends to request a determination letter from the IRS regarding the
tax-qualified status of the ESOP. Although no assurance can be given that a
favorable determination letter will be issued, the Association expects that a
favorable determination letter will be received by the ESOP.
1996 Stock Option Plan. The Board of Directors of the Holding Company
intends to adopt the Stock Option Plan and to submit the Stock Option Plan to
the stockholders for approval at a meeting held no earlier than six months
following consummation of the Conversion. The approval of a majority vote of the
Holding Company's outstanding shares is required prior to the implementation of
the Stock Option Plan within one year of the consummation of the Conversion. The
Stock Option Plan will comply with all applicable regulatory requirements.
However, the Stock Option Plan will not be approved or endorsed by the OTS.
54
The Stock Option Plan will be designed to attract and retain qualified
management personnel and nonemployee directors, to provide such officers, key
employees and nonemployee directors with a proprietary interest in the Holding
Company as a incentive to contribute to the success of the Holding Company and
the Association, and to reward officers and key employees for outstanding
performance. The Stock Option Plan will provide for the grant of incentive stock
options ("ISOs") intended to comply with the requirements of Section 422 of the
Code and for nonqualified stock options ("NQOs"). Upon receipt of stockholder
approval of the Stock Option Plan, stock options may be granted to key employees
of the Holding Company and its subsidiaries, including the Association. Unless
sooner terminated, the Stock Option Plan will continue in effect for a period of
ten years from the date the Stock Option Plan is approved by stockholders.
A number of authorized shares of Common Stock equal to 10% of the
number of shares of Common Stock issued in connection with the Conversion will
be reserved for future issuance under the Stock Option Plan (225,400 shares
based on the issuance of 2,254,000 shares at the maximum of the Estimated
Valuation Range). Shares acquired upon exercise of options will be authorized
but unissued shares or treasury shares. In the event of a stock split, reverse
stock split, stock dividend, or similar event, the number of shares of Common
Stock under the Stock Option Plan, the number of shares to which any award
relates and the exercise price per share under any option may be adjusted by the
Committee to reflect the increase or decrease in the total number of shares of
Common Stock outstanding.
The Stock Option Plan will be administered and interpreted by a
committee of the Board of Directors ("Committee"). Under the Stock Option Plan,
the Committee will determine which nonemployee directors, officers and key
employees will be granted options, whether, in the case of officers and
employees, such options will be ISOs or NQOs, the number of shares subject to
each option, and the exercisability of such options. The per share exercise
price of an option granted to an officer or employee will equal at least 100% of
the fair market value of a share of Common Stock on the date the option is
granted. All options granted to nonemployee directors will be NQOs and such
options will be granted at an exercise price equal to 100% of the fair market
value of the Common Stock on the date the option is granted. Options granted
upon the effective date of the Stock Option Plan will become exercisable ratably
over a five-year period following the date of grant. However, unvested options
will be immediately exercisable in the event of the recipient's death or
disability. Unvested options will also be exercisable following a change in
control (as defined in the Stock Option Plan) of the Holding Company or the
Association, to the extent authorized or not prohibited by applicable law or
regulations. Current OTS regulations, however, do not permit accelerated vesting
of options in the event of a change in control.
Each stock option that is awarded to an officer or key employee will
remain exercisable at any time on or after the date it vests through the earlier
to occur of the tenth anniversary of the date of grant or three months after the
date on which the optionee terminates employment (one year in the event of the
optionee's termination by reason of death or disability), unless such period is
extended by the Committee. Each stock option that is awarded to a nonemployee
director will remain exercisable through the earlier to occur of the tenth
anniversary of the date of grant or one year (two years in the event of a
nonemployee director's death or disability) following the termination of a
nonemployee director's service on the Board. All stock options are generally
nontransferable except by will or the laws of descent or distribution.
The Stock Option Plan will also provide that upon the payment of an
"extraordinary dividend" by the Holding Company, each optionee will receive a
cash payment equivalent to the dividends that would have been payable to such
optionee had the options been exercised on or before the record date of such
dividend. For purposes of the Stock Option Plan, an "extraordinary dividend" is
a dividend payable at a rate in excess of the Association's weighted average
cost of funds on interest-bearing liabilities for the 12-month period preceding
the record date of the dividend.
Under current provisions of the Code, the federal tax treatment of
ISOs and NQOs is different. With respect to ISOs, an optionee who satisfies
certain holding period requirements will not recognize income at the time the
option is granted or at the time the option is exercised. If the holding period
requirements are satisfied, the
55
optionee will generally recognize capital gain
or loss upon a subsequent disposition of the shares of Common Stock received
upon the exercise of a stock option. If the holding period requirements are not
satisfied, the difference between the fair market value of the Common Stock on
the date of grant and the option exercise price, if any, will be taxable to the
optionee at ordinary income tax rates. A federal income tax deduction generally
will not be available to the Holding Company as a result of the grant or
exercise of an ISO, unless the optionee fails to satisfy the holding period
requirements. With respect to NQOs, the grant of an NQO generally is not a
taxable event for the optionee and no tax deduction will be available to the
Holding Company. However, upon the exercise of an NQO, the difference between
the fair market value of the Common Stock on the date of exercise and the option
exercise price generally will be treated as compensation to the optionee upon
exercise, and the Holding Company will be entitled to a compensation expense
deduction in the amount of income realized by the optionee.
Although no specific award determinations have been made, the
Association anticipates that if stockholder approval is obtained it would
provide awards to its directors, officers and employees to the extent permitted
by applicable regulations. OTS regulations currently provide that no individual
officer or employee may receive more than 25% of the shares reserved for
issuance under any stock compensation plan and that non-employee directors may
not receive more than 5% of such shares individually or 30% in the aggregate for
all non-employee directors.
Management Recognition Plan. Following the Conversion, the Board of
Directors of the Holding Company intends to adopt an MRP for officers,
employees, and nonemployee directors of the Holding Company and
the Association. The MRP will enable the Holding Company and the Association to
provide participants with a proprietary interest in the Holding Company as an
incentive to contribute to the success of the Holding Company and the
Association.
The MRP will be submitted to stockholders for approval at a meeting to
be held no earlier than six months following consummation of the Conversion. The
approval of a majority vote of the Holding Company's stockholders is required
prior to implementation of the MRP within one year of the consummation of the
Conversion. The MRP will comply with all applicable regulatory requirements.
However, the OTS will not approve or endorse the MRP.
The MRP expects to acquire a number of shares of Common Stock equal to
4% of the Common Stock issued in connection with the Conversion (90,160 shares
based on the issuance of 2,254,000 shares in the Conversion at the maximum of
the Estimated Valuation Range). Such shares will be acquired on the open market,
if available, with funds contributed by the Holding Company to a trust which the
Holding Company may establish in conjunction with the MRP ("MRP Trust") or from
authorized but unissued shares or treasury shares of the Holding Company.
A committee of the Board of Directors of the Holding Company will
administer the MRP, the members of which will also serve as trustees of the MRP
Trust, if formed. The trustees will be responsible for the investment of all
funds contributed by the Holding Company to the MRP Trust. Upon recommendation
of the Board of Directors, the Committee will allocate awards under the MRP to
nonemployee directors, officers and employees of the Association.
Shares of Common Stock granted pursuant to the MRP will be in the form
of restricted stock vesting ratably over a five-year period following the date
of grant. During the period of restriction, all shares will be held in escrow by
the Holding Company or by the MRP Trust. If a recipient terminates employment
for reasons other than death or disability, the recipient will forfeit all
rights to allocated shares that are then subject to restriction. In the event of
the recipient's death or disability, all restrictions will expire and all
allocated shares will become unrestricted. In addition, all allocated shares
will become unrestricted in the event of a change in control (as defined in the
MRP) of the Holding Company or the Association to the extent authorized or not
prohibited by applicable law or regulations. Current OTS regulations, however,
do not permit accelerated vesting of MRP awards in the event of a change in
control. Compensation expense in the amount of the fair market value of the
Common Stock at the date of the grant to the recipient will be recognized during
the years in which the shares vest.
56
The Board of Directors of the Holding Company may terminate the MRP at
any time and, upon termination, all unallocated shares of Common Stock will
revert to the Holding Company.
A recipient of an MRP award in the form of restricted stock generally
will not recognize income upon an award of shares of Common Stock, and the
Holding Company will not be entitled to a federal income tax deduction, until
the termination of the restrictions. Upon such termination, the recipient will
recognize ordinary income in an amount equal to the fair market value of the
Common Stock at the time and the Holding Company will be entitled to a deduction
in the same amount after satisfying federal income tax withholding requirements.
However, the recipient may elect to recognize ordinary income in the year the
restricted stock is granted in an amount equal to the fair market value of the
shares at that time, determined without regard to the restrictions. In that
event, the Holding Company will be entitled to a deduction in such year and in
the same amount. Any gain or loss recognized by the recipient upon subsequent
disposition of the stock will be either a capital gain or capital loss.
Although no specific award determinations have been made, the
Association anticipates that if stockholder approval is obtained it would
provide awards to its directors, officers and employees to the extent permitted
by applicable regulations. OTS regulations currently provide that no individual
officer or employee may receive more than 25% of the shares reserved for
issuance under any stock compensation plan.
Transactions with the Association
Applicable law and regulations require that all loans or extensions of
credit to executive officers and directors must be made on substantially the
same terms, including interest rates and collateral, 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, and the
Association has adopted a policy to this effect. In addition, loans made to a
director or executive officer in an amount that, when aggregated with the amount
of all other loans to such director or executive officer and his or her related
interests are in excess of the greater of $25,000, or 5% of the Association's
capital and surplus (up to a maximum of $500,000), must be approved in advance
by a majority of the disinterested members of the Board of Directors. See
"REGULATION -- Federal Regulation of Savings Associations -- Transactions with
Affiliates." The aggregate amount of loans by the Association to its executive
officers and directors was $134,589 at June 30, 1996, or approximately 0.44% and
0.38%, respectively, of the Holding Company's pro forma stockholders' equity
based on the minimum and maximum of the Estimated Valuation Range.
Mr. Joseph T. Swindlehurst, General Counsel to the Association, is a
partner with the law firm of Huppert & Swindlehurst, P.C. Mr. Swindlehurst also
is the brother of Beverly D. Harris, President of the Association, and the
brother-in-law of Ernest A. Sandberg, Executive Vice President and Secretary of
the Association. As counsel to the Association during the fiscal year ended June
30, 1996, Huppert & Swindlehurst, P.C. was paid $11,734 in fees and expense
reimbursement, which amount did not exceed 5% of the law firm's annual gross
revenues. The fees proposed or estimated to be paid to Huppert & Swindlehurst,
P.C. for the ending June 30, 1997 are $12,000, which amount is not expected to
exceed 5% of the law firm's annual gross revenues.
The Association's main office is owned by Mr. Swindlehurst, Mrs.
Harris and their sister, Mrs. Jean E. Sandberg, who is the wife of Mr. Sandberg,
and is leased by the Association from the owners through March 1997. The
Association has negotiated the purchase of the building, which has been approved
by the OTS. See "BUSINESS OF THE ASSOCIATION -- Properties. During the fiscal
year ended June 30, 1996, the owners received $10,000 in rental income from the
Association.
REGULATION
General
The Association is subject to extensive regulation, examination and
supervision by the OTS as its chartering agency, and the FDIC, as the insurer of
its deposits. The activities of federal savings institutions are governed by
57
the Home Owners' Loan Act, as amended ("HOLA") and, in certain respects, the
Federal Deposit Insurance Act ("FDIA") and the regulations issued by the OTS
and the FDIC to implement these statutes. These laws and regulations delineate
the nature and extent of the activities in which federal savings associations
may engage. Lending activities and other investments must comply with various
statutory and regulatory capital requirements. In addition, the Association's
relationship with its depositors and borrowers is also regulated to a great
extent, especially in such matters as the ownership of deposit accounts and the
form and content of the Association's mortgage documents. The Association must
file reports with the OTS and the FDIC concerning its activities and financial
condition in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with, or acquisitions of, other financial
institutions. There are periodic examinations by the OTS and the FDIC to review
the Association's compliance with various regulatory requirements. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such policies, whether by the OTS, the FDIC or Congress, could have a
material adverse impact on the Holding Company, the Association and their
operations. The Holding Company, as a savings and loan holding company, will
also be required to file certain reports with, and otherwise comply with the
rules and regulations of, the OTS.
Federal Regulation of Savings Associations
Office of Thrift Supervision. The OTS is an office in the Department of
the Treasury subject to the general oversight of the Secretary of the Treasury.
The OTS generally possesses the supervisory and regulatory duties and
responsibilities formerly vested in the Federal Home Loan Bank Board. Among
other functions, the OTS issues and enforces regulations affecting federally
insured savings associations and regularly examines these institutions.
Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs,
is under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to: supervise the FHLBs; ensure that the FHLBs
carry out their housing finance mission; ensure that the FHLBs remain adequately
capitalized and able to raise funds in the capital markets; and ensure that the
FHLBs operate in a safe and sound manner.
The Association, as a member of the FHLB-Seattle, is required to
acquire and hold shares of capital stock in the FHLB-Seattle in an amount equal
to the greater of (i) 1.0% of the aggregate outstanding principal amount of
residential mortgage loans, home purchase contracts and similar obligations at
the beginning of each year, or (ii) 1/20 of its advances (borrowings) from the
FHLB-Seattle. The Association is in compliance with this requirement with an
investment in FHLB-Seattle stock of $1.1 million at June 30, 1996.
Among other benefits, the FHLB provides a central credit facility
primarily for member institutions. It 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-Seattle.
Federal Deposit Insurance Corporation. The FDIC is an independent
federal agency established originally to insure the deposits, up to prescribed
statutory limits, of federally insured banks and to preserve the safety and
soundness of the banking industry. In 1989 the FDIC also became the insurer, up
to the prescribed limits, of the deposit accounts held at federally insured
savings associations and established two separate insurance funds: the BIF and
the SAIF. As insurer of deposits, the FDIC has examination, supervisory and
enforcement authority over all savings associations.
The Association's accounts are insured by the SAIF. The FDIC insures
deposits at the Association to the maximum extent permitted by law. The
Association currently pays deposit insurance premiums to the FDIC based on a
risk-based assessment system established by the FDIC for all SAIF-member
institutions. Under applicable regulations, institutions are assigned to one of
three capital groups that are based solely on the level of an
58
institution's capital -- "well capitalized," "adequately capitalized," and
"undercapitalized"-- which are defined in the same manner as the regulations
establishing the prompt corrective action system under Section 38 of the
FDIA, as discussed below. These three groups are then divided into three
subgroups that reflect varying levels of supervisory concern, from those that
are considered to be healthy to those that are considered to be of
substantial supervisory concern. The matrix so created results in nine
assessment risk classifications, with rates currently ranging from .23%
for well capitalized, financially sound institutions with only a few minor
weaknesses to .31% for undercapitalized institutions that pose a substantial
risk of loss to the SAIF unless effective corrective action is taken. Until
the second half of 1995, the same rate matrix applied to BIF-member
institutions. The FDIC is authorized to raise assessment rates in certain
circumstances. The Association's assessments expensed for the year ended
June 30, 1996 were $185,000.
Effective January 1, 1996, the FDIC substantially reduced deposit
insurance premiums for well-capitalized, well-managed financial institutions
that are members of the BIF. Under the new assessment schedule, rates were
reduced to a range of 0 to 27 basis points, with approximately 92% of BIF
members paying the statutory minimum annual assessment rate of $2,000. With
respect to SAIF member institutions, the FDIC has retained the existing rate
schedule of 23 to 31 basis points. The Association is, and after the Conversion
will remain, a member of the SAIF rather than the BIF. See "RISK FACTORS --
Recapitalization of SAIF and its Impact on SAIF Premiums."
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, order or
any condition imposed by an agreement with the FDIC. It also may suspend deposit
insurance temporarily during the hearing process for the permanent termination
of insurance, if the institution has no tangible capital. If insurance of
accounts is terminated, the accounts at the institution at the time of
termination, less subsequent withdrawals, shall continue to be insured for a
period of six months to two years, as determined by the FDIC. Management is
aware of no existing circumstances that could result in termination of the
deposit insurance of the Association.
Liquidity Requirements. Under OTS regulations, each savings institution
is required to maintain an average daily balance of liquid assets (cash, certain
time deposits and savings accounts, bankers' acceptances, and specified U.S.
Government, state or federal agency obligations and certain other investments)
equal to a monthly average of not less than a specified percentage (currently
5.0%) of its net withdrawable accounts plus short-term borrowings. OTS
regulations also require each savings institution to maintain an average daily
balance of short-term liquid assets at a specified percentage (currently 1.0%)
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. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- Liquidity and Capital Resources."
Prompt Corrective Action. Under Section 38 of the FDIA, as added by the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), each
federal banking agency is required to implement a system of prompt corrective
action for institutions that it regulates. The federal banking agencies have
promulgated substantially similar regulations to implement this system of prompt
corrective action. Under the regulations, an institution shall be deemed to be
(i) "well capitalized" if it has a total risk-based capital ratio of 10.0% or
more, has a Tier I risk-based capital ratio of 6.0% or more, has a leverage
ratio of 5.0% or more and is not subject to specified requirements to meet and
maintain a specific capital level for any capital measure; (ii) "adequately
capitalized" if it has a total risk-based capital ratio of 8.0% or more, a Tier
I risk-based capital ratio of 4.0% or more and a leverage ratio of 4.0% or more
(3.0% under certain circumstances) and does not meet the definition of "well
capitalized;" (iii) "undercapitalized" if it has a total risk-based capital
ratio that is less than 8.0%, a Tier I risk-based capital ratio that is less
than 4.0% or a leverage ratio that is less than 4.0% (3.0% under certain
circumstances); (iv) "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital
ratio that is less than 3.0% or a leverage ratio that is less than 3.0%; and (v)
"critically undercapitalized" if it has a ratio of tangible equity to total
assets that is equal to or less than 2.0%.
59
Section 38 of the FDIA and the implementing regulations also provide
that a federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized and
may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or has received
in its most recent examination, and has not corrected, a less than satisfactory
rating for asset quality, management, earnings or liquidity. (The OTS may not,
however, reclassify a significantly undercapitalized institution as critically
undercapitalized.)
An institution generally must file a written capital restoration plan
that meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to the provisions of
Section 38 of the FDIA, which sets forth various mandatory and discretionary
restrictions on its operations.
At June 30, 1996, the Association was categorized as "well capitalized"
under the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The FDIA requires the federal
banking regulatory agencies to prescribe, by regulation, standards for all
insured depository institutions relating to: (i) internal controls, information
systems and internal audit systems; (ii) loan documentation; (iii) credit
underwriting; (iv) interest rate risk exposure; (v) asset growth; and (vi)
compensation, fees and benefits. The federal banking agencies have adopted final
regulations and Interagency Guidelines Prescribing Standards for Safety and
Soundness ("Guidelines") to implement safety and soundness standards required by
the FDIA. The Guidelines set forth the safety and soundness standards that the
federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. The agencies also
proposed asset quality and earnings standards which, if adopted in final, would
be added to the Guidelines. Under the final regulations, if the OTS determines
that the Association fails to meet any standard prescribed by the Guidelines,
the agency may require the Association to submit to the agency an acceptable
plan to achieve compliance with the standard, as required by the FDIA. The final
regulations establish deadlines for the submission and review of such safety and
soundness compliance plans.
Qualified Thrift Lender Test. All savings associations are required to
meet a qualified thrift lender ("QTL") test set forth in the HOLA and
regulations of the OTS thereunder to avoid certain restrictions on their
operations. A savings institution that fails to become or remain a QTL shall
either become a national bank or be subject to the following restrictions on its
operations: (i) the association may not make any new investment or engage in
activities that would not be permissible for national banks; (ii) the
association may not establish any new branch office where a national bank
located in the savings institution's home state would not be able to establish a
branch office; (iii) the association shall be ineligible to obtain new advances
from any FHLB; and (iv) the payment of dividends by the association shall be
subject to the rules regarding the statutory and regulatory dividend
restrictions applicable to national banks. Also, beginning three years after the
date on which the savings institution ceases to be a QTL, the savings
institution would be prohibited from retaining any investment or engaging in any
activity not permissible for a national bank and would be required to repay any
outstanding advances to any FHLB. In addition, within one year of the date on
which a savings association controlled by a company ceases to be a QTL, the
company must register as a bank holding company and become subject to the rules
applicable to such companies. A savings institution may requalify as a QTL if it
thereafter complies with the QTL test.
Currently, the QTL test requires that 65% of an institution's
"portfolio assets" (as defined) consist of certain housing and consumer-related
assets on a monthly average basis in nine out of every 12 months. Assets that
qualify without limit for inclusion as part of the 65% requirement are loans
made to purchase, refinance, construct, improve or repair domestic residential
housing and manufactured housing; home equity loans; mortgage-backed securities
(where the mortgages are secured by domestic residential housing or manufactured
housing); FHLB stock; and direct or indirect obligations of the FDIC. In
addition, the following assets, among others, may be included in meeting
60
the test subject to an overall limit of 20% of the savings institution's
portfolio assets: 50% of residential mortgage loans originated and sold
within 90 days of origination; 100% of consumer and educational loans
(limited to 10% of total portfolio assets); and stock issued by the FHLMC
or the FNMA. Portfolio assets consist of total assets minus the sum of
(i) goodwill and other intangible assets, (ii) property used by the savings
institution to conduct its business, and (iii) liquid assets up to 20% of
the institution's total assets. At June 30, 1996, the Association's qualified
thrift investments significantly exceeded 65% of its portfolio assets as
required by regulation.
Capital Requirements. Under OTS regulations a savings association must
satisfy three minimum capital requirements: core capital, tangible capital and
risk-based capital. Savings associations must meet all of the standards in order
to comply with the capital requirements. The Holding Company is not subject to
any minimum capital requirements.
OTS capital regulations establish a 3% core capital or leverage ratio
(defined as the ratio of core capital to adjusted total assets). Core capital is
defined to include common stockholders' equity, noncumulative perpetual
preferred stock and any related surplus, and minority interests in equity
accounts of consolidated subsidiaries, less (i) any intangible assets, except
for certain qualifying intangible assets; (ii) certain mortgage servicing
rights; and (iii) equity and debt investments in subsidiaries that are not
"includable subsidiaries," which is defined as subsidiaries engaged solely in
activities not impermissible for a national bank, engaged in activities
impermissible for a national bank but only as an agent for its customers,
or engaged solely in mortgage-banking activities. In calculating adjusted
total assets, adjustments are made to total assets to give effect to the
exclusion of certain assets from capital and to account appropriately for
the investments in and assets of both includable and nonincludable
subsidiaries. Institutions that fail to meet the core capital requirement
would be required to file with the OTS a capital plan that details the steps
they will take to reach compliance. In addition, the OTS' prompt corrective
action regulation provides that a savings institution that has a leverage
ratio of less than 4% (3% for institutions receiving the highest CAMEL
examination rating) will be deemed to be "undercapitalized" and may be subject
to certain restrictions. See "-- Federal Regulation of Savings
Associations -- Prompt Corrective Action."
As required by federal law, the OTS has proposed a rule revising its
minimum core capital requirement to be no less stringent than that imposed on
national banks. The OTS has proposed that only those savings associations rated
a composite one (the highest rating) under the CAMEL rating system for savings
associations will be permitted to operate at or near the regulatory minimum
leverage ratio of 3%. All other savings associations will be required to
maintain a minimum leverage ratio of 4% to 5%. The OTS will assess each
individual savings association through the supervisory process on a case-by-case
basis to determine the applicable requirement. No assurance can be given as to
the final form of any such regulation, the date of its effectiveness or the
requirement applicable to the Association.
Savings associations also must maintain "tangible capital" not less
than 1.5% of the Association's adjusted total assets. "Tangible capital" is
defined, generally, as core capital minus any "intangible assets" other than
purchased mortgage servicing rights.
Each savings institution must maintain total risk-based capital equal
to at least 8% of risk-weighted assets. Total risk-based capital consists of the
sum of core and supplementary capital, provided that supplementary capital
cannot exceed core capital, as previously defined. Supplementary capital
includes (i) permanent capital instruments such as cumulative perpetual
preferred stock, perpetual subordinated debt and mandatory convertible
subordinated debt, (ii) maturing capital instruments such as subordinated debt,
intermediate-term preferred stock and mandatory convertible subordinated debt,
and (iii) general valuation loan and lease loss allowances up to 1.25% of
risk-weighted assets.
The risk-based capital regulation assigns each balance sheet asset held
by a savings institution to one of four risk categories based on the amount of
credit risk associated with that particular class of assets. Assets not included
for purposes of calculating capital are not included in calculating
risk-weighted assets. The categories range from 0% for cash and securities that
are backed by the full faith and credit of the U.S. Government to 100% for
61
repossessed assets or assets more than 90 days past due. Qualifying residential
mortgage loans (including multi-family mortgage loans) are assigned a 50% risk
weight. Consumer, commercial, home equity and residential construction loans are
assigned a 100% risk weight, as are nonqualifying residential mortgage loans and
that portion of land loans and nonresidential construction loans that do not
exceed an 80% loan-to-value ratio. The book value of assets in each category is
multiplied by the weighing factor (from 0% to 100%) assigned to that category.
These products are then totalled to arrive at total risk-weighted assets.
Off-balance sheet items are included in risk- weighted assets by converting them
to an approximate balance sheet "credit equivalent amount" based on a conversion
schedule. These credit equivalent amounts are then assigned to risk categories
in the same manner as balance sheet assets and included as risk-weighted assets.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. Under the rule, savings associations with "above
normal" interest rate risk exposure would be subject to a deduction from total
capital for purposes of calculating their risk-based capital requirements. A
savings association's interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e., the difference between incoming and
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts) that would result from a hypothetical 200 basis point increase or
decrease in market interest rates divided by the estimated economic value of the
association's assets, as calculated in accordance with guidelines set forth by
the OTS. A savings association whose measured interest rate risk exposure
exceeds 2% must deduct an interest rate risk component in calculating its total
capital under the risk-based capital rule. The interest rate risk component is
an amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
association's assets. That dollar amount is deducted from an association's total
capital in calculating compliance with its risk-based capital requirement. Under
the rule, there is a two quarter lag between the reporting date of an
institution's financial data and the effective date for the new capital
requirement based on that data. The rule also provides that the Director of the
OTS may waive or defer an association's interest rate risk component on a
case-by-case basis. Under certain circumstances, a savings association may
request an adjustment to its interest rate risk component if it believes that
the OTS-calculated interest rate risk component overstates its interest rate
risk exposure. In addition, certain "well-capitalized" institutions may obtain
authorization to use their own interest rate risk model to calculate their
interest rate risk component in lieu of the OTS-calculated amount. The OTS has
postponed the date that the component will first be deducted from an
institution's total capital until savings associations become familiar with the
process for requesting an adjustment to its interest rate risk component.
See "HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE" for a table that sets
forth in terms of dollars and percentages the OTS tangible, core and risk-based
capital requirements, the Association's historical amounts and percentages at
June 30, 1996, and pro forma amounts and percentages based upon the assumptions
stated therein.
Limitations On Capital Distributions. OTS regulations impose uniform
limitations on the ability of all savings associations to engage in various
distributions of capital such as dividends, stock repurchases and cash-out
mergers. In addition, OTS regulations require the Association to give the OTS 30
days' advance notice of any proposed declaration of dividends, and the OTS has
the authority under its supervisory powers to prohibit the payment of dividends.
The regulation utilizes a three-tiered approach which permits various levels of
distributions based primarily upon a savings association's capital level.
A Tier 1 savings association has capital in excess of its fully
phased-in capital requirement (both before and after the proposed capital
distribution). A Tier 1 savings association may make (without application but
upon prior notice to, and no objection made by, the OTS) capital distributions
during a calendar year up to 100% of its net income to date during the calendar
year plus one-half its surplus capital ratio (i.e., the amount of capital in
excess of its fully phased-in requirement) at the beginning of the calendar year
or the amount authorized for a Tier 2 association. Capital distributions in
excess of such amount require advance notice to the OTS. A Tier 2 savings
association has capital equal to or in excess of its minimum capital requirement
but below its fully phased-in capital requirement (both before and after the
proposed capital distribution). Such an association may make (without
application) capital distributions up to an amount equal to 75% of its net
income during the previous four quarters
62
depending on how close the association is to meeting its fully phased-in
capital requirement. Capital distributions exceeding this amount require prior
OTS approval. Tier 3 associations are savings associations with capital below
the minimum capital requirement (either before or after the proposed capital
distribution). Tier 3 associations may not make any capital distributions
without prior approval from the OTS.
The Association is currently meeting the criteria to be designated a
Tier 1 association and, consequently, could at its option (after prior notice
to, and no objection made by, the OTS) distribute up to 100% of its net income
during the calendar year plus 50% of its surplus capital ratio at the beginning
of the calendar year less any distributions previously paid during the year.
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limit on loans to one borrower.
Generally, this limit is 15% of the Association's unimpaired capital and
surplus, plus an additional 10% of unimpaired capital and surplus, if such loan
is secured by readily-marketable collateral, which is defined to include certain
financial instruments and bullion. The OTS by regulation has amended the loans
to one borrower rule to permit savings associations meeting certain
requirements, including capital requirements, to extend loans to one borrower in
additional amounts under circumstances limited essentially to loans to develop
or complete residential housing units. At June 30, 1996, the Association's limit
on loans to one borrower was $2.4 million. At June 30, 1996, the Association's
largest aggregate amount of loans to one borrower was $1.3 million, all of
which were performing according to their original terms.
Activities of Associations and Their Subsidiaries. When a savings
association establishes or acquires a subsidiary or elects to conduct any new
activity through a subsidiary that the association controls, the savings
association must notify the FDIC and the OTS 30 days in advance and provide the
information each agency may, by regulation, require. Savings associations also
must conduct the activities of subsidiaries in accordance with existing
regulations and orders.
The OTS may determine that the continuation by a savings association of
its ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary. The FDIC
also may determine by regulation or order that any specific activity poses a
serious threat to the SAIF. If so, it may require that no SAIF member engage in
that activity directly.
Transactions with Affiliates. Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act ("Sections 23A and 23B")
relative to transactions with affiliates in the same manner and to the same
extent as if the savings association were a Federal Reserve member bank. A
savings and loan holding company, its subsidiaries and any other company under
common control are considered affiliates of the subsidiary savings association
under the HOLA. Generally, Sections 23A and 23B: (i) limit the extent to which
the insured association or its subsidiaries may engage in certain covered
transactions with an affiliate to an amount equal to 10% of such institution's
capital and surplus and place an aggregate limit on all such transactions with
affiliates to an amount equal to 20% of such capital 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, the
purchase of assets, the issuance of a guaranty and similar types of
transactions.
Three additional rules apply to savings associations: (i) a savings
association may not make any loan or other extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank holding
companies; (ii) a savings association may not purchase or invest in securities
issued by an affiliate (other than securities of a subsidiary); and (iii) the
OTS may, for reasons of safety and soundness, impose more stringent restrictions
on savings associations but may not exempt transactions from or otherwise
abridge Section 23A or 23B. Exemptions from Section 23A or 23B may be granted
only by the Federal Reserve Board, as is currently the case
63
with respect to all FDIC-insured banks. The Association has not been
significantly affected by the rules regarding transactions with affiliates.
The Association's authority to extend credit to executive officers,
directors and 10% shareholders, as well as entities controlled by such persons,
is currently governed by Sections 22(g) and 22(h) of the Federal Reserve Act,
and Regulation O thereunder. Among other things, these regulations require that
such loans be made on terms and conditions substantially the same as those
offered to unaffiliated individuals and not involve more than the normal risk of
repayment. Regulation O also places individual and aggregate limits on the
amount of loans the Association may make to such persons based, in part, on the
Association's capital position, and requires certain board approval procedures
to be followed. The OTS regulations, with certain minor variances, apply
Regulation O to savings institutions.
Community Reinvestment Act. Under the Community Reinvestment Act
("CRA"), a federal statute, all federally-insured financial institutions have a
continuing and affirmative obligation consistent with safe and sound operations
to help meet all the credit needs of its delineated community. The CRA does not
establish specific lending requirements or programs nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to meet all the credit needs of its delineated
community. The CRA requires the federal banking agencies, in connection with
regulatory examinations, to assess an institution's record of meeting
the credit needs of its delineated community and to take such record into
account in evaluating certain regulatory applications filed by an institution.
The CRA requires public disclosure of an institution's CRA rating. The
Association received a "satisfactory" rating as a result of its latest
evaluation.
Regulatory and Criminal Enforcement Provisions. Under the FDIA, the OTS
has primary enforcement responsibility over savings institutions and has the
authority to bring action against all "institution-affiliated parties,"
including stockholders, and any attorneys, appraisers and accountants who
knowingly or recklessly participate in wrongful action likely to have an adverse
effect on an insured institution. Formal enforcement action may range from the
issuance of a capital directive or cease and desist order to removal of officers
or directors, receivership, conservatorship or termination of deposit insurance.
Civil penalties cover a wide range of violations and can amount to $25,000 per
day, or $1 million per day in especially egregious cases. Under the FDIA, the
FDIC has the authority to recommend to the Director of the OTS that enforcement
action be taken with respect to a particular savings institution. If action is
not taken by the Director, the FDIC has authority to take such action under
certain circumstances. Federal law also establishes criminal penalties for
certain violations.
Savings and Loan Holding Company Regulations
Holding Company Acquisitions. The HOLA and OTS regulations issued
thereunder generally prohibit a savings and loan holding company, without prior
OTS approval, from acquiring more than 5% of the voting stock of any other
savings association or savings and loan holding company or controlling the
assets thereof. They also prohibit, among other things, any director or officer
of a savings and loan holding company, or any individual who owns or controls
more than 25% of the voting shares of such holding company, from acquiring
control of any savings association not a subsidiary of such savings and loan
holding company, unless the acquisition is approved by the OTS.
Holding Company Activities. As a unitary savings and loan holding
company, the Holding Company generally is not subject to activity restrictions.
If the Holding Company acquires control of another savings association as a
separate subsidiary other than in a supervisory acquisition, it would become a
multiple savings and loan holding company. There generally are more restrictions
on the activities of a multiple savings and loan holding company than on a
unitary savings and loan holding company. The HOLA provides that, among other
things, no multiple savings and loan holding company or subsidiary thereof which
is not an insured association shall commence or continue for more than two years
after becoming a multiple savings and loan association holding company or
subsidiary thereof, any business activity other than: (i) furnishing or
performing management services for a subsidiary insured institution, (ii)
conducting an insurance agency or escrow business, (iii) holding, managing, or
64
liquidating assets owned by or acquired from a subsidiary insured institution,
(iv) holding or managing properties used or occupied by a subsidiary insured
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 bank holding companies, unless the OTS
by regulation, prohibits or limits such activities for savings and loan holding
companies. Those activities described in (vii) above also must be approved by
the OTS prior to being engaged in by a multiple holding company.
Qualified Thrift Lender Test. The HOLA requires any savings and loan
holding company that controls a savings association that fails the QTL test, as
explained under "-- Federal Regulation of Savings Associations -- Qualified
Thrift Lender Test," must, within one year after the date on which the
association ceases to be a QTL, register as and be deemed a bank holding company
subject to all applicable laws and regulations.
TAXATION
Federal Taxation
General. The Holding Company and the Association will report their
income on a calendar year basis using the accrual method of accounting and will
be subject to federal income taxation in the same manner as other
corporations with some exceptions, including particularly the Association's
reserve for bad debts discussed below. See "CHANGE IN FISCAL YEAR." The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Association or the Holding Company.
Tax Bad Debt Reserves. For taxable years beginning prior to January 1,
1996, savings institutions such as the Association which met certain
definitional tests primarily relating to their assets and the nature of their
business ("qualifying thrifts") were permitted to establish a reserve for bad
debts and to make annual additions thereto, which additions may, within
specified formula limits, have been deducted in arriving at their taxable
income. The Association's deduction with respect to "qualifying loans," which
are generally loans secured by certain interests in real property, may have been
computed using an amount based on the Association's actual loss experience, or a
percentage equal to 8% of the Association's taxable income, computed with
certain modifications and reduced by the amount of any permitted additions to
the nonqualifying reserve. The Association's deduction with respect to
nonqualifying loans was computed under the experience method, which essentially
allows a deduction based on the Association's actual loss experience over a
period of several years. Each year the Association selected the most favorable
way to calculate the deduction attributable to an addition to the tax bad debt
reserve.
Recently enacted federal legislation repeals the reserve method of
accounting for bad debt reserves for tax years beginning after December 31,
1995. As result, savings associations are no longer able to calculate their
deduction for bad debts using the percentage-of-taxable-income method. Instead,
savings associations are required to compute their deduction based on specific
charge-offs during the taxable year or, if the savings association or its
controlled group had assets of less than $500 million, based on actual loss
experience over a period of years. This legislation also requires savings
associations to recapture into income over a six-year period their post-1987
additions to their bad debt tax reserves, thereby generating additional tax
liability. At June 30, 1996, the Association's post- 1987 reserves were a
negligible amount of approximately $1,000. The recapture may be suspended for up
to two years if, during those years, the institution satisfies a residential
loan requirement. The Association anticipates that it will meet the residential
loan requirement for the taxable year ending December 31, 1996.
Under prior law, if the Association failed to satisfy the qualifying
thrift definitional tests in any taxable year, it would be unable to make
additions to its bad debt reserve. Instead, the Association would be required to
deduct bad debts as they occur and would additionally be required to recapture
its bad debt reserve deductions ratably over a multi-year period. At June 30,
1996, the Association's total bad debt reserve for tax purposes was
approximately $3.3 million. Among other things, the qualifying thrift
definitional tests required the Association to hold at least 60% of its assets
as "qualifying assets." Qualifying assets generally include cash, obligations of
the United States or any
65
agency or instrumentality thereof, certain obligations of a state or political
subdivision thereof, loans secured by interests in improved residential real
property or by savings accounts, student loans and property used by the
Association in the conduct of its banking business. Under current law, a
savings association will not be required to recapture its pre-1988 bad debt
reserves if it ceases to meet the qualifying thrift definitional tests.
Distributions. To the extent that the Association makes "nondividend
distributions" to the Holding Company that are considered as made: (i) from the
reserve for losses on qualifying real property loans, to the extent the reserve
for such losses exceeds the amount that would have been allowed under the
experience method; or (ii) from the supplemental reserve for losses on loans
("Excess Distributions"), then an amount based on the amount distributed will be
included in the Association's taxable income. Nondividend distributions include
distributions in excess of the Association's current and accumulated earnings
and profits, distributions in redemption of stock, and distributions in partial
or complete liquidation. However, dividends paid out of the Association's
current or accumulated earnings and profits, as calculated for federal income
tax purposes, will not be considered to result in a distribution from the
Association's bad debt reserve. Thus, any dividends to the Holding Company that
would reduce amounts appropriated to the Association's bad debt reserve and
deducted for federal income tax purposes would create a tax liability for the
Association. The amount of additional taxable income attributable to an Excess
Distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if, after the
Conversion, the Association makes a "nondividend distribution," then
approximately one and one-half times the amount so used would be includable
in gross income for federal income tax purposes, assuming a 35% corporate
income tax rate (exclusive of state and local taxes). See "REGULATION" and
"DIVIDEND POLICY" for limits on the payment of dividends by the Association.
The Association does not intend to pay dividends that would result in a
recapture of any portion of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on
alternative minimum taxable income ("AMTI") at a rate of 20%. The excess of the
tax bad debt reserve deduction using the percentage of taxable income method
over the deduction that would have been allowable under the experience method is
treated as a preference item for purposes of computing the AMTI. In addition,
only 90% of AMTI can be offset by net operating loss carryovers. AMTI is
increased by an amount equal to 75% of the amount by which the Association's
adjusted current earnings exceeds its AMTI (determined without regard to this
preference and prior to reduction for net operating losses). For taxable years
beginning after December 31, 1986, and before January 1, 1996, an environmental
tax of .12% of the excess of AMTI (with certain modification) over $2.0 million
is imposed on corporations, including the Association, whether or not an
Alternative Minimum Tax ("AMT") is paid.
Dividends-Received Deduction and Other Matters. The Holding Company may
exclude from its income 100% of dividends received from the Association as a
member of the same affiliated group of corporations. The corporate
dividends-received deduction is generally 70% in the case of dividends received
from unaffiliated corporations with which the Holding Company and the
Association will not file a consolidated tax return, except that if the Holding
Company or the Association owns more than 20% of the stock of a corporation
distributing a dividend, then 80% of any dividends received may be deducted.
There have not been any IRS audits of the Association's federal income
tax returns during the past five years.
State Taxation
Empire Federal is subject to the Montana Corporation License Tax, which
is imposed at the rate of 6.75% of Montana taxable income. There have not been
any audits of the Association's state tax returns during the past five years.
66
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. OTS
approval, however, does not constitute a recommendation or endorsement of the
Plan.
General
On August 29, 1996, the Association's Board of Directors adopted the
Plan of Conversion, pursuant to which the Association will convert from a
federally chartered mutual savings and loan association to a federally chartered
stock savings bank under the name "Empire Federal Savings Bank," to be held as a
wholly-owned subsidiary of the Holding Company, a newly formed Delaware
corporation. The Holding Company and the Association intend to pursue the
business strategy described in this Prospectus with the goal of enhancing
long-term shareholder value. Neither the Holding Company nor the Association has
any existing plan to pursue any possible business combination, and neither has
any agreement or understanding, written or oral, with respect to any possible
business combination.
The following discussion of the Plan of Conversion is qualified in its
entirety by reference to the Plan of Conversion, which is attached as Exhibit A
to the Association's Proxy Statement and is available from the Association upon
written request to Ernest A. Sandberg, Executive Vice President and Secretary,
123 South Main Street, Livingston, Montana 59047. The OTS has approved the Plan
of Conversion subject to the Plan's approval by the members of the Association
entitled to vote on the matter at a Special Meeting called for that purpose to
be held on ________ __, 1996, and subject to the satisfaction of certain other
conditions imposed by the OTS in its approval.
If the Board of Directors of the Association decides for any reason,
such as possible delays resulting from overlapping regulatory processing or
policies or conditions that could adversely affect the Association's or the
Holding Company's ability to consummate the Conversion and transact its business
as contemplated herein and in accordance with the Association's operating
policies, at any time prior to the issuance of the Common Stock, not to use the
holding company form of organization in implementing the Conversion, the Plan of
Conversion will be amended to not use the holding company form of organization
in the Conversion. In the event that such a decision is made, the Association
will promptly refund all subscriptions or orders received together with accrued
interest, withdraw the Holding Company's registration statement from the SEC and
will take all steps necessary to consummate the Conversion and proceed with a
new offering without the Holding Company, including filing any necessary
documents with the OTS. In such event, and provided there is no regulatory
action, directive or other consideration upon which basis the Association
determines not to consummate the Conversion, the Association will issue and sell
the common stock of the Association. There can be no assurance that the OTS
would approve the Conversion if the Association decided to proceed without the
Holding Company. The following description of the Plan assumes that a holding
company form of organization will be utilized in the Conversion. In the event
that a holding company form of organization is not utilized, all other pertinent
terms of the Plan as described below will apply to the Conversion of the
Association from mutual to stock form of organization and the sale of the
Association's common stock.
The Conversion will be accomplished through adoption of a Federal Stock
Charter and Bylaws to authorize the issuance of capital stock by the
Association. Under the Plan, 1,666,000 to 2,254,000 shares of Common Stock are
being offered for sale by the Holding Company at the Purchase Price of $10.00
per share. As part of the Conversion, the Association will issue all of its
newly issued common stock (1,000 shares) to the Holding Company in exchange for
50% of the net proceeds from the sale of Common Stock by the Holding Company.
The Plan of Conversion provides generally that (i) the Association will
convert from a federally chartered mutual savings and loan association to a
federally chartered stock savings bank; (ii) the Common Stock will be
67
offered by the Holding Company in the Subscription Offering to persons having
Subscription Rights and in a Direct Community Offering to certain members of
the general public with preference given to natural persons residing in the
Local Community; (iii) if necessary, shares of Common Stock not subscribed
for in the Subscription and Direct Community Offering will be offered to
certain members of the general public in a Syndicated Community Offering
through a syndicate of registered broker-dealers pursuant to selected dealers
agreements; and (iv) the Holding Company will purchase all of the capital
stock of the Association to be issued in connection with the Conversion.
The Conversion will be effected only upon completion of the sale of at least
1,666,000 shares of Common Stock to be issued pursuant to the Plan of
Conversion.
As part of the Conversion, the Holding Company is making a Subscription
Offering of its Common Stock to holders of Subscription Rights in the following
order of priority: (i) Eligible Account Holders (depositors with $50.00 or more
on deposit as of March 31, 1995); (ii) the Association's ESOP; (iii)
Supplemental Eligible Account Holders (depositors with $50.00 or more on deposit
as of _________ __, 1996); and (iv) Other Members (depositors of the Association
as of __________ __, 1996, and borrowers of the Association with loans
outstanding as of ________ __, 1996, which continue to be outstanding as of
__________ __, 1996). Concurrent with the Subscription Offering and subject to
the prior rights of holders of Subscription Rights, the Holding Company is
offering the Common Stock for sale to certain members of the general public
through a Direct Community Offering.
Shares of Common Stock not sold in the Subscription and Direct
Community Offering may be offered in the Syndicated Community Offering.
Regulations require that the Syndicated Community Offering be completed within
45 days after completion of the Subscription Offering unless extended by the
Association or the Holding Company with the approval of the regulatory
authorities. If the Syndicated Community Offering is determined not to be
feasible, the Board of Directors of the Association will consult with the
regulatory authorities to determine an appropriate alternative method for
selling the unsubscribed shares of Common Stock. The Plan of Conversion provides
that the Conversion must be completed within 24 months after the date of the
approval of the Plan of Conversion by the members of the Association.
No sales of Common Stock may be completed, either in the Subscription,
Direct Community or Syndicated Community Offerings, unless the Plan of
Conversion is approved by the members of the Association.
The completion of the Offerings, however, 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 of Conversion at
the Special Meeting that will be required to complete the Syndicated Community
Offering or other sale of the Common Stock. If delays are experienced,
significant changes may occur in the estimated pro forma market value of the
Holding Company and the Association as converted, together with corresponding
changes in the net proceeds realized by the Holding Company from the sale of the
Common Stock. In the event the Conversion is terminated, the Association would
be required to charge all Conversion expenses against current income.
Orders for shares of Common Stock will not be filled until at least
1,666,000 shares of Common Stock have been subscribed for or sold and the OTS
approves the final valuation and the Conversion closes. If the Conversion is not
consummated by ___________ __, 1997 (45 days after the last day of the fully
extended Subscription Offering) and the OTS consents to an extension of time to
consummate the Conversion, subscribers will be given the right to increase,
decrease or rescind their subscriptions. Unless an affirmative indication is
received from subscribers that they wish to continue to subscribe for shares,
the funds will be returned promptly, together with accrued interest at the
Association's passbook rate (____% per annum as of the date hereof) from the
date payment is received until the funds are returned to the subscriber. If such
period is not extended, or, in any event, if the Conversion is not consummated
by ____________ __, 1997, all withdrawal authorizations will be terminated and
all funds held will be promptly returned together with accrued interest at the
Association's passbook rate from the date payment is received until the
Conversion is terminated.
68
Purposes of Conversion
Management of the Association believes that the Conversion offers a
number of advantages that will be important to the future growth and performance
of the Association in that it is intended to (i) improve the competitive
position of the Association in its market area and to support possible future
expansion (currently there are no specific plans, arrangements or
understandings, written or oral, regarding any such activities); (ii) afford
members of the Association and others the opportunity to become stockholders of
the Holding Company and thereby participate more directly in, and contribute to,
any future growth of the Association; and (iii) provide future access to capital
markets.
The Association's Board of Directors has formed the Holding Company to
serve upon consummation of the Conversion as a holding company with the
Association as its subsidiary. The Association, as a mutual savings association,
does not have stockholders and has no authority to issue capital stock. By
converting to the stock form of organization, the Holding Company and the
Association will be structured in the form used by holding companies of
commercial banks and by a growing number of savings institutions.
Effects of Conversion to Stock Form on Depositors and Borrowers of the
Association
Voting Rights. Savings members and borrowers will have no voting rights
in the converted Association or the Holding Company and therefore will not be
able to elect directors of the Association or the Holding Company or to control
their affairs. Currently, these rights are accorded to savings and borrower
members of the Association. Subsequent to the Conversion, voting rights will
be vested exclusively in the Holding Company with respect to the Association
and the holders of the Common Stock as to matters pertaining to the Holding
Company. Each holder of Common Stock shall be entitled to vote on any matter
to be considered by the stockholders of the Holding Company. A stockholder
will be entitled to one vote for each share of Common Stock owned.
Savings Accounts and Loans. The Association's savings accounts, account
balances and existing FDIC insurance coverage of savings accounts will not be
affected by the Conversion. Furthermore, the Conversion will not affect the loan
accounts, loan balances or obligations of borrowers under their individual
contractual arrangements with the Association.
Tax Effects. The Association has received an opinion from Breyer &
Aguggia, Washington, D.C., that the Conversion will constitute a nontaxable
reorganization under Section 368(a)(1)(F) of the Code. Among other things, the
opinion states that: (i) no gain or loss will be recognized to the Association
in its mutual or stock form by reason of its Conversion; (ii) no gain or loss
will be recognized to its account holders upon the issuance to them of accounts
in the Association immediately after the Conversion, in the same dollar amounts
and on the same terms and conditions as their accounts at the Association in its
mutual form plus interest in the liquidation account; (iii) the tax basis of
account holders' accounts in the Association immediately after the Conversion
will be the same as the tax basis of their accounts immediately prior to
Conversion; (iv) the tax basis of each account holder's interest in the
liquidation account will be zero; (v) the tax basis of the Common Stock
purchased in the Conversion will be the amount paid and the holding period for
such stock will commence at the date of purchase; and (vi) no gain or loss will
be recognized to account holders upon the receipt or exercise of Subscription
Rights in the Conversion, except to the extent Subscription Rights are deemed to
have value as discussed below. Unlike a private letter ruling issued by the IRS,
an opinion of counsel is not binding on the IRS and the IRS could disagree with
the conclusions reached therein. In the event of such disagreement, no assurance
can be given that the conclusions reached in an opinion of counsel would be
sustained by a court if contested by the IRS.
Based upon past rulings issued by the IRS, the opinion provides that
the receipt of Subscription Rights by Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members under the Plan will be taxable to the
extent, if any, that the Subscription Rights are deemed to have a fair market
value. Keller, a financial consulting firm retained by the Association, whose
findings are not binding on the IRS, has indicated that the Subscription Rights
do not have any value, based on the fact that such rights are acquired by the
recipients without
69
cost, are nontransferable 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 paid by purchasers in
the Direct Community Offering for unsubscribed shares of Common Stock. If the
Subscription Rights are deemed to have a fair market value, the receipt of such
rights may only be taxable to those Eligible Account Holders, Supplemental
Eligible Account Holders (if any) and Other Members who exercise their
Subscription Rights. The Association could also recognize a gain on the
distribution of such Subscription Rights. 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 the Subscription Rights
are deemed to have a fair market value.
The Association has also received an opinion from Huppert and
Swindlehurst, P.C., Livingston, Montana, that, assuming the Conversion does
not result in any federal income tax liability to the Association, its account
holders, or the Holding Company, implementation of the Plan of Conversion will
not result in any Montana income tax liability to such entities or persons.
The opinions of Breyer & Aguggia and Huppert and Swindlehurst, P.C.
and the opinion from Keller are filed as exhibits to the Registration
Statement. See "ADDITIONAL INFORMATION."
PROSPECTIVE INVESTORS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS
REGARDING THE TAX CONSEQUENCES OF THE CONVERSION PARTICULAR TO THEM.
Liquidation Account. In the unlikely event of a complete liquidation of
the Association in its present mutual form, each depositor in the Association
would receive a pro rata share of any assets of the Association remaining after
payment of claims of all creditors (including the claims of all depositors up to
the withdrawal value of their accounts). Each depositor's pro rata share of such
remaining assets would be in the same proportion as the value of his or her
deposit account to the total value of all deposit accounts in the Association at
the time of liquidation.
After the Conversion, holders of withdrawable deposit(s) in the
Association, including certificates of deposit ("Savings Account(s)"), shall not
be entitled to share in any residual assets in the event of liquidation of the
Association. However, pursuant to OTS regulations, the Association shall, at the
time of the Conversion, establish a liquidation account in an amount equal to
its total equity as of the date of the latest statement of financial condition
contained herein.
The liquidation account shall be maintained by the Association
subsequent to the Conversion for the benefit of Eligible Account Holders and
Supplemental Eligible Account Holders who retain their Savings Accounts in the
Association. Each Eligible Account Holder and Supplemental Eligible Account
Holder shall, with respect to each Savings Account held, have a related inchoate
interest in a portion of the liquidation account balance ("subaccount").
The initial subaccount balance for a Savings Account held by an
Eligible Account Holder or a Supplemental Eligible Account Holder shall be
determined by multiplying the opening balance in the liquidation account by a
fraction of which the numerator is the amount of such holder's "qualifying
deposit" in the Savings Account and the denominator is the total amount of the
"qualifying deposits" of all such holders. Such initial subaccount balance shall
not be increased, and it shall be subject to downward adjustment as provided
below.
If the deposit balance in any Savings Account of an Eligible Account
Holder or Supplemental Eligible Account Holder at the close of business on any
annual closing day of the Association subsequent to March 31, 1995 is less than
the lesser of (i) the deposit balance in such Savings Account at the close of
business on any other annual closing date subsequent to March 31, 1995 or
_________ __, 1996 or (ii) the amount of the "qualifying deposit" in such
Savings Account on March 31, 1995 or _________ __, 1996, then the subaccount
balance for such Savings Account shall be adjusted by reducing such subaccount
balance in an amount proportionate to the reduction in such deposit balance. In
the event of a downward adjustment, such subaccount balance shall not be
subsequently
70
increased, notwithstanding any increase in the deposit balance of the related
Savings Account. If any such Savings Account is closed, the related subaccount
balance shall be reduced to zero.
In the event of a complete liquidation of the Association (and only in
such event) each Eligible Account Holder and Supplemental Eligible Account
Holder shall be entitled to receive a liquidation distribution from the
liquidation account in the amount of the then current adjusted subaccount
balance(s) for Savings Account(s) then held by such holder before any
liquidation distribution may be made to stockholders. No merger, consolidation,
bulk purchase of assets with assumptions of Savings Accounts and other
liabilities or similar transactions with another federally insured institution
in which the Association is not the surviving institution shall be considered to
be a complete liquidation. In any such transaction the liquidation account shall
be assumed by the surviving institution.
The Subscription, Direct Community and Syndicated Community Offerings
The Offerings (including the Syndicated Community Offering) are
expected to expire at Noon, Mountain Time, on the Expiration Date, unless
extended or continued as described on the cover page of this Prospectus.
Subscription Offering. In accordance with the Plan, nontransferable
Subscription Rights to purchase the Common Stock have been issued to all persons
and entities entitled to purchase the Common Stock in the Subscription Offering.
The amount of the Common Stock which these parties may purchase will be subject
to the availability of the Common Stock for purchase under the categories set
forth in the Plan. Subscription priorities have been established for the
allocation of stock to the extent that the Common Stock is available. These
priorities are as follows:
Category 1: Eligible Account Holders. Each depositor with $50.00 or
more on deposit at the Association as of March 31, 1995 will receive
nontransferable Subscription Rights to subscribe for up to the greater of 12,500
shares of Common Stock, one-tenth of 1% of the total offering of Common Stock or
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 qualifying deposit of the
Eligible Account Holder and the denominator is the total amount of qualifying
deposits of all Eligible Account Holders. If the exercise of Subscription Rights
in this category results in an oversubscription, shares of Common Stock will be
allocated among subscribing Eligible Account Holders so as to permit each
Eligible Account Holder, to the extent possible, to purchase a number of shares
sufficient to make his or her total allocation equal 100 shares or the number of
shares actually subscribed for, whichever is less. Thereafter, unallocated
shares will be allocated among subscribing Eligible Account Holders
proportionately, based on the amount of their respective qualifying deposits as
compared to total qualifying deposits of all Eligible Account Holders.
Subscription Rights received by officers and directors in this category based on
their increased deposits in the Association in the one-year period preceding
March 31, 1995 are subordinated to the Subscription Rights of other Eligible
Account Holders.
Category 2: ESOP. The Plan provides that the ESOP shall receive
nontransferable Subscription Rights to purchase up to 8% of the shares of Common
Stock issued in the Conversion. The ESOP intends to purchase 8% of the shares of
Common Stock issued in the Conversion. In the event the number of shares offered
in the Conversion is increased above the maximum of the Estimated Valuation
Range, the ESOP shall have a priority right to purchase any such shares
exceeding the maximum of the Estimated Valuation Range up to an aggregate of 8%
of the Common Stock.
Category 3: Supplemental Eligible Account Holders. Each depositor with
$50.00 or more on deposit at the Association as of _________ __, 1996 will
receive nontransferable Subscription Rights to subscribe for up to the greater
of 12,500 shares of Common Stock, one-tenth of 1% of the total offering of
Common Stock or 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 qualifying deposit of the
Supplemental Eligible Account Holder and the denominator is the total amount of
qualifying deposits of all
71
Supplemental Eligible Account Holders. If the exercise of Subscription Rights in
this category results in an oversubscription, shares of Common Stock will be
allocated among subscribing Supplemental Eligible Account Holders so as to
permit each Supplemental Eligible Account Holder, to the extent possible, to
purchase a number of shares sufficient to make his or her total allocation equal
100 shares or the number of shares actually subscribed for, whichever is less.
Thereafter, unallocated shares will be allocated among subscribing Supplemental
Eligible Account Holders proportionately, based on the amount of their
respective qualifying deposits as compared to total qualifying deposits of all
Supplemental Eligible Account Holders.
Category 4: Other Members. Each depositor of the Association as of the
Voting Record Date and each borrower with a loan outstanding on ________ __,
1996 which continues to be outstanding as of the Voting Record Date will receive
nontransferable Subscription Rights to purchase the greater of 12,500 shares of
Common Stock in the Conversion or one-tenth of 1% of the total offering of
shares in the Conversion to the extent available following subscriptions by
Eligible Account Holders and Supplemental Eligible Account Holders. In the event
of an oversubscription, the available shares will be allocated proportionately
based on the amount of their respective subscriptions.
Subscription Rights are nontransferable. Persons selling or otherwise
transferring their Subscription Rights to subscribe for Common Stock in the
Subscription Offering or subscribing for Common Stock on behalf of another
person will be subject to forfeiture of such right and possible further
sanctions and penalties imposed by the OTS or another agency of the U.S.
Government. Each person exercising Subscription Rights will be required to
certify that he or she is purchasing such shares solely 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. Once tendered, subscription
orders cannot be revoked without the consent of the Association and the Holding
Company.
The Subscription Offering and all Subscription Rights under the Plan
will expire at Noon, Mountain Time, on _____________ __, 1996, whether or not
the Association has been able to locate each person entitled to such
Subscription Rights. OTS regulations require that the Holding Company complete
the sale of Common Stock within 45 days after the close of the Subscription
Offering. The Subscription Offering may be extended by the Holding Company and
the Association up to _____________ __, 1997 without the OTS's approval. If the
Direct Community Offering and the Syndicated Community Offerings are not
completed by ______________ __, 1996 (or __________ __, 1997, if the
Subscription Offering is fully extended), all funds received will be promptly
returned with interest at the passbook rate and all withdrawal authorizations
will be canceled or, if regulatory approval of an extension of the time period
has been granted, all subscribers and purchasers will be given the right to
increase, decrease or rescind their orders. If an extension of time is obtained,
all subscribers will be notified of such extension and of the duration of any
extension that has been granted, and will be given the right to increase,
decrease or rescind their orders. If an affirmative response to any
resolicitation is not received by the Holding Company from a subscriber, the
subscriber's order will be rescinded and all funds received will be promptly
returned with interest (or withdrawal authorizations will be canceled). No
single extension can exceed 90 days.
Direct Community Offering. Concurrently with the Subscription Offering,
the Holding Company is offering shares of the Common Stock to certain members of
the general public in a Direct Community Offering with preference given to
natural persons residing in the Local Community. Purchasers in the Direct
Community Offering, together with their associates and groups acting in concert,
are eligible to purchase up to 12,500 shares of Common Stock in the Conversion.
In the event an insufficient number of shares are available to fill orders in
the Direct Community Offering, the available shares will be allocated on a pro
rata basis determined by the amount of the respective orders. Orders for the
Common Stock in the Direct Community Offering will be filled to the extent such
shares remain available after satisfaction of all orders received in the
Subscription Offering. The Direct Community Offering may terminate as early as
Noon, Mountain Time, on _____________ __, 1996 or any date thereafter; however,
in no case later than ___________ __, 1997, unless extended. Any extensions
beyond ___________ __, 1997 would require a resolicitation of orders, wherein
subscribers would be given the opportunity to continue their orders, in which
case they will need to reconfirm affirmatively their subscriptions prior to the
expiration of the resolicitation offering or their subscription funds will be
promptly refunded with interest at the passbook rate, or be
72
permitted to modify or cancel their orders. The right of any person to purchase
shares in the Direct Community Offering is subject to the absolute right of the
Holding Company and the Association to accept or reject such purchases in whole
or in part. If an order is rejected in part, the purchaser does not have the
right to cancel the remainder of the order. The Holding Company presently
intends to terminate the Direct Community Offering as soon as it has received
orders for all shares available for purchase in the Conversion.
If all of the Common Stock offered in the Subscription Offering is
subscribed for, no Common Stock will be available for purchase in the Direct
Community Offering and all funds submitted pursuant to the Direct Community
Offering will be refunded promptly with interest.
Syndicated Community Offering. The Plan provides that shares of Common
Stock not purchased in the Subscription and Direct Community Offering, if any,
may be offered for sale to certain members of the general public in a Syndicated
Community Offering through a syndicate of registered broker-dealers to be
managed by Webb acting as agent of the Holding Company. The Holding Company and
the Association have the right to reject orders, in whole or part, in their sole
discretion in the Syndicated Community Offering. If an order is rejected in
part, the purchaser does not have the right to cancel the remainder of the
order. Neither Webb nor any registered broker-dealer shall have any obligation
to take or purchase any shares of the Common Stock in the Syndicated Community
Offering; however, Webb has agreed to use its best efforts in the sale of shares
in the Syndicated Community Offering.
Stock sold in the Syndicated Community Offering will be sold at the
$10.00 Purchase Price, the same price as all other shares in the Offerings. See
"-- Stock Pricing and Number of Shares to be Issued." No person, together with
any associate or group of persons acting in concert, will be permitted to
subscribe in the Syndicated Community Offering for shares of Common Stock with
an aggregate purchase price of more than $250,000. See "-- Plan of Distribution
for the Subscription, Community and Syndicated Community Offerings" for a
description of the commission to be paid to the selected dealers and to Webb.
Webb may enter into agreements with selected dealers to assist in the
sale of shares in 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 Holding Company as of a certain
date ("Order Date") for the purchase of shares of Conversion Stock. When and if
Webb and the Holding Company believe that enough indications of interest and
orders have been received in the Subscription Offering, the Direct Community
Offering and the Syndicated Community Offering to consummate the Conversion,
Webb 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 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 Holding Company established for
each selected dealer. Each customer's funds so forwarded to the Holding Company,
along with all other accounts held in the same title, will be insured by the
FDIC up to the applicable $100,000 legal limit. After payment has been received
by the Holding Company from selected dealers, funds will earn interest at the
Association's passbook rate (_____% per annum as of the date hereof) until the
completion of the Offerings. At the consummation of the Conversion the funds
received in the Offerings will be used to purchase the shares of Common Stock
ordered. The shares of Common Stock issued in the Conversion cannot and will not
be insured by the FDIC or any other government agency. 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
their customers' brokerage accounts.
The Syndicated Community Offering may close as early as Noon, Mountain
Time on _____________ __, 1996, the Expiration Date, or any date thereafter at
the discretion of the Holding Company. The Syndicated Community Offering will
terminate no more than 45 days following the Expiration Date, unless extended by
the Holding Company with any required regulatory approval, but in no case later
than ____________ __, 1997. The
73
Syndicated Community Offering may run concurrent to the Subscription and Direct
Community Offering or subsequent thereto.
In the event the Association is unable to find purchasers from the
general public for all unsubscribed shares, other purchase arrangements will be
made by the Board of Directors of the Association, if feasible. Such other
arrangements will be subject to the approval of the OTS. The OTS may grant one
or more extensions of the offering period, provided that (i) no single extension
exceeds 90 days, (ii) subscribers are given the right to increase, decrease or
rescind their subscriptions during the extension period, and (iii) the
extensions do not go more than two years beyond the date on which the members
approved the Plan. If the Conversion is not consummated by ______________ __,
1996 (or, if the Offerings are fully extended, by ____________ __, 1997), either
all funds received will be returned with interest (and withdrawal authorizations
canceled) or, if the OTS has granted an extension of such period, all
subscribers will be given the right to increase, decrease or rescind their
subscriptions at any time prior to 20 days before the end of the extension
period. If an extension of time is obtained, all subscribers will be notified of
such extension and of their rights to modify their orders. If an affirmative
response to any resolicitation is not received by the Holding Company from a
subscriber, the subscriber's order will be rescinded and all funds received will
be promptly returned with interest (or withdrawal authorizations will be
canceled). No single extension can exceed 90 days.
Persons in Non-Qualified States. The Holding Company and the
Association will make reasonable efforts to comply with the securities laws of
all states in the United States in which persons entitled to subscribe for stock
pursuant to the Plan reside. However, the Holding Company and the Association
are not required to offer stock in the Subscription Offering to any person who
resides in a foreign country or resides in a state of the United States with
respect to which (i) a small number of persons otherwise eligible to subscribe
for shares of Common Stock reside in such state; or (ii) the Holding Company or
the Association determines that compliance with the securities laws of such
state would be impracticable for reasons of cost or otherwise, including but not
limited to a request or requirement that the Holding Company and the Association
or their officers, directors or trustees register as a broker, dealer, salesman
or selling agent, under the securities laws of such state, or a request or
requirement to register or otherwise qualify the Subscription Rights or Common
Stock for sale or submit any filing with respect thereto in such state. Where
the number of persons eligible to subscribe for shares in one state is small,
the Holding Company and the Association will base their decision as to whether
or not to offer the Common Stock in such state on a number of factors, including
the size of accounts held by account holders in the state, the cost of reviewing
the registration and qualification requirements of the state (and of actually
registering or qualifying the shares) or the need to register the Holding
Company, its officers, directors or employees as brokers, dealers or salesmen.
Limitations on Purchases of Shares
The Plan of Conversion provides for certain additional limitations to
be placed upon the purchase of Common Stock by eligible subscribers and others
in the Conversion. Each subscriber must subscribe for a minimum of 25 shares. No
person by himself shall purchase shares of Common Stock with an aggregate
Purchase Price that exceeds $125,000 (12,500 shares based on the $10.00 Purchase
Price) in the Conversion. Additionally, no person, together with any associates
or groups of persons acting in concert, shall purchase shares of Common Stock
with an aggregate Purchase Price that exceeds $350,000 (35,000 shares based on
the $10.00 Purchase Price) in the Conversion. Officers, directors and their
associates may not purchase, in the aggregate, more than 34% of the shares of
Common Stock offered in the Conversion. For purposes of the Plan, the directors
are not deemed to be acting in concert solely by reason of their Board
membership. Pro rata reductions within each Subscription Rights category will be
made in allocating shares to the extent that the maximum purchase limitations
are exceeded.
The Association's and the Holding Company's Boards of Directors may, in
their sole discretion, increase the maximum purchase limitation set forth above
up to 9.99% of the shares of Common Stock sold in the Conversion, provided that
orders for shares which exceed 5% of the shares of Common Stock sold in the
Conversion may not exceed, in the aggregate, 10% of the shares sold in the
Conversion. The Association and the Holding Company do not intend to increase
the maximum purchase limitation unless market conditions are such that an
74
increase in the maximum purchase limitation is necessary to sell a number of
shares in excess of the minimum of the Estimated Valuation Range. If the Boards
of Directors decide to increase the purchase limitation above 12,500 shares of
Common Stock, all persons who subscribed for the maximum number of shares will
be given the opportunity to increase their orders accordingly, subject to the
rights and preferences of any person who has priority Subscription Rights.
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. In
general, a person who acts in concert with another person ("other party") shall
also be deemed to be acting in concert with any person who is also acting in
concert with that other party. The Holding 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 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. For example, a corporation of
which a person serves as an officer would be an associate of such person, and,
therefore, all shares purchased by such corporation would be included with the
number of shares which such person could purchase individually under the above
limitations.
The term "officer" is defined in the Plan to mean an executive officer
of the Association, including its President, Executive Vice Presidents, Senior
Vice Presidents, Vice Presidents in charge of principal business functions,
Secretary and Treasurer.
Common Stock purchased pursuant to the Conversion will be freely
transferable, except for shares purchased by directors and officers of the
Association and the Holding Company and for shares purchased by National
Association of Securities Dealers, Inc. ("NASD") members. See "-- Restrictions
on Transferability by Directors and Officers and NASD Members."
Plan of Distribution for the Subscription, Direct Community and Syndicated
Community Offerings
The Holding Company and the Association have retained Webb to consult
with and to advise the Association and the Holding Company, and to assist the
Holding Company, on a best efforts basis, in the distribution of the shares of
Common Stock in the Subscription and Community Offering. The services that Webb
will provide include, but are not limited to (i) training the employees of the
Association who will perform certain ministerial functions in the Subscription
and Community Offering regarding the mechanics and regulatory requirements of
the stock offering process, (ii) managing the Stock Information Center by
assisting interested stock subscribers and by keeping records of all stock
orders, (iii) preparing marketing materials, and (iv) assisting in the
solicitation of proxies from the Association's members for use at the Special
Meeting. For its services, Webb will receive a management fee of $25,000 and a
success fee of 1.5% of the aggregate Actual Purchase Price of the shares of
Common Stock sold in the Offerings excluding shares purchased by the ESOP and
officers and directors of the Association (such success fee not to exceed 1.5%
of the gross offering proceeds at the midpoint of the Estimated Valuation Range,
or $294,000). In the event that selected dealers are used to assist in the sale
of shares of Common Stock in the Community Offering, such dealers will be paid a
fee of up to 5.5% of the aggregate Purchase Price of the shares sold by such
dealers. The Holding Company and the Association have agreed to reimburse Webb
for its out-of-pocket expenses, and its legal fees up to a total of $35,000, and
to indemnify Webb against certain claims or
75
liabilities, including certain liabilities under the Securities Act, and will
contribute to payments Webb may be required to make in connection with any such
claims or liabilities.
Sales of shares of Common Stock will be made primarily by registered
representatives affiliated with Webb or by the broker-dealers managed by Webb. A
Stock Information Center will be established at the office of the Association.
The Holding Company will rely on Rule 3a4-1 of the Exchange Act and sales of
Common Stock will be conducted within the requirements of such Rule, so as to
permit officers, directors and employees to participate in the sale of the
Common Stock in those states where the law so permits. No officer, director or
employee of the Holding Company or the Association will be compensated directly
or indirectly by the payment of commissions or other remuneration in connection
with his or her participation in the sale of Common Stock.
Procedure for Purchasing Shares in the Subscription and Direct Community
Offering
To ensure that each purchaser receives a prospectus at least 48 hours
prior to the Expiration Date in accordance with Rule 15c2-8 under the Exchange
Act, no Prospectus will be mailed any later than five days prior to such date or
hand delivered any later than two days prior to such date. Execution of the
Stock Order Form will confirm receipt or delivery in accordance with Rule
15c2-8. Stock Order Forms will only be distributed with a Prospectus. The
Association will accept for processing only orders submitted on original Stock
Order Forms.
To purchase shares in the Subscription and Direct Community Offering,
the accompanying original Stock Order Form (facsimile copies and photocopies
will not be accepted) and a fully executed separate original Certification Form,
along with the required full payment for each share subscribed, or with
appropriate authorization for withdrawal of full payment from the subscriber's
deposit account with the Association (which may be given by completing the
appropriate blanks in the Stock Order Form), must be received by the Association
by Noon, Mountain Time, on the Expiration Date. Stock Order Forms and
Certification Forms that are not received by such time or are executed
defectively or are received without full payment (or appropriate withdrawal
instructions for full payment) are not required to be accepted. The Holding
Company and the Association have the right to waive or permit the correction of
incomplete or improperly executed Stock Order Forms, but do not represent that
they will do so. Pursuant to the Plan of Conversion, the interpretation by the
Holding Company and the Association of the terms and conditions of the Plan of
Conversion and of the Stock Order Form will be final. Once received, an executed
Stock Order Form or Certification Form may not be modified, amended or rescinded
without the consent of the Association, unless the Conversion has not been
consummated within 45 days after the end of the Subscription Offering, unless
such period has been extended.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the Eligibility Record Date (March 31,
1995) and/or the Supplemental Eligibility Record Date (_________ __, 1996)
and/or the Voting Record Date (__________ __, 1996) must list all accounts on
the Stock Order Form giving all names in each account, the account number and
the approximate account balance as of such date.
Full payment for subscriptions may be made (i) in cash only if
delivered in person at the Association, (ii) by check, bank draft, 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 on the Stock Order Form. No wire transfers will be
accepted and full payment is required. Interest will be paid on payments made by
cash, check, bank draft or money order at the Association's passbook rate (___%
per annum as of the date hereof) from the date payment is received until the
consummation or termination of the Conversion. If payment is made by
authorization of withdrawal from deposit accounts, the funds authorized to be
withdrawn from a deposit account will continue to accrue interest at the
contractual rates until consummation or termination of the Conversion (unless
the certificate matures after the date of receipt of the Stock Order Form but
prior to closing, in which case funds will earn interest at the passbook rate
from the date of maturity until consummation of the Conversion), but a hold will
be placed on such funds, thereby making them unavailable to the depositor until
consummation or termination of the Conversion. At the consummation of the
Conversion the funds received in the Offerings will be used to
76
purchase the shares of Common Stock ordered. The shares issued in the Conversion
cannot and will not be insured by the FDIC or any other government agency. In
the event that the Conversion is not consummated for any reason, all funds
submitted will be promptly refunded with interest as described above.
If a subscriber authorizes the Association to withdraw the amount of
the Purchase Price from his or her deposit account, the Association will do so
as of the effective date of Conversion. The Association will waive any
applicable penalties for early withdrawal from certificate accounts. If the
remaining balance in a certificate account is reduced below the applicable
minimum balance requirement at the time that the funds actually are transferred
under the authorization the certificate will be canceled at the time of the
withdrawal, without penalty, and the remaining balance will earn interest at the
Association's passbook rate.
If the ESOP subscribes for shares during the Subscription Offering, the
ESOP will not be required to pay for the shares subscribed for at the time it
subscribes, but rather may pay for such shares of Common Stock subscribed for at
the Purchase Price upon consummation of the Conversion, provided that there is
in force from the time of its subscription until such time, a loan commitment
from an unrelated financial institution or the Holding Company to lend to the
ESOP, at such time, the aggregate Purchase Price of the shares for which it
subscribed.
IRAs maintained in the Association do not permit investment in the
Common Stock. A depositor interested in using his or her IRA funds to purchase
Common Stock must do so through a self-directed IRA. Since the Association does
not offer such accounts, it will allow such a depositor to make a
trustee-to-trustee transfer of the IRA funds to a trustee offering a
self-directed IRA program with the agreement that such funds will be used to
purchase the Holding Company's Common Stock in the Offerings. There will be no
early withdrawal or IRS interest penalties for such transfers. The new trustee
would hold the Common Stock in a self-directed account in the same manner as the
Association now holds the depositor's IRA funds. An annual administrative fee
may be payable to the new trustee. Depositors interested in using funds in an
Association IRA to purchase Common Stock should contact the Stock Information
Center at the Association as soon as possible so that the necessary forms may be
forwarded for execution and returned prior to the Expiration Date. In addition,
the provisions of ERISA and IRS regulations require that officers, directors and
10% shareholders who use self-directed IRA funds to purchase shares of Common
Stock in the Subscription and Direct Community Offering make such purchases for
the exclusive benefit of IRAs.
Certificates representing shares of Common Stock purchased, and any
refund due, will be mailed to purchasers at such address as may be specified in
a properly completed Stock Order Form or to the last address of such person(s)
appearing on the records of the Association as soon as practicable following
completion of the sale of all shares of Common Stock. Any certificates returned
as undeliverable will be disposed of in accordance with applicable law. Until
certificates for the Common Stock are available and delivered to subscribers and
purchasers, subscribers and purchasers may not be able to sell the shares of
Common Stock for which they subscribed or purchased.
Stock Pricing and Number of Shares to be Issued
OTS regulations require that the aggregate purchase price of the
securities sold in connection with the conversion of a thrift institution be
based upon an estimated pro forma value of the association and its holding
company (if any) as converted (i.e., taking into account the expected receipt of
proceeds from the sale of securities in the Conversion), as determined by an
independent appraisal. The Association and the Holding Company have retained
Keller to prepare an appraisal of the pro forma market value of the Holding
Company and the Association as converted, as well as a business plan. Keller
will receive a fee of $22,000 for its appraisal services and preparation of a
business plan, plus reasonable out-of-pocket expenses incurred in connection
with the appraisal not to exceed $1,000. The Association has agreed to indemnify
Keller under certain circumstances against liabilities and expenses (including
legal fees) arising out of, related to, or based upon the Conversion.
77
Keller has prepared an appraisal of the estimated pro forma market
value of the Holding Company and the Association as converted taking into
account the formation of the Holding Company as the holding company for the
Association. For its analysis, Keller undertook substantial investigations to
learn about the Association's business and operations. Management supplied
financial information, including annual financial statements, information on the
composition of assets and liabilities, and other financial schedules. In
addition to this information, Keller reviewed the Association's Form AC
Application for Approval of Conversion and the Holding Company's Form SB-2
Registration Statement. Furthermore, Keller visited the Association's facilities
and had discussions with the Association's management and its special conversion
legal counsel, Breyer & Aguggia. No detailed individual analysis of the separate
components of the Holding Company's or the Association's assets and liabilities
was performed in connection with the evaluation.
In estimating the pro forma market value of the Holding Company and the
Association, as required by applicable regulatory guidelines, Keller's analysis
utilized three selected valuation procedures, the Price/Book ("P/B") method, the
Price/Earnings ("P/E") method, and Price/Assets ("P/A") method, all of which are
described in its report. Keller placed the greatest emphasis on the P/E and P/B
methods in estimating pro forma market value. In applying these procedures,
Keller reviewed, among other factors, the economic make-up of the Association's
primary market area, the Association's financial performance and condition in
relation to publicly-traded institutions that Keller deemed comparable to the
Association, the specific terms of the offering of the Holding Company's Common
Stock, the pro forma impact of the additional capital raised in the Conversion,
conditions of securities markets in general, and the market for thrift
institution common stock in particular. Keller's analysis provides an
approximation of the pro forma market value of the Holding Company and the
Association as converted based on the valuation methods applied and the
assumptions outlined in its report. Included in its report were certain
assumptions as to the pro forma earnings of the Holding Company after the
Conversion that were utilized in determining the appraised value. These
assumptions included expenses of $545,000, $585,000, $619,000 and $619,000 at
the minimum, midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range, an assumed after-tax rate of return on the net Conversion
proceeds of 3.81%, purchases by the ESOP of 8% of the stock sold in the
Conversion and purchases in the open market by the MRP of a number of shares
equal to 4% of the stock sold in the Conversion at the Purchase
Price. See "PRO FORMA DATA" for additional information concerning these
assumptions. The use of different assumptions may yield somewhat different
results.
On the basis of the foregoing, Keller has advised the Holding Company
and the Association that, in its opinion, as of September 6, 1996, the aggregate
estimated pro forma market value of the Holding Company and the Association, as
converted, and, therefore, the Common Stock was within the valuation range of
$16.7 million to $22.5 million with a midpoint of $19.6 million. After reviewing
the methodology and the assumptions used by Keller in the preparation of the
appraisal, the Board of Directors established the Estimated Valuation Range
which is equal to the valuation range of $16.7 million to $22.5 million with a
midpoint of $19.6 million. Assuming that the shares are sold at $10.00 per share
in the Conversion, the estimated number of shares would be between 1,666,000 and
2,254,000 with a midpoint of 1,960,000. The Purchase Price of $10.00 was
determined by discussion among the Boards of Directors of the Association and
the Holding Company and Webb, taking into account, among other factors (i) the
requirement under OTS regulations that the Common Stock be offered in a manner
that will achieve the widest distribution of the stock and (ii) desired
liquidity in the Common Stock subsequent to the Conversion. Since the outcome of
the Offerings relate in large measure to market conditions at the time of sale,
it is not possible to determine the exact number of shares that will be issued
by the Holding Company at this time. The Estimated Valuation Range may be
amended, with the approval of the OTS, if necessitated by developments following
the date of such appraisal in, among other things, market conditions, the
financial condition or operating results of the Association, regulatory
guidelines or national or local economic conditions.
Keller's appraisal report is filed as an exhibit to the Registration
Statement. See "ADDITIONAL INFORMATION."
If, upon completion of the Subscription and Direct Community Offering,
at least the minimum number of shares are subscribed for, Keller, after taking
into account factors similar to those involved in its prior appraisal, will
78
determine its estimate of the pro forma market value of the Association and the
Holding Company as converted, as of the close of the Subscription and Direct
Community Offering.
No sale of the shares will take place unless prior thereto Keller
confirms to the OTS that, to the best of Keller's knowledge and judgment,
nothing of a material nature has occurred that would cause it to conclude that
the actual total purchase price on an aggregate basis was incompatible with its
estimate of the total pro forma market value of the Holding Company and the
Association as converted at the time of the sale. If, however, the facts do not
justify such a statement, the Offerings or other sale may be canceled, a new
Estimated Valuation Range and price per share set and new Subscription, Direct
Community and Syndicated Community Offerings held. Under such circumstances,
subscribers would have the right to modify or rescind their subscriptions and to
have their subscription funds returned promptly with interest and holds on funds
authorized for withdrawal from deposit accounts would be released or reduced.
Depending upon market and financial conditions, the number of shares
issued may be more or less than the range in number of shares shown above. In
the event the total amount of shares issued is less than 1,666,000 or more than
2,592,100 (15% above the maximum of the Estimated Valuation Range), for
aggregate gross proceeds of less than $16.7 million or more than $25.9 million,
subscription funds will be returned promptly with interest to each subscriber
unless he indicates otherwise. In the event a new valuation range is established
by Keller, such new range will be subject to approval by the OTS.
If purchasers cannot be found for an insignificant residue of
unsubscribed shares from the general public, other purchase arrangements will be
made by the Boards of Directors of the Association and the Holding Company, if
possible. Such other purchase arrangements will be subject to the approval of
the OTS and may provide for purchases for investment purposes by directors,
officers, their associates and other persons in excess of the limitations
provided in the Plan of Conversion and in excess of the proposed director
purchases set forth herein, although no such purchases are currently intended.
If such other purchase arrangements cannot be made, the Plan will terminate.
In formulating its appraisal, Keller relied upon the truthfulness,
accuracy and completeness of all documents the Association furnished it. Keller
also considered financial and other information from regulatory agencies, other
financial institutions, and other public sources, as appropriate. While Keller
believes this information to be reliable, Keller does not guarantee the accuracy
or completeness of such information and did not independently verify the
financial statements and other data provided by the Association and the Holding
Company or independently value the assets or liabilities of the Holding Company
and the Association. The appraisal by Keller is not intended to be, and must not
be interpreted as, a recommendation of any kind as to the advisability of voting
to approve the Conversion or of purchasing shares of Common Stock. Moreover,
because the appraisal is necessarily based on many factors which change from
time to time, there is no assurance that persons who purchase such shares in the
Conversion will later be able to sell shares thereafter at prices at or above
the Purchase Price.
Restrictions on Repurchase of Stock
Pursuant to OTS regulations, OTS-regulated savings associations (and
their holding companies) may not for a period of three years from the date of an
institution's mutual-to-stock conversion repurchase any of its common stock from
any person, except in the event of (i) an offer made to all of its stockholders
to repurchase the common stock on a pro rata basis, approved by the OTS; (ii)
the repurchase of qualifying shares of a director; or (iii) a purchase in the
open market by a tax-qualified or non-tax-qualified employee stock benefit plan
in an amount reasonable and appropriate to fund the plan. Furthermore,
repurchases any of its common stock are prohibited if the effect thereof would
cause the association's regulatory capital to be reduced below (a) the amount
required for the liquidation account or (b) the regulatory capital requirements
imposed by the OTS. Repurchases are generally prohibited during the first year
following conversion. However, recent OTS policy has relaxed this restriction,
particularly during the second six months after conversion. While an applicant
needs to demonstrate the existence of "exceptional circumstances" during the
first six months after conversion, the OTS has indicated that it would analyze
repurchases during months seven through 12 after conversion on a case-by-case
basis. Upon 10 days' written
79
notice to the OTS, and if the OTS does not object, an institution may make open
market repurchases of its outstanding common stock during years two and three
following the conversion, provided that (x) no more than 5% of the outstanding
common stock is to be purchased during any 12-month period, (y) the repurchases
do not cause the association to become undercapitalized as defined under the OTS
prompt corrective action regulations and (z) the repurchase would not adversely
affect the financial condition of the association. No assurances, however, can
be given that the OTS will approve a repurchase program under current policy or
that such policy will not change or become more restrictive.
Shares to be Purchased by Management Pursuant to Subscription Rights
The following table sets forth certain information as to the
approximate purchases of Common Stock by each director and executive officer of
the Association, including their associates, as defined by applicable
regulations, assuming that sufficient shares will be available to satisfy
subscriptions in all categories. No individual has entered into a binding
agreement with respect to such intended purchases and, therefore, actual
purchases could be more or less than indicated below. Directors and officers of
the Association and their associates may not purchase in excess of 34% of the
shares sold in the Conversion. Directors, officers and staff members will pay
the same price for the shares for which they subscribe as the price that will be
paid by all other subscribers.
Percent of
Shares at
Name and Maximum of
Position with Anticipated Number of Anticipated Dollar Estimated
the Association Shares Purchased(1) Amount Purchased(1) Valuation Range(1)
Beverly D. Harris 22,500 $225,000 1.1%
President
Walter J. Peterson, Jr. 10,000 100,000 0.4
Chairman of the Board
and Director
Ernest A. Sandberg 12,500 125,000 0.6
Executive Vice President
Secretary and Director
John R. Boe 4,000 40,000 0.2
Director
Edwin H. Doig 10,000 100,000 0.4
Director
Sanroe J. Kaisler, Jr. 5,000 50,000 0.2
Director
Walter R. Sales 5,000 50,000 0.2
Director
69,000 $690,000 3.1%
(1) Excludes any shares awarded pursuant to the ESOP and MRP and options to
acquire shares pursuant to the Stock Option Plan. For a description of
the number of shares to be purchased by the ESOP and expected awards
under the MRP and Stock Option Plan, see "MANAGEMENT OF THE ASSOCIATION
-- Benefits
80
-- Employee Stock Ownership Plan," "-- Benefits -- 1996 Stock Option
Plan" and "-- Benefits -- Management Recognition Plan."
Restrictions on Transferability by Directors and Officers and NASD Members
Shares of Common Stock purchased in the Offerings by directors and
officers of the Holding Company may not be sold for a period of one year
following consummation of the Conversion, except in the event of the death of
the stockholder or in any exchange of the Common Stock in connection with a
merger or acquisition of the Holding Company. Shares of Common Stock received by
directors or officers through the ESOP, the MRP or upon exercise of options
issued pursuant to the Stock Option Plan or purchases subsequent to the
Conversion are not subject to this restriction. Accordingly, shares of Common
Stock issued by the Holding Company to directors and officers shall bear a
legend giving appropriate notice of the restriction, and, in addition, the
Holding Company will give appropriate instructions to the transfer agent for the
Holding Company's Common Stock with respect to the restriction on transfers. Any
shares issued to directors and officers as a stock dividend, stock split or
otherwise with respect to restricted Common Stock shall be subject to the same
restrictions.
Purchases of outstanding shares of Common Stock of the Holding Company
by directors, executive officers (or any person who was an executive officer or
director of the Association after adoption of the Plan of Conversion) and their
associates during the three-year period following Conversion may be made only
through a broker or dealer registered with the SEC, except with the prior
written approval of the OTS. This restriction does not apply, however, to
negotiated transactions involving more than 1% of the Holding Company's
outstanding Common Stock or to the purchase of stock pursuant to the Stock
Option Plan.
The Holding Company has filed with the SEC a registration statement
under the Securities Act for the registration of the Common Stock to be issued
pursuant to the Conversion. The registration under the Securities Act of shares
of the Common Stock to be issued in the Conversion does not cover the resale of
such shares. Shares of Common Stock purchased by persons who are not affiliates
of the Holding Company may be resold without registration. Shares purchased by
an affiliate of the Holding Company will be subject to the resale restrictions
of Rule 144 under the Securities Act. If the Holding Company meets the current
public information requirements of Rule 144 under the Securities Act, each
affiliate of the Holding 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 Holding 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 Holding Company
to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances.
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.
RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY
The following discussion is a summary of certain provisions of federal
law and regulations and Delaware corporate law, as well as the Certificate of
Incorporation and Bylaws of the Holding Company, relating to stock ownership and
transfers, the Board of Directors and business combinations, all of which may be
deemed to have "anti-takeover" effects. The description of these provisions is
necessarily general and reference should be made to the actual law and
regulations and to the Certificate of Incorporation and Bylaws of the Holding
Company. See "ADDITIONAL INFORMATION" as to how to obtain a copy of these
documents.
81
Conversion Regulations
OTS regulations prohibit any person from making an offer, announcing an
intent to make an offer or participating in any other arrangement to purchase
stock or acquiring stock or subscription rights in a converting institution (or
its holding company) from another person prior to completion of its conversion.
Further, without the prior written approval of the OTS, no person may make such
an offer or announcement of an offer to purchase shares or actually acquire
shares in the converting institution (or its holding company) for a period of
three years from the date of the completion of the conversion if, upon the
completion of such offer, announcement or acquisition, that person would become
the beneficial owner of more than 10% of the outstanding stock of the
institution (or its holding company). The OTS has defined "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 other group formed for the purpose of acquiring, holding or
disposing of securities of an insured institution. However, offers made
exclusively to an association (or its holding company) or an underwriter or
member of a selling group acting on the converting institution's (or its holding
company's) behalf for resale to the general public are excepted. The regulation
also provides civil penalties for willful violation or assistance in any such
violation of the regulation by any person connected with the management of the
converting institution (or its holding company) or who controls more than 10% of
the outstanding shares or voting rights of a converting or converted institution
(or its holding company).
Change of Control Regulations
FIRREA extended the scope of the Change in Bank Control Act to savings
associations and savings and loan holding companies and concurrently repealed
the Change in Savings and Loan Control Act of 1978. The Change in Bank Control
Act requires persons who at any time intend to acquire control of an insured
savings association or its parent holding company to give 60 days' prior written
notice to the "appropriate federal banking agency." The OTS is the "appropriate
federal banking agency" for savings associations and savings and loan holding
companies. Any company that acquires such control becomes a "savings and loan
holding company" subject to registration, examination and regulation by the OTS.
Control for these purposes exists when the acquiring party has voting control of
at least 25% of the institution's voting stock or the power to direct the
management or policies of an institution.
Under existing OTS regulations, "control" is presumed to exist where
the acquiring party (which includes a group "acting in concert") has voting
control of at least 10% of the institution's voting stock and any of the
following factors exist: (i) the acquiror would be one of the two largest
holders of any class of voting stock; (ii) the acquiror would hold more than 25%
of the total stockholders' equity; (iii) the acquiror would hold more than 35%
of the combined debt securities and stockholders' equity; (iv) the acquiror is
party to any agreement (A) pursuant to which the acquiror possesses a material
economic stake resulting from a profit-sharing arrangement, use of common names,
facilities or personnel or the provision of essential services; or (B) that
enables the acquiror to influence a material aspect of the management or
policies, other than agreements to which the insured institution is a party
containing restrictions customary under the circumstances and, in the case of an
acquisition agreement, applicable only during the period the acquiror is seeking
OTS approval to acquire the institution, prohibiting transactions between the
acquiror and the insured institution and their respective affiliates without OTS
approval during the pendency of the application process and containing no
material forfeiture provisions applicable in the event the acquisition is not
approved or not approved by a specified date; (v) the acquiror would have the
ability, other than through the holding of revocable proxies, to direct the
votes of more than 25% of a class of the voting stock or to vote more than 25%
of a class of voting stock upon the occurrence of a future event; (vi) the
acquiror would have the power to direct the disposition of more than 25% of the
voting stock other than by means of a widely dispersed or public offering; (vii)
the acquiror and/or the acquiror's representatives or nominees would constitute
more than one member of the board of directors; and (viii) the acquiror or a
nominee or management official of the acquiror would serve as the chairman of
the board of directors, chairman of the executive committee, chief executive
officer, chief financial officer or in any position with similar policy making
authority. There are also rebuttable presumptions in the regulations concerning
whether a group "acting in concert" exists, including presumed action
82
in concert among members of an "immediate family." In the event a person or
entity acquires 10% or more of any class of an institution's voting stock but
does not also have one of the other eight factors to constitute a presumption of
control, he is required to file an informational report with the OTS disclosing
the ownership.
OTS regulations provide that no company may acquire "control" of a
savings association 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 OTS
regulations, control of an insured institution is conclusively deemed to have
been acquired by, among other things, the acquisition of more than 25% of any
class of voting stock of an insured institution 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, of an insured institution where
certain 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 institution, 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.
Anti-takeover Provisions in the Holding Company's Certificate of Incorporation
and Bylaws and Delaware Law
A number of provisions of the Holding Company's Certificate of
Incorporation and Bylaws deal with matters of corporate governance and certain
rights of stockholders. The following discussion is a general summary of certain
provisions of the Holding Company's Certificate of Incorporation and Bylaws and
regulatory provisions relating to stock ownership and transfers, the Board of
Directors and business combinations, which might be deemed to have a potential
"anti-takeover" effect. These provisions may have the effect of discouraging a
future takeover attempt which is not approved by the Board of Directors but
which individual Holding Company 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 incumbent Board of Directors
or management of the Holding Company more difficult. The following description
of certain of the provisions of the Certificate of Incorporation and Bylaws of
the Holding Company is necessarily general, and reference should be made in each
case to such Certificate of Incorporation and Bylaws, which are incorporated
herein by reference. See "ADDITIONAL INFORMATION" as to how to obtain a copy of
these documents.
Restrictions on Acquisitions of Securities. The Certificate of
Incorporation provides that for a period of five years from the effective date
of the Conversion, no person may acquire directly or indirectly the beneficial
ownership of more than 10% of any class of equity security of the Holding
Company, unless such offer or acquisition shall have been approved in advance by
a two-thirds vote of the Holding Company's Continuing Directors (as defined in
the Certificate of Incorporation). This provision does not apply to any employee
stock benefit plan of the Holding Company. In addition, during such five-year
period, no shares beneficially owned in violation of the foregoing percentage
limitation, as determined by the Holding Company's Board of Directors, shall be
entitled to vote in connection with any matter submitted to stockholders for a
vote. Additionally, the Certificate of Incorporation provides for further
restrictions on voting rights of shares owned in excess of 10% of any class of
equity security of the Holding Company beyond five years after the Conversion.
Specifically, the Certificate of Incorporation provides that if, at any time
after five years from the Conversion, any person acquires the beneficial
ownership of more than 10% of any class of equity security of the Holding
Company, then, with respect to each vote in excess of 10%, the record holders of
voting stock of the Holding Company beneficially owned by such person shall be
entitled to cast only one-hundredth of one vote with respect to each vote in
excess of 10% of the voting power of the outstanding shares of voting stock of
the Holding Company which such record holders would otherwise be entitled to
cast without giving effect to the provision, and the aggregate voting power of
such record holders shall be allocated proportionately among such record
holders. 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 Holding
83
Company's "Continuing Directors." Under the Holding Company's Certificate 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 Holding Company's Common
Stock in a proxy contest.
Board of Directors. The Board of Directors of the Holding Company is
divided into three classes, each of which shall contain approximately one-third
of the whole number of the members of the Board. The members of each class shall
be elected for a term of three years, with the terms of office of all members of
one class expiring each year so that approximately one-third of the total number
of directors are elected each year. The Holding Company's Certificate of
Incorporation provides that the size of the Board shall be as set forth in the
Bylaws. The Bylaws currently set the number of directors at seven. The
Certificate of Incorporation provides that any vacancy occurring in the Board,
including a vacancy created by an increase in the number of directors, shall be
filled by a vote of two-thirds of the directors then in office and any director
so chosen shall hold office for a term expiring at the annual meeting of
stockholders at which the term of the class to which the director has been
chosen expires. The classified Board is intended to provide for continuity of
the Board of Directors and to make it more difficult and time consuming for a
stockholder group to fully use its voting power to gain control of the Board of
Directors without the consent of the incumbent Board of Directors of the Holding
Company. The Certificate of Incorporation of the Holding Company provides that a
director may be removed from the Board of Directors prior to the expiration of
his or her term only for cause and only upon the vote of 80% of the outstanding
shares of voting stock. In the absence of this provision, the vote of the
holders of a majority of the shares could remove the entire Board, but only with
cause, and replace it with persons of such holders' choice.
Cumulative Voting, Special Meetings and Action by Written Consent. The
Certificate of Incorporation does not provide for cumulative voting for any
purpose. Moreover, the Certificate of Incorporation provides that special
meetings of stockholders of the Holding Company may be called only by the Board
of Directors of the Holding Company and that stockholders may take action only
at a meeting and not by written consent.
Authorized Shares. The Certificate of Incorporation authorizes the
issuance of 4,000,000 shares of Common Stock and 250,000 shares of preferred
stock. The shares of Common Stock and preferred stock were authorized in an
amount greater than that to be issued in the Conversion to provide the Holding
Company's Board of Directors with as much flexibility as possible to effect,
among other transactions, financings, acquisitions, stock dividends, stock
splits, restricted stock grants and the exercise of stock options. However,
these additional authorized shares may also be used by the Board of Directors
consistent with its fiduciary duty to deter future attempts to gain control of
the Holding Company. The Board of Directors also has sole authority to determine
the terms of any one or more series of preferred stock, including voting rights,
conversion rates, and liquidation preferences. As a result of the ability to fix
voting rights for a series of preferred stock, the Board has the power to the
extent consistent with its fiduciary duty to issue a series of preferred stock
to persons friendly to management in order to attempt to block a tender offer,
merger or other transaction by which a third party seeks control of the Holding
Company, and thereby assist members of management to retain their positions. The
Holding Company's Board currently has no plans for the issuance of additional
shares, other than the issuance of shares of Common Stock upon exercise of stock
options.
Stockholder Vote Required to Approve Business Combinations with
Principal Stockholders. The Certificate of Incorporation requires the approval
of the holders of at least 80% of the Holding Company's outstanding shares of
voting stock to approve certain "Business Combinations" (as defined therein)
involving a "Related Person" (as defined therein) except in cases where the
proposed transaction has been approved in advance by a majority of those members
of the Holding Company's Board of Directors who are unaffiliated with the
Related Person and were directors prior to the time when the Related Person
became an Related Person. The term "Related Person" is defined to include any
individual, corporation, partnership or other entity (other than the Holding
Company or its subsidiary) which owns beneficially or controls, directly or
indirectly, 10% or more of the outstanding shares of voting stock of the Holding
Company or an affiliate of such person or entity. This provision of the
Certificate of Incorporation applies to any "Business Combination," which is
defined to include: (i) any merger or consolidation
84
of the Holding Company with or into any Related Person; (ii) any sale, lease,
exchange, mortgage, transfer, or other disposition of 25% or more of the assets
of the Holding Company or combined assets of the Holding Company and its
subsidiaries to a Related Person; (iii) any merger or consolidation of a Related
Person with or into the Holding Company or a subsidiary of the Holding Company;
(iv) any sale, lease, exchange, transfer, or other disposition of 25% or more of
the assets of a Related Person to the Holding Company or a subsidiary of the
Holding Company; (v) the issuance of any securities of the Holding Company or a
subsidiary of the Holding Company to a Related Person; (vi) the acquisition by
the Holding Company or a subsidiary of the Holding Company of any securities of
a Related Person; (vii) any reclassification of common stock of the Holding
Company or any recapitalization involving the common stock of the Holding
Company; or (viii) any agreement or other arrangement providing for any of the
foregoing.
Under Delaware law, absent this provision, business combinations,
including mergers, consolidations and sales of substantially all of the assets
of a corporation must, subject to certain exceptions, be approved by the vote of
the holders of a majority of the outstanding shares of common stock of the
Holding Company and any other affected class of stock. One exception under
Delaware law to the majority approval requirement applies to stockholders owning
15% or more of the common stock of a corporation for a period of less than three
years. Such 15% stockholder, in order to obtain approval of a business
combination, must obtain the approval of two-thirds of the outstanding stock,
excluding the stock owned by such 15% stockholder, or satisfy other requirements
under Delaware law relating to board of director approval of his or her
acquisition of the shares of the Holding Company. The increased stockholder vote
required to approve a business combination may have the effect of foreclosing
mergers and other business combinations which a majority of stockholders deem
desirable and place the power to prevent such a merger or combination in the
hands of a minority of stockholders.
Amendment of Certificate of Incorporation and Bylaws. Amendments to the
Holding Company's Certificate of Incorporation must be approved by a majority
vote of its Board of Directors and also by a majority of the outstanding shares
of its voting stock, provided, however, that an affirmative vote of at least 80%
of the outstanding voting stock entitled to vote (after giving effect to the
provision limiting voting rights) is required to amend or repeal certain
provisions of the Certificate of Incorporation, including the provision limiting
voting rights, the provisions relating to approval of certain business
combinations, calling special meetings, the number and classification of
directors, director and officer indemnification by the Holding Company and
amendment of the Holding Company's Bylaws and Certificate of Incorporation. The
Holding Company's Bylaws may be amended by its Board of Directors, or by a vote
of 80% of the total votes eligible to be voted at a duly constituted meeting of
stockholders.
Stockholder Nominations and Proposals. The Certificate of Incorporation
of the Holding Company requires a stockholder who intends to nominate a
candidate for election to the Board of Directors or to raise new business at a
stockholder meeting to give not less than 30 nor more than 60 days' advance
notice to the Secretary of the Holding Company. The notice provision requires a
stockholder who desires to raise new business to provide certain information to
the Holding Company concerning the nature of the new business, the stockholder
and the stockholder's interest in the business matter. Similarly, a stockholder
wishing to nominate any person for election as a director must provide the
Holding Company with certain information concerning the nominee and the
proposing stockholder.
Purpose and Takeover Defensive Effects of the Holding Company's
Certificate of Incorporation and Bylaws. The Board of Directors of the
Association believes that the provisions described above are prudent and will
reduce the Holding 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 Association in the orderly
deployment of the Conversion proceeds into productive assets during the initial
period after the Conversion. The Board of Directors believes these provisions
are in the best interest of the Association and the Holding Company and its
stockholders. In the judgment of the Board of Directors, the Holding Company's
Board will be in the best position to determine the true value of the Holding
Company and to negotiate more effectively for what may be in the best interests
of its stockholders. Accordingly, the Board of Directors believes that it is in
the best interest of
85
the Holding Company and its stockholders to encourage potential acquirors to
negotiate directly with the Board of Directors of the Holding Company and that
these provisions will encourage such negotiations and discourage hostile
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 a price reflective of the true value of the Holding Company and
which is in the best interest 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 of the Holding
Company and its stockholders, with due consideration given to matters such as
the management and business of the acquiring corporation and maximum strategic
development of the Holding Company's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Although a tender offer
or other takeover attempt may be made at a price substantially above current
market prices, such offers are sometimes made for less than all of 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 objective may not be similar to
those of the remaining stockholders. The concentration of control, which could
result from a tender offer or other takeover attempt, could also deprive the
Holding Company's remaining stockholders of benefits of certain protective
provisions of the Exchange Act, if the number of beneficial owners became less
than 300, thereby allowing for Exchange Act deregistration.
Despite the belief of the Association and the Holding Company as to the
benefits to stockholders of these provisions of the Holding Company's
Certificate of Incorporation and Bylaws, these provisions may also have the
effect of discouraging a future takeover attempt which would not be approved by
the Holding Company's Board, but pursuant to 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 any opportunity to do so. Such provisions will also render the removal
of the Holding Company's Board of Directors and of management more difficult.
The Board of Directors of the Association and the Holding Company, however, have
concluded that the potential benefits outweigh the possible disadvantages.
Pursuant to applicable law, at any annual or special meeting of its
stockholders after the Conversion, the Holding Company may adopt additional
charter provisions regarding the acquisition of its equity securities that would
be permitted for a Delaware business corporation. The Holding Company and the
Association do not presently intend to propose the adoption of further
restrictions on the acquisition of the Holding Company's equity securities.
The cumulative effect of the restrictions on acquisition of the Holding
Company contained in the Certificate of Incorporation and Bylaws and Holding
Company, federal law and Delaware law may be to discourage potential takeover
attempts and perpetuate incumbent management, even though certain stockholders
of the Holding Company may deem a potential acquisition to be in their best
interests, or deem existing management not to be acting in their best interests.
DESCRIPTION OF CAPITAL STOCK OF THE HOLDING COMPANY
General
The Holding Company is authorized to issue 4,000,000 shares of Common
Stock, par value of $0.01 per share, and 250,000 shares of preferred stock, par
value of $0.01 per share. The Holding Company currently expects to issue up to
2,254,000 shares of Common Stock and no shares of preferred stock in the
Conversion. Each share of the Holding Company's Common Stock will have the same
relative rights as, and will be identical in all respects
86
to, each other share of Common Stock. Upon payment of the Purchase Price for the
Common Stock, in accordance with the Plan of Conversion, all such stock will be
duly authorized, fully paid and nonassessable.
The Common Stock of the Holding 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 government agency.
Common Stock
Dividends. The Holding Company can pay dividends out of statutory
surplus or from certain net profits if, as and when declared by its Board of
Directors. The payment of dividends by the Holding Company is subject to
limitations which are imposed by law and applicable regulation. See "DIVIDEND
POLICY" and "REGULATION." The holders of Common Stock of the Holding Company
will be entitled to receive and share equally in such dividends as may be
declared by the Board of Directors of the Holding Company out of funds legally
available therefor. If the Holding Company issues preferred stock, the holders
thereof may have a priority over the holders of the Common Stock with respect to
dividends.
Stock Repurchases. The Plan and OTS regulations place certain
limitations on the repurchase of the Holding Company's capital stock. See "THE
CONVERSION -- Restrictions on Repurchase of Stock" and "USE OF PROCEEDS."
Voting Rights. Upon Conversion, the holders of Common Stock of the
Holding Company will possess exclusive voting rights in the Holding Company.
They will elect the Holding Company's Board of Directors and act on such other
matters as are required to be presented to them under Delaware law or as are
otherwise presented to them by the Board of Directors. Except as discussed in
"RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY," each holder of Common
Stock will be entitled to one vote per share and will not have any right to
cumulate votes in the election of directors. If the Holding Company issues
preferred stock, holders of the Holding Company preferred stock may also possess
voting rights. Certain matters require a vote of 80% of the outstanding shares
entitled to vote thereon. See "RESTRICTIONS ON ACQUISITION OF THE HOLDING
COMPANY."
As a federal mutual savings and loan association, corporate powers and
control of the Association are vested in its Board of Directors, who elect the
officers of the Association and who fill any vacancies on the Board of Directors
as it exists upon Conversion. Subsequent to Conversion, voting rights will be
vested exclusively in the owners of the shares of capital stock of the
Association, all of which will be owned by the Holding Company, and voted at the
direction of the Holding Company's Board of Directors. Consequently, the holders
of the Common Stock will not have direct control of the Association.
Liquidation. In the event of any liquidation, dissolution or winding up
of the Association, the Holding Company, as holder of the Association's capital
stock, would be entitled to receive, after payment or provision for payment of
all debts and liabilities of the Association (including all deposit accounts and
accrued interest thereon) and after distribution of the balance in the special
liquidation account to Eligible Account Holders and Supplemental Eligible
Account Holders (see "THE CONVERSION -- Effects of Conversion to Stock Form on
Depositors and Borrowers of the Association -- Liquidation Account"), all assets
of the Association available for distribution. In the event of liquidation,
dissolution or winding up of the Holding Company, the holders of its common
stock would be entitled to receive, after payment or provision for payment of
all its debts and liabilities, all of the assets of the Holding Company
available for distribution. If Holding Company preferred stock is issued, the
holders thereof may have a priority over the holders of the Common Stock in the
event of liquidation or dissolution.
Preemptive Rights; Redemption. Holders of the Common Stock of the
Holding Company will not be entitled to preemptive rights with respect to any
shares that may be issued. The Common Stock is not subject to redemption.
87
Preferred Stock
None of the shares of the authorized Holding Company preferred stock
will be issued in the Conversion and there are no plans to issue the preferred
stock. Such stock may be issued with such designations, powers, preferences and
rights as the Board of Directors may from time to time determine. The Board of
Directors can, without stockholder approval, issue preferred stock with voting,
dividend, liquidation and conversion rights that could dilute the voting
strength of the holders of the Common Stock and may assist management in
impeding an unfriendly takeover or attempted change in control.
Restrictions on Acquisition
Acquisitions of the Holding Company are restricted by provisions in its
Certificate of Incorporation and Bylaws and by the rules and regulations of
various regulatory agencies. See "REGULATION" and "RESTRICTIONS ON ACQUISITION
OF THE HOLDING COMPANY."
REGISTRATION REQUIREMENTS
The Holding Company will register the Common Stock with the SEC
pursuant to Section 12(g) of the Exchange Act upon the completion of the
Conversion and will not deregister its Common Stock for a period of at least
three years following the completion of the Conversion. Upon such registration,
the proxy solicitation and tender offer rules, insider trading reporting and
restrictions, annual and periodic reporting and other requirements of the
Exchange Act will be applicable.
LEGAL AND TAX OPINIONS
The legality of the Common Stock has been passed upon for the Holding
Company by Breyer & Aguggia, Washington, D.C. The federal tax consequences of
the Conversion have been opined upon by Breyer & Aguggia and the Montana income
tax consequences of the Conversion have been opined upon by Huppert and
Swindlehurst, P.C., Livingston, Montana. Breyer & Aguggia and Huppert and
Swindlehurst, P.C. have consented to the references herein to their opinions.
Certain legal matters will be passed upon for Webb by Elias, Matz, Tiernan &
Herrick LLP, Washington, D.C.
EXPERTS
The consolidated financial statements of the Association as of June 30,
1996 and 1995 and for the years then ended June 30, 1996 included in this
Prospectus and in the Registration Statement have been so included in reliance
upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm
as experts in accounting and auditing.
Keller 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 market value of the Holding Company and the Association as converted and
its opinion as to the value of Subscription Rights, and to the use of its name
and statements with respect to it appearing herein.
CHANGE IN FISCAL YEAR
The Holding Company's Bylaws provide for a fiscal year end of December
31. The Federal Stock Charter to be adopted by the Association in connection
with the Conversion also provides for a change of the Association's fiscal
year end from June 30 to December 31.
88
ADDITIONAL INFORMATION
The Holding Company has filed with the SEC a Registration Statement on
Form SB-2 (File No. 333-_____) under the Securities Act with respect to the
Common Stock offered in the Conversion. 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; 500 West
Madison Street, Suite 1400, Room 1100, Chicago, Illinois 60661; and 75 Park
Place, New York, New York 10007. 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 Association has filed with the OTS an Application for Approval of
Conversion, which includes proxy solicitation materials for the Association's
Special Meeting and certain other information. This Prospectus omits certain
information contained in such Application. The Application, including the proxy
solicitation materials, exhibits and certain other information that are a part
thereof, may 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 Regional Director
of the OTS at the West Regional Office of the OTS, 1 Montgomery Street, Suite
400, San Francisco, California 94104.
89
Index To Consolidated Financial Statements
Empire Federal Savings and Loan Association and Subsidiary
Page
Independent Auditors' Report ............................................................................. F-1
Consolidated Statements of Financial Condition as of
June 30, 1996 and 1995 .................................................................................. F-2
Consolidated Statements of Income for the Years
Ended June 30, 1996 and 1995 ............................................................................ 18
Consolidated Statements of Equity for
the Years Ended June 30, 1996 and 1995 .................................................................. F-4
Consolidated Statements of Cash Flows for the Years
Ended June 30, 1996 and 1995 ............................................................................ F-5
Notes to Consolidated Financial Statements................................................................ F-6
* * *
All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or related
Notes.
Separate financial statements for the Holding Company have not been
included since it will not engage in material transactions, if any, until after
the Conversion. The Holding Company, which has engaged only in organizational
activities to date, has no significant assets, liabilities, revenues, expenses
or contingent liabilities.
90
EMPIRE FEDERAL SAVINGS AND LOAN
ASSOCIATION AND SUBSIDIARY
Consolidated Financial Statements
June 30, 1996 and 1995
(With Independent Auditors' Report Thereon)
(KPMG PEAT MARWICK LLP logo here)
1000 First Interstate Center
401 N. 31st Street
P.O. Box 7108
Billings, MT 59103
Independent Auditors' Report
The Board of Directors
Empire Federal Savings and Loan Association:
We have audited the accompanying consolidated statements of financial condition
of Empire Federal Savings and Loan Association and subsidiary as of June 30,
1996 and 1995, and the related consolidated statements of income, equity and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Association's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Empire Federal
Savings and Loan Association and subsidiary as of June 30, 1996 and 1995, and
the results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
(Signature of KPMG Peat Marwick LLP)
August 9, 1996, except as to note 17
which is as of August 29, 1996
F-1
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
Consolidated Statements of Financial Condition
June 30, 1996 and 1995
Assets 1996 1995
- ---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 1,160,760 961,050
Interest-bearing deposits 1,337,948 1,234,856
Investment and mortgage-backed securities available-for-sale 13,876,659 1,191,934
Investment and mortgage-backed securities held-to-maturity 25,195,531 39,441,193
Loans receivable, net 41,882,298 39,432,375
Stock in Federal Home Loan Bank of Seattle, at cost 1,123,300 1,044,100
Accrued interest receivable 327,994 362,727
Income tax receivable 65,817 -
Premises and equipment, net 1,337,731 1,160,990
Prepaid expenses and other assets 502,333 665,979
-------------- ---------------
$ 86,810,371 85,495,204
============== ===============
Liabilities and Equity
Liabilities:
Deposits 68,547,802 67,063,722
Advances from Federal Home Loan Bank 1,500,000 1,750,926
Advances from borrowers for taxes and insurance 205,876 239,013
Accrued expenses and other liabilities 449,060 580,694
Income taxes payable - 46,177
Deferred income taxes 231,234 314,713
-------------- ---------------
Total liabilities 70,933,972 69,995,245
Equity:
Retained earnings, substantially restricted 15,620,702 14,989,025
Unrealized gain on securities available-for-sale, net of deferred taxes 255,697 510,934
-------------- ---------------
Total equity 15,876,399 15,499,959
-------------- ---------------
Commitments and contingencies
$ 86,810,371 85,495,204
============== ===============
See accompanying notes to consolidated financial statements.
F-2
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
Consolidated Statements of Equity
Years ended June 30, 1996 and 1995
Unrealized
Retained gain on
earnings, securities
substantially available- Total
restricted for-sale equity
Balances at June 30, 1994 $ 14,037,087 437,589 14,474,676
Net income 951,938 - 951,938
Change in unrealized gain on securities
available-for-sale - 73,345 73,345
-------------- ------------ ---------------
Balances at June 30, 1995 14,989,025 510,934 15,499,959
Net income 631,677 - 631,677
Change in unrealized gain on securities
available-for-sale - (255,237) (255,237)
-------------- ------------ ---------------
Balances at June 30, 1996 $ 15,620,702 255,697 15,876,399
============== ============ ===============
See accompanying notes to consolidated financial statements.
F-3
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended June 30, 1996 and 1995
1996 1995
- ---------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 631,677 951,938
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 55,000 -
Depreciation 199,309 139,899
Loss on retirement of premises and equipment, net 17,430 3,462
Amortization of premiums and discounts on loans and
mortgage-backed securities, net 30,239 40,798
Stock dividends reinvested in Federal Home Loan Bank (79,200) (61,000)
Decrease (increase) in accrued interest receivable 34,733 (53,913)
Increase in income tax receivable (65,817) -
Decrease (increase) in prepaid expenses and other assets 163,646 (51,503)
Increase (decrease) in accrued expenses and other liabilities (131,634) 156,686
Decrease in income taxes payable (46,177) (89,561)
Decrease in deferred income taxes 48,007 (482)
--------------- ----------------
Net cash provided by operating activities 857,213 1,036,324
--------------- ----------------
Cash flows from investing activities:
Net change in interest-bearing deposits (103,092) 24,457
Net change in loans receivable (2,504,609) 1,955,888
Purchases of investment securities held-to-maturity (3,998,800) (1,497,500)
Proceeds from matured or called investment securities held-to-maturity 3,997,500 200,000
Purchases of mortgage-backed securities held-to-maturity (5,704,272) (4,869,975)
Principal payments on mortgage-backed securities held-to-maturity 4,535,653 5,489,487
Principal payments on mortgage-backed securities available-for-sale 2,313,580 -
Purchases of premises and equipment (393,480) (438,600)
--------------- ----------------
Net cash provided by (used in) investing activities (1,857,520) 863,757
--------------- ----------------
Cash flows from financing activities:
Net change in deposits 1,484,080 (1,272,116)
Proceeds from advances from Federal Home Loan Bank 1,500,000 1,000,000
Repayment of advances from Federal Home Loan Bank (1,750,926) (1,438,172)
Repayment of note payable - (70,000)
Net change in advances from borrowers for taxes and insurance (33,137) 2,739
--------------- ----------------
Net cash provided by (used in) financing activities 1,200,017 (1,777,549)
--------------- ----------------
Net increase in cash and cash equivalents 199,710 122,532
Cash and cash equivalents, beginning of year 961,050 838,518
--------------- ----------------
Cash and cash equivalents, end of year $ 1,160,760 961,050
=============== ================
See accompanying notes to consolidated financial statements.
F-4
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1996 and 1995
(1) Summary of Significant Accounting Policies
(a) General
Empire Federal Savings and Loan Association (Empire) operates with
a main office and two branches and provides services to customers
in south central Montana. Empire offers a variety of savings
products to its retail customers while concentrating its lending
activities on real estate mortgage loans. Lending activities focus
primarily on the origination of loans secured by one- to
four-family residential real estate. Lending activities also
include the origination of multi-family, commercial real estate
and home equity loans. Empire is subject to competition from other
financial service providers and is also subject to the regulations
of certain federal and state agencies and undergoes periodic
examinations by those regulatory authorities. Empire has a
wholly-owned subsidiary, Dime Service Corporation, which was
formed in December 1985 to conduct business as an insurance
agency. Empire and Dime Service Corporation are herein referred to
collectively as "the Association."
The accounting and consolidated financial statement reporting
policies conform with generally accepted accounting principles and
prevailing practices within the banking industry. In preparing the
consolidated financial statements, management is required to make
estimates and assumptions that affect the reported and disclosed
amounts of assets and liabilities as of the date of the balance
sheet and income and expenses for the period. Actual results could
differ significantly from those estimates.
Material estimates that are particularly susceptible to
significant change in the near-term relate to the determination of
the allowance for possible loan losses and the valuation of real
estate acquired in connection with foreclosures or in satisfaction
of loans. In connection with the determination of the allowances
for losses on loans and real estate owned, management obtains
independent appraisals for significant properties.
Management believes that the allowances for losses on loans and
real estate owned are adequate. While management uses available
information to recognize losses on loans and real estate owned,
future additions to the allowances may be necessary based on
changes in economic conditions. In addition, various regulatory
agencies, as an integral part of their examination process,
periodically review the Association's allowances for losses on
loans and real estate owned. Such agencies may require the
Association to recognize additions to the allowances based on
their judgments about information available to them at the time of
their examination.
(b) Basis of Presentation
The accompanying consolidated financial statements include the
accounts of Empire Federal Savings and Loan Association and Dime
Service Corporation. All significant intercompany transactions
have been eliminated in consolidation.
(c) Cash Equivalents
For purposes of the statements of cash flows, the Association
considers all cash, non-interest-bearing deposits with banks, and
interest-bearing deposits having original maturities of three
months or less to be cash equivalents.
F-5 (Continued)
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(d) Investment Securities
The Association's investment securities are classified and
accounted for as follows:
Trading Securities - Securities held principally for the
purpose of selling them in the near term are classified as
trading securities and are reported at fair value, with
unrealized net gains and losses included in earnings.
Securities Held-to-Maturity - Debt securities for which the
Association has the positive intent and ability to hold are
classified as held-to-maturity. Held-to-maturity securities
are stated at amortized cost.
Securities Available-for-Sale - Debt securities not classified
as held-to-maturity and debt or equity securities not
classified as trading are classified as available-for-sale.
Available-for-sale securities are stated at fair value, with
any unrealized gains and losses net of deferred taxes,
reported as a separate component of equity.
The Association did not hold any trading securities during the
years ended June 30, 1996 and 1995.
Declines in the fair value of available-for-sale or
held-to-maturity securities below carrying value that are other
than temporary are charged to expense as realized losses and the
related carrying value reduced to fair value.
The amortized cost of debt securities is adjusted for amortization
of premium and accretion of discount using a method that
approximates the interest method over the term of each security.
The cost of investments sold is determined by specific
identification.
(e) Mortgage-Backed Securities
Mortgage-backed securities represent participating interests in
pools of long-term first mortgage loans originated and serviced by
issuers of the securities. These securities are carried at unpaid
principal balances, adjusted for unamortized premiums and unearned
discounts. Premiums and discounts are amortized using a method
that approximates the interest method over the remaining period to
contractual maturity, adjusted for anticipated prepayments. The
cost of mortgage-backed securities sold is determined by specific
identification. The Association has classified its portfolio of
mortgage-backed securities as held-to-maturity or
available-for-sale as defined in "Investment Securities" above.
(f) Loans Receivable
Loans receivable are stated at unpaid principal balances less
unearned discounts and net deferred loan origination fees.
Interest on loans is credited to income as earned. Interest
receivable is accrued only if deemed collectible. Discounts on
purchased loans are amortized using a method that approximates the
level-yield method over the remaining period to contractual
maturity, adjusted for anticipated prepayments.
F-6 (Continued)
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
The allowance for loan losses is increased by charges to income
and decreased by charge-offs (net of recoveries). Management's
periodic evaluation of the adequacy of the allowance is based on
factors such as the Association's past loan loss experience, known
and inherent risks in the portfolio, adverse situations that may
affect the borrower's ability to repay, the estimated value of any
underlying collateral, current and prospective economic
conditions, and independent appraisals.
Accrued interest on loans that are contractually ninety days or
more past due is generally charged off against income. Interest is
subsequently recognized only to the extent cash payments are
received until, in management's judgment, the borrower's ability
to make periodic interest and principal payments is reasonably
assured, in which case the loan is returned to accrual status.
During the year ended June 30, 1996, the Association adopted the
provisions of Statement of Financial Accounting Standards (SFAS)
No. 114, "Accounting by Creditors for Impairment of a Loan," and
SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosures," (collectively, the
Statements). The Statements provide guidance for establishing an
allowance for losses on specific loans which are deemed to be
impaired. Groups of small-balance homogeneous loans (generally
residential real estate and consumer loans) are evaluated for
impairment collectively. A loan is considered impaired when, based
upon current information and events, it is probable that the
Company will be unable to collect, on a timely basis, all
principal and interest according to the contractual terms of the
loan's original agreement. When a specific loan is determined to
be impaired the allowance for loan losses is increased through a
charge to expense for the amount of the impairment. The amount of
the impairment is measured using cash flows discounted at the
loan's effective interest rate, except when it is determined that
the sole source of repayment for the loan is the operations or
liquidation of the underlying collateral. In such cases, the
current value of the collateral, reduced by anticipated selling
costs, will be used in place of discounted cash flows. The
Association uses the cash basis of income recognition on impaired
loans.
The Association's adoption of the Statements did not have a
material impact on the Association's financial position or results
of operations. During the year ended June 30, 1996 and 1995, the
Association had no impaired loans.
(g) Loan Origination Fees and Related Costs
Loan origination fees and certain direct loan origination costs
are deferred and the net fee or cost is recognized in interest
income using the level-yield method over the contractual life of
the loans. The amortization of deferred loan fees and costs and
the accretion of unearned discounts on non-performing loans is
discontinued during periods of non-performance.
(h) Stock in Federal Home Loan Bank
Federal law requires a member institution of the Federal Home Loan
Bank (FHLB) System to hold common stock of its district FHLB
according to predetermined formulas.
F-7 (Continued)
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(i) Real Estate Owned
Real estate owned represents real estate acquired through
foreclosure or in satisfaction of loans and is initially recorded
at the lower of fair market value less estimated costs to sell or
"cost" (defined as the fair market value at initial foreclosure).
Valuations are periodically performed by management and an
allowance for losses is established by a charge to operations if
the fair market value less estimated costs to sell is less than
"cost" or carrying value.
(j) Premises and Equipment
Premises and equipment are carried at cost less accumulated
depreciation. Depreciation is provided over the estimated useful
lives, which range from 3 to 50 years, of the respective assets on
straight-line and accelerated methods. Leasehold improvements are
amortized on the straight-line method over their estimated useful
life or lease term, whichever is less.
(k) Income Taxes
Deferred tax assets and liabilities are recognized for the
estimated future consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date.
(l) Reclassifications
Certain reclassifications have been made to the 1995 financial
statements to conform with the 1996 presentation.
(m) Future Accounting Changes
The Financial Accounting Standards Board has issued two Statements
of Financial Accounting Standards which the Association will be
required to adopt. SFAS No. 121 pertains to the accounting for
impairment of long-lived assets and long-lived assets to be
disposed of. SFAS No. 125 pertains to the accounting for mortgage
servicing rights and assets subject to prepayment. Adoption of the
Statements is not expected to have a material impact on the
Association's financial position and results of operations.
F-8 (Continued)
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(2) Investment and Mortgage-Backed Securities Available-For-Sale
The amortized cost, unrealized gains and losses, and estimated market
values of investment and mortgage-backed securities available-for-sale at
June 30 are summarized as follows:
1996
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
FHLMC common and preferred stock $ 67,791 970,709 - 1,038,500
Mutual funds 350,000 - (3,463) 346,537
---------------- ----------- ------------ ---------------
417,791 970,709 (3,463) 1,385,037
Mortgage-backed securities:
FHLMC certificates 10,680,009 - (451,433) 10,228,576
FNMA certificates 2,391,439 - (128,393) 2,263,046
---------------- ----------- ------------ ---------------
13,071,448 - (579,826) 12,491,622
---------------- ----------- ------------ ---------------
$ 13,489,239 970,709 (583,289) 13,876,659
================ =========== ============ ===============
1995
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
FHLMC common and preferred stock $ 67,791 770,334 - 838,125
Mutual funds 350,000 5,558 (1,749) 353,809
------------ ----------- --------- -------------
$ 417,791 775,892 (1,749) 1,191,934
============ =========== ========= =============
There were no sales of investment securities available-for-sale during
the years ended June 30, 1996 and 1995.
On November 15, 1995, the Financial Accounting Standards Board issued a
special report which provided for a "one-time reclassification" of
securities prior to December 31, 1995. The Association reclassified
approximately $14,200,000 of mortgage-backed securities from the
held-to-maturity classification to the available-for-sale classification.
Unrealized losses at the date of transfer were $158,214.
F-9 (Continued)
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(3) Investment and Mortgage-Backed Securities Held-to-Maturity
The amortized cost, unrealized gains and losses, and estimated market
values of investment and mortgage-backed securities held-to-maturity at
June 30 are summarized as follows:
1996
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
United States Government and agency
obligations $ 2,498,800 - (94,050) 2,404,750
Other 200 - - 200
--------------- ----------- ------------ ---------------
2,499,000 - (94,050) 2,404,950
Mortgage-backed securities:
FHLMC certificates 14,029,147 77,388 (174,294) 13,932,241
FNMA certificates 7,686,880 31,942 (66,395) 7,652,427
GNMA certificates 980,504 34,996 - 1,015,500
--------------- ----------- ------------ ---------------
22,696,531 144,326 (240,689) 22,600,168
--------------- ----------- ------------ ---------------
$ 25,195,531 144,326 (334,739) 25,005,118
=============== =========== ============ ===============
1995
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
United States Government and agency
obligations $ 2,497,500 9,990 (9,925) 2,497,565
Other 200 - - 200
---------------- ----------- ------------ ---------------
2,497,700 9,990 (9,925) 2,497,765
Mortgage-backed securities:
FHLMC certificates 22,819,394 217,134 (231,653) 22,804,875
GNMA certificates 1,246,958 58,875 - 1,305,833
FNMA certificates 12,877,141 146,007 (107,062) 12,916,086
---------------- ----------- ------------ ---------------
36,943,493 422,016 (338,715) 37,026,794
---------------- ----------- ------------ ---------------
$ 39,441,193 432,006 (348,640) 39,524,559
================ =========== ============ ===============
Maturities of securities held-to-maturity by contractual maturity at June
30, 1996 are shown below. Maturities of securities do not reflect
repricing opportunities present in many adjustable rate securities, nor
do they reflect expected shorter maturities based upon early prepayments
of principal.
Estimated
Amortized market
cost value
Due after one year through five years $ 1,000,000 978,600
Due after five years through ten years 500,000 469,650
Due after ten years 998,800 956,500
-------------- --------------
2,498,800 2,404,750
Mortgage-backed securities and other 22,696,731 22,600,368
-------------- --------------
$ 25,195,531 25,005,118
============== ==============
F-10 (Continued)
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
There were no sales of investment securities held-to-maturity during the
years ended June 30, 1996 or 1995.
The Association has not entered into any interest rate swaps, options and
future contracts. Included in U.S. Government agency obligations are
investments in structured notes which have contractual step-up interest
rates and call features.
(4) Loans Receivable
Loans receivable at June 30 are summarized as follows:
1996 1995
- ---------------------------------------------------------------------------------------------------------------
First mortgage loans, including multi-family and
commercial real estate $ 38,716,819 37,956,488
Construction loans 1,380,000 257,000
Loans to depositors, secured by savings 900,771 454,749
Other consumer loans 2,112,269 1,456,005
---------------- ----------------
43,109,859 40,124,242
Less:
Unearned discounts (5,174) (5,488)
Undisbursed portion of mortgage loans (770,190) (314,951)
Allowance for loan losses (200,000) (145,000)
Net deferred loan origination fees (252,197) (226,428)
---------------- ----------------
$ 41,882,298 39,432,375
================ ================
The weighted average stated interest rate on loans receivable at June 30,
1996 and 1995 was approximately 7.59% and 7.64%, respectively. The
average yield on loans receivable, including amortization of unearned
discount and loan origination fees, was approximately 7.69% and 7.61% for
the years ended June 30, 1996 and 1995, respectively.
Loans receivable include approximately $4,440,000 and $5,510,000 in
adjustable rate mortgages at June 30, 1996 and 1995, respectively.
Real estate loans serviced for others totaled approximately $110,000 and
$140,000 at June 30, 1996 and 1995, respectively.
A summary of activity in the allowance for loan losses follows:
1996 1995
- ---------------------------------------------------------------------------------------------------------------
Balance at beginning of year $ 145,000 145,000
Provision charged to expense 55,000 -
----------- ----------
Balance at end of year $ 200,000 145,000
=========== ===========
F-11 (Continued)
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(5) Accrued Interest Receivable
Accrued interest receivable at June 30 is summarized as follows:
1996 1995
- ---------------------------------------------------------------------------------------------------------------
Loans receivable $ 211,440 191,421
Mortgage-backed securities 83,685 90,741
Investment securities and interest-bearing deposits 32,869 80,565
----------- -----------
$ 327,994 362,727
=========== ===========
(6) Premises and Equipment
Premises and equipment at June 30 is summarized as follows:
1996 1995
- ---------------------------------------------------------------------------------------------------------------
Buildings and leasehold improvements $ 2,160,134 1,782,741
Land and improvements 424,182 367,838
Furniture, fixtures and equipment 891,884 728,485
Construction in progress - 382,866
-------------- ---------------
3,476,200 3,261,930
Accumulated depreciation (2,138,469) (2,100,940)
-------------- ---------------
$ 1,337,731 1,160,990
============== ===============
The Association is party to a long-term lease agreement with an officer
and relatives (lessor) for land on which the Livingston, Montana main
office is built. The lease expires in March 1997 at which time all
improvements made by the Association revert to the lessor. At June 30,
1996, these improvements had an amortized cost basis of $48,123. The
Association has negotiated with the lessor to purchase the building. If
the Association determines not to purchase the building, it will
negotiate and enter into a lease with the lessor for rental of the
building prior to the expiration of the current lease term. Total lease
expense under this agreement was $10,056 for the years ended June 30,
1996 and 1995.
(7) Deposits
Deposits at June 30 are summarized as follows:
Weighted
average rate at 1996 1995
--------------------------- -------------------------
June 30, 1996 Amount % Amount %
Balance by interest rate:
Passbook accounts 3.25% $ 14,948,530 21.8% $ 15,224,817 22.7%
NOW accounts 2.71% 13,624,016 19.9 13,300,943 19.8
-------------- ------- -------------- -------
Total passbook
and NOW accounts 28,572,546 41.7 28,525,760 42.5
--------------- ------- -------------- ---------
F-12 (Continued)
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
Weighted
average rate at 1996 1995
--------------------------- ---------------------------
June 30, 1996 Amount % Amount %
Certificates of
deposit: 3.01 to 4.00 $ - - % $ 1,595,271 2.4%
4.01 to 5.00 4,626,075 6.8 10,469,108 15.6
5.01 to 6.00 26,196,709 38.2 13,306,507 19.8
6.01 to 7.00 6,764,071 9.9 10,035,367 15.0
7.01 to 8.00 2,156,573 3.1 2,682,412 4.0
8.01 to 9.00 231,828 .3 449,297 0.7
-------------- ------- -------------- -------
Total certificates
of deposit 39,975,256 58.3 38,537,962 57.5
-------------- ------- -------------- -------
$ 68,547,802 100.0% $ 67,063,722 100.0%
============== ======= ============== =======
Scheduled maturities of certificates of deposit at June 30, 1996 are as
follows:
Due within one year $ 27,431,057
Due within two to three years 9,176,808
Due within four to five years 2,300,630
Thereafter 1,066,761
--------------
$ 39,975,256
The weighted average cost of deposits was approximately 4.7% and 4.6% at
June 30, 1996 and 1995, respectively. The average cost of deposits
approximated 4.7% and 4.1% for the years ending June 30, 1996 and 1995,
respectively.
Accrued interest payable on deposits (included in accrued expenses and
other liabilities) totaled approximately $107,000 and $154,000 at June
30, 1996 and 1995, respectively.
Cash payments for interest on deposits in 1996 and 1995 totaled
approximately $2,900,000 and $2,700,000, respectively.
Interest-bearing deposits with a carrying value of $100,000 were pledged
to secure public deposits at June 30, 1996.
(8) Advances from Federal Home Loan Bank
Advances from Federal Home Loan Bank at June 30 are summarized as
follows:
1996 1995
- ------------------------------------------------------------------------------------------------------------------
5.27% advance, principal due September 1996, interest
payable monthly $ 250,000 -
6.02% advance, principal due July 1996, interest payable
monthly 750,000 -
5.82% advance, principal due July 1996, interest payable
monthly 500,000 -
5.80% advance, paid July 1995 - 1,000,000
5.8011% advance, paid June 1996 - 241,667
4.091% advance, paid April 1996 - 509,259
--------------- ----------------
$ 1,500,000 1,750,926
============== ==============
F-13 (Continued)
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
The advances are collateralized by Federal Home Loan Bank stock,
securities issued by the U.S. government or agency thereof,
mortgage-backed securities, and first mortgage loans not otherwise
pledged.
Cash payments for interest on advances in 1996 and 1995 totaled
approximately $95,000 and $145,000, respectively.
(9) Income Taxes
Income tax expense for the years ended June 30, 1996 and 1995 is
summarized as follows:
Federal State Total
1996:
Current $ 290,714 60,759 351,473
Deferred 41,212 6,795 48,007
----------- ----------- -----------
$ 331,926 67,554 399,480
=========== =========== ===========
1995:
Current $ 485,284 103,821 589,105
Deferred (400) (82) (482)
----------- ----------- -----------
$ 484,884 103,739 588,623
=========== =========== ===========
Actual income tax expense for the years ended June 30 differs from
"expected" income tax expense (computed by applying the United States
Federal corporate income tax rate of 34% to income before income taxes)
as follows:
1996 1995
- ---------------------------------------------------------------------------------------------------------------
Computed "expected" tax expense $ 350,593 523,791
Increase (decrease) resulting from:
State taxes, net of Federal income tax effects 48,887 68,632
Other - (3,800)
------------- ------------
$ 399,480 588,623
============= ============
Deferred income taxes are recognized for the future tax consequences of
temporary differences between the financial statement carrying amounts
and the tax bases of assets and liabilities. The types of temporary
differences that give rise to significant portions of the deferred tax
assets and liabilities at June 30 are as follows:
1996 1995
- ---------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Loans:
Reserve for loan losses $ 76,910 55,760
Loan origination fees deferred for financial reporting
purposes 96,982 87,084
Premises and equipment, principally due to differences in
depreciation 7,691 26,922
Deferred compensation accrual 34,998 31,203
------------ ------------
Gross deferred tax assets 216,581 200,969
------------ ------------
F-14 (Continued)
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
1996 1995
- ---------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Stock in Federal Home Loan Bank of Seattle, principally due to
dividends not recognized for tax purposes $ (276,453) (246,026)
Prepaid insurance premium (30,379) -
Unrealized gains on securities available-for-sale (131,723) (263,209)
Other, net (9,260) (6,447)
------------ ------------
Gross deferred tax liabilities (447,815) (515,682)
------------ ------------
Net deferred tax liability $ (231,234) (314,713)
============ ============
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the existence of, or generation of,
taxable income in the periods which those temporary differences are
deductible. Management considers the scheduled reversal of deferred tax
liabilities, taxes paid in carryback years, projected future taxable
income, and tax planning strategies in making this assessment. Based upon
the level of historical taxable income and projection for future taxable
income over the periods which the deferred tax assets are deductible, at
June 30, 1996 and 1995, management believes it is more likely than not
that the Association will realize the benefits of these deductible
differences.
Retained earnings at June 30, 1996 includes approximately $3,320,000 for
which no provision for Federal income tax has been made. This amount
represents the base year tax bad debt reserve which is essentially an
allocation of earnings to pre-1988 bad debt deductions for income tax
purposes only. This amount is treated as a permanent difference and
deferred taxes are not recognized unless it appears that this reserve
will be reduced and thereby result in taxable income in the foreseeable
future. The Association is not currently contemplating any changes in its
business or operations which would result in a recapture of this federal
bad debt reserve into taxable income.
Cash paid for income taxes for the years ended June 30, 1996 and 1995
totaled approximately $461,820 and $511,000, respectively.
(10) Pension Plan
All eligible employees are included in a noncontributory multi-employer
trusteed defined benefit pension plan. Actuarially determined pension
costs are funded as required by the trustee. Contributions were $108,000
and $101,000 for the plan years ended June 30, 1996 and 1995,
respectively.
(11) Regulatory Capital
The Association is required to meet three FIRREA-enacted capital
requirements: a tangible capital requirement equal to not less than 1.5%
of tangible assets (as defined in the regulations); a core capital
requirement, comprised of tangible capital adjusted for supervisory
goodwill and other defined factors equal to not less than 3.0% of
tangible assets; and a risk-based capital requirement equal to at least
8.0% of all risk-weighted assets. For risk-weighting, selected assets are
given a risk assignment of 0% to 100%. The Association's total
risk-weighted assets at June 30, 1996 were $32,794,000.
F-15 (Continued)
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
Generally accepted accounting principles (GAAP) capital differs from
tangible, core, and risk-based capital as a result of the following:
Capital measured by GAAP(rounded) $ 15,876,000
Net effect of audit adjustments 54,000
----------------
Capital as reported in Thrift Financial Report 15,930,000
Non-includable assets of subsidiary (495,000)
Unrealized gains on certain available-for-sale securities (254,000)
----------------
Tangible and core capital 15,181,000
General valuation reserve 145,000
Assets required to be deducted (21,000)
----------------
Risk-based capital $ 15,305,000
================
The following table demonstrates, in dollars and percents, the extent to
which the Association exceeds the minimum capital requirements as of June
30, 1996:
Regulatory Capital
Actual Requirement Excess
Tangible capital:
Dollar amount $ 15,181,000 1,292,000 13,889,000
Percent of tangible assets 17.6% 1.5% 16.1%
Core capital:
Dollar amount $ 15,181,000 2,583,000 12,598,000
Percent of adjusted tangible
assets 17.6% 3.0% 14.6%
Risk-based capital:
Dollar amount $ 15,305,000 2,624,000 12,681,000
Percent of risk-weighted assets 46.7% 8.0% 38.7%
Failure to comply with applicable regulatory capital requirements can
result in capital directives from the director of the Office of Thrift
Supervision, restrictions on growth and other limitations on a savings
association's operations.
(12) Noncash Investing Activities
The Association recorded a decrease in unrealized gain on investment
securities available-for-sale of $386,723, net of deferred taxes of
$131,486, at June 30, 1996.
The Association recorded an increase in unrealized gain on investment
securities available-for-sale of $111,129, net of deferred taxes of
$37,784, at June 30, 1995.
F-16 (Continued)
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(13) Commitments and Contingencies
The deposits of the Association are insured by the Savings Association
Insurance Fund (SAIF), one of two funds administered by the Federal
Deposit Insurance Corporation (FDIC). The Association currently pays
premiums of approximately $.23 per $100 of deposits. Under a plan to
recapitalize the SAIF, the U.S. Treasury Department, FDIC, OTS, and the
Congress are considering a plan to impose a "one-time" premium assessment
of .80% per $100 of deposits as of March 31, 1995. If this plan is
implemented, the Association would be assessed a one-time premium which
would result in a change to income of approximately $340,000 after income
taxes.
(14) Financial Instruments With Off-Balance-Sheet 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. These financial instruments include
commitments to extend credit and involve, to varying degrees, elements of
credit risk.
The Association's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to extend
credit is represented by the contractual amount of those instruments. The
Association uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
Financial instruments outstanding at June 30, 1996 whose contract amounts
represent credit risk are fixed-rate commitments to extend credit
totaling approximately $304,000.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The
Association evaluates each customer's creditworthiness on a case by case
basis. The amount of collateral obtained by the Association upon
extension of credit, if deemed necessary, is based on management's
evaluation of the counter-party. Collateral held varies but may include
personal property, residential real property and income-producing
commercial properties.
(15) Financial Instruments With Concentration of Credit Risk
At June 30, 1996, approximately $2,000,000 of the Association's loans
receivable are secured by real property located outside of the
Association's trade area of south central Montana of this amount,
approximately $1,100,000 are secured by properties located in Southern
California.
(16) Fair Value of Financial Instruments
The Association is required to disclose the fair value for financial
instruments, whether recognized or not recognized on the statement of
financial condition. A financial instrument is defined as cash, evidence
of an ownership interest in an entity, or a contract that both imposes a
contractual obligation on one entity to deliver cash or another financial
instrument to a second entity.
F-17 (Continued)
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
Quoted market prices are used for fair value when available, but do not
exist for some of the Bank's financial instruments, primarily loans and
time deposits. The fair value of these instruments has been derived from
the OTS Net Portfolio Value Model (OTS Model). This OTS Model primarily
employs the static discounted cash flow method which determines the
economic value of loans and time deposits by calculating the present
value of expected cash flows. The present value is determined by
discounting the cash flows the instruments are expected to generate by
the yields currently available to investors on instruments of comparable
risk and duration. Therefore, to calculate present value, the OTS makes
assumptions about the size and timing of expected cash flows and
appropriate discount rates. Different assumptions could materially change
these instruments' estimated values.
These disclosures exclude certain financial instruments and all
nonfinancial instruments. Therefore, the aggregate fair values presented
do not represent the Bank's underlying value.
The following assumptions and methods were used by the Bank in estimating
fair value:
FINANCIAL ASSETS. Due to the liquid nature of the instruments, the
carrying value of cash and cash equivalents and interest-bearing
deposits approximates market value. For all investment and
mortgage-backed securities, the fair value is based upon quoted
market prices. The fair value of loans receivable was obtained from
the OTS Model. The fair value of accrued interest receivable
approximates book value as the Association expects contractual
receipt in the short-term. The fair value of FHLB stock approximates
redemption value.
FINANCIAL LIABILITIES. The fair value of NOW and demand accounts and
non-term savings deposits approximates book values as these deposits
are payable on demand. The fair value of time deposits was obtained
from the OTS Model. The imputed interest rate on the borrowed funds
approximates the Company's current long-term borrowing rate.
Accordingly, the fair value of borrowed funds approximates the
carrying value.
OFF-BALANCE SHEET. Commitments made to extend credit represent
commitments for loan originations, the majority of which are
contracted for immediate sale and therefore no fair value adjustment
is necessary.
LIMITATIONS. Fair value estimates are made at a specific point in
time, based on relevant market information and information about the
financial instrument. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the
Association's entire holdings of a particular instrument. Because no
market exists for a significant portion of the Association's
financial instruments, fair value estimates are based on judgments
regarding comparable market interest rates, future expected loss
experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates
are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates.
F-18 (Continued)
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
Fair value estimates are based on existing on-and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities
that are not considered financial instruments. In addition, the tax
effect of the difference between the fair value and carrying value
of financial instruments can have a significant effect on fair value
estimates and have not been considered in the estimates presented
herein.
June 30, 1996
Book Value Fair Value
Financial Assets:
Cash and cash equivalents $ 1,160,760 1,160,760
Interest-bearing deposits 1,337,948 1,337,948
Investment and mortgage-backed securities
available-for-sale 13,876,659 13,876,659
Investment and mortgage-backed securities
held-to-maturity 25,195,531 25,005,118
Loans receivable, net 41,937,298 42,318,000
Stock in Federal Home Loan Bank of Seattle 1,123,300 1,123,300
Accrued interest receivable 327,994 327,994
Financial Liabilities:
Deposits 68,547,802 68,463,000
Borrowed funds 1,500,000 1,500,000
Off-Balance Sheet:
Commitments to extend credit 304,000 304,000
(17) Subsequent Event
On August 29, 1996, the Board of Directors approved a plan under which
the Association would convert from a federally chartered mutual savings
and loan association to a federally chartered capital stock savings bank.
The conversion to a stock institution is subject to approval of the
Office of Thrift Supervision and members of the Association and includes
the filing of a registration statement with the Securities and Exchange
Commission. If such approvals are obtained, a holding company (of which
the Association will become a wholly-owned subsidiary) will issue and
sell shares of capital stock to eligible members of the Association and
the public.
The cost of issuing the Association's capital stock will be deferred and
deducted from the sales proceeds of the conversion. At June 30, 1996, the
Association had not incurred any conversion costs. In the event that the
conversion is not completed, any deferred conversion costs will be
charged to operations.
F-19 (Continued)
EMPIRE FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
In accordance with OTS Regulations, at the time that the Association
converts from a mutual savings and loan association to a stock savings
bank, the Association will restrict a portion of retained earnings by
establishing a liquidation account. The liquidation account will be
maintained for the benefit of eligible holders who continue to maintain
their accounts at the Association after the conversion. The liquidation
account will be reduced annually to the extent that eligible account
holders have reduced their qualifying deposits. Subsequent increases will
not restore an eligible account holder's interest in the liquidation
account. In the event of a complete liquidation of the Association, and
only in such event, each account holder will be entitled to receive a
distribution from the liquidation account in an amount proportionate to
the adjusted qualifying account balances then held. The Association may
not pay dividends if those dividends would reduce equity capital below
the required liquidation account amount.
F-20
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 other information or representation must not be relied upon as having been
authorized by the Holding Company or the Association. 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 or 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 to make such offer or solicitation in such jurisdiction. 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
Holding 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............................................
Selected Consolidated Financial Information...................
Risk Factors..................................................
Empire Federal Bancorp, Inc...................................
Empire Federal Savings and Loan Association. .................
Use of Proceeds...............................................
Dividend Policy...............................................
Market for Common Stock.......................................
Capitalization................................................
Historical and Pro Forma Capital Compliance...................
Pro Forma Data................................................
Empire Federal Savings and Loan Association and Subsidiary
Consolidated Statements of Income............................
Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................
Business of the Holding Company...............................
Business of the Association...................................
Management of the Holding Company.............................
Management of the Association.................................
Regulation....................................................
Taxation......................................................
The Conversion................................................
Restrictions on Acquisition of the Holding Company............
Description of Capital Stock of the Holding Company ..........
Registration Requirements.....................................
Legal and Tax Opinions........................................
Experts.......................................................
Change in Fiscal Year.........................................
Additional Information........................................
Index to Consolidated Financial Statements....................
Until the later of _____ __, 1996, or 25 days after commencement of the
Syndicated Community Offering of Common Stock, if any, 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.
EMPIRE FEDERAL BANCORP, INC.
[Logo]
(Proposed Holding Company for Empire Federal
Savings and Loan Association, to
be known as Empire Federal Savings Bank)
1,666,000 to 2,254,000 Shares of
Common Stock
Prospectus
Charles Webb & Company,
a Division of Keefe, Bruyette & Woods, Inc.
______________ ___, 1996
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Officers and Directors
Article XVII of the Certificate of Incorporation of Empire
Federal Bancorp, Inc. requires indemnification of directors,
officers and employees to the fullest extent permitted by
Delaware law.
Section 145 of the Delaware General Corporation Law sets forth
circumstances under which directors, officers, employees and
agents may be insured or indemnified against liability which
they may incur in their capacities:
145 INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS;
INSURANCE.--(a) A corporation may indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(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, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which 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 reasonable cause to believe that his conduct was unlawful.
(b) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor 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 and except that no indemnification shall 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 shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
(c) 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
action, suit or proceeding referred to in subsections (a) and (b) of this
section, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as authorized
in the specific case upon a 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) of this
section. Such determination shall be made (1) by 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 (2) 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 (3) by the stockholders.
II-1
(e) 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 such action, suit 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 as authorized in this section. Such expenses (including
attorneys' fees) incurred by other employees and agents may be so paid upon such
terms and conditions, if any, as the board of directors deems appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of this section shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office.
(g) A corporation shall have power to purchase and maintain insurance on
behalf of any person who 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 any liability asserted against him or
incurred by him any such capacity, or arising out of his status as such, whether
or not the corporation would have the power to indemnify him against such
liability under this section.
(h) For purposes of this section, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
any person who is or was a director, officer, employee or agents, so that any
person who is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, shall stand in the same position under
this section with respect to the resulting or surviving corporation as he would
have with respect to such constituent corporation if its separate existence had
continued.
(i) For purposes of this section, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to any employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee, or
agent with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in this
section.
(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this section shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
II-2
Item 25. Other Expenses of Issuance and Distribution(1)
Legal.................................................. $ 95,000
Securities marketing legal fees........................ 35,000
Printing, postage and mailing.......................... 65,000
Appraisal and business plan preparation................ 22,000
Accounting fees........................................ 30,000
Accounting advisor fee................................. 7,000
Securities marketing fees(1)........................... 285,130
Data processing fees................................... 7,500
SEC registration fee................................... 9,000
Blue Sky filing fees and expenses...................... 10,000
OTS filing fees........................................ 8,400
Other expenses......................................... 10,970
--------
Total............................................ $585,000
========
(1) Assumes a total offering of $22.5 million (midpoint of the
Estimated Valuation Range), a management fee payable to Webb equal to $25,000
and a success fee of 1.5% of the aggregate Purchase Price of the shares of
Common Stock sold in the Subscription and Direct Community Offering and the
Syndicated Community Offering, excluding shares purchased by the ESOP and
officers and directors of the Association (such success fee not to exceed 1.5%
of the gross offering proceeds at the midpoint of the Estimated Valuation Range,
or $294,000). See "THE CONVERSION -- Plan of Distribution for the Subscription,
Direct Community and Syndicated Community Offerings."
Item 26. Recent Sales of Unregistered Securities.
Not Applicable
Item 27. Exhibits
The exhibits filed as part of this Registration Statement are as
follows:
(a) List of Exhibits
1.1 -- Form of proposed Agency Agreement among Empire Federal Bancorp,
Inc., Empire Federal Savings and Loan Association of Livingston and
Charles Webb & Company (a)
1.2 -- Engagement Letter with Empire Federal Savings and Loan Association
of Livingston and Charles Webb & Company
2 -- Plan of Conversion of Empire Federal Savings and Loan Association
of Livingston (attached as an exhibit to the Proxy Statement
included herein as Exhibit 99.5)
3.1 -- Certificate of Incorporation of Empire Federal Bancorp, Inc.
3.2 -- Bylaws of Empire Federal Bancorp, Inc.
4 -- Form of Certificate for Common Stock
5 -- Opinion of Breyer & Aguggia regarding legality of securities
registered
8.1 -- Federal Tax Opinion of Breyer & Aguggia
II-3
8.2 -- State Tax Opinion of Huppert & Swindlehurst, P.C. (a)
8.3 -- Opinion of Keller & Company, Inc. as to the value of subscription
rights
10.1 -- Proposed Form of Employment Agreement for Certain Executive
Officers
10.2 -- Proposed Form of Stock Option Plan
10.3 -- Proposed Form of Management Recognition and Development Plan
10.4 -- Proposed Form of Employee Stock Ownership Plan
21 -- Subsidiaries of Empire Federal Bancorp, Inc.
23.1 -- Consent of KPMG Peat Marwick, LLP
23.2 -- Consent of Breyer & Aguggia (contained in opinions included as
Exhibits 5 and 8.1)
23.3 -- Consent of Keller & Company, Inc.
23.4 -- Consent of Huppert & Swindlehurst, P.C. (contained in opinion
included as Exhibit 8.2) (a)
24 -- Power of Attorney (contained in the signature page to this
Registration Statement)
99.1 -- Order and Acknowledgement Form (contained in the marketing
materials included herein as Exhibit 99.2)
99.2 -- Solicitation and Marketing Materials
99.3 -- Appraisal Agreement with Keller & Company, Inc.
99.4 -- Appraisal Report of Keller & Company, Inc. (a)
99.5 -- Proxy Statement for Special Meeting of Members of Empire Federal
Savings and Loan Association
- ---------------------
(a) To be filed by amendment.
Item 28. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities,
a post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of
the Securities Act of 1933, as amended ("Securities Act");
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the
II-4
changes in volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) Include any additional or changed material information
on the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time shall be the initial
bona fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(4) The undersigned registrant hereby undertakes to provide the
underwriter at the closing specified in the underwriting agreement, certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
(5) Insofar as indemnification for liabilities arising under the
Securities 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 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-5
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, 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
City of Livingston, State of Montana on September 25, 1996.
EMPIRE FEDERAL BANCORP, INC.
By: /s/Beverly D. Harris
Beverly D. Harris
President and Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned directors and officers of Empire Federal Bancorp,
Inc. do hereby severally constitute and appoint Beverly D. Harris, our true and
lawful attorney and agent, to do any and all things and acts in our names in the
capacities indicated below and to execute all instruments for us and in our
names in the capacities indicated below which said Beverly D. Harris may deem
necessary or advisable to enable Empire Federal 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
Statement on Form SB-2 relating to the offering of Empire Federal Bancorp,
Inc.'s Common Stock, including specifically but not limited to, power and
authority to sign for us or any of us in our names in the capacities indicated
below the Registration Statement and any and all amendments (including
post-effective amendments) thereto; and we hereby ratify and confirm all that
Beverly D. Harris shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
Signatures Title Date
/s/Beverly D. Harris President, Chief Executive September 25, 1996
- ------------------------------------------
Beverly D. Harris and Director
(Principal Executive Officer)
/s/Ernest A. Sandberg Treasurer, Chief Financial September 25, 1996
- -----------------------------------------
Ernest A. Sandberg Officer, Secretary and Director
(Principal Financial and
Accounting Officer)
/s/W. J. Peterson, Jr. Chairman of the Board September 25, 1996
- ---------------------------------------
W. J. Peterson, Jr.
/s/John R. Boe Director September 25, 1996
- ----------------------------------------
John R. Boe
/s/Sanroe J. Kaisler, Jr. Director September 25, 1996
- ----------------------------------------
Sanroe J. Kaisler, Jr.
II-6
/s/Walter R. Sales Director September 25, 1996
- ----------------------------------------
Walter R. Sales
/s/Edwin H. Doig Director September 25, 1996
- -----------------------------------------
Edwin H. Doig
II-7
As filed with the Securities and Exchange Commission on September 25, 1996
Registration No. 333-_____
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
EMPIRE FEDERAL BANCORP, INC.
(Exact name of registrant as specified in charter)
Delaware 6035 [Applied for]
(State or other jurisdiction of (Primary SICC No.) (I.R.S. Employer
incorporation or organization) Identification No.)
123 South Main Street
Livingston, Montana 59047
(406) 222-1981
(Address and telephone number of principal executive offices)
John F. Breyer, Jr., Esquire
Victor L. Cangelosi, Esquire
BREYER & AGUGGIA
Suite 470 East 1300 I Street, N.W.
Washington, D.C. 20005
(Name and address of agent for service)
INDEX TO EXHIBITS
1.1 -- Form of proposed Agency Agreement among Empire Federal Bancorp, Inc., Empire Federal Savings
and Loan Association of Livingston and Charles Webb & Company (a)
1.2 -- Engagement Letter with Empire Federal Savings and Loan Association of Livingston and Charles
Webb & Company
2 -- Plan of Conversion of Empire Federal Savings and Loan Association of Livingston (attached as an
exhibit to the Proxy Statement included herein as Exhibit 99.5)
3.1 -- Certificate of Incorporation of Empire Federal Bancorp, Inc.
3.2 -- Bylaws of Empire Federal Bancorp, Inc.
4 -- Form of Certificate for Common Stock
5 -- Opinion of Breyer & Aguggia regarding legality of securities registered
8.1 -- Federal Tax Opinion of Breyer & Aguggia
8.2 -- State Tax Opinion of Huppert & Swindlehurst, P.C. (a)
8.3 -- Opinion of Keller & Company, Inc. as to the value of subscription rights
10.1 -- Proposed Form of Employment Agreement for Certain Executive Officers
10.2 -- Proposed Form of Stock Option Plan
10.3 -- Proposed Form of Management Recognition and Development Plan
10.4 -- Proposed Form of Employee Stock Ownership Plan
21 -- Subsidiaries of Empire Federal Bancorp, Inc.
23.1 -- Consent of KPMG Peat Marwick, LLP
23.2 -- Consent of Breyer & Aguggia (contained in opinions included as Exhibits 5 and 8.1)
23.3 -- Consent of Keller & Company, Inc.
23.4 -- Consent of Huppert & Swindlehurst, P.C. (contained in opinion
included as Exhibit 8.2) (a)
24 -- Power of Attorney (contained in the signature page to this Registration Statement)
99.1 -- Order and Acknowledgement Form (contained in the marketing
materials included herein as Exhibit 99.2)
99.2 -- Solicitation and Marketing Materials
99.3 -- Appraisal Agreement with Keller & Company, Inc.
99.4 -- Appraisal Report of Keller & Company, Inc. (a)
99.5 -- Proxy Statement for Special Meeting of Members of Empire Federal Savings and Loan Association
- ---------------------
(a) To be filed by amendment.